Based in Sydney, Australia, Foundry is a blog by Rebecca Thao. Her posts explore modern architecture through photos and quotes by influential architects, engineers, and artists.

Who does the CESL protect in B2B transactions?

Projekt gostujočih prispevkov

V želji po večji povezanosti revij s pravnimi vsebinami v letošnji rubriki Mundus Oeconomicus izvajamo projekt gostujočih prispevkov. Sledeča članka avtorjev Laure Ratniece ter Rastka Pavlovića sta bila izvorno objavljena v reviji Student economic law review1, ki pa v svoji zadnji izdaji gosti angleški različici člankov NeODEMOKRATIČNOsti!2 ter Politični izzivi in odzivi3.

1 Dostopno na: http://selr.bg.ac.rs/ (2. 3. 2014)

2 Setnikar, N. : NeODEMOKRATIČNOsti!, Pamfil (januar 2013), str. 5-9, v angleščino prevedla Nina Stankovič, STIKS ŠOU v Ljubljani.

3 Dolinar, M. : Politični izzivi in odzivi, Pamfil (januar 2013), str. 10-13, v angleščino prevedla Nina Stankovič, STIKS ŠOU v Ljubljani.


WHO DOES THE CESL PROTECT IN B2B TRANSACTIONS?

An insight in the economic analysis of certain issues, related to the legal relationship between a buyer and a seller pursuant to the CESL

Laura Ratniece

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The aim of this article is to find out, which of the parties – the seller or the buyer – the CESL protects more in the B2B transactions. In order to achieve the aim, the author has given an insight in the legal relationship between a buyer and a seller from the viewpoint of the economic analysis of law. The author has focused on the main aspects of the relevant regulation of the CESL, related to the 1) contract formation; 2) burden of proof; 3) duty to inspect the goods; 4) remedies, which help to characterize and analyse the legal relationship between the parties of a sales contract.

Key words: efficiency, transaction costs, legal certainty, risks, CESL, cross-border transactions

»Law needs economics to understand its behavioural consequences, and economics needs law to understand the underpinnings of markets.«1

1. INTRODUCTION

On October 11th 2011, the European Commission proposed a new regulation – »Common European Sales Law« (CESL), at the same time indicating that »[t]he optional Common European Sales Law will help to break down the trade barriers (…)«.1 The European Commission has researched that nearly 99 percent of the companies, registered in the European Union (EU), cannot afford to trade across the EU borders because selling abroad means adapting sales contracts for up to 26 different legal systems.2 Thus, it can be concluded that the CESL proposal was created, inter alia, to increase trade among merchants in the territory of the EU.

CESL contains diverse legal rules: some can be related only to business to consumer (B2C) transactions, some regulate only business to business (B2B) transactions, and the rest can be applied to both B2C and B2B transactions. In this article the author will focus only to B2B transactions, as they are the main object of international commercial law.

As each sale transaction is carried out by two parties – a buyer and a seller, it is important to understand their legal relationship. If it is possible to determine, which of the parties is weaker and, thus, should be more protected, it is possible to evaluate the efficiency of the particular legal act, which regulates the particular legal relationship (transaction). The legal relationship between a buyer and a seller can be determined, by analyzing several legal issues, inter alia, from an economic perspective. As a result, it can be stated how the relevant regulation affects, for example, the allocation of risks among buyers and sellers, legal certainty and the transaction costs of parties, thus allowing to evaluate the overall efficiency of the transaction.

One of the most appropriate methods of research and analysis of this particular issue is the economic analysis of law. The economic analysis of law means »the use of economic principles and reasoning to understand legal materials«.3Although the economic analysis of law provides several approaches and ways of research, in this article the main focus will be put to the efficiency and the increase of it as the main goal of commercial transactions and the proposal of the CESL as well. Additionally, it should be stated that the particular method of analyzing the legal rules from an economic perspective, is used from a lawyer’s, not economist’s view point. It means that the analysis should not be considered as the only right approach and outcome.

