Mandatory Law (Basic Features of Regulation in European Private Law)
1. EU legislation
The EU directives concerning private law predominantly aim at the protection of consumers (consumers and consumer protection law). Consequently (see mandatory law (fundamental regulatory principles) at 2. a)), they have a mandatory effect in favour of the consumer (‘unilaterally mandatory law’). This applies to the most important instruments of consumer protection, ie rights of withdrawal and information duties (see Art 6 of the Directive to protect the consumer in respect of contracts negotiated away from business premises (Dir 85/ 577); Art 12 of the Directive on the protection of consumers in respect of distance contracts (Dir 97/7); Art 12(1) of the Directive concerning the distance marketing of consumer financial services (Dir 2002/65); Art 8 of the Directive on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a timeshare basis (Dir 94/47); Art 11 of the Directive on electronic commerce (Dir 2000/31)). The judicial review of contract terms according to the Directive on unfair terms in consumer contracts is also explicitly excluded from derogation by the parties (Art 6(1) Dir 93/13). With regard to non-individually negotiated terms in business-to-consumer (b2c) contracts, this directive contains a substantial catalogue of specific prohibitions and provides for judicial review under a general reasonableness test, according to which a term is not binding if ‘it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’ (Art 3(1)).
Furthermore, for specific types of contracts, some EU directives provide a more extensive core area of mandatory consumer rights, in particular with regard to the sale of consumer goods (Art 7 of the Directive on certain aspects of the sale of consumer goods and associated guarantees (Dir 1999/44)), consumer credit contracts (Art 22 of the Directive for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit (Dir 2008/48; consumer credit (regulatory principles)) and package travel contracts. The mandatory nature of package travel contracts is only partly determined in express terms (Art 5(3) of the directive on package travel, package holidays and package tours (Dir 90/314)) but is also unquestionable for the remainder due to its protective effect for the consumer. Furthermore, the draft for a general directive on consumer rights (COM/2008/0614, final) also includes a provision on the mandatory nature of consumer protection (Art 43).
Prohibitions on discrimination constitute another area of ‘naturally’ mandatory EU law (mandatory law (fundamental regulatory principles)). The TFEU contains various non-discrimination rules (Arts 18, 19, 157 TFEU/12, 13, 141 EC), which are further specified in numerous—not very coherently structured—directives on non-discrimination. With regard to general business dealings, particularly so-called bulk business, discrimination is only prohibited on the basis of gender (Dir 2004/113), race and ethnic origin (Dir 2004/43). More extensive prohibitions of discrimination (religion, belief, disability, age, sexual orientation) based on Art 19 TFEU/13 EC apply to the field of labour and employment.
Beyond consumer protection and protection against discrimination, there are some other areas that are regulated by mandatory EU law. For example, the Directive on combating late payment in commercial transactions (Dir 2000/ 35) prohibits deviating agreements as to the date for payment or the consequences of delay in payment as far as they are grossly unfair to the creditor (Art 3(3)(1)). The Directive on the coordination of the laws of the Member States relating to self-employed commercial agents (Dir 86/653) provides for a mandatory determination of the rights to indemnity and compensation of commercial agents and for a restriction of clauses concerning restraint of trade (Arts 19, 20). The Directive on liability for defective products (Dir 85/374) provides that the ‘liability of the producer arising from this Directive may not, in relation to the injured person, be limited or excluded by a provision limiting his liability or exempting him from liability’ (Art 12; product liability). Finally, the various directives concerning corporate law should be mentioned. The provisions of these directives fit in with the numerus clausus of legal forms under corporate law practised all over Europe and therefore concern—at least indirectly—mandatory law.
In general, the legitimacy requirements explained above (mandatory law (fundamental regulatory principles)) are also valid for mandatory provisions of private law on the European level. However, the aim to harmonize the law throughout the EU Member States does not by itself justify the mandatory regulation of private law. Harmonization is not an end in itself but must be directed at facilitating the internal market, in particular by guaranteeing transnational legal security for the parties (see Art 114 TFEU/95 EC). Voluntary derogations by the parties concerning their legal relationship do not compromise legal certainty and do not constitute impediments for the internal market. The freedom to determine the content of contractual agreements is essential for the functioning of the internal market. In the current debate as to whether the process of legal unification should follow the principle of minimum harmonization or of full harmonization, these considerations must be taken into account: the idea of full harmonization cannot in itself challenge the primacy of party discretion.
