VOLUME 23 ISSN PENN STATE INTERNATIONAL LAW REVIEW · VOLUME 23 NUMBER 3 WINTER 2005 ISSN PENN...

VOLUME 23NUMBER 3

WINTER 2005ISSN

PENN STATEINTERNATIONALLAW REVIEWTABLE OF CONTENTS

ARTICLES

491 12th Biennial Conference of the International Academy ofCommercial And Consumer Law: Globalization, Regionalizationand Transplants in Commercial and Consumer LawLouis F. Del Duca

493 Corporate Social Responsibility-CSRRadl Anibal Etcheverry

507 Good Faith in Commercial Law and the UNIDROIT Principles ofInternational Commercial ContractsDr. Laureano F. Gutirrez Falla

521 Precedent in East and WestEwoud Hondius

535 The Unknown World Government: Some Very Recent CommercialLaw Developments and GapsDonald B. King

549 The Concept of Competitive Contract LawHans-W. Micklitz

587 Transformation of Contract Law and Civil Justice in the New EUMember Countries-The Example of the Baltic States, Hungaryand PolandProf. Dr. h.c. Norbert Reich

625 Universalism and Choice of LawJay Lawrence Westbrook

639 The Challenges of Comparative Consumer InsolvenciesJacob Ziegel

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I Articles I

12 th Biennial Conference of the InternationalAcademy of Commercial And ConsumerLaw: Globalization, Regionalization andTransplants in Commercial and ConsumerLaw

Louis F. Del Duca*

Introduction

"Globalization, Regionalization and Transplants in Commercial andConsumer Law" was the theme of the 12th Biennial Meeting of theInternational Academy of Commercial and Consumer Law at the RigaGraduate School of Law in Riga, Latvia from August 11 to August 14,2004. The articles in this symposium are based on papers presented atthe Riga Meeting. They continue the Academy tradition initiated at itsfounding in 1980 to contribute to development of a more rational worldorder by "identifying the international nature of commerce, the commonproblems faced across jurisdictions and the benefits in solving

* A. Robert Noll Professor of Law, Associate Dean for International andComparative Law Programs, Director, Center for International and Comparative Law,The Pennsylvania State University Dickinson School of Law; Immediate past PresidentInternational Academy of Commercial and Consumer Law.

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PENN STATE INTERNATIONAL LAW REVIEW

commercial and consumer problems by attention to approacheselsewhere."'

The Riga Graduate School of Law was the ideal site for a meetingfocusing on the impact of globalization, regionalization and transplantsand convergence phenomena in the developing new legal world order.We note the success of the newly founded Riga Graduate School of Lawin achieving its initial mission of providing specialized training for legalgraduates of the Baltic States as their countries became members of theEuropean Union. Under its expanded mission, the School is now open toall graduates and its core programs offer LL.M. and Doctorate Programsin International and European Law. This growth of the Riga GraduateSchool of Law under the able leadership of Deans Jan Ramberg andNorbert Reich (distinguished members of the International Academy ofCommercial and Consumer Law) and its current Dean John JA Burke,exemplifies the many new education initiatives underway world-wideresponding to the legal needs of the new world order.

The International Academy of Commercial and Consumer Law atits 12th Biennial Meeting also honored Ole Lando, Professor ofComparative Law at the Copenhagen Business School, President of theCommission on European Contract Law and member of the WorkingGroup for the Preparation of the UNIDRIOT Principles on InternationalCommercial Contracts in recognition of his outstanding work innegotiating, preparing and implementing the Principles of EuropeanContract Law. The Penn State International Law Review and the PennState Dickinson School of Law Center for International and ComparativeLaw are also privileged to dedicate this issue of the Penn StateInternational Law Review to Professor Ole Lando for his outstandingcontributions and leadership.

1. COMMERCIAL AND CONSUMER LAW; NATIONAL AND INTERNATIONAL

DIMENSIONS, Preface (Ross Cranston & Roy Goode eds., Clarendon Press Oxford, 1993).(We borrow this language from the eloquent preface by Oxford Professors Ross Cranstonand Roy Goode to the proceedings of the fifth meeting of the Academy of Commercialand Consumer Law held in Oxford in August 1990).

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Corporate Social Responsibility-CSR

Rauil Anibal Etcheverry*

I. The Subject Matter: Introduction

A corporation, as a consistent structure, may take different legalforms.' It is a socioeconomic reality, constituted by different elements,such as capital and property, workers of all categories, and theentrepreneur-the person liable for such organization. It has a corporatepurpose and object, from a legal point of view, and has at its disposalseveral management bodies of different organizational levels.

Corporations operate in the market, and may have an economicobject. From a legal point of view, corporations arise under differentframeworks and legal forms, pursuant to the legal rules and regulationsof each country. However, only certain aspects or characteristics ofcorporations, applicable to each identifiable "legal classification," havebeen ruled upon.

The object of a Non-governmental Organization ("NGO's") is topartake in activities that bring about public welfare. Conversely, civiland commercial corporations have a capitalist organization, which try tomaximize earnings to distribute them among their members or for furtherinvestments.

The Corporate Social Responsibility Doctrine refers to capitalistcorporations and is a doctrine that has spread in the Northern developedcountries, including Europe, Canada, and the United States-althoughunder different names. Recently, the doctrine is appearing in LatinAmerica, where specific social actions exist, though actually few innumber and non-systematically.

The solitary function of a commercial corporation is normallydeveloped at several levels, some of which shall be considered in thisintroduction.

* The author is a lawyer, Juris Scientia Doctor, researcher and regular professor in

the Law School of the University of Buenos Aires, Republic of Argentina.1. Rafil Anibal Etcheverry, "Derecho Comercial y Econ6mico. Formas juridicas de

organizaci6n de la empresa," Astrea, Buenos Aires, 1989, at 3, 2.



A. Insofar as it Must be Organized Observing Due Care Principles ofPlanet Earth

In this respect, the use of soil, drinking water, forests, the treatmentof industrial residues, climate, protection of natural reserves, and therational use of energy present the commercial or industrial corporationwith the great challenge of improving the production policies or theexchange of goods and services.

B. The Same Due Care Must be Observed Towards the Community

A purpose related to services, however, must be added to encouragework, access to regular rest periods, education, health and a decent home.

C. A Third Level Connects with the Preceding Two

A portion of the capital, and of the operative and working capacityof its managers and workers, should not be used to the corporation'sbenefit in itself, but to fulfill a social function, in full consideration of thecommunity, encouraging works of corporate voluntarism.

The movement known as "fair trade" (or trade based on solidarity)was created in the 1960's on the initiative of several NGOs andcharitable associations of the Netherlands and England.

In a second level, there is a regionalization and internationalizationof those entities devoted to trade on a solidarity basis. Theaforementioned movements brought about the creation of a solitary tradeor business law movement, with the following purposes: 1) Fair pricesand trade; 2) Producers' refinancing; 3) Removal of brokers;4) Development of Corporate Social Responsibility relations on a longterm basis; 5) Search for a lasting or permanent development of thetarget community, a sustainable development; 6) Transparency ofbusiness within the market; 7) Responsible investments from a socialpoint of view; 8) Defence of solidarity and common interest principles;and 9) Observance of the main labor rules stated by the ILO.

Not only from the UNO, through the ideas of many thinkers, butalso in the Catholic Church doctrine, the world is observed as if it were aplace with grotesque inequalities. Such inequalities result in a seriousdiscussion against dehumanized capitalism, though further developmentis desired.

Profit is not considered a bad thing, but there remains a real need to

2. A brief history of the alternative trading movement (2001), available athttp://www.ifat.org/dmr/resource.3html. This is a dossier published in the web site of theInternational Federation for Alternative Trade.

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CORPORATE SOCIAL RESPONSIBILITY

straighten consumer forces and bring entrepreneurs with them into aneconomy embracing both industrial and/or services production withsocial solidarity. The concept of "profit" arises from section 8, sub-section 1 and 2 of the Argentine Commercial Code.3

It is not a subject of business law, though this does not reject theraising of benefits. Today, it is widely accepted that companies arecreated for raising benefits, provided that-at the same time-theyobserve an ethical and responsible behavior, cooperating with socialdevelopment.

This trend is remarkably imposing in the most advanced societies.However, through more controversial and, perhaps, more violent ways, itis gaining ground in developing countries' and in countries sufferingshortages of any kind.

Bernardo Kliksberg asks himself: "What do ethics have to do withdevelopment and economy?" And he answers:

Quite a lot. Latin America has several challenges, not only economicand social, but also ethical. Thirty-six percent of the childrenyounger under two years old suffer from undernourishment.Seventeen percent of deliveries occur without medical assistance.Mothers mortality is five times the rate of developed countries.Juvenile unemployment is twice the general rate. A large number offamilies are being destroyed due to their poverty conditions. Itsinequality gap is the largest gap in the planet. Criminality increasesand is related with juvenile unemployment and family's deterioration.They are all inescapable ethical challenges.

4

Mr. Kliksberg recalls that these problems were analyzed in aseminar held in Washington in December 2000, where thirty notablepersonalities, including Nobel prize recipients, ex-presidents,philosophers, political leaders, entrepreneurs, and academicians,assembled, upon the initiative of IADB's (Inter-American DevelopmentBank) president, Dr. Enrique V. Iglesias. During the Conference, therewere several useful teachings, such as adopting a critical stance on thepresent situation and, afterwards, being aware of changing to a positiveaction to reverse this situation related with the economic ethics.

Economics and Law bear many relations; specifically, they allmerge into Commercial Law. Europe has passed a "Green Book."Besides the whole "green" movement and increasing commercialization

3. C6digo de Comercio de la Repiiblica Argentina. Articulo 8, incisos 10 y 20(2004) [Argentine Commercial Code, Section 8, sub-section 1 and 2 (2004) available athttp://www.justiniano.com/codigos-juridicos/codigos-argentina.htm].

4. BERNARDO KLIKSBERG,. HACIA UNA ECONOMiA CON ROSTRO HUMANO [TOWARDS

AN ECONOMY WITH A HUMAN FACE] 169 (Fondo de Cultura Econ6mica. Buenos AiresProvince, Argentina 2002).

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of organic products, Belgium has recently passed the Social Label Act.All products displaying such a label guarantee consumers that theproduct has been manufactured pursuant to the labor law and withoutdiscrimination or the use of a child labor force.

In the United States, the companies voluntarily sign a compromiseto develop a voluntary works program to be performed by its employees.And, on the other hand, consumers seek to invest in healthy products,which have created an increasing movement in which corporate ethics is,additionally, a good business. After scandals such as Enron and severalother companies, the society, the citizen community, encourages changesin corporate attitudes. In December 2003, Boeing, a major worldwideplane manufacturer, dismissed its CEO for lack of ethics and announcedit through the press.

In Great Britain, a board with ministerial powers was created todevelop Corporate Social Responsibility ("CSR"). In the "default"Argentina, a portion of the people went out into the street, during 2001and 2002, to criticize the conducts of some of the financial systemcompanies showing little solidarity.

Pension funds are compulsory in some of the investment countriesconsidering social or environmental aspects, including Sweden. In 2001,the same movement created in France a corporate obligation ofpublishing a social report as well as environmental one; both matters arerelated with CSR's new ethics. All over the world, several investmentfunds seek to invest their money in companies adhering to the sameprinciples as CSR.

Over three hundred "environmental, fair trade or ecological labels"are circulating around the European Union territory; besides the CSR'sGreen Book, there are several regulations protecting those rights. The"fair trade" principle ensures consumers that product prices arereasonable.

Small and medium size enterprises (PYMES in Spanish) are heavilyfavored by CSR's new ethics. In Italy, such enterprises are compelled toprepare social reports and, in some regions, there are governmentalpreferences for hiring services from enterprises with socially responsibleproduction.

It is interesting that the movement does not refer to commercialcorporations but to enterprises, whether or not commercial-neither areenterprise's requesting a particular philanthropy, although it is alwayswelcomed.

What is the new enterprise requested within the CSR framework? Ithas the following attributes: 1) good treatment to its staff, including allits implications; 2) environmental preservation, care of the planet and ofthe environment; 3) cooperation in the development of the target country,

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when acting beyond its frontiers; 4) strict observance of the fiscal dutiesof the place where it develops its main activity or where it hassubsidiaries or branches; 5) fair play with consumers in the market;6) correct and social integration with the environment where it shalloperate, through cooperation with social programmes; 7) appropriatepractices in the developing countries whenever the advanced countries'companies go beyond their frontiers (obviously, this behavior must alsobe observed within their own frontiers); and 8) within the "fair"practices, the use of corruption is condemned no matter the personinvolved, be it the company or a governmental officer.

There are many ways to insert corporate organizations in societyand, at the same time, exhibit such behaviors for the benefit of the wholecommunity, the public welfare. Further than the improvementsaccomplished by the companies for the benefit of their workers and themovement by the NGO's, society claims a bona fide, loyal and diligentbehavior with the individual persons from the legal acts point of view.Moreover, society claims the companies with capitalist organization(those with profitable purposes and earnings distribution forecasts amongits members) a "social action" or a benefit for the community not onlyfor the purpose of obtaining a fiscal benefit in exchange, but as a merecontribution from a capitalist corporation to the environment in which itexists.

It is known that the Common Law countries have studied and set upa series of tacit duties for the corporations, which are not legal duties, butwhich are based on the ethical and cultural parameters related with abetter and solitary living. The Corporate Government Doctrine is anexample, developed in the Anglo-Saxon countries, not as a duty but as acompulsory device intended to improve the corporations administrationand to give them transparency. Within the European Union there is agrowing tendency to grant these regulations a legal status.

Thus, certain laws were drafted to foster these changes, upon thebasis of "reports" written by special committees of the Congress andacademic committees. 5

II. Social Responsibility

The term "social responsibility," originating from the Anglo-Saxonworld, must not be identified with the civil responsibility theory,6 a

5. In 1997 (July-August) we presented a work about "Corporate Government," inthe XV the International Congress of Comparative Law, organized by the InternationalAcademy of Comparative Law, held in the City of Bristol, England.

6. ATILIO A. ALTERINI, RESPONSABILIDAD CIVIL [CIVIL RESPONSIBILITY] passim,(Abeledo-Perrot, Buenos Aires ed., 1974).

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characteristic of the Roman-Germanic Law methodology. Likewise,people talk about "business ethics," which for us represents a differentconcept; ethics implies moral honesty and good behavior.

Tomas Perdiguero believes that although the term CSR has been inuse since the 1960's, especially in countries of Anglo-Saxon culture, "ithas only been during the last decade when the reflections about therelationship between society7 and corporation have gained a new andextraordinary importance within the intellectual environment dominatedby debates and criticism about the worst social consequences related withglobalization."

8

Today, the concept of a corporation is a systemic one applicable todifferent kinds of organizations. The corporation is an entity producinggoods and services for the community. It is a dynamic system, incontinuous development, directly affecting its own social environment:workers, trade unions, investors, clients, suppliers, loan institutions,government, consumers and others.9 There are also positive and negativeexternal actions which make the corporate unit producing these actionsresponsible.

The proposal is to replace the paradigm of a getting a maximum ofbenefits for the one of getting the most out of them, according to a set ofrestrictions or corporate purposes.10

It is essential not to develop such solitary activities in a diffusemanner-not even with annual repetitions or grounded only upon anexecutive's intention of promoting welfare. It is best to plan said socialbenefit facts or activities as if they were one of the various activities ofthe corporation.

It is one thing to have annual collections, spontaneous donations orsporadic benefits, and it is another thing to design an entire corporativeschedule committing the corporation upon the basis of its executives andemployees who offer themselves voluntarily.

The CSR represents a moral compromise and specific action,sometimes arising from an altruist concern and sometimes from theintention of improving the corporation's image within the society whereit develops its activities. The specialists' opinion rejects the idea ofusing this social concern as a marketing element. Social plans, however,

7. "Society" from the sociological sense, not from the legal one.9. ToMAs G. PERDIGUERO, LA RESPONSABILIDAD SOCIAL DE LAS EMPRESAS EN UN

MUNDO GLOBAL [CORPORATE SOCIAL RESPONSIBILITY IN A GLOBAL WORLD] 17

(Anagrama, Barcelona ed., 2003).9. MARIA ISABEL DE LARA BUENO, LA RESPONSABILIDAD SOCIAL DE LA EMPRESA:

IMPLICACIONES CONTABLES [CORPORATE SOCIAL RESPONSIBILITY: ACCOUNTING

IMPLICATIONS], 50 (Edisofer SL, Madrid ed., 2003).10. Id.

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are always included within the strategic plans of the corporations. In thisway, spontaneous social actions turn into planned social actions, throughthe participation of the higher rank executives and the human resourcesarea or department which encourages employees to perform voluntaryactivities. CSR is not an expense, it is an investment.

Some corporations allow employees to perform voluntary CSRworks within working hours. Sometimes, capitalist corporations worktogether with a NGO, such is the case of Bank Boston in Argentina,working since 1999 with "Aguilas Solidarias," a group which offerspuppet shows in hospitals and recycles paper."

American Express Argentina also performs its solitary actionthrough "Buenos Ciudadanos" program and a support foundation inwhich it develops educative strategies, upon the grounds of undertakings,support to primary schools and training. Repsol-YPF, the gas andpetroleum complex, has been developing twenty-four projects since 2002and another thirty since 2003, with the participation of many of itsemployees in voluntary works, in Argentina and other countries. 12

Many other national and international enterprises developing theiractivities in Argentina or within the region, have undertaken similarplans, including Pan-American Energy Argentina, Solvay Indupa,Prudential Seguros, IBM, Movicom Bellsouth, Autopistas del Sol, GrupoZurich, Establecimientos Las Marias. 13

Social development offers corporations the possibility of promotingthe corporate volunteerism which will bring about an improvement ineducation implying a future cultural change and in the sanitaryconditions improvement, basic axis of the happiness, capacity andexcellence of the human being. Volunteerism arises and developsthrough a specific program. The values of excellence, quality andcommitment are transferred to society and are shown through a plannedaction related to the enterprises' participation and promotion carried outwithin them.

11. See http://www.comunidar.org.ar/rseargentina.htm. This webpage describes theactivity of enterprises and organizations, including "Aguilas Solidarias" of Bank BostonArgentina.

12. These projects were discussed at the "Programa Integral de ResponsabilidadSocial Empresaria. Ciclo de capacitaci6n 2004. Estrategias e Iniciativas de las Empresasen Respuesta a los Grandes Desafios Sociales de Nuestro Pais," (Integral programme ofCorporate Social Responsibility. Capacitation Course 2004: Enterprise strategies andanswering big social challenges in our Country]. This course has taken place at HiltonHotel in Buenos Aires from April 2 2 nd to November 11 t

h (Thursday sessions) and wasorganized by The Chamber of Commerce of the United States in The Argentine Republic(AmCham).

13. Id.

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III. The Consumer in Relation to the Enterprise

In this case, it is also fair to consider another responsibility: thesocial responsibility of the consumer who cannot enter an unlimitedconsumption race. Within the scope of the ethical reflection, there is aconsumer's ethic, developed in the 1990's, which is part of the marketingethics included within the enterprise ethics. 14 The consumptiongenerates a strong social force and consumers produce a huge socialimpact, according to their behavior.

Adela Cortina believes there to be three main values whichconstitute consumer responsibility: 1) the responsibility for itself(autonomy); 2) the responsibility for its possible influence upon others(participation in organizations) and 3) the responsibility for the possibleinfluence upon the institutions at a local and global level (jointresponsibility).' 5

Consuming gives rise to a great number of social relations, althoughthe consumer has been compared to individualism. The action ofconsuming is not characteristic of individualism but of social solidarity.The person who buys and gives presents, receives other presents. Theexchanged products create social networks.16 A decent living imposes acertain level of reasonable consumption. A decent living is one of thehuman rights.

Cortina suggests a global agreement in relation to consumptionmaking it possible to: 1) reinforce the consumption patterns of middleclass or strata of the developed countries and of those which are notdeveloped; 2) reach a politic compromise so that all sectors-all humanbeings-may have free access to basic goods; 3) provide the basis for afree and gratifying work; 4) modify, through education, the mechanismby means of which self-realization is identified with social success andthe latter with the gathering of valuable goods; 5) modify the economyconcept considering consumption as the driving force creating wealthand job positions instead of considering it as a training process to achievefreedom; 6) promote a change in the values of the overall social life andin the economic activities; and 7) modify the concept of development,considering that it occurs when people are able to choose their ownconsumption style in an autonomous manner. 17

14. ADELA CORTINA, POR UNA ETICA DEL CONSUMO [FOR A CONSUMPTION ETHICS]

274 (Taurus, Madrid ed., 2003).15. Id. at 280.16. Id. at 287.17. Id. at 323.

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IV. Corporate Social Responsibility (CSR)

Professionals in Economic Sciences state that providing resources tonon-protected sectors of the community may be considered a relevantmanagement element by the companies in general. Such ideas could betranslated into creating a different corporate culture and negotiatingbetter human resources. 8 The concept of social responsibility furtherdeveloped and two new categories, derived from the end of the 1970's,as a result of Frederick's 19 work, among others. These two newcategories are: 1) Corporate Social Responsibility (CSR1), and 2) Theability of being sensitive and the corporate social response (CSR2), i.e.,Corporate Social Responsiveness.

Thus, capitalist corporations must face a new evaluation not basedon their strict corporate behavior in the market, but rather with theirworkers, with the consumer and the environment. The persons doingbusiness with the corporation expect it to observe a certain "socialbehavior." Compliance with the law or generic social responsibility withthe business world is not enough in this sense, because there is a realsearch for a concrete answer to the community.

Archie B. Carroll 20 proposed a model, in 1979, which would laterhave influence on the subsequent decades, introducing four levels ofrequirements: 1) corporate economic responsibilities, which imply theduty to contribute to the creation of wealth and the production of goodsand services needed by the community; 2) the legal system and theresponsibilities arising there from; 3) there are also ethicalresponsibilities by which the company must respect "standards, rules orexpectations reflecting a concern about what the consumers, workers,shareholders and the community consider fair; or showing respect andprotection to moral rights of the persons involved;" and 4) the companyShould assume the voluntary responsibilities not expressly required bylaw, but which show its commitment with the community, supportingsocial objectives1

Carroll further states that corporations bear four stages or aspectslike a common "citizen" of the community.22 Each stage discloses a

18. De Lara Bueno, supra note 9, at 225.19. Perdiguero, supra note 8, at 210 (citing William C. Frederick, From CSRsubl to

CSRsub2: The Maturing of Business and Society Thought, 33 Bus. & Soc'Y 150 (1994).20. Archie B. Carroll, The Pyramid of Corporate Social Responsibility: Toward the

Moral Management of Organizational Stakeholders, BuSINEss HORIZONS, vol. 34, at 47[copy on file with author]. This is only one of the many works by Carroll on this issue.This specific citation refers to an ideal corporate pyramid, with four levels ofresponsibility.

21. Id.22. Archie B. Carroll, Business and Society Review: The four faces of Corporate

Citizenship, Volume 100/101, pg. 1-7 available at http://www.facstaff.bucknell.edu/

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relevant side which contributes to the whole. Corporations must fulfiltheir responsibilities in the same way as citizens do. For Carroll,business corporations and societies have an economic, legal, ethical andphilanthropic aspect.23 The following is expected from a good businesscorporation: 1) to be profitable, in economics terms; 2) to comply withthe law in force; 3) to undertake an ethical behavior; and 4) to returnbenefits to the community, a philanthropic behavior (engagement incorporate contributions).

During the 1990's, beyond the traditional view of the capitalistcorporation and the exclusive interest of shareholders, the existence of"participating groups" within the companies started to be accepted, thusconsolidating CSR theory. To achieve the main function of creating avalue to the owners, the activity of groups of persons taking part in thebusiness organization must also be taken into consideration. These arethe "stakeholders" (staff, suppliers, clients and other groups) leading tothe consideration of the necessary balance and respect among all interestscombined into -the corporation.24 Besides, external factors force thecorporation to change and accomplish a better corporate managementand also design non-compulsory acts and activities towards thecommunity for the public welfare.

Obviously, a gentle balance should be observed between theoriginal nature of the capitalist corporation (obtaining the highestpossible profits to distribute them among its members) and this theorywhich forces the corporation-particularly large corporations-toperform activities which are inherent to the NGO to delegate certaintasks on them. Human society has integrated with audiovisual means,informatics and telematics and transmits its knowledge and its negativeand positive actions while it is reduced to a global size. Internationalfinancing, scientific advances and also terrorism and war attacks, have adirect impact on all countries involved in the so-called globalization.Debates concerning the behavior of all market traders-whethereconomic or not-are now universal issues and appear on-line. Today,corporate responsibility in all its aspects is extended and computed, and,moreover, directly requested.

As Perdiguero25 states, following Jonas and Ulrich, there is a movefrom the ethical theory towards a collective action requestingresponsibility. This latter approach reflects on rationality and the socialmeaning of the private economic activity from a modem perspective. In

pagana/mg312/carroll.htm1.23. Id.24. Perdiguero, supra note 8 at 158.25. Id. at 168.

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the global age, according to Ulrich, private companies must seriouslyconsider the values and responsibilities of the public institutions torecover harmony between private and public interests and priorities, andthese adjustments must be continuously taken into consideration sincethey turn necessary as a result of the dysfunctions or lack ofgovernmental welfare policies.26

In this way, private corporations must participate with their ownactivities not only in their own development but also in the correction ofthe main economic deviations of this age and also of political excesses.Private corporations must control corruption and poverty.

V. Legal Issues Concerning Social Responsibility in Argentina

After describing the subject matter, it is important to point out thatthis doctrine referring to the Corporate Social Responsibility, which wascreated as an ethical or moral issue of the corporate behavior, is receivedby the laws, rules and regulations contained in the Codes and to theEuropean System with some aspects which are already enforceable.

As previously stated, the term "Corporate Social Responsibility"has different meanings in the ethical, moral, philanthropic and law fields.In the Roman-Germanic System, the law is formed by enforceableprovisions, systems and rules describing expected or not expectedbehaviors. As Reich explains,

The legal system is formally designed in order to foresee thedecisions to be entered. Law is enforced under conditionalprogrammes, i.e., certain economic or similar situations written inconditional form which bring about legal consequences. In general,the contents of these situations do not appear to be ruled by the stateor the law.

27

The concept "Government of Laws, 28 seems to refer exactly to the abovementioned.

Max Weber has referred, on several occasions, to the legal systemand to the way in which a situation belonging to reality enters into thelegal order. The following is a paragraph of this thinking, cited byReich:

Thus, the particular technical-legal peculiarity of a rule, the sort ofreasoning categories with which it works, are essential to create acertain legal institution in its core, and this applies to an extent higher

26. Id. at 171.27. Norbert Reich, MERCADO Y DERECHO [MARKET AND LAW] 30, Spanish

Translation (Barcelona, 1985).28. Id.

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than the habitual one. Economic situations do not automaticallycreate new legal forms, but are only a possible means to allow atechnical-legal rule find its own scope in case it is actually put intopractice.

29

Some aspects of CSR were included in many Latin American lawsystems (labor law and social security in the corporate field;environmental protection system). Other systems only include a lightinvitation to act with social responsibility, i.e., with solidarity (forexample in Argentina, the fiscal law). But, within the corporateorganizational framework, CSR is not contemplated, neither its positiveor negative effects.

On the contrary, the social interest is defined as the work aimed atgetting the maximum economic benefits; this is not consistent with anysocial or philanthropic allocation of profits or reserves. The regulationsalready included in the Argentine laws, and the future accomplishmentsinclude the following aspects: 1) include the subject in the NationalConstitution; 2) protect the environment; 3) practice fair trade, prices,refinance productors; 4) include the concept of CSR in labor relations.Social balance. ILO Rules; 5) fiscal system fiscal benefits; 6) corporatelaw; and 7) governmental acts: competence and transparency in themarket, business fairness, fair play with consumers, removal ofunnecessary brokers, governmental contributions particularly for smalland medium size enterprises, socially responsible investments, defense ofsolidarity values, punishment of all forms of corruption.

The following is a brief development of the aforementioned.The Argentine National Constitution,3° the supreme law of the

country, was amended in 1994 and includes many advances which couldbe reflected in our CSR subject. The Constitution secures the right towork to all Argentine and foreign persons who wish to do so in ourcountry. The work for a salary is protected by a whole set of rules calledLabor Law, which includes the duty of the companies engaging morethan three hundred workers to make an annual and confidential "socialbalance" to be informed to the corresponding trade-union, reporting laborand work conditions, labor cost and social services benefits in charge ofthe company. This social balance shall be submitted annually, togetherwith the balance sheet of the fiscal year, and represents a partialexpression of the Corporate Social Responsibility in connection with thecompany's internal labor situation.

The National Constitution also includes a principle for the

29. Id. at 33.30. Constituci6n Nacional Argentina, Sections 1-43 (1994), available at

http://infoleg.mecon.gov.ar/txtnorma/ConstitucionNacional.htm.

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protection of the consumer. This protection is further described in aspecial law. Free and fair competition is also requested from capitalistcorporations in the market, and also business fairness rules. Besides theconstitutional protection, there are many special acts referring to thesesubjects. There are a wide number of rules connected with the protectionand development of the small and medium size enterprises, thus showinga compromise by the Government with the development of the country;but this is not connected with CSR.

There are not many fiscal benefits and they are not easily obtainedfor those companies developing an actual CSR activity. In Argentina'sopinion, it is essential to establish a system of rewards for thosecompanies behaving as "good citizens" and reflecting their CSR in thecommunity where they operate. This is the most relevant gap ofArgentine law, since it hinders the generation of many CSR projectswhich could be developed if more relevant fiscal benefits were obtained.

The environment is widely protected in Argentina. Argentina is notonly a party in the Kyoto Protocol, but also has a large number of federaland provincial laws protecting the environment against damageseventually produced by the companies on the soil, drinking water, food,humans and other living beings.

Within the framework of the Commercial Partnerships andCorporations Law, this subject is not considered by the law or by thebusiness doctrine at all. CSR is not only a management issue, but coversall the activities of the corporations, be it commercial, industrial orrelated to services. Our law does not include the concept of"stakeholders," very useful to describe all those persons involved in thebusiness companies' activities, either internally or externally.

The Argentine Commercial Partnerships and Corporations Lawdoes not include any rule referring to the accounting statements field toshow the CSR situation. The situation in the Argentine CommercialPartnerships and Corporations Law is similar to that of many otherplaces in the world. CSR measures have not been included in anyconsistent, methodical or systematic way within the legal .order. Thispaper constitutes a first invitation to reach order and to regulate thesubject. The Law cannot be unaware of such an important subject.

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Good Faith in Commercial Law and theUNIDROIT Principles of InternationalCommercial Contracts

Dr. Laureano F. Gutierrez Falla*

I. Introduction

The meaning of the words "good faith" have eluded law students sincetheir original conception. Good faith is an ancient ethical concept that hasinfluenced philosophical, moral, and juridical institutions throughout theircontinuing evolution. Today, it serves as a basic principle of legislative andjudicial decision-making that tries to join, as much as possible, the coldterms of a given law with what is just and equitable under the social-political circumstances of the moment. Good faith is a dynamic concept,and though it maintains its own idiosyncrasy, this has not prevented it fromevolving within the political and social fabric of nations.'

II. What Do the Words "Good Faith" Mean?

The first problem that confronts a law student or lawyer is defining thevery concept: what is good faith? Though commentators such as Italy'sNatoli maintain that it is impossible to conceive a precise definition of therules of good faith,2 it is possible to find several concepts of good faith inthe variety of interpretations adopted by authors who have analyzed thisprinciple. For example, Atienza believes good faith consists of the"conviction of acting in accordance with the law." 3 A broad concept

* Professor of Law, Universidad Nacional Auton6ma de Honduras and theUniversidad Tecnol6gica Centroamericana.. 1. Arrubla Paucar & Jaime Alberto, Contratos Mercantiles [Mercantile Contracts],in Editorial Biblioteca Juridica "Dike" [Dike Editorial Law Library] Volume 1, 91 (8"h

ed. 1998).2. See Natoli U., L'attuazione del rapporto obbligatorio: 1l comportamento del

debitore [The Performance of the Obligatory Relationship: The Behavior of the Debtor] (2ded. 1984).

3. See Humberto Podetti, Deberes de las partes al momento de extinguirse elcontrato de trabajo [The Duties of the Parties at the Time of Performing a WorkContract] R.D.C.O., 76 (1977).



unifies good faith's diverse aspects: the pursuit of one's own rights coupledwith the ethical will to act honestly. Similarly, Escriche defines good faithas "the sincere and just conduct with which one executes contracts, withouttrying to deceive the person with whom agreement is reached.'A Thisconcept is incorporated into Article 1.7 of the UNIDROIT Principles ofInternational Commercial Contracts [hereinafter "Principles"], which states:

Good faith and fair dealing

(1) Each party must act in accordance with good faith and fairdealing in international trade.

(2) The parties may not exclude or limit this duty.5

Notwithstanding this foundational spirit of goodwill, applying the conceptof good faith incurs a double risk. It may: (1) allow for the application ofcharitable sentimentality that demerits the certainty of contracts (especiallythose in which similar characteristics of the contracting parties exclude allideas of "favor debitoris"); (2) permit the exercise of interpreting thecontract under individual judge's subjective ideologies. This threat iscompounded when the theory of good faith requires judges to apply staticconcepts like the ethics of the period. Thus, good faith is a slipperyexpression that reflects the changing points of view of generations andsucceeding societies. Especially in a time when change occurs withrapidity, we do not have the luxury of stating "that the laws of Medes andPersians will not be altered.",6

As America's Farnsworth stated:

In recent years, courts have often supplied a term requiring bothparties to a contract to exercise what is called good faith orsometimes good faith and fair dealing. This duty is based onfundamental notions of fairness, and its scope necessarily variesaccording to the nature of the agreement. Some conduct, such assubterfuge and evasion, clearly violates the duty. However, the dutymay not only proscribe undesirable conduct, but may requireaffirmative action as well. A party may thus be under a duty not onlyto refrain from hindering or preventing the performance of the otherparty's duty, but also to take some affirmative steps to cooperate by

4. See Franz Wieacker, El Principio General de la Buena Fe [The General Principleof Good Faith], translated by Jos6 Luis Carro, Editorial Civitas, R.D.C.O., 652 (2d ed. 1986).

5. UNIDROIT Principles of International Commercial Law [hereinafter Principles]art. 1.7, available at http://www.unidroit.org/english/principles/contracts/ principles2004/blackletter2004.pdf (last visited Feb. 22, 2005).

6. E. Allan Farnsworth, The Return of Good Faith: This Time to Stay? presented at theNinth Congress of the International Academy of Commercial and Consumer Law, BondUniversity, Australia., Aug. 1998.

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GOOD FAITH IN COMMERCIAL LAW

helping the other party perform. Courts have often supplied a termrequiring a party to exercise good faith when that party has beengiven a discretionary power over one of the terms of the contract.Output and requirements contracts are leading examples of this. 7

Analyzing the issue in the legislative field, we find different ideals and

concepts of good faith within the majority of legal jurisdictions. For

example, Article 723 of the Honduran Civil Code states:

Good faith is the awareness of having acquired the dominion of thething by legitimate means, exempt from fraud and all othervices... 8

The Uniform Commercial Code of the United States defines good faith in

Section 1-201(19):

Good faith ... means honesty in fact and the observance of reasonablecommercial standards of fair dealing.9

Finally, Article 1.8 of the Principles has a similar provision regardingcontractually inconsistent behavior:

A party cannot act inconsistently with an understanding it has causedthe other party to have and upon which that other party reasonablyhas acted in reliance to its detriment. °

III. Functions of Good Faith

How does good faith function in legal application? In addition to

being a rule of conduct guiding all legal matters, one of good faith's basic

functions is the so-called "integrative function." As Italy's Nanni stated,"majority doctrine grants good faith the function of integrating contractualobligations as a source of the 'lex contractus' at the same level as the

consent of the parties, the law, and the uses and customs."" Thus, in

addition to the limits of contractual law, good faith constitutes a disciplinethat is equal to the contract terms themselves, necessary to fill the inevitable

legal gaps that occur and create other prohibitions and obligations not

imposed by the law, thus completing the contractual system.' 2 As Article

7. E. ALLAN FARNSWORTH, UNITED STATES CONTRACT LAW 137 (Revised Ed. 1999).8. CIVIL CODE [C. CIv] art. 723 (Hond).9. Uniform Commercial Code [hereinafter UCC] § 1-201(19), available at

http://www.law.cornell.edu/ucc/1/article 1.htm#sl-201 (last visited Feb. 22, 2005).10. Principles. supra note 5, at art. 1.8.11. NANNI, LA BUONA FEDE CONTRATTUALE [THE GOOD FAITH CONTRACT] 501 (1986).12. Galgano Francesco, quoted by D'Angelo in "La Tipizzazione," Giurisprudenciale

delle Buona Fede Contrattuale.-Contrato Civile e Commerciale, Cedam, Padua No.2, p.70 2

ss p.70 3 .

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4.8 of the Principles states:

Supplying an Omitted Term

(1) Where the parties to a contract have not agreed with respect to aterm which is important for a determination of their rights and duties,a term which is appropriate in the circumstances shall be supplied.

(2) In determining what is an appropriate term regard shall be had,

among other factors, to:

a) the intention of the parties;

b) the nature and purpose of the contract;

c) good faith and fair dealing;

d) reasonableness.13

In addition to this important integrative function, good faith serves as aprinciple that should guide judges in the resolution of cases. This is thereason for Articles such as 1546 of the Honduran Civil Code which states:

Contracts must be executed in good faith. They therefore obligatenot only that which is expressed therein, but all other things that ariseprecisely from the nature of the obligation or those things which bylaw or customs form part of the same.

Also, Article 1337 of the Italian Civil Code (the equivalent of Article 1546of the Honduran Civil Code)' 5 describes a rule of conduct formulated ingeneral terms that leaves to the court the analysis of concrete cases inaccordance with good faith. 16 This decision, according to Wieaker, isapplied by the judge in three different capacities:

a) As executor of the law by applying the principles of good faith tothe issues not covered by the law.

b) Reestablishing the "medium behavior" in the exercise ofsubjective rights; and

13. Principles supra note 5, at art. 4.8.14. C. Civ art. 1546 (Hond).15. Revista del Derecho Comercial y de las Obligaciones [Review of Comercial Rights

and Obligations] (1979), available at http://cisg.tij.uia.mx/ambito05.htm (last visited Feb.22, 2005).

16. NANN supra note 11.

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c) As tutor of the just behavior of both parties, following a rule, notnecessarily written, that can signify in certain cases, the creation of anew rule of law of judicial nature.

Through these means, the traditional legal order is complemented bythe judge's discretion to evaluate the situation and apply standards of goodfaith to the law within parameters based on modem behavior or socialvalues present in the sphere in which the decision is to take place. Thus, incontract law, conduct contrary to good faith is elevated to the equivalent ofa breach of contract.18 A perfect example of this principle may be found inthe 1992 Dutch Civil Code that states:

Article 6:248(2): A rule binding upon the parties as a result of thecontract does not apply to the extent that, in the given circumstances,this would be unacceptable according to criteria of reasonablenessand equity.'

9

Ewoud Hondius 20 elaborated that "according to the legislative history, thearticle should be used with restraint and this indeed has been the practice.'

IV. Kinds of Good Faith

Good faith is composed of two factors: 1) objective good faith, whichcorresponds to the rules of behavior, and 2) subjective good faith, whichcorresponds to the actor's state of mind.

Objective good faith is exemplified by Article 752 of the HonduranCommercial Code which permits one of the contracting parties to refuse tocomply with his obligation in a bilateral contract if the other party to thecontract does not fulfill his.22 The principle of objective good faithrepresents a modem rule that the reciprocal loyalty of conduct must inspirethe execution of the contract (i.e. good faith should inspire its formation andinterpretation, and should accompany the contract in each of its phases).23

17. Wieacker, supra note 4.18. D'Angelo, supra note 12, at 707 quoting Mario Rotonda.19. CIVIL CODE [C. CIV] art. 6:248 (Dutch).20. Ewoud Hondius is a professor at the Law School of the Universiteit Utrecht. His

educational background includes a Master of Comparative Law, Columbia Universityand Ph. D., Universiteit Leiden. Hondius is a member of several organizations, includingthe Commission on European Contract Law (Lando-Commission) and the Royal DutchAcademy of Sciences, and is member titulaire of the Acad6mie Internationale de DroitCompar6. Ghent University Law School Website, at http://www.law.ugent.be/llm/documents/Curriculum%20Hondius.htm (last visited Feb. 22, 2005).

21. Letter from Ewoud Hondius to WHO (Aug. 16,2004) (on file with author).22. COM. CODE [C. COM] art. 752 (Hond.).23. FRANSESCO MESSINEO, DOCTRINA GENERAL DEL CONTRATO, Volume II, 206 (Eur.

ed. 1952).

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For example, the compliance of objective good faith (loyalty) by thecontracting parties (creditor and debtor) signifies that a creditor may notdemand more, in enforcing his credit, nor can the debtor offer less, incomplying with his obligations, than that which is required by honesty andthe objective of the contract. Objective good faith constitutes, therefore, arequired form of conduct, the manner in which the parties should conductthemselves being one of the basic principles of all contractual doctrine.

Subjective good faith, on the contrary, is the belief or psychologicalstate of the person under which he is convinced that he is actinglegitimately to complete his part of the contract.24 According to Ferreyrasubjective good faith is "the firm conviction of the legitimacy with which acertain juridical situation is acquired and maintained. 25 A typical exampleof subjective good faith is codified in Article 723 of the Honduran CivilCode:

Good faith is the awareness of having acquired the dominion of athing by legitimate means, exempt from fraud and all other vices.26

V. Good Faith and the Contract

It is undeniable that the influence of good faith is most apparent in thecontractual field of law. However, in analyzing the influence of good faithin contractual matters it is necessary to observe the different phases of thecontract. We must address not only its enforcement but also its preparation.

A. Culpa In Contrahendo

The application of the principle of good faith in the preparatory phaseof the contract, i.e. "culpa in contrahendo," is specifically regulated bylegislation, such as the Italian Civil Code, which states in Article 1337:

Negotiation and precontractual responsibility. The parties, in thenegotiation and formation of the contract must behave in accordancewith good faith. 27

Article 2.1.15 of the Principles presents an additional example:

Negotiation in bad faith

24. Id.25. EDGARD A. FERREYRA, PRINCIPALES EFECTOS DE LA CONTRATACION CIVIL 184

(1972).26. C. Civ art. 723 (Hond.).27. CIV. CODE [C. Civ] art. 1338 (Italy).

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(1) A party is free to negotiate and is not liable for failure to reach anagreement.

(2) However, a party who negotiates or breaks off negotiations in badfaith is liable for the losses caused to the other party.

(3) It is in bad faith, in particular, for a party to enter into or continuenegotiations when intending not to reach an agreement with the otherparty.

28

According to Benatti, "[t]o respond to the demands of substantial justice allmodem legal systems accept the principle that the conduct of he who actsincorrectly in the precontractual phase should be reprehended. ''29 Benattistates that in regulating said principle two systems exist: the system thatexpressly recognizes that right (as in Article 1337 of the Italian Civil Code),and those systems that accept that right, based on the principles ofextracontractual liability, as occurs in France and Switzerland. The secondsystem is also found in jurisdictions that follow Spanish "jurisprudente" ofArticle 1902 of the Spanish Civil Code.30 This approach is the direct andtextual precedent of Article 2236 of the Honduran Civil Code andjurisdictions that apply the principle of Article 41 of the Swiss Code ofObligations, which states that he who antijuridically causes damage toanother, either intentionally or by negligence, is obligated to indemnify theaggrieved party.31 The same obligation is incurred by he who intentionallycauses damage to another by violating public mores. The reasoning behindthis conclusion is that although there is no express norm that so states, theprinciple of good faith is not only one of the fundamental rules of allobligations, but of the juridical order in totum.

The same concept is maintained by Larenz who stated:

The liability for violating a precontractual duty is ruled by the sameprinciples as those of the liability for breach of contractual conduct.However, the precontractual duties (negotiations) are not, in the sensehere analyzed, those derived from a precontract, but rather thoseresulting from an obligatory relation analogous to the contractactualone that arises due to the existence of contractual negotiations thatexist independendent of whether the contract is or is not executed.These precontractual negotiations are not yet an obligatoryrelationship as such, (as is a precontract that creates, at least, for oneof the parties, a duty of excecution) because they do not create a

28. Principles, supra note 5, at art. 2.1.15.29. Benatti, Culpa in Contrahendo, Contratto e Impresa 287 (1987).30. Id.31. Swiss Code of Obligations, art. 41, available at http://www.admin.ch/

ch/i/rs/220/a41.html (last visited Feb. 22, 2005).

