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The Optional Instrument of European Contract Law and Freedom of Contract Paper submitted as part of the consultation process initiated by the European Commission by its Green Paper on policy options for progress towards a European Contract Law for consumers and businesses1 Simon Whittaker, Professor of European Comparative Law, University of Oxford2 Summary. This paper considers Option 4 of the Green Paper3 which proposes a ‘Regulation setting up an optional instrument in European Contract Law.’ It does so from the perspective of the dual vision of freedom of contract in national contract laws and in the Union acquis, both in its substantive law and its private international law: freedom of contract as promoting market transactions and freedom of contract as promoting individual autonomy. Having outlined the purposes and proposed scheme for the Optional Instrument in the Green Paper, the paper seeks to assess the Optional Instrument from the perspective of these two visions of freedom of contract. In this respect, in the case of consumer contracts, it argues that such an Optional Instrument would either not give sufficient recognition to the importance of the quality of consent of consumers or, if it did, the concomitant legal uncertainty would reduce its effectiveness in terms of the development of the internal market. Secondly, as regards commercial contracts, it argues that the existing balance between chosen applicable law and other laws (whether of the forum or the law otherwise applicable) in the Rome I Regulation should not be put aside without more explicit justification than an appeal to the economic advantages of an exclusive legal regime. Moreover, it argues that the limits on the effectiveness of choice of applicable law as regards noncontractual liability (whether pre-contractual or arising in the course of a contract) and difficulties of defining the scope of a system of rules of the likely breadth of the Optional Instrument are likely to generate both uncertainty and complexity for any businesses which were to choose it.

I. The significance of freedom of contract in European law 1.

1

Freedom of contract has been recognised as a ‘general principle of civil law’ by the European Court of Justice,4 has been seen as protected by article 16 of the EU Charter of Fundamental Rights (‘freedom to conduct business’)5 and has been set by the EU Commission as a fundamental point of

Com(2010)348 final (1 July 2010) (‘Green Paper’) This contribution is given in an individual capacity. 3 Green Paper, p. 9. 4 Case C-240/97 Spain v European Commission [1999] E.C.R. I-6571 at para. 99 (common agricultural policy); Case C 277/05 Société thermale d’Eugénie-les-Bains v Ministère de l’Economie, des Finances et de l’Industrie [2007] E.C.R. I-6415 at paras 21, 24, 28 and 49 (V.A.T.); Case T-170 Alrosa Co Lt v European Commission Eu-Lex at para. 108 implicitly referring to ‘the fundamental economic freedoms guaranteed by the Treaty’ (competition law). 5 EC Commission, Explanations relating to the Charter of Fundamental Rights OJ C 303 (14 Dec. 2007) 17 at 23. 2

reference for the future development of European contract law.6 Furthermore, a starting-point in freedom of contract or ‘party autonomy’ is reflected both in EU private international law7 and in EU substantive law provisions which qualify its application in the interests of protecting ‘weaker parties’ (notably consumers8) or which otherwise prohibit an ‘abuse of freedom of contract’.9 As these latter examples make clear, however, in EU law as in the laws of the Member States, freedom of contract is no more than a starting-point (if an important one), given the range of modern social and political considerations which require its qualification. So, while the subordinate nature of the ‘private law-making’ of contracting parties has long been clearly proclaimed in national legal traditions,10 the last half century or so has seen a considerable growth in the range of ‘public policy’ qualifications on freedom of contract, notably for the protection of consumers, tenants and employees. 2.

6

However, in my view, in modern European law (whether EU law proper or the laws of Member States) there lies under the banner of freedom of contract a fundamental duality of vision. On the one hand, freedom of contract can be seen as an economic principle on which markets of all kinds are to be based.11 Seen in this light, the law’s role in establishing or supporting freedom of contract lies in ensuring that legal and commercial institutions are so set up as to support a free and open market and, more specifically, the role of contract law is primarily (or at least generally) to support and facilitate market transactions: this may be termed ‘the market vision’ of freedom of contract. On the other hand, freedom of contract can instead be seen as a moral principle, according to which the justification for contractual obligations is found in the choice (‘will’) of the individuals party to the contract, a vision of freedom of contract often expressed on continental Europe under the phrase ‘contractual autonomy’ or ‘the autonomy of the will’ and with obvious roots in the philosophy of Rousseau and Kant12: this may be termed the ‘voluntarist’ vision of freedom of contract.

EC Commission, First Annual Progress Report on European Contract Law and the Acquis Review Com(2005) 456 final para. 2.6.3. 7 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (‘Rome I’) (the ‘Rome I Regulation’) art. 3. 8 The residual need to protect the parties’ ‘contractual autonomy’ can be seen in the fact that Directive 93/13 on unfair terms in consumer contracts does not apply to terms which have been individually negotiated nor to those which reflect the ‘main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other, in so far as these terms are in plain intelligible language’: arts. 3, 4(2). Cf. H. E. Brandner and P. Ulmer, ‘The Community Directive on Unfair Terms in Consumer Contracts: Some Critical Remarks on the Proposal Submitted by the EC Commission’ (1991) 28 CMLR 645. 9 Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payments in commercial transactions, recital 19 (‘This Directive should prohibit abuse of freedom of contract to the disadvantage of the creditor’). The directive applies to ‘commercial transactions’, defined as ‘transactions between undertakings or between undertakings an public authorities which lead to the delivery of goods or the provision of services for remuneration’: arts. 1 & 2(1). 10 E.g. art. 6 and 1134 al. 1 Code civil français. 11 For this purpose, I do not restrict the term ‘market’ to purely commercial transactions between businesses (‘B2B’) and I include within it transactions made between traders and consumers (‘B2C’) and at least some transactions made between individuals neither of whom are acting in the course of business (so-called ‘C2C’) such as the buying and selling of residential property. 12 V. Ranouil, L’autonomie de la volonté, Naissance et évolution d’un concept (PUF, Paris 1980) p. 10. This acknowledgment of the influence of enlightenment philosophy on contract law does not

3.

The relationship between these different visions of freedom of contract is not straightforward either in the national laws of European Member States nor in EU law. So, rather than modern European laws fully reflecting one or other vision of the role of the law in relation to contracts (whether the general law or contract law properly so-called), these visions exist in tension within the laws, though to different extents in different substantive areas and in different national laws. So, while in some situations, these two visions of freedom of contract lead to the same approach to a particular legal issue (for example, as regards the general freedom whether or not to contract and with whom), in other situations they lead to very different approaches, different rules and different substantive results. For sometimes a concentration on the protection of an individual’s ‘will’ may lead to a rule or rules which would not facilitate the reliable making of private transactions in the market. I will give no more than two examples from national laws. 3.1

First, English contract law possesses a very restricted law of vitiation of a contract on the ground of mistake: in principle, a single party’s mistake (‘unilateral mistake’) is not a ground of invalidity and both the parties’ mistake is only exceptionally a ground of invalidity: this position (which sidelines the poor quality of a party’s consent) is explicitly justified by the courts on the ground that it promotes certainty of contract, and this in turn reflects a concern that the law should be posited in a way which best facilitates private transactions. By contrast, the French law of mistake takes as its starting-point a concern with the quality of (‘subjective’ and therefore ‘actual’) consent of each of the contracting parties and this has led French courts to extend the narrowly drafted provisions of the Code civil so as to provide a broad ground of invalidity for erreur sur les qualités substantielles of the contract.13

