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GERMANY: European Contract Law Harmonization

Max Planck Institute

Andrew Vogeler, Pitt Law '12 and Nordenberg Fellow at the Max Planck Institute for Comparative Private and International Private Law in Hamburg, Germany, writes about attempts to harmonize contract law in the European Union...

Lately, there has been much debate over the proper direction of the European Union in response to the ongoing fiscal and monetary crises. These debates have well demonstrated the difficulty of bringing together a number of economies, and the particular problem of establishing the political arrangements necessary to do so successfully.

Max Planck InstituteAs a Nordenberg Fellow at the Max Planck Institute for Comparative and International Private Law in Hamburg, I have had the chance to study a similarly challenging project that intends to simplify and harmonize the legal systems in Europe in areas key to the development of the Internal Market of the European Union.

My research has focused on the process of developing a Common Frame of Reference, or CFR, for contract law in the European Union. This has, of course, been very useful for getting the "lay of the land" of contract law in Europe, particularly the relationship between the European Community and national law. But it has also provided a powerful example of the dynamics of legal change through comparative study, a model that characterizes the development of international law in the modern world.

My time at the Max Planck Institute has not only provided access to an unmatched collection of scholarship on the topic of contract law harmonization, but has also afforded rare opportunities to interact with leading scholars in European private law, including two of the institutes' directors, Professor J├╝rgen Basedow and Professor Reinhard Zimmerman. They, and others at the institute, have enriched my understanding of issues facing harmonization of European private law by sharing their experience and knowledge on this topic and offering insight into the dynamic and changing legal culture that accompanies harmonization.

To give a sense of the CFR process, I offer some of my findings and reflections on a topic that, though not widely known in the United States, could have a great impact on international transactions in the future.

The perceived need for contract law harmonization, which has justified the effort to develop a CFR, is essentially twofold. First, the diversity of national laws among the twenty-seven Member States is said to pose an undue obstacle to the Internal Market. It is argued that businesses and consumers are deterred from contracting across borders due to uncertainty in dealing with foreign law and increased transaction costs for hiring foreign law specialists.

Second, where the European Community (Community) has already acted with respect to contracts, mainly in the area of consumer protection, it has taken a fragmentary approach, addressing particular needs as they are perceived. Furthermore, it has mainly acted in the form of Directives, which are not law themselves, but merely set out legal objectives which the Member States are then bound to satisfy through national legislation.

The result is a labyrinth of national legislation accompanied by a patchwork of Community law, which is applied and interpreted differently in the various Member States. In response to this fragmentation, the European Commission (Commission) issued a Communication in 2001 (2001 Communication) calling for the development of a strategy to consolidate and clarify contract law. This 2001 Communication offered four basic choices for Community action, moving forward.

First, the Commission could do nothing and simply allow legal market forces to correct inefficiencies. Second, it could develop common principles of contract law so that member states would have a coherent body of European standards to serve as a model for national-level reform and encourage convergence. Third, it could improve existing legislation by clarifying terminology and consolidating Directives in the interest of coherency. Finally, it could adopt comprehensive legislation or a new instrument at the Community level.

The 2001 Communication thus figured in an ongoing debate about the proper direction any harmonization efforts should take. On the one hand, an eventual European Civil Code was advocated on the basis that the obstacles caused by national law divergence could only be fully eliminated through codification.

On the other hand, skeptics of codification argued that removing all legal diversity would also remove legal competition and would thus remove an important source of innovation for addressing new legal problems in the Community. Furthermore, skeptics noted that since Member states would be reluctant to quickly desert their own contract laws, codification would take place gradually and be subject to implementation and interpretation on the national level. Thus, legal uncertainty could actually be exacerbated, and the problem of divergence would simply take a new form rather than being eliminated.

The responses to the 2001 Communication came from a wide range of businesses, consumer groups, and interest groups and enabled the Commission to reach a couple of general conclusions for moving forward. First, the problems with the extant contract law were real enough that inaction was not a favorable option. Second, the idea of consolidating and clarifying existing Community law was widely embraced. And third, diversity of law could pose an obstacle, but not to the extent that uniformity would be necessary. Thus, the Commission determined that finding common principles and developing a common terminology might be a useful idea, but that something like codification would not be widely embraced.

