The DRAFT COMMON FRAME OF REFERENCE AND ARBITRATION

Report
The DRAFT COMMON FRAME OF
REFERENCE AND ARBITRATION
By Prof. Tibor Tajti (Thaythy) ©
CAVEAT

The lecturer and the author of these slides was NOT
involved in the drafting of the Draft Common Frame
of Reference by any means so far

The presentation is thus based on the reflections of a
professor and scholar – and earlier for about ten
years a corporate counsel – primarily interested in
international and comparative law, reform of law and the
interplay between law and economy

Up to this point in time the only indirect connection
to the DCFR is the invitation to critically assess the
consumer protection aspects of the CESL to be held
in Brussels on 5th December 2012 (EPP Public
Hearing on CESL)
“That is a text serving as a source of
inspiration for law making and law
teaching at all levels.”
Christian von Bar, A Common Frame of Reference for European
Private Law - Academic Efforts and Political Realities, Electronic
Journal of Comparative Law, at 1 (< www.ejcl.org/121/art121-27.pdf >).
“We, the academic teams that in 2005 contracted with the
European Commission to deliver […] the Academic
Common Frame of Reference, hope to bring about a
framework set of annotated rules to which the European
and national legislators and the European and national
courts, including arbitral tribunals, can refer to when in
search for a commonly acceptable solution to a given
problem. This ‘Common Frame of Reference’ is also
drafted with a view to allowing parties to a contract,
whether cross-border or purely domestic, to incorporate
its contents into their agreement.”

Christian von Bar, A Common Frame of Reference for European Private Law – Academic
Efforts and Political Realities, 23 Tul. Eur. & Civ. L.F. 37 (2008).
2003: EU Action Plan– for a more coherent contract law
2007: first publications of the cooperating Groups
- Von Bar group (2005): focus on what is common
- Acquis group (2002-Prof. Ajani): focus exclusively on the
law of the EU
- the so-called Principles of European Contract Law were also
integrated (i.e., integration of the work of the (Lando
Commission)
2009: Outline edition becomes publicly available
2010: annotated text - COMMENTS (i.e., commentary
with examples from national laws of EU Member States) –
six volumes (publisher: Oxford University Press)
COORDINATORS


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
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


Christian von Bar
(Osnabrück)
Guido Alpa (Italy)
Hugh Beale (UK, Warwick)
Eric Clive (Edinburgh)
Maurits Barendrecht
(Tilburg)
Ulrich Drobnig (Hamburg)
Ole Lando (Denmark)
Verica Trstenjak (Maribor)
Lajos Vekas (Budapest) etc.
FROM POST-SOCIALIST CEE
COUNTRIES







Lubos Tichy (Czech Rep.)
Paul Varul (Estonia)
Christain Takoff (Bulgaria)
Valentinas Mikelenas
(Lithuania)
Monika Jurčova (Slovakia)
Mircea-Dan Bob (Cluj,
Romania)
Etc.
REALITY
“whilst it seems that the
European contract law
initiative as described in the
Commission communication of 11
October 2004 (COM(2004)0651) and
reported on in the Commission's First
Annual Progress Report
(COM(2005)0456) should be seen
primarily as an exercise in
better law-making at EU
level, it is by no means clear
what it will lead to in terms
of practical outcomes or on
what legal basis any binding
instrument or instruments will
be adopted […]”
WHAT WOULD BE
NEEDED (WISHES)
The European Parliament “…
reiterates its conviction,
expressed in its resolutions
of 26 May 1989, 6 May 1994,
15 November 2001 and 2
September 2003, that a
uniform internal market
cannot be fully
functional without
further steps towards
the harmonisation of
civil law […].”
MAURO BUSSANI:
“The defense of the status quo [that the time … is not
ripe to enact whatever Restatement or Civil Code] …
fits perfectly with the need of the professional elite
to keep the leadership over national and
transnational legal affairs … ”
Mauro Bussani, the Driving Forces behind a European Civil Code, Zbornik Prav. Fak. Sveuč. Rij.
Suppl. Br. 3, xx-xx, at 11.
GREEN PAPER FROM THE COMMISSION
on policy options for progress towards a European Contract
Law for consumers and businesses
(Brussels, 1.7.2010, COM(2010)348 final)
Option 1: “mere” publication of the DCFR (for legislators,
teachers and private parties)
Option 2: an “official toolbox for legislator”
Option 3: EU Commission recommendation to Member
States to incorporate the DCFR into national laws
Option 4: DCFR as an alternative system to national laws
that could be chosen by parties (“optional instrument”)
Option 5: EU Directive with minimum common standards
Option 6: EU Regulation with uniform rules replacing
national laws
Option 7: European Civil Code





