EUROPEAN CONTRACT LAW – SUCCESSES AND LIMITATIONS

One of the most significant achievements of the European Union (EU) is the establishment of a unified single market among its 28 member states. The fundamental freedoms within this single market allow businesses and citizens to move and interact freely within a borderless economic union. Trade liberalization and the reduction of barriers among EU member states have generated numerous benefits for the population, including freedom of movement, study, and work abroad. As consumers, citizens have enjoyed a variety of economic advantages, such as lower airline ticket prices, reduced mobile roaming charges, and access to a diverse range of goods in terms of form and quality. Merchants and businesses have been able to expand cross-border operations more easily by importing and exporting goods, providing services, and establishing legal and natural entities abroad. Consequently, these economic actors benefit from the economies of scale of a single market and have access to greater business opportunities compared to the domestic market alone.

Despite the impressive successes of the single market, trade barriers persist among EU member states. A notable barrier is the differences between national legal systems. These differences make cross-border trade more complex and costly than domestic trade. Businesses must understand the applicable legal regulations of other member states and/or negotiate the governing law for their contracts. Additionally, they incur extra costs for translation services, legal advice, and contract enforcement under the laws of different countries. This situation has resulted in economic actors often avoiding cross-border contracts, particularly small and medium-sized enterprises (SMEs), as the costs of exporting or importing to multiple foreign markets may exceed their revenues. Moreover, the reluctance of businesses to sell across borders has consequences for consumers, who often face fewer choices, higher prices, and limited access to products and services from other countries.

It is apparent that the EU’s approach to harmonizing contract law by sector has historically lacked consistency. Several issues have arisen due to the absence of uniformity in the domestication of EU law and inconsistent application of domestic laws by member states.

► Merchants face difficulties due to the existence of differing sales contract laws among member states.The differences between the legal systems of EU member states in general, and specifically the variations in laws governing sales contracts, explain the discrepancies in contract content. These differences are reflected in matters such as contract formation, termination, and the distribution of products and services. The existence of such legal barriers regarding contracts has had a negative impact on businesses conducting cross-border operations, discouraging them from entering new markets.

When a business decides to sell products to consumers or other businesses in different member states, it faces a complex legal environment characterized by the diversity of contract law across EU member states. If foreign law applies to sales contracts or online transactions, businesses must invest time, effort, or hire legal counsel to understand the legal system of the relevant country and to adapt their websites to comply with applicable regulations. Overcoming these obstacles entails high transaction costs, which significantly affect SMEs, particularly small and micro-enterprises, as the costs of cross-border transactions can be high relative to their revenues. Exporting to another member state may cost up to 7% of a retail business’s annual revenue, and exporting to four member states may reach 26% of annual revenue. The avoidance of cross-border trade due to contract law barriers has resulted in a commercial loss to the EU of at least 26 billion Euros annually.

► Consumers face difficulties due to differences in contract law within the EU.According to an EU survey, 44% of consumers are unwilling to engage in transactions with other EU member states due to concerns over unprotected rights. Meanwhile, about one-third of consumers would consider cross-border online transactions if a uniform legal regulation were in place, yet only 7% of consumers currently conduct cross-border transactions within the EU. The uncertainty of EU consumers in engaging in cross-border transactions primarily stems from differences in sales contract laws among member states. Even when consumers actively search for products across the EU, they face obstacles due to merchants’ avoidance of such transactions, as noted above.

To protect the interests of businesses and consumers and to reduce trade barriers and difficulties, the European Union has implemented numerous initiatives in commercial law, insurance contract law, and cloud computing contract law to strengthen the single market. The EU Common Sales Law is a key initiative aimed at harmonizing the EU legal system during the integration process. In its Communication to the European Parliament and the Council of the European Union on July 11, 2001, the European Commission initiated a discussion on how to resolve issues arising from differences in contract law among member states. Based on broad support, in February 2003, the European Commission adopted an “Action Program on the Establishment of a More Coherent European Contract Law.” On October 11, 2011, the European Commission officially published the Common European Sales Law (CESL). This law is intended to operate in parallel with the existing national sales contract laws of each EU member state.

1. Basic Content of the Common European Sales Law (CESL)

The Common European Sales Law (CESL) comprises three parts, 18 chapters, and 186 Articles. The main purpose of this law is to establish a uniform legal framework for sales contracts across all EU member states, specifically:

• It allows businesses to use the same contract law regardless of whether they sell to one or multiple EU countries.

• It provides a high level of consumer protection through clearly defined consumer rights.

CESL does not replace national law. Instead, it allows sellers considering entering a new market to offer a system of optional contract rules identical across all EU countries. Parties who do not wish to use CESL can continue to apply existing national rules.