3.2

Secondly, the modern laws controlling the effectiveness of ‘unfair’ contract terms can be seen differently according to the different visions of freedom of contract. So, these laws can be seen as qualifications on freedom of contract (and its sister principle of the binding force of contracts) in the interests of public policy or contractual justice: here, public policy trumps the general usefulness for the market of giving effect to contract terms, even to standard contract terms. Alternatively, or in addition, these modern laws can be seen as justified by the low quality or even lack of consent of one of the contracting parties, particularly where the term in question forms part of a standard form used by the other party in the course of business: the control of unfair terms does not qualify the party’s ‘contractual autonomy’, it seeks to protect it. Furthermore, sometimes the same vision of freedom of contract can lead to different approaches here. So, in English law the general position remains that in

deny the ancient origins of the importance of consent to contract found in Roman law and later Romanist scholarship. 13 John Cartwright, ‘ Defects of Consent and Security of Contract: French and English Law Compared’ in P. Birks and A. Pretto, Themes in Comparative Law in honour of Bernard Rudden (OUP, Oxford, 2002) chap. 11.

non-consumer contracts, terms (once agreed14) are valid even if they are contained in a standard form of business of the other party15: the use of standard form contracts (including onerous terms) is seen by most English lawyers as a legitimate expression of market power as well as of freedom of contract. By contrast, the modern German approach to the control of standard contract terms in all types of contracts (including B2B as well as B2C) is often justified on the ground that here there is a ‘partial failure of the market which may legitimately be corrected by means of judicial intervention’.16 The idea is that in B2B contracts businesses act rationally in relation to another business’s standard contract terms by avoiding disproportionate costs of negotiating or obtaining the necessary information or contracts on more favourable terms given that these costs are out of proportion to the advantages to be gained.17 Here, therefore, a specifically market-oriented argument is used to justify legal intervention in market practices. Freedom of contract (market vision) can justify legal intervention. 4. However, in my view, the fundamental duality of vision of the principle of freedom of contract (market and voluntarist) can also be seen in EU law itself. The market vision can easily be seen in the most fundamental aspects of the law (notably, the fundamental freedoms guaranteed by the Treaty which are concerned to establish and to promote the internal market) and references to the needs of the internal market are prominent in EU secondary legislation governing contracts, reflecting the competences on which it is based. However, on turning to the substance of a good deal of the same legislation, we find a clear concern with the quality of consent of contracting parties. This is particularly striking in the consumer acquis. So, for example, the Unfair Terms in Consumer Contracts Directive of 1993 starts by justifying its enactment by reference to ‘the aim of progressively establishing the internal market’ and that: the laws of Member States relating to the terms of contract between the seller of goods or supplier of services, on the one hand, and the consumer of them, on the other hand, show many disparities, with the result that the national markets for the sale of goods and services to consumers differ from each other and that distortions of competition may arise amongst the sellers and suppliers, notably when they sell and supply in other Member States.18 14

The law governing the question of agreement of terms (the ‘incorporation of terms’) does allow the courts to evaluate the surprising and/or onerous nature of a particular term, with the important exception of a contractual instrument in signed writing. 15 The most important exceptions to this position are found in the common law of penalty clauses and in the controls of exemption clauses (and certain related clauses) in s. 3 of the Unfair Contract Terms Act 1977: see G.H. Treitel, The Law of Contract (12th edn., 2007 by E. Peel), paras 7-064 – 7-066, 20121 – 20-128. 16 R. Zimmermann, The New German Law of Obligations, Historical and Comparative Perspectives (2005) p. 176. 17 H. Kötz and A. Flessner, European Contract Law, Vol. I Formation, Validity, and Contract of Contracts; Contracts for Third Parties by H. Kötz, trans. T. Weir (Oxford, 1997) pp. 139 & 144. 18

Directive 93/13/EEC on unfair terms in consumer contracts

So, the Directive is needed so as to facilitate the conclusion of contracts within the European internal market (so fulfilling the condition in the EEC Treaty).19 On the other hand, on turning to the provisions of the Directive itself, these combine a concern with the substantive effect of a term allegedly unfair with a concern as to whether or not it is ‘plain and intelligible’.20 The requirement of the with the transparency of contract terms reflects a concern with the quality of consent of a consumer to the particular term, even where it has not been individually negotiated. 5. In looking at the consumer acquis more broadly, the concern with the provision of information by businesses to consumers about the goods or services to be supplied to them is of widespread importance and the reason for this is both to improve the quality of the decision-making by consumers (thereby reflecting the ‘voluntarist’ vision of freedom of contract) and to enhance competition (thereby reflecting the market vision of freedom of contract). Nowhere is this more clearly seen than in the Unfair Commercial Practices Directive, whose purpose is to promote the internal market and whose ‘general clause’ defines an ‘unfair commercial practice’ in part by reference to the ‘material distortion’ of ‘the economic behaviour with regard to the product of the average consumer whom it reaches or to whom it is addressed,’ defining the material distortion of a consumer’s economic behaviour as ‘using a commercial practice to appreciably impair the consumer's ability to make an informed decision, thereby causing the consumer to take a transactional decision that he would not have taken otherwise.’21 Again, the general justification for the legislation reflects a concern with the development of a free and open market, while its substantive content is concerned (in part) with the promotion of the informed decisionmaking and, therefore, quality of consent of consumers. 6. EU private international law governing contracts also reflects a dual concern with the proper functioning of the internal market through the establishment of an area of ‘freedom, security and justice’ and with the parties ‘contractual autonomy’. So, recital 6 of the Rome I Regulation on the law applicable to contractual obligations states that: The proper functioning of the internal market creates a need, in order to improve the predictability of the outcome of litigation, certainty as to the law applicable and the free movement of judgments, for the conflict-of-law rules in the Member States to designate the same national law irrespective of the country of the court in which an action is brought.