2. International uniform law: UN Sales Convention
According to Art 6 of the UN Convention on the Sale of Goods (CISG, sale of goods, international (uniform law)), the parties can exclude the application of the CISG as a whole, and they can also derogate from its individual rules. However, Art 12 CISG states a reservation with regard to form if a contracting state—in which one of the parties has its place of business—has excluded the general rule of freedom as to form by a declaration under Art 96 CISG, ie by requiring written form as a precondition for the validity of contracts. With regard to the content of party agreements, there are no limits in the CISG.
3. Model laws drafted from a comparative point of view
a) Principles of European Contract Law
The Principles of European Contract Law (PECL) also explicitly provide for a general priority of party autonomy (Art 1:102 PECL). However, they include a potential gateway for mandatory regulation as the freedom of contract is only granted ‘subject to the requirements of good faith and fair dealing, and the mandatory rules established by these Principles’ (Art 1:102(1) PECL). In addition, the principles of good faith and fair dealing are viewed as sources of general contractual obligations that cannot be excluded or limited by the parties (Art 1:201 PECL). The exact meaning of these rules remains obscure, particularly to what extent Art 1:102(1) and Art 1:201 PECL place mandatory restrictions on the content of a contract. The wording of the provisions suggests that the principle of good faith can be interpreted as a source of mandatory judge-made law that has precedence over the parties’ arrangements. However, it is also possible that we are dealing here with a drafting inaccuracy rather than an expression of a well-considered regulatory plan (see 4. a) below). The latter interpretation seems to be more convincing as the PECL in general include only very few rules establishing limits to the parties’ agreements and, where they do so, define very strict requirements for interference.
One of these limits concerns so-called usury agreements. The victim of the usury is entitled to avoid the agreement if the usurer has exploited a situation of economic distress or urgent needs of the other party in a way which is grossly unfair, or if the usurer acquired an excessive benefit (Art 4:109 PECL). Another mandatory rule limits the freedom of the parties to determine the content of their contract with regard to standard contract terms. A party may avoid such terms if ‘contrary to the requirements of good faith and fair dealing, [they] cause a significant imbalance in the parties’ rights and obligations…’ (Art 4:110 PECL). This reasonableness test is not restricted to particular types of parties and is therefore also applicable in business-to-business (b2b) relations.
The authors of the PECL refrained from stating independent standards for the prohibition of illegal or immoral contents of contracts (see also Art 4:101 PECL). Instead, the PECL refer to external sources of European private law, ie to ‘fundamental principles’ of the legal systems of the EU Member States and to ‘mandatory rules of law’ applicable according to the rules of private international law. If a contract is ‘contrary to principles recognised as fundamental in the laws of the Member States of the European Union’ it shall be of ‘no effect’ (Art 15:101 PECL). If mandatory rules of law are violated, a flexible system of legal consequences applies. These consequences depend on the content of the rule, its purpose, and the principle of proportionality; and they range from upholding the agreement in an unaltered form to its modification or avoidance. The idea behind this flexible scheme of legal consequences is to respect the purpose of the rule in question as well as the principle of proportionality. Arguably, however, it merely states something that is self-evident in an overly complicated way. In addition, the terms ‘fundamental principles’ and ‘mandatory law’ require further clarification.
Finally, the PECL contain some restrictions referring to particular contract terms. There are mandatory rules on the unilateral determination of contractual terms by one party or by a third person (Arts 6:105, 6:106(2) PECL, ‘grossly unreasonable’), on the exclusion of remedies in cases of fundamental mistake (Art 4:118 PECL) and non-performance (Art 8:109 PECL, proviso of ‘good-faith’), on agreed payment for non-performance, ie conventional penalties (Art 9:509(2) PECL, ‘grossly excessive’) and on agreements concerning prescription (Art 14:601(2) PECL). In the notes concerning the PECL provision about the termination of recurring obligations (Notes to Art 6:109 PECL, no 1), it is furthermore mentioned that a contractual obligation cannot be in force for an indefinite period.
b) UNIDROIT Principles of International Commercial Contracts
Under the UNIDROIT Principles of International Commercial Contracts (PICC) the freedom of contract and the non-mandatory character of the model rules are established as fundamental principles (Arts 1.1 and 1.5 PICC). As opposed to the PECL, the PICC do not view the principles of good faith and fair dealing as restrictions to the freedom of contract but merely as general obligations of conduct (Art 1.7 PICC). The PICC do not, so far, include rules on illegal and immoral contents of contracts (Art 3.1(c) PICC), but such rules are envisaged in the new, third edition to be published in 2011. In general, the PICC contain mandatory restrictions for the same ‘particular’ subject-matters as the PECL, but in many cases these restrictions differ in questions of detail from those contained in the PECL and are mostly less extensive. As a result, the PICC adopt a more liberal approach to freedom of contract than the PECL.
