Ogus fabrizio cafaggi horatia muir watt the making european private law

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Date of publication: March 20, 2007

The Making of European Private Law: Regulation and Governance design

Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

Abstract

List of References .................................................................................................. 45

Private law definition – Comparative legal analysis suggests that, even acknowledging the differences between and within legal families, a workable definition of private law at national level has been reached2. This definition however often presupposes a clear distinction between public and private law and between State and market. However, these distinctions are framed differently at the European level, assuming that they play a relevant role at all. The competence system of Europe is framed according to policy fields and not to the traditional partitioning of western legal traditions.

New challenges to private law definition – At least two different phenomena have arisen which question this definition even at national level and pose new challenges at European level. First, the emergence of the regulatory function of private law and, second, the increasing contribution of public and private regulators (such as independent authorities or administrative agencies) to the production of legal norms concerning private law. They relate to contracts, property and torts, but they also affect fundamental rights. By regulatory functions of private law3 we mean the ability of private law instruments, in particular contract, torts and property to address market failures. Such control of competition distortions in the market by States through a set of techniques is meant to protect participants in markets and to guard against undesirable external effects of markets. While we do not believe that addressing market failure is necessarily the dominant let alone exclusive function of private law, given the importance of distributive factors, in the following analysis we focus on the correlation between the regulatory function of private law and the emerging need of a governance design.

Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

As to the production of private law rules by independent authorities and administrative agencies, we refer on the one hand to sector regulation that designs predominantly contract law and property rights consistent with the regulatory goals that have to be pursued, on the other hand to civil liability and regulation in the area of product safety and environmental protection. These phenomena play an even more relevant role at the European level. It should not be assumed that specialized regulators and codes are the sole type of legal regulatory mechanism. Private law of contract, as enforced by ordinary courts, is also a form of legal regulation. Interesting questions may be raised such as whether the different forms of legal regulation pursue similar goals, and which of the different legal techniques and agencies proves more successful in achieving its objectives.

(b) The need for governance structures. The creation of a European private legal system has been and will be based on a complex multilevel structure where the

4 The changing nature of the regulatory function according to different market structures reveals a strong interdependence between private law and competition law. See infra p. 21-23. The regulatory function of contract and tort law varies also according to the ‘status’ of parties, whether they are firms or consumers.

Much recent academic attention has focused on the cultural (see Legrand 1996, 1997 and for the debate generally, see the various contributions in Van Hoecke and Ost 2000) and economic values of diversity (see Grundmann 2001, Van den Bergh 1996, Kerber 2000 and Snell 2002), and the need for more imaginative tools of multi-level governance than can be provided by a nineteenth century model of unified codification (see The Study Group on Social Justice in European Contract Law 2004). The assumption that “merely technical” rules of, say, contract law (Kennedy

5 See on the counter-intuitive notion of interregulation between sectorial regulations, Frison-Roche 2005.

The constitutionalisation of EPL–The unification of contract law in Europe poses profound questions concerning the values which should underpin the market order. Just as the nineteenth century civil codes and the common law contained a scheme of basic values about the appropriate standards for governing economic and social relations between citizens, so too a European law of contract will enact a scheme of social justice. A unified law will similarly have to strike a balance between, on the one hand, the weight attached to individual private autonomy as expressed in the idea of freedom of contract, and on the other hand, principles which respect other equally important demands for social solidarity, which prohibit persons from taking advantage of superior market power or from ignoring the claims of justified reliance upon others. In striking this balance, any system of contract law expresses a set of values, which strives to be coherent, and is regarded as fundamental to the political morality of each country. The creation of EPL fits into the broader evolution of Europe towards

7 On the enterprise of unification as revealing complexity, see Samuel 2002.

12 The Commission’s various publications, including its appeal to public response, has betrayed little concern for the symbolic aspects of codification, focusing as it does on internal market objectives. This is no doubt dictated by the fact that Article 95 of the EC Treaty is the likely legal basis for any Community regulation (see Staudenmayer 2002, discussing the choice of the appropriate legal basis, and its constraints for the Community legislator).

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Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

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Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

Public law, private law and the multi-level system – The enhanced regulatory function of EPL is basically the story of the decline of the entrenched distinction between public and private regulatory spheres, which in turn provided the traditional conceptual framework for the regulatory state. Characteristic of the public sphere were mandatory command-and-control, goal-oriented regulatory techniques used by public actors. In the private sphere, a less mandatory normative framework composed of “private law” rules, supposedly non-redistributive, compensatory, purely facilitative of private autonomy, allowed private rule-making by private actors. Profound changes linked to the normative environment both on a global and European level unsettle the frontiers between public and private spheres, public and private regulation, and consequently public and private law. Thus, there is an increase both in private rule-making in the public sector (1) and a growth of clearly goal-oriented “private” law, invested with a regulatory function when other institutional frameworks prove inadequate or unavailable (2). This unsettling of disciplinary boundaries is accentuated by the multi-level context in which EPL is developing (3).