19

At the time, art. 100A EEC (subsequently art. 95 EC; now art. 114 TFEU). Arts. 3 & 7. 21 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council (‘Unfair Commercial Practices Directive’) Directive art. 2(e) and 5(2)(b) (emphasis added). 20

A concern with the need for predictability and certainty as to the law applicable to a dispute for the proper functioning of the market is also found in the Rome II Regulation on the law applicable to non-contractual obligations.22 7. On turning to the substantive provisions of the Rome I Regulation, recital 11 explains that: The parties’ freedom to choose the applicable law should be one of the cornerstones of the system of conflict-of-law rules in matters of contractual obligations. Article 3(1) then states that: A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract. This provision is cast in the language of choice and is often viewed in terms of giving expression to the parties’ ‘autonomy of the will’.23 As can be seen, article 3(1) even allows contracting parties to choose different laws to apply to different ‘parts’ of their contract, thereby allowing what may be called voluntary dépeçage,24 a possibility sometimes criticised as attracting a degree of legal uncertainty. 8. On the other hand, as is very well-known, the Rome I Regulation puts in place importance qualifications on the effectiveness of the contracting parties’ choice. 8.1 First, it allows only the choice of a ‘State law’ as the applicable law, though it allows the possibility of non-State law being incorporated as the terms of a contract.25 8.2 Secondly, the Rome I Regulation is not restricted to determining the law applicable to cross-border contracts (although clearly these are its main concern),26 but it specifies that: 22

Regulation (EC) 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (‘Rome II’) (the ‘Rome II Regulation’), recital 6. 23 Y. Loussouarm, P. Bourel, P. de Vareille-Sommières, Droit international privé (9th edn., Dalloz, 2007) para. 378-1 1 (concerning Rome I’s direct predecessor, the Rome Convention on the law applicable to contractual obligations, whose article 3(1) & 3(3) are in very similar terms to arts. 3(1) and 3(3) Rome I Regulation. The authors state that ‘[u]ne très grande liberté est reconnue aux parties dans le choix de la loi applicable. Cette force d’expansion d’autonomie de la volonté manifeste quant à l’objet et aux modalités du choix. Elle résulte également de la double possibilité offerte aux contractants de soumettre leur contrat à plusieurs lois et de modifier le choix initialement effectué par eux.’ 24 Dépeçage can be ‘involuntary’ where the law itself applies different governing laws to distinct issues. 25 Recitals 13, 14. The EU Commission takes this position in the Green Paper, para. 2, p. 3. 26 Dicey, Morris and Collins, The Conflict of Laws (14th edn, Thomson, 2006) with later supplements paras. 32-065 – 32-068.

Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.27 So, where the parties to a purely domestic contract choose a law other than that domestic law, their choice will not prejudice those domestic laws ‘which cannot be derogated from by agreement’.28 8.3 Thirdly, and most obviously, the Rome I Regulation does not allow the parties choice of law unfettered sway. So, this choice shall not ‘have the result of depriving the consumer of the protection afforded to him by provisions that cannot be derogated from by agreement by virtue of the law’ of his habitual residence.29’ Nor will it ‘restrict the application of the overriding mandatory provisions of the law of the forum’.30 9. A very similar approach is taken to the choice of jurisdiction under the Brussels I Regulation, which recognises that the parties to an agreement may, subject to certain conditions, set the ‘jurisdiction to settle any disputes that have arisen or which may arise in connection with a particular relationship,’31 but any such agreement may not prevent a consumer from bringing a claim before the jurisdiction of his or her domicile.32 10. The approach of the Rome II Regulation on the law applicable to noncontractual obligations is, by contrast, much more circumspect in the extent to which it allows parties by agreement (including by contractual agreement) to choose the law applicable for these purposes. So, article 14(1) provides that: The parties may agree to submit non-contractual obligations to the law of their choice: (a) by an agreement entered into after the event giving rise to the damage occurred; or (b) where all the parties are pursuing a commercial activity, also

27

Rome I Regulation, art. 3(3). The reference to ‘the law of that other country which cannot be derogated from by agreement’ apparently refers to laws which are generally not capable of derogation under domestic law (national mandatory laws) rather than to those which are not capable of derogation by choice of law (internationally mandatory laws): Dicey, Morris and Collins, para. 32-134 (concerning the Rome Convention, art. 3(3) , whose later supplement notes that recital 15 Rome I Regulation records that no substantial change from the Rome Convention is intended by the slightly different wording in its own provision in article 3(3). 29 Art. 6(2) referring back to art. 6(1) Rome I Regulation. 30 Art. 9 Rome I Regulation. 31 Council Regulation (EC) No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‘Brussels I Regulation’), art. 23. 32 Art. 16 & 17. 28

by an agreement freely negotiated before the event giving rise to the damage occurred. The choice shall be expressed or demonstrated with reasonable certainty by the circumstances of the case and shall not prejudice the rights of third parties. 11. This provision is particularly interesting as it restricts the choice of law governing future non-contractual obligations to cases not merely where ‘all the parties are pursuing a commercial activity’ but where such an agreement is ‘freely negotiated’. In this context, therefore, EU private international law seeks to restrict freedom of choice to the commercial context and to where the quality of consent of the contracting parties is likely to be high. Finally, article14(2) Rome II Regulation provides a similar provision as is found in article 3(2) Rome I Regulation for contracts in stating that: Where all the elements relevant to the situation at the time when the event giving rise to the damage occurs are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. In common with the Rome I Regulation, the Rome II Regulation is not restricted to the designation of the law applicable to cross-border torts/delicts, but where a tort/delict is purely domestic any otherwise effective choice of law cannot escape domestic legal rules which cannot be derogated from by agreement. 12. Overall, therefore, EU substantive contract law and EU private international law recognise the importance of freedom of contract both in the sense of the facilitation of private transactions in the market and in the sense of giving effect to the choices of individuals. However, they also recognise that the law (sometimes EU law itself and sometimes national laws otherwise applicable) may need to override the parties’ choice on grounds of policy. Generally, the law should give effect to party choice; but sometimes the law should not give parties the option. 13. In my view, it is in the light of these existing fundamental features of the acquis and of the national legal traditions of Member States that the Commission’s suggestion of the creation of an Optional Instrument of European Contract Law should be viewed. Put simply, would the creation of such an optional instrument give proper weight to ensuring genuine individual choices? Would the optional instrument facilitate the conclusion and performance of market transactions within the EU? And does its scheme recognise the importance of denying party choice in the interests of public policy? II. The ‘Optional Instrument’ as presented by the Commission 14. The idea of an ‘optional’ contract law for Europe has been present in the European Commission’s documents inviting discussion about the future of

European contract law from 2002,33 though it first found clear expression a year later in the Commission’s Action Plan.34 The Commission’s Green Paper (together with the published Synthesis of the Fifth Meeting of the Expert Group of the Commission35) provide a much clearer picture as to what the Commission envisages as being the purpose and the legal nature of such an optional instrument. It puts forward a number of possibilities as regards the scope of such an instrument. At present, the proposed content of such an optional instrument is not determined, this waiting for the outcome of the Commission’s consideration of the work of its Expert Group on the Common Frame of Reference. The purposes of the Optional Instrument 15. The purposes of the Optional Instrument as set out by the European Commission are fundamentally economic and are concerned with the facilitation of contracting within the internal market, particularly as regards cross-border contracts. From this perspective, the Optional Instrument seeks to give effect to a ‘market vision’ of freedom of contract as I earlier explained it. 16. For this purpose, the Commission identifies a number of existing obstacles to market transactions across Europe, summarising these as being: The internal market is built on a multitude of contracts governed by different national contract laws. Yet, differences between national contract laws may entail additional transaction costs and legal uncertainty for businesses and lead to a lack of consumer confidence in the internal market. Divergences in contract law rules may require businesses to adapt their contractual terms. Furthermore, national laws are rarely available in other European languages, which imply that market actors need to take advice from a lawyer who knows the laws of the legal system that they are proposing to choose. Partly for these reasons, consumers and businesses, in particular small and medium enterprises (SMEs) having limited resources, may be reluctant to engage in cross-border transactions. This reluctance would in turn hinder cross-border competition to the detriment of societal welfare. Consumers and businesses from small Member States might be particularly disadvantaged.36

33

Communication from the Commission to the Council and the European Parliament on European Contract Law Com(2001) 398 final paras 62-69. 34 Communication from the Commission to the European Parliament and the Council, A more coherent European Contract Law, An Action Plan Com(2003) 68 final paras 89-97. See also Communication from the Commission to the European Parliament and Council, European Contract Law and the revision of the acquis: the way forward Com (2004) 651 final para. 2.3.. 35 European Commission, D-G Justice, Expert Group on a Common Frame of Reference in European Contract Law, Synthesis of the Fifth Meeting, 30 September – 1 October 2010 (‘Expert Group Synthesis of Fifth Meeting’) available at http://ec.europa.eu/justice/policies/consumer/docs/cfr_report_10_10_01_09_30_en.pdf. 36 Green Paper, para. 1.