While the fate of the DCFR is questionable, the EU is about
to bless the CESL
Optional instrument for cross-border sales contracts
(movables and digital content – as well as related services)
Heavily consumer protective
Register for cases on CESL & review of application (after 4
years, MSs will provide info – after 5 years, the EU
Commission will do that to Parliament)
5th of Dec. 2012, Brussels – EPP Group Public Hearing:
CESL – A Balanced Proposal between Consumers and
Traders?






A document made by western-European academic elite (with
simbolic contribution of experts from smaller countries – see the order and
the quantity of text in the comments)
Primarily theoretically-based rather than based on input coming
from the side of industries and practicing lawyers
Incomplete (e.g., inheritance and family law or real estate
property law are not covered)
Non-mandatory source of law (i.e., “soft law”)
Monistic (i.e., the rules equally apply to merchants and nonmerchants – though separate consumer protection rules have been
added – primarily the law from EU consumer directives)
The text integrates the work of three academic groups (Lando
Commission, Acquis Group and the Study Group) what often
affects the quality and consistency of the DCFR











Book I: General provisions
Book II: Contracts and other juridical acts
Book III: Obligations and corresponding rights
Book IV: Specific contracts and the rights and
obligations arising from them
Book V: Benevolent intervention in another’s affairs
Book VI: Non-contractual liability arising out of
damage caused to another
Book VII: Unjustified enrichment
Book VIII: Acquisition and loss of ownership of goods
Book IX: Proprietary security rights in movables assets
Book X: Trust
Appendix: definictions and index of topics
Arbitrability – business interests –
corollary risks – potential for abuses



IS THE DCFR FITTING THE INTERESTS OF MAJOR
ARBITRAL CENTERS ?
- Or, to what extent matters substantive law in choosing the
place of arbitration?
WHEN AND WHY IS THE DCFR SUITABLE – OR ILLSUITED – TO SERVE AS LEX ARBITRI?
- Or, how is the DCFR finding the middle-ground (e.g.,
culpa in contrahendo)
GOING BEYOND THE DCFR: ABUSES
- What can we learn from the experiences of non-Europeans
in trying to find the answer to which fields of DCFR are
arbitrable and which are not?
- The unhappy US experiences with arbitrating franchise and
private debt collection-related disputes.
Is it in the interest of English, Swiss or other
arbitral centers to pay attention to the DCFR?
LONDON
According to estimates
London handles annually
international arbitrations
with a combined value of
USD 40 to 50 billion
 Lord Ashborne in the
debate on the 1979 English
Arbitration Act:
“new arbitration might attract
to England as much as £ 500
million per year … in the
form of fees for arbitrators,
barristers, solicitors, and
expert witnesses.”