The core content of CESL addresses three main areas:(I) Fundamental principles of contract law, (II) Definitions of key abstract legal concepts, and (III) Model rules on contract law.

Fundamental PrinciplesThis section contains the most important general principles of contract law, as well as exceptions applied within limits, particularly for consumer protection in contractual relationships. Examples include:

• The principle of freedom of contract, subject to mandatory provisions.

• The principle of contractual binding, with exceptions for contract termination.

• The principle of good faith and fair dealing.

Definitions of Key Legal ConceptsThe second section defines abstract concepts in contract law, particularly those relevant to EU law. Examples include:

• The definition of “contract”

• The definition of “damage”

Model Rules on Contract LawThis section includes general provisions on contracts, pre-contractual obligations, performance and non-performance of contracts, multi-party contracts, assignment of claims, assumption of debt and contracts, limitation periods, as well as specific rules on sales contracts and insurance contracts.

• General provisions on contracts cover formation, form, representation, validity, and contract interpretation.

• Pre-contractual obligations and performance rules address matters such as the place and time of performance, performance by a third party, delivery time and location, performance costs, non-performance, and liability grounds.

It is evident that the Common European Sales Law establishes a solid legal framework governing sales contracts, with its scope particularly oriented toward cross-border contracts.

2. Successes and Limitations of the Common European Sales Law (CESL)

With specific provisions aimed at protecting the interests of businesses and consumers in cross-border commercial activities, CESL promised to deliver significant successes and promote the development of the European economy. However, there remain many divergent opinions among experts and lawmakers in European countries regarding the limitations of CESL. The following outlines both the successes achieved and the limitations that persist.

a) Successes

CESL was officially published on 11 October 2011, and during its application and enforcement, it has generated five major successes:

1. Establishment of a solid legal framework regulating the field of sales contracts across Europe.

2. Balancing business and consumer interests in cross-border sales between member states, thereby fostering comprehensive confidence within the internal market.

3. Facilitating market access for businesses: CESL allows businesses to enter new markets more easily, reducing transaction costs. Consumers gain access to a wider variety of products at lower prices, reinforcing consumer confidence in their rights.

4. Supporting future initiatives to reduce trade barriers within the internal market: CESL contains specific sales rules related to digital content contracts, which may serve as a basis for more comprehensive consumer protection policies in digital markets.

5. Contributing to the harmonization and unification of contract law at the European level and globally, complementing the CISG (Convention on Contracts for the International Sale of Goods).

 ► CESL addresses difficulties arising from differences in contract law among member states: An “optional” European sales law is more effective than other “soft law” solutions because it establishes a single, uniform set of rules directly regulating and protecting commercial and consumer activities. CESL is particularly designed to govern cross-border sales, thereby reducing barriers to international trade. Being optional, CESL does not interfere with traditional national approaches that are deeply embedded in domestic commerce. For example, it allows member states to maintain varying levels of consumer protection already existing under national contract laws. Therefore, CESL serves as an optional supplement to existing contract law without replacing it.

 ► Advantages for Businesses

CESL has comprehensive applicability across all EU member states. When a business opts to apply CESL, it becomes the sole applicable contract law for that sales transaction. Businesses therefore only need to study and understand CESL provisions, rather than mandatory rules of individual member states, reducing transaction costs.

In practice, a business seeking to expand into new markets must become familiar with the legal systems of the countries it targets. For example, a French company wishing to sell across the remaining 27 EU member states would need to study the laws of all 27 countries—a significant obstacle. By choosing CESL, the business only needs to understand CESL itself, which effectively represents the contract law of all 28 EU countries. Businesses thus benefit from a unified legal environment and gain confidence to expand into new markets. When selling to consumers in other countries, compliance with CESL can serve as a legal assurance of protection.

Additionally, CESL enables small and micro businesses to participate in cross-border commerce within the EU. Small and medium-sized enterprises (SMEs) account for a significant share of EU trade. CESL provides opportunities and reduces costs for these businesses, creating a more accessible business environment across the EU and stimulating economic growth. Furthermore, CESL reduces cross-border e-commerce transaction costs, as companies no longer need to adapt their websites to the laws of each member state. This offers unprecedented opportunities for businesses operating in the EU market.

 ►  Advantages for Consumers

CESL is designed to provide a uniform legal framework protecting consumers across all member states, thereby ensuring consumer rights and enhancing confidence in cross-border purchases. CESL allows consumers freely to choose protective measures, including the ability to terminate a sales contract immediately if a defective product is delivered. Current national laws in most EU member states do not provide such freedom. This high level of consumer protection encourages consumer confidence and motivation to purchase products from other EU countries.