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judicially claimable obligation, but only a duty of conduct (in themeasure demanded by good faith).32

The requirements for application of the principle of culpa in contrahendo toprecontractual negotiations are as follows:

a) That one of the parties believed that the contract would beexecuted, including the cases of mental reservation or lack of aserious intention by the breaching party.

b) That the breaching party refused to conclude the contract withoutjust cause.

c) That the breach caused a damage to the party in bono.33

If said requirements are met, the rules of Article 2236 of the HonduranCivil Code would apply. This Article states:

He who by action or omission causes damage to another intentionallyor negligently, is obliged to repair the damage caused.34

B. Why Is the Contract Obligatory?

There are various doctrines that try to explain the obligatory nature ofcontract. One of the first applies the doctrine of "pacta sunt servanda"which affirms that the contract and its terms are binding due to the will ofthe contracting parties and within the limits of this intention (i.e., thecontent of the intention of the parties, must be analyzed to determine theextent to which one of the parties has declared to the other that he isobligated to comply with his obligations). 35 An example of the applicationof this doctrine may be found in Article 1348 of the Honduran Civil Code:

Obligations that arise from contracts have force of law between thecontracting parties and must be complied with in accordance with itsterms.

36

Similarly Article 1.3 of the Principles reads:

Binding character of contracts

32. KARL LARENZ, DERECHO DE LAS OBLIGACIONES [LAW OF OBLIGATIONS] 110

(1958).33. Id.34. C. Civ art. 2236 (Hond.).35. PuG BRUTAU, MANUAL DE DERECHO CIVIL [MANUAL OF CIVIL RIGHTS], Volume II,

229 (2d. ed. 1978).36. C. Civ art. 1348 (Hond.).

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A contract validly entered into is binding upon the parties. It canonly be modified or terminated in accordance with its terms or byagreement or as otherwise provided in these principles. 37

An alternative doctrine maintains that the contract is obligatory basedon the fact that the manifested consent of one of the parties has influencedthe sphere of interest of the other party, who would suffer damages if thefirst party were not bound. Under this doctrine, the obligatory nature of thecontract is based on an ethical consideration derived from good faith thatrequires protecting the reliance that the promise or conduct of one of theparties may have been the reason for the execution of the contract by theother.

Defending this position, Puig Brutau maintains that to try to allege thewill of one of the parties as the only basis for the contractual obligation canonly be partially maintained when his compliance is conflicted.38 The ideathat the obligatory nature of the contract is based on the will of one of theparties is both insufficient and excessive. It is insufficient becausefrequently the will of one of the parties is incapable of creating valid andeffective obligations. On the other hand it is excessive because many timesthe solution to a contractual problem may only be reached if what has reallybeen agreed to by the parties is not taken into account.

Two of the major problems in contractual matters revolve around whatrequirements should be met for a declared intention to be binding and whateffects it produces in addition to or apart from those really desired by theparties. The existence of these problems proves that the spheres of liabilityfor contractual obligations are not radically separated, i.e., those that resultfrom the factual situations created by acts of the parties in the formation ofthe contract and factual situations that later appear in the relations betweenthem.

In analyzing cases of breach of contract the doctrine that maintainsthat the contract is obligatory due to the principle of good faith states:

[G]ood faith may be characterized as a criterion of conduct based onthe fidelity of the contractual relationship, and on the obligation tocomply with a legitimate expectation of the other party; theobligation to use all of one's efforts in the service of the interests ofthe other party in the measure required for the kind of obligatoryrelationship entered into; the obligation to satisfy the interests of thecreditor of the obligation.39

Based on this principle, Article 1364 of the Honduran Civil Code may be

37. Principles supra note 5, at art. 1.3.38. BRUTAU, supra note 35.39. EMILIO BETrl, TEORIA GENERALE DELLE OBLIGAZIONI, Volume I, 103 (1953).

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interpreted in conformity with the fidelity and obligation imposed by goodfaith when it states:

Damages must be indemnified from the moment in which the debtoris constituted in default or, if the obligation is of a negative nature,from the moment of its breach.40

As Bianca has well stated, "the contractual nature of the debtor'sliability is recognized for its harmful intervention in the juridical sphere ofthe creditor."4' 1 Applying this principle to Honduran legislation, thedebtor's obligation to indemnify the damages caused is, by its own nature, adifferent and accessory obligation to that of complying with the contract. Itis based on the obligation of security or protection of the creditor's"violated interest" in the performance of the contract. That is the reasonwhy Nanni maintains that in contracts with correspective obligations, theexception of non-compliance is based on conserving the substantialequilibrium between the opposing obligations. The party alleging theexception may only be considered to be acting in good faith if his refusal tocomply with the contract constitutes a behavior that is objectivelyreasonable and logical in the sense that the refusal to comply may bejustified as an unenforceable obligation in the context of the economicfunction of the contract.4 2

Applying such reasoning, Article 752 of the Honduran CommercialCode states:

In bilateral contracts, each contracting party may refuse to complywith his obligation if the other party does not comply or does notoffer to comply simultaneously with his obligation, unless the non-simultanity of the obligations has been agreed in the contract or theseresult from the nature of the contract itself.43

Therefore, if one of the parties breaches his obligation in a bilateralcontract, the other party only has the right not to comply with his obligationif said breach is objective, reasonable, and logical, and his concretejustification being based on the relationship between the non-requestedobligation and the denied obligation, taking into account the economicfunction of the breached contract. As stated in Articles 7.1.2 of thePrinciples:

Interference by the other party

40. C. CIv art. 1364 (Hond.).41. MAssmMo BIANCA, DELL'INADEMPIMENTO DELLE OBLIGAZiONi 34 (1967).42. NANNI, supra note 11.43. C. Civ art. 752 (Hond.).

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A party may not rely on the non-performance of the other party to theextent that such non-performance was caused by the first party's actor omission or by another event as to which the first party bears therisk.

44

Additionally, Article 7.1.3 of the Principles states:

Withholding performance

(1) Where the parties are to perform simultaneously, either party maywithhold performance until the other party tenders its performance.

The preceeding principles are in accord with the modem juridical positionwhich considers the breach as a specific legal event that has its ownsubstance and autonomy.46 This explains why part of the good faithdoctrine considers it as included within the field of the "theory of theunjust," which requires "the culpability" that involves a subjectivepresupposition of the party in breach for acting in an illegal form, violatingthe principle of good faith.

VI. Some Special Cases of Application to the Doctrine of Good Faith

Honduran legislation recognizes three institutions that are based on theprinciple of good faith.

A. The Rescission of the Contract Due to Hardship

It is undeniable that the "ratio" of the rescission of contracts due tohardship regulated by Articles 75347 and 75448 of the HonduranCommercial Code violates the principle of good faith that must rule alljuridical relations. The right to claim rescission of the contract by the party

44. Principles, supra note 5 at art. 7.1.2.45. Id. at art. 7.1.3.46. FUEYO L. FERNANDO, CUMPLIMENTO E INCUMPLIMIENTO DELLA OBLIGAZIONI,

EDITORIAL JURiDICA DE CaILE 250 (2d. ed. 1992).47. Article 753 states, "When somebody impelled by extreme need, executes a

contract in iniquitous conditions, he may rescind it if he so requests. The judge, upondeclaring the rescision, may determine an equitable compensation to the other contractingparty." C. COM. art. 753 (Hond.).

48. Article 754 states:If an enormous disproportion exists between the obligations of each of thecontracting parties due to ignorance, penury or need of one of them, which wastaken advantage of by the other party, the injured party may request therescision of the contract if same was not aleatory.The action will not be admissible if the injury did not exceed half of the valueof the obligation that was made or promised at the time of executing thecontract.The lesion must exist at the time the rescision of the contract was requested.

Id. at art. 754.

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who, due to extreme need, ignorance or penury, executed an iniquitouscontract, is based on the lack of objective good faith of the party who seeksto execute said contract while violating the limits of probity in theagreement.

Following Mosco-Luigi the basis of the aforesaid norm is found in thegeneric interrelationship of the obligations of the parties where. theequilibrium that should exist between parties that put them on an equalethical basis to agree on the terms of contract does not exist. 49

Therefore, a problem is created when one of the parties subjected to asituation of ignorance or penury is unable to freely express his desire orlack of desire to enter into the contract and a situation known to the otherparty who, abusing said situation, demands the execution of the contract.The result is that the contractual relationship is tainted by the fact that theinjured party may refuse to comply with his contractual obligations.

An obvious example would be that of a doctor, taking into accountthat the injured party is bleeding to death due to a traffic accident, requiringthe injured party to sign a $100,000 contract to control the hemorrhage.This contract obviously violates the principle of good faith which must bethe foundation of all contractual obligations.

B. The Resolution of the Contract Due to Excessive SuperveningOnerosity

The rule contained in Article 757 of the Honduran Commercial Codepermits the resolution of the contract if, as a consequence of extraordinaryor unforeseeable circumstances, its execution becomes excessively onerousfor one of the parties. This rule is based on the principles of good faithwhich find their origin in the Roman "rebus sic stantibus" doctrine.

The Principles maintain this rule in Articles 6.2.4 and 6.2.2, whichdefine hardship:

Article 6.2.2. (Definition of hardship)

There is hardship where the occurrence of events fundamentallyalters the equilibrium of the contract either because the cost of aparty's performance has increased or because the value of theperformance *a party receives has diminished, and

(a) the events occur or become known to the disadvantaged party after theconclusion of the contract;(b) the events could not reasonably have been taken into account by thedisadvantaged party at the time of the conclusion of the contract;(c) the events are beyond the control of the disadvantaged party; and

49. Mosco-LuiGI, LA RESOLUCION DE LOS CONTRATOS POR INCUMPLIMIENTO, CONNOTAS DE JOSt SALAMERO ARADO CAPiTULO it, p.1. (Colecci6n Meleo, Barcelona, 1962).

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(d) the risk of the events was not assumed by the disadvantaged party.50

C. The Resolution of the Contract Due to Frustration of Its End

If the reason for which a contract was executed is frustrated (thefundamental reason for the signing of the contract disappears), the principleof good faith would step in. The principle would prohibit the interests ofthe debtor to be unjustly affected by the creditor who, acting in bad faith,requires the compliance with an obligation lacking all foundation. Perfectexamples of this doctrine may be found in the English "Coronationcases."

50

D. Good Faith and Negotiable Instruments

All the regulations on negotiable instruments in Honduran commerciallaw are based on the principle of good faith, following the "theory ofappearances," that maintains that the actions of a party who, acting in goodfaith, relied on the "appearance" of the document must be protected.

If the chapter on "General Rules on Negotiable Instruments" of theHonduran Commercial Code is analyzed, it may easily be ascertained thatmany of its norms are based on the principles of good faith. Likewise,Article 455 requires that the holder in due course of a negotiable instrumentexhibit the same in order to be able to demand the compliance of theobligation therein incorporated. This obligation results from the applicationof the "theory of appearances" as, for a third party in good faith, the onlyperson who has the right to require the compliance of a negotiableinstrument is its legitimate holder in due course presentation.

Article 459 of the Honduran Commercial Code, which confirms thedoctrine of "creation" in Honduras, obligates the issuer of a negotiableinstrument to be bound by it, even though it entered into circulation withouthis will, as, the third party in good faith who acquired the document has theright to rely on the fact that he acquired a legitimately enforceabledocument.

Article 460 of the same Code, which contains the principle of"literality" of the instrument, clearly states the rule that "what is written iswhat is valid, and only what is written may be claimed," as the holder ingood faith of the document has the right to rely on the fact that what thedocument states is the right stated therein.

Finally, Article 462 of said Code regulates the effects of the alterationof documents following the principle that the holder in due course of a

50. Principles, supra note 5 at art. 6.2.2.51. See, e.g., Chandler v. Webster, I K.B. 493 (1904); see also Krell v. Henry, 2

K.B. 704 (1903).

20051



document may rely on the text of the document he receives, even thoughsame was altered prior to his reception.

VII. Conclusion

It has been my intention to discuss one of the most debatableprinciples of contemporary legislation that may trace its origin to Romanlaw: the principle of good faith.

I accept that the opinions herein expressed are debatable nevertheless.The principle of good faith must be, one of the basic columns of alljuridical reasoning. Although the judge is bound to follow the principle of"legality," said principle must be moderated, humanized and applied, inaccordance with the fundamental principles of good faith, not only to fillthe blank spaces that could exist in the laws or contractual agreements, butto apply the principle of social justice required by Article 331 of theHonduran Constitution. This article states:

The State recognizes, guarantees and encourages the liberties ofconsumption, savings, investment, occupation, initiative, commerce,industry, contracting, of enterprise and any others that derive fromthe principles that shape this Constitution. Notwithstanding, theexercise of said liberties may not be in violation of social interest,morals, health or public security.

I conclude by suggesting that in applying the existing laws orjurisprudence, as justice and equity are twin sisters of the same juridicalorder, it must entail therefore:

An honest intention to abstain from taking any unconscientiousadvantage of another, even though technicalities of law, together withabsence of all information, notice, or benefit or belief of facts, whichrender transactions unconscientious

52. Warfield Natural Gas Co. v. Allen, 248 Ky. 646, 655; 59 S.W.2d 534, 538(1933).

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Precedent in-East and West*

Ewoud Hondius**

I. Introduction

Throughout Europe, academics have been active over the pastdecade in a half studying the desirability and feasibility of harmonizingprivate law.' The question may be raised-and that is precisely thequestion I wish to address here-whether or not even a fully harmonizedprivate law will be applied the same way all over Europe. I will arguethat this is not necessarily the case. In various legal systems, the law inaction and the law in the books may differ from one another to varyingdegrees. Courts may interpret uniform law in line with nationaltraditions.2 One of these traditions has to do with precedent. TheEnglish common law, as is well known, is based on cases, whereas civillaw systems are based on legislation. Furthermore, there are conflictingtheories on the importance of precedent.3 In this paper, I will explore towhat extent these different approaches are converging in a UnitingEurope.4 In fact, there are actually three approaches. I will argue that incivil law systems, two trends are discemable. In Western Europe,precedent plays an important role in practice, even when this is notalways acknowledged in legal writing. In Central and Eastern Europe,

* Work in progress. I earlier wrote on this subject in the M Langes Marcel Fontaine

(Bruxelles, 2003) and I hope to expand my research in a general report to be submitted tothe Utrecht Congress of the International Academy of Comparative Law in 2006.

** Professor of Civil Law, University of Utrecht; Member, International Academy ofCommercial and Consumer Law.

1. See ARTHUR HARTKAMP ET AL., TOwARDS A EUROPEAN CIVIL CODE, (The Hague:Kluwer/Nijmegen: Ars Aequi, 3rd ed. 2004).

2. HARTMUT HAHN, NATIONALE AUSLEGUNGSMETHODEN, VERGLEICHEND

BETRACHTET-EUROPAISCHE ANFORDERUNGEN AN DIE METHODENLEHRE, ZEITSCHRIFT FUFR

RECHTSVERGLEICHUNG 163-170 (2003).3. See URS PETER GRUBER, METHODEN DES INTERNATIONALEN EINHEITSRECHTS 2757

328 (Tiibingen: Mohr ed., 2004).4. Mark Van Hoecke predicts that "The Europeanisation of private law will slowly,

but thoroughly, influence theory building in the various jurisdictions." See MARK VANHOECKE, EPISTEMOLOGY AND METHODOLOGY OF COMPARATIVE LAW 398 (Oxford: Hart ed.,2004).



however, the practice is different. In the former socialist nations,precedent was not only denied a place as source of law, but the courtshave often adhered to this doctrine-and perhaps still do-in fact. I willargue that this is not desirable, even apart from the question ofharmonization. A possible fourth group of jurisdictions-those wherewestern law has been exported beyond its host jurisdictions and where inthe words of Patrick Glenn the problem of corruption has assumedmassive proportions 5-will be left out in this paper.

II. Structure of this Paper

In the common law, cases have always been the cornerstone of thelegal system. Stare decisis is an age-old tradition. In civil law systemsthe courts are but the "bouche de la loi." Although in civil lawjurisdictions, case-law plays an increasing role in the process of"Rechtsfortbildung," this is hard to reconcile with the classical divisionof the trias politica, where it is the legislature's monopoly to lay downrules.

The notion of the history of precedent alluded to in the aforementionedwords, I must admit, until recently was mine. This conception, however, isfalse, as I shall try to explain in the first Part of this paper, first with regardto the common law and then with regard to West European law and Centraland East European law. Regarding civil law, I will start by mentioning, byway of example, a legal system well-known to myself, that of theNetherlands, and more in particular its legal writing. I will then brieflyengage in an excursion into other civil law systems, before venturing intothe situation in Central and Eastern Europe. Having surveyed the law as itis, I will then in a second Part venture into a look into the future, first withregard to the common law, then West European law and finally Central andEast European law. I will conclude this essay with a prognosis for thefuture of precedent in Europe.

This paper is limited to private law, although some of the findings mayalso be valid for criminal law and public law. For reasons of time andspace I have refrained from analysing the role of precedent in the practiceof the two main European courts, the European Court of Justice inLuxemburg and the European Court of Human Rights in Strasbourg.6

The subject of "precedent" may seem somewhat out of tune with thegeneral theme of this conference: "Globalization, regionalization and

5. H. PATRICK GLENN, LEGAL TRADITIONS OF THE WORLD/SUSTAINABLE DIVERSITY IN

LAW 247 (Oxford: University Press ed., 2000).6. There is reason to believe that at least the first mentioned court adheres to the

French legal method of dealing with cases. See STEFAN VOGENAUER, DIE AUSLEGUNGVON GESETZEN IN ENGLAND UND AUF DEM KONTINENT 1481 (Tiibingen: Mohr Siebeck2001).

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PRECEDENT IN EAST AND WEST

transplants in commercial and consumer law." However, I would submitthat it may throw light on issues which are discussed in other papers for thisconference, such as those on a CISG Digest,7 harmonization of productliability case-law, and the ius commune casebooks.9

III. The Status Quo and Its Development

In this section I will try to describe some of the principaldevelopments relating to precedent.

A. Precedent in the Common Law

Earlier, in Section II, I mentioned the widespread belief-or at leastwhat I myself believed until recently-that precedent and common laware interchangeable. This belief, as most lawyers from common lawbackground already know, happens to be erroneous. The system ofprecedents is much younger than the common law itself, it is notuncontested and it is subject to erosion. Historically speaking, precedentis much younger than one might think. "Prior to the mid- or latenineteenth century, judges in England did not regard themselves boundby earlier decisions (... ).,,1 According to the thinking of the time ofBracton in 1256, "the law was not to be found in individual cases; ratherthe case decisions in their totality were a reflection of the law."" Amongother factors, the rise of the printed text and the establishment of ahierarchy of courts combined in the sixteenth century to shift the natureof legal reasoning to the common law.' 2 Other elements whichcontributed to the rise of stare decisis were the growing custom of givingreasons for decisions and the improvement in the quality of lawreporting.

7. Peter Winship, Digesting the CISG Case Law: Implications for UniformInterpretation, Paper for the International Academy of Commercial and Consumer Law(Riga, Aug. 12-14, 2004).

8. Mads Andenas, Problems of Harmonizing European Private Law-ProductLiability as a Case, Paper for the International Academy of Commercial and ConsumerLaw (Riga, Aug. 12-14, 2004).

9. Walter Van Gerven, Convergence, a New and Open Method of Approximation ofPrivate Law, Paper for the International Academy of Commercial and Consumer Law(Riga, Aug. 12-14, 2004).

10. J. DAVID MURPHY, ROBERT RUETER, STARE DECISIS IN COMMONWEALTH

APPELLATE COuRTS 3 (Toronto: Butterworths 1981).11. Thomas Lundmark, "Soft" Stare Decisis: The Common Law Doctrine Retooled

for Europe, in REINER SCHULZE, RICHTERRECHT UND RECHTSFORTBILDUNG IN DEREUROPISCHEN RECHTSGEMEINSCHAFT 161-168 (Ulrike Seifed., Tilbingen: Mohr 2003).

12. David J. Ibbetson, Case-law and Doctrine: A Historical Perspective on theEnglish Common Law, in REINER SCHULZE, RiCHTERRECHT UND RECHTSFORTBILDUNG INDER EUROPAiSCHEN RECHTSGEMEINSCHAFT 27, 33 (Ulrike Seif ed., Tuibingen: Mohr2003).

2005)



Only in 1898 was the binding force of precedents accepted, 13 althougheveryone was not completely convinced. For instance, Lord Denning,known for his dissenting opinions, engaged in an epic battle withprecedents. 14 Before him, Lord Wright had already criticised the-nowrelinquished-theory whereby the House of Lords was bound by its owndecisions.'5 Moreover, there has always been opposition in academiccircles:

Judges owe their fidelity, not to the pronouncements of predecessors,but to the law. They might not now identify that as ancient custom,and in practice they will usually discover it in the law reports, butthey are ultimately free to reject a precedent if they do not believe itrepresents the law. 16

The prevailing view on precedent does give courts some discretionarypower: "most cases coming to appellate courts for decision allow judgesconsiderable scope for avoiding precedents which would result ininjustice or an otherwise inappropriate decision."' 7

We should keep in mind that the notion of "precedent" in the commonlaw stands for two different meanings:

In English law, the concept of "precedent" covers two ideas that areclosely connected. In the broad sense, precedent involves treatingprevious judicial decisions as authoritative statements of the lawwhich can serve as good legal reasons for subsequent decisions. Inthe narrow sense, precedent (often described as stare decisis) requiresjudges in specific courts to treat certain previous decisions, notably ofsuperior courts, as a binding reason. 8

The system of precedent has a number of exceptions; Holdsworth alreadymentioned these in 1934.19 But, on the whole, the system of precedentseems well established in common law countries, which in the European

13. London Tramways Co. v. London County Council, A C 375 (1898).14. See M. ADAMS, TIJDscHRir VoORPRIVAATRECHT 13, 37-40 (2002).15. Lord Wright, Precedents, Cambridge L.J. 122 (1944).16. Peter Wesley-Smith, Theories of Adjudication and the Status of Stare Decisis, in

LAURENCE GOLDSTEIN, PRECEDENTINLA W 73, 87 (Oxford: Clarendon 1987). See also A.L.Goodhart, Precedent in English and Continental Law, LAW QUARTERLY REvIEw 40-65(1934).

17. CATRIONA COOK ET AL., LAYING DOWN THE LAW 79 (London: Butterworth, 5th ed.2001). The authors refer to a decision of the Australian High Court in whichnotwithstanding a two hundred year old precedent rape within marriage was held possible.Id. at 107. In addition, the authors discuss the court's rejection of vicarious liability inRylands v. Fletcher. Id. at 109.

18. John Bell, Sources of Law, in PETER BIRKs, ENGLISH PRIVATE LAW 1, 29 (Oxford:Oxford University Press 2000).

19. RUPERT CROSS AND J.W. HARRIS, PRECEDENT IN ENGLISH LAW 125 (Oxford:Clarendon, 4"hed. 1991) (quoting 50 LAW QUARTERLY REvIEw 180 (1934)).

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Union include Cyprus, England, Ireland, Malta and Scotland, the latterbeing a mixed legal system.

B. Precedent in a Civil Law Jurisdiction: The Netherlands

From a historical perspective, the era of ius commune was one inwhich there was a system of precedents on the European continent, as hasbeen set out by Jan Drion in his inaugural address at Leyden University.20

With the entry of the codification principle on the continent, the system ofprecedents was all but abolished. In fact, the Prussian Code of 1794 heldthat "auf altere Ausspriiche der Richter bei kiinftigen Entscheidungen keineRiicksicht genommen werden (soll)' (in future cases, old decisions shallnot be taken into consideration).2 ' In France, as well as other countries witha system of cassation, courts only had to take into account another court'sdecision after a renvoi by the Court of cassation.22 Precedents weresomething of the past, at least in theory. In practice, case-law alwaysremained of interest, especially after well-known academics started to writeannotations.23

How does one reconcile this practice with the theory of the triaspolitica? In his Ph.D. thesis, defended at the Erasmus University

24Rotterdam, Kottenhagen seeks to find a solution for the dilemma. Hearrives at the conclusion that a Dutch judge is bound to follow precedents"unless he can show why this precedent is wrong, outmoded, unjust ordistinguishable. 25 In the footsteps of Vranken,26 Haazen argues thatprecedents should be "sort of binding," which should be sufficient to speakof a binding effect, while at the same time providing sufficient flexibility toallow the courts to deviate.27 Rijpkema has argued that even if thelegislature is democratically controlled, it hardly makes legislation moredemocratic than judge-made law.28 Woltjer has also analyzed the dilemmain terms of the trias politica.29 There appears to be a communis opinio that

20. J. Drion, Stare decisis/Het gezag van precedenten, in VERZAMELDE GESCHRIFTENVAN J. DRION 142-170 (Deventer: Kluwer 1968).

21. Id. at 152.22. Id. at 147 (this is in fact slightly more nuanced).

23. In the Netherlands Eduard Maurits Meijers and Paul Scholten, who both becameannotators for the Nederlandse Jurisprudentie, were of major importance in this regard.

24. R.J.P. KOTTENHAGEN, VAN PRECEDENT TOT PRECEDENT 389 (Arnhem: GoudaQuint 1986).

25. Id. at 312.26. J.B.M. VRANKEN, C. ASSER'S HANDLEIDING TOT DE BEOEFENING VAN HET

NEDERLANDS BURGERLIJK RECHT/ALGEMEEN DEEL ** 190 (Zwolle: W.E.J. TjeenkWillink, 1995).

27. O.A. HAAZEN, ALGEMEEN DEEL VAN HET RECHTERLIJK OVERGANGSRECHT 340(Tilburg 2001).

28. PETER RIJPKEMA, RECHTERSRECHT 232 (Den Haag: Boom 2001).29. A.J.T. WOLTJER, WETGEVER, RECHTER EN HET PRIMAAT VAN DE GELIJKHEID 527

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in Dutch law there is a light variant of precedent. 30 As to the theoreticalfoundation of this system, the opinions are divided.3'

C. Precedent in Other Civil Law Jurisdictions

Are the developments in the Netherlands an example of what ishappening in other civil law systems? Not completely, but the differencesare only marginal. In Belgium, when it looks as if the Cour de cassation isunaware of any precedents, in fact it is the conclusions of the Parquetg~n~ral and the mercuriales of the procureur-gbn~ral which serve as afunctional equivalent.32 In France, a strict division between law and factstill has the consequence that courts of appeal are not considered to provideprecedents. In Germany, legal authors sometimes argue that once theBundesgerichtshof has overturned previous caselaw, this will applyretroactively to the date of the entry into force of the legislation concernedto all cases arisen prior to the decision.33 As for the theory behind this,authors are divided between Fikentscher's "Theorie der Fallnorm ''34 andBydlinski's "Lehre von der subsididren Verbindlichkeit desPrijudizienrechts. ' 35 For a more extended analysis, I refer to the study byMacCormick and Summers36 and to a volume edited by Vincenti.37

According to many authors, a convergence is taking place: "common lawand civil law practice, each in like fashion to the other, likewise admit ofjustified departures from precedent., 38 This convergence also is apparentfrom a number of recent publications on the legitimacy of the judge.39

(Den Haag: Boom).30. I. Giesen, De 'achterblijvers' van de rechtsontwikkeling: over verouderde

rechtspraak en hoe er weer vanaf te komen, WPNR Nr 6494 (2002) (appears to defendthe contrary). But see WPNR Nr. 6507 (2002) (Giesen's Post Scriptum, under myreaction, of which this paper is a further elaboration).

31. There is an abundance of philosophical writing on this theme. See RAIMO

SITTALA, A THEORY OF PRECEDENT/FROM ANALYTICAL POSITIVISM TO A POST-

ANALYTICAL PHILOSOPHY OF LAW (Oxford: Hart 2000).32. Isabelle Rorive, Le revirement de jurisprudence/Etude de droit anglais et de droit

beige 504, 520 (Bruxelles: Bruylant 2003).33. See ANDREAS HELDRICH, 50 JAHRE RECXHTSPRECHUNG DES BGH-AUF DEM

WEG ZU EINEM PRAJUDIZIENRECHT?/FESTVORTRAG zUM 50-JAHRIGEN BESTEHEN DES BGH

497-500 (2000).34. W. Fikentscher, Prajudizienbindung, Zeitschrift ffir Rechtsvergleichung 518

(1985).35. FRANZ BYDLINSKI, JURISTISCHE METHODENLEHRE tJND RECHTSBEGRIFF 501-515

(Wien: Springer, 2d ed. 1991).36. D. NEIL MACCORMICK, ROBERT S. SUMMERS, INTERPRETING PRECEDENTS

(Dartmouth: Ashgate 1997).37. UMBERTO VINCENTI, IL VALORE DEI PRECEDENTI GIUDIZIALI NELLA TRADIZIONE

EUROPEA (PADOVA: CEDAM 1998).

38. MacCormick and Summers, supra note 36, at 531, 535.39. In 2002, this was one of the subjects on the agenda of the Sixteenth Comparative

Congress of the Acadbmie Internationale de Droit Compare. See, e.g., The national

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D. Precedent in Central and Eastern Europe

So far, this paper has presented the place of precedent in common andcivil law as one evolving from two conflicting trends: the common lawtrend towards precedent, although recently showing a slight recoil, and thecivil law trend away from precedent, with a slightly earlier a tendencytowards recognition of precedent. Where does this leave the legal systemsof Central and Eastern Europe? The answer can be short: they are backwhere the civil law countries stood some fifty years ago: "the post-communist judicial methodology is much closer to the narratives of theEuropean legal culture that prevailed in the nineteenth century. 'Ao One ofthe reasons for this can be found in the writings of communist writers. Inthe former Czechoslovakia, the role of precedent was denied on the groundthat as a source of socialist law, it would go against the principle ofdemocratic centralism. 41 In this view, judge-made law is incomprehensible,beyond the reach of the vast masses of population. Likewise, theHungarian Edrsi emphasised that the socialist legal system consistedexclusively of written law.42 The situations in the German DemocraticRepublic 43 and Estonia 4 were very similar. A problem also was thepaucity of reported cases. One author, writing about Russian tort law, hadto resort to newspaper clippings to find out about lawsuits against thegovernment.45 Only in Poland, the writing of Wr6blewski may have beeninfluential in the use of precedent.46

Kuhn suggests that the type of cases decided by courts in Central andEastern Europe, often very simple, was much different from that in WesternEurope:

reports of J.L.M. Gribnau, Legitimacy of the Judiciary, in NETHERLANDS REPORTS TO THE

SIXTEENTH INTERNATIONAL CONGRESS OF COMPARATIVE LAW 25-45 (Antwerpen:Intersentia 2002); BARTHELEMY MERCADAL, LA LEGITIMITE DU JUGE, REVUE

INTERNATIONALE DE DROIT COMPARE 277-291 (2002); ANDREAS VOBKUHLE, GERNOT

SYDOW, DIE DEMOKRATISCHE LEGITIMATION DES RICHTERS, JURISTEN ZEITUNG 673-682(2002).

40. ZDENEK KUHN, WORLDS APART/WESTERN AND CENTRAL EUROPEAN JUDICIAL

CULTURE AT THE ONSET OF THE EUROPEAN ENLARGEMENT (2004).41. Id. (quoting BOGUSZAK, ZAKLADY SOCIALISTICKE ZAKONNOSTI V CSSR 144

(Praha 1963).42. G. EORSI, COMPARATIVE CIVIL (PRIVATE) LAw/LAW TYPES, LAW GROUPS, THE

ROADS OF LEGAL DEVELOPMENT 547 (Budapest 1979).

43. Inga Markovits, Children of a Lesser God: GDR Lawyers in Post-SocialistGermany, 94 MICH. L. REV. 2270 (1996).

44. F. Emmert, The Independence of Judges: A Concept Often Misunderstood inCentral and Eastern Europe, 9 EUR. J. OF L. REF. 405 (2002).

45. Donald D. Barry, Tort law and the State in Russia, in GEORGE GINSBURGS ET. AL,THE REVIVAL OF PRIVATE LAW IN CENTRAL AND EASTERN EUROPE/ESSAYS IN HONOR OF

F.J.M. FELDBRUGGE 179, 187 (The Hague: Nijhoff 1996).46. Jerzy Wr6blewski, The Judicial Application of Law (Kluwer 1992).

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Complex issues of international litigation, or of administrative,constitutional or commercial law, either did not arise in the socialiststate or the task of resolving them was transferred from courts toother bodies. For instance, East German judges handled a caseloadconsisting 51% of family law issues, while the caseloads of theirWest German counterparts contained only 13.7% of similar cases. 47

Kiihn further observes the status of the judiciary:

It was impoverished, lacking in prestige, with very problematiceducation, ignored by the elites, who generally did not join thejudiciary, either before or after the anti-communist revolution. Thejudiciary continued to be a predominantly female profession, whichwas, however, not the sign of flourishing gender equality.48

According to this author, since the fall of communism the old philosophy ofbound decision-making continues:

The ordinary courts in the Czech and Slovak republics, and mostother post-communist nations, have never acted as one might expecttransitional courts would act. With the exception of the constitutionalcourts, the post-communist courts have continued their formalistreading of the law. When it was necessary to solve a more difficultcase, they often saved themselves by disposing of the case on purelyformalist grounds.

49

Kiihn informs us about his own experience in the Czech Republic:

It is not rare to find a judge, especially in the lower courts in both theSlovak and Czech Republics, who refuse during trial even anyreference to precedent or legal science because she is not "bound bythem" and, therefore, they are without any importance for herreasoning, which remains independent of anything but the letter ofthe law.

5

Not all experiences are negative. Peter Solomon informs us about theadmirable performance of administrative courts in post-Soviet Russia,notwithstanding a dramatic growth of jurisdiction and of caseload. 5'

IV. The Future

What does the future hold in stock for us? Are the common law and

47. ZDENEK KUHN, WORLDS APART/WESTERN AND CENTRAL EUROPEAN JUDICIAL

CULTURE AT THE ONSET OF THE EUROPEAN ENLARGEMENT (2004).48. Id.49. Id.50. Id.51. Peter H. Solomon Jr., Judicial Power in Russia: Through the Prism of

Administrative Justice, 38 L. & Soc. REV. 549-581 (2004).

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the civil law converging and is it simply a question of time before Centraland Eastern Europe's backlog is overcome? In the following sections ofthis paper, I will answer these questions.

A. Common Law: The Future

It seems as if the very strict adherence to stare decisis has slightlydeclined over the past half century. Recently, there seems to be more roomfor divergence. On the basis of a number of cases which attracted muchpopular attention, Harris has concluded that precedents should be easier todepart from:

The presumption to date has been that stare decisis values shouldprevail over the overruling of "merely wrong" precedents. I thinkthat the presumption should be reversed in favour of the overruling ofwrong precedents unless their retention can be justified in thecircumstances by overriding stare decisis values. 52

B. Western Europe: Towards Convergence with the Common Law?

Many writers in civil law countries seem to be of the opinion that thefuture lies with a system in which precedent plays a larger role, ascompared with legislation. Adams, for example, argues for a culture ofattributing binding effect to judicial precedents. 3 I do not share this view.It seems to me that the notion of the primacy of precedents of one singleSupreme Court in a legal system no longer is adequate. There are twoarguments which I can give. First, the central position of courts-and therather humble role of legal writing-is changing. In most Europeancountries, Constitutional courts or councils have gained importance. If onereads recent overviews of Belgian or German case-law, the importance ofthe decisions of the Arbitration Court (Belgium's Constitutional Court) andthe Bundesverfassungsgericht (Germany's Constitutional Court) isoverwhelming. But the Belgian Cour de cassation and the GermanBundesgerichtshof will also have to follow the decisions of the twoEuropean courts: the Luxembourg Court of Justice-including its Court offirst instance--of the European Union and the Court of Human Rights inStrasbourg. The Marx case is an example of a European decision of the

52. B.V. Harris, Final Appellate Courts Overruling their Own "Wrong" Precedents:The Ongoing Search for Principle, 18 LAW QUARTERLY REVIEW 408, 427 (2002). Theauthor develops a number of "considerations relevant to deciding whether to defer to oroverrule precedent." Id. at 422.

53. MAURICE ADAMs, STARE DECISIS ET QUIETA NON MOVERE/RECHTSZEKERHEID ENDE GEBONDENHEID AAN PRECEDENTEN IN HET ENGELSE RECHTSSYSTEEM. LESSEN VOORONS? 13, 50 (2002).

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latter court which has exerted considerable influence in Belgium. In thefuture, a system of federal European courts under the two Luxemburgcourts is also imaginable.

Apart from this formal argument, there also is a substantive argument.The changes in norms and values, in theories as to finding the law,nowadays are so rapid, that case-law-which often takes a long time to besubmitted to a legal system's highest court-simply cannot cope with them.Legal writers will have to fill the gap. They should formulate generalprinciples and fit in the various bodies of case-law developed by thetraditional highest civil courts, the newly formed constitutional courts andthe European courts. Attributing stare decisis to the decisions of one ofthese courts no longer fits into this system. This will mean that establishedprecedents, which have not yet been challenged in the courts, may well losetheir value, because they are at variance with the newly developed generalprinciples, such as that of non-discrimination,54 equality,55 orproportionality.

So far, I have addressed purely national questions of precedent. InEurope, however, there is a growing body of community law. It does notmake sense that this law is being interpreted in different ways and by wayof different systems of reasoning in the various jurisdictions. In this regard,civil law jurisdictions have much to learn from common law courts, wherethe use of precedents from other common law jurisdiction, if only aspersuasive precedents, is by no means exceptional.56 Recently, Englishcourts have even accepted continental cases as-persuasive-precedents. 57

Civil law courts rarely take into account what is happening over the border.I would suggest that the blame does not lie exclusively with the courts.Legal academics have a task in preparing the use of comparative law. Amost important part of this is the collection of cases, assembling these into adatabase and providing translations into easily accessible languages.58

54. See, e.g., NICOLA JAGERS, CORPORATE HUMAN RIGHTS OBLIGATIONS: IN SEARCH

OF ACCOUNTABILITY 309 (Antwerpen: Intersentia 2002).55. DENIS BERTHIAU, LE PRINCIPE D'EGALITt ET LE DROIT CIVIL DES CONTRATS 475

(Paris: LGDJ 1999).56. A famous example is the case of Donoghue v. Stevenson, AC 562, All ER 1 (HL)

(1932), where a New Jersey case was used.57. See cases such as White v. Jones, 2 AC 207, 2 WLR 187(1995); Fairchild v

Glenhaven Funeral Services, 3 WLR 89 (2002); and BASIL MARKESINIS, COMPARATIVELAW IN THE COURTROOM AND CLASSROOM/THE STORY OF THE LAST THIRTY-FIVE YEARS273 (Oxford: Hart 2003) (quoting Greatorex v. Greatorex, 1 WLR 1970 (2000)).

58. Some examples are the several collections of cases relating to the Vienna SalesConvention and the one on the EU directive on product liability, set out by ThomasLundmark, "Soft" Stare Decisis: The Common Law Doctrine Retooled for Europe, inREINER SCHULZE, ULRIKE SELF, RICHTERRECHT UND RECHTSFORTBILDUNG IN DEREUROPAISCHEN RECHTSGEMEINSCHAFT 161, 168 (Tiibingen: Mohr 2003).

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C. Central and Eastern Europe: We Shall Overcome

Should the status of precedent in Central and Eastern Europe continuein its present form? In order for their legal systems to react quickly to newdevelopments, it is essential that they follow their Western civil lawcounterparts. How should this be accomplished? I will not try to give anexhaustive answer to this question, but will simply come up with somesuggestions.

First, legal doctrine is important in this matter. It is essential that theimportance of case law is stressed in national books on legal methodology.Second, cases should be reported far more often than what is presentlydone. Until recently, the number of law reviews or other publicationsdevoted to reporting of cases has been very limited. Additionally, it wasoften viewed that reporting a case gives it more weight. Therefore, suchcases must be carefully selected, preferably by justices in the SupremeCourt. Since the process of selection takes a considerable time, cases arereported with considerable delay.59 I do not suggest that this selectionprocess be abolished, but rather that it shall be supplemented by law reportsfor specific areas that are based on voluntary submissions by judges andattorneys. The argument that this will cost very much, in this era ofelectronic law reports is no longer valid.

Third, in order for the reported cases to have any impact, they shouldbe annotated. This is the lesson to be learned from Western Europe. Theannotations of the two grandmasters of Dutch civil law, Meijers andScholten, revolutionised the place of case law in the Netherlands. InFrance, it is still virtually impossible for an outsider to fathom the relevanceof a case handed down by the Cour de cassation without case notes. This iseasier said than done. At first, courts may not like others criticising theiropinions and this may reflect upon the annotators. This in turn may shyaway possible annotators who do not wish to jeopardise their career.

Fourth, legal education should take into consideration the importanceof case-law as authoritative. The impression one gets from legal educationin Central and Eastern Europe is that precedent is not taught at all.Exchange students, upon arrival in Western Europe, in their classroompapers do not report cases, unless by way of example. The place of case-law in the legal education of Slovakia becomes clear from the followingquotation:

During my early studies at a faculty of law in Slovakia, I do notremember reading a single court decision. Case law had always beenconsidered as source of law only in the common law system, and not

59. EMILIA CAPRNDOVA, IMPORTANCE OF CASE LAW/COMPARATIVE STUDY OFENGLISH, GERMAN AND SLOVAK LAW 44 (Utrecht 2004).

20051



ours, although it was admitted, that decisions of the Slovak SupremeCourt are de facto been followed. This phrase de facto, but not deiure was repeated many times, without actual introducing any courtdecision or pointing out its real importance in our legal order.Rather, it was stressed, that Slovak law is not based on courtdecisions; they are binding only for specific parties, not generally.They are definitely not sources of our law. As the role of case lawhad considerably been neglected, and this was presented as the realityin all civil law countries, I got the impression, that whole continentalEurope does not use them at all.60

And to quote yet Kiihn again:

Legal academia supports the old dogmas of the inferior role of thejudiciary and of parliamentary sovereignty. During the first ten yearsof the Czech Constitutional Court's existence (1993-2003) theprevailing attitude of the educators at the Czech law schools wasoriented strongly against the Constitutional Court. TheConstitutional Court is often considered a symbol of poor reasoning,as it openly employs value reasoning instead of textual arguments. 61

Fifth, if we wait for the current generation of law students to moveinto key positions in society, it will take another twenty to thirty yearsbefore Central and Eastern European countries have caught up. We shouldtherefore also provide continuing legal education to the present holders ofkey positions.

62

D. The Future of Precedent

What may we learn from the developments sketched above? Thereseem to be conflicting tendencies in civil and common law. On theEuropean continent, there was a system of precedents before thecodification in the nineteenth century. Because of the primacy, which at theturn of the eighteenth century was attributed to legislation, precedent lost itsimportance. But, because of idleness of the legislature in the area of privatelaw, the courts gradually regained some of their former positions. In this,the courts were helped by legal writing, which in its annotations providedcase-law with terms of reference and allowed practitioners to see itsimportance. Legal theory comes to the conclusion that there is once again alight version of the system of precedent, although with exceptions and ways

60. Id. at 4.61. ZDENEK KOHN, WORLDS APART/WESTERN AND CENTRAL EUROPEAN JUDICIAL

CULTURE AT THE ONSET OF THE EUROPEAN ENLARGEMENT (2004).

62. I am myself involved in a MATRA project supported by the European Union,which aims at helping Czech judges to cope with case law. The project includes fundingof a law report, Jurisprudence.

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out.Not all civil law systems are in the same state of development.

Especially lagging behind are the systems of Central and Eastern Europe,which still suffer from their socialist past. In the common law systems, thedevelopment has been the reverse. Until the nineteenth century, there wasno system of precedent. Only recently has it been accepted that the courtsshould also follow "wrong" precedent. In this sense, there is a majordifference with the civil law, where courts are not bound to follow wrongprecedent.63 The difference, however, is diminishing-witness the recentcall in the common law by B.V. Harris for reversal of the main rule.6 4

Most authors predict that the future lies in the common law, whichwill gradually extend its theory of precedent first to Western and then toCentral and Eastern Europe. I do not share this view, but I do agree thatequality and predictability justify adherence to at least a limited theory ofstare decisis.65 I also agree that legal theory should take into account thatthe law does not evolve within itself I do, however, oppose theintroduction in civil law jurisdictions to a strict system of precedent as maystill be found in common law systems. Instead, I advocate a system basedon persuasive authority of cases as contextualised by legal doctrine.

63. That continental courts, unlike their common law counterparts, do not considerthemselves bound by "wrong cases" is apparent from cases such as Hoge Raad 7 March1980, Nederlandse Jurisprudentie 1980, 353, in which the Dutch Supreme Courtaccepted that its view had for a long time not been observed by lower courts.

64. B.V. Harris, Final Appellate Courts Overruling their Own "Wrong Precedents:"The Ongoing Search for Principle, 118 LAW QUARTERLY REVIEw 408, 427 (2002).

65. Thomas Lundmark, "Soft" Stare Decisis: The Common Law Doctrine Retooledfor Europe, in REINER SCHULZE, ULRIKE SEF, RICHTERRECHT UND RECHTSFORTBILDUNGIN DER EUROPAISCHEN RECHTSGEMEINSCHAFT 166 (Tibingen: Mohr 2003).

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The Unknown World Government: SomeVery Recent Commercial LawDevelopments and Gaps

Donald B. King*

I. Introduction

I am pleased to bring some ideas for discussion at this distinguishedInstitute of learning and research here in Riga headed formerly byProfessor Jan Ramberg of Stockholm University and currently byProfessor Norbert Reich of Berman University, both members of theAcademy. I also want to thank members of the Academy for their lettersand friendship, and want to congratulate Lou Del Duca on the fine job hehas done as President these past two years. Also the accomplishments ofother members are awesome.