TORONTO


Charles Rives Associates
(2012): Arbitration in
Toronto: An Economic
Study, at 3:
“we estimate the total
impact of arbitration on
the economy of the City of
Toronto to be $256.3
million in 2012, growing
to $273,3 million in 2013.”
Claim 1: Making the weak points of the others visible is a
weapon in the global competition of established and lessestablished arbitral centers
Switzerland: a/ setting aside only by the Swiss Federal Tribunal
(awards appr. confirmed in 93% of cases) – limited
confidentiality
b/ Geneva: French style – Zurich: German legal thinking
France: the ‘group of companies’ doctrine (not in Switz.) & language
England: a/ Often English lawyers must be consulted to understand the law
b/ Less predictable as court cases are not based on a single opinion of the
court but of the various individual opinions of the judges (same
conclusion but different reasoning)
United States: a/ arbitral law is a mixture of federal and State stutory and
case law (State where the arbitration’s seat is)
b/ In some States, foreign lawyer might even be charged for unauthorized
practice of law.
Claim 2: Substantive law plays a role in promoting of a
jurisdiction as an international arbitration center
“The selection of the place of arbitration has impact on the
pool of arbitrators, the parties’ choice of law, procedural
law and enforceability of the award.”
Wilske & Fox: at
384.
“[The] chairperson might have a strong tendency to follow
his or her local practice and – in situations where the
parties have not made a clear choice of law – even
convince his or her co-arbitrators that the substantive
law of the place of arbitration is applicable for the
dispute.”
Id. at 385.
ENGLAND
GERMANY
2007 Law Society campaign
Booklet: Exporting
Excellence – A Guide to
Legal Services
 Press release: “The brochure
includes the promotion of
draft clauses for insertion in
to commercial contracts at
the contract agreement stage
to recognise the application
of English law to that
contract..”
2008: German counter-campaign
“Codification enables swift and
straightforward access to law.
[…]. Codification provides
legal certainty, as legislation
contains general principles
and guidelines, and defines
the terminology used. […].
[N]ot only are contracts under
German law more concise,
they are also more costeffective and reliable than
contractual agreements
under English or US law.”



If substantive law matters (is one of the factors) in
choosing the international arbitral center –
Could jurisdictions aspiring to become arbitral
centers benefit from offering expertise in DCFR?
The DCFR, a soft law (i.e., optional) instrument
that manages – in certain fields – to find the
middle-ground between conflicting, or
substantially differing, national laws?
The DCFR as lex mercatoria or rules
applicable to the substance
THE DCFR AND THE INDUSTRY
-
The DCFR is an EU – soft – law instrument that may be exploited
in the context of ADR:
a/ as lex mercatoria or rules applicable to the substance
b/ as a tool to find or understand national private laws
-
The DCFR is a pan-European instrument, which with its corollary
documents present so far unimaginable vistas (though risks as well):
a/ teaching law
b/ for researching, comparing and thus applying various
European national laws – and better understanding one’s own law
-
The DCFR may (?) breake the monopoly of the few major western
European jurisdictions also in the context of ADR
- arbitral law is procedural but substantive law is a sine qua non
- it is always the local lawyers that known local substantive &
procedural law the best and profit from that
“The conventional method of ascertaining the law
applicable to the merits of a dispute is to select a
national system of law [...]. The law so chosen is then
regarded as the proper law of the contract.
It is sometimes suggested, however, that this search for
the proper law is out of touch with the realities of
modern international trade; and that what is needed
is not a particular national system of law, but a
modern law of merchant. [...].
This modern law merchant goes under various
descriptions, including 'transnational law', 'the
international law of contracts,' ' international lex
mercatoria' and 'international trade law.”
LEX MERCATORIA IN
GENERAL

Problem 1: determining
the content of law
E.g., if the meaning of a trade
usage is unknown to
arbitrators, the content might
be proven (question: how?
With what?)

Problem 2: confliuct with
public policy rules of a
national law(ordre public)
DCFR AS LEX MERCATORIA


-
-
Problem 1: The DCFR is
exact and hence easier to
determine content
Problem 2:
As there is no closed list
of what qualifies as
public policy, conflict can
never be excluded
Yet the risk is much
smaller as the DCFR took
into account what is
normally in Europe in
conflict with public policy

Moot court competition on the DCFR organized under the
auspices of the Warsaw Arbitral Tribunal attached to the
Polish Chamber of Commerce (8th March 2012) <
http://sakig.pl/en/news/events/draft-common-frame-of-reference-warsaw-internationalarbitration-moot-at-the-court-of-arbitration-at-the-pcc >
-------------------------------------------------------------------------------------“The Court of Arbitration at the Polish Chamber of Commerce together with the
European Legal Studies Institute is pleased to invite all interested students and
their professors to join the International Arbitration Moot in Warsaw -
a competition touching on problems concerning the Draft Common
Frame of Reference (DCFR) and procedural issues in arbitration.
The Moot is intended to popularize and disseminate knowledge regarding
the legal texts of the Draft Common Frame of Reference prepared by the
Study Group on a European Civil Code and the Research Group on EC Private
Law (Acquis Group), and to promote the use of international commercial
arbitration to resolve international commercial disputes in accordance with the
DCFR. The competition will promote knowledge of the process of European
Private Law unification, and show the vital importance of the DCFR as a complete
set of rules which will significantly facilitate the settlement of disputes, especially
in international arbitration.”
Are they equally appropriate to serve as the lex
mercatoria in arbitration?