(1) Private regulation in the public sector – In the past, the involvement of private actors in rule-making, particularly through party autonomy in the field of contracts, concerned regulatory spaces not within the public sphere. There was perceived to be a clear-cut distinction – however variable among different national systems – between private and public regulation, which corresponded nicely to public and private spheres. However, private actors are now increasingly involved in regulatory processes through various participatory forms in the public sphere. In particular, a well developed system has been achieved at the European level in the field of technical standards. There is no longer any symmetry between private and public regulation on the one hand, and private and public regulatory spheres on the other. The public sphere is increasingly occupied by both public and private regulators, which interact through various cooperative and competitive processes (see Cafaggi 2006a).

(3) Multilevel system– These developments are all taking place in a multi-level normative context, which contributes additional layers of complexity. At a European level, conflicts of regulation call for new techniques of coordination which differ according to whether national laws are harmonised or not, and require solutions for conflicts with third States. The relationship between internal market objectives, which include the country of origin principle, and the specific goals of private international law, require clarification. But other factors, present on a global level, such as pressure from regulatory competition, also interfere. For instance, whereas, in a domestic or indeed a Community setting, party autonomy is increasingly made subordinate to regulatory goals, in the global environment, the growth of systems of

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Whereas pluralism tends to emerge as a foundational value in the complex, multi-level structure that Europe represents, the conflict of laws may appear as a convincing alternative to centralised decision-making in an integrated market (see Muir Watt 2005). In this respect, it may even constitute a distinctive feature of European governance14. It cannot however fulfil this function unless its regulatory dimension is acknowledged.

The global context: from private autonomy to private international law passing via economic due process – Interestingly, the potential of private international law in this context has been discovered by proponents of an economic analysis, essentially in a global context (see in particular, Trachtman 1993, 1994, 2001) where trans-national private actors have progressively moved away from national roots to fill the global financial market. While the mobility of capital was increasing, and international arbitration liberalized, the inter-jurisdictional competition paradigm (see Bratton and McCahery 1997) gained support among international lawyers. Private international law, through the promotion of private autonomy, was then considered as an efficacious tool to foster competition between legal products, be they public or private law products (Romano 1985), thereby safeguarding legal pluralism and at the same time contributing to maintaining a healthy pressure on national legislators. This meant accepting the diminution of the accountability of trans-national actors (Wai 2002; Moreau and Trudeau 2000) freed from state bounds and loosening the grip of internationally mandatory rules15. However, extending the scope of the fiscal federalism model16 was not that straightforward for the development of the US federal market, as corporate charters made commentators fear a race to the bottom in legal standards. It was therefore crucial to find the means to cure the consequences of the imbalance between mobile and immobile factors of production (see Trachtman 1993, 1994, 2001) and thereby heal what have been called cross-

Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

border externalities17. Economic due process18, balancing the harm felt within the regulating state and that burdening foreign interests, was to help in this endeavour (Goldsmith and Sykes 2001). While designed for the Commerce Clause framework, it may however largely inspire the way private international law tools are conceived in order to avoid for example deregulating effects of the forum non conveniens doctrine (see Blumberg 2002) and simultaneously qualify the resulting “transnational liftoff” (Wai 2002).

20 Its status is all the more shadowy given that the pleading and proof of foreign law is traditionally – at least to a certain extent and according the legal system – left to the parties. For a comparative survey, seeGerooms 2004.

21 July 22nd 2003, COM (2003) 427 final. It may well be regrettable that the proposed Regulation does not extend this analysis to other fields: see Symeonides 2004.

Mutual recognition and regulatory competition –Once economic freedoms are coupled with the principle of subsidiarity, the economics of mutual recognition clearly emerge: to boost regulatory competition between MS, as underlined by W. Kerber (Kerber 2000). The case law of the ECJ23echoes such a rationale, in particular in the area of freedom of secondary establishment, where the place of incorporation criterion has been given ample room so that firms can freely choose between the different national legal regimes. MS can not simply impose a second regulatory burden on foreign companies when they have had to bear equivalent restrictions in their own state. While some have heavily criticized the deregulating effects of such decisions, in particular vis-à-vis worker participation in corporate decision-making, the answer was to state that harmonization of company law at the European level was still possible24. The Sunday trading saga25 raised similar concerns since it had