The main hypothesis was presented in the past at the last AcademyConference' at the Max Planck Institute in Hamburg: Currentcomparative and international law and developments form a substantialpart of an unrecognized world government. However, this talk is on themost recent developments not discussed in the earlier one. I welcomeyour suggestions, input, and criticism.

A very brief mention of some aspects of the overall framework ofthis proposed unknown world government may be useful. Basically it isincremental and defacto. Both history and definitions of government tellus that a variety of types and forms may exist.2 However, to help

organize our thinking in more familiar terms, we may think oflegislative, executive, and judicial functions.

* Professor of Law Emeritus, Saint Louis University School of Law; Professor

King taught also at University of Washington, Dickinson, Wayne State, Cincinnati andStetson law schools; B.S. Washington State University, Juris Dr., Harvard Law School,LL.M. New York University, MSW, Saint Louis University; Member of the WashingtonState, Missouri, and Supreme Court Bars; Life Member of American Law Institute.

1. See Donald B. King, Does an Unknown World Government Exist? Impact ofCommercial and Consumer Law, 22 PENN. ST. INT'L. L. REv. 73 (2003).

2. See e.g., WEBSTERS NEW AMERICAN DICTIONARY (1995); RANDOM HOUSE

DICTIONARY OF THE ENGLISH LANGUAGE (unabridged ed. 1987).



II. Legislative

In the economics sphere many of the developments are well knownto all of you. The current world government is considerably moreadvanced than was the Articles of Confederation government found inthe early stages of the United States.3 There is a regulation of worldtariffs and world barriers that far exceeds any type of controls found inthat earlier form of government. This regulation is on a worldwide basis.This agreement in effect very much curtails the leveling of tariffs by anycountry or the creation of other artificial trade barriers. It also regulatespractices which tend to economically destroy competition in themarketplace. The legislation was achieved through an internationaltreaty system. Further, there is an administrative organization known asthe World Trade Organization (WTO), as well as a court.

While the law governing tariffs is an integral part of the legislativepart of the unknown world government, and has major economic benefitswith increased world trade, it is not without its problems. In the last twoyears, some of these have gained increased attention. Some are solvedby the WTO dispute resolution process, which is a part of the judicialbranch of the unknown world government. However, some are of asubstantive nature which may require additional global legislation andorganization.

The meeting of the nations at Cancun in 2003 highlighted some ofthese problems. While the basic framework of tariff reduction isrelatively effective and has facilitated international trade, there areserious challenges.

One major problem relates to farm subsidies given to European andAmerican farmers by their governments. These massive subsidies,which would be impermissible in regard to other products under theworldwide agreement reducing tariffs, are still permitted. Needless extracrops are produced because of the subsidies. The results are disastrousfor many of the farmers in developing and underdeveloped countries.Receiving subsidies, the farmers of the United States and Europe are ableto sell their crops for far less. Exported to the third world countries atlower prices, they cause the market prices there to drop. This drop inprices is often so great, that small farmers in those countries are unable tosell their locally grown crops at even the cost of producing them. Theresult is even greater poverty for them.

3. James Brown Scott, Articles of Confederation, in THE DECLARATION OFINDEPENDENCE, THE ARTICLES OF CONFEDERATION, AND THE CONSTITUTION OF THE

UNITED STATES, 13-23 (1917).4. See generally THE LAW OF THE WTO (Philip Raworth & Linda C. Reif eds.,

Oceana Press 1995).

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THE UNKNOWN WORLD GOVERNMENT

At the Cancun meeting,5 both developing and underdevelopedcountries asked Europe and the United States to drop or substantiallylower their farm subsidies. But farmers in the developed countries havevery considerable political power; Europe and the United States refusedto do so. This caused a deadlock in the overall negotiations on othermatters as well. Any further progress on lowering other trade barrierswas stopped.

At another meeting in 2004, called the Doha talks, this same basicproblem was reconsidered. The European Union and the United Statesagreed in principle to meet the "Third World" demands to lower theirsubsidies.6 The overall desirability of maintaining this important aspectof trade and the world government far outweighs the narrow farm relatedinterests in developed countries.

At a meeting in Geneva, the deadlock appears to have been brokenand a framework for continued progress of the WTO has been agreedupon by all 147 nation members. In terms of agriculture, there is a basicagreement "to scrap" export subsidies, cut trade-distorting domesticsubsidies, and reduce tariffs.7 In regard to trade in industrial goods, thereis a commitment to cut tariffs even more.8 In regard to the services trade,there is a generalized agreement that there should be more progress. Italso was agreed that customs procedures should be simplified.9 All ofthis may take some time, perhaps until 2006 or 2007.10

III. Politics, Time and Economics

Some might think or say that the resolution of such issues, such asthe effect of farm subsidy legislation of developed countries, is not onewithin the scope of law. Rather, they would say this is politics orpolitical science. But would constitutional law scholars or practitionerssay that civil rights are the realm of politics and not law. Would they saythat lawsuits or legislation promoting those rights is not within the realmof law? We know that these things are very much within the realm oflaw and within the concern of judges, law scholars and practitioners. Sotoo would consumer law scholars find major legislation to protectconsumers within the realm of law. International laws which helpfarmers in underdeveloped countries, and their families, are not just amatter of politics, but a matter of concern to those in the law as well. Forit is laws which contribute to the problem and it is the changing of laws

5. See Editorial, The Unkept Promise, N.Y. TIMES, Dec. 30, 2003, at A22.6. INT'L. HERALD TRIBUNE, Saturday, July 31-Sunday, August 1, 2004, at 4.7. Now Harvest It; World Trade, THE ECONOMIST, Aug. 7, 2004, at 67.8. Id.9. Id.

10. Id.

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which can aid in some solution of the problem. It is law which affectstrade and commerce. Producers, sellers, and consumers on a worldwidebasis are dramatically affected. It is very much a concern of commerciallaw, consumer law scholars, and the legal profession.

This is certainly a problem which is multi-disciplinary, involvinglaw, political science, and economics. To the extent that one isconcerned with the overall legal structure and the solving of disputesunder it, this problem deserves our attention.

The element of "time," as it relates to legal development, changes,and reform is also important. Too often we do not think or analyze thesolution of problems in terms of time, and years go by before reforms areaccomplished. Yet the price of not achieving reform more rapidly is atremendous one in terms of the effect on hundreds of thousands, if notmillions of people. For example, in civil rights, how many millions ofpersons were affected over the course of the two hundred years that ittook in the United States to resolve the issue of slavery, or even over thehalf century it took to go from "separate but equal" to a meaningfulequality standard. Time is important in getting better commercial lawsand better consumer protection. For all the years that improvements arenot made, millions of persons worldwide may be adversely affected.Certainly that is true in the resolution of the problem concerning theeffect of outlandish and wasteful farm subsidy laws on commerce andindividuals in underdeveloped countries. Also years of delay ineffectuating consumer protection laws affects millions of people."Time" should be an element of all our legal analysis. Unfortunately thisvital factor-time-has not been recognized or appreciated as it shouldbe within both legal scholarship and application of the law.

One important consideration is that there is not a surplus of somefoods being produced when one considers the many undernourished orstarving persons in the world. While the tremendous increase in worldpopulation is a problem which must be looked into in the near future bythose in several disciplines, including law, the feeding of livingindividuals throughout the world is important. While there are bothgovernment agencies, including those from the United Nations, whichare concerned with reducing world hunger, some new approaches may benecessary. It may be necessary for a new international organization toadequately stabilize farm product prices within certain price ranges on aworldwide basis in both developed and third world countries. This mayalso mean the large scale purchasing of surplus farm products by the newinternational agency and the increased distribution of some of theseproducts to the world's needy.

In regard to the distribution of food, the United Nation's WorldFood Program may be useful. The World Food Program had been

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suggested in 1960 by President Eisenhower and was made permanent. In2003, its expenditures were estimated at 3.33 billion dollars. It has aidedpeoples affected by earthquakes, droughts, and other national disasters.It has given emergency relief in the Balkans, Africa, Afghanistan, Iraq,and North Korea. It also had some long term projects involvingimproved agricultural techniques and nutrition. Its experience wouldmake it a valuable part of a larger solution. 1'

In the legislative sphere, UNCITRAL has been active. 12 In additionto the Convention for International Sale of Goods, some otherinternational laws relate to some specific areas including arbitration, billsand notes, terminal operators, credit transfer, procurement, guarantee andstand by electronic commerce, and insolvency.1 3 In addition, GerhardHerrman, former Secretary of UNCITRAL, proposed a GlobalCommercial Code. This would provide a framework for all of thecurrent laws and future ones governing the various aspects ofinternational commerce. It also would make the unknown worldgovernment more visible.1 4

There is also some economic legislation in terms of internationalinvestment. Indeed, there is a United Nations sponsored treaty which hasbeen approved by a number of nations relating to the protection ofinvestments. 15

While there is not yet an international system relating to security forloans or sales of equipment on credit, there are some efforts being madein this regard. There are groups working on creating an internationaltype of "security interest" which can make sales on credit even morefeasible.

There are also international standards set for letters of credit. TheInternational Chamber of Commerce also has drafted a letters of credittype of law which many businessmen use for international transactions.In addition, the International Chamber of Commerce has drafteddefinitions for various types of shipping terms and abbreviations forshipping terms and has spelled out the legal obligations of each.

11. See Steve Stecklow, Before Iraqi War, UN, US Hatched Plan to Feed Nation,WALL ST. J., Sept. 26, 2003, at Al.

12. See, e.g., 1 U.N. Comm'n on Int'l Trade L. Y.B., U.N. Doc, A/CN.9/SER.A/1970.

13. See Michael Joachim Bonell, Creating International Legislation for the Twenty-First Century: Do We Need a Global Commercial Code?, 106 DICK. L. REV. 87, 88 n.7(2001). Professor Bonell was honored by the Academy for his work with UNIDROIT informulating international standards.

14. Gerhard Herrman, Outline of Paper presented at 1 0 h Biennial Conference of theInternational Academy of Commercial and Consumer Law held at the Dickinson Schoolof Law of the Pennsylvania State University (2000).

15. See King, supra note 1, at 75-76.

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Another part of the unknown world government's policies involvesconsumer rights. The United Nations' endorsement of consumer rightswas only briefly mentioned 6 in my past address. Therefore some of thebasics should be pointed out here. Also they support current and futurepossibilities.

In 1985, the United Nations endorsed eight consumer rights whichare now recognized internationally. The eight rights include those fourinitially declared by John F. Kennedy over two decades previously. TheUnited Nations Guidelines for consumer protection provide 17:

l. The right to safety-the right to be protected against products,production processes and services that are hazardous to health or life.

2. The right to be informed-the right to be given the facts andinformation you need to make your own choices.

3. The right to choose-the right to be able to choose from a rangeof products and services offered at competitive prices. As aconsumer, you have the right to expect satisfactory quality.

4. The right to be heard-the right to have your interests as aconsumer represented in government policy.

5. The right to redress-the right to a fair settlement of consumerdisputes, including compensation for misrepresentation, shoddygoods or unsatisfactory services.

6. The right to education-the right to learn the knowledge andskills you need to make informed and confident choices about goodsand services.

7. The right to a healthy environment-the right to live and workin an environment which does not threaten the well-being of presentand future generations.

8. The right to satisfaction of basic needs-the right to accessbasic essential goods and services like adequate food, clothing,shelter, health care, education and sanitation.

16. King, supra note 1, at 81.17. G.A. Res. 39/248, U.N. GAOR, 39th Sess. 106 t1 plen. mtg., U.N Doc.

A/RES/39/248 (1985) [hereinafter G.A. Res. 39/248]. See also David Harlan, The UnitedNations Guidelines for Consumer Protection: Their Impact in the First Decade, inCONSUMER LAW IN A GLOBAL ECONOMY: NATIONAL AND INTERNATIONAL DIMENSIONS 5(lain Ramsay ed. 1997).

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In 1999, the United Nations' guidelines were amplified in theUnited Nations' Guidelines for Consumer Protection.1 8 The objectivesof these guidelines were stated:

(a) To assist countries in achieving or maintaining adequateprotection for their population as consumers;

(b) To facilitate production and distribution patterns responsive to theneeds and desires of consumers;

(c) To encourage high level of ethical conduct for those engaged inthe production and distribution of goods and services to consumers;

(d) To assist countries in curbing abusive business practices by allenterprises at the national and international levels which adverselyaffect consumers;

(e) To facilitate the development of independent consumer groups;

(f) To further international cooperation in the field of consumerprotection;

(g) To encourage the development of market conditions whichprovide consumers with greater choice at lower prices;

(h) To promote sustainable consumption.

Following the statement objectives and guidelines, there is a moredetailed set of guidelines. 19

While these objectives, general principles and guidelines areimportant statements of policy, they do not have the effect that aninternational law of consumer rights would have. The globally ratifiedtreaty for the international sale of goods would be an example of a lawthat is enforceable in courts. It is an example for what could be done inthe field of consumer protection.

The subject of consumer protection is clearly in the gambit ofUnited Nations' concern. This is manifested by the general statement onconsumer rights and by the guidelines. It may well be asked whether aUnited Nations' organization such as UNCITRAL should formulate atreaty guaranteeing consumer rights.

18. G.A. Res. 54/449, U.N. GAOR, 54t ' Sess., at 21 (1999). See also Brooke

Overby, Contract in the Age of Sustainable Consumption, 27 IOWA J. CORP. L. 603(2002).

19. G.A. Res. 39/248, supra note 17.

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Some would argue that consumer rights are more local in nature.But the universal declaration of needs and goals contradicts such anassertion. Consumers are an unfortunate part of international trade andservices. There is no reason why they should be denied protectiondealing with products and services which often cross internationalboundaries.

Similar arguments were raised in the United States in regard toconsumer protection concerning "state" versus "federal" regulation. Itwas sometimes said that consumer protection was a local matter. Yetconsumers throughout the country have similar needs for consumerprotection. In addition, they often dealt with goods and servicesproduced elsewhere. There has been some major federal consumerprotection, ranging from regulation of unfair advertising,2° to theMagnuson-Moss Warranty Act,2 ' to some regulation of credit cards.22

There is no reason to consider consumer protection to be local in nature.Advertising, financing, and the sale of goods across state boundaries, andpersons in all states are equally in need of laws for consumer protection.

Some would argue that consumer protection is a controversialsubject, and is not a proper subject for international treaties. But it iscontroversial only in that some industries oppose any regulation of theiractivities. This is not a sufficient reason to forego the formulation of aglobal treaty setting forth basic consumer rights.

Some might argue that it would be hard to get nations to ratify sucha treaty. But with the current agreement of nations on the basicprinciples, this should not be too difficult a task. In a number ofcountries, the public lacks greater consumer protection. Of course, someeconomic interests will complain and actively object to such regulation.But business is used to the fact that the public often demands suchprotection and enacts national consumer protection. Since trade isinternational, there is no reason to forego the formulation of a multi-national treaty.

In talks with the current Secretary of UNCITRAL, he hasacknowledged that it is clearly within the scope of the United Nations

23action. Concerns about controversy or the need of considerable effortsto get nations to ratify, should not stop such progress.

Thus, it can be seen in the economic realm that there is aconsiderable amount of legislation which serves as a basis of law in the

20. See MICHAEL M. GREENFIELD, CONSUMER TRANSACTIONS 12-15 (FoundationPress, 2003).

21. 15 U.S.C. § 2301-2312 (2005).22. 15 U.S.C. § 1666 (2005).23. Interview with Jernej Sekolec, Secretary, UNCITRAL, in Vienna, Austria (Aug.

2002).

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economic sphere. The general principle of freedom of contract, withcertain limitations, is also a generally accepted basis of world trade. Thisoverall body of law forms an important part of the law of the existingworld government.

IV. Executive

The executive branch of the existing world government is multi-faceted. It is not a more singular type of unit such as we find in theUnited States with the president as chief executive. Nor is it like anumber of the European countries where the prime minister also servesas the executive leader. Instead, the current executive branch of theworld government is found in several organizations.

One of those organizations is the WTO. It is this body whichgoverns most of the world legislation on tariffs and free trade. It tries toenforce the treaties against tariffs or other barriers to free trade. It hearscomplaints from various nations and tries to settle them. If it is unable tosettle these disputes in its executive function, there is a court to whichparties can resort.

Another facet of the executive branch of the current worldgovernment is that of the United Nations. The United Nations SecretaryGeneral is in charge of a rather large administrative unit composed ofvarious parts. He speaks for the nations of the world generally, and alsois in charge of a variety of administrative agencies. The SecurityCouncil also acts in an administrative manner at times by undertakingaction.

Another major part of the executive branch is found in variouscoalitions of nations. These coalitions are often times formed andutilized when United Nations action is impracticable. Very often the useof the coalition element is directed towards military action. The possibleuse of the veto power in the Security Council sometimes has precludedthe United Nations from heading the military action. In those instancesthe military action fell to coalitions of nations.24

In recent times, the enforcement of restrictions on Iraq pertaining tobiological or other weapons of mass destruction has involved both use ofthe United Nations and coalition building.

The United States had initially placed its emphasis on the UnitedNations' decision making before undertaking any military action. Itinitially urged the United Nations to re-enter Iraq and search forweapons. Even though the inspectors had not completed the inspectionsand evidence did not appear as to imminent danger of mass destruction,

24. For example, the military effort in Bosnia in the 1990s required the militaryexpertise of the United States, U.N. Coalition Forces, and European nations.

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the Bush administration still sought United Nations backing for aninvasion. It sought to obtain a majority vote in the Security Council.When it was clear it could not get even a majority vote, Bush turned tothe coalition approach.

While the United States President, G.W. Bush, sometimes talked ofthe possibility of unilateral military action, he also has desperatelyattempted to build supporting coalitions of nations. Ironically, somecoalitions of major nations-Germany, France, Russia and China-haverejected the idea of proceeding against Iraq without United Nations'approval. Likewise the Arab League has called for United Nationsapproval of any possible actions. Some countries which would be lookedto for support in the sense of airbases or other military assembly points,likewise insisted on a United Nations' decision. Still, Bush was able toconvince Great Britain, and some other nations as well, to be part of thecoalition for invading Iraq.

While the coalition type of executive action is possible, it suffersfrom some uncertainties. There is no definition of what constitutes a"coalition" for world government type action. Is a coalition consisting ofthe United States, Great Britain, and a. few other medium or small nationssufficient? Years ago, when Great Britain and France combined toattempt to take over the Suez Canal, objections of other countriesprecluded this goal. It would seem that if a coalition approach of actionis undertaken, it should be a coalition of a large number of bothsignificant and smaller nations. For a nation to undertake war, it may nolonger undertake to do so by itself. But the question remains as towhether a nation should be able to undertake war when its coalition isnot very significant, is inconsistent with expectations of other majornations, or is opposed by other significant coalitions. Thus, the coalitionform of executive actions is not a desirable form. United Nations'executive action seems more desirable. But only when there is reform ofthe veto power is it likely that the alternative of coalition action will beabandoned.

It also should be noted, however, that any failures of the unknownworld government to prevent war does not mean that such governmentdoesn't exist. Even the United States government failed at times toprevent rebellion and war within itself. In the early years, the smallrebellions were crushed relatively easily.25 But the great U.S. Civil Warwent on for over four years with casualties in the hundreds of thousands.While the government failed to prevent war, it still remained a

25. For example, President George Washington successfully undermined theWhiskey Tax Rebellion, an uprising orchestrated in Pennsylvania to protest the increasedtax on whiskey, in 1794.

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government. In a similar way, the unknown world government may stillexist, even though it failed to prevent the Iraq war.

V. Judicial

When one thinks of courts, the International Court of Justice comesto mind. In some ways it has been effective, but in others it has not.This Court has been active over many years in deciding disputes betweennations, often involving boundaries, and has undoubtedly preventedsome possible wars. Although its effect has been limited by nations suchas the United States, which has not fully accepted the court's jurisdiction,it may possibly play a role in future peacekeeping. Regardless of itsrelatively little use and questions as to its effectiveness, it forms one ofthe judicial bases for world government and could be more effective infuture years. Even the United States Supreme Court was not alwayseffective, and was not always able to enforce its judgments. Also, thedeveloping international judicial system is much broader than just thiscourt.

Commercial law plays a role in the "judicial" branch of worldgovernment. If an international trade dispute arises concerning tariff orother anti-competitive measures, then the help of the WTO court may beinvoked. This court will hear the arguments of both parties and render adecision. In a relatively short span of a few years, there have alreadybeen numerous cases decided by the WTO judicial branch. Some of themost recent activity has involved the imposition of high tariffs onimported steel by the United States. This went to trial and the initial andappellate decisions were against the United States. The American tariffson steel were found to go beyond any rules allowing a country to protectan industry against any sudden surges of imports. Unless the tariffs weredropped quickly, the European Union would be allowed to impose more

26than two billion dollars in tariffs on American goods as a sanction.Interestingly, not only were foreign steel producers harmed by the hightariffs, but American automakers in need of steel were also affected.Ultimately American consumers were hurt by higher automobile prices.

The acceptance of the WTO's decision in the steel tariffs case byPresident George W. Bush was of landmark proportion.27 It meant therecognition and success of this judicial branch of the unknown worldgovernment.

A judicial system which exists for trying cases governed by the

26. See Elizabeth Becker, U.S. Tariffs on Steel Are Illegal, World TradeOrganization Says, N.Y. TIMES, Nov. 11, 2003, at Al.

27. See David E. Sanger, A Blink from the Bush Administration, N.Y. TIMES, Dec. 5,2003, at A28.

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International Sale of Goods law is simply the use of regular courts in thevarious countries which have ratified the Convention. These courts havetried a number of contracts cases. Already there is a body of lawdeveloping around the adequacy of notice in regard to allegedly defectivegoods. There also are other cases on matters such as the use of theremedy of specific performance.28

In addition to the WTO court and the national courts, which may trycases under the Convention for the International Sale of Goods, there arealso proposals for international courts to try cases involving commercialdisputes. An international commercial law court for appeals in disputesarising under the convention for the international sale of goods wasproposed at a United Nations conference a few years ago by this writer.29

It would be feasible to create and staff such a court to handle appealsinvolving the international sales convention. It could be effectuatedthrough a simple addition to the current convention with specificratification by the existing signatories. It could be administered byUNCITRAL, with judicial appointments of well known commercial lawauthorities.

Another possible international procedural and court system to trycommercial cases and disputes is a current formulation of the AmericanLaw Institute. 30 It creates an international procedure for trying the cases,merging Common Law and the Civil Law procedures. It envisions theappointment of special judges from those currently a part of the courts ofeach nation.

It was the job of the drafters to produce a system which would beacceptable to judges throughout the world. The proposed proceduralsystem is one which should be usable by both common law and civil lawlawyers and judges. The new ALl procedural system provides that eachjurisdiction shall have special judges appointed to hear such matters fromits regular court system. To facilitate formation and enactmentthroughout the world, the ALl made UNIDROIT a partner in thisendeavor. Discussions of the draft have been held throughout the world.

In the Preface to the most recent draft, two major objections havebeen noted and overcome.31 In regard to the constitutional problems

28. See L. F. Del Duca & Patrick Del Duca, Selected Topics Under the Conventionon International Sale of Goods, 106 DICK. L. REV. 205, 229 (2001). Professor JohnHonnold, an Academy member, was honored by the Academy for his work in the draftingof this international legislation.

29. U.N. COMMISSION ON INTERNATION, UNIFORM COMMERCIAL LAW IN THE

TWENTY-FIRST CENTURY, PROCEEDINGS OF THE CONGRESS OF THE UNITED NATIONS

COMMISSION ON INTERNATIONAL TRADE LAW, 105, 251 (1992).30. A.L.I./UNIDROIT, Principles and Rules of Transnational Civil Procedure,

(Preliminary Draft No. 3, 2002).31. Council Draft No. 2 of the Principles and Rules of Transnational Civil

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raised by having a procedure without a jury system, the draftersacknowledge that such a system would not be practical for globaldevelopment, and therefore limit themselves to commercial cases. Theother objections are noted and answered:

Part of the dissent evidently reflects some irritation at "Americancultural imperialism." We hope that work product reflects the factthat one of the ALl Reporters, Professor Taruffo, one of theUNIDROIT Reporters, Professor Stilmer, and the Associate Reporter,Professor Gidi, are civil-law scholars and lawyers. We have allendeavored to overcome the parochialism of our backgrounds. 32

The drafters also note that, "we believe that we are much closer to anapproximation of civil procedure worldwide than when we commencedthis project several years ago." They also point out the largeralternatives:

In this era of globalization, the world is marching in two paths. Onepath is of separation and isolationism, with war and turmoil: in sucha world, this project is useless and unwelcome. The other path isincreasing exchange of products and ideas among the people of theworld; this path underscores the need for a Transnational CivilProcedure.

33

The final version received formal ALl approval in 2004.

VI. Conclusion

While the "unknown world government" is not embodied in a singleconstitution or organized legislation, it does exist in a combination oftreaties, organizations, coalitions, and courts. While these are not alwaysclear-cut legislative, executive and judicial divisions, there are definitelythese functions of government which exist on a world-wide basis.Commercial law plays a very important role in this new worldgovernment. There is an established framework for facilitatinginternational trade on a large scale and legislation facilitating theformation of international contracts and remedies. In the consumerrealm, basic goals and principles have been established, but await theformation of international consumer legislation. It seems only a matterof time before this gap is plugged. In the executive realm, the problemswhich have been seen with coalition type executive action will no doubtresult in some reform of the United Nations executive and the vetopower. Then the United Nations and its Security Council will become

Procedures, (Council Draft No. 2, 2003).32. Id. at xv.33. Id.

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548 PENN STATE INTERNATIONAL LAW REVIEW [Vol. 23:3

the major executive force. In the judicial realm, international sales lawwill increasingly be used and internationally oriented judges shall bedeciding such cases within the framework of worldwide judicialprocedures. Persons in Commercial Law, and also hopefully persons inConsumer Law, may be proud of the role that these subjects play in theoverall world government.


The Concept of Competitive Contract Law

Hans-W. Micklitz*

I. The Purpose of the Paper

European contract law has become one of the most fascinatingsubjects of legal theory. Thanks to the Commission's Communication'issued in summer 2001, civil lawyers all over Europe have eagerlyrediscoverd a long-forgotten subject. The Commission is sponsoring aninternational group of lawyers which has to develop ground rules onEuropean contract law.2 For the time being, the Commission is no longerstriving for a full-fledged European Code on Contract Law that wouldsubstitute the national private legal orders. Instead, the Commission isstriving for A Common Frame of Reference3 which could stand side-by-side with the national private legal orders and for whose application theparties are free to opt. The project, however, does not meet unanimoussupport and there is a growing critique against the lack of social justicewithin the project.4 The mandate, however, is clear and the timeschedule, at least in the eyes of the Commission, is rather tight. Until2009, the Common Frame of Reference has to be shaped and fueled outof two different sources of law:

1) a comparative analysis of the different national legal systems and

* University of Bamberg, Germany. I would like to thank Norbert Reich andThomas Wilhelmsson for valuable comments on earlier drafts.

1. See STEFAN GRUNDMANN AND J. STUYCK, AN ACADEMIC GREEN PAPER ONEUROPEAN CONTRACT LAW, (Kluwer Law International, 2002).

2. The DG SANCO has urged the Van Bar group and the Acquis group to merge,as it was willing to sponsor one group only. In a way, the Commission has forged aresearch cartel. It remains to be seen whether this strategy will weaken the legitimacy ofits findings.

3. Communication on European Contract Law and the Revision of the Acquis: theWay Forward, COM (04) 651 final.

4. See Study Group on Social Justice in European Private Law, Social Justice inEuropean Contract Law: a Manifesto, 10 EuR. LAW. J. 653 (2004); see also ThomasWilhelmsson, Varieties of Welfarism in European Contract Law, 10 EUR. LAW. J. 712(2004).



2) a dense analysis of the acquis communautaire.

What to do with the already adopted EC directives and regulationswhich form the acquis communautaire? It is commonly known that thebulk of EC directives in the field of European contract law is consumercontract law. Despite Directive 2000/35/EC on Late Payment5 andDirective 86/553/EEC 6 on Commercial Agents, at the end of the day, it isconsumer contract law which lies at the heart of the matter.7 That is whysocial justice is at stake. While I sympathize with the "Manifesto," myinterest in writing this paper is different. I would like to I show thatEuropean contract law is far broader than European consumer law andthere is a paradigm behind the regulatory technique which ends up in anew understanding of the role and function of contract law.8 I would liketo identify three other areas of contract law where the EuropeanCommunity has been active: 1) directives dealing with particularservices (telecommunication, e-commerce and general services);2) directives aiming at liberalizing formerly state governed markets(electricity and gas); and 3) Wettbewerbsvertragsrecht-competitioncontract law (vertical agreements).9 In stark contrast to Europeanconsumer law I would like to term it business contract law.

Setting aside efforts to integrate consumer law into a CommonFrame of Reference, maybe even guided by the intention to downplayconsumer law and its inherent principles which are so alien to traditionalprivate lawyers all over Europe, the Head of Unit in the DirectorateGeneral for Sant6 et Consommation SANCO, who is in charge of theoverall project, has a clear perspective in mind:'0

1) An optional model which contains the ground rules in contract lawmatters

2) That is accomplished by binding European consumer law rules.

Such a perspective is not far-fetched. It seems realistic with regard

5. 2000 O.J. (L 200) 35.6. 1986 O.J. (L 382) 17.7. See Reiner SCHULZE ET. AL., INFORMATIONSPFLICHTEN UND VERTRAGSSCHLUSS IM

AcQuIs COMMUNAUTAIRE, (Mohr Siebeck, Taibingen 2003).8. Stefan Grundmann, The optional European Code on the basis of the Acquis

Communautaire-starting points and trends, 10 EUR. LAW. J. 698, 704 (2004). "While itis certainly true that the acquis has gaps, it is much less fragmented that has beeninsinuated by virtually every commentator." Id.

9. Another area of interest is public procurement, where competition law andprivate law are closely intertwined as well.

10. Personal statement of Dirk Staudenmayer, who is the father of the overallproject, the driving force behind, the coordinator and head of the respective unit in DGSANCO.

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THE CONCEPT OF COMPETITIVE CONTRACT LAW

to the first limb-a Common Frame of Reference on European contractlaw-and optimistic with regard to second limb-binding Europeanconsumer law rules. Realistic, because it might be difficult to achieveconsensus over the adoption of a full-fledged European Civil Code.Optimistic, in that it is not at all clear whether and to what extentconsumer contract law directives, as they stand today, could "survive" apossible revirement which would be necessary to bring consumer lawrules into compliance with the Common Frame of Reference. In myview consumer contract rules would have to be amended in at least twoways. First, it is commonly agreed and widely accepted 1 that changesshould be made with regard to the inner consistency of the rules. Asecond and more controversial change, involves the establishment of aconclusive body of European consumer contract law rules.12 In its lastconsumer policy program DG SANCO has already indicated where thebind blows. 13 Full harmonization of consumer contract law rules insteadof minimum harmonization is the overall message. The debate is gainingmomentum and is dominating European policy making more and more.14

I will not speculate over future politics. The existing body of-European Consumer Law is "real" and it is subject to constantdevelopment-most importantly by the European Court of Justice. WhatI have in mind is:

(1) To look into the inner mechanics of European consumer contractlaw, as it stands today and as it will stand probably for a long while;

(2) To demonstrate that steadily and silently a new paradigm incontract law theory is emerging, a paradigm which I have termedcompetitive contract law;

(3) To demonstrate that the concept of competitive contract lawreaches far beyond European Consumer Law-that it is the leading

11. See STEFAN GRUNDMANN, PARTY AUTONOMY AND THE ROLE OF INFORMATION INTHE INTERNAL MARKET, (Walter de Gruyter 2001).

12. There is strong critique from the Scandinavian side. See Thomas Wilhelmsson,Private Law in the EU: Harmonised or Fragmented Europeanisation?, EUR. REV. OFPRIVATE LAW 77 (2002). But, there is some preparedness at least with regard tocodifying European consumer law. See Walter Van Gerven, Codifying European PrivateLaw? Yes if... !, EuR. L. REV. 156 (2002).

13. Consumer Policy Strategy, 2002 O.J. (C 137) 2.14. Thomas Wilhelmsson, European Consumer Law: Thesis of the Tasks of the

Member States; Stephen Weatherill, Constitutional Ambiguities in European ConsumerLaw: Is Minimum Harmonisation an Oxymoron? [both papers are to be published in:Hans W. Micklitz (ed.), Verbraucherrecht in Deutschland-Stand und Perspektiven,Schriftenreihe des VIEW, Band 19, 2005, Nomos, Baden-Baden]; see also StephenWeatherill, Why Object to the Harmonisation of Private Law by the EC, EuR. REV. OFPRIVATE L. 633 (2004).

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philosophy of all European contract law rules; and

(4) To demonstrate that the concept of competitive contract lawmight neither be kept away from the Common Frame of Reference onEuropean contract law, nor-and which might be more important-from the Member States' national private legal orders.

I will develop my thesis in four steps: Part II of this paper willexplain what I understand by competitive contract law and why theparadigm is "new." Part III will define my understanding of Europeancontract law rules. Part IV will identify the major elements of Europeanconsumer contract law being understood as competitive contract law andthen apply the very same approach to European business contract law.Lastly, in Part V, I would like to conclude my considerations with somesort of a stock-taking of where we are in the process of developingEuropean contract law.

II. What is "New" in Competitive Contract Law?

Why competitive contract law and what is new in competitivecontract law? I start from the premise that consumer contract law doesnot only constitute some eighty percent of European contract law, butthat this European consumer contract law works as a forerunner inmodernizing the national civil legal orders.' 5 There is ample evidencefor such an understanding not only in national private legal orders whereconsumer law has become an integral part of the civil code, but alsowithin the debate over the Common Frame of Reference where the samethoughts arise. Therefore, consumer law quite necessarily contains to alarge extent what is "new" in contract law. There is, however, animportant second premise. Member States have deliberately delegatedaway parts of the competence to adopt consumer contract law rules to theEuropean Community, so far by means of minimum regulation. Thus,the new elements do not all derive from national consumer contract law,but, to a growing extent, from European consumer contract law. Thenew phenomena enshrined in consumer law, reappear in Europeanbusiness contract law as well, which will have to be demonstrated. 6

15. See H. ROSLER, EUROPAISCHES KONSUMENTENVERTRAGSRECHT (CH. Beck2004).

16. See also, Norbert Reich, The tripartite function of modern contract law inEurope: Enablement, regulation, information, Das Schweizerische Privatrecht im Lichtedes europbischen Gemeinschaftsrechts, Aktuelle Fragen aus dem Haftpflicht undVertragsrecht 145-172, 158 (Franz Werro & Thomas Probst eds 2004) (spillover effect ofconsumer law to general civil law); Stephen Grundmann, Verbraucherrecht,Unternehmensrecht, Privatrecht-warum sind sich UN-Kaufrecht und EU-Kaufrechtsrichtlinie so iihnlich, Archiv fUr civilistische Praxis 202 41-71, 57 (2002).

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A. The "New" Cconsumer Contract Law

Consumer law in the hands of the European Community haschanged its outlook. It is no longer social protection that legitimatesmarket regulation to fight down imbalance of power, but economicinstrumentalisation to establish the Internal Market. Despite allconstitutional rhetoric the Internal Market philosophy is still the drivingforce behind European integration. Europe is not a state, it is at the verybest a quasi-state with an independent legal order; it may even beconsidered "a constitutional charter" as the European Court of Justice hasput it. This is not to blame the process of constitutionalising Europe, butto show that the governing philosophy behind rule-making in theEuropean Community, in particular within (consumer) contract law,results from the Internal Market program. The little-known but highlyinfluential Sutherland-report 7 has paved the way for upgrading the roleof the consumer in the Internal Market. The consumer plays an activepart in establishing the Internal Market. One may easily attribute to sucha political program a social element-there will or there should be noInternal Market without a social space-but even a social-orientatedInternal Market cannot hide its roots. It is first and foremost a marketthat will have to be established inter alia by means of consumer law.18

The market bias of consumer contract law has far-reachingimplications on the way in which contract law is conceptualized in thatparticular area. There is less room for an understanding of contract lawas an integral part of the "Privatrechtsgesellschaft," which mirrors for thegood and the bad the thinking which lies behind a society which is basedon "rights, property and contract."' 19 European contract law is groundedin private autonomy,. but its scope is narrower in extent than in generalcontract law because it applies to cross-border transactions, is limited toeconomic actors enjoying the economic freedoms of the EuropeanCommunity law, and does not relate to transactions with thirdcountries. 20 That is why European law is much more market biased thannational contract law. It suffices to recall the importance the ten newMember States have initially devoted to developing their own nationalprivate legal order.2 ' In the nineties it seemed as if nation building and

17. The Internal Market After 1992 Meeting the Challenge, Eur. Pan. Doc (SEC 92-final) 2277 (1992).

18. This is the critique that bears the Social Manifesto.19. K. Giinter, Ohne weiteres und ganz automatisch? Zur Wiederentdeckung der

Privatrechtsgesell-schaft!, Rechtshistorisches J. 473 (1992); M. Stollies, Auferstandenaus der Wende: Die biirgerliche Gesellschaft und ihr Recht?, RECHTSHISTORISCHES J. 500(1992).

20. On the words of Norbert Reich, supra note 17, at 149.21. See Norbert Reich, TRANSFORMATION OF CONTRACT LAW AND CIVIL JUSTICE IN

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private law making were still closely intertwined.22 It is, however,equally striking that the new Member States quite often have not yetcompleted the reform of their national private legal order. Thus, onemay wonder whether the link between Privatrechtsgesellschaft, privateautonomy, and nation state building might loose importance, whichthereby opens the door to a market focused European contract law. Bynow, however, contract law in the European Community is just onedevice among other areas of law and politics to foster Europeanintegration which means in essence-again and again-to complete theInternal Market.

The European legal order being understood as a EuropeanEconomic Constitution23 cannot overcome the differences in MemberStates' and European contract law making. In its ordo-liberalgrounding 24 the concept is meant to constitutionalise the marketfreedoms and the competition rules. This is were private autonomy isread into market freedoms. However, even an Economic Constitutionenshrined in the Treaty remains bound to a particular purpose-toEuropean integration. Private autonomy cannot be a full-fledgedconstituent element of a "Europdiische Privatrechtsgesell-schaft," becauseit does not-yet--exist. Even in a possible social welfare grounding, letus assume a European Economic and Social Constitution, the conceptreadily meets the limits of a European legal order where a "Europeanstate" is missing who could slip into the national social-welfare coat.The European Community cannot take over the "protective" outlookconsumer law bears in national legal orders, although it often pretends todo so. Therefore, the European Economic Constitution is deficient atboth ends, private autonomy and social protection. It cannot sustainwithout the Member States' legal order, in grounding private autonomy

THE NEW MEMBER STATES COUNTRIES: THE EXAMPLE OF THE BALTIC STATES, HUNGARY

AND POLAND (RGSL, Working Paper No. 21, 2004).22. Hans W. Micklitz, Verbraucherschutz West versus Ost-

Kompatibilisierungsmdglichkeiten in der Europdischen Gemeinschaft-EinigeVoriuberlegungen, Helmut Heiss (Hrsg.), Briickenschlag zwischen den Rechtskulturendes Ostseeraums 137 (2001).

23. See Christian Joerges, Markt ohne Staat? Die Wirtschaftsverfassung derGemeinschaft und die Renaissance der regulativen Politik, R. Wildenmann (Hrsg.),Staatswerdung Europas, Optionen einer Europiischen Union 254 (1991); translated inThe Market without a State? States without Markets? Two Essays on the Law of theEuropean Economy (EUI Working Paper Law 1/96, 1996) available athttp://eiop.or.at/eiop/texte/1997-019 and -020.htm; States without a Market. Commentson the German Constitutional Court's Maastricht-Judgment and a Plea forInterdisciplinary Discourses (NISER Working Paper 1996); Jurgen Basedow, Von derdeutschen zur europiischen Wirtschafisverfassung, Mohr Siebeck, Milnchen (1992).

24. David Gerber, Constitutionalizing the Economy: German Neo-liberalism,Competition Law and the "New" Europe, 42 AM. J. COMP. L. 25 (1994).

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and in legitimating social policies. 25

That is exactly why the Internal Market philosophy remains sodominant and that is why the European Commission could so easily andso successfully relate the adoption of the consumer contract lawdirectives to the Internal Market powers.26 European consumer contractlaw has been realized in a pick-a-pack procedure, the Internal Marketbeing the driving force and consumer contract law being no more than anappendix. The outcome of such a subordinate consumer contract law isstriking. Consumer contract law is turned into a device to contribute to ahigher political objective-that of realizing the Internal Market.Consumers shall play their part in the Internal Market. They, however,are able to do so only if they are equipped with the necessary rights andremedies.

Just like national consumer contract law rules, European consumercontract law rules continue to undermine "pacta sunt servanda." Thedifferent perspectives, limiting private autonomy to guarantee protectionto the weak and protection-needed consumer2 7 and limiting privateautonomy to create a consumer which is able to play an active part incompleting the Internal Market evoke different notions of "contract law."European consumer contract law-and this is my leading hypothesis-reflects its subordination to the Internal Market philosophy. This willhave to be developed step by step in breaking down the Europeanapproach to regulating contract law into its seven constitutive elements.The outcome is competitive contract law, because the contract law rulesare shaped so as to allow effective competition between suppliers in theInternal Market.

B. The "New" Business Contract Law

The very same phenomenon, though much less specific, can be

25. There is much discussion in particular on the legitimacy of a European contractlaw. See Thomas Wilhelmsson, supra note 14, at 88; Christian Joerges, Zur Legitimitdtder Europdisierung des Privatrechts. Uberlegungen zu einem Recht-Fertigungs-Recht furdas Mehrebenensystem der EU, in Christian Joerges & Gunther Teubner (Hrsg.),Rechtsverfassungsrecht 183 (2003), translated in, On the Legitimacy of EuropeanisingPrivate Law: Considerations on a Justice-making Law for the EU Multi-level System,ELECTRONIC J. OF COMP. L. 7:3 (September 2003), available at http://www.ejcl.org/ejcl/73/art73-3.html; Ius Commune Lectures on European Private Law 6 (EUI WorkingPaper Law 3003/2 2003).

26. See Bettina Heiderhoff, Grundstrukturen des nationalen und europdischenVERBRAUCHERVERTRAGSRECHTS, inbesondere zur reichweite und zur europiiischenauslegung, Sellier, European law Publishers, Miinchen, (2003).

27. For a need-orientated approach, see Thomas Wilhelmsson, SOCIAL CONTRACT

LAW AND EUROPEAN INTEGRATION, Dartmouth Aldershot, Brookfield USA, Singapore,Sydney (1995)

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found in European business contract law. The regulatory mechanism andthe regulatory philosophy is identical. While there is no Sutherlandreport, which has provided the ground for a consistent policy toinstrumentalise European business law for completing the InternalMarket via active, responsible and circumspect suppliers, most ofEuropean business contract law rules are guided by the same philosophy;the difference being that consumer contract law is subject relatedwhereas business contract law is object-related.

The Internal Market Program, more particularly the 1985 "WhitePaper on the Completion of the Internal Market," 28 turned out to be thedriving force behind the expansion of European business contract law.The Commission rediscovered the respective competition rules on publicundertakings in the Treaty, Articles 82 and 86 to initiate deregulation andprivatization. There is a strong link between privatization andderegulation of public undertakings and the growing importance ofprivate law. The most recent initiative is much younger and, again, ittook place in competition law. In the late nineties the EuropeanCommission began to reframe its policy on block exemptions to enhancecompetition and most explicitly to strengthen the role of the consumer.29

All of these policy fields have one element in common: the Commissionreshapes the market order in particular fields of business by using thecompetition articles in the Treaty or its competence to adopt secondarylegislation to reset the competitive environment,-thereby regulating as aby-product the private law relationship between the parties involved inthe respective transaction.

III. The Existing Body of European Contract Law

Before entering into an analysis of what the elements of competitivecontract law are, it is helpful to define the essence of European consumercontract law and European business contract law.

A. Consumer Contract Law

In a timely order, European consumer contract law30 consists ofDirective 84/450/EEC on misleading advertising, Directive 85/577/EECon contracts concluded away from business premises, Directive87/102/EEC on consumer credits as amended, Directive 90/314/EEC on

28. COM (85) 310 final.29. The starting point is the so-called umbrella regulation 2799/2000.30. Most of the directives are reprinted in three languages--German, English and

French. See Europiiisches Schuldrecht, Verordnungen und Richtlinien, European Law ofObligations, Regulations and Directives, Droit europren des obligations R~glements etDirectives (Ulrich Magnus ed. 2002).

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package tours, Directive 93/13/EEC on unfair terms in consumercontracts, Directive 94/47/EC on time sharing, Directive 97/7/EC ondistant selling, Directive 97/55/EC on comparative advertising, Directive98/27/EC on injunctions, Directive 99/44/EC on consumer sales,Directive 2000/31/EC on e-commerce, Directive 2002/65/EC on distantselling of financial services, and Directive 2004/39/EC on investmentservices. As the Commission starts in its Communication from a broadconcept of contract law one might add the Directive 87/374/EEC onproduct liability as amended, the Brussels regulation 44/2001/EC, andthe Rome Convention.

