The Principle of Reasonableness in EU Directives on Contract Law

The Principle of Reasonableness in EU Directives on Contract Law Name Institutional Affiliation The Principle of Reasonableness in EU Directives on Contract Law Introduction Over the years, the European Union (EU) has made efforts to make its internal market effective by removing barriers and making the existing rules simple to facilitate convenient access to various markets by all its members. To this end, the EU has achieved significant progress in the harmonization of laws such as the equality law (Salewudin & Richard, 2015). However, attempts to harmonize contract law and other privacy laws have been slow and more sporadic because of complexities. Concerning contract law, the EU has adopted the approach of EU Directives whereby member countries are required to achieve minimum legal standards in terms of their mandatory laws (Haas, 1998). Both the supporters and opponents of the EU Directives have attempted to explain the reasonableness or the unreasonableness of the efforts to harmonize the European contract law. In this paper, the respective arguments are discussed to highlight the reasoning behind each perspective and the way forward for the EU. When the EU Directives on European Contract Law are considered, two questions should be examined. The first question is whether having different contract laws among the member states is an obstacle to efficient cross-border trade. The second question is whether harmonization of the EU contract law is an effective remedy to the cross-border trade problems. The answers to the aforementioned questions form the basis of the reasonableness of the EU Directives on Contract Law. The first important argument among the supporters of the harmonization is that different contract laws for each member state are a source of high costs when conducting cross-border trade (Pomar, 2008). Moreover, two or more parties from different countries within the EU would need to research and understand the national law of each trading partner before entering into a contract (Zhou, 2019). Even if the three parties chose one national contract law as the basis for their transactions, the other parties would need to familiarize themselves by studying the foreign law to avoid liabilities (Chirico & Larouche, 2010, p. 26). This process is costly in terms of the learning and negotiations involved. The costs inherent in different contract laws for each state also make cross-border trade less lucrative because profit margins are reduced. Further, consumers’ interests are affected as they do not enjoy varieties and friendly prices (DiMatteo et al., 2013, p. 509). According to Zhou (2019), almost €1 billion are incurred every year as the costs of cross-border transactions in an environment of unharmonized contract law. The equivalent value lost from the foregone trade was estimated to be €100 billion per year (European Commission, 2011). Therefore, the argument is that the EU Directive to harmonize the contract law will eliminate these huge transaction costs and promote savings, encourage more cross-border trade, and uphold consumer interests (Jagodzinska, 2014). For example, DiMatteo et al (2013, p. 510) assert that a one percentage point achievement in the value of the increased cross-border trade would be equivalent to €30 billion. It, therefore, follows that the harmonization of contract law is a reasonable initiative that should be fully supported and implemented without delays. On their part, those who view the EU Directives as flawed and unreasonable perceive the above argument as empirically and theoretically invalid. For example, the argument assumes that the parties to the transactions lack sufficient knowledge of the national contract law of each trading partner. Also, the argument assumes that the traders have not traded before or lack a set of well-established rules to guide how they trade. The reality is international markets consist of traders who are new in the market and those who have been trading for a long time. The latter shape the rules that legally govern their trade (Bonell, 2018). In other words, their many years of experience make them efficient in the establishment of trade customs, norms, and informal rules that guide their transactions. Many of them may have as well cultivated a shared mechanism of using one contract law (Hutchison, 2019). As such, they have a vast knowledge of the applicable law and differences in the contract laws of nations are not an obstacle for them (Posner, 2013). This means that they do not experience additional costs of learning new laws or negotiating the relevant contract law as they have become accustomed to the workings of the agreed-upon contract law. A good example of the above scenario is the wide adoption of the English contract law by several leading trade associations that set the industry standards across various jurisdictions. The associations include the Shell and British Petroleum (BP) and the Grain and Feed Trade Association (GAFTA) (DiMatteo, 2014, p. 670). For these traders, the harmonization of the EU contract law could introduce new hurdles because they will have to navigate a new set of rules. As a result, their transaction costs would increase instead of reducing (Coetzee, 2017). This reality is largely not covered by the policymakers advocating for full harmonization (Howells & Schulze, 2009, p. 139) yet, it demonstrates the lack of reasonableness in the EU Directives on contract law. Further, the harmonization directives lack reasonableness because they tend to exaggerate the relevance of contract law in governing cross-border transactions. By assuming that contract law is the central component in the execution of transactions and dispute resolutions, the EU Directives portray the existence of different national contract laws as a source of legal uncertainty (Wagner, 2009). However, evidence from empirical studies shows that contract law is not a major factor in commercial transactions. Instead, trading parties depend heavily on private institutions and informal rules/norms to govern their contracts (Trebilcock & Leng, 2006); (Macaulay, 2003); (Macaulay, 1963); (Bernstein, 2001). In the U.K., for instance, Beale and Dugdale (1975) found that courts and formal agreements are rarely used to solve contractual disputes. Instead, parties choose to use informal means such as negotiations. These observations imply that the harmonization of EU contract law will have little or no impact on the costs of cross-border trade as the applicability of national contract laws is limited in commercial transactions. The second important argument among those who see the EU Directives as reasonable is that allowing each member state to keep its contract laws will distort competition in the internal market (Cordero-Moss, 2014, p. 184). Moreover, each country will ensure that its domestic industries are protected against competition from foreign firms (Cseres, 2005, p. 237). For example, most jurisdictions in Europe have incorporated the doctrine of the duty of good faith in their contract laws (Davies, 2019). H...