New proposal on EU-wide contract law: advantages for firms and consumers
European Commission proposed to develop a draft of the Common European Sales Law to boost trade and expand consumer choice. It will provide firms with an easy and cheap way to expand their business to new markets in Europe while giving consumers higher level of protection. Instead of setting aside national laws, the European Commission is taking an innovative approach to contracts based on free choice, subsidiarity and competition.
The European Commission argued on several occasions that despite the success of the EU’s Single Market, barriers to cross-border trade still remain. Many of these obstacles result from divergent sales laws functioning in the EU-27 member states. They make selling abroad complicated and costly, especially for small firms.It is calculated that due to obstacles in cross-border transactions stemming out of divergences in different contract law rules at least ?26 billion is lost in intra-EU trade every year. Meanwhile, 500 million consumers in Europe lose out on greater choice and lower prices because fewer firms make cross-border offers, particularly in smaller national markets.
BackgroundContracts are essential for running businesses and making sales to consumers. They formalise an agreement between parties and can cover a broad range of matters, including the sale of goods and associated services such as repairs and maintenance.
Companies use a wide variety of contracts that are governed by different national contract laws when operating in Europe’s Single Market. The 27 different sets of national rules can lead to additional transaction costs, a lack of legal certainty for businesses and a lack of consumer confidence. These can act as a deterrent for both consumers and businesses to shopping and trading across EU borders. Small and medium-sized companies are particularly affected by higher transaction costs.This contrasts with the United States’ internal market, where a trader in Maryland can easily sell his products to a consumer in Alaska.
Under the Europe 2020 strategy, the Commission is tackling bottlenecks in the Single Market to drive economic recovery; this includes making progress towards a universal European contract law.
In July 2010, the Commission put forward several options in a Green Paper for a more coherent approach to contract law. The Commission then held a public consultation that ran until 31 January 2011 and resulted in 320 responses.
On 3 May 2011, an expert group established by the Commission delivered a feasibility study on a future initiative on European contract law. The Commission consulted stakeholders and citizens during the feasibility study and received 120 responses.On 8 June 2011, the European Parliament backed an optional European contract law in a plenary vote (initiative report was presented by MEP Diana Wallis.
New European Sales LawThe European Commission proposed recently an optional Common European Sales Law to help break down these barriers and give consumers more choice and a high level of protection. It is expected to facilitate trade by offering a single set of rules for cross-border contracts in all 27 EU countries (Brussels, 11 October 2011).
If traders offer their products on the basis of the Common European Sales law, consumers would have the option of choosing a user-friendly European contract with a high level of protection, often with just a click of a mouse in e-trade. The Commission’s proposal now needs approval from the EU member states and the European Parliament; the latter already signaled its overwhelming support in a vote at the beginning of 2010.
«The optional Common European Sales Law will help kick-start the Single Market, Europe’s engine for economic growth. It will provide firms with an easy and cheap way to expand their business to new markets in Europe while giving consumers better deals and a high level of protection. Instead of setting aside national laws, the European Commission is taking an innovative approach based on free choice, subsidiarity and competition.»
Vice-President Reding, the EU’s Justice Commissioner.
The legal draftThe Common’s proposal for the EU Sales Law breaks down barriers and maximises benefits for consumers and businesses. The proposal describes the following items:
Advantages for Companies
Providing one common (yet optional) regime of contract law that is identical for all 27 Member States so that traders no longer need to wrestle with the uncertainties that arise from having to deal with multiple national contract systems: According to a Eurobarometer released in October 2011, about 70 per cent of European companies stated that if able to choose, they would use one single European contract law for all cross-border sales to consumers from other EU countries.
2. Cutting transaction costs for companies that wish to trade cross-border: Currently, businesses wishing to carry out cross-border transactions must adapt to up to 26 different national contract laws, translate them and hire lawyers, costing an average ?10,000 for each additional export market.
3. Helping small and medium-sized companies (SMEs) to expand into new markets: currently only 9,3% of all EU companies sell across EU borders and thereby forego at least ?26 billion per year.
Advantages for Consumers
Providing the same high level of consumer protection in all EU member states, consumers will be able to rely on the Common European Sales Law as a mark of quality. For example, it offers consumers a free choice of remedies in case they buy a defective product – even several months after a purchase. This means that consumers could terminate the contract, ask for a replacement or repair or a price reduction. Presently, such a free choice of remedy only exists in five EU countries — France, Greece, Lithuania, Luxembourg and Portugal.
The new law would provide a wider choice of products at lower prices. Thus, currently, consumers who proactively search for better deals across the EU, in particular online, are often refused sale or delivery by the trader. At least 3 million consumers experienced this over a one year period.
Another advantage is in providing certainty about consumers’ rights in cross-border transactions: 44% of consumers say that uncertainty about their rights discourages them from buying from other EU countries.
The law would increase transparency and consumers’ confidence: consumers will always be clearly informed, and will have to agree to use a contract based on the Common European Sales Law. In addition, an information notice will clearly lay out the consumers’ rights in their language.