Important legislation is under way, the directive on unfaircommercial practices will probably be adopted in June 2005,31 aregulation on sales promotion, a draft directive on services, a revision ofthe Rome convention (dealing with contracts), and the adoption of Rome1132 (dealing with tort law) should also occur in the near future. This listcould easily be elongated and, at the very least, shows that theCommission is continually working hard to draft important legislation.The legislative machinery does not stop. There is no stand still periodduring which the Common Frame of Reference shall and will bedeveloped. That is why the "acquis communautaire" is steadily growing,maybe not so much in the field of consumer law where DG SANCO hasproclaimed its intention to publish revisions of the package tour and thetime share directive only, but at the outer end of European contract law,in fields of the law where the inner link to traditional civil law matters isless obvious though existent.

For my purposes, it suffices to quite formally classify the existingbody of law in a general part and a specific part. It is said to be formalbecause it does in no way consider the differences in the reach andimportance of the directives. The general part consists of the unfairterms Directive 93/13//EEC and the four directives dealing with sellingmodalities (Directive 85/577/EEC on doorstep selling, Directive 97/7/ECon distant selling, Directive 2000/31/EC on e-commerce and Directive2002/65/EC on distant selling of financial services). All these directivescommonly start from a horizontal perspective. They are, in theory,applicable to all sorts of contracts provided they are concluded between aconsumer and a supplier. There specific parts cover all directives thatdefine particular types of contracts: Directive 87/102/EEC on consumercredit, Directive 90/314/EEC on package tours, Directive 94/47/EC on

31. A common position has been reached in November 2004.32. See Hamburg Group for Private International Law, Comments on the European

Commission's Draft Proposal for a Council Regulation on the Law Applicable to Non-Contractual Obligations, 67 RabelsZ 1-56 (2003).

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time sharing, Directive 99/44/EC on consumer sales, and Directive85/354/EEC on product liability. Directive 98/27/EC on injunctions fallsapart, although it underpins one characteristic of European contractlaw-the close clink between substantive contractual rights and the needfor appropriate remedies. I will come back to this fairly neglectedrelationship later on.

Seen in such a perspective European consumer contract lawdemonstrates a remarkable consistency, which results from the first andthe second European consumer policy program.33 Legal doctrine likes touse metaphors to describe the existing state of European contract law,such as mere islands in the deep and dark sea of contract law, a mosaic oflegal rules, or a puzzle. I do not fully share such a sotto voce pejorativefinding. While it is true that European consumer law rules lackconsistency, it suffices to recall the differences in the shaping ofinformation rights and the deviating periods for the execution of the rightto withdrawal. European consumer contract law rules form a relativelyclose body of rules which mirror the major policy problems of the lasttwo decades, and, what is much more important for the purpose of thispaper, the rules suffice to identify the key elements of a new paradigm incontract law theory which is not bound to consumer law alone.

B. Business Contract Law

At first hand sight, there are only two directives which are normallyattributed to regulating contract law in B2B relations, Directive86/553/EEC on commercial agents and Directive 2000/35/EC on latepayment. These two directives, however, do not constitute Europeanbusiness law! In order to liberalize the market for insurance services, 34

job employment,35 telecommunication, energy (electricity and gas) andtransport (aviation, railway, public transport), the Commission hasdeveloped a mixed approach which consists of firstly applying thecompetition articles of the Treaty to break off the market and secondly toregulate and shape the so opened markets via secondary EC legislation.The different pieces of secondary legislation are dealing inter alia withcontractual relations.

Passing the last twenty years in review (since the adoption of the

33. The Commission is constantly reviewing its policy, the name is sweepingbetween action plan, new impetus, new impulse etc. The basic ideas, however, are still tobe found in the first two consumer programmes; 1975 O.J. (C 92) and 1981 O.J. (C 133).

34. While insurance contracts might be a good testing field, it will be set aside as itis governed by particular rules, which are difficult to compare. See Jurgen Basedow &Till Fock (Hrsg), Europaisches Versicherungsrecht, Band 1 und 2 (2002) Mohr Siebeck,Tilbingen, (show the particularities of EC insurance law).

35. See Case C-41/90, Hofner, 1991 E.C.R. 1-1979.

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White Paper on the Completion of the Internal Market), the Commissionset the tone in the way in which it regulated the telecommunicationsector. Directive 89/522/EEC,36 preparing the ground for Directive2002/21/EC37 and Directive 2002/22/EC 38 on universal services, workedas a blueprint for regulating the e-commerce in Directive 2000/3 1/EC 3 9

and the draft proposal on services, 40 which is meant to become anumbrella regulation for all those services which are not covered byparticular EC secondary law rules. The three directives are to becharacterized by a strange-seen from a continental lawyer'sperspective-mixture of public (competition) and private (contract) lawto lay down ground rules for a market of telecommunication services, ofe-commerce services and of all remaining services outside particular EUrules. This should, ideally, guarantee free access to the Internal Marketfor new competitors, which could be done by breaking down nationalpublic monopolies in the telecommunication sector, or by setting asidenational barriers to get access to particular professions in the draftdirective on services, or by framing ground rules on newly emergingmarkets such as in the e-business. Public law historically sets aregulatory frame and private law historically gets the already establishedmarket going. Emphasis is certainly put on public law rules, mainly oncompetition law even if it appears in a new device. However, the threedirectives, the telecommunication Directive 89/522/EEC read togetherwith Directives 2002/21/EC and 2002/22/EC, the E-Commerce Directive2001/31/EC and the draft proposal on services, contain to a varyingdegree provisions shaping directly or influencing indirectly contractmaking in B2B relations as well as in B2C relations.

The telecommunication sector was the first to be privatized in theaftermath of the adoption of the Single European Act. Thus, in a way,Directive 89/522/EEC served as a pattern to deregulate the energymarket, such as electricity and gas, and maybe even the water supply in

36. Council Directive (89/552/EEC) on the Coordination of Certain Provisions LaidDown by Law, Regulation or Administrative Action in Member States Concerning thePursuit of Television Broadcasting Activities, 1989 O.J. (L 298), amended by Directive97/36/EC of the European Parliament and of the Council Amending Council Directive89/552/EEC on the Coordination of Certain Provisions Laid Down by Law, Regulation orAdministrative Action in Member States Concerning the Pursuit of TelevisionBroadcasting Activities, 1997 O.J. (L 202) 60.

37. 2002 O.J. (L 108) 33.38. 2002 O.J. (L 108) 51.39. Directive 2000/31/EC of the European Parliament and of the Council of on

Certain Legal Aspects of Information Society Services, in Particular ElectronicCommerce, in the Internal Market 2000 O.J. (L 178) 1 [hereinafter Directive onElectronic Commerce].

40. Proposal for a Directive on Services in the Internal Market, COM (04) 2 (SEC04) 21.

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the near future. The commonality between all three of these sectors isthat the Commission has an established policy of separating thetransmission system from the distribution system, which enablesparticular cross-border competition in between operators of thetransmission system and in between operators of the distribution system.The most recently revised directives, Directive 2003/54/EC41 onelectricity and Directive 2003/55/EC 42 on gas, pay tribute to thedifficulties the Commission faces in arriving at a fully operational andcompetitive internal market. The primary addressee of the two directivesare the Member States through their competent regulatory agencies.These are entrusted powers, which have to be regarded as regulatorypowers similar to competition rules, all meant to open up thetransmission and distribution system, to unbundling the systems and toorganize and grant access to the systems. That is why the two directivesare usually seen as regulatory means outside contract law. This is,however, only half the truth. Indirectly, the two directives affect privatelaw relations on the energy market. This comes particularly clear in therules which are meant to guarantee customer-not consumer-protection. Here, Member States are requested to guarantee a minimumstandard of choice and fair contract conditions, not only to consumers,but also to customers as such.43 Regulation 1228/200344 on conditionsfor access to the network for cross border exchanges in electricity as wellas its counterpart in the gas sector, which has not yet been adopted,45 areboth meant to promote the cross-border trade in electricity and gas. Theydefine fair, cost-reflective, transparent rules, which are directlyapplicable. In essence the two regulations affect the way in which theparties to such a cross-border trade are allowed to shape (calculation) andto present (the conditions of price shaping) their prices. Theoretically thetwo domains, competition and civil law are kept separate; in practicethey are closely intertwined.

Last but not least, reference should be made to the most recentinitiative of the Commission to review its policy on block exemptions.Here, similar tendencies may be reported. Block exemptions are a well

41. Directive 2003/54/EC of the European Parliament and the Council ConcerningCommon Rules for the Internal Market in Electricity and Repealing Directive 96/22/EC2003, O.J. (L 176) 37.

42. Directive 2003/55/EC of the European Parliament and the Council ConcerningCommon Rules for the Internal Market in Gas and Repealing Directive 98/30/EC, 2003O.J. (L 176) 57.

43. Primary addressee seems to be the final consumer. Article 3(5), however, refersto Annex A as follows: "as regards at least household customers, i.e. the addressee is notonly the final consumer but also the customer."

.44. 2003 O.J. (L 176) 1.45. COM (04) 760 final.

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established means used by the Commission to shape the borderlines ofvertical agreements by means of competition law. The diverseregulations on exclusive and selective distribution, the umbrellaregulation 2790/1999,46 the regulation 1400/200247 on the car sector, andthe regulation 772/200448 on technology transfer, however, interveneindirectly into contract-making and indirectly, because the parties to thevertical agreement are free to define their contractual relations. Inpractices, however, the content of the rights and duties in verticalagreements is determined by the block exemptions. The parties will evenliterally copy the articles in the block exemptions into their contracts toavoid discrepancies between the EC rules and the contractual rights.49

IV. The Key Elements of Competitive Contract Law

I would like to distinguish seven elements which may be drawnfrom European consumer law: 1) the protective-instrumental device,2) commercial communication and conclusion of contract, 3) competitiveand contractual transparency, 4) standard form contracts via informationduties, 5) fairness as market clearance, 6) post contractual cancellationrights and 7) effective legal protection. 50 These elements will beanalyzed by first taking into consideration the existing body of consumerlaw, before the very same findings may be contrasted with similar oridentical developments in European business contract law.

A. The Protective-Instrumental Device

It is a common characteristic of EC law dealing with B2C or B2Brelations that the dispersed rules are dominated by a particular regulatoryperspective. It is not contract law such as which is submitted to EC law,but contract law is used in a particular way by the EC regulator to

46. 1999 O.J. (L 336) 21.47. Commission Regulation (EC) No 1400/2002 of 31 on the Application of Article

81(3) of the Treaty to Categories of Vertical Agreements and Concerned Practices in theMotor Vehicle Sector, 2002 O.J. (L 203) 30.

48. 2004 0.J.(L 123) 11.49. Stephen Grundmann, EUROPAISCHES SCHULDVERTRAGSRECHT, Walter de

Gruyter, Berlin, New York, 936 (1999); T. Schumacher, RECHT DES KFZ-VERTRIEBS INEUROPA, CH. Beck, Miincehn, (2005).

50. The distinction is based on previous research, I have undertaken in the field ofcompetitive contract law. Perspektiven eines europdischen Privatrechts-Ius CommunePraeter Legem?, ZEuP 257-273 (1998); The New German Sales Law-ChangingPatterns on the Regulation of Product Quality, J. OF CONSUMER POL'Y 379-401 (2002);Der Vertragsbegriff in den ibereinkommen von Briissel und Rom, in Reiner Schulze &Hans Schulte-N6lke in Verbindung mit L. Bernardeau (Hrsg.), EuropiischesVertragsrecht im Gemeinschaftsrecht, Schriftenreihe der Europaischen RechtsakademieTrier, Herausgeber der Schriftenreihe, Wolfgang Heusel, 39-83 (2002).

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achieve a particular purpose, mainly with regard to open up markets or toenhance competition. That is why EC contract law rules maybecharacterized as being "instrumental" and "protective."

European consumer law is not primarily meant to protect the weakerparty, in the sense given to it by most private national legal orders. Theinstrumentalisation of consumer contract law to complete the InternalMarket, however, does not mean that consumer law is entirely deprivedof its protective device. It is the direction of protection which differsfrom national law. This is where consumer protection law is beingunderstood as a necessary element of the social welfare state thinking.Consumers are regarded as being per se in an underprivileged situationwhen it comes down to conclude a contract. The European legislatoruses the protective-device only as a mere starter or even worse as apretext to pursue the overall concept of European integration, morespecifically to realize the Internal Market.5' This is why it might becorrect to speak of a "protective-instrumental" device. The means to beused are similar, the substance, however, is different. The differencesmaybe condensed in the debate around the role and function of the so-called "Verbraucherleitbild." The European legal order starts from anormative concept under which the average consumer is idealized asbeing "responsible and circumspect." The rights and remedies grantedare shaped along the line of such a fictitious figure, at a time where"information economics" and "behavioural economics" is beginning totake into consideration how consumers really behave. 2 In the idealworld of a responsible and circumspect consumer, the true needs ofprotection fall apart. Thus, there is a growing conflict between thenormative concept of the consumer in the European legal order and thefactual concept still in existence in a number of Member States. Theformer is market bound, the latter is social policy bound. The strive formaximum harmonization in combination with the country of originprinciple provides evidence that EC consumer law is, more than ever,focusing on the overall dimension of completing the Internal Market, butnot-and how can it be-the formation of a EuropeanPrivatrechtsgesellschaft.

European business contract law starts from the same premise. Thismeans that a protective device may be identified. It may be more or less

51. That is why Thomas Wilhelmsson has identified an abuse of the concept ofconfident consumer. See Thomas Wilhelmsson, The Abuse of the "Confident Consumer"as a Justification for EC Consumer Law, 27 JCP 317-337 (2004).

52. Joseph E. Stiglitz, Information and the Change in the Paradigm in Economics,92 THE Am. ECONOMIC REV. 460 (2002); Andreas Oehler, Behavioural Finance,Theoretische, empirische und experimentelle Befunde unter Marktrelevanz, OBA 978(2000).

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explicit. Directive 86/553/EEC53 on self-employed commercial agentsserves as a starter. The intention was to provide the self-employedcommercial agents with mandatory rights to claim remuneration from theprincipal.

Directive 2000/35/EC was meant to fight down late payment whichplace "heavy administrative and financial burdens on business,particularly small and mediums seized ones. 54 The same thinking mightbe found in recital 2 of Directive 2004/54/EC on electricity and Directive2004/55/EC on gas which runs as follows: 55 "concrete provisions areneeded to ensure ... that the rights of small and vulnerable customersare protected. . ." (emphasis added). Newcomers in the market, this isthe regulatory philosophy, need to be protected to be able to play theirrole in a more competitive market. Recital 9 of regulation 1400/2002 onvertical agreements and concerted prices in the motor vehicles directivessays: 56 "In order to strengthen the independence of distributors andrepairers from their suppliers ... ." That means distributors and repairersare not regarded as per se weak, but only with regard to a particularperspective, i.e., within the field of vertical agreements where they aresaid to need regulatory protection to fulfill the mission, the Commissionwould like to see realized. The umbrella regulation 27/1999 and theregulation 772/2004 on technology transfer do not contain similaroutspoken statements on the potential addressees.

There seems to be a common policy behind the directives andregulations. They all refer to an image of business which is not too faraway from the protective-instrumental device in consumer relatedmatters, thereby following the blueprint of the commercial agentsdirective. Again, there is this obvious intention of the EuropeanCommission to provide rights to an identified group of businesses inorder to make them use their rights in a very particular way, i.e., to openup the Internal Markets or to keep it open. It presupposes that thoseaddressed, i.e., small and medium seized business, are able, competentand circumspect to make use of their rights. As in consumer law, theconcept of business is a normative one.

53. 1986 O.J. (L 382) 17.

54. 7 th Recital ofDirective 2000/35/EC.

55. Directive 2003/54/EC of the European Parliament and the Council ConcerningCommon Rules for the Internal Market in Electricity and Repealing Directive 96/22/EC,2003 O.J. (L 176) 37.

56. Commission Regulation (EC) No 1400/2002 of3l. July 2002 on the Applicationof Article 81(3) of the Treaty to Categories of Vertical Agreements and ConcernedPractices in the Motor Vehicle Sector, 2002 O.J. (L 203) 31.

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B. Advertising, Pre-contractual Information and Contract Conclusion

The European directives and regulations at stake here constantlyrepeat the "credo" that the European rules do not intervene into nationalprivate legal orders which still determine the interplay of offer andacceptance and the moment at which the contract is concluded. TheCommission failed to regulate contract making in the e-commercedirective, where it had in mind to install the so-called double clickprocedure which would have Europeanized offer and acceptance. Thisdomain is seen as being in the realm of the Member States' competence.Such a reading, however, of the EC law is not correct and actually ismisleading.57 European directives and regulations, mostly in consumerlaw, really downgrade the function and the importance of offer andacceptance in contract law. In EC law, rules, advertising, pre-contractualinformation, and contract making are legally not clearly separated-theyare interlinked. Therefore, it is more correct to start from the premisethat under EC law, advertising, pre-contractual information, contract-making, and even post contractual duties are regarded as a continuum,where the moment at which the contract is concluded looses importance.In so far EC law is liquefying contract law. The same tendencies,although less outspoken, might be identified in the field of businesscontract law.

The Commission has always used the emergence of newtechnologies to introduce new regulatory techniques in consumer lawwhich might turn into a common trend. It did so in the field of theinformation technologies where Directive 97/7/EC on distant selling,Directive 2001/31/EC on e-commerce, and Directive 2002/65/EC ondistant selling of financial services set the tone. At the same timeadvertising, or in EC jargon "commercial communication" became afavorite field of EC action to shape inter alia contract law, which islegitimated by the overall need to strive for common rules in the InternalMarket to set aside barriers to trade resulting from different marketingstandards.

The first technique to downplay offer and acceptance is toEuropeanize the invitatio ad offerendum via pre-contractual informationduties which are imposed on the supplier prior to the conclusion of thecontract. The policy can be traced back to the door step selling directiveand has been more fully developed in the general distant sellingdirective, the e-commerce directive, and the directive on distant sellingof financial services. The supplier, therefore, is obliged to provide theconsumer with basic information on products and services if they are

57. See Reich, supra note 16, at 149.

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subject to particular selling arrangements outside business premises orsubject to the use of particular communication means. There might evenexist a general duty to disclose information.58

The second technique is closely linked to the particular Europeanunderstanding of the inter-relationship between trade practices law andcontract law. There is good reason to conclude that Directive84/450/EEC on misleading advertising imposes an information-like dutyon the supplier contrary to most of the legal orders of the Member States,at least in the meaning given to it by the European Court of Justice.59

The two pieces under way, the common position on unfair commercialpractices and the draft regulation on sales promotion, push thedevelopment even one step further. Whereas the draft regulation mightset up scrutinized information obligations, the common position onunfair commercial practices comes close to the Scandinavian traditionwhich imposes information duties on the advertiser in prohibitingEurope-wide misleading omissions. The borderline between omissionand action is sweeping and so is the difference between a prohibition notto mislead the consumer via unfair omissions and the duty to provideinformation.6°

In European business contract law, the very same tendency can berecognized, although the existence of information duties which interveneinto commercial communication remains very much context-related.

Nevertheless, pre-contractual information duties are becoming moreand more common. It remains to be recalled that the e-commerceDirective 2000/3 1/EC is equally applicable to B2B relations. Article's 5and 6 impose information duties on the service provider in the pre-contractual stage. Article 9 obliges the member States to ensure that thelegal requirements applicable to the contractual process neither createobstacles for the use of electronic contracts nor result in such contractsbeing deprived of legal effectiveness and validity on account of theirhaving made by electronic means. This very broad rule might allow theEuropean Court of Justice to decide when an electronic contract does ordoes not exist. 61

Specific pre-contractual information duties may likewise be found

58. See infra Part IV.G.59. Norbert Reich & Hans W. Micklitz, Europdisches Verbraucherrecht, 4 Auflage,

2003, Nomos, Baden-Baden, § 6.10.60. Hans W. Micklitz & J. KeBler, Europdisches Lauterkeitsrecht-dogmatische und

6konomische Aspekte einer Harmonisierung des Wettbewerbsverhaltens im europdischenBinnenmarkt, GRUR INT. 885-901 (2002); Hans W. Micklitz & J. KeBler, DieHarmonisierung des Lauterkeitsrechts in den Mitgliedstaaten der EuropiischenGemeinschaft und die Reform des UWG, Band 12, VIEW Schriftenreihe (2003), Nomos,Baden-Baden.

61. See Reich, supra note 16, at 150.

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in the telecommunication and the energy sector. Directive 2002/22/ECobliges the addressed companies to provide the "subscriber ' 62 withinformation on the control of the expenditure, Article 10 together withAnnex I; or the "consumer," respectively, the "end-user '63 withinformation on the content of the contract, Article 20 and Article 21 withAnnex II. Similar rules may be found in the Directive 2003/54/EC andDirective 2003/55/EC, respectively the annex; on common rules for theinternal market on electricity and gas. They contain outspokenprovisions on the electricity and gas suppliers' duties to provide basiccontractual information in promotional materials to final customers thatare meant to be household customers and non-household customers.64

Last but not least, the different block exemptions have to mentioned-where information duties can be detected.

The relationship between commercial practices and contract lawseems to be less tight. This might be due to the fact that the EuropeanCommission has now started to separate B2C commercial practices lawfrom B2B commercial practices law. The common position on unfaircommercial practices does not cover B2B relations. Directive 84/450/ECon misleading advertising, however, remains applicable to all type ofrelations notwithstanding the status of the addressee. That is why therulings of the European Court of Justice, whether along the line ofArticles 28 and 30 of the Treaty of Rome or along the line of the conceptof "misleading advertising" in Directive 84/450/EEC, are, in principle,applicable to B2B relations as well. So far, the Court has not yet had anopportunity to dwell on possible differences between consumers andsuppliers to the degree in which they may be mislead by insufficient ornon-existent information. An extension of the project on unfaircommercial practices to B2B relations would considerably enhance theimpact of European trade practices law on European contract law. TheCommission has left the door open to take that step at a later stage.

C. Competitive and Contractual Transparency

The transparency principle bears a twofold connotation: 1) it isrelated to the bilateral relationship between the parties to the contract-this is what I would like to term contractual transparency, and 2) it isrelated to the multilateral relationship of all those possible consumers

62. As defined in Art. 2 (k) Directive 2002/21/EC (any natural person or legal entitywho or which is party to a contract with the provider of publicly available electroniccommunication services for the supply of such services).

63. End-user means a user not providing public communication networks or publiclyavailable electronic communication services. Directive 2002/2 1/EC, Art. 2 (n).

64. A final customer is per definitionem not only the private consumer but abusiness party who consumes the energy. See id. at Art. 2 No. 9.

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who would like to benefit from the transparency in making a full-fledgeddecision-this is what I would like to term competitive transparency.This distinction is equally found in B2C and B2B relations.Transparency is much less context-related, it turns out to become agenerally applicable principle notwithstanding its reference in secondaryCommunity law. Such a principle governs the continuum of contractmaking in EU law. It determines the way in which pre-contractualinformation duties are provided, it might even have an impact onadvertising and sales promotion as far as they cover information whichhas to be disclosed or transmitted to the consumer or to the supplier.

Competitive transparency is deeply routed in competition law. Theidea here is to establish equal conditions for all competitors to guaranteeeffective competition. What is much less developed is the role andfunction competitive transparency might and should play with regard toconsumers. While the European Court of Justice has most recently, inCourage,65 reopened the debate on the relationship between competitionlaw and consumer protection, the more innovative impact results fromsecondary law making-in the context of contract making whichincludes, to my understanding, the different directives on unfair andmisleading commercial practices. Since its insertion in Article's 4 and 5of the unfair terms Directive 93/13/EEC, the transparency principle hasmade its way in the consumer contract law directives and more strikinglyin the unfair market practices rules. It suffices to look into the draftregulation on sales promotion. After all, the transparency principle canbe regarded as a well-established legal principle, reaching even beyondthe particular context of a consumer contract law directive.

In Cofinoga,66 the European Court of Justice explicitly recognizedthe twofold function of the transparency principle. Thus, it has clarifiedthe relationship between transparency and information. Thetransparency principle provides criteria on the way in which theinformation has to be given-with regard to the contracting partner andwith regard to interested consumers. Its impact is far reaching as it isapplicable to all sorts of information which has to be made available toconsumers. Along the line of the Directive 2002/65/EC on distant sellingof financial services, three types of information might be distinguished:information on the supplier, on the service and on the contract. Thestandards to be applied under an all-embracing transparency principle arethe same, lower in that the information standards remain less explicit

65. Case C-453/99, Courage v. Crehan, 2001 E.C.R. 1-6297; K. J. Cseres,Competition Law and Consumer Law: A Love-Hate Relationship (2004) (Ph.D. Thesis,University of Utrecht).

66. Case C-264/02, Cofinoga Mrignac SA v. Sylvain Sachithanathan, 2004 E.C.R.,I-nnv.

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with regard to the three-fold distinction and higher in that theinformation provided must meet the particular challenge of competitivetransparency.

An example might serve to explain what is meant. The supplier hasto inform the consumer on the price of the product or services. This isparticularly sensitive in the field of services. The classical legaldistinction would be:

1. Price information in advertising or sales promotion-generalprovisions in the draft regulation on sales promotion and the draftdirective on unfair commercial practices; more particular rules in thedistant selling directives;

2. Price information prior to the conclusion of the contract via priceindication or price information-no general rules on price indicationfor services. However, particular rules in diverse service relatedconsumer contract law directives; and

3. Price information at the time of the conclusion of the contracteither in writing or on a durable medium-particular rules in diverseservice related consumer contract law directives.

An overall transparency principle enshrines all three stages ofcontract making both in a bilateral and a multilateral dimension-bilateral with regard to the possible contracting party and multilateralwith regard to possible interested persons who ask for information to beable to compare the price of products and services.

The principle of transparency has been equally codified in the threedirectives on telecommunication, energy and services. They are muchless explicit in the regulations on block exemptions, although theestablishment of a transparent framework has always been of majorconcern for the European Commission. Otherwise competition wouldnot be enhanced but hampered.

The principle of transparency is the governing rule in e-commerceDirective 2000/31/EC and will be introduced in the project on a generaldirective on services. Directive 2002/22/EC on universal services andthe two directives, Directive 2004/54/EC and Directive 2004/55/EC oncommon rules for an internal market on electricity and gas, have evenupgraded the role of transparency-in particular with regard totransparent tariffs for access to electricity or gas networks or with regardwith to transparent tariffs on electronic communication services.67 These

67. Recital 13 and 14 Directive 2003/54/EC of the European Parliament and theCouncil Concerning Common Rules for the Internal Market in Electricity and RepealingDirective 96/22/EC, 2003 O.J. (L 176) 37; Recitals 4 and 14 of Commission Regulation

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provisions express literally the dual character of the transparencyprinciple. Information on tariffs should be disclosed prior to theconclusion of the contract, to enhance competition and to put all partiesconcerned on an equal footing when it comes down to concluding thecontract. It is tempting to argue that the principle is context-bound. Onthe other hand, tariffs and price shaping constitute "the" decisive featurein contract making as the quality of the products do not vary to a greatextent. Thus, the principle of transparency governs the internal marketon gas and electricity.

D. Standardizing Contract Making

While there is a common trend in both fields of contract law, thestrategy is different. In consumer contract law, contracts arestandardized indirectly via information duties.68 The same approachexists in business law, however, -the block exemption regulationsintervene more directly into the way in which the contract should beshaped. Within its recent communication on European contract law, theEuropean Commission is advocating for the elaboration of standardbusiness conditions in B2B relations and in business to public authoritiesobligation, but not in B2C relations.69

It is common knowledge that the European Community has partlyreversed the responsibilities on information supply in consumercontracts. In consumer contracts, which are concluded by electronicmeans, the consumer is free from seeking the necessary information.The consumer can rely on the suppler, which the directives have imposeda remarkable set of information duties. The situation, however, is.different in the consumer sales' Directive 99/44/EC, where the consumerremains responsible for bringing the necessary information together.More specific information duties in particular via voluntary guaranteesdid not get the approval from the Member States. 70

The way in which the information duties in Directive 2002/65/ECon the distant selling of financial services are grouped together might bepath-breaking. The threefold distinction, supplier related information,product/service related information and contract related information,

No. 1228/2003 on Conditions for Access to the Network for Cross-border Exchanges inElectricity, 2003 O.J. (L 176) 1; Recital 3 and 31 Directive 2002/22/EC on UniversalService and User's Right to Electronic Communications Networks and Services 2002O.J. (L 108) 51 [hereinafter Universal Services Directive].

68. This goes back to the famous Cassis-de Dijon judgment. See Reich, supra note16, at 162.

69. See COM (04) 651 final at 6-9.70. See Christian Twigg-Flesner, CONSUMER PRODUCT GUARANTEES (Ashgate,

Aldershot, Burlington 2003).

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can easily be transferred to the consumer contract law directives alreadyadopted, as well as be used for a more general concept of informationsupply in consumer contracts.7'

What really matters in my context, however, is not so much thediversity of information, but its consequences for contract making. Evena wilful supplier faces considerable differences to fully meet theinformation standards in areas, where the requirements differ althoughthe marketing strategies for which the information is used are closelyintertwined. It suffices to compare the information requirements ondirect marketing strategies with those on distant marketing strategies. Incommenting on the distant selling directive we have tried to develop astandard information format.72 This was not only a challenging task, itwas, at the same time, a striking self-experience as we realized that weended up shaping a standard format on distant selling. The EuropeanCommission is far ahead in that it had proposed as early as 1976 astandard formula on notifying the consumer on his right to withdrawal incontracts concluded away from business premises. The Germanlegislator went down exactly that way in 2002 after painful experiences,when it introduced such a standard format to the benefit of the consumerand the supplier. The shaping of the notification requirements have beensubject to an endless stream of judgments.

The European Commission is advocating for the development ofstandard format contracts on a voluntary basis though. The results, in thefield of package tours and time sharing, are not promising, however. Onthe other hand, there are limits to standardizing consumer contracts.They result from possible anti-competitive effects, in case standardizingconsumer contracts leads to standardized consumer products andconsumer services. Insurance contracts are one notable example.73

In business contract law, two distinct strategies can clearly bedistinguished. On the one hand, the European legislator imposesinformation duties on the parties to a B2B contract. On the other hand,the whole contract is predetermined under the disguise of setting acommon European frame for enhanced competition in particular policyfields.

It lasted until the adoption of the e-commerce Directive, Directive2000/31 /EC, before information duties turned into a common element ofB2B contract making. The very same approach is easily identifiable inDirective 2002/12/EC on universal services and in the draft directive on

71. See R6sler, supra note 15.72. See Hans W. Micklitz & Klaus Tonner, Vertriebsrecht, Handkommentar [The

Law on Distributition-Hand Comment] 284-289 (2002), Nomos, Baden-Baden.73. See Art. 6 of Regulation EC No. 358/2003 of the Commission on the Application

of Art. 81(3) of the Treaty in the Insurance Sector, 2003 O.J. (L 53) 8.

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services. In the privatization directives the starting point was different,maybe with the exception of Directive 89/522/EEC. A new market wasto be created, enabling newcomers to benefit from competition where itdid not exist before. Therefore, information is premature as the legislatorpointed out in recital 2 of the electricity directive, "concrete provisionsare needed to ensure ... that information on energy sources forelectricity generation is disclosed as well as reference to sources, whereavailable, giving information on their environment., 74

The set of information made available is then specified all over thedirectives with regard to the production and distribution of energy. Quitedetailed rules have been adopted addressing the transmission and thedistribution systems operator.

The different regulations on block exemptions claim not to inferinto private law making. As has already been explained, quite thecontrary is true. It appears safe to conclude that private autonomy isseverely restricted under the garment of competition law. The blockexemptions have been led and will yield standardized verticalagreements and technology agreements whenever the block exemptionsapply.

The most recent initiative of the European Commission on standardbusiness conditions has not yet lead to tangible results. The Commissionhas in mind to set up a website to promote the development and use ofEU wide STC (standard terms and conditions). The website invitesmarket participants to exchange information. The relationship of STC'swith competition law needs to be clarified. The Commission has not yetpublished guidelines on how to meet EU cartel law.75 It has withheld theright to submit STC's to European cartel law. However, the Commissionintends to examine, together with interested parties, what legislativeobstacles to EU-wide STC exist in the Member States, with a view toeliminating them where needed and appropriate. All in all the wholeprocess is still at an infant stage.76

74. Directive 2003/54/EC of the European Parliament and the Council ConcerningCommon Rules for the Internal Market in Electricity and Repealing Directive 96/22/EC,2003 O.J. (L 176) 37.

75. It refers, however, to its Guidelines on the Applicability of Article 81 of the ECTreaty to Horizontal Co-operation Agreements, Commission Note No. 200 1/C3/02, 2001O.J. (C 3) 2.

76. Hugh Collins, The Freedom to Circulate Documents: Regulating Contracts inEurope, 10 EUR. L.J. 787 (2004) (Mr. Collins pleads for an essential fifth element for amodem market to operate efficiently and competitively, the freedom to circulatedocuments, comprising standard form contracts).

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E. Fairness as Market Clearance

Fairness of contract law is easily associated with fairness inconsumer contracts. Fairness, here, deals with the question of whetherthe parties have struck a fair balance between the rights and duties orwhether one party, usually the supplier, takes advantage of hissuperseding power to influence the contract terms to his advantage. Thesame issue appears in B2B relations, usually between bigger companieson the one side and small and medium sized companies on the other.However, in the context of my analysis a new issue appears, resultingfrom the Commission's policy to open up markets. The competitivenewcomers must be granted access to the market and the conditions to bemet are linked to the concept of fairness. The terminology used in theprivatization directives, however, is different. Access to the market mustbe discrimination free, transparent and at fair costs.

Directive 93/13/EEC on unfair terms has introduced the principle ofgood faith, which is far from being commonly accepted in the MemberStates. There is no room and no need to discuss the intricacies of thegood faith principle and its relationship to different legal tradition andlegal cultures. It means, in essence, to control the substance of thecontract if it is laid down in standard contract terms, maybe even to someextent in individual contract terms.77 In a European perspective, theindicative list of prohibited contract terms seems of utmost importance.It provides an overall yardstick of control, which is relatively easilyaccessible even for Member States which face difficulties in applying thegood faith test in practice. Therefore, it is not at all surprising that therespective enforcement authorities are using the "black list" of prohibitedcontract terms to clear the market. This is what the Office of FairTrading, a late comer in the unfair contract term business, has been doingover the last years. In essence, Directive 93/13/EEC has harmonized theconditions under which suppliers might get access to a European lawdetermined process of contract making.

The regulatory approach, first adopted with regard to unfair terms inconsumer contracts, has equally been applied to insurance contracts.Regulation 358/2002 contains a whole set of contract terms for which theblock exemption, with regard to standard contracts, does not apply. Tome the non-exempted contract terms in the Regulation must beunderstood as being equally unfair in the sense of Directive 93/13/EEC.Outside insurance contracts, there are provisions to be found in most of

77. The German legal culture binds the control to standard business conditions, thecommon law and the Scandinavian countries to the imbalance of power, i.e.,notwithstanding whether the contract terms have been individually negotiated or not.

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the consumer contract law directives, which might easily be read so as toprohibit certain market practices. 78 If these provisions are contract-related, they do not distinguish between standard contract terms andindividual terms, as is the case in the directive 99/44/EC on consumergoods.

A further step towards market clearance will probably result fromthe adoption of the directive on unfair commercial practices. Theregulatory approach of the envisaged directive on unfair marketingpractice is similar if not identical to the unfair contract terms Directive93/13/EEC. The general verdict put on unfair commercial practices isconcretized by way of an annex in which incriminated marketingstrategies are blacklisted. The effects of the unfair commercial practicesdirective might therefore be comparable to those of the unfair termsdirective. The common law countries, but not these countries alone, willface difficulties in applying the general clause, although the key conceptbehind is not "good faith," but "unfairness., 79 The very same countries,however, will be happy to have the list of incriminated commercialpractices which will facilitate enforcement.

In European business contract law there is no general principle offairness, not even restricted to the control of unfair (standard) contractterms. However, it is striking to see that the privatization directives haveestablished the principle of discrimination-free access to the net, whichshall facilitate the conclusion of the contract. The first steps have beentaken in Directive 2002/12/EC on universal services. Annex VIII givesshape to the conditions under which the net must be opened tocompetitors. The three principles, non-discrimination, cost-orientationand transparency have become the common credo, now governing allnet-bound services. In the words of Directive 2003/54/EC:

Recital 7: In order to complete the internal electricity market, non-discriminatory access to the network of the transmission or thedistribution system operator is of paramount importance

Recital 14: In order to facilitate the conclusion of contracts....Member States and, where appropriate, national regulatoryauthorities should work towards more homogenous conditions andthe same degree of eligibility for the whole of the internal market.

The anti-discrimination principle is supplemented by the principle of

78. Market practices are meant to cover unfair contract terms and unfair commercialpractices (unfair and misleading advertising).

79. Hans W. Micklitz & Jurgen Keller (eds.), Marketing Practices Regulation andConsumer Protection in the EC Member States and the US, Band 10, VIEWSCHRIFTENREIHE (2002), Nomos, Baden-Baden.

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fair-pricing for cross-border tarification and the allocation of availableinterconnection capacities.8°

Recital 4: Fair, cost-reflective, transparent and directly applicablerules, taking into account a comparison between efficient networkoperators from structurally comparable areas.., should beintroduced with regard to cross-border tarification and the allocationof available interconnection capacities, in order to ensure effectiveaccess to transmission systems for the purpose of cross-bordertransactions.

The hardcore restrictions in the block exemptions are similar to theindicative list of incriminated unfair terms in Directive 93/13/EEC orunfair commercial practices in the envisaged directive. Hardcorerestrictions shall disappear from the market. While these restrictionshave been adopted under the competition garment, they are equallyimportant in private law relationships. There would be a lot to say infavor of regarding hardcore restrictions as unfair contract terms-if notunder the non-applicable Directive 93/13/EEC, then under the respectivenational laws as far as they provide for control of standard contracts orcontract terms as such in B2B relations.

F. Post-Contractual Cancellation/Rescission and Termination Rights

The European Community has no explicit power to regulateremedies. The EC legal order is based on the premise that the materialrules of EC law are endorsed by remedies foreseen in the national legalorders of the Member States. That is why, in principle, there should notbe a need to introduce EC specific remedies. Such an understandingcomplies with the overall policy of the Commission not to interfere intothe basics of the national private legal orders. However, the story ECcontract law tells us is different. While it is correct that Europeancontract law has remained context bound, because Article 95 requires alink between law-making and completing the Internal Market, theEuropean Commission managed to link to its context bound measuresappropriate EC law remedies. The outcome of this disparate policydemonstrates a relatively consistent set of rules which might be united inthe perspective that contractual agreements should not tie the partiestogether beyond what is necessary for effective competition. This iswhere the concept of competitive contract law is abundantly clear.

The consumer contract law directives grant consumers two differenttypes of rights enabling them to get out of a contract-rights outside and

80. Recital 4 and 14 of Commission Regulation No. 1228/2003 on Conditions forAccess to the Network for Cross-border Exchanges in Electricity, 2003 O.J. (L 176) 1.

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beyond the traditional remedy of avoidance: 81

1. The right to rescission in case the product or the service isdefective, and

2. The right to cancellation (withdrawal from a contract), which is anunconditional right in the sense that the consumer may simply changehis mind and decide to get rid of the binding arrangement.

The right to cancellation (withdrawal) is well established in the fourdirectives regulating the direct and distant selling arrangements and maybe inserted into the consumer credit directive which is under revision.The overall legitimacy is taken from the particular circumstances underwhich the contracts are concluded. They do not allow for the consumerto compare prices and performance. The right granted, under the fourdirectives, to cancel the contract has to compensate the consumer's longterm involvement. Although numerous circumstances may explain whya consumer changes his or her mind, the consumer must conclude thecontract long before it will be executed.

Usually, the consumer does not have to bear any consequences byannulling the contract. In theory, such a regulatory model seems to bethe ideal type of competitive contract law. The consumer, even afterconcluding the contract, may, on whatever basis, believe that he hasmade an unfavorable decision and that better products and bettersuppliers with more beneficial conditions are available. If so, theconsumer may withdraw from the binding arrangement and engage in abetter contract.

The second set of rights is bound to the existence of a defectiveproduct-in the consumer sales Directive 99/44/EC--or defectiveservices-in the case of the package tour Directive 90/314/EEC and timesharing Directive 94/47/EC. Here, obviously the starting point isdifferent. If the product bears a defect, there must be remedies granted toconsumers to compensate for these deficiencies. The consumer, inprinciple, remains bound to the party with whom he has concluded thecontract. The consumer, however, may have a right to rescission. In thiscase, the mutually exchanged performances have to be returned.Whether and to what extent the consumer may use the right to rescissionfor competitive purposes depends to a large extent on the set of legalrequirements the consumer must meet. If the standard is high, theadvantage is on the supplier's side, and if the standard is low, theconsumer might be in a better position to revise an uncomfortabletransaction decision.

81. Reich & Micklitz, supra note 59.

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Both together, the unconditional right to withdrawal and thecomprehensive right to rescission, are not easily to be made compatiblewith pacta sunt servanda. Legally, there may be justifications for eachand every particular context, in practice, the borderlines are sweeping.Consumers tend to think that they are free to return the product and gettheir money back, even if the product is not defective at all. Thus, thereis an overall trend to enlarge easily accessible rescission and cancellationrights beyond the existing boundaries-and further undermine theprinciple of pacta sunt servanda.

It is the policy of the European Commission to cut down long-termB2B contractual arrangements, be it via primary or secondaryCommunity law. Around the time of negotiating the Single EuropeanAct in 1985 the European Commission launched an infringementprocedure against the Federal Republic of Germany because of itsrestricted insurance law.8 2 The largely affirmative judgment paved theway for cutting down long-term contractual arrangements either via thecompetition articles or via secondary Community law in numerousmarkets.83

This overall policy is best reflected in the privatization directives.Private contractual arrangements shall not be used to undermine theCommission's policy of granting access to newcomers on the newlyestablished markets. If these newcomers are not "protected" againstmarket abuse, the whole policy may fail. The remedies enshrined in thedirectives are shaped so as to match the Commission's policy. The mostinvasive "remedy" is unbundling of transmission and distribution systemoperators. It is not a private law remedy, but it has private law effects.The second, more general remedy is condensed in the principles oftransparency and non-discrimination which are constantly reiterated inDirective 2002/12/EC on universal services, Directive 2003/54/EC onelectricity, and Directive 2003/55/EC on gas. These directives have tomake sure that the access to the newly established market has to be keptopen and any long-term agreements between unbundled companies runafoul to such a policy. More specific private law related remedies maybe found, for example, in regulation 1228/2003 on conditions for accessto the network for cross-border exchanges in electricity. Again, theparticular context dominates the regulatory mechanism. As has alreadybeen said, the regulation is meant to guarantee that tariffs for the cross-border transmission of energy are fair, cost-reflective, transparent and

82. Case 205/84, 1986 E.C.R. 3793.83. See Case 125/03, Commission v. Germany, 2004 E.C.R. I-nyr (the ECJ held that

subsidies which have been granted under violation of EC law, have to be repaid, i.e., theunderlying contract has to be rescinded. In so far EC cartel law prevails over nationalcontract law).

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directly applicable. Therefore, transmission system operators shallreceive compensation for costs incurred as a result of hosting cross-border flows of electricity to their networks. Compensation paymentsmay be, if there is need, adjusted ex post. 84 Such a ruling, which is nowmandatory Community law, affects pacta sunt servanda, even if priceadjustments may be allowed in the national private law orders withingeneral principles of law.85

A similar concern arises in Regulation 1400/2000 on verticalagreements in the motor vehicle sector. The EC legislature is concernedwith guaranteeing that termination rights are not misused to restrictcompetition. That is why Article 3(5) allows the manufacturer to choosebetween a five-year contract, which can be terminated in case of non-prolongation six months in advance, and an unlimited contract with theright to terminate the contract at least two years in advance. While theserules might be read as considering the interests of the manufacturer,recital 9 makes it clear that the right to termination shall equally protectthe distributor or repairer:

In order to prevent a supplier from terminating an agreement becausea distributor or repairer engages in pro-competitive behavior, such asactive or passive sales to foreign consumers, multi-branding orsubcontracting of repair and maintenance services, every notice oftermination must clearly set out in writing the reasons which must beobjective and transparent. Furthermore, in order to strengthen theindependence of distributors and repairers from their suppliers,minimum periods of notice should be provided for the non-renewal ofagreements concluded for a limited duration and for the terminationof agreements of unlimited duration. 86

The overall policy behind these termination rules is the intention toguarantee competition. Contract law, in particular, long term agreementsshall not be used, neither from the supplier nor from the distributor orrepairer to hinder competition.

G. Effective Legal Protection

It is one characteristic of European law that the substantive lawcannot be separated from procedural law. EC law in general and contractlaw in particular is "rights" based. These rights, however, have to beenforced. The European Court of Justice has created a European legal

84. Art. 3(3) Commission Regulation No. 1228/2003 on Conditions for Access tothe Network for Cross-border Exchanges in Electricity, 2003 O.J. (L 176) 3.

