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Vice-President of the European Commission,
EU Justice Commissioner
Opening trade and opportunities: From the Hanseatic League to European Contract Law
Informal meeting of the Council of Justice Ministers
Sopot, Poland 19 July, 2011
Dear Krzysztof, dear Ministers of Justice,
The Polish government was truly inspired to kick off its Presidency in the field of justice in Gdansk, right on the shores of the Baltic Sea. The Presidency has put the theme of European contract law high on the agenda for the next six months. I warmly welcome this initiative. It is especially important that we do this here in Gdansk.
Gdansk is well known as an historic Hanseatic trading city. For centuries, it has been at the heart of a flourishing trade that greatly benefited members of the Hanseatic League and contributed to the economic, social and cultural prosperity of our entire continent.
The merchants of the Hanseatic League were interested in trading goods and enjoying stable business relations. This is why contract law was highly relevant even during their time. These traders did business regardless of location or borders. They also had sorted out their own version of contract law, which at the time differed not only from country to country, but from city to city. They did not have to worry about these different laws because they had developed, over time, their own contract law.
Legal historians call this today "lex mercatoria", the law of the merchants. It was the traders’ system of choice at the time. It was freely chosen by them, and it became progressively a kind of business standard.
All this happened long before the creation of nation states. It also occurred before national codifications of contract law took the place of what has been for a long time a very established and useful tradition.
Against this rich historical background, it is clear that Krzysztof did not choose the location for our informal Ministerial today by chance. This historic location reminds us of a time when the lex mercatoria made the life of traders in many ways much simpler and less cumbersome than it is today in Europe, notably when it comes to cross-border transactions.
It is very timely that justice ministers are discussing European contract law. We are living in very challenging economic times. The old certainties that meant that prosperity and rising standards of living could be taken for granted are gone. This is no time for complacency, and certainly not the moment to sit back and relax. Instead – and I thank the Polish Presidency for recognising this – it is the right moment for all of us to do what we can to help transform Europe into a prosperous and dynamic economic area; one that will grow further, moving out of the crisis and competing in a world of new economic superpowers.
This means that Justice Ministers – just like economy or industry ministers – should be thinking of what we can do to strengthen the integration of Europe's internal market. The internal market of 500 million consumers is our greatest asset. Despite its promise, we have fallen far short of realising the full potential of the internal market. This is particularly true when it comes to business-to-consumer transactions, which are at the very heart of our social market economy.
It is not for want of trying. Recognising the need to do more, the Commission made an important choice in 2008 in proposing the Consumer Rights Directive. The proposal was based on an ambitious full harmonisation approach. Instead of 27 rules governing B2C transactions, the Commission proposed a single rule, a "one size fits all" solution. At the time, this was seen as the means to overcome the differences in consumer protection in the 27 Member States. Indeed, the logic was sound; continuing with minimum harmonisation meant continuing with national barriers. This is why it was more logical to replace 27 rules with a single Directive based on full harmonisation.
Unfortunately, logic alone does not always lead to perfect results. Several years later, we have learnt from the long and difficult discussions in the European Parliament and Council on the Consumer Rights Directive. We have learnt that progress based on traditional approaches to harmonisation in the field of consumer and contract law is hard to achieve. We have 27 Member States with different legal traditions, in particular in the field of contract law. It would be an illusion, a dangerous illusion in my view, to believe that we could simply scrap these traditions and replace them by one set of rules.
This is why as the new EU Justice Commissioner I showed flexibility on the Consumer Rights Directive starting from the first days of my mandate. In essence, we have continued with minimum harmonisation in most fields. This certainly pays tribute to the differences of national legal traditions. However, it does not respond to the business interest in a single market and a level playing field that would have been as efficient as during the times of the Hanseatic League.
So where do we go from here? Should we simply accept a second-best solution? I refuse to accept that. We can find innovative ways of making progress, whilst respecting national contract law. This is the time when our internal market needs a quantum leap to trigger new waves of growth.
This is why I welcome the questions raised by the Polish Presidency’s paper. These questions suggest that now is the time for a new approach, which should meet with three important objectives:
An optional and voluntary European contract law system, which could be freely chosen by traders, would in my view be a very good way to meet these three objectives. An optional instrument that provides guarantees and certainty to both consumers and businesses would provide a useful and necessary boost to the internal market.
The subsidiarity principle requires that we find new ways to complete the internal market. That does not mean that we carry on harmonising ever more deeply. That may be appropriate in some cases. But in others, it is clearly not the answer. An alternative is to complement the EU rules we already have, which leave Member States with quite some flexibility, with an optional set of common rules.
The optional nature of the regime fits well with the principle of freedom of contract. It means that those traders who are perfectly happy with the status quo are left free to carry on trading under national law. On the other hand, those traders who see the advantage in a common set out of rules may opt for that regime – if they consider that it is commercially attractive.
Our discussion on this subject must of course take account of the mandatory protection that is provided to consumers under EU law. That is why the Polish Presidency’s paper is right to stress the level of consumer protection. An optional regime could only work if it were it based on a reasonably high level of protection. It should be offered by traders as a mark of quality, not as an open door to the Wild West.
