European contract law reform consultation closes: where next?

In July last year the European Commission published a Green Paper on policy options for progress towards a European Contract Law, which argued that the current system of national laws operating in the internal market creates unnecessary complexity and hampers cross-border trade. It set out seven policy options, ranging from publishing the work of a group of experts looking at the issue through to a Regulation establishing a European civil code.

The Commission apparently favours the 4th option, which would see the creation of an optional instrument of European contract law. This so-called "28th regime" would insert into the national laws of the 27 member states an alternative set of contract law rules which could be chosen by contracting parties as the governing law for their contract.

Background

The Green Paper argues that the current system of national laws operating in the internal market creates unnecessary complexity and hampers cross-border trade. It sets out the following seven policy options:

• Option 1 – publication of the work of a group of experts looking at the issue
• Option 2 – an official "toolbox" for legislators either adopted by the Commission (Option 2a) or by an interinstitutional agreement between the Commission, the European Parliament and the Council (Option 2b)
• Option 3 – a Commission Recommendation encouraging Member States to incorporate an instrument of European contract law into their national laws
• Option 4 – a Regulation setting up an optional instrument of European contract law
• Option 5 – a Directive on European contract law to harmonise national contract laws on the basis of minimum common standards
• Option 6 – a Regulation establishing a European contract law to replace national laws with a uniform European set of rules
• Option 7 – a Regulation establishing a European civil code

The European Commission apparently favours Option 4 which would see the creation of an optional instrument of European contract law. This so-called "28th regime" would insert into the national laws of the 27 member states an alternative set of contract law rules which could be chosen by contracting parties as the governing law for their contract. Consultation on the Green Paper closed on 31 January 2011.

The UK Government issued its own Call for Evidence on the Commission's proposals. Whilst the Green Paper assumed that the current situation causes problems, the Call for Evidence started by asking whether this is in fact the case. It also asked for opinions on the advantages and disadvantages of each of the options set out in the Green Paper and asked for responses to focus primarily on issues that flow from the legal framework rather than from different administrative systems and languages. We understand that there were over 50 responses to the Call for Evidence. The Ministry of Justice used these responses to inform the UK Government's response to the Commission.

UK Government's position

The UK Government has now published its response to the Green Paper in which it favours Options 1 and 2a but robustly challenges the other options. The response cites a lack of demonstrable need for any of the other options and raises serious doubts about the EU's competence to pursue any of them. It also raises concerns about the apparent support of the Commission for Option 4 since "it suggests that important policy decisions have been taken in the absence of adequate evidence and before the views of the consultees are known". If the Commission does attempt to pursue this option further the UK Government calls for a rigorous impact assessment and a full consultation on the proposed content of the relevant instrument. It goes on to highlight a number of points in relation to Option 4, including the following:

• the risk that an optional instrument would be rarely used as it would not reflect any particular legal or cultural heritage and would be "comfortable and familiar to no one";
• the extra costs that will inevitably result from the introduction of the optional instrument;
• the impact that the optional instrument may have on the current commercial position of English law and the risk that businesses would instead choose non-EU jurisdictions such as New York, Switzerland or Singapore;
• the need to show an appropriate legal base for the optional instrument given that, if there is any doubt about its legality, it may not be used at all; and
• the uncertainty that would remain given the differences in interpretation by courts in different Member States.

Herbert Smith's position

Representatives from Herbert Smith have been involved in various cross-City working groups which submitted responses both to the Ministry of Justice and the Commission. We also submitted our own response to the Ministry of Justice and a joint response to the Commission in conjunction with our German alliance partner Gleiss Lutz. Our submission focussed primarily on Option 4 given the Commission's clear preference for this option. The issues we raised related to the content and interpretation of the optional instrument, the jurisdictional basis for such a change, the impact for consumers, the cost implications and the risk that the adoption of an optional instrument will start the move towards a single contract law code for Europe.

Next steps

We understand that the Commission has received approximately 300 contributions and that support is generally split between Option 4 on the one hand and Options 1 and 2 on the other hand. There is little support for any of the other options.

The Commission is apparently intending to present an impact assessment in July and to propose any follow up measures in the last quarter of this year. The Green Paper itself states that any further action proposed would be by 2012. This tight timescale hardly suggests that the impact assessment will be the rigorous, far-reaching study called for by the UK Government and many other respondents, nor does it allow for a detailed and considered consultation on the actual contents of any optional instrument that may be proposed.