85. See Reinhard Zimmermann & Simon Whittaker, Good Faith in EuropeanContract Law 532, 546 (Cambridge University Press 2000).

86. 2002 O.J. (L 203) 31.

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order which is based not only on the availability of rights to the benefitof consumers and business, but also on "effective" rights which need tobe enforceable. 87 The European Court of Justice has rooted the conceptof effective legal protection of rights in the Convention on HumanRights.

88

Article 153 of the Treaty of Rome may be interpreted as grantingconsumers a right to information and a right to set up a consumerorganization. These "rights," however, need to be given shape bysecondary Community law. They do not stand for themselves. Withoutany consumer contract law directives, the "rights" granted under Article153 remain meaningless.

Passing the set of consumer contract law directives in review, theset of unquestionable rights established de lege lata is impressive alreadyby now:

1. The right to transparency in contractual relations;

2. The right to information on the supplier, on the product/service andon the contract; and

3. The right to cancel (withdraw) the contract and/or to rescind acontract.

More challenging "rights" could easily be formulated. Is theresomething like a "right" to be offered a fair contract? The EuropeanCourt of Justice has proven to be innovative and that is why the list ofunquestionable rights should not be regarded as a closed shop.

Ubi ius ibi remedium,89 where there is a right, there must be aremedy, is the essence of the principle of effective judicial protection.The right to effective legal protection is recognized as a commonprinciple of the European legal order and deserves no particularcodification in secondary Community law, which is deeply rooted in theHuman Rights Convention. The consumer contract law directives reflectthe quest for effective legal protection to a different degree. In the mostadvanced version, Directive 2002/65/EC refers to sanctions that must be"deterrent, proportionate and dissuasive." This wording goes back to theEuropean Court of Justice' case law in anti-discrimination matters. Theimportance and the reach of the principle of effective legal protection inrelation to the unquestionable consumer rights is less clarified. Thus far,

87. See Reich, supra note 16, at 151, 162.88. Case 222/84 Johnston v. Chief Constable of the Royal Ulster Constabulary, 1986

E.C.J. 1651, 1682.89. Walter Van Gerven, Of Rights, Remedies and Procedures, 37 COMMON MKT. L.

REv. 501 (2000).

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the European Court of Justice has had few occasions to decide onconsumer contract law issues, but the few that have been decidedprovoked strong reaction. The most controversial judgments turn aroundthe reach of the right to withdrawal under the doorstep selling directive.90

The potential power of the right to information linked to theprinciple of effective legal protection is being discussed more and morein legal doctrine. 91 This is particularly important as the directives do notfurther specify what sort of remedies the Member States must be madeavailable. Most recently Thomas Wilhelmsson has developed thehypothesis that there is a general obligation under EC law to discloserelevant contractual information. If the supplier fails to comply withthese requirements, the consumer is said to invoke that the contract hasno binding effect. Such a reading would reach beyond existing rights toinformation as well as rights to cancel (withdraw) and rescind and grantthe consumer one overarching power to sanction a supplier who does notcomply with the law.

If information disclosure can and must be understood so as to serveboth ends of the transparency principle, contractual and competitivetransparency, then the potential of the emerging new paradigm comesclearer and clearer. Information to be made available to the consumer atthe pre-contractual, the contractual, or the post-contractual stage could beused by consumers to enhance competition not only before havingconcluded a contract but also-at least to some extent-after havingconcluded the contract.

The interrelationship between rights and remedies is less tight inEuropean business contract law, perhaps with the exception of Article 4of Directive 99/44/EC. There is uncertainty at both ends, at the level ofenforceable rights and at the level of effective legal protection.

The right to transparency, the right to information, and the right toterminate a contract exists-however, only in certain areas. These rightsare context related. Transparency is closest to becoming a legalprinciple. Information rights play an ever increasing role. It would,however, be too bold to start from a general right to information of"weaker" suppliers towards "stronger" suppliers. Information rightsexist only in particular areas of European business contract law, where

90. Case 481/99, Heininger v. Bayerische Hypo and Vereinsbank AG, 2001 E.C.R.1-9945; see also Case 350/03, Schulte 2005 E.C.R. 1-nyr at http://europa.eu.int.

91. See Thomas Wilhelmsson, Private Law Remedies against the Breach ofInformation Requirements of EC Law, in Reiner Schulze et. al., INFORMATIONSPFLICHTENUND VERTRAGSSCHLUSS IM ACQUIS COMMUNAUTAIRE 245-266 (2003); Hans-PeterSchwintowski, Informationspflichten und effet utile-A uf der Suche nach einem effektivenund effizienten europdischen Sanktionssysem, in Reiner Schulze et. al.,INFORMATIONSPFLICHTEN UND VERTRAGSSCHLUSS IM ACQUiS COMMUNAUTAIRE 267-290(2003).

2005)



privatization and liberalization has led to the establishment of newmarkets for products or services. While there is a heavy impact oncutting down long-term contracts mainly resulting from competition law,there are only a few remedies available that grant rights to terminatecontractual relations. The three rights exist, as in consumer contract law,but they are less stable and far away from becoming part of fully fledgedlegal principles.

One notable exception may be reported from Directive 99/44/EC onconsumer sales. Article 4 strengthens the position of the final selleragainst the resellers and the manufacturer. There is no agreement onwhat Article 4 exactly means and whether it compels Member States tointroduce mandatory recourse systems. 92 However, one thing is for sure;Article 4 implies that the final seller shall not bear the economic burdenalone resulting from a consumer who is marking use of his warrantyrights.

It is a common characteristic of all secondary Community law,which is meant to open up markets, that it addresses first and foremostthe Member States. Whether and to what extent these public law basedprivatization directives or regulations on block exemptions affect privatelaw relations is subject to a constant struggle between the Member Statesand the Commission, as well as between the Member States and theprivate parties. This is true for substantive law and it is all the more truewith regard to effective legal protection. Provisions in secondaryCommunity law, if there are any, are either directly aimed at protectingthe rights of private suppliers against regulatory actions of the publicauthorities in charge to implement the liberalization rules or are unclearwith regard to its potential effect on private law relations between privatesuppliers, i.e., companies. There is an overall contradiction between thewell-established overarching principle of effective legal protection andits concrete shaping in the directives or regulations at stakenotwithstanding the addressee.

Nevertheless, several references may be found. They can broadlybe classified into two different categories. Either there are provisions,like in Directives 2003/54/EC and 2003/55/EC on common rules for theinternal market in electricity and gas where it is not clear whether theyare addressed to the Member States, or there are no provisions at all as inthe regulations on block exemptions. Euro-speak hides the uncertainty

92. See Reich, supra note 16, at 160; see also G. Briiggemeier, Zur Reform desdeutschen Kaufrechts-Herausforderungen durch die EG-Verbrauchergiuterkaufreichtlinie, Juristenzeitung 529 (2000); Ulrich Magnus, DerRegressanspruch des Letztverkiiufers nach der Richtlinie uiber denVerbrauchersgiiterkauf, in Jurgen Basedow & Isaak Meier (eds.), Liber Amicorum KurtSiehr 431 (2000).

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on the potential addressee in the opaque concept of "sanctions," whichmust be "effective, proportionate and dissuasive." In so far as therespective provisions are more outspoken. Although the gas and theelectricity directives, Directives 2003/54 and 55/EC, do not really touchupon "sanctions" and "effective legal protection," there is a Europeancomplaint procedure93-the complementary Regulation 1228/2203 onconditions for access to the network for cross-border exchanges refers to"penalties" thereby reiterating the formula already known from Directive2002/65/EC.9 4 There is some stretching necessary to derive from theavailable rules on liberalized markets that the suppliers are given theright to effective legal protection, not only against national enforcementauthorities but against the contracting partner.

The different regulations on block exemptions do not contain ruleson effective legal protection. There is no such formula as in Directive2002/65/EC, not even a weaker or more hidden one. The reason mightbe found in the decentralized enforcement of competition law, whereMember States' authorities have a more important role to play now.This, however, does not fully explain why there is no reference toeffective legal protection at all. Maybe the reason lies in the impact ofthe regulations on private law relations. If the legislator would havepicked up "effective legal protection," it would have had to define therelationship between cartel and civil law, between the verticalagreements and the implementing private law arrangements. Thecomplete disregard for this makes it all the more important that theprinciple of effective legal protection applies notwithstanding itsadoption in the secondary Community law. Its reach has not yet beentested, but the ECJ has paved the way for further action.95

V. Stock Taking and Preliminary Conclusions

Some stock-taking might help to define where we are in Europeancontract law. It will have to be demonstrated that European consumercontract law is no longer law in the books-it is becoming more andmore law in action. The subjects dealt with seem to be of minorimportance, but its practical impact is much broader. This is particulartrue in countries which have decided to use consumer contract law as abasic pattern for laying down fundamental principles for nationalcontract law as such.

European consumer contract law and European business contract

93. See Directive 2003/54/EC, Art. 23(5).94. Directive 2003/54/EC, Art. 12 and Regulation 1228/2003, Art. 12.95. See Norbert Reich, The Courage-Doctrine: Encouraging or Discouraging

Compensation for Antitrust Injuries? 42 COMMON MKT. L. REV. 35 (2005).

20051



law is and might remain for a long while incrementalistic. Itsincrementalistic character shall not be underestimated, though. Thenew" law bears "new" elements and these elements will growirrespective and independent from all efforts to draft a coherent andsystematic Common Frame of Reference. The legislatory machinery willnot come to a halt unless the European integration process itself wouldbe in jeopardy. And the European Court of Justice will keep thedevelopment going. A constant stream of judgments directly or evenindirectly affecting European contract law pay tribute to the overall needto give full effect to Community (contract) law-as the Court has put it.

A. European Consumer Contract Law

The presentation of EC contract law may be blamed for being one-sided and for leaving aside counter-movements mainly in the Europeanconsumer contract law. Instead, I would like to present the hypothesisthat it remains for the Member States to maintain a concept of contractlaw which reaches beyond the emerging paradigm of competitivecontract law. That is why the Commission's intention to fully harmonizeconsumer contract law deserves utmost attention.

The analysis here presented is mainly based on the texts anddocuments of the European Community and the European Commission,as well as on legal doctrine. The European Court of Justice had littleopportunity so far to raise its voice on the numerous issues. Todetermine the state of the art, it seems indispensable to look into theseven elements of competitive contract law separately:

1. Instrumental-protective device: there is little or no case-law athand where the Court has explicitly shaped the borderline betweenconsumer law and consumer protection law or between theresponsible and the weak consumer. Ocano has already beenmentioned. Here, the Court seems willing to go beyond the image ofthe circumspect consumer which complies best with the concept ofcompetitive contract law.

2. Commercial communication and conclusion of contract: thejoining together of the two different fields of law might be the policyof the Commission as recognized in legal doctrine. However, case-law is largely missing. In Gabriel ,96 the Court gave an explanation ofwhen a contract is concluded as a precondition to allowing one partyto take legal action against the other for fulfillment of(complementary) obligations arising out this contract-conceming

96. Case C-96/00, Gabriel v. Schlank & Schick GmbH 2002 E.C.R./I-6367.

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gifts attached to a sale. Engler97 points into the same direction. Allin all, the Court seems willing to start from a broad understanding of"contract" which leaves room for the integration of advertising.

3. Contractual and competitive transparency: while the Court hasidentified the twofold dimension of the transparency principle, thereare no cases to be reported where the importance of the concept couldhave been tested. In Axa Royale,98 the Court showed preparedness tooblige the supplier to inform the consumer on his or her rights instandard business conditions. The decision seems to be a promisingstart for the hypothesis here defended-but no more than that.

4. Standard form contract via information duties: the key playerseems to be the legislator, i.e., the European Community and/or theEuropean Commission. The Commission demonstrates a growingpreparedness to advocate for the development of standard businessterms, however, not in B2C relations. Considerations to rely onstandardization institutions to play a key role within the newapproach type regulation failed.99

5. Fairness as market clearance: the challenge for the EU law will bethe notion of good faith and unfairness. So far, the Court had nooccasion to give its own understanding of what good faith in the EUcontext could mean. Oc~ano has been read as if the Court seemswilling to protect the weak consumer and to enter into a concept ofcontract law which reaches beyond competitive contract law. Itshould not, however, be forgotten that in Ocbano the Court had todecide on jurisdiction clauses which were prohibited in the indicativelist. So what the Court did was just market clearance. Thus, there isno contradiction between Oc~ano 100 and FreiburgerKommunalbauten,10 1 where the Court refrained from submittingstandard business terms to a general fairness test. This task shouldremain-according to the European Court of Justice-for the nationalcourts.

6. Post contractual cancellation rights: the key player certainly is theEuropean Court of Justice. In Dietzinger and Heininger1

03 the

97. Case C-27/02, Petra Engler v. Janus Versand GmbH, 2005 E.C.R. I-nyr.98. Case C-386/00, Axa Royale Beige SA v. Geores Ochoa und Stratrgie Finance

SPRL, 2002 E.C.R. 1-2209.99. In the context of regulating multi-level marketing there were efforts to involve

CEN and CENELEC.100. Combined cases C-281/98 to C-244/98, Ocrano Grupo Editorial und Salvat

Editores, 2000 E.C.R. 1-4941.101. Case C-237/02, Freiburger Kommunalbauten v. Hofstetter, 2004 E.C.R. I-nyr.102. Case 45/96, Bayerische Hypotheken and Wechselbank AG v. Dietzinger, 1998

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Court caught legal doctrine by surprise. In these two cases the Courthas given shape to the right to withdrawal. It remains to be seen,however, whether the European Court of Justice in Schulte10 4 andCrailsheimer Volksbank10 5 manages to withhold its strongcommitment to protect deceived consumers or whether it will stayaway and leave it for the Member States' courts to decide over theconcrete effects of the cases at issue. In terms of the concept ofcompetitive contract law, whether the Court is courageous enough togo beyond competitive contract law or whether the Court will limitEC law to set up a competitive environment which has to be fueledby the national courts.

7. Effective legal protection: The European Court of Justice has nothad a chance to raise its voice with regard to effective legalprotection in consumer affairs, perhaps with one promisingexception-Cofidis. 1

06

As European consumer contract law will develop, the balancebetween the EC concept of competitive contract law and Member States'social justice based concepts can only be withheld if the European legalorder provides leeway for the Member States. The Commission,however, seems willing to abolish minimum harmonization and to insertmaximum harmonization as the necessary counterpart to the optionalEuropean Civil Code. It remains to be seen what maximumharmonization really means. There is ample evidence that evenmaximum directives provide for escape rules or intermediary solutions.In essence a new regulatory effort would end up in a reversal of theburden of argumentation, i.e., contrary to minimum harmonization wherethe Commission has to prove that Member States legislation reachingbeyond the minimum is incompatible with EC law principles, now theMember States would have to justify if they deviate from maximumstandards. The policy shift from minimum to maximum harmonizationcould become the breakeven-point for European contract law theory inthat it will decide over the degree to which Member States may defend aconcept of consumer contract law reaching beyond competitiveconsumer contract law.

E.C.R. 1-1199.103. Case 481/99, Heininger v. Bayerische Hypo and Vereinsbank AG, 2001 E.C.R.

1-9945.104. Case 350/03, Schulte, 2005 E.C.R. 1-nyr.105. Case C-229/04, Crailsheimer v. Volksbank, pending case.106. Case C-473/00, Cofidis, 2002 E.C.R. 1-875.

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B. European Business Contract Law

The fields of European business contract law here presented havenot been the subject of litigation. A stock-taking of the Court's case-lawalong the line of the seven elements would make no sense.

The only area where the Court had the chance to raise its voice is inthe commercial agents directive. Quite a number of rulings provideevidence on the Court's preparedness to realize the protective-instrumental device inherent to the directive. It suffices to point toIngmar.107 Most of the directives analyzed have not yet led to case-law,maybe because the directives are simply to young. If there is case-law,such as Agostini, °8 it is focusing on the public law side of the respectiverulings. The same is true with regard to case-law dealing with the blockexemptions. The potential impact of the respective directives onEuropean private law and the potential resulting from the interplay ofrights and remedies needs to be discovered. The already existing case-law in the field of consumer contract law might one day or the otheraffect European business laws too, when it comes down to give shape tothe other six elements of competitive contract law.

Even if European business law still is in an infant stage, it should befully considered in the project of drafting a Common Frame of Referenceon European contract law. European business law, however, cannot onlybe found in directives where the contractual bias is evident. Europeanbusiness law may be discovered in rather strange areas, sometimes as amere by-product or in the disguise of secondary Community law whichdoes not indicate its private law impact. There is a simple lesson to learnfrom my survey. It is not helpful to put established national categoriesover the growing European business law. The European legislatorpursues an instrumental approach to each and every field of law. Privatelaw issues are covered either directly or indirectly-if there is need tofoster the completion of the Internal Market.

107. Case C-381/98, Ingmar Ltd. v. Eaton Leonard Technologies Inc., 2000 E.C.R. I-9305.

108. Combined cases C-34/95, C-35/95 and C-36/95, Konsumentenombudsmannen v.Agostini F6rlag and TV-Shop i Sverige, 1997 E.C.R. 1-3843.

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Transformation of Contract Law and CivilJustice in the New EU Member CountriesThe Example of the Baltic States, Hungaryand Poland

Prof. Dr. h.c. Norbert Reich*

I. Introduction

A. Functions of European Contract Law as the Theoretical StartingPoint

Instead of trying to analyze European private law under EUinfluence as a whole, I plan to limit myself in this paper to thetransformation of contract law. The rationale for this decision stemsfrom the fact that this discussion is the most advanced, and because it isan area where I can draw substantially from my research and teaching.My concept of European contract law is a functional one and has beendescribed elsewhere.'

I first want to distinguish between three main functions of modemEuropean contract law, namely autonomy, regulation, and information.

Under autonomy, I understand that the fundamental function of anycontract law in a market economy, like the one enshrined by the EC andEU Treaties, is primarily to make economic transactions by the subjectsof private law, natural persons, including consumers, business entities,and the state acting in its "dominium" function as secure and efficient as

* Ex-Rector, Riga Graduate School of Law; University of Bremen, Faculty of

Law.I express my thanks to my colleagues Prof. Dr. L. V6kds, Budapest, and Doz. Dr.

Ewa Baginska, Tortn, to my LL.M. students J. Petkevica/A. Svjatska, Riga and M.Petrevicius/T. Samulevicious, Vilnius for valuable help in preparing the national reportsof this paper. Errors and misunderstandings are of course my responsibility.

1. Norbert Reich, The Tripartite Function of Modern Contract Law in Europe:Enablement, Regulation, Information, in LE DROIT PRIVI SUISSE FACE Au DROITCOMMUNAUTAIRE EUROPtEN 145-172 (Franz Werro & Thomas Probst eds., 2004).



possible and to enforce them effectively under the rule of "pacta suntservanda," once the conditions of a "free meeting of the minds" are met.At the same time, I am convinced that even in a liberal economic andlegal context, autonomy is not without borders; therefore, its inherentrestrictions have to be made the subject of reflection, using the principleof "good faith."

The regulatory function of contract law may be subject to doubt bymany, most notably liberal authors, who may fear a return to socialism. Ido not share this skepticism, but I am convinced that this regulatoryfunction has always been present in contract law, sometimes hiddenunder general clauses such as good morals, public policy, and ordrepublic. Later, the regulatory function was more noticeable when theweaker party in labor and consumer transactions was deliberatelyprotected. National2 and European constitutional law also invadescontract law, under the theory of direct horizontal effect of fundamentalfreedoms and the theory of the non-discrimination principle.3 Regulationmay come from outside of contract law, such as when there arerestrictions on certain types of gambling contracts or lotteries.However, in recent times it has been introduced into contract law itself,as seen in consumer law becoming part of contract law. I will not gointo the details of this protracted discussion, but simply accept "consumerlaw as part of the European acquis which, therefore, has greatlycontributed to the transformation of contract. However, consumer lawmay inspire a completely new orientation of traditional civil lawprinciples.

Information is itself a somewhat vague concept, because it canalready be found in traditional rules on fraud and misrepresentation aspart of contract formation. These rules have been extensively studiedelsewhere and will not be subject to my reflections. I am concerned withmore subtle and differentiated rules of information provision where oneof the parties to the (future) contract, who either is in possession of thisinformation, or is required by law to provide this information, and theother party, who needs this information for rational decision-making.Again, consumer law is a good example of this new principle which,

2. Claus-Wilhelm Canaris, Wandlungen des Schuldvertragsrechts-Tendenzen zuseiner Materialisierung, 200, Archiv ffir die civilistische Praxis 273 (2000); OLIVERREMIEN, ZWINGENDES VERTRAGSRECHT UND GRUNDFREIHEITEN DES EG-VERTRAGS 156-

174 (2003).3. NORBERT REICH, UNDERSTANDING EU LAW--OBJECTIVES, PRINCIPLES, AND

METHODS OF COMMUNITY LAW 17-18 (2003) (referring to the case-law of the ECJ).4. See, e.g., Case C-275/92, HM Customs's and Excise Services v Schindler, 1994

E.C.R. 1-1039.5. P. Rott, German Sales Law two years after implementation of Dir. 1999/44/EC,

5 GERMAN L.J. 237 (2004).

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2005] TRANSFORMATION OF CONTRACT LAW AND CIVIL JUSTICE 589

while it departs from the classical rule of caveat emptor, is not limited to

this area. Transaction cost economics may help to define the conditions

and limits of this information paradigm in modem contract law.6 I am

interested not so much in looking at the sometimes the highly specificand technical rules of information provision, but rather at the emergence

of general principles and the rules necessary for its effective

enforcement 7 without endangering the pacta sunt servanda principle.

B. Enlargement Process

The European Union enlargement process is mainly concerned with

the new member countries coming from the former socialist block.

Consequently, I deliberately choose the Baltic States, particularly

Latvia.8 I also extended my research to Hungary and Poland, countries

which had enacted Civil Codes in 1959 and 1964 respectively, while still

under the socialist regime. These Civil Codes have been substantiallymodified, but not completely abolished after the demise of socialism,though new codifications are on the agenda. 9 I will explain the

differences in Hungary and Poland's contributions to modem contractlaw, as compared to the Baltic States.' 0

Following the 1990s, all of these countries became politically andlegally linked to the European acquis by the so-called EuropeAgreements," which exercised a deep influence on their contract law

before accession. This will be shown by looking at the transformation,not the implementation, of two important European directives, the so

called horizontal directives, namely 93/13/EEC of April 5, 1993, on

unfair terms in consumer contracts 2 and 99/44/EC of May 25, 1999, on

6. Stefan Grundmann, Information, Party Autonomy and Economic Agents in

European Contract Law, 39 CML REv 269 (2002); Viktor Vanberg and WolfgangKerber, Constitutional Aspects of Party Autonomy and Its Limits-The Perspective of

Constitutional Economics, in PARTY AUTONOMY AND THE ROLE OF INFORMATION IN THEINTERNAL MARKET, 49-79 (Stefan Grundmann et al. eds., 2001).

7. Thomas Wilhelmsson, Private Law Remedies Against the Breach of Information

Requirements of EC Law, in INFORMATIONSPFLICHTEN UND VERTRAGSSCHLUSS IM ACQUISCOMMUNAUTAIRE, 245-265 (Reiner Schulze et al. eds., 2002).

8. I have resided in Latvia from 2001-2004 and, therefore, had convenient access toinformation in that country

9. See Lajos Vkfs, Die Vorbereitungsarbeiten zu einem ungar. Zivilgesetzbuch, 13WIRO (2001) (discussing Hungary).

10. Again, I had to rely on secondary sources which, however, seem to be more

elaborate because these two countries, in contrast to the Baltic republics, which lost theirindependence in 1940 and again in 1944, never had to abandon their academic andprofessional contacts with the Western world, even during the most dire times ofsocialism.

11. See discussion infra Part II.D.12. 1993 O.J. (L 95) 29.



the sale of consumer goods and associated guarantees.13However, the enlargement process cannot be understood without at

least referring briefly to the prior legal system under socialist principlesand its subsequent transformation under the rules of a market economy.This was an autonomous legal revolution that those countries underscrutiny had undertaken before their membership in the EU was everdiscussed. This revolution has a truly constitutional character 14-theabolition of socialist elements of property, legal personality, andrestrictions of autonomy by a complex, and some say, corrupt licensingsystem, and its replacement with liberal principles of market economy.These principles cannot be studied here in great detail, but must beremembered as a precondition to the now existing contract law and itstripartite function described here.

C. "Relative Autonomy" of Contract Law and Civil Justice

My paper is a legal-theoretical analysis of the transformationprocess of contract law in the jurisdictions studied. Therefore, attentionwill be given to the integration of these modem functions of contract lawinto the relevant legal systems. It may be of surprise to many observersthat, despite similar political-economic principles, their implementationin the transformation-process has been very different. There is clearly noEuropean model of private, or even only of contract, law. While thereare indeed several models, traditions, and systems, they vary greatlyamong the new Member countries. Among Marxist authors, in theheyday of socialism, this was called the "relative autonomy of law.15

This model attempted to explain why, despite the social and politicalrevolution that had taken place in the countries studied here, the legalsystem still contained elements of traditionalism, particularly under theinfluence of the continental codification idea.

It can be shown that this ideological paradigm also worked inreverse. Even under principles of market economy, the old socialistcodes were not immediately replaced by new ones that reflect theimperatives of the transformation process. Sometimes only incrementalchanges were introduced into prior existing codes, but there is aninherent tendency to reshape legal reality by codification.

Within this systemic transformation process, another questionbecomes crucial: How to integrate specific protective laws into the moregeneral and, to some extent, abstract and formal codification principles?

13. 1999 O.J. (L 171) 12.14. CONSOLIDATING LEGAL REFORM IN CENTRAL AND EASTERN EUROPE: AN

ANTHOLOGY (Anders Fogelklou & Fredrik Sterzel eds., 2003).15. NORBERT REICH, SOZIALISMUS UNDZIVILRECHT 33-37 (1972).

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This is not specific to the contract law of the new member countries, butrather it has been debated with equal passion in old member countries,such as Germany, France, and Italy. 16 Labor law had been completelyseparated from general contract law and, will, therefore, not be studiedhere. With regard to consumer law, the debate is still open, and,therefore, we must study the different legal mechanisms of how tointegrate this new, still rather unsystematic area of law, into the moregeneral principles of contract law. This is not a merely theoreticaldebate. It also has great importance for the understanding andapplication of contract law itself: How much can specific private laws(Sonderprivatrechte) inspire or, for its critics, undermine general contractlaw? Should an integrationist or a separatist approach be used? Thedebate has not ended with some countries, like Germany in itsSchuldrechtsmodemisierungs-Gesetz (Act on Modernizing the GermanLaw of Obligations) of 2001, choosing an integrationist approach.17

The solutions found in the countries studied here are particularlyrelevant for the future of European contract law. Indeed, they form awide field of legal and systematic experimentation, the results of whichare emerging slowly. Can the solutions contribute to answering thecentral question of "codification of European contract law, namelywhether to systematize the existing acquis in consumer law, or to favoran integrationist approach?' 8

II. Contract Law: From Socialism to Market Economy

A. Overview

The Baltic countries on the one hand, and Poland and Hungary onthe other, had been forced into a socialist system of economy thatobviously had a decisive influence on their respective contract lawsystems and principles. Due to substantial political differences in therealization of this process, the impact on the legal system was quitedifferent and will be mentioned below. The politico-economic specifics,however, are quite similar, even if their intensity varied over time andplace.

16. See Lajos Wkds, Privatrecht des Verbraucherschutzes in der EU, in

EUROPAISCHES RECHT IM UNGARISCHEN PRIVAT-UND WIRTSCHAFTSRECHT, 19-24 (LajosVkis & Marian Paschke eds., 2004).

17. Hans-W. Micklitz, The New German Sales Law: Changing Patterns in the

Regulation of Product Quality, 25 J. CONSUMER POL'Y 379 (2002); Rott, supra note 5.18. But see AN ACADEMIC GREEN PAPER ON EUROPEAN CONTRACT LAW (Stefan

Grundermann & Jules Stuyck eds., 2002) (providing different answers to this question);see HANNES ROSLER, EUROPAISCHES KONSUMENTENVERTRAGSRECHT 250-288 (2004)(providing a codification of European consumer law).



The socialist economy, in its conflict with market economy, is basedon a completely different concept of property and the legal relationsemerging from it. We will refer to these concepts very briefly withoutintending to go into details or to repeat the century long debate on theirideological origin and truth.

Since, according to Marxist theory, the system of private property incapitalist economies allows an extortion of the fruits of production by theowner, a socialist system that aims to overcome this process of unjustdistribution of economic resources must, and will, at first radicallymodify the system of property ownership and power. Instead of aprevalence of private property over land and the means of production, amechanism of socialist property is introduced. In the Soviet model ofsocialism, the state becomes the main owner of property, which isallocated to economic unities (state enterprises, etc.) only formanagement, not for full use and disposal. Alongside this state property,certain forms of collective, cooperative or communal property areinstalled, the extent of which has varied greatly over time. There is noautonomous contract regime addressing the use and transfer of this typeof socialist property. It underlies state supervision and disposal. In theinterest of socialist economy, a certain transactional autonomy relating toproperty out of running production (Umlaufverm6gen), not to the stockof property itself, will be guaranteed to socialist entities. In this context,contract law plays a certain, yet limited role. There is a rule of pactasunt servanda, but it is subject to the imperatives of the socialisteconomy and, therefore, litigated before a special type of court, the so-called gosarbitrage. Contract law is not governed by the principle ofautonomy, but by discretionary regulation and a rather restrictivelicensing system, depending on the type of economic activity.19

Whether elements of private property, mainly of small businesses,are allowed parallel to socialist economic entities, was the subject tointense debate and conflict in the socialist economies prior to their owncomplete abolition. I will refer later to the substantial changes in thecountries studied.2° Also, with regard to foreign investment, differentrules were imposed, always subject to state control and revocation.

In striking contrast to private property, personal property wasallowed in all socialist countries and formed part of the civil law, but itwas restricted to items of individual and family use. It could not be usedto create private property. Contractual relations with the latter objectivewere regarded to be against the principle of socialist economy and

19. Reich, supra note 15, at 275-303 (referring to the Soviet debate); DIETRICHLOEBER, DER HOHEITLICH GESTALTETE VERTRAG, 1969.

20. See discussion infra Part II.B. and C.

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therefore void.Parallel to this concept of property law, the law of persons

systematically distinguished between those subjects who managed statesocialist property, namely in the first hand socialist production anddistribution entities, the so-called socialist enterprises, with a certainmargin of discretion concerning the retention of profits for investmentpurposes, and other entities like communes, branches of allowed politicalparties (mostly relating to the governing Communist parties and theirauxiliary organizations), labor unions, and recreation associations. Otherentities in the economic and social sphere were subject to a strictlicensing system.2 1 There was obviously no freedom of association, onlya gradual alleviation of existing restrictions subject to the discretion ofthe ruling party.

In this system of socialist property and legal persons, a ratherelaborate but to some extent irrelevant contract law system existed,playing a very limited role in legal practice. Between socialized entitiesthis was not conceptualized as an expression of party autonomy, but astransmission of the will of the ruling class, the Communist party and itsstate and societal organs, into the economy. Limited autonomy wasgranted only in transactions regarding personal property. Therefore,many transactions, even though quite common in socialist countries,were regarded as illegal and, therefore, became part of an ever growingblack market. This phenomenon explains to some extent the still existingpreference to criminal law over private law in legal practice, and thefundamental problems in the transformation process to civil justice.Contract law operated more in the shadow of the law, instead of being acentral part of the law itself as in market economies.

After the fall of socialism-a truly fundamental revolution-boththe system of socialist property and the system of licensing legal entitiesand specific types of contracts were abolished. At the same time, aprocess of privatization and restoration of formerly nationalized propertywas initiated.22

B. The Baltic Revolution

The formerly independent Baltic States first came under Sovietdominance in 1940, and again in 1944 after the retreat of the Germanoccupation forces. For these formerly independent countries, this

21. Bogudar Kordasiewicz & M. Wierzbowski, Polish Civil and Commercial Law,in LEGAL REFORM IN POST-COMMUNIST EUROPE: THE VIEW FROM WITHIN 184-188(Stanislaw Frankowski et al. eds., 1995).

22. Georg Brunner, Privatisierung in Osteuropa, 45 OSTEUROPARECHT 2 (1999)(giving a typology of privatisation).



implied a double revolution:

It was a political revolution since they became part of the SovietUnion as Soviet Republics which implied not only loss ofsovereignty, but also the loss of independent legislative functions. Incivil law matters, this led to a separation of the Soviet Union's abilityto lay down the fundamentals of civil law, and obligation of the

23republics to implement the fundamentals in separate codes.

It was an economic and social revolution which consisted of takingover the above mentioned principles concerning ownership, legalpersonality, and restricted autonomy.

It is obvious that this double revolution brought to a halt the alreadyadvanced codification work in the three republics.24

Latvia had enacted its Civil Code in 1937. This came into force in1939, but could not survive the Soviet takeover. It was immediatelyreplaced by the RSFSR Code of 1924 in 1940.

The Estonian codification was nearly finished before the Soviettakeover, but the draft Code of 1939 was never formally enacted. It

25did not play any role later.

The Lithuanian codification proved to be particularly difficult andprotracted because of the several civil law systems which existed inthis country, namely German law in the Klaipeda (Memel) region,Polish law (modeled after the Code Napol6on) in Wilna (Vilnius),(pre-revolutionary) Russian law in Kaunas, and Baltic law inPalanga. A merger of these different systems was not successfulbefore the war.E6 A draft Code was prepared in 1940, but was lostafter Soviet occupation.

27

After the Baltic Revolution in 1990-1991, which re-established the threeformerly independent republics as sovereign states 2s it was obvious thatthe law stemming from Soviet times had to be abolished and replaced bynew civil legislation. However, this process occurred differently in the

23. Reich, supra note 15, at 311-326.24. Loeber, Kontinuitdt im Zivilrecht nach Wiederherstellung staatlicher

Unabhingigkeit, in AUFBRUCH NACH EUROPA: 75 JAHRE MAX PLANCK INSTITUT FURPRIVATRECHT (Jurgen Basdow, et al. eds, 2001).

25. Id. at 948.26. Id. at 951.27. Ulrich W. Schulze, Das litauische Zivilrecht-Entwicklung, IPR und

Allgemeiner Teil WGO, 331, 332 (2001).28. Anatol Lieven, The Baltic Revolution: Estonia, Latvia, Lithuania, and the Path to

Independence 194 (1994).

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three Baltic States, which explains the divergence of civil jurisdictions inthis region:

Latvia decided to re-enact the Civil Code of 1937 in 1992-1993, andto amend it, mostly with regard to family and inheritance law. Adraft commercial code including the regulation of certain transactionswas prepared, but never enacted. The existing commercial law islimited to company law and to formal questions on registration andsimilar considerations. A separate Consumer Rights Act was enactedin 1999. It served to include the relevant EU consumer law directivesinto Latvian law, and has been amended with the coming of newdirectives. For example, it was amended in 2001 to implement theSales Directive 99/44. This dual system will be analyzed in moredetail below.

29

Estonia decided on a step-by-step codification of its civil law, startingwith the most urgent subject matters in property law.29 Finally, in2002, a comprehensive Code of Obligations was enacted whichclosely followed the Swiss and Dutch models, thereby including bothcommercial and consumer transactions. It is based on a comparativeapproach. 30 EU consumer directives have been included in the Code.This monist system is important from a legal-theoretical point ofview.

Lithuania decided to first desocialize the existing socialist civil lawand to prepare simultaneously a new comprehensive codificationwhich was enacted on July 18, 2000.31 This came into force on June1, 2001. Its contract law closely follows the UNIROIT-principles.32

Part Six contains the general principles, as well as detailed rules ofcontract law, including consumer contracts. A separate ConsumerProtection Law of 2000 exists separately, but the Code provisionswill take priority over special laws.33 This has led to a parallelregulation of consumer contracts, notably those determined by EC-directives, while conflicts are solved not by the lex specialis

29. B. Broka, Topical Issues of Protection of Consumer Rights, in PROBLEMS OF

TRANSFORMATION OF LAW IN CONNECTION WITH EUROPEAN INTEGRATION: CURRENTToPics IN LATVIAN LAW (U. LATVIA ed. 2002).

30. Martin Ka~rdi, Estonia and the New Civil Law, in REGIONAL PRIVATE LAWS ANDCODIFICATION IN EUROPE 253-255 (Hector MacQueen et al. eds., 2003); Jaan Paju, BasicFeatures of Estonia Property Law, ZEuP 87 (2000).

31. Kaerdi, supra note 30, at 257.32. Valentinas Mikelenas, Unification and Harmonisation of Law at the Turn of the

Millennium: The Lithuanian Experience, 5 UNIF. L. REV. 243-261 (2000); Schulze, supranote 27, at 339-353.

33. Mikelenas, supra note 32, at 252-254.34. CODE CIVIL [C. CIv.] art. 1.3(2) (Lith.)



principle, but by the lex superior rule.34

The different contract law systems in the Baltic States enable us to lookat contract regulation as an experimental field, and to draw someconclusions for the future European contract law model.

C. Hungary and Poland

The revolution which took place under Soviet dominance in thesecountries was a social and economic revolution, not so much a politicalone. It meant the takeover of the Soviet system of socialist property andlegal persons, but left formal jurisdiction with the constitutionalauthorities of these countries and gave them at least some margin ofrelative autonomy. The solutions and techniques used in contract laware, therefore, to some extent different than those used in the SovietUnion and its republics, such as the Baltic States before their revolutions.Both countries enacted their Civil Codes, namely Hungary in 1959 andPoland in 1964, which show some specific characteristics and which arestill in force today, even though the underlying economic system hasbeen substantially changed.

1. Hungary

The Hungarian Civil Code of 1959 deviates from the Soviet modelto the extent that it recognized private property rights, though to a limitedextent.35 The Code was elaborated in the reform period which wascrushed by Soviet occupation in 1956, and was adopted briefly after theexecution of the leader of the reform government, Imre Nagy. It allowedthe acquisition of ownership rights in land and anything else that couldbe taken into possession. Ownership rights could be acquired bytransfer, manufacture, separation, accretion, adverse possession, andinheritance. Ownership was defined in the traditional sense, but it didnot include using the property in a manner that would needlessly disturbothers or jeopardize another's property rights. Parallel to this limitedregime of private property, the Code recognized socialist property andprovided that it enjoyed increased legal protection. In contrast to theSoviet Union, it authorized private ownership of land, but did not stop orreverse collectivisation. 36 Full privatization only occurred after 1991.31

35. Schulze, supra note 27, at 340.36. Hugh Spall, The Development of Private Property Rights in Communist Hungary

and the Theory of Path Dependent Institutional Change, 1 GLOBAL JURIST TOPiCS (2004).37. Wkis, supra note 16, at 25.38. A. Gobert, Eigentumsordnung und Privatisierung in Ungarn, WIRO 361

(1997).

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The introduction of the New Economic Mechanism38 increased theneed for consumer protection. The first moderate rules were included inthe Civil Code in 1977 by Act IV, allowing challenge to unfair contractterms. However, in Section 209, the concept of general contract termswas not defined. This was done only in 1997.39

Later reform concentrated on enacting a separate ConsumerProtection Act. As a forerunner, the Act to Prohibit Unfair BusinessPractices was enacted in 1984. This was substantially amended by ActLXXXVI of 1990 on the Prohibition of Unfair Market Practices.4 °

Finally, in 1997, Act No. CLV on Consumer Protection was adopted andcame into force in 1998. It implemented several EC-Directives,including the one on consumer credit.41

Directive 93/13 was transformed into Act CXIX of 1997 andSections 205(3), (5), (6), Section 207(2), and Sections 209-209(d) of theCivil Code were amended.42 The Sales Directive 99/44 was introducedinto the Civil Code by Act XXXVI of 2002. 43

Hungary, therefore, can be said to have a modified uniform system.However, Hungary has a clear preference to put consumer protectiondirectives, as far as they relate to contract law, into the Code as generallegislation, and not into the special legislation on consumer protection,with the exception of consumer credit, or other separate acts, packageholidays for example.

Hungary is working on a new Civil Code which, according to one ofits proponents, will be a comprehensive legislation including commercialand consumer contracts."

2. Poland

Polish civil law was codified by the Civil Code of April 25, 1964,which is still in force today. Naturally, its provisions bear characteristicsof the prior political system, the most salient having been the excessivelyprivileged position of so-called social property.4 5 On the other hand, itssystem and rules are reminiscent of traditional continental codes.Socialist economy was ruled by decrees of the Council of Ministers whowas empowered to regulate commerce between the units of the socialized

39. Katalin Cseres, The Hungarian Cocktail of Competition Law and ConsumerProtection: Should it be Dissolved? 27 J. CONSUMER POL'Y 43, 46 (2004).

40. Wkds, supra note 16, at 27.41. Cseres, sup. a note 39, at 51.42. See the critique of V~kds at 9.43. See discussion infra Part III.B.5.44. See discussion infra Part IV.B.4.45. Vkis, supra note 9.46. Kordasiewicz et al., supra note 21, at 165.



economy.46 This was done to a great extent, but stayed completelyoutside civil law. Economic activities by private persons, including thefounding of legal persons, were based on a system of licenses.

Surprisingly, the imposition of martial law on Poland in 1981 led toa further liberalization of the economy and, therefore, a re-establishmentof civil law relations. The idea began to be advanced that socialism didnot rule out the adoption of certain elements of a market economy.47

State enterprises gained more autonomy, the ability to found smallbusinesses was made easier, and consumer protection inserted into theCode. In the Act of December 23, 1988, the state declared the freedomto engage in economic activity and to replace of the almost universalsystem of licensing.48

The political changes after the demise of the communist regimeintroduced traditional elements of property in the emerging, andsomewhat chaotic, market economy. The Civil Code underwent its firststage of reform on July 28, 1990.49 The concept of property was unifiedas a legal category. Privatization was started, but not completelyimplemented. Privatization through liquidation was used morefrequently than commercial privatization-a sign of the bad state of thePolish economy.5° Foreign investment was allowed nearly withoutrestriction.

Contractual autonomy was secured by abolishing the rules thatpertained to the socialized elements of the economy, such as theinfluence of the bureaucracy on engaging in, and shaping, contractualrelations, particularly by imposing general contract terms whose legalcharacter as norms or model contracts were in doubt. Article 353,paragraph 1 of the Civil Code restored the principle of freedom ofcontract, with the reservation that what is contracted cannot be contraryto the law or the principles of social coexistence.5 t A clear borderlinewas drawn between civil law transactions of a unilateral, a consumer,and a bilateral, a professional, character. The consumer transactionswere treated more rigorously against the professional and in favor of theconsumer.5 2 A separate consumer law emerged, but it was limited tosome particular rules concerning payment, exclusion clauses,prescription periods, modification of the amount under inflationary

47. C. CIv. art. 2 (Pol.)48. Kordasiewicz et al., supra note 21, at 166.49. E. Gralla, Polen-Gesetz iber die Wirtschaftstatigkeit, WIRO 215 (1992).50. M. Pazdan, Zur Anderung des polnischen Zivilrechts, 37 OSTEUROPARECHT 13

(1991).51. Gralla, supra note 49, at 182.52. See discussion infra Part III.B.5.53. Gralla, supra note 49, at 192.

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conditions, and clausula rebus sic stantibus. Here, the Council ofMinisters could intervene in order to restore, in the interests ofconsumers, contractual equality of the parties-a power used in practiceby Regulation of 15.7.1995, even though it reminded too much on theold system of contract regulation."

Later changes in consumer law, in particular those imposed by EUdirectives were included in the Civil Code. However, Directive 99/44was put into separate legislation.54 Therefore, Poland can be said to havemaintained a mixed system of contract law. There has been a debate ondrafting a new codification, but, to my knowledge, no concrete proposalshave been published.

D. The Importance of the Europe Agreements

When it became clear that the mentioned former socialistgovernments and (Soviet) republics would become members of the EU,they drafted association agreements (the Europe Agreements (EA)) toprepare them for membership and to guarantee the taking over of the so-called acquis communautaire. The Europe Agreements with Poland andHungary were completed in 1993/1994, 55 and with the Baltic States in1997/1998.56 They contain provisions about taking over the acquis, e.g.,in the area of financial services, consumer protection, product liability,and labor law. Obviously, these provisions were so vaguely drafted thatthey do not take direct effect, in contrast to the non-discrimination rulesof the EA,57 but put an obligation de moyen on the coming MemberStates which was supported by the so-called PHARE programmes andmonitored by the Commission in its accession progress reports. Mostcountries under scrutiny indeed tried to make their legislation conform asmuch as possible with EU law.58 This process terminated with accessionon May 1, 2004.

