Contractual wrangling

A House of Lords select committee report has recommended that convergence of EU contract law should be encouraged.

David Pryce explains

The government's response in October 2001 to the European Commission's communication on contract law showed a familiar domestic antipathy towards outside intrusion into our legal system.

The communication had asked for comments on the possible problems arising from divergences of national contract laws.

According to the government, none of the other responses to the communication had identified any specific problems.

However, the House of Lords EC select committee's 12th report, published on 29 January 2002, has taken a different view, one which suggests that action needs to be taken.

Doing nothing, according to the report, is not a satisfactory option, and will not suffice.

The convergence of national laws should be a gradual evolutionary process responding to a practical need, the way forward being to promote the development of common contract law principles, eventually leading to more convergence.

The extent of the 'practical need' is a factor which none of the respondents to the communication was able satisfactorily to measure.

Therefore, any remedy requires flexibility.

For this reason the select committee's approach goes both too far and not far enough.

While the possible abolition of domestic contract law is strongly opposed by the report, its view of convergence as a goal would, if pursued, leave total convergence as an increasingly practical possibility, thereby necessitating abolition.

On the other hand, the suggestion that the convergence is to be gradual does not address such immediate difficulties as currently exist.

Contracting parties in the EC already have a relatively free hand under the Rome Convention to decide applicable law, and under the Brussels Convention to decide a litigation forum.

However, this freedom does not always translate into a practical solution, particularly for small and medium sized enterprises (SMEs) that do not have an international presence but which need to contract with similar organisations abroad.

If not addressed, the law applicable to cross-jurisdictional contracts is that of the country most closely connected to the contract.

This will often give rise to a situation where the applicable law will be unfamiliar to one, but not both, of the contracting parties, giving a dispute resolution advantage to the party whose country's law is to govern the contract.

Alternatively, should the parties under the Rome Convention contract under the laws of a neutral third country, the SME may find itself in the this type of situation: party A is unwilling to contract under the law of the country of party B, not wanting to give away a dispute resolution advantage.

The parties agree as a result that their contract is to be governed by the law of 'neutral' country C.

For practical reasons, the courts of country C are then chosen as the litigation forum.

A dispute arises, and the aggrieved party has to decide whether to accept the high cost of resolving the dispute in the neutral third country, under laws with which neither party may be particularly familiar.

Compare that with this question: should contracting parties be given the opportunity, without obligation, of choosing to have their contract governed by a contract law system common to all EU member states and which could be litigated in any member state?

The parties would in this situation enjoy a degree of tactical parity should a dispute arise.

In addition, as the courts of any member state could decide the dispute, this flexibility would allow the contract to provide that the dispute is heard in the country of the defendant's domicile, minimising the total costs of the action.

The use of a 'neutral' contractual system would not be appropriate in most situations.

However, the legal market could adopt the system according to need, while retaining the existing domestic systems which, in most cases, work perfectly well.

The unmeasured 'practical need' identified by the Lords' report would thereby elicit as great or as little a response from the neutral system as required by the market.

David Pryce is an assistant solicitor in the litigation department at the City offices of south-east regional firm Thomas Eggar Church Adams