4. Model laws based on existing provisions of EU law
a) Acquis Principles
In line with their fundamental conception the Acquis Principles (ACQP) include numerous provisions adopting and generalizing the European consumer protection law (rights of withdrawal, information duties, fairness test for standard terms etc). Due to the purpose of consumer protection inherent in the EU directives, the rules of the ACQP are largely of a mandatory nature. Most importantly, Art 1:203 ACQP establishes the mandatory character of consumer protection as a general rule (with an exception for contracts settling existing disputes). This principle is restated in various particular provisions, some of which expressly refer to the general rule of Art 1:203 ACQP (Arts 1:302, 2:205(2), 2:301, 4:108(4) ACQP; see also the caveat against an argumentum e contrario in the Commentary to the ACQP, Art 1:203, no 8). Without reference to Art 1:203 ACQP, Art 5:101 ACQP affirms the mandatory nature of all rules concerning rights of withdrawal. This is based on the—highly questionable—consideration that the protective effect of the rights of withdrawal can potentially be extended also to relationships other than b2c ones (see Commentary to the ACQP, Art 5:101, nos 2, 9 with reference to Art 2 of the Directive concerning life insurance (Dir 2002/83)).
Some mandatory rules of the ACQP apply to b2b contracts as well (see Commentary to the ACQP, Art 1:203, no 9). Thus, in the case of the formation of a contract by electronic means, the obligation of businesses to draw attention to all contract terms used and to keep them available in textual form is declared mandatory also for b2b relations (Art 2:205(1) ACQP). Furthermore, according to the Directive on combating delay in payment in commercial transactions, particular agreements about the debtor’s obligation of payment are not binding insofar as this would be grossly unfair to the creditor (Art 8:407 ACQP).
The section on non-individually negotiated contract terms is also of a mandatory nature, even without an express provision (Arts 6:301 ff ACQP, based on the Directive on unfair terms in consumer contracts). The general reasonableness test, valid for b2c (and c2c) contracts, is adopted from the Directive on unfair terms in consumer contracts. The test resembles the formula used in the PECL (see Art 6:301 (1) ACQP and 3. a) and b) above). However, the scope of judicial control suggested in the ACQP is broader than the one adopted in the Unfair Terms Directive, as according to the ACQP the judicial scrutiny also applies to b2b contracts (Art 6:301(2) ACQP). In this regard, the ACQP introduce a particular standard that has no parallel in the PECL. A term in a b2b contract is considered unfair ‘only if using that term amounts to a gross deviation from good commercial practice’. Furthermore, the prohibitions on discrimination relating to gender, race and ethnic origin (Art 3:101 ACQP) are mandatory by implication (see Commentary to the ACQP, Art 1:203, no 8). The prohibitions on discrimination under the ACQP appear to extend to all acts of private law. This constitutes another radical widening of the scope of mandatory EU law.
Finally, the use of the principle of good faith in the ACQP is noteworthy. The ACQP incorporate this principle only with regard to pre-contractual negotiations and as a guideline for the performance of obligations and the exercise of rights (Arts 2:101, 7:101, 102 ACQP). The authors of the ACQP appear to assume that the principle is of a mandatory character; however, they refrain from stating this as a rule (see Commentary to the ACQP, Art 1:203, no 9). The reason for this is plausible, especially in contrast to the vague approach found in the PECL: as a general rule, a party agreement can be taken to be compatible with the principle of good faith and thus, in principle, the common intention of the parties has to prevail over the principles of good faith and fair dealing (see Commentary to the ACQP, Art 2:101, no 18). As a result, the mandatory character of the good faith principle is limited to the idea that the parties cannot set it aside entirely. If the parties have not resolved a conflict of interests in their specific contract, the principles of good faith and fair dealing apply complementarily. The agreement of the parties and the requirements of good faith and fair dealing are thus interdependent. An explicit statement as to the mandatory character of the good faith principle tends to conceal this subtle interplay and to evoke the inaccurate conclusion that the good faith principle deserves preference over the parties’ agreement.
b) Draft Common Frame of Reference
The Draft Common Frame of Reference (DCFR) is based on an approach that is open for a number of different, and divergent, objectives. This indicates that its authors aimed at replacing, at least to some extent, the traditionally liberal focus of private law by a more regulatory approach (DCFR Principles, nos 1 ff). On the one hand, the DCFR confirms the general primacy of freedom of contract and postulates the principle of ‘minimum intervention’, ie a general preference for the less restrictive means of interference with the parties’ discretion. On the other hand, the fairness tests are characterized as less restrictive means compared to mandatory rules (DCFR Principles, no 11). This ignores the fact that fairness tests—at least when restricting the validity of contractual agreements—are just a special and rather vague type of mandatory law. The characteristic feature of this type of mandatory law is that the determination of specific mandatory rules is left to the courts (mandatory law (fundamental regulatory principles) at 1. c)).