The following analysis will pay special attention to the integrationof consumer contract law into the existing civil legislation of thecountries under scrutiny. It will be placed into the general concepts ofcontract law which had been described as autonomy, regulation, and

54. Z. Jara, Polen-Verbraucherkauf, WIRO 258 (1996).55. See discussion infra Part IV.B.5.56. 1993 O.J. (L 348)(Pol.); 1993 O.J. (L 347)(Hung.).57. 1998 O.J. (L 26)(Lat.); 1998 0.1. (L 51)(Lith.); 1998 O.J. (L 68)(Est.).58. Norbert REICH, FREE MOVEMENT AND CITIZENSHIP IN THE NEW MEMBER

COUNTRIES. (RGSL, Working Paper No. 19).59. With regard to Poland, see J. Bober and N. Redeker, Polens Gesetzgebung im

Zuge der EG-Rechtsangleichung-Zur polnischen Debatte ziber Gesetzesfehler und dasGesetzgebungsverfahren. 48 OSTEUROPARECHT 83 (2002). With regard to Hungary, seeL. Vk~s, L. and M. Paschke, EUROPAISCHES RECHT IM UNGARISCHEN PRIVAT-UNDWIRTSCHAFTSRECHT, LIT MONSTER (Hrsg. 2004).



information. Particular attention will be paid to legal-systematicquestions which, even though striving to attain the same objectives, haveused surprisingly different legal techniques and means ofimplementation. We will classify the approaches as Monist approach(Estonia), Dualist approach (Latvia), Parallel approach (Lithuania),Modified monist approach (Hungary), and Mixed approach (Poland).

III. Autonomy

A. Recognition ofAutonomy in Civil Legislation of New Member States

Primary Community law presupposes the autonomy of economicactors, but does not in itself guarantee it expressly. 59 We will not go intodetails.

All Civil Codes or Laws of Obligation of the countries investigatedcontain a guarantee of freedom of contract, the classical one written intoArt. 1415 of the Latvian Civil Code of 1937: An impermissible orindecent action, the purpose of which is contrary to religion, laws ofmoral principles, or which is intended to circumvent the law, may not bethe subject matter of a lawful transaction; such transaction is void.

This is a somewhat old-fashioned recognition of the principle ofautonomy. The main problem is of course to define the limits of the lawwhich restricts such freedom; here the fundamental freedoms of EC-lawhave to be taken into account but will not be discussed in this context.60

A more modem definition can be found in Section 5 of the EstonianCode on Obligations and in Art. 6.158 of the Lithuanian Civil Code:

Section 5 of the Estonian Code:

Upon agreement between the parties to an obligation or contract, theparties may derogate from he provisions of this Act unless the Actexpressly provides or the nature of the provision indicates that thederogation from this Act is not permitted, or unless the derogation iscontrary to public order or good morals or violates the fundamentalrights of a person.

Article 6.158 (1) of the Lithuanian Civil Code: "The parties to acontract are entitled to conclude contracts freely and to engage ontheir own will into mutual rights and obligations, and to concludecontracts which are not foreseen by this law, provided it does notviolate the law....

60. Party Autonomy and the Role of Information in the Internal Market 135-150(Grundmann et al, eds. 2001).

61. Reich, supra note 15, at 255-260; Remien, supra note 2, at 178-192.

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The Estonian formula is particularly interesting and innovative as itlimits the fundamental freedom of contract to the equally "fundamentalrights of a person."

B. Good Faith and Pre-formulated Terms in (Consumer) Contracts

The following lines will be concerned with defining inherentlimitations to the broad autonomy principles. Under continental legaltradition, they have been spelled out by the good faith principle. Thishas played a role in the control of so-called standard form and otherunilaterally drafted contracts. Article 3 (1) of the EC Directive 93/13 onunfair contract terms has for the first time recognized this principle inCommunity law which thus has become part of acquis. It is howeversubject to a number of limitations, the most important one being itspersonal application to consumers as natural persons acting outside[their] trade, business or profession. It is also not applicable toindividually negotiated clauses and to clauses relating to the subject-matter and the price of the transaction, provided it is drafted in clearintelligible language. It will be seen whether a more general approachhas emerged in the Codes under investigation, which EU-law wouldallow under the minimum harmonization principle.

1. Estonia

Sections 6 and 7 of the Estonian Act on obligations recognizes theprinciples of good faith and reasonableness.

Good faith, supplemented by the new principle of reasonableness(likely borrowed from common law), is regarded as a guiding principleof the law of obligations, including the interpretation of contracts, section29(5) number 4. The relationship between the two principles is,however, not clear and has to be shaped by judicial interpretationbecause no precedent seem to exist.

Standard terms are regulated in sections 35-44 of the Act. Theirprominent position makes it clear that they are an inherent limitation ofautonomy. The Estonian legislator thereby implemented Directive93/13, but at the same time extended its sphere of application, thusshaping a general law of standard terms, including such traditional rules

on the irrelevance of surprising terms for the contents of the contract,section 37(3), the priority of individual agreements over standard terms,section 38, the battle of forms, section 40, and the contra proferentem-rule of interpretation, section 39(1).

Specific consumer protection provisions are included in the so-called black list of section 42(3) which widened the material sphere ofthe indicative list of Article 3(3) of Article 93/13; a total of thirty-seven



terms have been blacklisted. Section 44 provides that there is apresumption of unfairness of blacklisted clauses which have been enteredinto a contract for the purposes of economic or professional activities ofthe person. This is to some extent surprising, as the function of the blackrespectively grey list is completely different in consumer and in businesstransactions.61 Section 36(2) and (3) relate to the internationalapplication of the rules on standard terms which is not limited toconsumers residing in Estonia. With regard to business entities having• . . their economic or professional activities and their places of businessrelated to the contract or the performance thereof .. in Estonia, the rulesof the Act on standard terms apply even if another law is applicable tothe contract. Such broad application of Estonian law is contrary to thefreedom of choice rules of Article 3 of the Rome Convention of 1980.62

It also goes beyond Directive 93/13 because it is not limited to the law ofa non-member country. With EU membership, Estonia may have tochange its Code of obligations.

2. Latvia

Latvian law has enshrined the good faith principle in Article 1which reads laconically: Rights shall be exercised and duties performedin good faith.

The place of this norm in the overall structure of the Civil Code issaid to be an acknowledgement of its fundamental importance in theimplementation of civil law. In court practice, however, a narrow,subjective approach is preferred. The typical cases concern abus dedroit. Thus, Article 1 of the Civil Code is considered a legal tool thatcan be used, inter alia, to prevent the exercise of rights in conditionswhen the entitled person has no protected interests, for instance, whenthe rights are used to achieve unfair aims.63

The Latvian Civil Code recognizes the possibility for the parties to acontract to use standard form contracts. This follows from the generalcivil law provisions allowing the parties to choose freely the form inwhich to draw up a contract, and not binding them (except for caseswhen mandatory norms apply)64 to obeying any formalities or models. 65

In the dualist Latvian system of civil law, the Consumer RightsProtection Act of 1999 has implemented Directive 93/13, but has also

62. L. Vkds, supra note 16 at 38; N. Reich, supra note 1 at 145-172 (Werro et al.2004).

63. Reich, supra note 3, at 270.64. K. BALODIS, THE PRINCIPLE OF GOOD FAITH IN LATVIAN CIVIL LAW. LIKUMS UND

TIESIBAS-LAW AND JUSTICE 7 (Riga, English edition) (2003).65. See, e.g., C. Civ. arts. 1475, 1477, 1483, 1484, 1493 (Lat.).66. C. CIV. art. 1492 (Lat.).

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20051 TRANSFORMATION OF CONTRACT LAW AND CIVIL JUSTICE 603

introduced a number of particularities which may be seen as theemergence of new principles of contract law. Article 5 established the(normative) principle of legal equality between business and consumer,while Article 6(1) prohibits the use of terms as are in contradiction withthe principle of legal equality of the contracting parties, this law or otherregulatory enactments. This broad principle is not limited to standard orpre-formulated terms.6 6 Only Article 6(3) takes up the wording ofArticle 3(1) of Directive 93/13 and blacklists at the same time twelveclauses from the indicatory list of the Annex.

The most important has been the extension of the concept ofconsumer to business entities acting outside their market activities:"consumer-a natural or legal person who expresses a wish to purchase,purchase or might purchase goods or utilizes a service for a purposewhich is not directly related to his or her entrepreneurial activity.

This has led Latvian courts to apply the consumer protectionlegislation to the purchase of cleaning material by a business companybecause this was outside its normal activity, quite contrary to the relevantcase-law of the ECJ in Idealservice.67 This leads to particular problemsin the field of consumer credit where Section 8(3) of the CRP Act allowsthe consumer to perform repayment before the period specified in thecontract, without a compensation of the bank for lost profits even in caseof mortgage loans. It is not known whether this extension of consumerlaw to business activities has merely happened by accident or amisunderstanding of the relevant EC Directive, or whether it can been beseen as a deliberate extension of the good faith principle as in Estonianlaw. In this author's opinion, the Latvian CRP Act must be interpretedrestrictively so as to exclude genuine business entities not needingprotection by law from falling under the concept of consumer

As a clear violation of EC law, the Act does not provide for anautomatic nullity of unfair terms against the consumer, but only allowsthat the term shall be declared, upon request of the consumer, null andvoid, but the contract shall remain effective if it may continuefunctioning also after exclusion of the unfair provision. This seems torule out an ex officio disregard of the term by a court of law, as in theOctano-judgment of the ECJ.68

67. See the critique of similar formulations in the Hungarian law by Wkds, supranote 62.

68. Decision of the Riga regional court, No. C 33168300/504/02 against ECJ, CaseC-541/99, ECR 1-9049 (2000).

69. Cases C-240-244/98, ECR 1-4491 (2000).



3. Lithuania

Article 1.5 of the Civil Code entrenches general principles of goodfaith, reasonableness and justice. Courts in interpreting and applyinglegal norms must follow these principles. The same rules apply to thesituation when courts have discretion. Article 6.38 provides thatobligations must be exercised in good faith; Article 6.158 acknowledgesthat each party must act in accordance with good faith, and the partiesmay not exclude or limit this duty. Lithuanian courts have on repeatedoccasions confirmed these principles.

Article 6.185(1) of the Lithuanian Civil Code provides a definitionof standard terms-those contract provisions which are prepared inadvance for general and repeated use by one party and which are actuallyused without negotiation with the other party. This provision basicallyreiterates Article 2.19 of the UNIDROIT principles. 69 Article 6.185(2)entrenches that standard terms of a contract proposed by one party bindthe other party only if this party had due possibility of becomingacquainted with these standard terms. Accordingly, standard termscannot be used against the party if this party did not have a properpossibility to get familiar with the standard terms.

Article 6.186 introduces the definition of surprising terms. No termcontained in standard terms which is of such a character that the otherparty could not reasonably have expected it, is effective. A term is notsurprising if it has been expressly accepted by that party, when it wasduly disclosed. In determining whether a term is of such a characterregard should be had to its content, language and presentation. Again,the provision in question reiterates UNIDROIT principles.7 ° Article6.186(3) also provides that, when a contract was concluded on the basisof standard terms, the other party has the right to demand a terminationor an alteration of the contract where standard terms, even if they are notagainst the law, exclude or limit the legal liability of the party whichprepared standard terms, or violates principles of equality of the partiesand balance of their interests, or conflict with the principles ofreasonableness, good faith and fairness.

The currently effective Law on Consumer Protection and the CivilCode implemented the regulation of the consumer protection issues.Those laws have been harmonized with the main EU consumerprotection legislation, 71 including Directive 93/13. As regards their

70. For the importance of the Unidroit-principles, see V. Mikelenas, Unification andHarmonization of Law at the Turn of the Millenium: the Lithuanian Experience, 5UNIFORM LAW REVIEW 252-254 (2000).

71. C. Civ art 2.20 (Lith.).72. See Doing business in Lithuania, at http://www.infolex.lt/porta/mVI

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wording in respect to consumer protection, the Law on ConsumerProtection and the Civil Code are almost identical. At present courtsapplies both acts in parallel.

Article 6.188 of the Civil Code gives a right to the consumer to aska court to declare unfair terms void. On the other hand, the court candeclare contractual terms void ex officio when these terms are contrary tothe imperative/mandatory rules. The Civil Code does not expressly statewhether the consumer protection rules entrenched in Article 6.188 aremandatory. It is not clear whether the court is able to set aside the

application of the relevant term even where the consumer has not raisedthe fact that it is unfair.

The article also contains a non-exhaustive list of the terms whichare regarded as unfair.72 This list is a verbatim translation of the Annexto the Unfair Terms Directive, but makes them into a black-list.However, the unfairness of a contractual term is determined by the court,taking into account the nature of the goods or services for which thecontract was concluded and by referring, at the time of conclusion of thecontract, to all the circumstances attending the conclusion of the contractand to all the other terms of the contract or of another contract on whichit is dependent. Again, this provision is merely a word-for-wordimplementation of directive in question.

It is important to recognize that this list is not exhaustive-othercontractual terms may be regarded as unfair, provided that they arecontrary to the requirements of good faith and cause inequality of themutually enjoyable rights and obligations between the seller, serviceprovider and consumer.73

It should be pointed out that the contra proferentem rule applies notonly in litigations where one party is a consumer; where there is doubtabout the meaning or interpretation of the term of contract, it should beinterpreted to the prejudice of the party which tenders it and in favor ofthe party which accepted it.74

4. Hungary

As mentioned above, Act CXIXL of 1997 amended the Civil Codeto regulate general contract terms. These broad provisions are notlimited to consumer contracts and therefore have a wider application thanDirective 93/13, while others, particular about blacklisted clauses, arelimited to consumer contracts. The Hungarian legislator did not go as far

start.asp?act=dobiz (last visited Mar. 15, 2005).73. C. CIv. art. 6.188(2) (Lith.)74. C. Ctv. art. Art. 6.188(3) (Lith.).75. C. CIv. art. 6.193(4) (Lith.).



as the Estonian law.Section 209/C contains a definition of standard terms which insists

that the user (which, against former law, can also be a private party)determines the contract conditions in advance, unilaterally and for thepurpose of repeat contract conclusion without the other party being ableto participate. It does, however, not require that the clause has not beenindividually negotiated. 75 The burden of proof concerning (non-)participation in the formulation is imposed on the user, a rule to berestricted to consumer contracts.76 The insistence on participation andnot on negotiation may be due to a misunderstanding of the relevant EC-law provisions which at that time were not officially translated.

The concept of unfairness has been defined in Section 209/B(1) byreference to the concept of good faith under Directive 93/13, well knownin Hungarian law. In addition to the directive, it tries to give twoexamples of a one-sided and unjustified imposition of rights and duties,section 209/B(2), namely if the clause deviates substantially from centralprovisions of contract law and if it is incompatible with the subjectmatter or provisions of the contract. Vrkds criticizes that this way thenon-mandatory provisions of the Civil Code become mandatory.77

The main critique against the Hungarian regulation is concernedwith the widening of the sphere of application of Directive 93/13(respectively its Hungarian implementation) also to B2B contracts. 78 Ifon the other hand one starts from the assumption-which is the basis ofthis paper-that the good faith principle is also rooted in B2B contracts,even though in a somewhat less intensive way, these contracts should notbe excluded from the unfairness control of pre-formulated clauses. Theyardstick may be a different and less intrusive one, and the mixture of theHungarian legislator between normal and consumer contracts may not bea very promising and successful approach.

5. Poland

As mentioned above, the re-establishment of market economy inPoland and the abolition of special relations between socialist enterprisesled to the recognition of the equality of all civil law subjects, thusrejecting the privileged position of socialist enterprises, and ofcontractual freedom. 79 According to Article 3531 of the civil Code of

76. Vrkds, supra note 16, at 26, n. 32-33.77. Id. at 30.78. Id. at. 28, 34.79. Id. at 34-40.80. J. Poczobut, Zur Reform des polnisches Zivilrechts (mit einigen

rechtsvergleichenden Bemerkungen), 7 ZEuP 82 (1999).

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1964 as amended in 1990, the parties are free to determine their legalrelationship according to their free will, provided that its contents andobjectives do not contradict the nature of the legal relation, the law andthe principles of social coexistence. The good faith principle is indirectlyrecognized in Article 7 of the Civil Code: if the law determines certainlegal consequences by referring to good or bad faith, there is apresumption of good faith.

By Act of 2.3.2000, in force since July 1, 2000, Article 384 et seq.of the Civil Code of 1964 were amended to modernize the existing lawon standard contract clauses and to introduce specific rules of consumerprotection under the impact of EC Directive 93/13 and the EuropeAgreement with Poland. At the same time they wanted to eliminate theold concept of (qualified) contract terms which had a quasi-normativepower and were imposed by state authorities upon business entities,whether privatized or not.80

Article 3853 contains a grey list of twenty-three clauses which incases of doubt are regarded as wrongful provisions. Article 385 § 2 ofthe Code as amended mentions the transparency principle of Article 4(2)of the Directive, thus respecting to ECJ-case law.8'

The actual practice with regard to the new provisions is not knownto me. The structure of the new law is somewhat complicated becausegeneral questions of the law of standard contract terms are mixed withspecific rules on consumer protection, taking different concepts asstarting points. There are no rules concerning surprising clauses. Thecontra proferentem-rule is only applied to consumer contracts, not as ageneral principle of the interpretation of standard forms.

IV. Regulation

A. Generalities-The Importance of Directive 99/44for GeneralContract Law

The following section will be devoted to analyzing the importanceof Directive 99/44 for the contract law of the countries studied here. It ismeant to be a consumer protection directive, as clearly stated already inparagraph 1 of its recitals. It therefore is limited to consumer sales in apersonal and substantive sense:

81. Surdek/Binieda (2003) at 470-473; STEPHAN HEIDENHAIN, DASVERBRAUCHERSCHUTZRECHT IN POLEN UND DER EUROPMISCHEN UNION 78,250 (2001).

82. Case C-144/99, Commission v. Netherlands ECR 1-3541 (2001). See alsoReich, supra note 3 at 280; L. Vkds, supra note 62, at 33 (with regard to HungarianLaw).



Personal insofar as only consumers as natural persons acting forpurposes which are not related to (their) trade, business or professioncome into its ambit of protection.

Substantive insofar as only consumer goods as tangible movablegoods are covered with some exceptions, not immovable property,rights and obligations.

With this limitation, the provisions of the Directive respectively MemberState law implementing it are mandatory and cannot be waived, Article7(1).

But the importance of the directive goes far beyond this narrowregulatory approach in respect to consumer protection.

First, it extends regulation beyond mere consumer protectionbecause in Article 4 it provides for a right of redress of the seller againsthis seller, manufacturer, or importer of the product. It is not clear howfar this right is mandatory; there is no similar provision to Article 7(1) inthe Directive, and paragraph 9 of the recitals is rather ambiguous on thispoint. On the one hand, it gives the last seller a right to pursue remediesagainst the producer, the previous seller in the same chain of contracts orany other intermediary, unless he has renounced that entitlement. At thesame time, the principle for freedom of contract is said to besafeguarded, and it is left to national law to determine against whom andhow the seller may pursue such remedies, thereby implicitly stating thatthe seller must be able as such to pursue these remedies, and that theycannot be completely contracted out of. This ambiguity must howeverbe resolved by national law. This paper will not go into the discussion ofsuch a highly controversial point,82 but will simply take a look at thesolutions found by the Member States under scrutiny.

Second, the concepts used in the directive itself, especially onconformity stemming from the United Nations Sales Convention, have amuch broader sphere of application than consumer sales; they may implya general paradigm change in sales and even more in contract law. It issuggested that dualist systems of contract law will have more problemswith implementing the Directive than monist ones, and that countrieswhich decide a new codification of contract law will be better off thanthose that have to integrate the imperatives of the Directive into their pre-existing contract law.

Third, the question of remedies has been intensely debated andresolved in a rather detailed though not complete way. This responds to

83. See NORBERT REICH AND H.W. MICKLITZ, EUROPAISCHES VERBRAUCHERRECHT(4. A.2003).

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the general principle of Community law of ubi ius ibi remedium.83 It,however, does not make reference to compensation but leaves this toMember States under the minimum harmonization principle.

B. The Importance of Directive 99/44 on Contract Law within theEnlargement Process

1. Estonia

The Estonian Code of Obligations regulates sales law in sections208-237. It uses Directive 99/44 to modernize sales law in general,while section 237(1) provides that in consumer sales the legal remediesprovided under the law cannot be escaped. The same is true if a contractis entered into as a result of a public tender, advertising or other similareconomic activities taking place in Estonia... with a purchaser residingin Estonia regardless of the country whose law is applied to the contract.

The remedies of the buyer are codified in sections 220-225 and arenearly identical for B2B and B2C contracts. Section 228 contains aprovision on redress of a seller in consumer sales, but only in cases of astatement by the producer, previous seller or other retailer with respect toparticular characteristics of the thing. This is somewhat narrower thanArticle 4, because there redress can be sought because of a lack ofconformity resulting from an act or omission by the producer.... Theserules are non-mandatory, but may be caught by the principles of unfairterm legislation.84

Section 230(1) contains detailed rules on warranties. Thetransparency requirements of the directive are correctly implemented. Inaddition to Community law, there are certain presumptions concerningthe content of the warranty.

2. Latvia

In the dualist system of Latvia, the Civil Code of 1937 did notregulate the remedies for non-conformity in sales contracts as such, butestablished general rules on liability in so-called alienation contractsagainst consideration (entgeltlicher Veriujferungsvertrag), e.g., sales,barter, pledge. The alienator has to guarantee that the "property has nohidden defects and possesses all the good qualities which are warrantedor presumed.85 Article 1612 et seq. regulate in detail the duties of the

84. Walter Van Gerven, Of Rights, Remedies, and Procedures, 37 CoMM. MKT. L.REV. 501 (2000). See also Reich, supra note 3, at 227-23 1.

85. See discussion infra Part II.B.1.86. C. Civ. art. 1593 (Lat.).



alienator and the remedies of the acquirer which are, as in traditionalRoman systems, limited to rescission and reduction of the price; thelimitation period for the first is six months, for the second one year.86

Under existing Latvian law, Directive 99/44 could not be simplyimplanted into the Civil Code because it starts from a completelydifferent concept. Therefore, an amendment of the Consumer RightsProtection Act of 1999 (CRP Act) was adopted on Nov 22, 2001. Thisenactment reinforced the dualist system of Latvia law.

The CRP Act lists all criteria of goods non-conforming with thecontract by reiterating in the negative the criteria of goods presumed tobe in conformity with the contract mentioned in the Sales Directive,8 7

adding several other grounds, such as counterfeit goods, inappropriatepackaging, etc.

The CPR Act restates the four means of redress available to theconsumer precisely as defined in the Sales Directive.8 8 The peculiarityof Latvian implementation is that when non-conformity is claimed withina period of six months after delivery, the consumer has the free choice ofthe four remedies as provided for by the Sales Directive-a questionableimplementation not taking into account the detailed two-step procedureof enforcing claims which the directive has introduced after long debatesin Parliament and Council, suggesting a complete harmonization of thehierarchy of remedies (with the exception of compensation).8 9

Six months after delivery, the priority is given to repair orreplacement. If these means are not possible or cause considerableinconvenience to the consumer, the contract can be rescinded, but thepayment made to the consumer should take into consideration naturaldepreciation of goods. There are no such provisions in the SalesDirective. It seems justified to take the interests of the sellers intoconsideration here, as Latvian law does.

Another interesting point is that under Latvian law a guarantee is anundertaking of a seller going beyond (that is, granting more than) theprotection of the CRP Act.90 If the guarantee does not specify somethingmore, it cannot be called "guarantee." The Sales Directive does notdefine the term guarantee and does not require such an extended

87. C. Civ art. 1633, 1634 (Lat.).88. Consumer Rights Protection Act (CRP Act), 14(1) (2001) (transposing Article 2

(2) of the Sales Directive.).89. CRP Act, § 28(1) (2001) (Lat.) (transposing Recital 10 of the Sales Directive.).90. Peter Rott, Minimum Harmonization for the Completion of the Internal Market?

The Example of Consumer Sales Law, 40 COMM. MKT. L. REv. 1107, 1129 (2003).Norbert Reich, Stichtag 1. Mai 2004: Eine erweiterte Union-auch ein erweiterteseuropaisches Zivilrecht? Zur Rolle der baltischen Privatrechtssysteme in der EU. 12ZEuP 2004 at 499.

91. CRP Act, § 16 (2001) (Lat.).

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definition.According to Article 33 of the CRP Act, the seller is entitled to

pursue remedies against the person liable in the contractual chain. Itseems that no private arrangement can divert.the. liability of the finalseller. This right of subrogation has been included in the CPR to makeenforcement of consumer claims effective, and it therefore cannot becontracted out. The Latvian legislator has not changed the provisions ofthe Civil Code even though they may be based on a different theory ofliability and have shorter prescription periods.

The Latvian implementation, though not formally integrated into theold Civil Code of 1937, will impose changes on general civil law beyondconsumer protection in three directions:

The broad consumer concept (supra III.B.2) means that also certainB2B transactions will be caught by the CPR Act and will take priorityover the rules of the Civil Code.

Questions of redress of the seller against his suppliers will be solvedby subrogation, e.g., by applying the norms of the CPA withoutallowing the defences under general civil law.

Most surprisingly, the rules on conformity have been extended also tocover services, per Article 29 of the CPR Act.

The CPR Act therefore may be starting point for a substantial change ofthe existing Latvian contract law as such. It is not known how thisemergence of a new contract law will be handled by the Latvianlegislator and Latvian courts.

3. Lithuania

All questions of contract law are dealt in the sixth book of the Code,which first deals with the law of obligations; then there is a chapter onthe law of contracts; the next deals with obligations arising on the basisof other grounds; and then the Code contains provisions concerningparticular contracts. Sales contracts are dealt with in the first place.Consumer sales contracts are regulated also by the Law on ConsumerProtection 9 (CPL), which is only applicable in the cases mentionedabove.

The twenty-third section of the fourth part of the sixth book of theCode contains provisions about sales contracts. Paragraph 4 contains

92. The Law on Consumer Protection of the Republic of Lithuania, No. 1-657(Amended Sept. 19, 2000), at http://www3.lrs.lt/c-bin/eng/preps2?Condition 1= 1 14309&Condition2= (last visited Feb. 17, 2005).



special norms on consumer sales contracts.The rights of the consumer in case he acquired non-conforming

goods contained in Article 3 of the Sales Directive are transposed inArticle 6.363(4) of the Code, namely the right to have the goods broughtin conformity free of charge by replacement (Article 6.363(4)(1) of theCode) or repair (Article 6.363(4)(3) of the Code), also the right to havean appropriate reduction in the price (Article 6.363(4)(2) of the Code)and the right to rescind the contract (Article 6.363(8) of the Code). Whatis different from the Directive is the way of application of those rights-the Directive provides in Article 3(5), that consumer is entitled toreduction of the price or to have the contract rescinded, if he is notentitled to other rights, mentioned above, or in case of other conditions,specified in the Sales Directive. The Code, however, provides in Article6.363(4) that the consumer has a discretion to choose one of thoserights-a problematic provision similar to the one under Latvian law.92

Article 4 of Directive 99/44 provides for a right of redress. Thisright is indirectly enshrined in the Article 6.280 of the Code. This part ofthe Code deals with questions of the law of torts, which is part of thechapter about obligations arising on the basis of grounds other thancontracts. According to Article 6.280(1), the person who has reimbursedthe damage caused to another person has the right of redress equal toreimbursement, if the law does not provide for a different amount. TheLithuanian rules on subrogation seem to be similar to those of Latvianlaw93 and make redress mandatory.

Article 6 of the Sales Directive provides some importantrequirements for the content of the guarantee. Special provisions of theCode on consumer sales contracts, namely Article 6.353(1) establish theseller's obligation to provide the necessary information about goods tothe consumer, including terms of the guarantee. The Code regulates theterm of the guarantee in Article 6.335-it states that the term of theguarantee begins to count from the moment of handover of goods, unlessthe parties agree otherwise. The Code also covers other matters, none ofwhich relate to the contents of the guarantee itself.

4. Hungary

If we follow the detailed account of Vkas94 concerningimplementation of Directive 99/44 into Hungarian private law, there wasagreement to amend the respective provisions of the Civil Code of 1959,and not to create a special law on consumer sales as in Latvia and

93. See discussion supra Part IV.B.2.94. Id.95. L. Vrkds , supra note 16.

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Poland. One of the reasons had been the already modem concept ofliability of the seller (and similar contracts) based on the agreement; theconcept used was defective performance which is identical with lack ofconformity in the sense of Article 2 of the Directive. Some provisions ofthe implementing legislation became less consumer-friendly. In the oldHungarian Civil Code, only positive knowledge of non-conformityexcluded liability of the seller, while the Directive in Article 2(3) extendsit to the case that the consumer could not reasonably be unaware of thelack of conformity which was taken over by section 305/A(2) of the CivilCode.

The remedies of Article 3 of the Directive were transposed intoHungarian law and extended by making use of the former case law of theHungarian Supreme Court, e.g., on giving the consumer a right ofretention of the purchase price in case of non-conformity. There is also aright to self-repair respectively to the reimbursement of such costs, if theseller does not finalize the repair within an adequate time in section306(3). 95 Similar to prior law, the consumer must inform the seller oflack of conformity within two months, according to Article 5(2) ofDirective 99/44. This period may be extended. Non-information doesnot lead to a loss of remedies, but only to an obligation to pay to theseller the additional costs caused by the delay, according to section 307Civil Code. The general time limit for liability of the seller has beenextended to two years, but only for consumer sales.

The seller has a right of redress against his prior seller for the costsof fulfilling the claims of the consumer, provided that the latter informedthe seller about the lack of conformity. The time limit for redress is sixtydays after fulfilling the consumer's claims, in total not more than fiveyears. This right of redress can be waived in part or completely96-asomewhat problematic solution.

The Hungarian legislator also made clear that the contractualguarantee does not modify the rights of the consumer under law insection 248 of the Civil Code. The guarantee is not a mandatoryinstrument. The rights under the guarantee have to be exercised similarto the remedies for non-conformity. The transparency and form-requirements of the guarantee have been transposed into law, but theirlack does not make the guarantee unenforceable.

VekUs 97 summarizes the Hungarian transposition of Directive 99/44as follows:

96. Id. at 65.97. Id. at 67, referring to the freedom of contract principles which, however, is

applicable here only to a limited extent.98. Id. at 68



The transposition must be said to be a success. It is practically in fullconformity with the directive, except for some minor errors. It mustbe particularly welcomed that the new rules have been organicallyintegrated into the existing provisions of the Civil Code even wherethey go beyond the directive, and that the few special rules onconsumer sales have been separated. In my opinion, the maintenanceof non-mandatory rules including the right of redress must be clearlysupported.

5. Poland

Poland has implemented Directive 99/44 not in amending its CivilCode of 1964, but by special Act of July 27, 2002, effective as fromJanuary 1, 2003. At the same time it tried to create a comprehensiveconsumer sales legislation, going beyond Directive 99/44.98

Article 1 defines the sphere of application similar to the Directive.Article 4-7 contain the transposition of Article 2 of the directive. Theprovision of Article 2(4), concerning the cases where a seller is notbound by statements of the producer or his representative, has been takenover into Polish law, with the exception of the alternative that "at thetime of conclusion of the contract the statement had been corrected.

Article 8 of the Polish Act transposes Article 3 of Directive 99/44regarding the rights of the consumer. The definition "free of charge inArticle 3(4) is extended to also cover costs borne by the buyer,"particularly costs of disassembly, delivery, labor, materials, as well ascosts of another installation by other means. The Act thereforeconfirmed the existence of a far-reaching right to self-help of theconsumer, similar to Hungarian law. The limits of such self-help are notdefined. The seller must react to a demand of repair or replacementwithin fourteen days; in not doing so, the demand shall be deemedjustified.

Article 10 is concerned with time limits and prescription within themargins allowed by the directive. Article 9 imposes a two-monthnotification period. Article 11 makes the rights of the consumermandatory and tries to avoid circumvention by a buyer's statement thathe had the knowledge of the inconsistency of the consumer good with theagreement, or by opting to apply a foreign law.

Article 13 contains detailed rules on the warranty with regard to itscontents, transparency, address of the warrantor or his representative inPoland. It must be formulated in Polish. A violation of theserequirements does not affect the validity of the warranty, as provided in

99. See discussion infra Part V.B.5 for a discussion of the information requirementsof the Act.

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Article 6(5) of the directive.The Act does not contain any rule with regard to the right of redress.

This is left to the general provisions of the Polish Civil Code which meanthat they can be contracted out according to the general rules of civil law.It is not sure how far protection under standard term legislation9 9 isavailable in this context.

V. Information

A. Generalities-EC Law as the Starting Point

Autonomy requires actors who are informed about their rights andduties. In traditional legal concepts, it is usually left to the actorsthemselves to acquire the necessary information that makes theirfreedom of action possible and effective. Caveat emptor as the generalrule of autonomous transactions in contract law includes responsibility toinform oneself. Autonomy is thus reduced to a formal concept based onthe fiction that actors either have or can get the information needed tomake decisions. Eventually they will have to buy and pay for it if theydo not want to rely on information conveyed through advertising. Amarket exists for information supplementing the market for goods andservices.

Community law as a basically liberal order also started from thisprinciple. However, it has increasingly recognized that autonomy in asubstantive sense must be supplemented by adequate informationprovisions. In the meantime, information requirements vis-A-vis citizenshave become part of primary Community law itself, especially in Article153(1) of the EC. This contains the consumer's right to information,which of course also includes (pre-)contractual information, even thoughit must be made concrete by specific directives. The objective ofCommunity law, as a recent study by R6sler stated, is a timely, specificand complete disclosure of relevant information to the consumer as thestructurally weaker party to a contract. 100 I will not go into details of theinformation paradigm in Community law which can be found on threelevels:

The interdiction of deceptive and misleading information-a ruleparticularly applicable to marketing practices;

100. See discussion supra Part III.B.5.101. H. ROSLER, EUROPAiSCHES KONSUMENTENVERTRAGSRECHT, 148, 168 (2004).



The transparency principle in pre-contractual negotiations;'0 1

Specific information obligations in consumer directives.102

B. Information Requirements in Contract Legislation of New MemberStates

1. Estonia

The Estonian Code of Obligations contains a general informationrule in case of pre-contractual negotiations. Section 15(2) reads:

Persons who engage in pre-contractual negotiations or otherpreparations for entering into a contract shall inform the other partyof all circumstances with regard to which the other party has, basedon the purpose of the contract, an identifiable essential interest.There is no obligation to inform the other party of such circumstancesof which the other party could not reasonably be expected to beinformed.

Obviously, these broad obligations must be made concrete by case-law which to our knowledge does not yet exist. It is worth mentioningthat the information obligation is not limited to consumer contracts, eventhough it will have its main field of application there.

2. Latvia

The limited application of a general duty to act in good faithunderpins also the legal regulation of pre-contractual duties oninformation in Latvian civil legislation. The Civil Code of 1937regulates pre-contractual duties only in general terms. Thus, the scope ofculpa in contrahendo provision as a basis for pre-contractual informationin the Latvian Civil Code is quite narrow, generally covering onlyintentional misconduct and not negligence. In the light of this, it hasbeen suggested in Latvian legal literature that amendments need to bemade in the law, requiring the pre-contractual negotiations to beconducted in good faith, with an intention to enter into contractualrelations. 103

The transparency principle of pre-formulated terms regarding theprice or the subject matter of a contract (Article 4 paragraph 2 ofDirective 93/13) seems to be omitted and not transposed into the CRP

102. Case C-144/99, Commission v. Netherlands, E.C.R. 1-3541 (2001).103. See Reich, supra note 3, at 278-286.104. K. Balodis, supra note 64, at 2-9.

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Act at all. On the hand, the rules on the transparency of a guarantee insales contracts have been introduced into the Latvian CPR Act. 10 4

Latvia has specific legislation concerning the use of the Latvianlanguage as the official state language (against Russian which used to bethe second or even first language during Soviet times). It is mostlyconcerned with state activities, but there are some spill-over effects toprivate law relations which are justified, according to Section 2, byconcerns of public security, public health, consumer protection and thelike. Therefore, Section 9 reads:

Contracts of natural and legal persons regarding provision of medicaltreatment, health care, public safety and other public services in theterritory of Latvia shall be entered into the official language. If acontract is in a foreign language, a translation into the officiallanguage shall be attached thereto.

It is somewhat surprising to justify this strict rule by concerns ofconsumer protection, because the consumer to be protected may notknow Latvian at all. It also contains a general exception to rules on theuse of language in private international law-this would be either the lawapplicable to the contract, or the language in which the partiesnegotiated. It is also not clear what the consequences of disregard are:will it void the entire contract if drafted in a foreign language without atranslation attached to it? This seems to be out of line with the principleof proportionality which the law itself mentions in Section 2(2).

3. Lithuania

The Lithuanian Civil Code expressly obliges parties to reveal toeach other information essential to conclude a contract.'0 5 Furthermore,where information is given as confidential by one party in the course ofnegotiations, the other party is under a duty not to disclose thatinformation or to use it improperly for its own purposes, whether or not acontract is subsequently concluded. 0 6 A party which breaks thisobligation is liable for the losses caused to the other party.'0 7 Article6.164(2) provides that minimum losses in such situations are equal to thebenefit received by the other party.

Under both the Law on Consumer Protection and the Civil Code,consumers are entitled to receive in the Lithuanian language (exceptwhen the use of the goods and services is traditionally known) correct,

105. See discussion supra Part IV.B.2.106. C. Civ. art. 6.163(4) (Lith.).107. C.Civ. art. 6.164(1) (Lith.).108. C. Civ. art. 6.164(1) (Lith.).



complete and transparent information concerning the terms under whichgoods and services are purchased, their quality, directions for use, adescription of warranties and exchange period, procedures fortermination of contracts for goods or services, and other relevantinformation which is significant to consumers. 0 8

If the consumer was not provided with relevant information he hasthe right to claim damages, or to unilaterally terminate the contract,reclaim sums paid by him, and claim other damages if the contract wasconcluded. 09 Moreover, if the seller fails to provide necessaryinformation, he is responsible for the defects of the goods, whichoccurred after the goods were delivered to the consumer, when theconsumer proves that the defect occurred because of the lack ofinformation. 110

4. Hungary

The Hungarian Civil Code contains a general information obligationin section 205(4) which reads: "The parties have to cooperate whenconcluding a contract and take care of the justified interests of the otherside." Before concluding the contract, they have to inform each otherabout the relevant essential circumstances concerning the contract to beconcluded.

This rule has been extensively used by the Hungarian courts toimpose information requirements, particularly in asymmetricalinformation relations. It is supplemented by specific informationobligations which are derived from transposing EC directives, namely onunfair contract terms and on consumer sales.

The Consumer Protection Act of 1997 gives the consumer twoimportant information rights:

information with regard to the product or service purchased

information about remedies-certainly an innovative provision.

5. Poland

Specific information requirements are included in the new Act of

109. C. Civ. art. 6.353 (Lith.). See also The Law on Consumer Protection of theRepublic of Lithuania, No. 1-657 (amended Sept. 19, 2000), available athttp://www3.lrs.lt/c-bin/eng/prep2?Conditionl=114309&Condition2= (last visited Feb.17, 2005).

110. C. Civ. art. 6.353(9) (Lith.).111. C. Civ. art. 6.353(10) (Lith.).

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July 27, 2002 on consumer sales.111 Article 2 contains a generalinformation prescription as to price, unit price, and conditions of a hire-purchase and similar agreement. At the buyer's request, the seller should"issue a written l1 2 confirmation of the conclusion of the agreement,including the seller's mark bearing his address, date of sale andspecification of the consumer good together with its amount and price.Article 3 contains a requirement for sales in Poland to provide clear,understandable, not misleading information in Polish, necessary forproper and full use of the consumer good. There are detailed rules withregard to the placement of the information, instructions for use,maintenance manuals, all in Polish. At the buyer's request the sellershall explain the meaning of each provision of the agreement. ThePolish language requirement written into the Act on language whichcontains this requirement for "legal transactions performed within theterritory of Poland1 13 is, however, not without problems in a context ofparty autonomy and free movement of products and services.

VI. Contract Law In the Books and In Action: New Rules for OldMechanisms of.Civil Justice?

A. A Summary of the New Contract Law of New Member States

The investigation presented above has shown that the principles ofautonomy, regulation and information as basic requirements of a marketconforming contract law, integrating consumer protection requirements,have been taken over by all former socialist countries now members ofthe EU, but that the methods and instruments chosen differ widely. Wehave distinguished between a monist approach (Estonia), a dualistapproach (Latvia), a parallel approach (Lithuania), a modified uniformapproach (Hungary), and a mixed approach (Poland). This shows therichness of European legal cultures after the enlargement process whichwill certainly give impulses to the ongoing emergence of a uniformEuropean contract law. European contract law is truly a field ofexperiment and maybe even for a competition of better rules, e.g., ongeneral information requirements written into some modem contractlegislation (Estonia, Lithuania, to some extent also Hungary and Poland),

112. See discussion infra Part IV.B.5.113. It is not clear whether this confirmation can also be in an electronic form, which

seems to be required by Art. 9 of Dir. 2000/31/EC of June 8, 2000 of the EP and theCouncil on Electronic Commerce 2000 O.J. (L. 178) 1.

114. K. Klapa, Die Auswirkungen des Gesetzes uber die polnische Sprache auf dieVertragpraxis, WIRO 233, 2000; Surdeck and Binieda in Z. BRODECKI, POLISH BUSINESSLAW 479 (Kluwer: The Hague, 2003).



on redress of the seller in consumer sales contracts (Latvia, Lithuania),on transparency of guarantees (Estonia, Latvia, Hungary, to some extentalso Poland), in improving remedies under EU law (Lithuania, Hungary),in prescribing spill-over effects to general contract law which had not yetbeen reformed (Latvia). On the other hand, it imposes a warning againsttoo much uniformity, and may discourage those who are optimisticallypromoting a European Civil Code.

At the same time, European law, both in its general principles andits specific directives, has had an enormous impact on the contract law ofthe new Member countries here under scrutiny. It is even moreremarkable that this process has been accomplished before and not aftermembership. There may be certain deficits with regard toimplementation of directives, e.g., hierarchy of consumer remedies insales contracts (Latvia, Lithuania), but they cannot be said to be such asto endanger the European legal integration model--quite to the contrary.They have strongly reinforced general contract law principles like goodfaith, control over standard contract terms. They have allowed specificcontract law, most notably on consumer protection, to spill over intogeneral contract law. They have encouraged integrationist models ofcontract law which have clearly shown the deficits of a dualist model likein Latvia. EU law has therefore be an instrument of transformation andmodernization of contract law-similar to the situation in old Membercountries like Germany.

This paper is not concerned with the implementation of EC law assuch and with possible violations of the obligations of new Memberstates. Three seemingly contradictory trends should however bementioned:

All new Member states analyzed here have taken great efforts tobring their contract law in line with basic EC directives, even thoughvia different methods to which they are entitled under Article 249(3)of the EC, once being member of the EU.

On the other hand, there is a certain tendency of overreach ofconsumer protective provisions into areas which are not covered byconsumer law, e.g., rules on the territorial application of consumerlaw (Estonia, Poland), widening of the concept of consumer to certainB2B transactions (Latvia), applying the rules on pre-formulatedcontracts also to individually negotiated clauses (Hungary),mandatory language rules beyond the accepted limits of partyautonomy and free movement (Lithuania, Poland, to some extent alsoLatvia).

Finally, the ambiguities of EU Directives itself create transposition

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problems particularly in new Member countries, e.g., the concept ofunfair terms (Latvia, Hungary), redress of the seller (differentsolutions in Latvia/Lithuania on the one hand, Hungary on the other,non-solution in Poland which creates problems with cross-bordertransactions), consequences of individual non-respect of directives.

B. Law in Action: Deficits in Civil Justice?

What is much less known is the working of the reconstruction ofcontract law in the countries under scrutiny. This is to some extent dueto the relative youth of the legislation under examination. Little case lawhas emerged, and even less is known to the foreign observer. We simplydon't know yet how the new law in the books really works, and wherethe fault-lines of new countries come up.

This leads to a more fundamental problem: the weakness of theinstitutions of civil justice after the fall of socialism. Harmathy has saidwith regard to Hungary that the element of insecurity in contractualrelationships may also be found in the form that the party crediting hiscontractual counterpart is unable to know whether the debtor will fulfillhis obligations in accordance with the contract.1 4 The quality of judicialdecisions in Hungary has been repeatedly criticised;115 a theory ofjudicial precedent is only emerging."l 6 With regard to Poland,Letowska 1 7 criticized the lack of focus on implementation of new laws;this is left to its own resources (which are scarce). Torgans, the leadingLatvian scholar of civil law, criticizes the excessive dogmatism orformalism of Latvian court practice, 1 8 which makes a flexible adaptationto modern market conditions difficult. The Open Society Institute," 9 in astudy done for the EC-Commission, voiced concerns over judicialindependence in some of the countries under scrutiny. Unfortunately,

115. A. Harmathy, Hungarian Civil Law Since 1990, 43 ACTA JURIDICA HUNGARICA1-22, 17 (2002).

116. H. Kiiper, Zivilrechtsprechung in Ungarn: die Metro-Ureile und die ungarischeVertragsrechtsdogmatik WIRO 366 (1999).

