Abstract
Article 67 of the initial proposal for a Common European Sales Law (CESL) stipulates that usage and practices are binding on traders. It follows that, if such customs can be referred to in the interpretation of contracts, they create flexibility in the understanding of contractual agreements and therefore introduce a factor of uncertainty in commercial dealings. One may wonder whether a flexible rule like this is appropriate for the context in which the CESL, according to this initial proposal, is meant to operate – B2B contracts in which at least one of the parties is a small or medium-sized enterprise (SME). A particular concern for the European market, in which many businesses are SMEs, is that local usage is likely to be unknown or even unknowable to one or both of the parties. If a similar rule were to be included in the digital single market package its appeal as an alternative contract regime therefore may be diminished.
This chapter addresses the question whether the CESL’s reference to trade usage in contract interpretation is indeed a weakness. A comparison is made with US literature in which two theories – the plain meaning rule and the incorporation theory – support different views on the role of usage in trade contracts. Applied to two existing uniform regimes for commercial contracts, the Uniform Commercial Code (UCC) and the Vienna Convention on Contracts for the International Sale of Goods (CISG), these theories reveal the strengths and shortcomings of the application of usage in specific market contexts. Distilling a number of parameters from earlier studies on these instruments, a comparison is made to test whether the CESL can safely make use of trade usage as a means of contract interpretation.
It will be argued that the particular context in which the CESL operates – ie cross-border contracts involving SMEs – implies that the role of usage should be clarified in order to guarantee legal certainty. Such clarification can either mean that usage is only referred to in a very limited sense (eg only international usage widely observed in the particular area of trade in which the parties operate and which could be known to both parties to the contract), or that other means are created by which parties can become aware of trade usage in a particular market or area (eg databases of guidelines or trade practices).
An earlier version of this chapter has appeared in the European Review of Contract Law with the title ‘According to Custom..? The Role of “Trade Usage” in the Proposed Common European Sales Law’ (2014) 10 European Review of Contract Law 64–84.
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Notes
- 1.
Vallejo v Wheeler (1774) 1 Cowp 143, Lord Mansfield at p 153.
- 2.
Cave v Mills (1862) 7 Hurlstone & Norman 913, 927, as quoted by Andrew D Mitchell, ‘Good Faith in WTO Dispute Settlement’ (2006) 7 Melbourne Journal of International Law 339, n 57.
- 3.
Notable is also that the new Commissioner for Justice, Consumers and Gender Equality, Věra Jourová, has expressed a need for legal certainty for especially SMEs in the digital single market; see her speech of 13 July 2015, available at: https://ec.europa.eu/commission/2014-2019/jourova/announcements/commissioner-vera-jourovas-remarks-european-parliaments-legal-affairs-juri-committee_en
- 4.
The principle of good faith could become an important factor in contract interpretation seeing that judges are obliged to apply the CESL in an autonomous manner (Art 4), even where specific clauses are lacking in the instrument itself. See on this problem eg S Whittaker, ‘The Proposed “Common European Sales Law”: Legal Framework and the Agreement of the Parties’ (2012) 75 Modern Law Review 578, 587.
- 5.
Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law, COM(2011) 635 final, Art 7(1).
- 6.
Proposed Regulation (n 5), Art 7.
- 7.
Commission Recommendation 2003/361/EC concerning the definition of micro, small and medium-sized enterprises [2003] OJ L124/36, Annex, Art 2.
- 8.
Cf. Ecorys, ‘EU SMEs in 2012: at the crossroads. Annual report on small and medium-sized enterprises in the EU, 2011–2012’, p 9.
- 9.
It is estimated that SMEs accounted for 58 % of growth measured by the ‘growth added value’(GVA); see Ecorys report (n 8) at 9.
- 10.
One could refer to this as the ‘cognosibility’ of law; see Raoul Van Caenegem, Judges, legislators and professors (CUP, Cambridge) 161.
- 11.
Proposed Regulation (n 5), Art 4.
- 12.
Compare Lisa Bernstein, ‘An (Un)common Frame of Reference: An American Perspective on the Jurisprudence of the CESL’ (2013) 50 Common Market Law Review 169, 179.
- 13.
European Commission, ‘Green Paper on policy options for progress towards a European Contract Law for consumers and businesses’, COM(2010) 348 final, p 9.