Our work on contract law must above all be well-targeted. The Commission must of course focus any proposal on tackling real problems – the real barriers to the internal market. Naturally, the Commission is carrying out a rigorous economic impact study. At the same time we are meeting today, the Commission's best economic and legal experts are presenting a first draft of the impact assessment to our very strict and rigorous impact assessment panel. As you all know, this is the start of our internal procedures that leads to the presentation of a legislative proposal.
Let's consider the problems that an optional European contract law proposal could help overcome. When traders want to export to another Member State they have to jump through a lot of hoops to make sure their contract is legally correct. To do this, they have to hire specialist lawyers, or spend many hours themselves researching the contract law of another country. Time and money are precious commodities that companies – especially small and medium-sized businesses – cannot afford to waste.
To make the situation worse, the costs usually grow proportionately to the number of EU countries a company trades with. This has the greatest impact on micro and small companies as these costs make up a greater share of their turnover.
A lot of SMEs can't afford to do this, or in some cases, cannot overcome the complexity of understanding the legal requirements of foreign laws. In the end, they either decide that it’s not worth exporting or they only export to a couple of countries – judging that it would cost them too much to trade in other markets.
The British small business federation told me just last week that 31% of its members are deterred by legal complexity from trading across borders. It is clear to me that doing away with this complexity means opening up new opportunities.
This legal uncertainty is very costly to our economy. The lost potential trade costs the EU economy tens of billions of euros. This is not a tenable situation in today's economic climate. We need to encourage cross-border trade to boost our economies. We need to break down the barriers that are preventing us from doing this.
The missed opportunities are not limited to traders. The differences in national contract laws also affect consumers who want to shop across borders. Part of the problem is that consumers are often uncertain about their rights when confronted with different foreign laws. For example, what rights would they have if they bought a defective product? The result is that they decide to only shop at home.
In many cases, this means that these consumers are disadvantaged by a limited choice and higher prices in their domestic markets. What's more, consumers who try to access better offers in other Member States are often refused sales or delivery by the trader. Imagine the message some web shoppers regularly read: "Sorry, but the product you requested cannot be delivered in your country of residence." When this happens, many consumers are naturally discouraged from shopping across borders and feel they have no choice but to pay a higher price or settle for a substitute product sold in the domestic market. The current situation doesn't help traders and consumers take advantage of the huge benefits of Europe’s single market.
The Commission is now entering a decisive stage. Based on its impact assessment, the Commission will have to decide on the proper focus for the legislative proposal that is being prepared for this autumn.
I am therefore looking forward to hearing your opinion on the questions raised in the Polish Presidency’s paper. These issues are essential in helping us decide on the measure’s proper scope. Your answers will help the Commission shape its proposal so that it is fit for purpose. I would therefore invite you to help me with constructive proposals that I can integrate into the Commission's further work.
One important question is whether an optional European contract law should be made available for both cross-border and domestic transactions or only for cross-border transactions. One could argue that in an internal market, it makes no sense to distinguish between cross-border and domestic trades. On the other hand, it is easier for Member States to accept that the EU only addresses contract law issues in cross-border transactions and gives Member States the possibility to opt for the European solution for domestic contracts. We have chosen such a modest, but subsidiarity friendly solution already in the EU's Mediation Directive. I would be very interested to hear your views on this.
I would also be interested in hearing whether our proposal should cover only the traditional offline world. Is this the right time to make a bold move that includes digital products and online services, in line with the EU's overall policy objective to create a digital single market?
Allow me also to address three points up front as I know that some of your advisors will have raised concerns about them.
First of all, the Commission is fully aware that differences in contract law are not the only obstacle to cross-border transactions. There are many others. But this is certainly not a reason for ignoring this obstacle, which is particularly difficult for many traders.
Secondly, I know that there are some delegations here who have written contributions to our public consultation that are much more ambitious than what I have just said. Two ministers even asked me to propose a European Civil Code. Dear colleagues, I am a Luxembourger, and therefore very down too earth and realistic. This is certainly not the time for a Napoleonic approach. This is the time for small, pragmatic and efficient steps, in line with the method applied very successfully by Jean Monnet since the beginning of European integration. This is why I want to limit the initiative to cross-border sales law. It is certainly good if some of us dream about more. Please continue to do so. But let's work together on obtaining what is achievable in our lifetime. Europe's internal market cannot wait any longer for more growth.
Thirdly, I know that some of your advisors continue to dream about a "tool box". A tool box is an interesting word. Putting tools in a box – well, I believe that Europe cannot afford to leave the tools in a box at this moment. We need to take the tools we have in hand and put them to use. For more than two decades, experts and practitioners have worked on developing the right tools. Last February, the Commission decided to take these tools a step further and turn them into something operational. A tool box for an optional European sales law was published at the beginning of May. Now, I believe it is the time to use the tools.
Just think back for a moment to the merchants from the Hanseatic League. They would almost certainly have considered a debate about a tool box to be rather esoteric. They would have said: show me what the tools can do. And if we like what we see, then we use them. But please do not leave them in a box. Put them on the table!
Dear colleagues, dear Justice Ministers,
my intention later this year is to put the tools on the table, in front of you and the European Parliament. I know that I can count on you to take them in hand. We are facing an historic challenge. We need to be as bold as the traders who sold goods around the Baltic Sea. Members of the Hanseatic League would quickly understand what we are doing. We are breaking down barriers and creating opportunities for businesses and consumers. What better way to make the most out of a single market of 500 million consumers.