117. B. Pokol, Statutory Interpretation and Precedent in Hungary, 46OSTEUROPARECHT 262, 274-288 (2000).

118. E. Letowska, Between Knowledge and Skill: Obstacles to EfficientImplementation of the Community Consumer Law in Poland, in M. KEPNSKI, THEEVALUATION OF THE NEW POLISH LEGISLATION IN THE MATTER OF CONSUMER PROTECTIONFROM THE EUROPEAN PERSPECTIVE. Conference Proceedings, Zakrzewo, June 21-23,2001.

119. K. Torgans, Contract Law: Latvia and the EU, in University of Latvia, Problemsof Transformatic a of Law in Connection with European Integration. Current Topics inLatvian Law, Riga, 2002-2003 ed., at 31.

120. Open Society Inst., Judicial Independence-Monitoring the EU Access in Process,Central European U. Press, 16-69 (2001). Detailed recommendations for improvementnot analyzed here.



there exists no follow-up for today's situation.A more general and highly critical discussion can be found in a

substantial paper by Emmert. 120 Talking from own experience, he sees

problems in law application in new member countries not so much in thelegislative framework but in the missing suitable structure ... to ensurethe application and enforcement of the new legal rules in practice. 121

Emmert also identifies methodological weaknesses which are part of thecommunist heritage. Judges are trained to apply written law only in arather formal manner. They have no training to overcome lacunae in thelaw, for example by recourse to general principles of law. . . . Thejudges have no experience with the concept of justice in contrast to theconcept of law. 22 There is no professional legal argument, nor athorough discussion of existing case-law. Citizens have no confidence inthe working of civil justice. 23 Legal education has to be reformed morerapidly to reflect not only the changes in legislation but also the(necessary) changes in legal culture. 2 4 Critical academic discussion ofcase law and regulatory action should be encouraged. The system ofhierarchical court administration should be changed to more self-administration.

Emmert points to structural problems of civil justice which are moreor less present in all countries studied here. On the other hand, with theimproved quality of legislation, especially the adoption of new civilcodes as in Estonia and in Lithuania, administration of justice willimprove. Complicated problems of multi-level application of legislationfrom completely different traditions like in Latvia and to some extentPoland should be avoided in the interest of a more transparent andresponsible administration of civil justice.

Some arguments of Emmert's study may seem anecdotal andexaggerated today. They need to be tested against the development ofthe countries studied here under the impact of preparation to (present)full membership. To conclude, the enormous changes in substantive andprocedural law, the role of the judiciary, training of legal personnel, andfinally the take-over of the excessively complex acquis may necessitate arethinking of these hypotheses. The Latvian judge at the ECJ, EgilsLevits is probably right in observing:

(Mastering interpretation methods regarding general clauses) hasbeen a serious problem in Eastern European countries where

121. Frank Emmert, Administrative and Court Reform in Central and EasternEurope, 9 EUR. L.J. 288-315 (July 2003).

122. Id. at 289.123. Id. at 295.124. St. Holmes, Citizen and Law After Communism, 7. E. EUR. CONT. REv. 1 (1998).125. Emmert, supra note 121, at 302.

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2005] TRANSFORMATION OF CONTRACT LAW AND CIVIL JUSTICE

these.., methods were neither recognized nor used in the inheritedsocialist traditions of law. In the course of time the situationimproved when the content of legal education slowly approachedEuropean (continental) education. In recent years, too, in Latvia itcan be observed that civil servants' and judges' knowledge ofinterpretation methods is becoming better.'25

126. E. Levits, General Clauses and Discretionary Power of AdministrativeInstitutions and Courts, Law and Justice 2, at 9, para. 37 (2004).


Universalism and Choice of Law

Jay Lawrence Westbrook*

This article discusses choice-of-law analysis in a multinationalbankruptcy case' and sets forth a basic structure for such an analysis. Itdiscusses the issues in the context of United States bankruptcy law anduses the decision in an important recent case in the United States toillustrate.

It is not unusual in multinational bankruptcy cases to see bankruptcyproceedings opened in more than one country as to the same debtorbecause of the need to seize the debtor's assets in each jurisdiction.Parmalat, Enron, and Dow Coming are among the best-known of manyrecent examples. The traditional doctrine applied in such instances was"territorialism" or "the grab rule," which contemplated that each countrywould seize such assets as it could and distribute them according to thelocal bankruptcy law. However, the modem approach is"universalism. '2 In its ideal form, universalism envisions a singlebankruptcy proceeding in the debtor's "home country."3 A single courtwould make a unified worldwide distribution to creditors through

* Benno C. Schmidt Chair of Business Law, The University of Texas School ofLaw. Some of the concepts in this article were presented as part of a lecture at the FourthAnnual Conference of the International Insolvency Institute, New York, June, 2004. I amgrateful to Eric Van Horn, Texas '05, for expert research assistance.

1. I use the term "bankruptcy" following United States usage, meaning aninsolvency-type proceeding involving a business debtor that is a legal entity. SeeAMERICAN LAW INSTITUTE, TRANSNATIONAL INSOLVENCY PROJECT, PRINCIPLES OF

COOPERATION IN TRANSNATIONAL INSOLVENCY CASES AMONG THE MEMBERS OF THENORTH AMERICAN FREE TRADE AGREEMENT 2 (American Law Institute 2003) [hereinafterA.L.I Principles]. Although individual bankruptcies present fascinating questions in themultinational context, they are not addressed in this article.

2. See, e.g., Andrew T. Guzman, International Bankruptcy: In Defense ofUniversalism, 98 MICH. L. REV. 2177, 2179, 2181 (2000); Jay Lawrence Westbrook, AGlobal Solution to Multinational Default, 98 MICH. L. REV. 2276 (2000) [hereinafterGlobal Solution]; but see Lynn M. LoPucki, Cooperation in International Bankruptcy: APost-Universalist Approach, 84 CORNELL L. REV. 696 (1999); Frederick Tung, Fear OfCommitment In International Bankruptcy, 33 GEO. WASH. INT'L L. REV. 555 (2001).

3. See generally, Hannah Buxbaum, Rethinking International Insolvency: TheNeglected Choice-of-Law Rules and Theory, 36 STANFORD J. INT'L L. 23, 60 (2000)(arguing for a single jurisdiction internationally following the logic of domestic practice).



liquidation or reorganization.Because a pure form of universalism is not immediately achievable,

many universalists have adopted "modified universalism," in which thecourts seek a result in multinational cases as close as possible to a unifiedworldwide administration and distribution.4 Although achieving aunified result is a goal limited by practical questions (like confidence inthe home-country court) and the constraints of local bankruptcy law, asubstantial portion of the benefits of universalism can be obtained by abest approximation. Among those benefits are a greater level ofpredictability in the extension of credit and a far greater likelihood ofsuccessful rescue of a business. The United States is one of the countriesincreasingly committed to universalism. 5 One of the consequences of anembrace of universalism is the need for a substantially moresophisticated understanding of choice-of-law issues. That is the subjectof this article.6

In any contentious7 multinational bankruptcy case the court mustperform a choice-of-law analysis to determine the validity anddistribution priority of each party's claims. The required choice-of-lawanalysis is bifurcated. The court must distinguish between two issues:1) what is the value of the claim, if any; and 2) what is the priority of theclaim in the distribution of the proceeds of the insolvency proceeding.The distinction is crucial because the first issue is typically governed bynonbankruptcy law, while the second is governed by bankruptcy law.8 Ina multinational bankruptcy, it will often be the case that one country'slaw will govern the existence and amount of the claim, while anotherlegal regime will govern its priority of distribution in bankruptcy (amongother issues). In a territorialist jurisdiction, the court will always chooseits own bankruptcy law as to the second issue, whatever choice it makesas to the first one. In a country with a modem bankruptcy system thathas adopted some form of universalism, the court may be required to

4. See A.L.I. PRINCIPLES, supra note 1, at 8.5. See American Law Institute, Transnational Insolvency Project, INTERNATIONAL

STATEMENT OF UNITED STATES BANKRUPTCY LAW 73-74 (2003) [hereinafter U.S.Statement].

6. For a survey of choice-of-law cases in the insolvency area, see Richard Coulson,32 DENVER J. INT'L. L. & POL'Y. 275 (2004) (review of cases noting lack of application offederal common law choice-of-law principles in this area).

7. In many multinational cases, the parties and their representatives see the need forcooperation and come to agreements that permit them to avoid resolution of difficultchoice-of-law issues. These agreements are often embodied in "protocols." See A.L.I.PRINCIPLES, supra note 1, at 66-67 and Appendix C (samples of protocols). Whereagreement is not possible, however, these legal issues must be resolved by the courts.

8. In a unitary state, the court need only distinguish which statute governs eachissue. In a federated state, one issue may be governed by regional law and the other by anational bankruptcy law.

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choose the bankruptcy law of another jurisdiction to govern distribution.

I. The Illustrative Case

The case is Lernout & Hauspie Speech Products N. V v. StoningtonPartners, Inc.9 Lernout was a company incorporated and managed inBelgium, but within the year before bankruptcy Lernout had acquiredand merged with two United States companies.t0 The result was thatmore than half of Lernout's asset value was located in the United Stateson Bankruptcy Day. The acquisitions had been made through grants ofLernout stock, allegedly accompanied by fraudulent misrepresentationsabout the finances of the company. When accounting questions began toemerge, its stock collapsed and it filed two bankruptcies the same day-aChapter 11 in the United States and a Concordat in Belgium.1' TheBelgian proceeding was later converted to a liquidation.

The key point in the case was a true conflict between United Statesand Belgian bankruptcy law with regard to the priority in payment to begiven to claims for stock fraud brought by the former owners of certainof the United States companies acquired by Lernout (the Stoningtonclaimants). The Stonington claimants alleged that they had beendefrauded by the debtor when they accepted the debtor's stock inexchange for the companies they had owned. They claimed substantialdamages. United States bankruptcy law subordinates such claims to allother unsecured claims, with the effect that such claims would receive

9. Lemout & Hauspie Speech Products N.V. v. Stonington Partners, Inc., 268 B.R.395 (D. Del. 2001) [hereinafter "Lemout I"], rev'd, 310 F.3d 118 (3d Cir. 2002)[hereinafter "Lemout II-Circuit"], on remand In re Lernout & Hauspie Speech ProductsN.V, 301 B.R. 651 (Bankr. D. Del. 2003) [hereinafter "Lernout III-Remand"]. To clarify,the first decision by the bankruptcy court in this litigation was unreported. Thus, thisarticle describes as "Lernout I" the first reported opinion, the district court decision thataffirmed the unreported decision of the bankruptcy court. "Lernout I1-Circuit" is thereversal of that district court decision by the Court of Appeals. The further decision bythe bankruptcy court on remand after the appeal is called "Lernout III-Remand." Finally,the district court decision affirming Lemout III will be called "Lemout IV-Affirmance."In re Lernout & Hauspie Speech Products N.V., 308 B.R. 672 (D. Del. 2004).

10. This statement of the facts of the case is very similar to that in a second paperabout the Lernout case, Jay L. Westbrook, The Duty to Seek Cooperation inMultinational Insolvency Cases, in FINANCING AND REFINANCING COMPANIES IN THEPERSPECTIVE OF INSOLVENCY: INTERNATIONAL LEGAL DEBATE (University of Geneva,2004) (forthcoming), available at http://www.unige.ch/droit/insolvency-symposium2004/wp.htm (last visited February 23, 2005), reprinted in Annual Review ofInsolvency Law, 2004 (2005) (Canada).

11. There is some confusion about the timing, but the Belgian case was filed no laterthan the next day. The first Concordat filing was rejected and it was refiled weeks later.The second filing was accepted, but after the court rejected the debtor's plan for payment,it was converted into a liquidation. See Lemout III-Remand. The reason for the rejectionof the payment plan by the Belgian court was that the plan followed the United Statesrule and provided nothing for the stock-fraud claimants.

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nothing in the Lernout proceeding. 12 Belgian law, by contrast, treatssuch claims just like all other unsecured, non-priority claims, entitled toreceive pro rata distribution after priority claims had been paid. Thusthe stock-fraud claimants, who were mostly United States persons, wouldreceive nothing under United States law, but would get some distributionunder Belgian law. Conversely, the other unsecured creditors wouldreceive greatly reduced distributions if the Belgian rule were applied. Itappears that most of the assets were under the de facto control of theAmerican court.

In an unreported opinion, the bankruptcy court held that the UnitedStates subordination rule should apply to the Stonington claimsworldwide and granted an injunction against re-litigation of that point inthe Belgian court. The holding was affirmed by the district court onappeal. 13 The decision was squarely based on the bankruptcy court'schoice-of-law ruling: that United States bankruptcy law controlled bothbankruptcy proceedings on the issue of priority (subordination) for thestock-fraud claims. 14 On appeal, the Third Circuit reversed andremanded the case to the bankruptcy court for a fresh review. Althoughthe appellate court made several important rulings, this article willconfine itself to one issue: the choice of law governing the rights of thestock-fraud claimants in bankruptcy. 15 The appellate court found that thebankruptcy court's choice-of-law analysis was fundamentally flawed andmust be reconsidered. 16

On remand, the debtor presented a liquidating Chapter 11 plan,'7

which it later revised, allocating the assets of the company between theUnited States and Belgian proceedings. 8 The original allocation notonly had given most of the assets to the United States proceeding, buthad left too little for the Belgian court to pay even priority claims. Afternegotiation with the Belgian curators, the plan was amended to providemore funds for the payment of the Belgian priority claims. It appearsthat the quid pro quo for the re-allocation may have been the silentacquiescence of the curators in the revised plan, which still gave most of

12. See 11 U.S.C. § 510(b) (2000). The effect of subordination is that all priorclaims must be paid in full before anything is paid to the holders of subordinated claims,meaning in most cases such claimants will receive no payment at all.

13. Lernout I, supra note 9.14. Id. at 400.15. The author has written a second article on Lernout, focusing on cooperation

between courts. Westbrook, supra note 10.16. Lernout II-Circuit, supra note 9, at 131.17. The United States Bankruptcy Code permits the use of a Chapter 11

"reorganization" plan for the purposes of liquidation as well as for reorganization. 11U.S.C. § I 123(b)(4) (2000).

18. The allocation was justified by a rather conclusory affidavit filed by Lily Chu, anexpert retained by the debtor. Lernout III-Remand, supra note 9, at 654-55.

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the assets to the United States proceeding. The bankruptcy courtapproved the plan.19 In approving the plan, the bankruptcy court reliedupon its prior ruling with regard to choice of law: United Statesdistribution rules applied to distributions in the United States proceeding.(In light of the appellate decision, it eschewed its earlier claim that theUnited States rules applied worldwide.) On that basis, the court foundthat the Stonington claimants were entitled to no recovery from theUnited States bankruptcy proceeding. The District Court affirmed thebankruptcy court's approval of the liquidating plan.20 The stock-fraudclaimants, apparently exhausted by the struggle, did not appeal further.

The great bulk of the value of the debtor company was to bedistributed under the United States plan.21 In approving the plan, thebankruptcy court emphasized that any claimant was free to claim inBelgium as well, but the allocation of assets meant any non-priorityclaim in that proceeding would be worthless. The result was approval ofa largely territorialist result. The problem with that approach, asexplained above, is that the United States is substantially committed tomodified universalism. Modified universalism instructs courts tointerpret and apply each country's bankruptcy law so as to achieve aresult as close to that of a universalist proceeding as is legally possibleand practical in a given case.22 The plan approved in Lernout, bycontrast, is of the sort that would produce dramatically different resultsdepending on where the assets happen to be found at the time ofbankruptcy-one of the basic defects of territorialism. If, for example, theaccounting questions in that case had remained unrevealed for anothertwo or three years, the assets might well have shifted substantially awayfrom the United States. In the dynamic, globalizing world in which welive, plants might have been thrown up quickly in South Korea or China,or manufacturing and technical support might have been outsourced toany of a number of other countries.23 A lender, investor, or customer

19. See Lernout III-Remand, supra note 9, at 654.20. See Lemout IV-Affirmance, supra note 9.21. The plan's allocation did not prefer United States persons as such, but rather

preferred all those who filed claims in the United States proceeding and were eligible toreceive distributions under the United States bankruptcy distribution rules, regardless oftheir nationality or residence. In fact, the Stonington claimants included a number ofUnited States persons. See generally Jay Lawrence Westbrook, Choice of AvoidanceLaw in Global Insolvencies, 17 BROOK. J. INT'L. L. 499, 513-14 (1991) (territorialismbenefits not only local creditors, but sophisticated multinationals, because in mostcountries the effect is to favor the local rules, but not necessarily the local creditors assuch, because most countries do not formally discriminate against foreign creditors). Fora summary of the plan, see Lernout III-Remand, supra note 9, at 654-55.

22. See Global Solution, supra note 2, at 2277.23. Lernout had a substantial Korean operation. Indeed, it was there that the

accounting problems first surfaced. Mark Maremont et al., How High-Tech Dream

20051



would have been hard put to predict where the asset-center of thecompany would be at the end of even so-short a time.

II. The Choice-of-Law Method

Two of the reasons that have persuaded most American experts tofavor a form of universalism in insolvency matters are the need forpredictability and the related question of expectations.24 Given the rapidmovement of assets around the world today, no rule can provide areasonable prediction about the results of a bankruptcy case except auniversalist system applying the bankruptcy law of the center of thedebtor's main interests. Such a rule is far from perfectly predictable, butit is the only rule that provides any real predictability at all.

Related to predictability is the recognition of expectations.Creditors (and others) dealing with a business should expect that ageneral default by the business will be dealt with under the laws of thehome country of the business. To respond to that expectation a courtmust choose a single applicable bankruptcy law. 5

In any bankruptcy case, whether purely domestic or multinational,every pre-petition claim 26 presents two issues that are distinctconceptually, although often hard to distinguish in the field2 7: first, thevalidity and amount of a claim under applicable nonbankruptcy law;second, the distribution right, or priority in payment, which will apply tothat claim in the distribution of the value that has been realized by thebankruptcy administration. A simple example is the claim of a personwho suffered bodily injury by the debtor's act before the debtor'sbankruptcy. The necessary elements of a claim in tort (delicto) will begoverned by nonbankruptcy law, as will the measure of recoverabledamages and any limitations upon damages. Following United Statesusage, the amount of the claim so calculated under nonbankruptcy law isthe "allowed" amount; that is, the sum that the claimant would have beenawarded in an ordinary lawsuit outside of bankruptcy. 28 However, the

Shattered in Scandal at Lernout & Hauspie, WALL ST. J. ( December 7, 2000).24. See Global Solution, supra note 2, at 2282-99. See also Guzman, supra note 2,

at 2208.25. To the extent that a nation's commitment is to modified universalism, this

proposition is one of several that are subject to pragmatic considerations in a particularcase, although such considerations should be viewed skeptically.

26. By "pre-petition claim," I mean claims that arose before the bankruptcyproceeding was opened, as opposed to claims incurred in the administration of theproceeding itself.

27. See IAN F. FLETCHER, INSOLVENCY IN PRIVATE INTERNATIONAL LAW 84 (1999);Donald T. Trautman, Jay Lawrence Westbrook & Emmanuel Gaillard, Four Models forInternational Bankruptcy, 41 AM. J. COMp. L. 573, 583-86 (1994).

28. 11 U.S.C. § 502(a) (2000).

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amount of money to be distributed to the injured person in bankruptcywill depend upon the priority rules established by the law applicable tothe debtor's bankruptcy. In a system that gives a special priority to othersorts of claims (for example, taxes and employee wages), there may benothing left to distribute to the injured claimant. On the other hand, if aparticular bankruptcy law gave priority to personal-injury claims, thenthe claim might be paid in full.

As it happens, United States courts, because of its federal system,have considerable experience with this problem in the context of twoseparate bodies of law. Generally, state law controls the allowed amountof a claim, but federal bankruptcy law governs the distribution priorities.A similar dichotomy exists as to property interests. State law is oftenapplied in the delineation of a claimed property interest, while the effectof that property interest in bankruptcy is governed by bankruptcy law.This intersection of laws frequently arises in connection with securityinterests, which are governed outside of bankruptcy by state law, butcarry with them enormous advantages in priority and even collateralcontrol in a bankruptcy proceeding.29 Their enforcement and priority inbankruptcy arise from the intersection of state and federal law.

Precisely the same sorts of difficulties are presented in multinationalcases, because the law defining a claim or a property interest may oftenbe the law of a different country than the law governing the bankruptcyproceeding itself. Thus, a bankruptcy court in a multinational case isrequired to draw a line between the nonbankruptcy law governing theexistence and scope of a claim or a property interest and the bankruptcylaw governing the distributional effects thereof in the bankruptcy. Inchoosing the law that defines the claim or property interest assertedunder nonbankruptcy law and its validity vel non under that law, the

29. See generally, Jay Lawrence Westbrook, The Control of Wealth in Bankruptcy,82 TEX. L. REv. 795 (2004). A well-known example of the intersection of state andfederal law concerning security interests is a case in the United States Supreme Court,Fidelity Fin. Servs. v. Fink, 522 U.S. 211 (1998), where a security interest was properlyregistered under state law, and therefore would ordinarily be enforceable in federalbankruptcy court, but was subject to attack as a "preference" because it was registeredduring the ninety-day preference period prior to the debtor's bankruptcy. The problemwas one of delay in registration after the security interest was created. State law alloweda thirty-day delay in registration of the interest, but federal preference law allowed onlytwenty days. The secured party had registered within the state "grace period" but outsideof the federal one. The question was which law controlled and the Bankruptcy Codelanguage was ambiguous. The details of the analysis are not important to the currentdiscussion, but in the end the Court concluded that federal law controlled and the securityinterest was "avoided" (made ineffective) in the bankruptcy case. The interesting pointfor us is the very close overlap between the two bodies of law. A crucial part ofAmerican commercial law could be seriously crippled by incoherent distinctions in thisarea, yet the task of making those distinctions is by no means easy.

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court should consider the usual choice-of-law factors like place ofcontracting, the parties' choice of law, and so forth. But as todistribution rules and other rules governing bankruptcy, it must choosethe applicable bankruptcy law by focusing upon the debtor's affairs as awhole on a worldwide basis, looking to factors such as principal place ofbusiness, principal location of assets, residence of most creditors, centerof financial interests, and the like.

Having established the general framework, we turn our attention tothe Lernout case to carry the analysis through.

III. The Choice of Law Analysis in Lernout

The first step in a case like Lernout is much like the relativelysimple one that served as our first example. The tort of stock fraud andthe entitlement to damages for those defrauded-the "allowed" claim-would be governed by nonbankruptcy law, while the distribution to bemade on account of the allowed claim would naturally be determined bybankruptcy law. Applying either a center of gravity theory or thetraditional "place of the wrong" theory,30 the applicable law of fraudmight well be found in the United States. 31 To that point the originalruling of the lower courts applying American law seems easy to defend.32

The difficulty comes with the next question: which bankruptcy lawshould be applied to determine the priority in distribution of this type ofclaim?

In a territorialist court, the answer is simple: the court should applyits own bankruptcy law governing distribution of the assets controlled bythat court. Each nation's bankruptcy court will do the same and that willbe that. But for a court committed to any form of universalism, theproblem is more difficult. Because the objective is to distribute thedebtor's worldwide assets in a manner as close to a single, coherentdistribution as possible, the universalist court must consider whichbankruptcy law would apply in one global distribution.

If the debtor's principal place of business ("center of maininterests",33) and principal assets are in the same jurisdiction, it seems

30. RUSSELL J. WEINTRAUB, COMMENTARY ON THE CONFLICT OF LAWS §§ 346-48(4th ed. 2000).

31. For most purposes, there is no federal law of tort in the United States, so thecourt would have to determine which state tort law would apply. However, in the case offraud involving securities, there is, in effect, a federal tort law that could be applied todetermine both liability and damages. E.g., Securities Exchange Act of 1934 § 10(b), 15U.S.C. § 78j(b) (2000).

32. Lernout I, supra note 9, at 400. That point may also be trivial, because it islikely that Belgium would give the Stonington claimants similar rights. See supra note11 and accompanying text.

33. This phrase has become the international standard. See U.N. Comm'n on Int'l

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obvious that the bankruptcy law of that jurisdiction should be the oneapplied in all but the rare case. The same conclusion seems compelledwhere the assets are scattered among a number of jurisdictions: theprincipal place of business should provide the controlling bankruptcylaw. The right answer may be somewhat less clear where the debtor'scenter of main interests and its principal assets are in differentjurisdictions. That was the situation in Lernout because the company'sAmerican acquisitions in the year before bankruptcy had produced anasset base in the United States that exceeded its European assets. Undersome circumstances and as to some issues, contacts of that sort mighthave supported application of United States bankruptcy law.34

The problem with the Lernout decisions is that these factors playedno part whatsoever in the court's choice-of-law decision. Instead, boththe bankruptcy and district courts looked to factors like the place of thewrong and the parties choice of law in their merger agreement.35 Thosechoice-of-law factors would have been highly relevant to thedetermination of the validity and amount of the stock-fraud claim undernonbankruptcy law. If, for example, United States and Belgian law haddiffered in some element of the tort of fraud or in the calculation ofdamages, those factors would have been key. However, as to the properbankruptcy rule-the rule of priority in distribution of a limited number ofassets to general creditors of equal entitlement-those factors were largelyirrelevant. As to that decision, the policy choice lay between satisfyinglocal policies by a territorial distribution of whatever assets could belocally seized or satisfying the larger purposes of bankruptcy law bychoosing a single law to govern distribution worldwide, within practical

Trade Law, Model Law on Cross-Border Insolvency with Guide to Enactment, art. 2(b)(U.N. Sales No. E.99.V.3 1998); European Union Regulation on Insolvency Proceedings,Official Journal of European Communities 160, art. 3 § 1 (June 30, 2000); Title VIII, S.256, H.R. 685, 1 0 4 th Cong., 1st Sess. (2005) (proposed Chapter 15 of the BankruptcyCode).

34. The location of assets may be linked to other specific factors that may affect thechoice-of-law decision in a particular circumstance. In Lernout, if there had been manyUnited States creditors that had extended credit to the American companies before theacquisition then the analysis as to the appropriate worldwide distribution rule mightchange. In that situation, those creditors could argue they had lent to Americancompanies and expected American law to apply in case of general default. Indeed, in theappellate opinion in Maxwell, the court noted that the presence of many unpaid creditorsof the United States subsidiaries might have changed the analysis. MaxwellCommunication Corp. v. Societe Generale (In re Maxwell Communication Corp.), 93F.3d 1036, 1052 (2d Cir. 1996). Thus the chosen rule might vary if the location andnature of the assets was a crucial point. However, the bankruptcy and district courts inLernout never considered these factors at all. It is also worth emphasizing that the locusof the assets might have shifted decisively in a short time. See supra text accompanyingnote 23.

35. Id.

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constraints. Given the steady movement of United States law towardmodified universalism, the single-law approach should have beenadopted. In this case, that law should probably have been Belgian.

The emerging international rule in multinational bankruptcy casesfocuses on the center of the debtor's main interests. Up to now, thatstandard has been adopted primarily as a choice-of-forum rule rather thana choice-of-law rule, but it is necessary to use it for both purposes toachieve the goals of universalism. 36 Given a company like Lernout,which engaged in classic Nineties-style mergers around the world, noother rule would give predictability. The center of gravity of thecompany's assets might shift from month to month,37 while mostcreditors and other concerned parties would naturally assume thatBelgian law would govern a worldwide company whose formal legalconnections, management, and financial dealings were concentrated inBelgium.

Directly analogous is a Nineteenth Century case in the United StatesSupreme Court in which the Court enforced the terms of a Canadianreorganization plan for a Canadian company against New Yorkbondholders, even though payment to the bondholders was to be in NewYork and New York law was the proper law of the contract. It explainedthat the bondholders should have known that Canadian law was likely togovern the general default or insolvency of a Canadian company. 38 Thatconclusion is even more natural in the modern, globalizing world.

In Maxwell, the most important modern choice-of-law case in thisarea, with precisely the same sort of division of management and assetsas in Lernout (principal management and financing in the UnitedKingdom, principal assets in the United States), it was held that theforeign bankruptcy law applied. 39 The picture is complicated by anequivocal opinion in the Court of Appeals and by the fact that the issuebefore the court in Maxwell was application of the preference power, buton the whole the case is a powerful precedent favoring application ofBelgian law in Lernout.

40

36. Jay Lawrence Westbrook, Theory and Pragmatism in Global Insolvencies:Choice of Law and Forum, 65 AM. BANKR. L.J. 457, 488 (1991).

37. See supra text accompanying note 23.38. Canada Southern Ry. Co. v. Gebhard, 109 U.S. 537-39 (1883).39. Maxwell Communication Corp. v. Societe Generale (In re Maxwell

Communication Corp.), 170 B.R. 800 ((Bankr. S.D.N.Y. 1994), affd 186 B.R. 807(S.D.N.Y. 1994), aff'd 93 F.3d 1036 (2d Cir. 1996).

40. There would have been a case to be made for applying United States law inMaxwell by analogy to the definition of "foreign proceedings" in subsection 101(23),which provides four bases for finding a foreign proceeding entitled to United Statesdeference (that is, finds it to be the home country of the debtor): residence, domicile,principal place of business, and location of principal assets. With the principal assets ofLemout being in the United States, one could have argued that the application of United

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On that basis, a court committed to a form of universalism would bewrong to approve a plan such as the one approved in Lernout. Not onlywas it a territorialist plan, but it denied the stock-fraud claimants thebenefit of the Belgian distribution rules to which, on the above analysis,they were entitled and would reasonably have expected to see applied inthe bankruptcy of a Belgian company.

IV. Procedures for Implementation

There remain some difficult questions of procedure in cases likeLernout. In the United States, as in most countries, it is unclear ifdistributions can be made under foreign bankruptcy rules or if local lawshould be understood to require that the local rules be applied to anydistribution made by the local court. 41 That is, if a United States courtfinds that a foreign bankruptcy-distribution rule applies, may it distributethe proceeds of assets to creditors under the foreign rules, or is it boundby its own distribution rules unless it dismisses its own proceeding andsends the assets to the foreign court? The holding in the Maxwell casepermits a United States court to keep its own avoiding powers inabeyance, but does not say whether the American court may apply theavoiding powers of another country within the confines of a UnitedStates full-bankruptcy proceeding.42 The increasing use of liquidatingplans in Chapter 1 1 cases may suggest a solution,43 because such planspermit substantially more flexibility in distributions than under theChapter 7 priority rules.44 Thus a United States court might take

States bankruptcy law would be consistent with the statute, although it was equallyconsistent to look to the principal place of business. As noted, the court chose theprincipal place of business.

41. There are substantial differences in priority rules around the world despite apattern of preference for certain creditors, like secured parties, employees, and taxauthorities. See generally Ulrik Rammeskow Bang-Pedersen, Asset Distribution inTransnational Insolvencies: Combining Predictability and Protection of Local Interests,73 Am. BANKR. L.J. 385 (1999); Jay Lawrence Westbrook, Universal Participation inTransnational Bankruptcies, MAKING COMMERCIAL LAW, ESSAYS IN HONOUR OF RoYGOODE 419 (Ross Cranston ed., 1997); Jay Lawrence Westbrook, Universal Priorities, 33TEX. INT'L. L.J. 27 (1998).

42. The limited extant authority suggests that foreign avoiding powers cannot beasserted in a full United States bankruptcy. See Choice ofAvoidance Law, supra note 21,at 564 n. 99. One wonders if that rule will prevail, given that logically it would seemsuch actions by a foreign trustee would not be so different from any other lawsuit "relatedto" a pending bankruptcy under section 1334(b) of Title 28 of the U.S. Code and arisingunder a foreign law. On the other hand, it seems reasonably clear that the United Statesmay apply foreign bankruptcy avoiding powers within a section 304 ancillary proceeding.See id.

43. See Elizabeth Warren & Jay L. Westbrook, Remembering Chapter 7, 23-May,AM. BANKR. L.J. (2004).

44. The DIP in Lernout used the device of a liquidating plan. See supra note 9 andaccompanying text.

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Maxwell one step farther and say that it could apply the Belgian rule inthe United States proceeding.45

On the other hand, the court in a case like Lernout might decideBelgian bankruptcy law should control distribution, but might be unsurewhether or not it could override the United States distribution rule in afull Chapter 11 bankruptcy proceeding. It might believe that UnitedStates law would have to be followed in making a distribution in aUnited States Chapter 11 proceeding, even though another bankruptcylaw should be applied through choice-of-law principles. In that situation,the court may dismiss the United States bankruptcy under section 305 ofthe Code, and act ancillary to the foreign proceeding under section 304.46

This approach will often make sense in such situations. If thebankruptcy law of the other jurisdiction is to apply, it is obviously bestunderstood and applied by the other court 47

The excellent opinion of the Third Circuit in Lernout captured manyof the essential points suggested in this article. The appellate courtpointed out that the courts below had failed to consider "the nature of therespective countries' policies and the principles animating the laws, so asto determine which country actually had a stronger interest in its policiesbeing advanced., 48 It went on to say that cases such as this one require"a qualitative assessment that can only occur if there is someunderstanding, and explication, of the way in which the allowance, orsubordination, of the claims at issue would advance or detract from eachnation's policy regarding insolvency proceedings and distributions tocreditors." It also related the choice-of-law decision to the need forcooperation. 49

The court of appeals did not, however, identify a generalcommitment to universalism as a starting point for analysis, nor did itrequire the courts below to look at the case from a global perspective.Like the courts in Maxwell, it was cautious about large pronouncements,focusing its attention on the case before it, as common law courts do.Nonetheless, its analysis and conclusions were consistent with the

45. The court should, of course, seek cooperation with the other courts involvedregardless of the law chosen or the procedure followed. See U.N. Comm'n on Int'l TradeLaw, Model Law On Cross-Border Insolvency With Guide To Enactment, arts. 25-26,U.N. Sales No. E.99.V.3 (1997). See generally, A.L.I. PRINCIPLES, supra note 1. Thisauthor has recently written another article concerning lack of cooperation in the Lemoutcase. See Westbrook, supra note 10.

46. See e.g., In re Board of Directors of Multicanal S.A., 314 B.R. 486 (Bankr.S.D.N.Y. 2004).

47. In that circumstance, the court has the authority under § 304 to transfer the assetsto the control of the Belgian court for distribution under Belgian law. 11 U.S.C.§ 304(b)(2) (2000).

48. Lernout II-Circuit, supra note 9, at 131.49. Id. at 133 (citing Maxwell). See generally, Westbrook, supra note 10.

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method proffered in this article and its policy concerns point in the samedirection. Inherent in its instructions to the lower courts is the idea that asingle bankruptcy distribution rule is to be chosen.

Particularly important is the Third Circuit's emphasis on theinterests of the international system as a factor in making that choice.One important choice-of-law method in the United States is known as"interest analysis," and its basic logic greatly influences the applicationof other approaches, like "significant contacts. '50 Interest analysisemphasizes the importance of the common interest of the states involvedin a smoothly functioning international system.51 There could be nobetter conclusion for this article than the admonition of the court ofappeals in Maxwell, "[i]t should be remembered that the interest of thesystem as a whole-that of promoting 'a friendly intercourse between thesovereignties,'-also furthers American self-interest, especially wherethe workings of international trade and commerce are concerned., 52

50. See e.g., McDoUGAL, FELIX & WHITTEN; AMERICAN CONFLICTS LAW, 337, 340-41 (5th ed. 2001).

51. See Jay L. Westbrook, Extraterritoriality, Conflicts of Laws, and the Regulationof Transnational Business, 25 TEX. INT'L L.J. 71, 79-82 (1990) (describing systemicvalues in international choice-of-law).

52. Maxwell, 93 F.3d at 1053 (citation omitted).

2005]


The Challenges of Comparative ConsumerInsolvencies

Jacob Ziegel*

I. A New Branch of Comparative Law

This paper is about a new branch of comparative law, comparative

consumer insolvency law, and its challenges. Comparative consumer

insolvency law is at best only twenty-five years old and for a very good

reason. Before the 1980s, most countries did not perceive consumerinsolvencies as a significant social, legal and economic problem, andeven fewer gave it much legislative attention. That neglect was also

shared by most insolvency text writers and academics, with the exceptionof American authors among whom this topic has attracted attention for amuch longer period.

All this has changed dramatically, as may be seen from thefollowing random statistics. Beginning with my own country, Canada,as late as 1972, the number of individual non-business bankruptcies,3,647, was smaller than the number of business bankruptcies. It grewrapidly thereafter and reached 21,025 in 1980.1 Between 1985 and 1997,

the number of consumer insolvencies increased by over 300 percent,

from 19,752 to 90,034.2 In 2001, the total number of individual filings

* Professor of Law Emeritus, University of Toronto. Warm appreciation to Ryan

Lavallee, Joint MBA-JD University of Toronto student, for valuable research andeditorial assistance.

1. Office of the Superintendent of Bankruptcy (OSB), International ConsumerInsolvency Statistics (Ottawa, June 1999) 2 [hereafter International Statistics].

2. There was a drop of nearly 10% in the number of Canadian consumerinsolvencies between 1997 and 1998 (from 90,034 to 82,620) and a 3.7% increase in theUS figures (from 1,350,118 to 1,398,182) as compared with a 20% increase in the USfigures between 1996 and 1997. See International Statistics, supra note 1, at 1, 3, 7. Theimprovement in the Canadian employment position and the general buoyancy of theCanadian economy may explain the drop in the Canadian figures, although this is onlyspeculation. The steep rise in the US insolvency figures throughout the 1990s shows thata robust economy is no harbinger of lower insolvency filings. Prof. Ausubel argues thatcredit industry standards, especially on the credit card side, are more important factors.See L.M. Ausubel, Credit Card Defaults, Credit Card Profits, and Bankruptcy (1997) 71AM. BANKR. L.J. 249.



amounted to 102,539. 3 The U.S. figures tell a similar story. Between1985 and 1997, the number of consumer insolvencies grew from 341,233to 1,350,118, also a three-fold increase. The number has continued toclimb and reached 1,452,129 in 2001 and 1.6 million in 2003. 4 Stillmore significant. is the increase in the number of consumer insolvenciesas a ratio of population. In Canada, the ratio increased between 1981 and1997 from 0.93 to 3.00 per 1,000 of population, an increase of 223%.The comparable figures for the U.S. were 1.4 and 5.1, an increase of264%.

The number of insolvencies in other jurisdictions was much smaller.Nevertheless, they too show a very significant percentage increasebetween 1985 and 1997. During this period, the number of personalinsolvencies in England and Wales grew from 6,776 to 24,441 and froma ratio of 0.14 to 0.47, a 235% increase.6 The number of personalinsolvencies was 30,587. at the end of 2002. The number has continuedto grow and amounted to 10,271 in the third quarter of 2003.7 Thenumber of Australian personal insolvencies .grew from 8,761 in 1986/7 to22,333 in 1996/7, a 150% increase. 8 The ratio per head of population

3. "Total individual filings" comprises individual bankruptcies and Division 1 and2 proposals by individuals. There were 87,302 individual bankruptcy filings, of which9.1% were individual business filings and 90.9% (79,317) individual consumer filings.There were 1,721 individual Division 1 filings, of which 72.2% (1,243) were individualconsumer filings. Of the 13,453 individual Division 2 filings all but 4% were individualconsumer filings. Information supplied in email message to author from StephanieCavanagh, OSB analyst (10 January 2003). A different set- of numbers, based ondifferent criteria, appears in International Statistics, June 2004, and cites the total numberof personal insolvencies as 93,419. The difference appears to rest in the fact that the2004 numbers excludes filings by individually owned businesses.

4. See International Statistics, supra note 1, at 7, and American BankruptcyInstitute, Filing Statistics, Annual U.S. Filings, available at http://www.abiworld.org/stats/1980annual.html (last visited'December 8, 2004). The US consumer insolvencyfigures cover both ch. 7 and ch. 13 filings.

5. International Statistics, supra note 1, at 4, 10.6. Id. at 12, 13, 17-18. Note carefully that in the Insolvency Service statistics

individual insolvencies covers individual business and professional insolvencies as wellas consumer insolvencies.

7. The Times, April 9, 2004., p.2 . There were 11, 967 individual insolvencies in thethird quarter of 2004 on an adjusted basis. This was an increase of 31.1% on the sameperiod in 2003. There were 35,604 individual insolvencies altogether in 2003.Department of Trade and Industry Homepage, DT, Statistics Release: Insolvencies in theThird Quarter 2004, 5 November 2004, and Table 2, Individual Insolvencies in Englandand Wales (seasonally adjusted), available at http://www.dti.gov.uk/sd/insolv/ (lastvisited December 8, 2004).

8. International Statistics, supra note 1, at 29. The number of personalbankruptcies amounted to 24,109 in administrative year 2001-2002, of which 20,039were non-business bankruptcies. These figures do not include debt agreements andarrangements under Parts IX and X of the Commonwealth Bankruptcy Act. Seeadditionally Jacob Ziegel, Comparative Consumer Insolvency Regimes (Oxford, HartPblishing, 2003) [hereinafter Comparative Consumer Insolvency Regimes], Table 4.1 at

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2005] THE CHALLENGES OF COMPARATIVE CONSUMER INSOLVENCIES 641

grew from 0.50 to 1.21, an increase of 142%. 9 The number of personalinsolvencies grew to a further 22,637 during the 2002-3 administrativeyear. 10

Looking at some non-common law jurisdictions, in Scotland thenumber of individual sequestrations (i.e., individual insolvencyproceedings) jumped from 2,618 in the 1985/6 administrative year to 11,970 in 1992/3 before dropping back substantially in later years forreasons unrelated to the need for insolvency relief. In Germany, wherebankruptcy relief for consumers and other individuals only becameavailable as of 1999, 20,000 personal bankruptcy and small businesspetitions were filed in the first full year of operations of the 1994 lawdespite its very restrictive provisions; 44,000 petitions were filed in 2002after the 2001 amendments to the law." Japan provides a still moredramatic example of the impact of de facto insolvencies on the need forlegal solutions. According to a New York Times report, as many as 2million Japanese were effectively bankrupt in 2002; another estimate putthe number at 1.5 million to 2 million. 12 Despite a less than favourablebankruptcy law, individual bankruptcies in Japan increased from 160,741in 2001 to 214,996 in 2002, or one person out of 587 in a population of126 million. 13 The number of filings under a 2001 law introducing acivil rehabilitation option doubled from 6,210 in the first year of itsoperation to 13,498 in 2002.14

II. Reasons for Rapid Growth in Number of Consumer Insolvencies

Insolvency essentially describes an individual's debt position and isusually defined as the status of a person who cannot meet her liabilitiesas they become due for payment or whose liabilities exceed her assets. 15

94.9. See International Statistics, supra note 1, at 32.

10. Insolvency and Trustee Service Australia, Annual Report by the Inspector-General in Bankruptcy on the Operation of the Bankruptcy Act 2002-2003, available athttp://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/About%/*2OUs-%3EPublications-%3EAnnual%20Documents/$FILE/I-G Annual2003.pdf?OpenElement (last visitedAugust 4, 2004), 14.

11. Jason J. Kilborn, The Innovative German Approach to Consumer Debt Relief:Revolutionary Changes in German Law, and Surprising Lessons for the United States(2004) 24 Nw J. INT LAW & Bus 257, at 286-87.

12. Mark D. West, Dying to Get Out of Debt: Consumer Insolvency Law and Suicidein Japan, University of Michigan Law School, Public Law & Legal Theory Res. PaperSeries, Res. Paper No. 37, also accessible at http://ssrn.com/abstract'479844, at 3, 17.

13. Japan Information Center Corp, V. Increase in personal bankruptcies andproblems of multiple debts (2003), available at http://www.jicc.co.jp/f/f 05.html (lastvisited August 3, 2004).

14. West, supra note 12, at 29.15. Cf. Bankruptcy and Insolvency Act (BIA), Canada, Rev. Stat. Can. 1985, c 31

(1st Suppl.), as am., s 2(1), definition of "insolvent person."



Often the two tests coincide because an individual with readily realizableassets can usually draw on a line of credit to meet current expenses.However, so far as consumers are concerned, it is a safe assumption thatthe second insolvency test, an excess of liabilities over assets, describesthe condition of most consumer insolvents. Consumer overindebtednessis not, of course, a new phenomenon-it is encountered in all societies,new and old, and at all levels of industrial development-so it is relevantto ask, what are the particular circumstances that account for the rapidgrowth in consumer insolvencies over the past twenty-five years in somany industrialized societies around the globe? The most importantreasons appear to be the following:

1. Rapid growth in the use and availability of consumer credit.Various forms of consumer credit-i.e., credit available for personal useor consumption-have been available in most Western societies for overa century. However, the credit was usually closely regulated by law andwas usually only available to well established employees with strongcredit records and to middle- and upper-income individuals. Thesebarriers were removed at different stages and at different tempos in thepost-World War II period as credit restrictions, usury ceilings and otherlegislative impediments were lifted. Similarly, large financialinstitutions discovered that consumer credit was a safe and highlyprofitable form of new business. The introduction of credit cards and theheavy marketing of them, starting in the 1970s, also made a verysignificant difference in the volume of outstanding credit. Credit cardswith a revolving line of credit ensure repeat business and encouragecompulsive shopping by consumers and a "consume now, pay later"mentality in consumer expenditures. Not surprisingly, U.S. studies showa close correlation between the volume of outstanding credit card debtand the growth in U.S. consumer bankruptcies. 16

Here again some statistics best describe the larger picture. Thevolume of consumer credit in the U.S. grew from U.S. $390.3 billion in1982 to U.S. $1,701 billion in 2001;"7 the corresponding figures forCanada were CAN. $139,710 million 8 and CAN $203,713 million. 19

Those for the United Kingdom rose from £36,290 million in 1987 to£141,719 million in 2002.20 In Germany, the volume of outstanding

16. D. Ellis, The Influence of Legal Factors on Personal Bankruptcy Filings, BankTrends (February 1998), Number 98-03. Federal Deposit Insurance Corporation,Division of Insurance (Washington D.C.).