- 14.
See Art 66 CESL. Compare also Art 59 CESL on interpretation.
- 15.
Compare CP Gillette, ‘The Law Merchant in the Modern Age: Institutional Design and International Usages under the CISG’ (2004) 5 Chicago Journal of International Law 157, 164.
- 16.
Study Group on a European Civil Code/Research Group on EC Private Law (Acquis Group), Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (DCFR). Full Edition (Sellier, Munich 2009), vol 1, commentary to Art II. – 1:104, 140 and 144.
- 17.
ObersterGerichtshof Austria 21 March 2000, CISG-Online No. 641; P Huber and AMullis, The CISG. A new textbook for students and practitioners (Sellier, Munich 2007) 17.
- 18.
F Ferrari, ‘What Sources of Law for Contracts for the International Sale of Goods? Why One Has to Look Beyond the CISG’ (2005) 25 International Review of Law and Economics 314, 333.
- 19.
ibid.
- 20.
See § 1-303(c) UCC.
- 21.
Cf DCFR (n 16), commentary to Art II. – 1:104, 140.
- 22.
It has been suggested that where a usage is generally observed in the jurisdiction of one party but not that of the other, the matter should be referred to the applicable law as determined by the conflict of laws rules of the forum; compare R Goode, ‘Usage and its Reception in Transnational Commercial Law’ (1997) 46 International and Comparative Law Quarterly 1, 16. However this compares to the CISG, it would in any event not work under a self-standing regime, such as the CESL was intended to be (Art 4 CESL).
- 23.
DCFR, Art II. – 1:104(2).
- 24.
For further examples, see DJ Bederman, Custom as a Source of Law (CUP, Cambridge 2010) 173.
- 25.
ibid., 174.
- 26.
Cf Ferrari (n 18), 335 and sources there cited. For an interesting contrary view, see WP Johnson, ‘The Hierarchy That Wasn’t There: Elevating “Usage” to its Rightful Position for Contracts Governed by the CISG’ (2012) 32 Northwestern Journal of International Law and Business 263.
- 27.
See Art 67(3) CESL. The same is implicit in Art. II. 1:104 of the DCFR; see DCFR (n 16), commentary to Art II. – 1:104, 139.
- 28.
I would like to thank Hugh Beale for pointing me to this issue.
- 29.
Cf Gillette (n 15) 164.
- 30.
L Bernstein, ‘Merchant Law in a Modern Economy’, Chicago Coase-Sandor Institute for Law and Economics Working Paper No 639, p 1. Available at: https://ssrn.com/abstract=2242490
- 31.
GP Miller, ‘Bargains Bicoastal: New Light on Contract Theory’ (2010) 31 Cardozo Law Review 1475. See also Bernstein (n 12) 186.
- 32.
Gillette (n 15) 157.
- 33.
Miller (n 31).
- 34.
All three scholars whose work has been discussed so far work from this position. See Bernstein (n30), Gillette (n 15) and AW Katz, ‘The Relative Costs of Incorporating Trade Usage into Domestic versus International Sales Contracts: Comments on Clayton Gillette, Institutional Design and International Usages under the CISG (2004) 5 Chicago Journal of International Law 181. Although the emphasis on law and economics considerations may be particular to US legal scholarship, it may in this case also be transferable to the EU debate on the CESL’s application to B2B cross-border contracts. See further below, Part IV.2.
- 35.
Daniela Caruso gives an excellent overview of the different attitudes in US and EU scholarship, with the former strongly based in law and economics traditions and the latter grounded in the welfarist traditions shared – albeit it to differing degrees – by the EU Member States. See D Caruso, ‘The Baby and the Bath Water: The American Critique of European Contract Law’ (2013) 61 American Journal of Comparative Law. To pay heed to the protection of SMEs, a solution may in the CESL for example be found in a (limited) recourse to the good faith principle.
- 36.
Cf Gillette (n 15). See also Katz (n 34) 184.
- 37.
Bernstein (n 12) 175.
- 38.
Bernstein (n30) 30.
- 39.
See also Bernstein (n 31) 181–183.
- 40.
Cf Katz (n 34) 184.
- 41.