It will be seen that the Commission sees the existing arrangements (different national contract laws expressed in their own languages) as creating costs which act as disincentives to cross-border trade: costs based on the need for translation, on the need to adapt their contract terms, and more generally on the need to take legal advice. This distorts competition. This is assumed to be the case despite the presence of comprehensive EU uniform rules determining the law applicable to cross-border contracts now found in the Rome I Regulation. 17. Later in the Green Paper, the Commission distinguishes between consumer contracts (B2C) and commercial contracts (B2B). 18. As regards consumer contracts, the position established by article 6 of the Rome I Regulation ensures that ‘consumers can be confident that, in the event of dispute, courts will ensure that they will benefit from at least the same level of protection as guaranteed in their country of residence’.37 However, ‘[f]or businesses, this rule means that when they sell across borders, the contracts that they conclude with consumers are subject to the different rules in force in the countries in which these consumers are resident, irrespective of whether a choice of law is made or not’.38 This increases the cost to businesses and ‘[i]n extreme cases, some businesses may even refuse to sell across borders and thus potential consumers of that company may be locked in their national markets and may be deprived of the enhanced choice and lower prices offered by the internal market. This may be particularly relevant in e-commerce transactions’.39 19. The Green Paper then distances itself from the usefulness of the EU relying on ‘full harmonisation’ of national contract laws as a solution to this problem since ‘even if adopted as proposed, it would not render fully compatible the national contract laws of the Member States in non-harmonised areas ... there would be a need to apply them in conjunction with other national provisions of general contract law.’40 This last point is an important one as it accepts the need to assess any new initiative in an area as complex and inter-connected as contract law (and private law more generally) in the light of its wider context.41 20. As regards commercial contracts, the Green Paper’s criticisms of the existing regime under the Rome I Regulation are rather different. It accepts the general ‘freedom to choose the law governing’ the contract in business-tobusiness contracts, though it notes the absence of ‘the option of a common European contract law which could be applied and interpreted uniformly in all the Member States’.42 Moreover, it sees the ability of large companies to set 37

Green Paper, para. 3.1. Ibid. 39 Ibid. 40 Ibid. 41 Cf. the criticisms of the present author of the Consumer Rights Directive Proposal on this basis in S. S. Whittaker ‘Unfair Terms and Consumer Guarantees: the Proposal for a Directive on Consumer Rights and the Significance of “Full Harmonisation” (2009) European Review of Contract Law 2-25. 42 Green Paper, para. 3.2. 38

the laws which govern the contracts which they make, whereas small businesses may find this more difficult, thus preventing them from grasping opportunities of the internal market. Ensuring compliance with different systems of law might increase legal costs.43 These comments suggest that the purpose of creating an optional contract law is – at least to an extent – to correct the imbalance of market power as between large and small businesses. 21. More generally, the Commission considers that: businesses might benefit from an instrument setting out a uniform set of rules of European Contract Law which could be easily accessible in all official languages. This could provide greater reassurance to businesses in cross-border trade, which might quickly familiarise themselves with such a system by using it in all dealings with businesses in other Member States. In such dealings, it could also come to be seen as an alternative to the Member States national contract laws and a neutral modern contract law regime drawing on the common national law traditions in a clear and user-friendly manner. Such an option could be particularly attractive for SMEs venturing into new markets for the first time.44 22. So, an Optional Instrument could be ‘neutral’ as between the parties and could reduce costs of all the parties to cross-border contracts, whether large or small businesses. To do so, it must be clear and its effects easily accessible to contracting parties. The legal nature of the optional instrument 23. There are three ways in which an Optional Instrument could regulate crossborder contracts.45 The first is that the parties to such a contract could set the instrument as terms of their contract: this possibility already exists under the Rome I Regulation, but would have no attraction from the point of view of the Commission’s purposes as it leaves entirely untouched the differences in legal consequences of the contracts, the ‘optional instrument/terms’ being subject to the rules of the otherwise applicable law. Secondly, the parties could be allowed to choose the Optional Instrument as the law applicable to their contract within the framework of the Rome I Regulation (which would require amendment to do so). However, this would also have little attraction from the point of view of the Commission’s purposes, as any such a choice of the optional instrument would generally be subject to ‘overriding mandatory provisions’ under article 9 of the Rome I Regulation and, as regards consumer contracts, would be without prejudice to any protections for the consumer provided by his or her law of habitual residence. 24. The Green Paper instead proposes at third way, viz. that the optional instrument should be 43

Ibid. Ibid. 45 Cf. S. Whittaker, ‘A Framework of Principle for European Contract Law?’ (2009) 125 Law Quarterly Review 616 at 621. 44

conceived as a “2nd Regime” in each Member State, thus providing parties with an option between two regimes of domestic contract law. It would insert into the national laws of the 27 Member States a comprehensive and, as much as possible, self-standing set of contract law rules which could be chosen by the parties as the law regulating their contracts. It would provide parties, primarily those wishing to operate in the internal market, with an alternative set of rules. The instrument could be applicable in cross-border contracts only, or in both cross-border and domestic contracts ... By its very nature, an optional instrument could only constitute a sensible solution to the problems stemming from regulatory divergences if it is sufficiently clear to the average user and provides legal certainty. These are preconditions for building the confidence of the contracting parties in the instrument so that it would be chosen as the legal basis of the contract in the first place. In particular, consumers should be reassured when entering into a contract on this basis that their rights will not be compromised. To be operational from an internal market perspective, the optional instrument would have to affect the application of the mandatory provisions, including those on consumer protection. Indeed, this would constitute the added value compared with the existing optional regimes, such as the Vienna Convention, which cannot restrict the application of national mandatory rules.46 So, first, the Green Paper accepts that the benefits of the Optional Instrument will only be achieved if the regulation which it substitutes for the national law otherwise applicable is ‘sufficiently clear to the average user and provides legal certainty’. Moreover, secondly, once the parties to a contract have opted for the Optional Instrument, then its rules will apply to their relationship to the exclusion of all other rules, whether of the otherwise applicable law or, in the case of consumer contracts, of the law of the consumer’s habitual residence. This point is made even more clearly in the views expressed by the Chair of the Commission’s Expert Group at its Fifth Meeting, according to whom ‘[w]hile an OI should be without prejudice to the normal application of the Rome I Regulation appropriate measures have to be taken to ensure that the OI, where chosen, is the only applicable law and solves all the problems arising within its scope of application.’47 As a result, in particular, ‘[t]he lack of application of divergent nationally mandatory consumer protection rules has to be counter-balanced by a high level of consumer protection in the OI itself.’48

