An Optional Instrument and Social Dumping

Abstract

In the European Commission's documents on the future of a European contract law freedom of contract is the leading principle of both a CFR and an optional instrument. In this paper, it is argued that an optional instrument as proposed by the European Commission will result in social dumping. However, this can be prevented, if the leading principle of an optional instrument will be a balance between freedom of contract and social justice or fairness. If not, it will be relevant to assess to what extent more stringent national mandatory rules can still be applied if parties have selected an optional instrument to govern their contract. In order to do so, first it is considered whether the optional instrument may be regarded as harmonization, if so, what type of harmonization it fits best. Finally the technique by which an optional instrument may be rendered applicable will be discussed.

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Electronic copy of this paper is available at: http://ssrn.com/abstract=969293




Centre for the Study of European Contract Law
Working Paper Series
No. 2006/03






An Optional Instrument and Social Dumping


Jacobien W. Rutgers

j.w.Rutgers@uva.nl






Centre for the Study of European Contract Law
Universiteit van Amsterdam
P.O. Box 1030
1000 BA Amsterdam
The Netherlands

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Electronic copy of this paper is available at: http://ssrn.com/abstract=969293
An Optional Instrument and Social Dumping
Jacobien W. Rutgers∗ ∗
Abstract
In the European Commission’s documents on the future of a European contract law freedom
of contract is the leading principle of both a CFR and an optional instrument. In this paper, it
is argued that an optional instrument as proposed by the European Commission will result in
social dumping. However, this can be prevented, if the leading principle of an optional
instrument will be a balance between freedom of contract and social justice or fairness. If not,
it will be relevant to assess to what extent more stringent national mandatory rules can still be
applied if parties have selected an optional instrument to govern their contract. In order to do
so, first it is considered whether the optional instrument may be regarded as harmonization, if
so, what type of harmonization it fits best. Finally the technique by which an optional
instrument may be rendered applicable will be discussed.

I. Introduction
Inherent to the internal market process is the tension between free trade on the one hand and
other concerns such as social or environmental on the other. In the European Commission’s
Communications on contract law,1 the preference has tilted towards free trade rather than
aiming at a balance between free trade and those other concerns. This follows from the
European Commission’s emphasis on freedom of contract as the leading principle of the
measures proposed in those documents. Freedom of contract can only be restricted in
exceptional circumstances.
At present the European Commission focuses on two measures: the development of a
Common Frame of Reference (CFR) and a discussion concerning the desirability and
feasibility of a Non Sector Specific Instrument, also referred to as an optional instrument.2
The former is described by the European Commission as a tool-kit, which will probably

∗ Senior-lecturer, Amsterdam Institute for Private Law, Universiteit van Amsterdam.
1 Communication from the Commission to the Council and the European Parliament on European Contract Law,
Com (2001) 398 final; Communication from the Commission to the European Parliament and the Council, A
more Coherent European Contract Law, An Action Plan, OJ 2003/C 63/01; Communication to the European
Parliament and the Council. European Contract Law and the revision of the acquis: the way forward, COM
(2004) 651 final, 8 ff. First Annual Progress Report on European Contract Law and the Acquis Review, COM
(2005) 456 final.
2 COM (2005) 456 final, n 1 above.

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contain principles, definitions and model rules.3 The latter probably will be of a body of rules
that parties can select to govern their contract in cross-border transactions.4
The aim of the optional instrument is the smooth functioning of the internal market.5
However, as set out in the Manifesto Study Group on Social Justice in European Private Law,
within the Member States contract law does not only aim at regulating the market, but also
pursues other policies particularly within the context of the Welfare state, for instance the
protection of weaker parties.6 If these aspects of contract law are ignored in the attempts to
create a harmonised contract law within Europe, an optional instrument may result in social
dumping. In this paper social dumping refers to a situation of reduced social protection. In
addition, such an optional instrument does not do justice to the aims of the EC, such as a
harmonious, balanced and sustainable development of economic activities and the raising of
the standard of living and quality of life (Article 2 EC).
The question whether an optional instrument will result in social dumping can be
addressed from many different angles. Here the starting-point will be the situation in which
two parties in a European cross-border situation have the possibility of selecting either one of
the Member States’ legal systems (or any other legal system) to govern their contract or the
optional instrument. If a future optional instrument includes fewer mandatory rules than the
national legal systems of the Member States, the choice for the optional instrument will most
likely result in less protection.7 This may be prevented if either the mandatory rules included
in the legal systems of the Member States concerned, still can or must be applied or if the
optional instrument will include sufficiently protective mandatory rules. Hereafter an attempt
will be made to answer the question whether national protective rules can still be applied
despite the parties’ choice for an optional instrument.