Consumers benefit from clear rights and transparency obligations imposed on businesses. Businesses must provide detailed information about contracts, including pricing (with all taxes and fees), product quality, and contact information. This information must be more comprehensive than that provided for in-store purchases. Failure to comply allows consumers to receive full refunds, replacements, repairs, or price reductions. For instance, in online or telephone transactions, consumers are entitled to compensation if the business provides inaccurate product information.

Competition on a larger market allows consumers access to lower-priced goods, stimulating cross-border transactions and economic growth. Such outcomes would not be possible without CESL, benefiting both consumers and businesses alike.

b. Remaining Limitations

Alongside its achievements, CESL also exhibits certain limitations, as follows:

First, the scope of CESL is limited. CESL does not address certain issues arising in sales contracts, such as legal personality, contract invalidity, language determination, or matters of non-discrimination.

From a practical perspective, CESL does not regulate commercial activities in the services sector, which is an important area in EU commerce and is closely linked to the cross-border transportation of goods.

In particular, CESL applies only to cross-border transactions, thereby creating a distinction between online consumers and domestic or traditional in-store consumers. Although they engage in similar sales transactions, their rights differ for the same product. This can disadvantage domestic consumers. Specifically, consumers may face four different contractual scenarios:

1. Cross-border sales (online) – contract governed by CESL;

2. Cross-border sales (online) – contract governed by national law;

3. Domestic online sales – contract governed by national law;

4. Direct in-store sales – contract governed by national law.

Potential issues arising include:

• The coexistence of different legal regimes for the same transaction can confuse consumers. Generally, online consumer protection rights under CESL are broader than those provided by national law in EU member states.

• Similarly, SMEs face difficulties adapting to multiple legal regimes, increasing management costs for businesses operating both online and through traditional sales channels. Such businesses must monitor both national law and CESL (even if they do not use CESL), resulting in differences in standard contracts or the need for case-by-case contractual determination.

• CESL’s consumer protection provisions may overlap with existing EU consumer law, such as the Consumer Rights Directive 2011 (CRD), mainly implemented for e-commerce contracts. This may create conflicts between the two instruments. While CESL is interpreted “automatically and in line with its objectives and core principles,” CRD is interpreted by national judges.

• Discrimination concerns: The coexistence of parallel legal rules raises concerns. Applying CESL may disadvantage consumers unwilling or unable to shop online. Consumers purchasing digital products in-store, or under national law, do not benefit from CESL’s modern rules. Similarly, businesses not engaged in online or cross-border commerce may face competitive distortions relative to online traders operating domestically and internationally.

Second, CESL lacks effective enforcement mechanisms. There is no robust system to enforce contractual obligations if parties breach the contract, which may significantly affect consumer rights. Moreover, since CESL targets SMEs, it may inadvertently disadvantage large corporations, creating inequalities in commerce.

Lessons from CESL for Vietnam regarding the harmonization of national law in the integration process.

Vietnam is undergoing deep international integration, making the harmonization of domestic law with international law necessary. Unified regulations create a transparent and clear legal environment.

Currently, the implementation of international treaties to which Vietnam is a party is governed by a legal framework, including:

• 1969 Vienna Convention on the Law of Treaties (Vietnam acceded in 2001);

• Law on the Conclusion, Accession, and Implementation of International Treaties 2005 (Article 6);

• Government Resolution 16/2007/NQ-CP dated 27 February 2007, establishing the obligation for all entities to comply with WTO commitments and proactively review national laws to directly apply, or amend and supplement, national legislation to implement WTO commitments.

These legal provisions show that Vietnam applies some, but not all, international treaty commitments directly, focusing on provisions “sufficiently clear and detailed” for implementation. Vietnam combines direct application and domestication (incorporation) of international treaties to which it is a party.

However, experience from the CESL demonstrates that harmonizing international and national law may encounter practical difficulties.

Drawing lessons from the EU, the following recommendations aim to maximize benefits and minimize shortcomings of law harmonization in Vietnam:

1. Direct application of international treaty provisions to which Vietnam is a party, with a clear “direct application mechanism” and a detailed implementation roadmap.

2. Clarify the hierarchy of legal instruments within domestic law, and define the position and effect of international treaties within the national legal order.

3. Establish inter-agency coordination mechanisms among legislative, executive, and judicial bodies to manage the implementation of international treaties. A lead agency should be designated to direct and coordinate state bodies in implementing Vietnam’s treaty obligations.

4. Develop a continuous legal review system, including a “direct application mechanism” for international treaties to which Vietnam is a party.