The possible variations in scope of the optional instrument 25. The Green Paper sets out in a very open way the various possibilities as to the scope of application of any instrument adopted: whether it should extend to commercial contracts (B2B) as well as consumer contracts (B2C); and 46

Green Paper, para. 4.1 Option 4, p. 9 (references omitted, emphasis added). Expert Group Synthesis of Fifth Meeting, para. I. 48 Ibid. 47

whether it should include rules governing special contracts (or at least some special contracts) as well as general contract law provisions.49 The tenor of the Commission’s own position appears from its statement that it should certainly cover general contract law,50 ‘mandatory consumer law rules, taking the Union acquis as a starting point’,51 and rules governing contracts for the sale of goods as ‘the most common and relevant from the internal market perspective.’52 For the purposes of assessing the desirability of the Optional Instrument, these three elements will be assumed to set its proposed scope, while acknowledging that the scope in fact remains a matter for later decision. 26. Finally, the Green Paper notes that ‘the problems of divergences of laws are normally a trademark of cross-border contracts,’ but then notes that restricting the Optional Instrument to this context would lead to businesses and consumers contracting on two sets of rules, one for cross-border, the other for domestic contracts.53 ‘An instrument applicable to both cross-border and domestic consumer contracts would further simplify the regulatory environment, but would impact on consumers who may not wish to venture into the internal market and prefer to preserve.’54 Here, it is acknowledged, therefore, that the availability to businesses of an Optional Instrument which they can use for domestic contracts would deprive consumers of their own domestic protection. Here, therefore ‘simplicity’ would come at a price. 27. On the other hand, according to the Green Paper, in business-to-business contracts where the principle of freedom of contract is paramount, it may be unreasonable to deny the parties the possibility of choosing the European instrument in purely domestic transactions. An instrument covering both cross-border and domestic contracts could represent a further incentive for businesses to expand across borders, as they would be able to use one single set of terms and one single economic policy.55 28. So, here freedom of contract is put forward as the justification for the creation of an Optional Instrument for domestic contracts as well as cross-border contracts: why, indeed, should European law deny them this choice? III. The Optional Instrument and freedom of contract 29. How, therefore, does the Optional Instrument as envisaged by the Green Paper match freedom of contract either in terms of its market vision or its voluntarist vision as earlier explained? I will start with the position as regards consumer contracts (B2C) and then turn to commercial contracts (B2B).

49

Green Paper, paras 4.2 & 4.3. Ibid., para. 4.3.1. 51 Ibid., para. 4.3 52 Ibid. para. 4.3.3. 53 Ibid., para. 4.2.2. 54 Ibid. 55 Ibid., para. 4.2.2. 50

An optional instrument for consumer contracts? 30. The Green Paper recognises that a European Optional Instrument in contract law would not achieve its intended economic advantages in terms of developing the internal market without having what I shall term an exclusive effect, that is to say, that once chosen it will govern all issues within its scope to the exclusion of any other law, whether this is the law of the forum or the law otherwise applicable under the normal rules of private international law. 31. The Green Paper specifically recognises that this would mean that consumers who choose the optional instrument would thereby lose whatever protection would otherwise be ensured to them under their habitual law (under article 6 of the Rome I Regulation).56 As has been seen, the Green Paper would seek to respond to this potential reduction in the protection of European consumers by the Optional Instrument’s setting a high level of consumer protection (based on the acquis) and by reference to the advantages which consumers would gain in exchange from the advantages drawn from a more developed internal market. 32. Clearly, it is a matter of judgment whether these anticipated advantages are ones which provide the basis of a fair bargain for consumers in exchange for this clear loss of protection. In my view, this is a very similar question as has been raised already in discussions of the ‘full harmonisation’ set out by the Consumer Rights Directive Proposal.57 Under this proposal, it is to be recalled, the Commission relied on the economic benefits which ‘full harmonisation’ (that is, a maximum as well as a minimum of protection within the scope of its provisions) would allegedly generate for its effect on existing national consumer rights beyond its own terms.58 As the Green Paper now admits, ‘two years of intense negotiations in the European Parliament and Council have highlighted that there are limits to an approach based on full harmonisation’.59 While the reasons for this may be complex, surely one reason is that many consider that EU law should not require Member States to reduce the protection for consumers established by their existing contract laws. 33. How, then, does an ‘exclusive optional instrument’ differ? A first point is that the breadth of scope of the intended instrument (general contract law and, at least, the law of sale of goods60) would seek to address the question of coherence. And the optional instrument would be ‘free-standing’, a 2nd national contract law implanted by the EU legislator. The implications of this idea clearly go beyond the consumer context and will be addressed later,61 but

56

Ibid., para. 3.1. European Commission, Proposal for a Directive on consumer rights, COM(2008) 614 final (9 October 2008) Art. 4. 58 European Commission, Proposal for a Directive on consumer rights, COM(2008) 614 final (9 October 2008) Explanatory Memorandum, para. 1; ‘policy option 4’, p. 5; p. 7. 59 Green Paper, para. 3.1, p. 5. 60 Above, para. 25. 61 Below, paras 46 et seq. 57

how should one view an optional ‘full harmonisation’ of contract law from the point of view of consumers? 34. My main point here, put simply, is that in the vast majority of cases such an option would undermine the contractual autonomy of consumer contractors and thereby their true freedom of contract. For how many consumers would understand that, by choosing the Optional Instrument they would necessarily lose the protection otherwise afforded to them by the law of where they live? An on-line consumer who clicks a ‘blue button’62 or who ticks an electronic box (designating the Optional Instrument) to govern his or her internet contract is not (without more) likely to understand this significance; nor is the off-line consumer who agrees the standard terms of a business whose boilerplate clause selects the Optional Instrument as the governing law. 35. This simple point can be supported more technically by applying the standards already put in place by EU law for the protection of the contractual autonomy of consumers. 36. So, first, how would the Commission’s scheme for an Optional Instrument match the standard set by the Unfair Commercial Practices Directive 2005? As has been seen, this Directive requires Member States to put in place a general system of control of the commercial behaviour of businesses to consumers, its general concern being that a business should not ‘appreciably impair [the average] consumer's ability to make an informed decision’.63 In the absence of any explanation of the significance of the Optional Instrument (especially in terms of the deprivation of rights under their law of habitual residence), would not a business risk being found guilty of such an unfair commercial practice? While the 2005 Directive does not require any private law effects,64 it does require Member States to ‘ensure that adequate and effective means exist to combat unfair commercial practices in order to enforce compliance with the provisions of this Directive in the interest of consumers.’65 37. Of course, the EU legislation creating the Optional Instrument could specially exempt businesses offering an unexplained choice of the Optional Instrument from control under national law implementing the 2005 Directive, but if it were to do so, this would emphasise the fact that such an option would fail to take proper account of the need for a properly informed decision by consumers in concluding their contract than would normally be required by EU law. Clicking a blue button or agreeing to a boilerplate choice of the ‘Optional Instrument of European Contract Law’ is not likely to have any great significance to the ‘average consumer’ and would surely not be understood, without more, as meaning that they would lose rights otherwise enjoyed.

