The European Commission considers that differences between national contract laws may entail additional transaction costs and legal uncertainty for businesses in the European internal market that, in turn, could lead to businesses being reluctant to engage in cross-border transactions. Therefore, in July 2010, the Commission published a Green Paper setting out its policy options for progress towards a European Contract Law for consumers and businesses.
European contract law options
The Commission put forward seven options, ranging from the expert group’s findings that could be used by legislators as a source of inspiration when drafting legislation (but which would have no formal authority or status), to a Regulation establishing a European Civil Code that would replace national laws and cover not only contract law but the law of general obligations. The middle ground, option 4, provides for an optional European contract law instrument giving parties a choice between two regimes of domestic contract law. It would work by inserting a set of self-standing contract law rules into Member States’ national law, which the contracting parties could choose as the governing law of their contract instead of the national law of one of them.
In April 2011, the European Parliament committee voted in favour of option 4, commenting that an optional instrument would have the effect of providing a single body of law that could do much to improve the functioning of the European internal market. The committee also noted a need to provide standard terms and conditions of trade for businesses based upon this optional instrument.
UK government and Law Society response
The idea of an optional European contract law instrument has not been well received in the UK. The UK government raised concerns that it would have an impact on the current commercial position of English law (which it states is the preferred choice of global and inter-EU commercial contract law). The government commented that if this commercial position is unsettled, any business that the UK loses would most likely not be displaced to elsewhere in the EU. The government also raised concerns regarding the interface such an optional instrument would have with other areas of law (for example, tort) stating that it would seem impossible for any new instrument to cover all possible areas of dispute (and that as a result, any instrument would need to refer back to national law in any event).
The Law Society actively opposes introducing a European contract law instrument and disagrees that diverging national laws impede cross-border trade. It believes that many barriers to cross-border trade are practical and procedural, adding that the concerns businesses have in entering the markets of other Member States relate to differing court processes, means of seeking redress and difficulties relating to enforcement procedures.
The Law Society further comments that an optional instrument would lack any established jurisprudence and that it would not be possible to ensure consistent interpretation of the new instrument across the courts of Member States, meaning that divergences would continue.
Feasibility study: a complete set of rules
The expert group’s feasibility study is a complete set of contract law rules covering those issues that are relevant in a contractual relationship, including:
- The meaning of certain concepts (such as damages) and general principles of contract law that parties should observe (like good faith and fair dealing).
- How agreements are concluded and the right to withdraw from an agreement.
- How contract terms should be interpreted and what constitutes an unfair (and therefore invalid) term.
- The obligations and remedies of parties to sales and services contracts.
- Damages, interest, restitution and prescription.
Impact on UK construction contracts
In considering what impact these rules could have on construction contracts, it is worth looking at the proposed rule relating to the basis of payment for non-performance. The rule states that where a contract provides that a debtor who fails to perform an obligation is to pay a specified sum to the creditor for non-performance, the creditor is entitled to that sum irrespective of the actual loss. That sum may be reduced to a reasonable amount where it is grossly excessive compared to the loss resulting from the non-performance and other circumstances.
This is in stark contrast to the English law on liquidated damages clauses, which are frequently used in construction contracts. Such clauses provide an employer with an easily-quantified contractual remedy to cover the losses sustained in the event of the contractor’s delay.
Under English law, such amounts must reflect a genuine pre-estimate of the employer’s loss (the assessment takes place at the time the contract was entered into). If a court finds it is not a genuine pre-estimate, the provision is unenforceable and loss has to be proved in the usual way. No principle of court adjustment exists in English law, enabling a court to reduce an agreed basis or amount to a level deemed appropriate in the circumstances. Adopting the payment for non-performance rule would be a significant change.
More generally, an optional European contract law would have an impact on the UK construction industry, in terms of employers and contractors from different Member States looking to enter into a construction contract having a “third” common regime that they could choose to govern their contract in place of one or other’s national laws.
I would be surprised if employers and contractors would readily choose such a “third” option to govern their contract. Parties confronted by a choice of law are generally prepared to contract under English law and many of the industry standard form contracts used on major construction projects are drafted on the basis of an English law approach. Parties from other Member States seeking to contract with a UK party are familiar with the principles of English contract law and are comfortable entering into contracts on that basis. If implemented, I would therefore question whether an optional European contract law would be chosen as the law to govern contracts in the construction industry in the UK.
Finally, on a multi-party, multi-contract project, involving contracts between UK parties and contracts between a UK party and parties from other Member States, it is essential that the governing law provisions are consistent across all of the contracts. In view of this, I think that English law will continue to apply as the law of choice for these projects.