-

SALES:
45 sections (plus a number of section from general
chapters)
FRANCHISE:
b.
Sections common to commercial agency, franchise and
distributorship – which apply only is not provided otherwise
by contract: 13 section (plus 2 on the relationship of the
chapters on these three contract types)
Sections specifically on franchise: 14 sections

SECURED TRANSACTIONS LAW:
a.

122 sections (though: 12 on registration and 28 on
enforcement of security interests – additionally the procedural
law of Member States regulates court enforcement of these)
SALES
•Traditional
nominated
contract
•Stable law
• Differences
among
jurisdictions the
smallest
• Main legal
problems are
FRANCHISE
• New
type of
contract
SECURED
TRANSACTIONS
• A new SYSTEM
promoted (also) by the
DCFR
• A system of various
•Hybrid
• Innominate (often) contracts (not a single
type)
• Often not
• Crucial differences
regulated
exist among European
• Variations though laws
• Some of the
basic forms are
differences may qualify
known
as ‘public policy’ (ordre
• Legal dilemmas
public)
SALES
-A
compromise
among differing
European systems
similar to the CISG
- Most
of the rules
are default rules
THE LEAST
DILEMMAS ON
WHETHER
ARBITRABLE
FRANCHISE
- Offers
a
comprehensive law
on franchise for
Europe
THE LAW IS VERY
FLUID, LITTLE IS
KNOWN ON
ARBITRATION OF
FRANCHISE
DISPUTES
SECURED
TRANSACTIONS
“The goal of
harminising
proprietary security
in novable assets in
Europe”
Crucial novelties &
huge differences on
national level
MOST DILEMMAS
ON
ARBITRABILITY
Black’s Law Dictionary
“The principle that parties must act in good faith
during preliminary contract negotiations.”
GERMAN LAW
“… contracting parties are
under a duty, classified as
contractual, to deal in good
faith with each other during
the negotiation stage, or else
face liability, customarily to
the extent of the wronged
party’s reliance.”
ENGLISH & US LAW
a/ Generally accepted view: common law does not have a
counterpart
b/ Kessler & Fine: “… the
doctrines of negligence, estoppel,
and implied contract, among
others, have … served many of
the doctrinal functions of culpa in
contrahendo.”
“In contrast [to Europe], the [U.S.] Uniform
Commercial Code mandates good faith only
during the performance and enforcement of
contracts. Good faith under the civil law system
means more than not breaking off negotiations in
bad faith. […].”
Larry A. Dimatteo, The Law of International Business Transactions (Thomson/West,
2003).
“[Part E] of Book IV apply primarily to contracts for the
establishment and regulation of a commercial agency,
franchise or distributorship. These contracts have
many characteristics in common , especially their
economic function – the establishment and regulation
of a marketing relationship.”
DCFR Comments, vol. 3, Point A of the comment to
section IV.E. – 1:101: Contracts covered, at 2281.
1
UNIFORMITY
1. Transfer of IP & know-how
(business package)
2. Training, assistance and
advising
1. Payment of royalty & fees
2. Duty to strictly follow
instructions
ASYMMETRY
F
R
A
N E
C E
H
I
S
UNREGULATED


EU:: some franchises are
caught by competition law
Pronuptia case1986: –
division of territory
problematic
REGULATED







Most of national laws have
nothing specifically on
franchise
DCFR: Chapter 4 –
nominated contract