See GTullock, ‘Welfare Costs of Tariffs, Monopolies and Theft’ (1967) 5 Western Economic Journal 224, which is generally regarded as the starting point for rent seeking literature. For an overview of further sources, see RD Congleton, AL Hillman, and KA Konrad, ‘Forty Years of Research on Rent Seeking: An Overview’ in Forty Years of Research on Rent Seeking (Springer, Heidelberg 2008) 1.
- 42.
Katz (n 34) 185. Katz also refers to interests of third parties, which may play a part in international trade but perhaps not so much in B2SME contracts, assuming that contracts involving SMEs are mostly simpler two-party transactions.
- 43.
ibid.
- 44.
The effect of entire agreement clauses however appears to be limited to defining the scope of the terms of the contract and does not prescribe how, objectively, the substance of the contract terms is evaluated by the courts. In civil law systems it is still possible that the agreement (including the entire agreement clause) is considered in its entirety in the light of general obligations arising from the principle of good faith/reasonableness. See in Dutch law: Dutch Supreme Court, 5 April 2013, LJN: BY8101 (Lundiform/Mexx). See also Castermans, De Graaff and Haentjens in this volume.
- 45.
SVogenauer, ‘Regulatory Competition through Choice of Contract Law and Choice of Forum in Europe: Theory and Evidence’ (2013) 21 European Review of Private Law 13, 20 ff.
- 46.
Eg if the parties have opted for English law as the governing law of their contract it makes sense to litigate in the Commercial Court in London rather than in front of a national court unfamiliar with English law. Procedural costs are high in the UK, which may be a reason for wanting to avoid this forum.
- 47.
Gillette (n 15) 174.
- 48.
ibid., 174–76.
- 49.
Above, p 4.
- 50.
Cf Bernstein (n 31) 177–78; LA DiMatteoc.s., ‘The Interpretive Turn in International Sales Law: An Analysis of Fifteen Years of CISG Jurisprudence’ (2004) 34 Northwestern Journal of International Law and Business 299; Gillette (n 15) 169.
- 51.
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, COM(2011) 636 final, p 11.
- 52.
See also Bernstein (n 31) 178.
- 53.
Cf HW Micklitz and M Radeideh, ‘CLAB Europa – The European Database on Unfair Terms in Consumer Contracts’ (2005) 28 Journal of Consumer Policy 325.
- 54.
Communication (n 51) 11.
- 55.
ibid.
- 56.
CfN Reich, ‘Competition between Legal Orders: A New Paradigm of EC Law?’ (1992) 29 Common Market Law Review 861; J Smits, The Making of European Private Law; Towards a Ius Commune Europaeum as a Mixed Legal System (Intersentia, 2002).
- 57.
Vogenauer (n 45); contrast G Rühl, ‘Regulatory Competition in Contract Law: Empirical Evidence and Normative Implications’ (2013) 9 European Review of Contract Law 61.
- 58.
LSenden, ‘Soft Law, Self-Regulation and Co-Regulation in European Union Law: Where do They Meet?’ (2005) 9.1 Electronic Journal of Comparative Law, available at http://www.ejcl.org/91/art91-3.PDF, 23.
- 59.
See above part 4.
- 60.
See eg Vertical relationships in the Food Supply Chain: Principles of Good Practice; Code of Contractual clauses and practices to be respected in Vehicle Manufacturer/Authorised Dealers and Repairer in contractual relations (CECRA Code of conduct); Dutch Advertising Code.
- 61.
Directive 2006/123/EC on services in the internal market [2006] OJ L376/36, recital 102 and Art 26(5). Knut Blind, ‘Standards in the Service Sectors: an Explorative Study’ (Fraunhofer Institute Systems and Innovation Research, April 2003), available at http://isi.fraunhofer.de/isi-media/docs/isi-publ/2003/isi03b30/standards-service-sector-summary.pdf?WSESSIONID=03e581a8101ce64a23ddd8a1fdffb416
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Mak, V. (2016). Art. 67: Contract Interpretation and the Role of ‘Trade Usage’ in a Common European Sales Law. In: Colombi Ciacchi, A. (eds) Contents and Effects of Contracts-Lessons to Learn From The Common European Sales Law. Studies in European Economic Law and Regulation, vol 7. Springer, Cham. https://doi.org/10.1007/978-3-319-28074-5_8
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