EU closes in on contract law for consumers, SMEs

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A common European contract law yesterday (8 June) came one step closer to reality after MEPs backed proposals by the European Commission to establish an optional EU-wide system. But consumer groups warned that such a scheme would do little to boost cross-border trade and only add to the confusion faced by businesses and shoppers alike. 

Introducing an EU contract law and a possible civil code is an ambitious long-term goal for supporters of closer European integration, as it is expected to make the EU's single market genuinely borderless.

MEPs yesterday (8 June) adopted a report on introducing an 'optional instrument' in European contract law – drawn up by UK Liberal Democrat MEP Diana Wallis (ALDE) – that would give businesses and consumers the opportunity to choose EU contract law over national law when agreeing a contract, including when purchasing products online.

Wallis's report was adopted by 521 votes in favour to 145 against amid eight abstentions.

Today, companies have to adapt to local rules if they want to sell their products in a different EU country. Legal uncertainty and the additional cost of complying with several legal systems often end up discouraging cross-border commerce, deterring consumers and businesses alike from shopping and trading across frontiers.

The problem is acute for small and medium-sized enterprises (SMEs), which are particularly affected by higher transaction costs and usually cannot afford lawyers in 27 different countries.

But it is also a problem for bigger companies. Amazon and eBay, two of the biggest e-commerce companies in the world, have websites in the UK and Germany, for example, but not in Luxembourg, because the market there is too small to cover their costs.

What presents problems for companies also presents problems for consumers. "Today, nearly two of every three consumers trying to buy from another EU country are turned down because traders refuse to serve the consumer's country," said Justice Commissioner Viviane Reding.

Hence her vision of an optional European contract law, which could be chosen freely by consumers and businesses in their contractual relations as an alternative to the existing national contract legislation when they want to buy or sell goods across national borders.

Commission hails vote

Vice-President Reding singled out contract law as a priority of her second term at the Commission and is expected to formally table legislation proposing an 'optional instrument' this autumn.

Welcoming yesterday's vote, Reding said she was looking closely at "all the possibilities to ease cross-border transactions".

Transaction costs, such as adapting contractual terms and commercial policies or obtaining translation of rules – as well as the legal uncertainty involved in dealing with foreign contract laws – make it particularly hard for SMEs to expand within the EU single market.

The Commission estimates that an optional European contract law could save a small online business wishing to trade in Europe an estimated €9,000 in legal and translation fees per market – or over €230,000 if they wanted to take their business EU-wide.

"I believe the option favoured by the European Parliament could be a very good choice. It would give Europe's 500 million consumers more opportunities to shop across borders while cutting transaction costs for small businesses – the backbone of our economy," the Commission vice-president said.

She pledged to work closely with MEPs and governments "to see how to turn [yesterday's] vote into an attractive legal reality".

Scheme 'fundamentally flawed'

Consumer groups, however, warned that the 'optional instrument' system of European contract law backed by the Parliament yesterday was "fundamentally flawed."

And 79% of traders say the same rules across the EU would make "little or no difference" to boosting their cross-border trade, according to the European Commission's own figures.

European consumers' organisation BEUC complained that the term 'optional' was not at all accurate, arguing that businesses were putting consumers in a 'take it or leave it' situation by deciding whether to use the instrument or not.

"[We] feel let down after [yesterday's] European Parliament vote. To support Commissioner Reding's push for a European contract law is to decide major policy without evidence," Ursula Pachl, BEUC's deputy director-general, told EurActiv.

The organisation believes it is unrealistic to ask consumers to choose between national and EU-wide legal systems and predicts that an optional instrument will create only more problems.

"An 'optional instrument' for consumer contracts will not provide added value - neither to consumers nor SMEs - but will instead cause confusion and more legal complexity rather than increase confidence to engage in cross-border transactions," said Pachl.

Parliament 'barking up the wrong tree': Tories

UK Conservative MEP Sajjad Karim, meanwhile, warned that the system would increase the administrative burden on businesses and expressed fear that consumers would be forced by companies to opt for the regime that provided them with the least protection.

"Applying a complex and costly blanket regime of law created at the EU level and drafted with an academic rather than a real-world focus will ride roughshod over our different legal traditions and customs," Karim predicted.

He is backing a less intrusive "toolbox approach" featuring non-binding guidelines and model contracts instead, which he believes could help businesses and consumers without requiring changes to national contract law regimes.

Karim was backed by Tory colleague Malcolm Harbour, chair of the Parliament's internal market and consumer protection committee, who said that other measures to help the single market must take priority over European contract law.

"Setting up cross-border resolution procedures and best practice in consumer contract transparency will solve the problems that many shoppers experience," Harbour said.

On 3 May, an expert group established by the EU executive delivered a feasibility study on a future initiative on European contract law.

The Commission is currently analysing the study to find outwhether and how it can serve as a starting point for its political initiative on European contract law.

Andrew Williams

Positions: 

"In difficult economic times, the optional instrument in European contract law is a real example of justice for growth. Of course it has to be the right optional instrument: we have to get it right," said UK Liberal Democrat MEP Diana Wallis (ALDE), the European Parliament's rapporteur on contract law, during a parliamentary debate this week.

"In this case, 'right' means a high level of consumer protection (indeed higher than in many member states), an easy and user-friendly system for SMES to incorporate in their business model as a badge of good practice and service, and most importantly no adverse effects on national law. Those are the criteria we have set out for the Commission," said Wallis.

"This is an optional, voluntary instrument but one that could really open up consumer choice and business possibilities across Europe. It could be a win-win […]. After decades of talk about European contract law, in the current economic crisis it must now really be time for action," she added.

Not everyone agrees with her. "Small businesses already spend too much of their time contending with EU regulation without having to apply two separate regimes of law to different contracts. Consumers are not in a position to make an informed choice by comparing two different sets of complex contract law," said UK Conservative MEP Sajjad Karim.

"The European Parliament is barking up the wrong tree here. The barriers to cross-border trade are language, delivery concerns and fears over the resolution of disputes," Karim said, concluding: "There are many initiatives that the Commission could take to encourage trade across the single market, but this should not be one of them." 

"I do not favour full harmonisation or a compulsory European code. […] We need a new approach that helps bring about the single market for businesses and consumers while respecting Europe's legal diversity and the subsidiarity principle. This can be achieved by proposing a legal instrument on European contract law that is voluntary and optional," European Commission Vice-President Viviane Reding reportedly said at a conference earlier this month.

"[European Commission] Vice-President [Viviane] Reding's ambition runs contrary to what consumers and SMEs want and expect the Commission to do to promote e-commerce. Instead, she is pushing for high-flying academic ideas which will not provide practical benefits to European citizens and contradict the Commission's own statistics," said Monique Goyens, director-general of European consumers' organisation BEUC.

"The stakeholders most concerned by this initiative – European consumers, SMEs and legal practitioners – are aligned against it and have written jointly to MEPs asking them not to support it," Goyens added.

"An optional instrument will not help facilitate [business-to-consumer] cross-border transactions, but instead complicate them: in addition there is a clear risk that consumer protection standards will be weakened in many member states," she said.

Richard Lloyd, executive director of UK consumer organisation Which?, said "there is no clear evidence that the European Commission's proposals will increase online cross-border trade".

"The main problems consumers fear when buying goods from online traders outside the UK are fraud, insecure payments and what to do if something goes wrong. An EU contract law won't solve this. In fact, it would be more likely to create confusion and, in the worst case, erode existing protection for UK consumers," Lloyd warned. 

Timeline: 
  • Autumn: Commission expected to formally table legislation proposing an 'optional instrument' for EU contract law.
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