A critical analysis of the new European sales law

Citation

DiMatteo, L.A. (2012), "A critical analysis of the new European sales law", Journal of International Trade Law and Policy, Vol. 11 No. 3. https://doi.org/10.1108/jitlp.2012.41911caa.001

A critical analysis of the new European sales law

Article Type: Guest editorial From: Journal of International Trade Law and Policy, Volume 11, Issue 3

It has been my great pleasure to have worked with the contributors to this Special Issue dedicated to analyzing the proposed Common European Sales Law (CESL). The names and their many accomplishments need no introduction. But, I would be amiss not to note that the authors all come from different countries, both from the civil and common law traditions, and one from a “mix” jurisdiction. They include Ulrich Magnus (Germany), Rafael Illescas Ortiz and Pilar Perales Viscasillas (Spain), Fryderyk Zoll (Poland), Hector MacQueen (Scotland)[1], Christian Twigg-Flesner (United Kingdom), and an outsider from the United States (yours truly).

Many of the contributions come from scholars noted for their work relating to the United Nations Convention on Contracts for the International Sales Law (CISG) (DiMatteo, Illescas Ortiz and Perales Viscasillas, Magnus, Twigg-Flesner, and MacQueen). Therefore, their articles provide a comparative analysis of the two instruments – CESL versus the CISG. However, the comparisons offered come from a number of perspectives. Professor DiMatteo provides a highly critical view of the stated rationales and the necessity for the CESL. Professors Illescas Ortiz and Perales Viscasillas are also critical of the CESL in their comparison of the scope of CESL and the CISG, as well as their review of the three subject areas covered by the CESL – goods, digital content, and related services. Professor Twigg-Flesner uses the concept of informational asymmetry in analyzing the CESL and the CISG. He analyzes how the two instruments deal with problems of asymmetrical information, as well as the case where both parties lack sufficient information. Twigg-Flesner also looks at the costs to freedom of contract of rules requiring the disclosure of information.

Professor Zoll focuses on a key eliminate of contract law – the bindingness of promise. Instead of comparing the CESL with the CISG, he compares CESL with pre-existing instruments including, the Draft Common Frame of Reference (DCFR) and the Principles of European Contract Law (PECL). Professor Magnus delves into the fundamental issue of the interpretation of private law instruments, and how they best serve their gap-filling roles. He returns to the comparative analysis approach discussed above – comparing different interpretive methodologies in relationship to the interpretation of CESL and the CISG. In the end, he provides an innovative, but provocative solution to CESL interpretation with the goal of preventing divergent interpretations of the two instruments. The Special Issue concludes with Professor MacQueen providing a most unusual case note. It is unusual because it involves the first usage of the CESL by a court of law. The following paragraphs of this essay summarizes the articles you will find in this Special Issue and highlight some of the findings and prognostications on the substance and viability of CESL – assuming it is enacted as an EU Regulation.

Professor DiMatteo, in “Common European Sales Law: a critique of its rationales, functions, and unanswered questions”, takes a critical look at the rationales given in favor of the enactment of CESL. The analysis is critical not because the author discounts the many potential benefits that CESL would provide, but elects to play the role of the “Devil’s Advocate” in vetting the plausibility of the rationales given for the proposed Regulation. He questions the ambitious scope of CESL, which covers the disparate areas of sale of goods, supplying (licensing) of digital content, supply of trade-related services, and consumer protection. His critique is multifaceted and includes:

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  CESL’s innovative ideas, such as the bifurcation of businesses into large and small-to-medium sized enterprises (SMEs), as well as providing rules covering digital content and the supply of trade-related services. The rationality and practicality of these innovations is questioned.

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  The analysis is highly critical of the designation of SMEs as types of businesses in need of extra protections and whether it would be best to combat overreaching by large businesses through contract law’s general policing doctrines.

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  The author also questions whether the process leading up to CESL included a thorough review of CESL’s interrelationship with the CISG and existing EU consumer protection laws, as well as nation-specific laws.