The Common European Sales Law will be applicable:
— only if both parties voluntarily and expressly agree to it;
— to cross-border contracts where most of the problems of additional transaction costs and legal complexity arise;
— Member States will have the choice to make the Common European Sales Law applicable to domestic contracts as well;
— to contracts for the sale of goods – the bulk of intra-EU trade – as well as digital content contracts, such as music, movies, software or smart-phone applications;
— for both business-to-consumer and business-to-business transactions, and
— if one party is established in a Member State of the EU.
Traders could use the same set of contract terms when dealing with other traders from within and from outside the EU, giving the Common European Sales Law an international dimension.
The Common European Sales Law concept
Consumers and businesses – especially small companies – are not using the full potential of a Single Market of 500 million people. At present, 44% of Europeans say they do not buy abroad because they are uncertain of their right.
A new Eurobarometer survey published in October 2011 revealed that 55% of exporting businesses say that differences between contract laws are one of the major obstacles for trading across borders to consumers.
The Common European Sales Law aims to break down these barriers. It will open markets for businesses and give consumers more choice and a high level of protection. It will facilitate trade by offering a single set of rules for cross-border contracts in EU-27. If traders offer their products on the basis of the Common European Sales Law, online shoppers would have the option of choosing a user-friendly European contract with a high level of protection with just one click of a mouse.
Possible problems for companies selling to other EU Member StatesOnly 9.3% of businesses that trade in goods sell across EU borders3. The reality is that businesses wishing to carry out cross-border transactions may have to adapt to up to 26 different national contract laws, translate them and hire lawyers, costing an average ?10,000 for each additional export market. Adapting their websites can cost a further ?3,000 on average. See: Eurostat database DS-056329-1: Trade by activity and enterprise size class, 2007. This is a problem both for companies selling cross-border to consumers and for those doing business with other firms.
Small and medium-sized enterprises – which make up 99% of all companies in the EU – are disproportionately affected because they lack the in-house legal and other expertise needed to work with different national contract law systems. The cost to trade in several foreign markets is particularly high when compared to SMEs’ turnover. The transaction costs to export to another member state could amount up to 7% of a micro retailer’s annual turnover.Exporting to four member states could raise the cost to 26% of its annual turnover. Traders who are dissuaded from cross-border transactions due to contract law obstacles forgo at least ?26 billion in intra-EU trade every year. This is a direct cost to the EU economy in terms of trade – and jobs.
In business-consumer transactions, 55% of companies active or interested in selling to consumers outside their national market said they were held back by a range of contract-law related obstacles.
The main contract law-related obstacles (ranked by companies) for business-consumer transactions are:— Finding out about foreign contract law 40%
— Complying with different consumer protection rules abroad 38%
— Obtaining legal advice on foreign contract law 35%
— Solving cross-border contractual disputes 34%
In business-business transactions, 49% of companies active or interested in selling to consumers outside their national market said they were held back by a range of contract-law related obstacles.
Consumers’ benefit from the Common European Sales Law
Consumers will have the same high level of protection for their rights across all Member States. That means that consumers will be able to rely on the Common European Sales Law as a mark of quality. For example, consumers will be offered a free choice of remedies if a faulty product is delivered. This means that consumers could, for instance, terminate the contract, or ask for replacement, repair, or price reduction. Currently such a free choice does not exist for the large majority of consumers across the EU. These remedies would also be available to consumers who have bought digital content products such as music, films, software or applications that are downloaded from the internet.
This high level of consumer protection will give consumers the confidence to buy products in other EU countries.Because the Common European Sales Law will make it cheaper for traders to sell across a border, it will encourage companies to export to more markets abroad. This will allow consumers to gain access to more and better offers at a cheaper price. Online shoppers should no longer get messages such as „this product is not available in your country“ because of differences of national contract laws. According to estimates, almost half (44%) of consumers who shop online are uncertain about their rights. Collectively, these consumers could save ?380 million if they would make at least one online cross-border purchase.
The average price differences for consumer goods across EU countries amount to approximately 24%. See: Eurostat, Statistics in focus 50/2009.Consumers in smaller EU countries, such as Malta, Cyprus, the Czech Republic, Slovakia and Slovenia are particularly disadvantaged by higher prices. See: Eurostat report (Borchert 2009), comparison of price levels of 2,500 consumer goods.
A recent mystery shopper study testing the availability of online offers of popular consumer goods showed that in 50% or more of the cases consumers could buy products at least 10% cheaper in other EU countries. See: YouGov Psychonomics, Mystery Shopping Evaluation of Cross-border E-commerce in the EU, October 2009, p. 40.
Consumers based in Portugal, Italy, Slovenia, Spain, Denmark, Romania, Latvia, Greece, Estonia, Finland, Hungary, Cyprus and Malta would particularly benefit from better prices when shopping abroad in the EU. See: YouGov Psychonomics, Mystery Shopping Evaluation of Cross-border E-commerce in the EU, October 2009, p. 40.