62

For the idea of the ‘blue button’ see H. Schulte-Nölke, ‘EC Law on the Formation of Contract – from the Common Frame of Reference to the “Blue Button”’ (2007) 3 ERCL 332, 348 – 349. 63 Above, para. 5. 64 Specifically, article 3(2) of the 2005 Directive provides that it is ‘without prejudice to contract law and, in particular, to the rules on the validity, formation or effect of a contract’. 65 2005 Directive, art. 11(1).

38. Secondly, if the Optional Instrument were designated as the governing law by a business’s standard terms, then (in the absence of special derogation) this term would itself fall to be assessed for its fairness under the legal rules as required by the Unfair Contract Terms Directive 1993. This would be the case either as a matter of the application of the national law implementing the Directive otherwise applicable (under the Rome I Regulation) or, if the exclusive character of the Optional Instrument were expressed as extending so far, under the rules within the Optional Instrument which themselves reflect this part of the Union acquis.66 38.1First, as regards cross-border contracts, a contract term whose effect is to deprive consumers of the protection of any law of their habitual residence which goes beyond the rules in the Optional Instrument, would arguably count as one which ‘causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’ within the meaning of article 3(1) of the 1993 Directive. Whether, in the circumstances such a deprivation would mean that the term was unfair taking into account ‘the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent’ and whether this was ‘contrary to the requirement of good faith’ would be more open questions. 38.2Secondly, as regards purely domestic contracts (on the premise that these contracts are to be capable of being subject to the Optional Instrument67), a standard term designating the Optional Instrument would deprive the consumer of the protection of those provisions of domestic law which cannot be derogated from by agreement.68 Again, such a term would prima facie fall within the test of unfairness in article 3 of the 1993 Directive. 38.3Thirdly, in the context clearly a very important element in the overall evaluation of the fairness of a term designating the Optional Instrument would be the extent to which the business had explained the significance of the option before contract: a standard term whose effect is explained is more likely to be fair as the conclusion of the contract is more likely to reflect an informed and therefore real choice on the part of the consumer. For this purpose, a contract term which merely designates an instrument of the likely complexity of the Optional Instrument (which it appears will contain rules sufficient to govern the general law of contract and the law of sale of goods69) could well be thought to fall within the example of a potentially unfair term in the ‘indicative list’ of terms in the Annex to the 1993 Directive as one which has the effect of ‘irrevocably binding the 66

That the Optional Instrument should contain such a system of control follows from the Commission’s requirement that it should represent at least the level of protection for consumers set by the acquis. 67 Above, para. 26. 68 Rome I Regulation art. 3(3), above, para. 8.2. 69 Above, para. 25.

consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract’.70 The Optional instrument may not count technically as ‘terms’ but the low quality of the consumer’s consent is identical. 39. So, whether as regards either a cross-border or a purely domestic contract, choice of the Optional Instrument by a term not individually negotiated would fall to be tested as to its fairness. Where a business did not explain that choice of the Optional Instrument would lead to a potential loss of rights in the consumer, then such a term would be more likely to be unfair. 40. How does this affect the practical operation of such a standard contract term as regards the development of the internal market and so freedom of contract in the sense of the facilitation of private transactions? 40.1 First, it suggests that, in deciding whether a standard term designation of the Optional Instrument as governing law is unfair within the meaning of the 1993 Directive, a court would take into account whether or not the business had explained that the effect of the Optional Instrument is to deprive the consumer of the protection of the law of his or her habitual residence. On the other hand, if a business were to explain this effect to consumers before the conclusion of the contract (in a plain and intelligible way), it may well be thought that at least some consumers will prefer not to contract on this basis (if the business gives them a choice in the matter) or will not conclude the contract at all. An individual consumer is unlikely to see the general benefits of the Optional Instrument for the internal market (wider competition as tending to lead to better prices) as sufficient compensation for losing rights under the law of his or her habitual residence. 40.2 Secondly, it would surely be relevant to any court deciding on the fairness of a term designating the Optional Instrument as to whether the consumer could chose to conclude the contract on this basis or instead some other basis (notably, the law otherwise applicable). So, for example, in an on-line contract, a consumer may be able to choose to click the ‘blue button’ or instead tick a ‘no, thanks - I’ll keep to the law otherwise applicable’ box instead. 71 Such a choice for the consumer would argue in favour of the fairness of the term under which a consumer chose the Optional Instrument, but it would mean that a business would not gain the economic advantages (in terms of the saving of costs) which the Optional Instrument might otherwise offer. 40.3 Thirdly, the European Court of Justice has made clear that while it ‘may interpret general criteria used by the Community legislature in order to define the concept of unfair terms. ... it should not rule on the application 70

Directive 93/13/EEC on unfair terms in consumer contracts, Annex I, para (i). The existence of such a choice would not mean that the terms designating one or the other governing law would be ‘individually negotiated’ so as to fall outside the test of control in article 3 of the 1993 Directive as they would both remain ‘ drafted in advance’ so that ‘the consumer has therefore not been able to influence the substance of the term’ under article 3(2) of the Directive. 71

of these general criteria to a particular term, which must be considered in the light of the particular circumstances of the case in question.’ Having noted the importance for this purpose under article 4 of the Directive of ‘all the circumstances attending the conclusion of the contract’,72 the Court observed that ‘it should be pointed out in that respect that the consequences of the term under the law applicable to the contract must also be taken into account.’73 However, a legal norm of the breadth and openness of the ‘unfairness’ of a contract term leaves a very considerable ‘margin of appreciation’ for national courts to come to a view as to fairness in the light of their own evaluation and the circumstances obtaining nationally. What this means is that the designation of the Optional Instrument by a business in its standard terms would be subject to national judicial evaluations as to whether such a designation is fair in the circumstances. This would significantly undermine the Commission’s stated purpose of providing businesses with a single and uniform legal basis for their European cross-border contracting. 41. Of course, one solution to this problem would be for the EU legislator in setting up the Optional Instrument to change the law governing unfair contract terms so that the choice of the Optional Instrument would not fall to be assessed as to its fairness, even if contained in a term not individually negotiated in a consumer contract. However, any such special exemption would show the extent to which the Optional Instrument scheme fails to take into account the existing law’s proper concern both with the quality of consent of consumers in concluding their contracts and with the risk of substantive unfairness to them by way of loss of rights which may thereby occur. There are some options which EU law should not allow businesses to put to consumers. 42. Finally, there is a practical aspect of the choice of Optional Instrument in online contracts which merits noting given that these contracts are seen by the Green Paper as particularly deserving of its attention.74 In this context, a consumer would be faced with a choice as to whether or not to click a ‘blue button’ or tick a box designating the Optional Instrument as applicable. But what is the position if a consumer clicks the button or ticks the box by mistake, whether inadvertence or physical clumsiness? 43. If the exclusive nature of the Optional Instrument follows the lead set by the general rule in article 10(1) of the Rome I Regulation, then ‘the existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it ... if the contract or term were valid.’ If this were the case, then the question whether a consumer could escape the effect of his or her contract by reason of this mistake would fall to the Optional Instrument’s own provisions on mistake. If these provisions were to allow consumers to escape the contract on the ground of their mistake in opting for the Optional Instrument, then this would clearly undermine the usefulness of the Optional Instrument for businesses, given that they could not know 72