Professor DiMatteo suggests that CESL is too ambitious at this stage of developing EU private law harmonization and that a practical first step would be to begin with a more targeted law focused on internet trading and licensing contracts. A broader, more detailed law dedicated to licensing would better respond to CESL’s goal of facilitating internet trading.

In the area of the practical impact of an enacted CISG, the DiMatteo aligns himself with the camp of scholars who believe that CESL is unlikely to have much practical significance if adopted. He reasons that in the real world of business, choice of law is not high on a businessperson’s list of priorities in the negotiation of contracts (especially for SMEs). The argument that transborder sales, especially those involving the internet, have been severely retarded by different national sales and consumer protection laws is not an overly plausible one. CESL runs the risk of creating unneeded complexity to areas not needing to be fixed. The very definition of a SME in CESL leaves one perplexed by the thought that SMEs will actually read, understand, or care whether they are a SMEs or not. In the end, CESL is likely to be ignored by the business community however, as pointed out by Professor Magnus, it retains significance from a theoretical perspective.

In covering new ground, CESL is serving two masters. On one side it is attempting to remove legal obstacles to internet trading and trading by SMEs, and on the other hand, providing mandatory consumer protection rules. These ratioanles for CESL are laudable, but are based upon unreasonably high expectations. More than courts, given CESL’s opt-in nature, it may be for arbitral tribunals, in cases where they are not restricted by a choice of law, to determine the impact of CESL either as a hard or soft law.

Professors Rafael Illescas Ortiz and Pilar Perales Viscasillas, in “ Scope of the Common European Sales Law: B2B, goods, digital content and services”, compare the relative scopes of CESL and the CISG. In reviewing concurrent areas of scope between CESL and the CISG, as well as CESL’s perceived breadth of scope, the authors question the worth of CESL’s coverage of certain business-to-business transactions (B2B) that are already covered under existing instruments, such as the CISG. The Ortiz and Perales Viscasillas conclude that the CESL is at best superfluous in B2B transactions. They argue that the best path to a unified commercial sales law in the EU is the adoption of the CISG by the four Member States of the EU not currently party to the CISG.

The article then suggests that the differences between contract laws in different EU countries do not constitute a major obstacle to cross-border trade, and it is not entirely correct to state that the search for the applicable law is a barrier to trade. Although some problems might exist in certain areas of the law, most traders use standard terms drafted by their trade organizations, while others rely on the application of international instruments either by direct application or by choice of law. This coupled with the choice of arbitration as the dominate means of commercial dispute resolution makes any variations in national contract laws less important in B2B transactions than in the area of consumer contracts.

Professor Zoll, in “The binding power of the contract – protection of performance in the system of the Common European Sales Law”, asserts that despite the similarities between CESL and its predecessor documents, namely, the DCFR, CESL weakens the enforceability of contracts in business-to-consumer transactions (B2C). In contrast, the DCFR and CISG aim at protecting the sustainability of the contractual relationship, even in the case of non-performance. The article investigates the contention that the principle of pacta sunt servanda plays a lesser role in B2C contracts under CESL. Professor Zoll also shows the inconsistencies in CESL in B2B contracts with a focus on its rules relating to the subjects of mistake and lack of conformity.

Professor Zoll investigates the tension between consent to contract and enforceability of contract. By lowering the threshold of proving consent, transactions are facilitated and transaction costs reduced. The cost of a lower threshold of consent is an increased moral hazard of overreaching, especially in B2C contracts. In analyzing the informational rules of CESL, he surmises that CESL leads in another direction than the DCFR by relaxing the binding power of contracts. He presents a coherent argument that the binding power of the contract is radically diminished in B2C contracts under CESL. His evidence is found in the CESL’s B2C rules. First, in the case of a lack of conformity, it is enough that the lack of conformity be not insignificant to terminate the contract without giving the seller the opportunity to cure. Second, the consumer’s right to withdraw in distance and off-premises contracts, as well as, generous rules for challenging consent, makes it more difficult to form a binding contract.