In response to these reactions, the European Commission released an Action Plan [PDF] in 2003 that called for improving the acquis, or the body of European contract law, by developing a Common Frame of Reference, or CFR. The CFR is to be a political project through which common principles of European contract law and common terminology will enable a clearer understanding and interpretation of legal concepts by legislators, courts or practitioners throughout Europe.

Additionally, the Action Plan called for reflection on the development of a possible "optional instrument," which would allow parties to subject their agreements to a Community instrument of contract rules, but would also leave national rules intact.

In a 2004 Communication [PDF], the Commission further articulated goals for the CFR: that it would offer clear definitions of legal concepts, articulate fundamental principles of contract law, and develop a coherent set of model rules, based upon the acquis and perceived best practice solutions from the various national laws.

Additionally, the European Commission and Parliament offered possible applications for the CFR. Beyond improving the acquis, it could be used as a "legislator's toolbox," both for adopting EU Directives in a consistent way and in national contract law reforms. It could also provide the European Court of Justice with a persuasive source in disputes concerning Community law. In this sense, it would serve a function quite similar to the American Law Institute's Restatements or the Uniform Commercial Code, and could also draw upon prior projects, such as the Principles of European Contract Law, published by the so-called "Lando Commission" between 1995 and 2003.

Further, the CFR could serve as the basis for an optional instrument available in arbitration cases because it would allow parties to choose a neutral set of rules to govern their contracts, much like the United Nations Convention on Contracts for the Sale of International Goods (CISG) in sales contracts or the International Institute for the Unification of Private Law (UNIDROIT) principles.

In 2005, the Commission charged the Joint Network on European Private Law (Joint Network) to develop a draft CFR, or the DCFR. The Joint Network includes a number of groups, including the successor to the Lando Commission, the "Acquis Group," to draft "Principles of European Law." Additionally, various groups were charged with researching issues ranging from the cultural bases of national laws to the economic impacts of various proposals. A couple of groups, such as the Project Group Restatement of European Insurance Contract Law, which had already been working on developing principles of insurance law, were brought in to support the DCFR's work in particularly important areas.

The Joint Network published an outline edition of the DCFR in 2007 and released a full, multi-volume edition with commentary in 2009 [Outline edition, PDF]. However, while the DCFR represents great progress in the process of harmonization, it has ignited or re-ignited debates in a number of areas. A foundational concern is the competence of the EU to pursue a CFR. It is undisputed that the European Union does not have a general power to act in contract law, which leaves the question of whether its limited ability to affect contract law through areas like consumer protection and the advancement of the Internal Market is sufficient.

There is also concern about the proper scope of the DCFR and future CFR, and how they should be applied. Where is the line between contract law and other areas of private law? Does the DCFR look too much like the beginning of a general law of obligations? Would the proposed optional instrument be "opt-in" or "opt-out?" Would such an instrument supplant national mandatory rules if chosen? If so, would it provide adequate protection of weaker parties? What would its relation be to existing international agreements, such as the CISG? Finally, there could be endless debates about the substantive details of the principles, definitions, and model rules contained in the DCFR.

Questions have also been raised about the manner of developing a CFR on the basis of the DCFR. On the one hand, though academic committees are perhaps best able to develop a comprehensive and coherent set of principles, they are often criticized as being elitist and unaccountable to democratic processes. On the other hand, the compromises necessary to any parliamentary process could threaten the coherency of the principles and undermine their effectiveness.

Nonetheless, if a CFR is created in according to the Commission's goals, it would provide a number of benefits beyond simplifying transactions within the Internal Market. It would provide a useful guide to non-European lawyers in transactions involving European parties. It would provide a potential model for contract law reform in other parts of the world, particularly because it would represent the mixture of diverse legal systems. Finally, it could offer valuable lessons in future international contract law harmonization projects.

To that end, the DCFR represents an important step along the path to harmonization if for no other reason than that it provides a substantive basis upon which the debate can continue. Where prior debates have depended entirely upon speculation as to what kind of harmonization might be possible, let alone its effects or desirability, the DCFR provides a much more substantial basis upon which qualitative and quantitative research and debates can be conducted.

However it might be evaluated directly, therefore, it represents an undeniable step forward for the process of contract law harmonization in Europe and should certainly encourage future progress.

Photo: Andrew Vogeler

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