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Pan-EU contract law should apply between UK buyers and sellers, say advisors


Traders and consumers in the same country should use a proposed pan-EU contract law Government legal advisors have said. The proposed voluntary law has been designed for use in cross-border transactions in the European Union.

In a review of the European Commission's proposed new Common European Sales Law (CESL), the Law Commission and Scottish Law Commission told the UK Government that it should extend the application of the prospective new law to domestic trading.

Under the Commission's plans outlined in October, the CESL can only be used in cross-border sales contracts where it is offered as an option by traders and explicitly consented to by shoppers, but the Law Commissions said that this could discourage big firms settling in the UK. They said the UK should take up an option in the proposal to apply the CESL to domestic sales transactions.

"It is not always clear where a multi-national internet trader is 'habitually resident'. We think one needs to look at the operation centre that receives the consumer’s agreement to use the CESL, rather than the location of the warehouse that dispatches the goods," the Law Commissions said in their advice. (141-page / 904KB PDF)

"But if it is acceptable for a firm based in Luxembourg to use the CESL for its considerable UK trade, why should it be unacceptable for a firm based in Leicester to do the same? If a multinational retailer based abroad is entitled to use the CESL in the UK while a retailer based in the UK is not, the CESL might become a factor discouraging multi-national traders from basing their internet operations in the UK," the Commissions said.

"If the CESL is adopted, and becomes successful, we think the UK Government should consider exercising its option to extend the CESL to domestic distance sales. Unfortunately, under ... the proposed Regulation, the option would require the CESL to be extended to all consumer sales, not just distance selling. This has the potential to undermine a member state’s ability to respond to specific abuses in problematic areas, such as doorstep or other off-premises selling," it said.

Last month the European Commission announced plans for a '28th regime' of contract law to exist as an optional alternative to the contract laws that already exist in EU member countries. The Commission believe that the new law would offer a harmonised alternative to the differences in contract laws that exist, reducing costs for businesses and giving consumers more confidence in their rights and access to cheaper goods. It said at the time that businesses currently spend €10,000 on average in legal costs when expanding into selling in a new country within the EU.

The Law Commissions think that most traders will not offer consumers the choice between CESL and national contract laws due to the potential confusion, and that instead traders would only likely offer the CESL if consumers wanted to buy from them. This, they said, would lead traders to using CESL for cross-border transactions and national law for domestic sales unless member states extended the CESL's application to domestic sales contracts.

The Commissions said that the proposed new laws should better focus on the specifics of distance selling. It said that the European Commission's draft new law was too general.

"We think there is a case for a new optional code to cover distance selling across the EU," the Commissions said in their report.

"We are not sure, however, that the current text always strikes the right balance. Distance selling needs its own clear rules, designed around automated processes. The CESL is based on more general contract law principles and we think that it would benefit from greater focus on distance sales. More could be done to clarify when the contract is formed; the effect of a change of circumstances; and unfair terms protection. Provisions on the transfer of property could also usefully be inserted," the Commission said.

"Consumers are particularly vulnerable to doorstep selling. Member states need to be able to retain the power to reform their laws to provide consumers with clear, simple remedies. We think that initially the use of the CESL should be confined to distance selling. It should be permitted for off-premises sales only once it has become established," they said.

The European Commission's draft proposals are "not always easy to understand" and would be better served if "separate codes for business-to-consumer contracts and business-to-business contracts" were included and if "notes and internal references were provided [and if] it was accompanied by an authoritative guide," the Law Commissions said.

CESL is "cumbersome to use for telephone sales", presenting traders with a problem if they use "both online and telephone sales alongside each other," the Commissions said. The new regime may also "discourage traders" altogether because proposals to give consumers two years to return faulty goods "from the date the consumer could be expected to be aware of the fault," or within 10 years after a sale if this is sooner, might be abused, they said.

The scope for confusion over consumers' rights to return faulty goods under the CESL could "lead to difficult arguments, which disadvantage consumers," the Commissions said.

"Consumers and traders need quick, simple solutions to resolve problems. Too much scope for argument may disadvantage the weaker party, who is often the consumer. Under the CESL as currently drafted, there is too much scope to argue over whether the consumer has acted in good faith or should give an allowance for their use of the product," they said.

Consumers should also be given the right to damages for "distress and inconvenience" - a right which is currently not included in the proposed new law, but which is included within both English and Scots law in "exceptional circumstances," the Commissions said.

Under the European Commission's plans, the new law could be used in contracts for the cross-border sale of goods between businesses and consumers or between two different traders providing at least one of the traders is a small or medium-sized enterprise (SME). Under the proposed law an SME is defined as a trader that employs fewer than 250 employees and has either an annual turnover of no more than €50 million or an annual balance sheet worth no more than €43 million.

Traders from outwith the EU could also operate contracts within the new regime providing that the business they are dealing with is based within the EU. Banks and other financial service institutions will not be able to offer the new contract law regime for financial service transactions, such as online banking. The sale of intangible digital goods, such as the sale of music files online, would be able to be covered by the new regime, the Commission said.

Under the Commission's proposals both businesses and consumers would have a duty to "act in accordance with good faith and fair dealing" and may lose certain rights set out in the contracts if they do not.

Under the new regime distance sellers, or off-premises sellers, are also obliged to provide certain information to consumers, including their name, contact details and total cost, in order for contracts to be deemed binding.

Contracts could also be considered to have been agreed to even if there is no written evidence of an agreement, the Commission's proposals said.

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