European contract law expert group publishes results of feasibility study

Practical Law UK Legal Update 8-505-9538 (Approx. 5 pages)

European contract law expert group publishes results of feasibility study

by PLC Commercial

Background

Common Frame of Reference

As part of initiatives to develop a European contract law, the Common Frame of Reference (CFR) was developed as a "toolbox" of fundamental principles of contract law, model rules of contract law and model definitions. The European Commission launched the Expert Group in May 2010 to study the feasibility of transforming the Common Frame of Reference (CFR) into a non-binding instrument that could be used by European Community legislators to improve the quality and consistency of Community contract legislation, see Legal update, European contract law: expert group set up to assist European Commission.

Green Paper

Separately to the CFR, the European Commission published a Green Paper in July 2010 proposing seven options for a European contract law, ranging from publication of the conclusions of the Expert Group through to an EU Regulation to establishing a European civil code. The European Commission argues in the Green Paper that such a law would remove (or reduce) barriers to cross-border trade, which it believes currently exist because of the differences between member states' national contract laws. It believes that these differences create legal uncertainty and additional transaction costs for businesses, especially SMEs, and mean that consumers do not feel confident about engaging in cross-border trade. The Green Paper sets out a number of possible forms that a European contract law instrument could take. Its preferred option, which has been endorsed by the Committee on Legal Affairs of the European Parliament, is for an optional European contract law instrument.

For more information, see the PLC Commercial legislation tracker.

Expert Group's report

The Expert Group has now published its feasibility study describing how EU-wide contracts could be created and providing guidance on interpreting common contract terms and their application. The study covers both business-to-business contracts and business-to-consumer contracts. It includes a draft instrument. The study also describes various scenarios which are intended to illustrate why a European contract law is needed.

The draft text includes the following sections:

Introductory provisions including definitions, for example of "consumer" and "durable medium", and general principles of contract law (Part 1).
Rules on the formation of contracts and rights to withdraw from, or avoid, distance or off-premises contracts (Part 2).
General provisions for interpreting contracts, including guidance on which contract terms may be considered unfair and are therefore invalid. The text also provides that, with the exception of the price and the main subject matter of contracts, terms in consumer contracts can be unfair not only when they are in standard form but also when they are individually negotiated, if they significantly disadvantage the consumer (Part 3).
Obligations of the seller (for example, to provide goods that conform to the description of goods set out in the contract) and the buyer (for example, to pay the price set out in the contract) and includes remedies for non-performance. For example, in business-to-business transactions, businesses will have a right to remedy any defective performance of a contract before the other party is able to call upon more serious remedies such as terminating the contract or demanding a price reduction. In business-to-consumer contracts, where faulty goods have been supplied, the text foresees that consumers will be able to choose between having the right to have faulty goods repaired or replaced, the right to withhold their own performance or terminate the contract, and the right to have the price reduced or claim damages for non-performance (Part 4).
Rules that are applicable the provision of services (such as installation, repair or maintenance) in close connection to a contract for the sale of goods (Part 5).
Rules on damages for contractual breach and interest applicable to late payments. It also explains the rules which apply on what must be returned when a contract fails and on the effects of the lapse of time on the exercise of contractual rights (Part 6).

The Expert Group is seeking feedback on a number of questions, including:

Should the controls on unfair terms in consumer contracts be extended to cover terms that are individually negotiated as well as standard terms.
Should a European contract law instrument cover digital content (whether it is delivered in a durable medium or directly downloaded from the internet).

Next steps

The European Commission now seeks feedback on the draft text by 1 July 2011. The European Commission is expected to put forward a formal proposal for an optional European contract law instrument this autumn.

Comment

The draft contract law is at an early stage but represents a step forward in the move towards a European contract law. Although the experts' study covers both business-to-consumer and business-to-business contracts, PLC understands that a decision has not been yet been taken on the scope of any future Commission proposal.

The European Commission has already expressed its support for an optional contract law instrument, although some member states and organisations are less enthusiastic. For example, the Law Society has issued a press release expressing concern over the results of the study and the lack of sufficient stakeholder and practitioner input in the process at EU level. The proposal is advancing quickly and, if implemented, could fundamentally change the way that business is transacted within the EU.

Source

Expert Group feasibility study, 3 May 2011.

European contract law expert group publishes results of feasibility study | Practical Law