22 Joined cases Keck et Mithouard, C-267/91 et C-268/91 (1993), ECR I-6097. Before these land-mark cases, Dassonville (Case 8/74 [1974]) had indicated that “all trading rules enacted by Member States which are capable of hindering, directly or indirectly, actually or potentially, intra-Community trade are to be considered as having an effect equivalent to quantitative restrictions” (emphasis added). Then, in Cassis de Dijon (Rewe Zentrale AG v Bundesmonopolverwaltung für Branntwein Case 120/78 [1979]), the Court used the Dassonville formula to strike down a measure that applied equally to domestic and foreign products. It held that goods lawfully produced and marketed in one Member State should have market access in the others. It gave rise to a long series of cases in which indistinctly applicable national measures were challenged. In Keck, its doctrine was “re’-examined and clarified”. In particular, most importantly, selling arrangements were removed from the ambit of article 28 EC, since such rules do not prevent or hinder market access, although they must of course apply indistinctly to all affected traders. This, in Keck, the French legislation prohibiting resale at a loss fell outside article 28. The judgment this established a multiple burden and effects-bases concept of discrimination as the determinant factor in drawing limits to the concept of a measure having an equivalent effect to quantitative restrictons on the importantion of goods from another Member State (see for this analysis Snell 2002, 80).

been deduced from the fact that states must recognize their neighbours’ legal standards that foreign goods brought with them all the rules likely to affect their production in one way or another. The latter line of cases shows that it is not enough to extend the scope of mutual recognition for regulatory competition to take place. One must carefully study the different ways in which regulatory competition operates, as boundaries have to be established at some points In this respect, a distinction should be drawn between product rules for which consumers vote with their purse and marketing rules for which consumers still vote with their feet (see Snell 2002, 46ff and Muir Watt 2005). In the second hypothesis it is thus necessary to safeguard the integrity of the host state’s policy. The market access test used by the ECJ in the field of services26may run counter to this idea and actually defeat any attempt by the host state to react against cross-border externalities. Yet, comparative regulatory advantages should be recognized only where national legal standards fulfil the same end. As a result, the very functioning of regulatory competition is undermined. This said, the simplification of the economic freedoms test in the realm of services is probably due to the very characteristics of the rules at stake, which tend to be more private than public in nature. Contract law rules hardly fit into the Keck territorial allocation of regulatory competences.

Private law, cross-border services and extra-territoriality– The issue is whether there is something special about private law which would make it more difficult for regulatory competition to take place and thus render the intervention of mutual recognition less legitimate. A. Ogus (1999) has suggested a framework to explain the process of legislative competition in the area of private law. It is only in the case of heterogeneous products (which give rise to losers and winners) that competition occurs. It is only if one feels oneself to be a loser under a certain legal rule that one will choose to act under the framework of another legal regime. But if the legal norm is merely homogeneous, its subjects do not feel the need to move or buy other merchandise. Therefore, contract law being essentially homogeneous, does not allow competition to take place satisfactorily. However, this is to deny the increasing regulatory function of private law. In any case, A. Ogus acknowledges the heterogeneous nature of tort law (Ogus 1999), which expressly belongs to the domain of the country of origin principle (see Muir Watt 2006).

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Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

1) domains; 2) objectives; 3) legal instruments.

1) From the perspective of the relative domains the main difference is that competition lawhas general horizontal application while regulation is sector specific30. This distinction implies different methodologies to analyse their impact on EPL.

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Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

A second factor is associated with the changes which have occurred in regulation. The development of self-regulation and co-regulation in many areas affecting private law, from financial markets to unfair trade practices, from consumer to environmental protection, from privacy to e-commerce, has imposed the need to analyse the relationship between these new modes of regulation and competition. Fields such as professional services or sports have always been characterised by these two regulatory phenomena. However, financial markets, consumer protection and environmental law have experienced a relative increase of the use of different regulatory instruments (see Esty 1996). Often, these modes have employed traditional private law devices such as contracts to perform regulatory functions. Unlike public regulation, these regulatory devices are subject to competition law and have often been scrutinized from this perspective32. Competition law therefore operates as a constraint on private regulation. To be sure, public regulators are also subject to competition constraints, but to a lesser degree33.

It is beyond the scope of this paper to examine in depth the relationship between competition law and private regulatory modesbut it is crucial at least to:

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Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

An impact evaluation analysis of European general directives on consumer protection in regulated fields may therefore assist in deciding either to apply general principles to the specific field, or to differentiate consumer protection measures in the regulated field, thereby excluding the applicability of general legislation.

3 Part II Governance and EPL

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Fabrizio Cafaggi / Horatia Muir Watt: The Making of European Private Law

Given these particular features, why is there a need for governance of EPL? What type of governance should be employed? What is the relationship between old and new modes of governance of EPL? Which features should the governance design possess?

3.1 Why do we need governance of EPL?

37 Common principles are particularly important in the area of tort law for the liability of European institutions and the application to state liability. See Van Gerven 1996, 2002.

38 An example is provided by the banking sector where the Basel Committee has produced rules that have been implemented either through EU legislation or directly by MS. Moreover in this case there is a combination of soft law (rule-making) and hard law (implementation). On transnational networks see Eberlein and Grande, 2005.