Contracts are essential for running businesses nowadays. The rise of cross-border transactions leads to the necessity of translating different national contract laws when operating in the internal market.
The aim of this paper is to emphasize the possibility to ease cross-border transactions by making contract law more coherent and by reducing transaction costs. Do we need a European contract law for businesses and consumers?
The European Union (EU) has been working on European Sales Law for a decade. The proposed Regulation for a Common European Sales Law (CESL), unveiled on October 11, 2011, is considered to be necessary for the harmonisation of contract laws.
The CESL is an optional instrument which leaves Member State’s laws intact. It will coexist with the national law. The objective is to create a new secondary regime recognised in the EU. If the CESL is attractive to private parties, they will choose this European instrument over the Member State’s contract regimes (Schulze, 2012).
Furthermore, the European Commission started a process of public consultation on the problems arising from differences between contract laws. The European Parliament’s Legal Affairs Committee voted in support of this instrument to facilitate cross-border transactions (Expert Group on European Contract Law, 2011).
According to another view, parties will hardly deviate from the national system that provides safety and stability. Consumers should be able to see the advantages of a choice by comparing information from different legal systems. There should be differences between various laws for the competition among national legal systems. Parties will choose the jurisdiction that best satisfies their needs. The more information is available about CESL, the more likely it is that the parties will choose this instrument. Technologies can have an important role in making comparisons. It could be useful if websites offered rankings of jurisdictions based on their attractiveness for parties. In this case parties would be able to choose the most suitable regime for them (Smits, 2012).
Do we need an optional regulation for contract law?
One of the CESL’s objectives is to help Small and Medium-sized Enterprises (SMEs) to trade easier across the single market and avoid excessive costs due to the consumer protection rules. Traders have to pay more because of constantly adapting transactions to different national rules. Less complexity is preferred by businesses and legal differences resulting from national laws are an impediment to the proper functioning of the internal market. Businesses sometimes refuse to sell products abroad.
The CESL aims to provide a higher level of consumer protection. Consumers can apply the CESL rules in all their cross-border transactions (Kornet, 2012). CESL contains mandatory rules from which parties cannot derogate. The level of protection is equal or higher than the current acquis. Consumers have better protection and certainty about their rights.
On the other hand, according to some opinions, CESL will not offer a higher level of consumer protection and consumers will be deprived of better standards. Even if they will be able to opt for the applicable regime, CESL will not be optional because it is an adhesion contract. The weak party (the consumers) will not be able to compare the benefits of different laws and decide what is better for them (Pachl, 2012).
I highly believe that CESL offers a high level of consumer protection and it will also reduce the current uncertainty of consumers.
If the consumer buys a defective product, CESL allows the consumer the right to choose between replacing, repairing the product, demanding a discount or cancelling the contract. Moreover, the future regulation will help traders to simplify negotiations because of the neutral law which is available to both parties in their own language.
Last but not least, European Commission ensures that ‘this proposal is without prejudice to future Commissions initiatives concerning the liability for infringements of the Treaty on functioning of the EU, for example relating the competition rules’ (European Commission, 2011).
Reducing contract-law-related transaction costs
CESL’s objective is to help traders avoid excessive costs due to the consumer protection rules. Differences in laws lead to a tax on cross-border transactions. A possible solution for reducing costs is harmonisation and standardisation of contract laws. This solution creates network benefits. With an optional regime, the language would not be an impediment to cross-border transactions (Eidenmüller, 2012).
Because of the differences in laws, there are additional transaction costs for adapting contracts, obtaining legal advice and negotiating the applicable law (Kornet, 2012). Furthermore, in e-commerce transactions, traders must adapt the business’ website to the legal requirements of each state where they sell. The costs resulting from interaction with various national laws are an impediment, especially for SMEs. Usually SMEs have to agree to apply the business partner’s law and support the costs of finding out the content of the applicable law. Because of these impediments, the number of traders is reduced, and this in turn generates a negative impact upon European consumers. Competitiveness decreases and this can lead to a more limited choice of products at a higher price.
CESL is a good opportunity for consumers. They will benefit from more choices at lower prices. The majority of European consumers shop only domestically because of their uncertainties about the consumer rights. E-commerce facilitates the search for offers and the comparison of prices. Businesses would trade with many Member States because of the lower costs. The legal environment for cross-border trade would be simpler (European Commission, 2011).
According to the proposed CESL Regulation, traders spend excessive sums of money, for example €10.000 per business and country they want to sell to, on legal advices for adapting contracts to each national law. On the other hand, the Commission’s evidence for calculating these costs is unclear. Also a trader does not have to translate the contract term.
Other statistics show that 90% of traders never refused to sell to foreign consumers because of the different terms and language (Pachl, 2012).
Conclusions and proposals
The aim of CESL is to improve the functioning of the internal market by facilitating the expansion of cross-border trade. More cross-border trades will lead to more diverse products at lower prices. Consumers will not be discouraged to shop cross-border. They will have better offers: lower prices and higher quality.
I think a website should be established with comparative legal information about consumer rights in each Member State and training for legal practitioners would also be adequate.
To conclude, I strongly believe that nowadays, due to the language barriers, a harmonisation of sales law is required. CESL will create a win-win situation for both traders and consumers. Traders will avoid excessive costs and they will expand to new Member States markets.