CESL attempts to balance the need to buttress consumer trust by giving them a right of withdrawal while at the same time not severely abridging the trader’s right of contract enforceability. It does this by limiting the right to cases of goods that are of the limited value and easily resalable by the trader. Unfortunately, this approach places a great deal of uncertainty and inconvenience on traders. As an opt-in instrument, traders will question whether the benefits of having a single law outweigh the higher uncertainty and greater consumer rights presented by CESL. In the end, Professor Zoll concludes that this slanted legal landscape, especially, the non-binding nature of the consumer’s duty to pay in certain contexts undermines the reasons for the optional instrument – removal of legal barriers to cross-border transactions.

Professor Ulrich Magnus, in “Interpretation and gap-filling in the CISG and CESL”, compares the interpretive provisions in both instruments. The article advocates that, as far as the CESL has borrowed from the CISG, it should follow the interpretive methodology that has already developed in the international case law applying the CISG. Professor Magnus undertakes a comparative analysis of the methods and problems of interpretation and gap-filling found in the CISG and CESL. He also pursues an analysis of whether the interpretation of the two instruments is likely to diverge and whether they should diverge.

Professor Magnus notes that both the CISG and CESL require autonomous interpretations of their rules. After a survey of interpretive methodologies including literal, systematic, historical, purposive, comparative, and the use of soft law instruments, he advocates that such traditional methods of interpretation should be augmented by an interconventional interpretative approach. He further explains the nuances between an EU-centered and a truly international approach to legal interpretation. In the area of autonomous interpretations, there are subtle differences in the weight and direction that different methods or elements of interpretation appear when comparing the interpretation of EU Regulations with the interpretation of international conventions. Article 4(1) of CESL mandate of “autonomous interpretation” could refer to the EU autonomous method of interpretation with its specific requirements of EU law conformity and effet utile compliance. Article 4(1) CESL could, however, reference the meaning of autonomous interpretation in the context of the CISG. Under the CISG approach, CESL would then be viewed as a self-contained source for any interpretation. The reference standard for its interpretation would be international in scope rather than an EU-specific perspective.

The need for courts and arbitral tribunals to apply an international, CISG-like interpretative methodology is an imperative since CESL is designed to replace the CISG on an optional basis. And, CESL can also apply “externally” in transactions involving an EU trader or consumer and a non-EU trader. Furthermore, the fundamental principles, structure, and policies of CESL have their roots in the CISG. Professor Magnus argues, for these reasons, that instead of an autonomous, EU-centred interpretation, it is preferable to interpret CESL in the same way as the CISG is interpreted. Where CISG and CESL provisions are identical or concur in essence their interpretation and any necessary gap-filling should be the same. As far as possible, the common terms in CESL and the CISG should be understood in a uniform, interconventional way. From a business perspective, it would be confusing and counterproductive if these terms were interpreted differently for each convention.

Professor Twigg-Flesner, in “Dealing with informational asymmetries under the CISG and the proposed CESL”, explores the way in which informational asymmetries between two parties to a contract for the sale of goods are dealt with under CESL and the CISG. Having considered the different types of informational asymmetries – from the perspectives of the buyer, seller, and when information is not possessed by either party – that can exist in a sales contract the article undertakes a doctrinal analysis of the relevant provisions in both instruments. It is apparent from this analysis that CESL provides a more comprehensive and detailed set of rules which address informational asymmetries. From the perspective of the business-trader, a contract of sale governed by CESL will be subject to more detailed (and onerous) requirements related to the disclosure of information than under the CISG.

Professor Twigg-Flesner notes that the disclosure rules are due to CESL’s focus on internet trading, as well as consumer protection. He questions whether the rationale that the fuller disclosure of information, especially in the area of pre-contractual disclosure, will actually lead to truer consent. He asserts that:

[…] it is not at all clear whether the consumer, or for that matter SMEs, will actually benefit from this additional information – simply making information available will do little to redress informational asymmetries if the intended beneficiary is unable to process the information.

Twigg-Flesner concludes that there is no assurance that CESL disclosure rules offer the best solution for tackling informational asymmetries.