3 COM (2004) 651 final, n 1 above, 14.
4 COM (2004) 651 final, n 1 above, 18; D. Staudenmayer, ‘The Way Forward in European Contract Law’
(2005) 13 European Review of Private Law, 95, 100 ff.
5 COM (2004) 651 final, n 1 above, 20.
6 Study Group, ‘Social Justice in European Contract Law : A Manifesto’ (2004) 10 European Law Journal, 653-
674. Cf G. Canivet, H. Muir Watt, ‘Européanisation du droit privé et justice sociale’ (2005) 13 Zeitschrift für
Europäisches Privatrecht, 517, 518; E. Hondius, ‘The Protection of the Weak Party in a Harmonised European
Contract Law: a Synthesis’ (2004) 27 Journal of Consumer Policy, 245; B. Lurger, ‘The “Social” Side of
Contract law and the New Principle of Regard and Fairness’ in A. Hartkamp et al. (eds) Towards a European
Civil Code, (Kluwer Law International 2004) 273, 281; B. Lurger, ‘The Future of European Contract Law
between Freedom of Contract, Social Justice, and Market Rationality’ (2005) 1 European Review of Contract
Law 442; U. Mattei, ‘Hard Minimal Code Now- A Critique of “Softness”’ in S. Grundmann, J. Stuyck (eds), An
Academic Green Paper on European Contract Law, (The Hague, London, New York: Kluwer Law
International, 2002) 228; T. Wilhelmsson, ‘Varieties of Welfarism in European Contract Law’ (2004) 10
European Law Journal, 712. Contra: T. Hartlief, ‘Freedom and Protection in Contemporary Contract Law’
(2004) 27 Journal of Consumer Policy, 253.
7 Cf Lurger (2005), n 6 above, 442, 446; R. Sefton-Green, ‘Cultural Diversity and the Idea of a European Civil
Code’, in M.W. Hesselink (ed), The Politics of a European Civil Code, (Kluwer Law International, 2006) § II.

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This paper focuses on whether harmonisation in the form of an optional instrument
will allow for national rules to be applied. This depends inter alia on the type of
harmonisation and the technique by which an optional instrument will be made applicable.
However, before these issues are considered, the situation as it is with respect to cross-border
transactions will be dealt with first.
II. Private (International) Law
As stated the European Commission takes freedom of contract as the starting-point in its
documents. However, the real question is whether freedom of contract is still the leading
principle of contract law.
When in the nineteenth century most civil codes came into force, the leading principle
of contract law was freedom of contract.8 This implies that parties are free to enter any
contract with any party in any form.9 However, there are of course some limits. The classical
doctrines are fraud, mistake, duress or doctrines concerning immoral and illegal contracts,
which have the effect of annulling or considering the contract void. These sort of rules which
restrict freedom of contract are mandatory.
In the course of the twentieth century also another group of mandatory rules has been
introduced, which aim at the protection of weaker parties, for instance the employee, the
tenant and the consumer.10 This protection has been extended to small and medium sized
companies, such as the franchisee or the commercial agent.11 Moreover, general rules are also
included to protect a socially and economically weaker party rather than a specific category
of persons, such as consumers. For instance, the Dutch BW, which came into force in 1992,
also provides a rule with respect to the situation that juridical acts which came into being
because of abuse of circumstances may result in avoidance of the contract (Article 3:44 para
4 BW). Ewan McKendrick summarises this development as follows: ‘The law of contract is
not based on one ideology … the tension between the two is a feature of contract law.