The same mystery shopper study also showed that the choice of products is more restricted in about half of the EU countries. In the majority of product searches (Cyprus (98% of the cases), Malta (98%), Luxembourg (80%), Lithuania (76%), Latvia (72%), Ireland (71%), Belgium (65%), Estonia (61%), Portugal (59%), Finland (58%), Slovenia (54%), Romania (51%) and Greece (51%) for products out of a basket of 100 popular consumer goods, the products were not available online domestically.
Advantages to SMEsWhile it would become cheaper for all businesses to trade across borders, small and medium sized enterprises would benefit in particular – they would be able to afford to expand into new markets. The cost of cross-border e-commerce would fall once companies no longer have to adapt their websites to the law of each EU country in which they sell. This will boost the e-commerce sector and in general small and medium-sized enterprises which make up 99% of EU businesses.
Overall, 71% of companies said they would be likely or very likely to use a single EU contract law for cross-border sales to consumers and 70% for cross-border trade with businesses.
Common European Sales Law and national contract lawsThe Common European Sales Law would exist as an option alongside national contract law. Sellers can voluntarily use a set of rules that is identical in all 27 Member States. Those who do not want to use the Common European Sales Law can simply continue using their national rules. Consumers will always be clearly informed, and will have to agree explicitly before using a contract based on the Common European Sales Law.
About freedom of contractThe principle of freedom of contract is respected as both parties have to agree on the application of the contract, i.e. nobody is obliged to use it. The Common European Sales Law would be a single set of contract rules, a second regime, which could be used by the parties voluntarily in cross-border transactions. The Common European Sales Law would not cause any costs to those companies that do not want to use it. Companies that decide to use it would only do so if the economic advantages outweigh the costs.
The Common European Sales Law in practiceExample 1
Bísaro-Salsicharia Tradicional, a small company based in northern Portugal, sells local pork products. It currently sells to traders and consumers from six other Member States. These exports contribute 8% of the company’s annual turnover. The foreign companies with which it trades always insist that their own national law apply to the contract. The company wants to enter the Dutch market, but feels deterred by the differences in contract and consumer law compared to Portuguese law. Presently, it has invested approximately 5% of its turnover to expand into foreign markets. The company feels that an EU-wide contract law would simplify transactions and make them more fluid. By using a Common European Sales Law, it would expect to export to more countries, increasing annual turnover by up to 15%.
Example 2Laboratorium Kosmetyczne (Dr. Irena Eris), a medium-sized Polish company trading in cosmetics, feels that differences in contract laws create considerable costs and are an important barrier for its sales to Romania. The company is particularly affected by the differences in the rules on delayed payment by retailers. The Common European Sales Law, available in all EU languages, provides one complete set of rules dealing with late payments (interest rate, due date, damages etc). The Polish company could use it for all its contracts with businesses in Romania or in any other EU country, without having to take national laws into account.
Example 3A Bulgarian resident decides to buy an e-book-reader for his wife’s birthday. He goes to a local electronics shop, but only finds three models of e-book-readers. The cheapest costs about ?100 and the other two cost about ?250 each. He wants to know if more choices are available. A friend tells him about two well known online shopping sites. Amazed by the choice offered, he chooses to buy a particular model which costs ?160. However, once he reaches the step where he has to indicate his country of residence, the website makes it clear that Bulgaria is not on the list of countries the company sells to.
A consumer tries another online company and finds an alternative model of e-book-reader for an even better price. However once again, he faces the same problem: the company does not allow for the product to be bought from its UK website and he is redirected to a website which allows him to buy it from the United States.
He finally manages to buy the e-book-reader but still wonders why it was easier to buy the product he wanted from the United States than in Europe.
A German beekeeper which produces and sells honey has bought a machine from a French company. The machine turns out to be faulty. The French supplier agrees to repair the defect, but refuses to pay for the transportation of the machine from Germany to France. The German company wants to clarify who should pay and whether the contract can be terminated, but would need to pay for costly legal advice. The Common European Sales Law would provide a clear and complete set of rights and obligations for both parties if the product turned out to be defective. In particular, the Common European Sales Law clearly states that the costs of transportation are to be borne by the seller.
Example 5A company with headquarters in Poland wants to expand but has experienced problems stemming from differences between contract laws in Poland, the Czech Republic, Slovakia and Hungary. In particular, the diverging rules on delivery make it difficult to draft contracts which would be valid simultaneously in all four markets. The Common European Sales Law, available in all EU languages, provides one clear set of rules which the company could use in all its cross-border contracts, including the place, time and means of delivery, the seller’s obligations in charge of the carriage of goods, the parties’ obligations and rights in cases of early delivery or delivery of a wrongful quantity.
Draft’s perspectiveThe proposal will now pass to the European Parliament and the Council of the EU for adoption in the ordinary legislative procedure and by qualified majority. Once adopted, the Regulation will enter into force 20 days after its publication in the EU’s Official Journal. The legal basis for the proposal is Article 114 TFEU on the approximation of laws in the internal market.
Eugene Eteris Baltic-course.com
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