Case C-237/02 Freiburger Kommunalbauten [2004] ECR I-3403 para. 22. Ibid., para. 21. 74 Green Paper, para. 3.1, p. 5. 73

whether or not any individual consumer had or had not genuinely chosen the Optional Instrument. If, on the other hand, under the Optional Instrument the mistake of a consumer in ‘choosing’ the Optional Instrument were not a ground of avoidance at least of the subjection of a consumer to its rules, then the result could seem very unreasonable. For if the Optional Instrument is applied as a result of the consent of the consumer (as well as the business), then it may be thought that this consent should be real and not merely apparent. For this purpose, it is to be recalled, the general rule in article 10(1) of the Rome I Regulation is qualified by article 10(2), which provides that ‘a party in order to establish that he did not consent may rely upon the law of the country in which he has his habitual residence if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct’ under article 10(1). 44. Overall, therefore, the approach adopted by the Union acquis as represented in article 10 of the Rome I Regulation takes as its starting-point that a choice of applicable law in contracting parties should affect issues of consent, unless it is not reasonable to do so in the circumstances. While formally this approach would not apply to the Optional Instrument as envisaged by the Commission (as it would take effect outside the scheme of the Rome I Regulation), nevertheless it shows that the EU legislator has accepted that issues of invalidity (including mistake) should not be governed necessarily by any law chosen by contracting parties and that a court may instead chose to apply the law of the country of a party’s habitual residence. 45. In conclusion, the Union consumer acquis demonstrates a consistent concern with the quality of consent of consumers in the making of their contracts, this concern reflecting the ‘voluntarist’ vision of freedom of contract as I earlier have identified it. The acquis possesses systems of rules requiring Member States to take effective action to prevent traders from acting in a way which undermines their genuine consent (unfair commercial practices) and systems of rules which allows (and, indeed, sometimes requires75) courts to review contract terms which do not reflect their genuine consent (unfair contract terms). This concern sets the standard by which we should assess the scheme put forward by the Optional Instrument. For either a business is permitted under the scheme to offer the ‘option’ without proper explanation of its potentially prejudicial consequences to the consumer (and therefore fall below the standard set by the acquis) or a business should avoid the risk of committing an unfair commercial practice or the choice of its Optional Instrument in its standard contract terms being held not binding on the consumer as an ‘unfair contract term’. So, if the normal standard as to the quality of consent of consumers is applied to a consumer’s choice of Optional Instrument, it will be seen that at least sometimes this choice will not be effective to ensure that the contract is subject to the Optional Instrument. Such a result would, therefore, undermine the purposes of the Optional Instrument in terms of development of the internal market as envisaged by the Green Paper. 75

Under the caselaw of the ECJ following Océano Grupo Editorial SA v Murciano Quintero Joined Cases C–240/98 to C–244/98 of June 27, 2000 [2000] E.C.R. I–4941 & Mostaza Claro v Centro Móvil Milenium SL Case C–168/05 of October 28, 2006 [2007] 1 C.M.L.R. 22.

An optional instrument for commercial contracts?

46. Unlike the position as regards consumer contracts just outlined, EU law does not contain any general scheme of rules governing the fairness of standard contract terms in commercial contracts (B2B) nor does it require Member States to take measures against unfair commercial practices generally. How, then, should we assess the idea of the Optional Instrument in the context of commercial contracts? 47. First, EU private international law does set out a system of rules which give effect to freedom of contract/contractual autonomy, but it also recognises that commercial parties’ freedom of choice of applicable law should have its limits. 48. Secondly, a key element in the Green Paper’s vision for success of the Optional Instrument in terms of the development of the internal market lies in the ability of contracting parties to subject their legal relationship to a single, certain regime.76 Is this vision justified? 49. Before looking at these two questions, it is helpful, in my view, to address an analogy often raised with the Optional Instrument in relation to the United Nations Convention for the International Sale of Goods 1980 (the ‘Vienna Convention’). An analogy with the Vienna Convention? 50. In informal discussions with continental colleagues the analogy is often raised between the application of the Optional Instrument of European Contract Law to commercial contracts and the Vienna Convention. The analogy is also picked up by the Green Paper, which notes early in its discussion of the application of the Optional Instrument’s application to ‘business-to-business contracts’ that the parties ‘can ... incorporate into their contracts existing instruments, such as the Vienna Convention on the International Sale of Goods.’77 51. However, while the analogy between the Optional Instrument and the Vienna Convention is a fruitful one, there are some points of possible difference between them (apart from the obvious difference that the Vienna Convention applies only to international sales of goods, whereas the Optional Instrument may not be similarly restricted). 51.1 First, in principle under the Vienna Convention ‘the parties may exclude or, subject to article 12, derogate from or vary the effect of any of its provisions’.78 In this respect, under the scheme as put forward 76

Above, para. 21. Green Paper, para. 3.2, p. 5. 78 Vienna Convention, art. 6. Article 12 concerns special rules governing the retention of formality rules by signatory States. 77

in the Green Paper, it would appear that commercial parties who designate the Optional Instrument may not derogate from or vary the effect of any of its provisions except to the extent which it will itself allow, but the extent to which derogation or variation is allowed will not be known until the text of the Optional Instrument is published. To the extent to which this text includes elements which commercial parties may not vary or exclude it will differ significantly from the Vienna Convention. 51.2.Secondly, as regards signatory States, the Vienna Convention applies in the absence of an option by the contracting parties that it should not do so: it forms an example of ius dispositivum. By contrast, the Optional Instrument (as presently envisaged) requires the contracting parties to opt in. The significance of this difference is, of course, that there is no need to establish any actual consent in the contracting parties to ius dispositivum: it applies in the absence of consent to the contrary. This means that while an ‘opt-out’ Instrument can straightforwardly govern a range of issues which do not rest on consent (such as regards pre-contractual liability or non-contractual liability), an ‘opt-in’ Instrument provides a much less sure foundation for the application or the exclusion of rules which cannot be traced to the parties’ consent. Choosing the optional instrument: freedom of contract/contractual autonomy 52. In general, as has been noted, the Rome I Regulation formally accepts the importance of the parties’ choice of applicable law.79 This is generally seen as being reflective of their autonomy (‘voluntarist’ vision of freedom of contract) and conducive to the facilitation of international commerce (‘market vision’ of freedom of contract. However, there are three important qualifications on the power of the party’s ‘autonomy’ in the Union acquis of private international law. 53. First, under the Rome I Regulation, where all elements (apart from the choice of law) relevant to the situation are located in a country other than the country whose law has been chosen, the choice of the parties is not allowed to prejudice the application of the rules of that other law which cannot be derogated from by agreement.80 By contrast, if the Optional Instrument were allowed to be applied to purely domestic contracts (where all elements were therefore domestic), then its exclusive nature would prevent the application of such domestic mandatory rules. This is a radical difference: parties to a commercial contract could avoid the application of the mandatory rules of their (general or ‘1st regime’) national law by choosing the Optional Instrument. Member States will surely need considerable convincing that commercial parties should be free to do so, given that this power was not vouchsafed to them under the Rome I Regulation.