8 Cf Ch. Jamin, ‘Plaidoyer pour le solidarisme contractual’, in: G. Goubeaux et al. (reds), Études offertes à
Jacques Ghestin, Le contrat au début du XXIe siècle, (Paris: LGDJ 2001), 444; Lurger (2005) n 6 above, 442,
447; Ch.U. Schmid, ‘The Instrumentalist Conception of the Acquis Communautaire in Consumer Law and its
Implications on a European Contract Law Code’, (2005) 1 European Review of Contract Law 211, 214.
9 M. Fabre-Magnan, Les Obligations, (Paris: Presses Universitaires de France, 2004) 49 ff; E. McKendrick,
Contract Law (Palgrave Macmillan Law Masters, 2005), 3 ff.
10 A.S. Hartkamp, Aard en opzet van het nieuwe vermogensrecht, Monografieën Nieuw BW (Deventer: Kluwer,
2002), 38; Jamin, n 8 above, 447 ff; Lurger (2005), n 6 above, 442, 447; Manifesto Social Justice Group, n 6
above, 654.
11 See for instance Council Directive 86/653/EEC on the co-ordination of the Laws of the Member States
relating to self-employed commercial agents OJ 1986 L 382-17. The Italian act concerning franchising: L.
129.2004.

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Sometimes “market-individualism” prevails over “consumer-welfarism”; at other times
“consumer-welfarism” triumphs over “market-individualism”.’12 The relevance of the
underlying principles of contract law lies in the fact that it sets the order of discussion. In
addition, exceptions tend to be interpreted strictly.13
This trend is also reflected in the area of private international law and especially with
respect to conflict rules, which establish the applicable legal system in an international
situation. There are conflict rules that seek to protect the weaker party and there is the
doctrine of overriding mandatory rules (loi de police). Both will be discussed hereafter.
Within the European Community the conflict rules on contract are harmonised by the
Rome Convention, which is an intergovernmental convention based on Article 220 (old) EC
(now Article 293 EC).14 At present the European Commission is in the course of consulting
the public concerning the transformation of the Rome Convention in a regulation.15
The main rule of the Rome Convention is that parties are able to select the legal
system that governs their contract (Article 3 Rome Convention). Such a choice of law implies
that both the mandatory and the default rules of the legal system, which would have been
applicable in case a choice of law had not been made, are replaced by the mandatory and
default rules of the legal system chosen.16
In the absence of a choice of law, the legal system most closely connected to the
contract will apply, which is considered to be the legal system of the country where the party
that performs the characteristic performance has his habitual residence at the moment of the
conclusion of the contract (Article 4 the Rome Convention). In the case of synallagmatic
contracts, this is generally the party that does not have to pay the price.17 If for instance a
German company hires an Italian architect to design new head quarters, the architect provides
the design and the other party has to pay for it. In that case, the legal system of the habitual
residence of the architect at the time of the conclusion of the contract governs the contract.

12 McKendrick, n 9 above, 5. Cf S. Grundmann, European Contract Law(s) of What Colour, (2005) 1 European
Review of Contract Law, 184, 205 ff.; A.S. Hartkamp, Mr. C. Asser’s handleiding tot de beoefening van het
Nederlands burgerlijk recht, Verbintenissenrecht, Deel II Algemene leer der overeenkomsten, (Deventer:
Kluwer, 1995) no. 34 ff.
13 Hondius, n 6 above, 245, 246; J.H. Nieuwenhuis, ‘Contractvrijheid, een weerbarstig beginsel’, in T. Hartlief,
C.J.J.M. Stolker (red), Contractvrijheid, (Deventer: Kluwer, 1999) 25.
14 Convention on the Law applicable to contractual obligations, OJ 1980, L 266/1-19. Hereafter: the Rome
Convention.
15 Green Paper on the conversion of the Rome Convention of 1980 on the law applicable to contractual
obligations into a Community instrument and its modernisation COM (2002) 654 final. Proposal for a
Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome
I) presented by the Commission, COM (2005) 650 final.
16 Cf Grundmann, n 12 above, 184, 188 ff.
17 Report on the Convention on the law applicable to contractual obligations, M. Giuliano, P. Lagarde, OJ 1980
C 282/20. Hereafter the Giuliano/Lagarde Report.

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