Professor Hector MacQueen, in “Change of circumstances: CISG, CESL and a case from Scotland”, uses a current Scottish case to illustrate how CESL Article 89’s “change of circumstance” defense may be applied in practice. He notes that the CISG (impediment) or Scottish law (frustration) possess excuse doctrines, but not a hardship principle. In contrast, Article 89 incorporates a hardship provision into CESL. Article 89 imposes a duty to negotiate an adaptation or termination of the contract if as the result of an “exceptional” change of circumstances one party’s obligation has become unduly burdensome or the contract has become substantially imbalanced.

Professor MacQueen uses the fact pattern of Lloyds TSB Foundation for Scotland v. Lloyds Banking Group plc., as a hypothetical or a test case for determining hardship under CESL. The case facts – the inability of the parties to negotiate a resolution of their dispute, despite a shared interest in the contract continuing; the lack of any express term in the contract addressing the specific problem; and the court’s inability to imply a term without contradicting the express term that did exist – make a strong case for a rule enabling courts to vary contracts in response to major changes in circumstances that produce inequitable outcomes. The First Division of the Court of Session issued its opinion in on 29 December 2011 and in doing so, very unusually, made reference to CESL in favoring a court’s power to adjust contracts based upon changed circumstances. But, the court also took note of the Scottish Law Commission’s criticisms of the proposal and held that, at least in Scots law, there was no general judicial power to vary a contract due to changed circumstances.

MacQueen notes the criticism of the frustration doctrine as being to inflexible. The First Division’s decision can be characterized as a case of a missed opportunity to recognize hardship, below the threshold of frustration of purpose, as subject to the courts equitable powers of rescission and reformation. But, he warns that flexibility comes at the expense of lesser certainty of contractual obligations, as well as increasing the propensity of sufferers under bad bargains to litigate. MacQueen concludes that national and transborder laws should carefully weigh the above costs and benefits before adopting a version of the changed circumstances rule.

The original research presented in this Special Issue raises more questions than it answers. It serves the purpose of generating additional discussion about some of the shortcomings of CESL and potential problems in its application. In an ideal world, such critiques would play a role in the law-making process in order to make CESL the best law possible. This may still be the case if Member States review such commentaries as the ones presented in this Special Issue before voting on the passage of CESL. If enacted, without modification, which seems doubtful, then critiques like the ones presented here can be used to alert courts and arbitral panels of first instance of the issues presented by CESL as it now stands.

The issues as presented in this research include:

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  how courts will further interpret the designation of SMEs and at what point in the transactional life cycle can such a designation be applied;

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  whether the digital content and supply of service rules should be broadly interpreted to build a general law of licensing;

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  how best to interrelate the CESL with the CISG;

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  the likelihood that CESL will become a popular opt-in law and whether court decisions can play a role in making it a more popular choice;

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  whether arbitral panels, given CESL’s expanded coverage into digital content and related services, will use it as customary international law in those types of transactions;

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  how will courts balance the consumer protection rules with the certainty provided by the bindingness of contracts;

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  will the courts apply a EU-center approach or an international-interconventional approach to the interpretation of CESL’s provisions;

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  how will courts deal with the problems of informational asymmetries and CESL’s disclosure rules; as well as balancing the rationale for broader disclosure requirements against whether they actually serve the purpose of producing truer consent and whether strict interpretations of CESL disclosure rules will prove to be too onerous on traders; and

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  how the hardship provision in CESL Article 89 will be applied and how such application will balance the need for flexibility to prevent injustice in a given case against the sanctity of contract and the moral hazard of its abuse in order to escape bad bargains.

It is my hope that this Special Issue has served the minimal purpose of alerting legislators and scholars of some of the potential shortcomings of CESL. It is also important to note that CESL may indeed be a step in the right direction. The rationales for harmonizing sale of goods, as well as the supply of digital content and related services, are conceptually sound. The purpose here is not to pass judgment on such a laudable goal, but to analyze the text in hand.

Note

1. Of course, Scotland is part of the United Kingdom, but I don’t believe that Hector MacQueen would be disappointed for being called Scottish.

Larry A. DiMatteoGuest Editor