Contract law in Europe
Laws on contracts are set by individual member states in the European Union (EU). However, the EU has harmonised some aspects of contract law across the whole of the European Community. In addition, some EU legislation affects contract law because it takes precedence over national laws.
If you deal with a business in another EU country, there is a choice about where you make the contract - ie, under which jurisdiction you agree the terms. Alternatively, the EU has produced a standard contract. This is called the "Principles of European Contract Law". You can include these the terms in any EU contract if both sides agree to it.
Contract law and the European single market
The EU has introduced the Principles of European Contract Law, which are model rules for cross-border contracts
The European Union (EU) single market is allow businesses to trade throughout the EU on an equal footing.
The EU has introduced measures to get rid of obstacles to free trade in the single market. this includes clauses in contracts which may restrict free trade. EU directives have dealt with areas such as e-commerce and the insurance and banking sectors. This has affected contract law in member states. However, the EU does not have the right to regulate the contract law of individual countries, so each country still has its own legal contract provisions.
The two parties can decide between themselves where to sign the contract is to be signed and, therefore, which jurisdiction applies. UK businesses should ensure they get professional legal advice before signing a contract in another EU member state.
The Principles of European Contract Law
To make it easier for businesses in member states with different contract laws to trade together, the EU has introduced the Principles of European Contract Law. These are a set of 'model' rules for business contracts, based on fairness and simplicity. They provide solutions for issues where national laws do not offer an answer.
The Principles are available in each of the EU's languages and businesses can agree that some - or all - of these clauses can be written into a contract. Those clauses then take precedence over the contract law of the country where the contract is signed.
Formation of European contracts
The point at which a contract is agreed is one of the most important elements of a contract
Most of the elements that are necessary for the formation of a contract under the Principles of European Contract Law are similar to those in UK contract law. This includes:
- the process of making an offer and its acceptance
- good faith in making and accepting the offer
The process of making and accepting an offer and it being accepted is set out in a series of clauses. These define how an offer is made, revoked and accepted. This lies at the core of making a contract. It includes the opportunity to specify time limits and modifications.
The role of the agent in European contract negotiation
Agents can create legal commitments for businesses, so their role needs to be clearly defined and agreed
The role of agents in contract negotiation can be difficult. An agent can sign a contract that creates a legally binding commitment for your business. Chapter three of the Principles of European Contract Law covers all aspects of what an agent can and cannot do. However, the actual authority for an agent to act will be dealt with in a separate contract between the agent and your business.
Chapter three explains how to deal with issues such as the authority to act. Aunthority can be clearly stated or implied. It also covers cases where an agent clearly acts outside their authority.
Separate clauses deal with other aspects of the relationship between the agent and both:
- your business
- the other parties to the contract
Validity of contracts in Europe
Instances in which European contracts may be deemed to be invalid
Usually, once a contract has gone through the process of offer and acceptance, both parties agree to be bound by its terms. However, even after you have signed a contract, there may be circumstances where it is invalid. Contracts can also become invalid because of an action by one side or the other.
Chapter four of the Principles of European Contract Law describes why a contract may become invalid. For example, factual or legal errors may make a contract invalid, as can fraudulent conduct during the negotiations.
After you sign a contract, it can become invalid if one side or the other fails to deliver what they have agreed.
Interpretation of terms and words in European contracts
Rules on interpretation are intended to prevent confusion about the meaning of contractual terms
The Principles of European Contract Law are written as clearly as possible, so that they can be understood easily by both sides. Different language versions are available so that both parties know exactly what they are agreeing to. This ensures that they understand and accept the terms of the contract. However, there may be cases where the interpretation of words or terms in a contract could cause problems.
Chapter five of the Principles explains the basis on which the parties should agree meaning of terms or words. In general, the underlying rules for interpretation are based on what is 'reasonable'. For example, the interpretation of a term or word is what both parties intended it to mean - even if that is different from the literal meaning.
If the sides cannot agree, then the term or word will be interpreted in the way that a suitably qualified 'reasonable person' would interpret it.
Clarifying the content of a European Contract
How to address issues that are not explicitly covered in a contract under the European contract law provisions
Chapter six of the Principles of European Contract Law on 'content and effects' clarifies any elements of the contract where there is potential for dispute.
Among the issues included are:
- statements that form part of the contract - even if not written into the contract itself
- implied obligations
- how price, quantity, quality and ending the contract are dealt with if not included in the actual contract terms
The emphasis is on reasonable behaviour by both sides in dealing with issues where there is any doubt or confusion.
Performance of obligations set out in a European contract
Performance of a contract is usually simple, but in longer-term contracts it can become complex
Performance is the focus of the contract, because it is the act of fulfilling the contracted obligation. In its simplest form, this involves one side supplying goods or services and the other side paying for them according to the terms of the contract.
Establishing performance of obligations in a European contract
Where a contract is for a straightforward supply of a product in return for money, establishing performance is usually simple. However, in more complex contracts, such as those for supplying goods or services over a period of time, perhaps with staged payments, the two sides could dispute performance.
Chapter seven of the Principles of European Contract Law explains how parties can specify performance in the contract terms. These include:
- the place
- time and order of performance
- the type and form of payment
- what happens if one side refuses to accept what the other side provides
Non-performance and remedies in European contract law
The contract needs to show what remedies are available if one side fails to deliver
Chapter seven of the Principles of European Contract Law explains how both sides fulfil their part of the contract. For more details, see performance of obligations set out in a European contract.
The first option is for the non-performing side to get the chance to complete their part of the contract. For instance, if a product does not work as specified, the supplier gets the chance to put the problem right. Performance is then achieved, although the customer in such a case might have the right to claim a reduction in price.
Remedies for non-performance in European contract law
If one side is simply not going to fulfil some or all of their part of the contract, there are various specific remedies for the injured party. These include:
- damages and/or interest on the loss caused
- a reduction in the price of the product or service
- termination of the contract
In each case, there are clauses outlining what the parties to the contract can do and how each side should give notice to the other for non-performance.