79 80

Above, para. 7. Above, para. 8.2.

54. Secondly, as has been noted, any choice of law under the Rome I Regulation made by commercial parties is subject to the application of ‘overriding mandatory provisions’ of the law of the forum under article 9. By contrast, the exclusive nature of the Optional Instrument would exclude the application of such provisions, even if they passed the stringent test of their being ‘regarded as crucial by a country for safeguarding its public interests ... to such an extent that they are applicable in any situation within their scope irrespective of the law otherwise applicable to the contract.’81 Again, excluding this qualification on the effectiveness of the parties’ choice of law reflects a considerable step in loss of national (applicable) law’s view of the public interest in contracts. 55. Moreover, under article 9(3) of Rome I, ‘overriding mandatory provisions’ of the law of the country where obligations arising out of the contract have to be or have been performed may be applied despite any choice of applicable law insofar as they render the performance of the contract unlawful. In the case of the Optional Instrument, it would appear that it will contain provision for ‘grounds of invalidity’ of the contract,82 and this expression in the DCFR includes invalidity on the grounds of ‘infringement of fundamental principles or mandatory rules’.83 If such a ground of invalidity were contained within the Optional Instrument, then it would contain the seeds of its own qualification on the grounds of national mandatory rules. For, the designation of the Optional Instrument would lead to an exclusive regime, except where that regime itself required the application of national/otherwise applicable law. If this were the case, then the advantage of the Optional Instrument over the choice of applicable law under Rome I in terms of simplicity and certainty would be to this extent undermined. 56. Thirdly, while the Rome I Regulation accepts that issues relating to the invalidity of a contract are in principle to be governed by the law chosen by the parties under article 3,84 the position is more complicated as regards precontractual liability (‘culpa in contrahendo’) and non-contractual liability more generally under the Rome II Regulation. 57. As regards pre-contractual liability, these difficulties have been acknowledged by the Commission in its Synthesis of the Fifth Meeting of the Expert Group of the Commission, whose Chair: set out the options of a) the direct application of Article 12 Rome II whether or not a contract has been concluded, b) (declaratory) derogation from Rome II laying down a separate rule with the content of Article 12 Rome II, and c) a differentiated rule leading to the application of the OI to pre-contractual duties where a contract has been concluded and to the applicable national law where no contract has been concluded.85

81

Rome I Regulation, art. 9(1). Green Paper, para. 4.3.1. 83 Arts II.-7:301 – II.-7:304 DCFR. 84 Above, para. 43. 85 Expert Group Synthesis of Fifth Meeting, para. 1. 82

The general rule set out in article 12(1) Rome II is that: The law applicable to a non-contractual obligation arising out of dealings prior to the conclusion of a contract, regardless of whether the contract was actually concluded or not, shall be the law that applies to the contract or that would have been applicable to it had it been entered into. Article 12(2) then sets other rules for cases ‘[w]here the law applicable cannot be determined on the basis of paragraph 1.’ 58. In my view, the scheme envisaged by article 12 Rome II cannot be transferred to the Optional Instrument to govern pre-contractual liability where no contract is concluded since the scheme in article 12 Rome II rests on a premise that the law applicable to the contract can be determined under the Rome I Regulation. Now, under the Rome I Regulation, such a determination may take place either by the parties choosing the contract under article 3 or by the various rules designating the law applicable in the absence of choice in article 4. This means that, under Rome I, it is meaningful to talk about a law applicable to a contract even in the absence of any concluded contract: this can often be determined under article 4 even where no contract is concluded. However, the position is very different as regards an Optional Instrument whose application takes effect only by the choice of the contracting parties and outside the scheme of Rome I: for how can the Optional Instrument ever be properly chosen as governing the parties’ contract (and therefore applicable law) where no contract is concluded? 59. It would appear that it is this sort of difficulty which lies behind the Commission’s suggestion (quoted above) that the Regulation setting up the Optional Instrument may instead provide that it would apply only to precontractual duties where a contract has been concluded, leaving to the applicable national law where no contract has been concluded. If this is the case, it can be seen that the vision of the Optional Instrument as governing the relationship between would-be contracting parties in an exclusive fashion would be, at least to this extent, compromised. 60. A similar sort of difficulty arises in relation to non-contractual liability. As has been seen, the existing position under the Rome II Regulation is that an agreement by contracting parties to submit any future non-contractual liability arising between them to a law of their choice will not take effect unless they are ‘pursuing a commercial activity’ and would do so by ‘an agreement freely negotiated.’86 Putting aside pre-contractual liability, the application of the Optional Instrument could give rise to issues of non-contractual liability to the extent to which a law otherwise applicable would treat non-performance of a contractual obligation as (sometimes) giving rise to non-contractual liability. One solution to this problem from the point of view of the Optional Instrument, would be say that it governs only contractual liability leaving noncontractual liabilities as governed by the national law otherwise applicable 86

Rome II, art. 14(1), above, para. 10.

(the line between the two to be defined ‘autonomously’). This would, however, give rise both to some difficult and delicate issues of classification and would disappoint businesses chosing the Optional Instrument in the expectation that it would form an exclusive basis of their future legal relationship. So, again, the Optional Instrument looks both less exclusive and less simple a scheme than is suitable to achieve the purposes of the Commission in terms of developing the internal market. The ‘Scope of the Instrument’: difficulty and uncertainty 61. This brings me to my final observations on the likely effectiveness of the Optional Instrument in achieving the purpose of developing the internal market: the problem of the complexity of its scope. For, if the Optional Instrument takes effect as an exclusive regime within its scope, this places enormous weight on the definition of the scope of all its provisions which, it is to be recalled, are likely to stretch across general contract law. 62. Of particular difficulty, in my view, is the situation where the Optional Instrument is silent as to an issue or a matter which is seen as relevant by the law otherwise applicable to the contract. Does this silence mean that the otherwise applicable law can apply? Or are some silences to be interpreted as implicitly excluding the application of otherwise applicable law? 63. Of course, it may be countered that questions of scope are familiar to EU lawyers – and to lawyers more generally – and should not deter us. However, in my view, the likely complexity and difficulty to be encountered as regards the many questions of the scope of an instrument seeking to create a common and general European contract law are very considerable. Such difficulties can be resolved, but only after a considerable period of interpretation and judicial decision-making. In the meanwhile, business parties choosing the Optional Instrument could find themselves embroiled in exactly the sort of expensive sorts of legal disputes which the Commission is seeking to avoid.

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