European contract law for consumers and businesses
In April 2010 the European Commission (EC) set up an Expert Group on European contract law, comprising practitioners, judges and academics from across the EU (EG), to progress the development of a European contract law ‘toolbox’. The aim was to reduce costs and legal uncertainty in cross border transactions.
rationale:
As one component of the toolbox, the EG was tasked with producing an instrument for use in business to business contracts covering sales contracts and associated services contracts as well as issues of general relevance to cross border transactions. The EG recently published its proposed draft ‘code of contractual provisions’ running to 189 articles. This would form the basis of the new European contract law. The idea is that this body of law would subsist in parallel with the laws of each member state of the EU and would be interpreted autonomously, without recourse to national laws.
draft requirements:
For business to business contracts the majority of the provisions would not be mandatory and parties would be free to derogate from them (although whether parties could freely ‘pick and choose’ individual clauses is entirely unclear). However, the principles of ‘good faith and fair dealing’ would become mandatory and could not be excluded. The Code requires:
- “Before the conclusion of a contract for the supply of goods or services to another business, the supplier has a duty to disclose any information concerning the main characteristics of any goods or services to be supplied which the supplier has or can be expected to have and which it would be contrary to good faith and fair dealing not to disclose to the other party.” This very much sounds like a pre-contract duty to warn!
- “A [business] who is engaged in negotiations has a duty to negotiate in accordance with good faith and fair dealing and not to break off negotiations contrary to good faith and fair dealing.”
Whilst these are concepts familiar to continental European jurisdictions, these have not historically been part of English contract law and would represent a very significant change.
draft provisions:
Other draft provisions of particular interest include:
- Additional protections against clauses limiting and excluding liability would apply in favour of small and medium sized enterprises.
- In interpreting a contract, particular regard may be had to the preliminary negotiations. This is very different from the current position under English law.
- Terms would be implied where ‘necessary’. Any implied term would, where possible “be such as to give effect to what the parties, had they provided for the matter, would probably have agreed”. Quite how this would be ascertained is unclear.
- Terms of the contract can be derived from pre-contractual statements. “If one of the parties to a contract is a business and before the contract is concluded makes a statement, either to the other party or publicly, about the characteristics of what is to be supplied under the contract, the statement becomes a term of the contract.” The wording of advertising or tender proposals could then become much more significant.
- All but core terms defining the subject matter of the contract and the appropriateness of the price are subject to a general test of ‘fairness’.
- There is a general implied duty of co-operation imposed on the parties.
- Non-performance must be ‘fundamental’ for the other contracting party to terminate. This is not terminology which is typically used in this context currently under English law.
points to note:
- There is a very considerable way to go before this draft code becomes available for use by contracting parties and it remains to be seen how popular a choice this might be for businesses (and, crucially, their lawyers!). For several years at least after its implementation there would be no available case law precedent on the interpretation of the code and therefore, at least in the medium term, legal uncertainty might actually increase.
- Different parts of the code have been produced for use in relation to business to consumer transactions.