The provisions of the DCFR have, in general, been strongly influenced by the PECL and the ACQP. Thus, also the general primacy of party discretion was adopted from the PECL. Remarkably, however, the general proviso concerning good faith, which had still been included in the first draft of the DCFR, was removed from its final version. In addition, the DCFR states that mandatory rules cannot exclude an intentional waiver of existing rights (Art II.-1:102 DCFR). The duty to comply with the principle of good faith and fair dealing is explicitly excluded from party discretion—both for pre-contractual contacts (Art II.-3:301(2) DCFR) and for contractual obligations (Art III.-1:103(1) and (2) DCFR; see 4. a) above). Furthermore, the DCFR generally contains the same restrictions concerning the contents of contracts as the PECL do (see 3. a) above). With regard to the exclusion of liability for non-performance, the DCFR extends the general proviso of good faith applicable under the PECL by explicitly prohibiting restrictions of liability for personal injury caused intentionally or by gross negligence (Art III.-3:105 DCFR).
The mandatory restrictions of the DCFR derived from EU law are based on the rules of the ACQP. This applies in particular to the various rules on consumer protection, eg the rules on information duties (Art II.-3:101 ff DCFR) and on rights of withdrawal (Art II.-5:101 ff DCFR). The DCFR does not contain a general rule establishing the mandatory character of consumer protection rules but only individual provisions with regard to particular subject matters (see Arts II.-3:107(5) and 3:201(3) DCFR: information duties; Art II.-5:101(2) DCFR: rights of withdrawal).
The reasonableness test for non-individually negotiated contract terms is explicitly declared to be mandatory (Art II.-9:401 DCFR). The section on judicial control of standard terms is similar in many respects to the rules of ACQP, which are based on the Directive on unfair terms in consumer contracts. In particular, the scope of the reasonableness test is extended to b2b and c2c contracts. However, in contrast to the ACQP, the DCFR offers the option to extend the judicial control of b2c contracts to non-individually negotiated terms (Arts II.-9:403, 9:404 DCFR). Another remarkable (and rather strange) feature of the DCFR is its double fairness standard for b2b contracts: a contract term is regarded to be ‘unfair’ if it grossly deviates from good commercial practice, contrary to good faith and fair dealing (Art II.-9:405 DCFR).
Another part of the DCFR, based on the ACQP, the provisions of which are mandatory is the section on discrimination (Arts II.-2:101 ff; III.-1:105 DCFR). However, its scope is confined to discrimination ‘in relation to a contract or other juridical act the object of which is to provide access to, or supply, goods, other assets or services which are available to the public’ (Art II.-2:101 DCFR). In this respect, the DCFR is narrower than the rules of the ACQP and closer to the scope of the EU directives.
Finally, the provisions on specific types of contract include several rules with a mandatory character. This is partly justified by the idea of consumer protection; eg the protection of the buyer’s rights with regard to the sale of consumer goods (Arts IV.A.-2:309, 4:102, 5:103(4), 6:101 ff DCFR) and of particular rights of lessees (Arts IV.B.-1:104, 2:103(2), 6:102 DCFR). Some of the remaining mandatory rules on specific contract types also have a basis in EU law. They are not, however, part of an overall systematic conception. Certain limitations to waivers of liability in service contracts (eg Arts IV.C.-4:108, 5:109, 6:107 DCFR), rules protecting the right to payment of commercial agents (Art IV.E.-3:302(2) DCFR), and provisions entrenching various rights of the franchisee (Arts IV.E.-4:102(3), 4:202 (2), 4:204(3), 4:206(4), 4:303(4) DCFR) may be mentioned in this context.
In 2010, an Expert Group was set up to assist the Commission in the preparation of a proposal for the CFR (Commission Decision 2010/233/ EU). In May 2011 the Expert Group presented a revised proposal for a future instrument in European Contract Law <http://ec.europa.eu/ justice/contract/files/feasibility-study_en.pdf>. As compared to the DCFR, the draft of the Expert Group has a much more limited scope of application, only covering general contract law and sales law. Within the range of the Expert Group’s draft, most of the mandatory provisions of the DCFR were adopted in the proposal. Perhaps the most significant (and alarming) mandatory provision of the draft establishes a judicial control of contract terms in b2c-transactions based on a fairness standard even if the term was individually negotiated (Arts 77, 78 of the Expert Group’s draft).
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