17. International Statistics, supra note 1, at 4.18. Id. at 5.19. Statistics Canada, Consumer Credit, Excluding Mortgages, available at

http://www.statcan.ca/english/Pgdb/fin20.htm (last visited August 4, 2004).20. United Kingdom Office for National Statistics, 23.15 Consumer credit' National

Statistics Online, available at http://www.statistics.gov.uk/STATBASE/Expodata/

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credit grew from DM 130,720 million in 1980 to DM 388,800 million in1996,21 a 200 percent increase that substantially exceeded the populationgrowth during the same period. The Japanese figures are even morestriking. Here consumer credit grew from V166.9 billion in 1979 to V681.3 billion in 2000, a 308% increase.22

2. Reduction in Savings by individuals and families. Whether ornot it is a consequence of the rapid growth of consumer credit, observersin the U.S., Canada and other countries have noted a disturbing andsteady increase of consumer indebtedness as a ratio of total disposableafter tax incomes. Equally troubling is a growing tendency for financialinstitutions to encourage older couples to mortgage their home equity,ostensibly to provide them with greater liquidity and a more comfortablelife style in their mature years.

3. Financial mismanagement by consumers and lack of financialliteracy. In commenting on the causes of consumer bankruptcy, trusteesin bankruptcy, financial counsellors, and credit grantors often claim thatdebtor mismanagement of their finances and lack of budgetary skills is aprimary cause of consumer insolvencies. This conclusion is suspectsince it ignores the role which credit advertising and the generalmarketing environment play in encouraging credit consumption.Nevertheless, the widely held belief that credit mismanagement is theprimary cause of consumer over-indebtedness encouraged the CanadianParliament to add provisions in the 1992 amendments to Canada'sBankruptcy and Insolvency Act (BIA)23 making credit counsellingmandatory for consumer bankrupts and those debtors seeking approval ofa consumer proposal for reduction of their debts in an approved debtrepayment plan.

4. Impact of Unforeseen Circumstances. This congeries of eventscovering such incidents as unemployment or reduced earnings by afamily breadwinner, demotion to a less remunerative job, familyproblems, significant illness in the family, and large medical bills hasbeen given great prominence in the U.S. by the empirical research ofthree leading researchers, Sullivan, Warren and Westbrook. Theirfindings show that these factors greatly exceed in importance the otherasserted causes of consumer bankruptcies.24 Analyses of bankruptcy

Spreadsheets/D4925.xls (last visited August 4, 2004).21. Comparative Consumer Insolvency Regimes, supra note 8, 136. See also

European Credit Research Institute, Briefing on Consumer Credit, Indebtedness andOverindebtedness in the EU (undated), http://www.ecri.be.

22. Japan Information Center Corp., supra note 13, at I.23. See now BIA, s 157.1 and OSB Directive No 1R2 (21 December 1994).24. See Teresa Sullivan, Elizabeth Warren, and Jay Westbrook, The Fragile Middle

Class: Americans in Debt (New Haven, Connecticut, Yale University Press, 2000), assummarized in Bankruptcyaction.com, Bankruptcy Profiles, available at



causes in Canada, Australia and England suggest that illness and medicalbills play a much smaller role there than they do in the U.S., and this isgenerally agreed to be because these countries have a much strongersocial safety net to protect insolvent debtors than is true in the U.S. Onthe other hand, unemployment and family problems also figuresignificantly in the Australian and Canadian statistics, though it may bethat in a substantial number of cases these factors also mask otherproblems.

III. Responding to Consumer Insolvencies

Historically, early societies responded very harshly to debtors whowere not able to meet their commitments. Under biblical and earlyRoman law, commitment to slavery and even worse fates awaiteddebtors and their families. Even as late as the 19 th century, creditors inEngland and other common law jurisdictions were entitled to seek civilimprisonment for delinquent debtors, and frequently did, as readers ofCharles Dickens' novels know only too well. This harsh remedyreflected two attitudes. One was the belief that, unlike insolvent traderswhose misfortunes were ascribed to the vagaries of the marketplace andother uncontrollable contingencies, non-traders were deemed to be theauthors of their own misfortune and therefore little deserving ofsympathy. The other attitude grew out of a sense of frustration. In theabsence of effective means for discovering and seizing debtors' assets,creditors felt the need to resort to coercive methods like imprisonment inthe hope that payment would be offered by the debtor or by the debtor'srelatives and friends.

Insolvency law has travelled a long distance since those rather crudeand simplistic attitudes. There is a much better appreciation today thatpersonal insolvency and a failure to honour debt obligations do not inthemselves denote moral bankruptcy and serious character defects.Nevertheless, the fact remains that a large number of civil lawjurisdictions-in Latin America, southern and eastern Europe, and theFar East, for example-continue to deny insolvent debtors access tobankruptcy proceedings or, if they do permit it, do not accompany it by

http://www.bankruptcyaction.com/USbankstats.htm (last visited August 3, 2004). Theirfindings were as follows: average age: 38; 44% of filers are couples; 30% are womenfiling alone; 26% are men filing alone; slightly better educated than the generalpopulation; two out of three have lost a job; half have experienced a serious healthproblem; and fewer than 9% have not suffered a job loss, medical event or divorce. For ahighly readable account of the problems many middle class American couples who haveaccumulated mortgage and other debts premised on a steady two family income andwhere one of the partners subsequently falls ill or loses her job, see ELIZABETH WARRENAND AMELIA TYAGI, THE Two-INCOME TRAP: WHY MIDDLE-CLASS MOTHERS ANDFATHERS ARE GOING BROKE (New York. Basic Books. 2003).

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the prospect of offering the bankrupt immediate or eventual discharge ofthe debtor's remaining debts.

This is in sharp contrast with the American "fresh start" philosophy.This, at least since the National Bankruptcy Act of 1898, has giveninsolvent U.S. consumers ready access to the bankruptcy system andmore or less immediate discharge of the remaining debts on surrender ofthe debtor's non-exempt assets. The underlying belief here is that thedebtor is a victim of unforeseen circumstances-unemployment, aneconomic depression, sickness and such like-and that restoring thedebtor promptly as a productive member of society without the millstoneof perpetual indebtedness is as much in the community's interest as it isin the interest of the debtor and his family.

Thus, broadly speaking, it may be said that modem bankruptcysystems fall into three categories so far as their approach to consumerinsolvencies are concerned:

1. Jurisdictions that remain very conservative in their response toconsumer over-indebtedness;

2. Jurisdictions that adopt an ultra-liberal position of the American"fresh start" variety; and

3. Jurisdictions that adopt a moderately liberal and qualified freshstart policy. The Canadian, English and Australian insolvencyregimes belong to this group and, it would appear, so does theJapanese regime as a result of the adoption of the 1999 SpecifiedConciliation Law.

A. A Preliminary Question

The classification of modem consumer insolvency systems raises amore basic question of the type of assistance that should be madeavailable to consumer debtors and at what point, and the philosophyinforming each of these approaches. These approaches too fall underthree principal headings, viz.:

1. Counselling facilities for overcommitted debtors coupled withvoluntary repayment plans;

2. Court supervised partial repayment plans followed by discharge ofthe remaining debts. Consumer proposals in Canada, administrationorders and Individual Voluntary Arrangements (IVAs) in England,chapter 13 plans in the US, and creditor approved repayment plansunder the Japanese Conciliation Law fall into this category; and



3. Regular or simplified bankruptcy proceedings coupled withdischarge of remaining debts either immediately (the US approach)or after a minimum prescribed period coupled with an obligation bythe bankrupt to make surplus income payments up to the time ofdischarge or for a fixed period (Canadian, English and Australianapproaches and, in a more attenuated form, the German approach as aresult of the 2001 amendments).

B. Rationales of Different Approaches

The appropriateness of each of these approaches will depend on adebtor's particular circumstances. A debtor experiencing only temporaryfinancial difficulties and enjoying a substantial discretionary income mayrequire little more than financial counselling and an extension of time bycreditors for repayment of the consumer's debts. On the other hand, adebtor with more serious financial difficulties and with few prospects ofbeing able to pay off all the debts within a reasonable time frame, butanxious to avoid the stigma of bankruptcy, will benefit from havingaccess to a statutory rehabilitation plan. Then, thirdly, there is the largegroup of debtors with little or no discretionary income who arehopelessly insolvent. For them, personal bankruptcy followed bydischarge of the debts either at the conclusion of the proceedings orwithin a few months thereafter, seems the obvious and indeed often theonly feasible solution assuming the debtors have not been guilty of activemisconduct.

C. Rationales of U.S. Fresh Start Philosophy

What is striking about the American fresh start approach is that itappears to offer the debtor the prospect of an immediate release from allhis dischargeable debts following the filing of the bankruptcy petitionand completion of the accompanying formalities regardless of hisparticular circumstances and capacity to repay some or all of his debts.25

Many non-American observers are troubled by what they perceive to bean excessively generous or naive approach and see it as an invitation forabuses by unscrupulous debtors.26 However, this view is not shared by

25. The US position may change radically if, as seems likely as of this writing(March 2005), US credit industry's seven year to persuade Congress to adopt a meanstesting law for debtors seeking to take advantage of chapter 7 of the US Bankruptcy Codeis finally crowned with success. S.256 was easily approved by the Senate on March 11,2005 and the predictions are that the House of Representatives will follow suit.

26. Note, however, that pursuant to 11 USC 707(b) and Bankruptcy Rules, Rule1017(e), the U.S. bankruptcy court has power to dismiss an abusive bankruptcy petition.Until recently such motions were rare, one of the reasons being that only the court actingon its own initiative and the US trustee could bring such a motion. However, acting in

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most American bankruptcy scholars and many bankruptcy judges, andthey offer one or more of the following rationales in support of the freshstart philosophy:

27

1. That to impound a consumer bankrupt's future income wouldviolate the 13th amendment to the U.S. Constitution againstinvoluntary servitude.

2. That a coercive payment regime will provoke the consumer'sresistance and encourage the consumer to change jobs or otherwisebecome less productive, and perhaps even to disappear completely.

3. That it is much better to secure the debtor's consent to a voluntarypayment system by giving the debtor incentives that are not availablein a straight bankruptcy than to coerce him to make involuntarypayments.

4. That the British-style income payment and discretionary dischargesystem is based on the historical role of the British insolvencylegislation as a creditors' debt collection instrument. This was nottrue (it is argued) of the American National Bankruptcy Act of 1898because pre-bankruptcy debt collection rules generally fall understate jurisdiction.28

5. That a British-style income payment and discretionary dischargesystem is intrusive, paternalistic, and subjective since no two debtorsand their families have the same needs and face the samecircumstances.29

6. That to attempt to engraft a means test on what is already a verycomplex and overburdened US consumer bankruptcy system wouldbe the straw that breaks the camel's back.30

7. That since the bulk of consumer bankruptcy debts today consist ofconsumer credit liabilities, it is more efficient to oblige the credit

response to creditors' criticisms, US trustees in various districts appear to have becomemore active in initiating such proceedings.

27. Comparative Consumer Insolvency Regimes, supra note 8, 69.28. See D.G. Boshkoff, Limited, Conditional, and Suspended Discharges in Anglo-

American Bankruptcy Proceedings 131 U. PA. L. REV. 69, 121 (1982).29. Id. at 120-123; and J. Braucher, Lawyers and Consumer Bankruptcy: One Code,

Many Cultures, 67 AM. BANR. L.J. 501, 583 (1993) (eloquently expressing similarsentiments without allusion to the British style provisions), cited in E Warren, APrincipled Approach to Consumer Bankruptcy 71 AM. BANKR. L.J. 483, 505 (1997).

30. E. Warren, supra note 29, at 505-506. The metaphor is the author's, not Prof.Warren's.



industry to intemalise its losses or to tighten its credit grantingstandards if creditors believe their losses are too high than to expectconsumers to resist the impulse for instant gratification encouragedby the ready availability of consumer credit.31

8. That there is no evidence of large scale abuses in the existingbankruptcy system and that the overwhelming percentage of thoseseeking chapter 7 bankruptcy protection are hopelessly insolvent andwould not be able to pay off their indebtedness in any reasonabletime frame even if means testing and a mandatory chapter 13 regimewere to be introduced.32

D. The Ongoing U.S. Debate

Since 1997, efforts have been made by the powerful U.S. creditindustry to persuade Congress to adopt legislation that would denybankruptcy relief to those debtors deemed capable of paying a substantialpercentage of their debts (20 percent is a popular figure) over a five yearperiod. Congress actually approved such legislation in 2000 butPresident Clinton pocket vetoed the bill as one of his last acts in office.33

A successor bill has won the endorsement of each of the Houses ofCongress but as of this writing (July 2004) remains frozen in committeebecause of fierce opposition by one or two Congresspersons and theirdetermination to amend the bill to promote other non-bankruptcyobjectives.34

It is in any event important to recognize that what current U.S. lawoffers insolvent debtors is only a "qualified" fresh start and not anabsolutely clean slate. This is because there are no less than 18exceptions to the right to an unconditional discharge under the presentBankruptcy Code.35 In addition, many American debtors enter intoreaffirmation agreements with creditors agreeing to pay their debts evenafter statutory discharge of the debts. Then, too, debtors in all statesmust surrender their non-exempt assets to the trustee at the time ofbankruptcy. The exemptions vary widely among the states and this too is

3 1. T.H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (Harvard UniversityPress, 1986) ch. 10, at 234-236.

32. T.A. Sullivan, E. Warren and J.L. Westbrook, Consumer Bankruptcy in theUnited States: A Study ofAlleged Abuse and of Local Legal Cultures 20 J. CONS. POL'Y223 (1997).

33. Comparative Consumer Insolvency Regimes, supra note 8, at 58-60.34. However, the prospects may have greatly improved with President Bush's re-

election as President in November 2004 and with a substantial increase in the number ofelected Republican Senators.

35. Comparative Consumer Insolvency Regimes, supra note 8, at 80-81.

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the subject of much controversy among the federal legislators.36

E. The Fresh Start Policy in Other Common Law Jurisdiction

In England, the principle of a debtor's entitlement to a discharge ofhis debts in bankruptcy was first recognized in the Bankruptcy Act of1883. However, it was a long way removed from the American freshstart rule. In particular, the English discharge was subject to thefollowing important qualifications. First, the discharge was in thediscretion of the court and, in addition to denying the dischargealtogether, the court could issue a conditional or suspended discharge.Second, the debtor had to apply for the discharge and creditors wereentitled to oppose it. In the third place, the debtor could be required tomake voluntary or court mandated payments to the trustees pursuant toagreement or a court order (income payment order (IPO)). 37

Significantly, the English legislation contained no formula fordetermining the amount of the IPO but left it to the court's discretionsubject to the debtor being left with sufficient income to meet thedebtor's essential expenditures for himself, his family and otherdependents.

Important amendments to the discharge provisions were adopted inthe English Insolvency Act of 1986.38 First time bankrupts were nowentitled to an automatic discharge, after three years in the case of regularbankruptcies and after two years in the case of summary administrations.

Further changes arrived with the enactment of the Enterprise Act2002. 39 The basic discharge period has now been reduced to one yearand may be shortened still further if the Official Receiver files a noticethat investigation of the bankrupt is unnecessary or that investigation ofthe bankrupt has been concluded.40 Non-British readers may besurprised to learn that these amendments were prompted not by aconcern to meet the needs of the growing number of over-indebtedBritish consumers. Rather, they were inspired by the Britishgovernment's wish to encourage a stronger enterprise culture in theBritish population.41

The Canadian discharge system offers still another version of amodified fresh start policy. Prior to 1992, the Canadian bankruptcy

36. Id. at 63-65.37. Id. at 117. In practice, an IPO appears to have been made in about 10 percent of

the cases, id, Table 5.2 at 118.38. Id. at 118-19; Insolvency Act 1986, s 279(1).39. Enterprise Act 2002 (U.K.), 2000, c. 40.40. Id. at s 256(1), amending Insolvency Act 1986, s. 279(1).41. See Secretary of State. for Trade and Industry, Productivity and Enterprise.

Insolvency-A Second Chance (London, Cm 5234, July 2001).



legislation basically mirrored the pre-1986 British approach to thedebtor's entitlement to a discharge. Amendments in 1992 to theBankruptcy and Insolvency Act (BIA)42 entitle first time bankrupts to anautomatic discharge nine months from the date of the bankruptcy orderunless the discharge is opposed by the Superintendent of Bankruptcy, thetrustee in bankruptcy or the debtor's creditors. In the latter event, thecourt is free to make such order as it deems appropriate. In practice,there are few objections to the debtor's discharge.

Another and still more important change in the Canadian positionwas introduced in 199743 dealing with the debtor's obligation to makesurplus income payments during the bankruptcy period and prior to thedebtor's discharge. The pre-1997 practice was to leave it to the trustee'sdiscretion to reach an appropriate agreement with the debtor although thetrustees were expected to follow the surplus income guidelines providedby the Superintendent. The 1997 amendments made it obligatory for thebankrupt to make surplus income payments to the trustee in accordancewith a "low income cut off' (LICO) table prepared annually by theSuperintendent. 44 The results from the first three years of operation ofthe new surplus income regime are instructive and also throw importantlight on the soundness of the U.S. style fresh start policy. In the period1998-2001, the surplus income of Canadian individual bankrupts variedfrom 16.94% in 1998 to 19.88% in 2001. 45 The size of the surpluspayments made by the bankrupts varied widely among the provinces.Nationwide, 55.6% of the payments were below CAN $200; the meanamount was CAN $240.16 and the median figure CAN $180 permonth.46

F. Scandinavian and Continental European Approaches

The approach of the continental European countries, including theNordic countries, to the treatment of consumer over-indebtedness lies atthe opposite end of the spectrum to the liberal discharge policies adoptedin common law jurisdictions-not just the United States but equallythose of Canada, Australia, and England. The reasons for this disparityrest partly in legal history and partly in the restricted role that consumercredit has played, and perhaps still plays, in these countries. For a longtime, bankruptcy was not, and in many cases still is not, an option for

42. SC 1992, c. 27, s. 61(1), adding s 168.l(l)(f) to the parent Act.43. Comparative Consumer Insolvency Regimes, supra note 8, at 28, and BIA s. 68

as revised in 1997.44. Note importantly that the bankrupt is only obliged to pay 50% of the surplus

income as determined in accordance with the Superintendent's directive.45. Comparative Consumer Insolvency Regimes, supra note 8, Table 2.1, at 32.46. Id. at 31.

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consumers in Western Europe. Where the remedy was available, unpaiddebts survived the bankruptcy process for as much as thirty years. Evennow, nearly twenty years after legislative relaxation of the oldshibboleths, consumer access to a right of discharge remains difficult andheavily circumscribed. Dr. Niemi-Kiesilainen reminds us in herexcellent survey of the European legislative developments 47 that there arethree basic differences between the Scandinavian, continental Europeanand common law approaches. Thus, in all the European legislationexamined by her (a) access is restricted to debtors deemed deserving ofassistance; (b) all of them require a mandatory payment plan of from 5 to7 years and there are no facilities for an automatic discharge; 48 and (c) allof them place special emphasis on debt counselling services provided by

a variety of state-sponsored or state-funded social agencies. Their dualrole is to help the consumer draw up a debt adjustment plan and to

mediate its acceptance by creditors, and to wean debtors away from theuse of consumer credit and to live in the future on a balanced and,usually, very tight budget.

Even these modest changes in European attitudes might not have

come about but for the rapid increase in the number of overcommittedconsumer debtors in the 1980 and 1990s. 49 Before the 1970s and 1980s,most of the continental countries restricted the availability of consumercredit through various controls. Demand exceeded supply and defaultswere rare.f ° Since then, the volume of consumer credit and/or householdcredit has grown rapidly, though not at an even rate. The UK figureswere cited earlier. 51 In Germany, consumer credit increased from 15billion ECU in 1970 to 200 billion ECU in 1998. As a percentage of

47. J. Niemi-Kiesilainen, The Role of Consumer Counselling as Part of theBankruptcy Process in Europe (1999) 37 OSGOODE HALL L.J. 409 [hereinafterCounselling]; J. Niemi-Kiesilainen, Consumer Bankruptcy in Comparison: Do We Cure aMarket Failure or a Social Problem? (1999) 37 OSGOODE HALL L.J. 473 [hereinafterDevelopments]; J. Niemi-Kiesilainen, Collective or Individual? Constructions of Debtorsand Creditors in Consumer Bankruptcy in J. Niemi-Kiesilainen, IDC Ramsay and W.C.Whitford (eds), CONSUMER BANKRUPTCY IN A GLOBAL PERSPECTIVE, (Oxford, HartPublishing, 2003) ch. 2.

48. "All European bills emphasize that the law must not undermine the generalmoral imperative of paying one's debts." Niemi-Kiesilainen, ibid. Developments, at 482.

49. "Debtors" is used here in the sense commonly employed by sociologists, viz.individuals with accumulated debts. A substantial number of the chapters in U. REIFNERAND J. FORD (EDS), BANKING FOR PEOPLE (Berlin, de Gruyter, 1992) contain a detailedexamination of the state of indebtedness in various European countries, especially amonglow-income consumers. For a later study, see EU Directorate-General for Health andConsumer Protection, Study of the Problem of Consumer Indebtedness: StatisticalAspects, Final Report (Brussels, October 2001) [hereinafter Consumer Indebtedness].

50. Niemi-Kiesilainen, Developments, supra note 47, at 480. For an excellentdescription of the German position, see also Kilborn, supra note 11.

51. United Kingdom Office for National Statistics, supra note 20.



PDI, average indebtedness grew from 15% in 1978 to 25% in 1997.52

G. Complexities of Continental Rules: German Insolvenzordnung 1994

The complexities of many of the Nordic and Western Europeanconsumer insolvency regimes may be gauged from the followingdescription of the rules appearing in the German insolvency law of 1994.The original report of the Commission established by the Germangovernment in the 1980s to present proposals for revising the century oldGerman insolvency laws did not include recommendations for dealingwith consumer problems and a discharge facility was only provided forbusiness debtors. Strong pressure by consumer groups and the support ofthe Social Democratic opposition party led to amendments being adoptedfor consumer debt relief during debate on the bill in 1991. The law wasapproved in 1994 but only became operative at the beginning of 1999.The law adopted a two-track procedure for the relief of consumerdebtors. The first, governed by Article 304, involved a debt adjustmentplan; the second was a bankruptcy proceeding, falling under Article 286,which, if all went well, might conclude after an interlude of 7 or moreyears with the discharge of any remaining debts. Under the debtadjustment procedure, the debtor was obliged to negotiate with thecreditors and present them with a plan. The plan had to be approved byhalf the creditors in number and value but a secured creditor could not bebound without its consent. The plan also required court approval and,when that had been obtained, an insolvency manager had to be appointedto collect and distribute the payments and supervise the plan.

The bankruptcy procedure was apparently based on differentprinciples and involved the debtor being required to pay his attachableincome for up to 7 years to a trustee-manager for distribution to thecreditors followed by discharge of any remaining debt if the debtor hadobserved all the requirements of the Law. Importantly, the Article 286procedure also had a preliminary phase requiring the debtor and hiscreditors to engage in serious negotiations about the terms and amountsof the payments to individual creditors.53 It also envisaged thepossibility of the payment plan involving all of the debtor's family withthe prospect of reducing the seven year period if other members of thehousehold contributed payments.54

The new Law encountered substantial teething troubles in its first

52. Udo Reifner, Consumer Lending and Overindebtedness Among GermanConsumer Households, Expert Report to the European Commission (Hamburg, 27 March1998) [hereinafter Expert Report] at 475.

53. Id. at 85-86.54. Id. at 83.

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year of operation. Apparently, only 13% of the applications for debtrelease led to approved payment plans. Some of the difficulties were thefollowing:55 there was a long waiting list for the obligatory debtcounselling mandated by the legislation; attorneys were not entitled tosufficiently high fees to be attracted to offer their services; some judgesbelieved that the debtor had to be in a position to repay a minimumamount of the debt to be entitled to enroll in a plan; and major creditorswere being uncooperative in the negotiation of payment plans. The debtrelease provisions in Article 304ff were also criticised on the followinggrounds:

56

1. The costs of the procedure had to be home by the debtor. Sincemany debtors could not afford to pay, even with legal aid, they wereexcluded from access to debt relief altogether.

2. The procedure was too complex and could lead to the proceedingsbeing terminated without the debtor's participation.

3. The duration of the procedure-a minimum of 7 years57-wasmuch too long, especially when account is taken of the financialhardship suffered by the debtor during this period as well as thedebtor's obligation to comply with numerous duties.

4. The Law was regressive insofar as it required the debtor to acceptany offer of work even if totally unsuitable for the debtor.

5. The Law took no account of creditors' responsibility for thedebtor's over-indebtedness. Banks were also given unfair prioritytreatment over other creditors' claims and, in particular, were entitledto continue to attach the debtor's earnings.

6. The Law was demeaning to debtors and deprived them of theirdignity as human beings.

7. The law operated unfairly against guarantors of the debtor. Theycould be sued by the debtor's creditors but had no right of recourseagainst the debtor. This meant that other members of the debtor's

55. The information is taken from an email to the author from Dr. Reifner (6December 1999).

56. Reifner, Expert Report, supra note 52, at 86-88. See also U. Reifner, TheEleventh Commandment: Inclusive Contract Law and Personal Bankruptcy in NIEMI-KIESILAINEN, RAMSAY AND WHITFORD, CONSUMER BANKRUPTCY IN A GLOBAL

PERSPECTIVE, supra note 47.57. In practice, after allowing for an initial waiting period, it could be as long as 10

years.



family, and divorced or separated spouses, could suffer greathardships and might themselves have to seek bankruptcy relief.

The rigidities of the 1994 provisions were substantially relaxed in2001 amendments to the German law. Nevertheless, the amendmentsretained the principle of the debtor's obligation to make payment fromsurplus income for six years, to accept any type of employment offeredto the debtor, and emphatic rejection of the painless U.S.-style fresh startphilosophy. It seems, however, that the 2001 amendments have led to avery significant increase in the number of consumers seeking debtrelief.

58

H. Relationship of Debt Repayment Plans to Straight BankruptcyProceedings

The preceding description of the current German approach toconsumer insolvencies (which is reasonably representative of theapproach adopted in many other Western European countries) raises abasic question of the appropriate relationship between negotiated andcreditor approved repayment plans and bankruptcy proceedings resultingin a discharge of the debtor's unpaid debts. Generally speaking, incommon law jurisdictions it is left up to the debtor to make theappropriate choice between these alternatives. It is assumed the debtorwill opt for the type of relief best suited to her particular circumstancesand that the state should not make the decision for her.59 It is felt to bebetter to build sufficient incentives into the repayment regime for thedebtor to opt for it in the expectation that a self-directed decision willproduce better results than a coerced decision made for the debtor. Thisperception is supported by experience in Canada and the U.S. of highrates of failure in voluntary repayment plans: as high as 70 percent in theU.S. for chapter 13 plans and about a third in Canada for consumerproposals.

As noted, the continental European approach proceeds from thepremise that the debtor should always be obliged to make payments forlong periods of time before "earning" the right to a discharge inbankruptcy, so there is no hesitation about building a mandatory

58. See Kilborn, supra note 11.59. However, there is much evidence in the U.S. and Canada that "local culture" in

the form of attorneys and bankruptcy judges (U.S.A.) and trustees in bankruptcy,creditors (sometimes) and bankruptcy judges (Canada) will often influence a debtor'sdecision. Note too that pursuant to s.170(2)(c) of the BIA, the trustee, in filing thetrustee's report at the time of the debtor's eligibility for discharge, must indicate whether,in the trustee's opinion, the debtor could have made a viable proposal instead of optingfor the bankruptcy route.

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repayment plan into the overall insolvency scheme. It could also beargued that the Commonwealth countries' approach is not that differentfrom the continental structure since the Canadian, English and Australianlegislation all require the debtor to turn over surplus income for varyingperiods before earning the right to a discharge. Given this feature, itseems but a small step for the legislation to provide that the administratormay refuse a bankruptcy remedy altogether if she forms the view that thedebtor had the resources to enter into a voluntary repayment plan andwas unreasonable in refusing to do so. The argument also derivessubstantial support from the philosophy informing all the recentCongressional bills. As previously noted, their common theme is that adebtor should be denied access to a chapter 7 discharge if the debtor'sfinancial statement shows that the debtor could have repaid a givenpercentage of the debts over a five year period after allowing forprescribed cost of living expenses.

I. The Future of the Fresh Start Philosophy

The preceding survey will have shown that so far no othercountry--common law or civil law in orientation-has evinced seriousinterest in following the U.S. lead in granting a consumer bankrupt theright to an immediate discharge without regard to his earning capacityand subject only to surrendering his existing non-exempt assets. In theU.S. itself, the fresh start philosophy is under deep assault by the financeindustry and presumably the lobbyists' efforts will continue regardless ofthe fate of the bills currently before Congress.

To non-American observers, many of the rationalizations of thefresh start philosophy seem fragile. Nevertheless, its underlying themeappears to have left its imprint on many of the more recent non-U.S.insolvency regimes in recognizing the need for more generous dischargeprovisions in the face of the rapidly escalating number of overcommitteddebtors and the futility of making impecunious debtors walk the plankfor up to six years to satisfy Calvinist notions of a responsible debtor.The reduced discharge periods in Canada and England-nine months inthe former and a year or less in the latter-essentially reflect this reality.

It is also important to stress the very modest results of the surplusincome payment requirements in the countries that have adopted them asa condition of the debtor's eligibility for discharge. In England, incomepayment orders in recent years have only been made in about ten percentof the personal bankruptcies; in Canada, the overall percentage ofbankrupts with surplus income as determined under the statutory BIAformula varied from 16.94% to 19.06% in the period between 1998 and



2001 .60 However, the actual benefits to an estate from surplus paymentsis often negligible. For example, in one sample of 900 summaryadministration files, pay outs only amounted to an average ofCAN $103.13 and 3.6% of total receipts, or 0.4% as a percentage ofreceipts from all 900 files.

IV. Other Aspects of Modem Consumer Insolvency Systems

The discharge of debts provisions and the introduction of debtrepayment plans as an alternative to the bankruptcy solution constituteonly a small, albeit very important, part of the larger insolvency picture.Space only permits me to indicate a few of the many other issues facingmodem policy makers.

A. Accessibility of Bankruptcy Relief

In many jurisdictions-England, Germany and Japan are goodexamples--debtors have often been denied access to the bankruptcysystem because the legal and related expenses are well beyond thedebtor's pocket. In England, a petitioner must deposit the sum of £250to cover the administrative costs of the Insolvency Service as well as acourt filing fee of £120 before the petition will be accepted.61 Thisfinancial hurdle explains in large part why the English personalbankruptcy rate is so low. In both Germany and Japan, it seems,petitioners face the prospect of high attorney fees, which may run toseveral thousand dollars. The Canadian position is different. In Canada,bankruptcy assignments are overwhelmingly handled by licensed trusteesand they have solved the fee problem by their willingness to accept asmall down payment and the debtor's promise to pay the balance of thetrustee's fee and expenses (approx. CAN $1,750) by installments.62

However, the arrangement has encountered significant legal and otherdifficulties and the future of such instalment arrangements is uncertain.63

It is not clear how indigent debtors solve the problem of access tothe U.S. bankruptcy system since it is now well established that adebtor's pre-bankruptcy promise to pay the attorney's fees is notenforceable once bankruptcy has intervened. Instead, the attorney mustfile a proof of claim like all other creditors. Because of the detail and

60. Comparative Consumer Insolvency Regimes, supra note 8, at 35, n.99.61. Id. at 115.62. For the details see Comparative Consumer Insolvency Regimes, supra note 8,

20; see also Niemi-Kiesilainen, supra note 47, and sources cited therein.63. See J.S. Ziegel, Financing Consumer Bankruptcies, Re Berthelette, and Public

Policy (2000) 33 CAN. Bus. L.J. 294, and J.S. Ziegel, Indigent Debtors and FinancialAccessibility of Consumer Insolvency Regimes, ANNUAL REVIEW OF INSOLVENCY LAW,2004, p 499.

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complexity of the documents required to accompany the petition, it isdifficult for debtors to complete the documents themselves.Nevertheless, there appears to be a small but not insignificant number ofpro se filers who complete the petition themselves, aided in some casesby pro bono lawyers or legal service clinics.

In terms of simplicity and accessibility to insolvent debtors, theAustralian model is surely the best. The bankruptcy petition andsupporting statement of affairs are easy to complete and no court hearingor filing fees are involved. Instead, the debtor can mail in the petition orlodge it by hand at one of the ITSA offices across Australia. If thedocumentation is in order and the debtor is not ineligible to file forbankruptcy, the Official Receiver must accept the petition andbankruptcy follows automatically. 64 Unless the debtor has retained theservices of a registered (i.e., private trustee) (very unlikely in practice),following the bankruptcy order the debtor's estate will be administeredby the Official Receiver, again free of charge to the debtor. Mostconsumer bankruptcy cases handled by ITSA are "no asset" cases and socan be handled very expeditiously and at low cost by the ITSA officials.

B. Exempted Property

Even the most indigent of debtors must be left with sufficientclothing, household equipment and furniture to maintain some semblanceof dignity and comfort for himself and his family and, where relevant,with tools and equipment to continue plying his trade or profession.Historically, the exemptions in England were barely at the subsistencelevel and were severely limited in value. The "one size fits all" standardhas been abandoned in the current English Insolvency Act and has beenreplaced by a "necessary" standard appropriate to the debtor'scircumstances. 65 Accordingly, s. 283(2) of the English Act entitles thedebtor to retain:

(a) such tools, books, vehicles and other items of equipment as arenecessary to the bankrupt for use personally by him in hisemployment, business or vocation;

(b) such clothing, bedding, furniture, household equipment andprovisions as are necessary for satisfying the basic domestic needs ofthe bankrupt and his family.

64. Comparative Consumer Insolvency Regimes, supra note 8, at 97, and theexcellent article by Thomas G.W. Telfer, The Proposed Federal Exemption Regime forthe Bankruptcy and Insolvency Act (2005) 41 CAN. Bus. L.J. 279.

65. Comparative Consumer Insolvency Regimes, supra note 8, at 116.



In case of dispute, the decision of what is necessary to meet thedebtor's needs is made by the trustee with a right of appeal to thebankruptcy judge. Reported English judgments appear to indicate that inpractice the courts err on the side of generosity.

Other insolvency regimes, civil law and common law, appear tohave retained the model of an itemized list of exemptions with individualmonetary ceilings. This is generally true in Canada and the U.S. InCanada, exemption levels continued to be governed by provincial lawalthough the federal government has been urged to exercise itsbankruptcy power to impose a uniform exemptions standard for allpersonal bankruptcies. The provincial exemption levels vary widely,with the Prairie provinces' debtor oriented provisions being the mostgenerous and those of the Maritime provinces the least generous. Evengreater disparity in exemption levels is found among the Americanstates, particularly in the treatment of the debtor's residence, where theexempted amount may range from a few thousand dollars to totalexemption of the debtor's home. The 1978 Bankruptcy Code attemptedto provide a minimum floor of exemptions for all debtors by entitling thedebtor to choose between the state exemptions and the Code providedexemptions.66 However, the drafter's good intentions were thwartedwhen most of the states decided to exclude the optional federal standards,which is what the Code entitles them to do.

An important feature that appears to divide North Americanjurisdictions from overseas countries is the treatment of the debtor'sresidence, or "homestead" as it is often referred to in the North Americanlegislation. Overwhelmingly, most of the American states and theCanadian provinces grant some form of exemption in this area but, asalready noted, the exemption varies enormously in value. The inequitiesof these disparities from the debtors' and creditors' points of view haveoften been noted, but legislators in both countries have so far beenunable to resolve it satisfactorily. The English and Australianbankruptcy legislation contains no explicit exemptions for residencesthough it seems that in England the bankrupt and his family may beafforded protection from being ousted from the family home for areasonable period of time.67 On the face of it, allowing the bankruptdebtor to retain a generous equity in the family home may be unfair tothe debtor's creditors. However, those who subscribe to this positionoverlook the fact that the psychic harm to the debtor and his family ofbeing forced to move into rented accommodation in an entirely different

66. 11 USC § 522(b). See also Comparative Consumer Insolvency Regimes, supranote 8, at 63-65.

67. See Insolvency Act (Eng.), as amended, s 283(2).

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area, and the associated costs of the move, may more than offset anypecuniary benefits to the creditors. In most cases, a debtor's equity inthe home is quite modest. It is only in those jurisdictions where thehomestead exemption is very high (or subject to no ceiling at all) that thedebtor will choose not to use his equity as collateral for a loan to helppay off his existing indebtedness.

Another exemption issue that is currently attracting much attentionin Canada is the treatment of various types of pension plans. Federal andprovincial pension legislation exempts employment related pension plansfrom seizure in or outside bankruptcy. Its proponents argue that theexemption should also extend to voluntary savings plans such as theRegistered Retirement Savings Plan recognized under Canada's federaltax legislation on the ground that the state should encourage taxpayers tomake provision for their sunset years.68 There are two weaknesses aboutthis reasoning. One is that the proposed exemption is unfair to lowincome debtors whose discretionary income is too small to enable themto set up a private pension plan, yet who are still expected to makepayments to the trustee. The other is that it proves too much. If privatepensions are exempted then so, it may be argued, should a debtor'sequity in his home, and that exemption should be more generous than thelimits currently provided for in most provincial legislation. This isbecause for most debtors the home represents the largest singleinvestment and nest egg for their retirement years.

C. Reaffirmations and Non-Dischargeable Debts

These two topics are quite disparate but, in the interest of space, it isconvenient to treat them together. A reaffirmation involves the questionwhether a debtor should be free to reaffirm pre-bankruptcy obligationsfollowing the debtor's discharge or whether such post-bankruptcyagreements need to be carefully regulated to avoid abuses. Theproponents argue that regulation is necessary and that without thisprotection debtors may easily lose the benefits of a statutory discharge.American experience shows 69 that these concerns are well founded.Canadian case law also illustrates that debtors will frequently reaffirm apre-bankruptcy contract-for example, by retaining a leased vehicle evenafter the debtor's discharge-without appreciating the legalconsequences of their conduct. Most common law jurisdictions have noclear rules governing reaffirmation of pre-discharge obligations and so,at a minimum, the case for statutory clarification of the position is very

68. Comparative Consumer Insolvency Regimes, supra note 8, at 24.69. Id. at 88-89.



strong.Pre-bankruptcy debts and obligations that are non-dischargeable in

bankruptcy raise a very different set of issues. The non-dischargeabledebts and obligations are invariably spelled out in the legislation and,though there may be problems of construction, the basic position is clearenough. What is highly contentious are the types of debts andobligations that should be non-dischargeable and the policy thatdetermines their choice. The answers vary widely even among commonlaw jurisdictions. The Canadian BIA contains eight non-dischargeabletypes of debts and obligations compared to five each for Australia andEngland and a whopping eighteen for the United States!7 ° It seemsconsistent with public policy that criminal penalties should not bedischargeable in bankruptcy but it is not as obvious that the same statusshould be accorded to unpaid taxes-they are dischargeable under theCanadian, British and Australian acts but not under the U.S. BankruptcyCode. Should the answer to this question rest on the debtor's motivationin failing to meet his civic obligations or does it rest on the sense ofunfairness that other taxpayers should have to shoulder the extra burdenof the bankrupt's delinquent taxes? Could the same argument not bemade as well about many other types of debt? The treatment of alimonyand family support obligations raises another set of difficult questions.They are not dischargeable in the above-mentioned jurisdictions, exceptin Australia, where the court may grant relief from payments that are inarrear, 7 1 and in England, where s.281(5) of the Insolvency Act permitsthe court to grant release from a family support or maintenance debt "tosuch extent and on such conditions" as the court may direct. The highincidence of unpaid family support obligations suggests that publicpolicy in this area may be easier to enunciate than to enforce.

D. Prophylactics and Creditors' Accountability

A well designed and balanced insolvency system will be concernednot only to provide relief to overcommitted debtors but also to putmechanisms in place to discourage over-indebtedness to begin with.Here the tendency is to put the burden on the debtors to acquire the skillsand discipline for proper budget management either through their ownexertions or with the help of high school instruction or credit counselling

70. Id. at Table 2.4, 42-44. Student loans constitute a separate and even morecontroversial category and are often dealt with in separate legislation. For the Canadiantreatment, see id. at 129. (At the time of this writing, a private member's bill in pendingin the Canadian House of Commons to reduce the non-dischargeability period for studentloans from ten years to two years.).

71. Cwth. Bankruptcy Act, s. 153(2), (2A).

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facilities. As previously noted, the Canadian Act does in fact obligebankrupts to receive some elementary counselling as a condition of theirdischarge from bankruptcy. However, the available evidence appears toshow that the statutory imposed counselling makes little difference to thedebtors' postdischarge credit rating.72 It is also unclear whether this isbecause the course of instruction is too short to change basic attitudesand expenditure patterns or whether it is because saturation creditadvertising and the easy availability of credit cards quickly offsets thebenefits of counselling.

It is striking however that North American legislation in generalimposes no legal obligations on creditors to exercise prudence andrestraint in the granting of credit except so far as the discipline may beimposed ex post following the discharge of a debtor from monies owingto a creditor. This is a crude approach and tars a careful credit grantorwith the same brush as the lax creditor whose high interest rates andgenerous profit margins allow it to absorb higher losses. It seems that,under the prodding of the British government, financial institutions andother major credit grantors have agreed to screen credit applicants morecarefully and to adopt standards of prudential conduct but it is not clearhow these can be effectively enforced in practice without crediblesanctions.73 In any event, these initiatives have no counterpart in NorthAmerica and offers of unsolicited credit cards and beguiling offers ofcredit for the acquisition of goods and services with no down paymentand no repayments for a year or more continue to flourish despite thehigh insolvency rates in Canada and the U.S. The U.S. credit cardindustry has even opposed suggestions for modest disclosurerequirements in monthly statements that would tell the credit card holderhow long it would take him to pay off the current balance on the creditcard at the minimum rate prescribed by the credit card agreement.

72. See Saul Schwartz, Effect of Bankruptcy Counseling on FutureCreditworthiness: Evidence from a Natural Experiment (2003) 77 ABLJ 257 (showingthat a comparison of Canadian consumer bankrupts pre-1993 who had not receivedcounseling with post-1993 bankrupts, who had not received it, showed no statisticallysignificant differences in their credit ratings.).

73. Of particular interest in this context is the Swiss Federal Law on ConsumerCredit of March, 2001, available at http://www.ofj.admin.ch/f/index.html (last visitedFebruary 6, 2005). The Law requires creditors to exercise prudence in extending credit tonew consumers, to report extensions of credit to a central registry as well as significantdefault in payments by debtors, and imposes strong sanctions for non-compliance bycreditors. See esp. Section 5 and Article 32. (I am indebted to Professor Bernd Stauderof the University of Geneva for drawing my attention to this legislation and providing mewith a copy of it.)



V. Conclusion

In this paper I have attempted to explain the principal reasons forthe rapid growth in many industrialized societies in the number of over-indebted consumers and the diverse approaches adopted in consumerinsolvency regimes to address these challenges. The variations inphilosophy and techniques range from those conservative systemsprimarily committed to educating debtors to handling their own and theirfamily's finances more responsibly, and granting discharge from unpaiddebts only as a last resort, to ultra liberal and moderately liberal regimesaccepting the need for a prompt or reasonably early discharge with aview to returning the debtor as a productive and self-respecting memberof society. The American fresh start philosophy represents the mostgenerous approach but it has found few exact imitators anywhere else.However, it has influenced a general tendency in many countries to relaxearlier stringent preconditions to the granting of a discharge and theimposition of post-discharge disqualifications and restrictions.

The framing of an appropriate discharge policy and the design ofeffective non-bankruptcy rehabilitational schemes constitute only a partof the much larger number of issues which must be addressed by modernconsumer insolvency regimes. These issues run the gamut fromproviding consumers ready access to the insolvency system to thequestions of the types of debts and obligations that should be non-dischargeable and under what circumstances the law should recognizethe debtor's reaffirmation of pre-bankruptcy debts.

This survey has also tried to make it clear that none of the abovequestions should be approached abstractly. Rather, they should begrounded in sound empirical research of the actual impact of currentrules and an appreciation that consumer insolvencies involvemultidisciplinary phenomena. A priori assumptions and sweepinggeneralizations need always to be tested against the available data andpolicy makers and legislators should resist the temptation to moralizeabout the weaknesses of overindebted consumers.

Finally but not least, the paper draws attention to the important roleplayed by the consumer credit industry in contributing to the over-indebtedness phenomenon and the need, at least in common lawjurisdictions, to devise much stronger incentives for the credit industry topolice its own credit practices more rigorously than has been true up tonow.

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