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Institutional competition of optional codes in European contract law

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Abstract

The Common European Sales Law (CESL) is the European Commission’s most recent policy initiative for European contract law. It aims to address the problem that differences between the national contract laws of the Member States may constitute an obstacle for the European Internal Market. This paper develops a model of the institutional competition in European contract law and uses it to addresses the question as to whether an optional European contract code and the CESL are economically desirable for European contract law. To do so I examine the transaction costs involved in the process of choosing an applicable law that European businesses face when they conduct cross-border transactions in the European Internal Market. I then describe how these transaction costs shape the competitive environment, i.e. what I refer to as the “European market for contract laws” in which the contracting parties choose a law to govern their cross-border contracts. Having identified this environment and the competitive forces operating within it, I propose a model, the “Cycle of European Contract Law”. I use this model to analyze the competitive processes that take place in the European market for contract laws. Based on my results I make recommendations for the optimal implementation of an optional European contract code and the CESL in European contract law.

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Notes

  1. Commission of the European Union 2011.

  2. In 2001 the Commission initiated a broader discussion on the future of European contract law, see Commission of the European Communities 2001. The Commission then issued two communications in which it has presented measures for approaching the different problems it identified in the consultation process that began in 2001, among others the optional instrument for European contract law (OI), see Commission of the European Communities 2003; Commission of the European Communities 2004. Until the end of 2009 it was not likely that the Commission would proceed with the development of an OI but this changed in 2010, see Commission of the European Union 2010. The OI is now referred to as the CESL, see note 1, above.

  3. E.g. Eidenmüller et al. 2012; Faust 2012; Vogenauer 2013a.

  4. E.g. Grigoleit 2012; Hähnchen 2009; Kuipers 2011; Max Planck Institute for Comparative and International Private Law 2011; Remien 2011; Rutgers 2011; Schmid 2001; van Gerven 1997; Vogenauer and Weatherill 2005; Weatherill 2004; Weatherill 2005; Zeno-Zencovich and Vardi 2004; Ziller 2006.

  5. Dannemann and Vogenauer 2013: 14. Some of the Member States believe that the Commission’s proposal for a CESL and its choice of Article 114 as the legal basis are highly controversial. See, for example, the German Bundestag’s 2011a subsidiarity objection; see also German Bundestag 2011b; German Bundestag 2011c; Sensburg 2012. For the opinions of the parliaments of other Member States which also consider the CESL to be incompatible with the principle of subsidiarity see Austrian Federal Council 2011; House of Commons 2011.

  6. Lando 2011: 728; Eidenmüller et al. 2012.

  7. In what follows I will use the terms “optional European contract law” and “optional European contract code” rather than “CESL” when I am referring to the general idea of an optional European contract law that has been under discussion for the past decade, but not when I am considering the Commission’s concrete proposals. I will use the term “existing optional codes” or simply “optional codes” to refer to the UNIDROIT Principles of International Commercial Contracts (PICC), the Principles of European Contract Law (PECL) and the United Nations Convention on Contracts for the International Sale of Goods (CISG).

  8. For arguments supporting the existence of institutional competition between the contract laws of the Member States see, for example, Eidenmüller 2011. For arguments against the existence of such a competition see the comprehensive and profound analysis by Vogenauer 2013b. See also Kieninger 2002a and b.

  9. E.g. Wagner 2002.

  10. E.g. Kieninger 2008; see also Eger 1999.

  11. de Geest 2002: 373.

  12. Grundmann and Kerber 2002: 305.

  13. Vogenauer 2013b.

  14. Berger 2001, 1999.

  15. The terms “suppliers” and “consumers” are used to illustrate the analogy between legal and economic products. To avoid confusion with other concepts, in what follows I will use the terms “users” instead of “consumers” (of contract laws) and “drafters” instead of “suppliers” (of contract laws).

  16. O'Hara and Ribstein 2009.

  17. Kirchner 2004.

  18. Faust 2008 points out that for economic analysis “it becomes necessary to decide how much of the regulatory framework (…) must be taken into account. (…) If economic analysis neglects rules that influence the behavior of people coping with the real-life problem studied, the results are likely to be seriously flawed”.