Italy: Law No.129/2004
Spain: s. 62 Retail Trade Act
and a special law
France: Loi Doubin (1989) &
Decree No. 91-337.
2006: Belgium
2006: Sweden
Romania: Decree No. 52-1997
(amended by 79-1998) plus the
new Civil Code of 2011
Ukraine: defined in two codes
(2003) but the act on
registration of franchise not
passed yet
How is the Weaker Party
(Franchisee) Protected in Europe?
Through
Regulation
- Mandatory norms
- Lists on what to
disclose
- US:
a.
Agency oversight
(FTC)
b. Some franchise
systems: SEC
- In Europe: Belgium,
France, Italy, Romania,
Spain and Sweden.
Industrial
Standards
- Code of Ethics
- voluntary
disclosure and
fair dealing
- Austria,
Lithuania,
Germany and
Portugal
(good faith law
systems)
Private law
remedies
- Two variants:
a. Countries in
which it is a
nominated
contract (Lithuania)
b. Not nominated:
where general
rules may be
exploited
(Hungary, Poland, ex-YU)
More than 500 businesses claim to be a franchise systems on the
website of the Hungarian Franchise Association
e.g., “FORNETI” – autochtonous Hungarian franchise system
(frozen pastry products)



Yet franchise is not regulated in Hungary – the drafters of the
new Civil Code decided not to make a nominated contracts out of it
(allegedly to vague & hybrid transaction)
- as a result, courts have to apply by analogy to provisions on
most similar contracts; concretely to:
1. sales (“adásvétel”) or
2. agency (“megbízási szerződés”) or
3. enterprise contract (“vállalkozási szerződés”) or
4. licencing contract.
RESULT: UNPREDICTABILITY AS TO THE RIGHTS AND
OBLIGATIONS OF THE PARTIES
Problem of determining the legal nature of franchise:
-
Unwritten rule is that in case of non-nominated contracts that law
should be applied the elements of which DOMINATE in the given
franchise contract (Discretion or subjectivity?)
E.g., the obligaitons of the franchisee are not the same depending
on the rules of which nominated contract are applied by analogy:
a/ If the rules on agency are applied:
- acting with due diligence is requested but NO PARTICULAR
RESULT must be achieved
-
b/ If the rules on entrepreneurship contracts are applied:
- due diligence is INSUFFICIENT – some concrete result must be
achieved (e.g., gathering of a predefined number of clients)
Is this Case from Poland Instructive to
the Entire CEE?
(Court of Appeals, Katowice, 1998)

Is asymmetry a natural corrolary (sine qua non) of
franchise contracts?
A. If not: how to determine which contract is voidable? Which
clauses to take into account in determining that?
E.g., given that normally franchisors draft the contract – is the mandatory
arbitration clause automatically void? Or, the abuse must be proven?
B. If YES:
1.
Can the DCFR model taken as the European model of
franchise asymmetry? Especially as most European countries has no
franchise regulation.
2.
What to do with clauses that were dictated by the franchisor
but are not listed in the DCFR? Are they per se void?
E.g., the DCFR does not contain a clause on arbitration of franchise disputes.
GLICKMAN MODEL
CONTRACT
DCFR
Audit and inspection limited
by reasonableness

(Comments: in reasonable time of the
day and with reasonable
frequency)







Nothing on mandatory
insurance
Nothing on the franchisee’s
duty to pay all taxes and
other encumbrances
Nothing on the prohibition
of the transfer of the contract
Nothing on arbitration
Art 2:302 – equal right to
termination the contract




No such limitation on audit
and inspection
Franchisee must pay such
insurance and to indicate the
franchisor as the beneficiary
Franchisee must pay all
taxes without delay – if
breached: franchisor has the
right to terminate
Prohibition of contract
transfer: standard
Arbitration: standard
Franchisor has bigger
termination rights
STRONGER CONTRACTUAL
POSITION
STRATEGIC ADVANTAGES



a.
b.