  19. Eichhorn 2000: 131–136.

  20. Hondius 2002: 28; see also Zimmermann 2009: 510.

  21. §1 Statute of UNIDROIT: The purposes of the International Institute for the Unification of Private Law are to examine ways of harmonizing and coordinating the private law of States and of groups of States, and to prepare gradually for the adoption by the various States of uniform rules of private law.

  22. Kotler and Andreasen 1991.

  23. O'Hara and Ribstein 2009: 73–77; Eidenmüller 2011; see also Kötz 2010; Rasmussen-Bonne 2009; The Law Society of England and Wales 2007; Bundesnotarkammer et al. 2008; Association des Juristes Français et Allemands et al. 2011.

  24. Like all economic models, the theory of transaction costs developed here and the model that is based on it must necessarily simplify reality. Only by isolating the main variables that are most relevant to the phenomena at stake, will it be possible to derive correct predictions that contribute new insights into the competitive relationship between national contract laws and an optional European contract code. The model does not therefore include all costs that could possibly be related to the choice of law for a cross-border contract (e.g. the negotiation costs that arise during the contracting parties' bargaining process for the applicable contract law to a transaction, etc.). To do so would complicate the model unnecessarily, reduce its predictive power and render it less useful for the intended policy analysis. Instead the focus is on the two main variables introduced above.

  25. Wagner 2002: 1010–1011.

  26. Basedow 1996: 1184.

  27. Hayek 1983, 1945; for an application of Hayek’s theory of legal order and his theory on knowledge and order to the European contract law see Smits 2006. For a comprehensive discussion on Hayek’s theory of legal institutions see Backhaus 2005.

  28. Schumpeter 1949, 1975.

  29. Hayek 2006: 40; see also Hayek 2002: 19.

  30. According to Berger 2001: 21 the development of privately drafted optional contract laws such as the PICC and the PECL may lead to a creeping codification of European contract law—“the idea that slowly and gradually by reference to such principles a uniform private law will emerge”. See also Berger 1999: 206–224.

  31. Note that the term “cycle” has been taken from Schumpeter's innovation theory and his work on the business cycle. Metaphorically the Cycle of European Contract Law could also be described as a downward-turning spiral that leads to constant, long-term decreases in transaction costs for cross-border transactions across Europe.

  32. Schumpeter 1975: 83.

  33. Schäfer and Leyens 2010.

  34. Ott and Schäfer 2002: 209–212.

  35. Cole 2005 has drawn attention to the similarities between the theories of Hayek and Coase. If we add Coase's thoughts to Hayek's theory of legal order we can conclude that it is efficient to rely on a centralized order mechanism until the complexity of the task to be accomplished exceeds the theoretical maximum that can be efficiently processed with a central order. This maximum is determined by the kind and amount of knowledge needed for the accomplishment of the task. If a very large amount of specific knowledge is needed, a centralized order is inappropriate and will therefore become inefficient. In such a case it is necessary to resort to a decentralized order mechanism, which can accomplish the same task more efficiently.

  36. Backhaus 2005: 97; see also Backhaus and Stephen 1998: 24.

  37. See Commission of the European Union 2010: 7.

  38. See Commission of the European Union 2010: 9–10.

  39. Commission of the European Communities 2004.

  40. However, this assumes that the CESL is effectively implemented in European contract law. Eidenmüller et al. 2012 point out that according to the Commission's current legislative proposal, consumers have to explicitly accept that a given cross-border contract be governed by the CESL rather than by their home jurisdictions' contract laws. This means that businesses may not profit from the intended reduction in transaction costs if consumers reject the option of using the CESL.

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  1. Bucerius Law School, Hamburg, Germany

    Alexander J. Wulf

  2. SRH Hochschule, Berlin, Germany

    Alexander J. Wulf

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Wulf, A.J. Institutional competition of optional codes in European contract law. Eur J Law Econ 38, 139–162 (2014). https://doi.org/10.1007/s10657-014-9439-y

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