Financially stronger
Bigger expertise
Dictates the tempo:
Entry fee: $ 10,000
Only duty to disclose on
risks (duty to deliver the
manual 14 days before)
Drafts all legal acts
Dictates applicable law,
place of arbitration or
court procedure
a.
b.
c.
d.
Right to dictate the terms
of the IP license
Right to audit
Right to monitor the
operations of the
franchisee
More favorable rights
for termination
-
Franchisee wanted to terminate because his outlet was nonprofitable ;
-
His arguments:
The contract was asymmetric – to wit, the outlet bankrupted
because everything was dictated by the franchisor
Franchise contracts as asymmetric contracts are contrary to
the principle of freedom of contract and good faith.
a.
b.
-
First instance: for the franchisee
Appeal court: for the franchisor as the first instance decision
was based on “from the past inherinted conceptions of what is
moral and fair in business life.”
Are the unhappy experiences with
arbitrating franchise disputes from
the US instructive to Europeans?
US Experiences
2007 Bill: Arbitration
Fairness Act
 The bill wanted to
PROHIBIT arbitration of:
1. disputes with consumers
2. employment disputes, and
3. franchise disputes.


Reason: these categories
of parties have no real
possibility of freely
deciding on whether to
arbitrate
GENERAL QUESTIONS




What is the legal nature
of franchise and is that of
relevance in deciding?
Is the DCFR’s system a
properly balanced
system or rather a toofranchisee tilted one?
Is asymmetry a sine qua
non of franchise
contracts?
If yes, what level of
asymmetry should be
accepted?
“Rules on the substantive aspects of security in movables
would be toothless, or would fail to achieve the goal of
harmonising proprietary security in movable assets in
Europe, if they left enforcement of those rights entirely to
the – diverging – procedural laws and rules of the Member
States.”
DCFR Comments to Article IX.- 7:101: Secured Creditor’s Rights after
Default, at 5613.
Philip R Wood, Law and Practice of International
Finance (Sweet & Maxwell, Thomson, 2008, University Edition), point 3228.
“Unlike ordinary commercial contracts, arbitration is
almost never used in financial contracts, especially
bank loan agreements or bond issues.
The main objections are: having nothing to arbitrate; very
limited appeals; time and delays involved in setting up the
arbitration tribunal; not necessarily less expensive; looser
procedures, and sometimes decisions are made on the
merits otherwise than in accordance with the strict
principles of law ”
BANKS
Philip R Wood is right that
banks are hesitant to resort
to ADR
 BUT in CEE disputes of
banks and consumers IS
being directed to
arbitration and mediation
Hungary: there is a PANEL
FOR MEDIATION attached
to the Agency on Financial
Supervision (FSA – Pszaf)

NON-BANKING FINANCIAL
ORGANIZATIONS
Contracts with RETAINED
OWNERSHIP
a. consignment
b. leasing (operational and
financial)
c. sales contracts (esp. crossborder ) of suppliers
 Factoring
 Pawnshops
 Pledging investment
property controlled by
brokers

“It appears that in many European countries there is an
increasing movement seeking an alternative to the
traditional method of enforcing security rights because
of [the] delays, costs and often disappointing results [of
enforcement through courts] ...”
Von Bar i Eric Clive, Komentar Nacrta (Oxford, 2010),
tom šesti, strana 5614.
See, e.g., Alabama Title Loans, Inc. v. White, 80 So.3d
887(Ala. 2011).
The clause in a car loan agreement provided that the
arbitration clause (agreement) “shall survive the
repayment of all amounts owed” and that it extended
to all claims, including tort claims, that “relate[d] to
this Agreement or the Vehicle;” (i.e., not only those
arising directly from the loan agreement).
Based on such formulation of the arbitration clause, the
court ordered arbitration of the debtor’s claims against
the repossession agency that had repossessed after the
loan had already been paid.

See the FTC document Repairing a Broken System:
Protecting Consumers in Debt Collection Litigation
and Arbitration (2010);
(http://www.ftc.gov/os/2010/07/debtcollectionreport.pdf>;
The document concludes that “[…] the current [US]
system for resolving consumer debts is broken, […]
because consumers are not adequately protected in
either debt collection litigation or arbitration.”
Id., Executive Summary, at i.

WHAT ALREADY IS
EVIDENT



Presence of private
collection industries
Growing number of
countries regulates
them
Indirect evidences on
abuses
NO EVIDENCE ON …


Whether arbitration is
resorted to?
Yet private collection
agencies – often
‘factoring’ companies –
qualify as financial
organizations, hence,
should resort to
mediation panels (e.g.,
Hungary)

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