Before going to the analysis of the topic, few remarks should be devoted to the main concept of the article – the concept of efficiency. »For long time efficiency was defined simply as the ability to produce more at a lower cost.«4However, nowadays the concept of efficiency has developed, and become more complex, and more widely applicable.

Most commonly »efficiency« is associated to wealth maximization, stating that efficiency is then when »a judgment, an action, or a law enhances (…) wealth rather than utility«.5 That is the perspective of efficiency which will be used in this article. Regarding efficiency, last but not least it should be mentioned that:

»It is widely taken for granted that an efficient approach is ipso facto superior to an inefficient one. The fastest way to eliminate a rival policy from the field is simply to brand it inefficient.«6

However, the author believes that it is possible to test efficiency of a legal act only then, when it has come into force and is practically applied. Therefore, as the CESL is just a proposal, there can only be academic attempts to analyze its efficiency, mainly by comparing the CESL with similar legal acts.

2. THE CESL AND B2B TRANSACTIONS PURSUANT TO THE CESL

The CESL has been designed to be the applicable substantive law that can be chosen, when parties express their choice of law. It has been proposed by the EU Commission with a clear aim to »boost trade and expand consumer choice«7. The EU Commission has indicated that: »The optional Common European Sales Law will help kick-start the Single Market, Europe’s engine for economic growth. It will provide firms with an easy and cheap way to expand their business to new markets in Europe while giving consumers better deals and a high level of protection.«8 It allows concluding that the promotion of efficiency in cross-border commercial transactions is the central aim of the CESL.

The CESL is an optional regime, into which parties have to expressly opt-in.9 Such approach is contrary to the United Nations Convention on Contracts for the International Sale of Goods (the CISG), which is directly applicable, if one of the parties has its habitual residence in a country which is a member state of the CISG or if conflict of law rules lead to the application of CISG member state’s law rules, unless the parties have expressly opted-out of it.10 One of the reasons of this difference is that from the very beginning the CESL has been designed as an optional legal instrument. Theoretically, it could have been proposed as the EU regulation with a direct effect11. However, taking into consideration the content of the proposal, i.e., the fact that it contains substantive sales law, it can be admitted that most likely the EU member states would not have agreed to the complete unification of the sales law in such way. This sphere still is in a process of harmonization.

There are several arguments, why the CESL might seem to be a good choice of the applicable law in the B2B transactions. First of all, the CESL is equally accessible and understandable to both parties. It does not give any direct advantages to any of the parties. Also it contains legal rules that have been carefully selected and drafted, taking into consideration the latest researches and well established practices. However, that what is not so clear is the relationship between the CESL and CISG. Almost all EU member states (except Portugal, Ireland, the United Kingdom, and Malta) are member states of the CISG. Therefore, the CISG could also be equally well applicable to cross-border transactions in the EU. Moreover, as most of the legal rules of the CISG and the CESL, regulating the B2B transactions, are rather similar, it is not so clear, why two almost identical regulations are needed.

At the same time there are several arguments against the application of the CESL to B2B transactions. That what might prevent traders from choosing the CESL, is the non-existing practice. Indeed, it might take years until the first judgments related to the CESL will be available. And then another significant time period will be needed for establishing a permanent and unified interpretation of some of the issues, included in the CESL.

To sum up, it can be said that certainly the existence of the CESL and ability to choose it as the applicable law for B2B transactions might facilitate cross-border sales transactions. However, currently the CESL has been analyzed only in an academic level. Therefore, its practical use remains unclear and uncertain.

Before going into the analysis of the legal relationship between a buyer and a seller, it is necessary to determine the characteristics of a B2B transaction, inter alia, stating who can be the parties in such transaction. As it has been previously mentioned, B2B means »business to business«. So B2B transactions in other words can be called commercial transactions, in which the parties are commercial entities, and none of the parties is a consumer. However, it should be clarified that the term »commercial entity« does not necessarily in all cases mean a legal entity. In certain situations also private individuals can be treated as commercial entities.

The article 7(1) of the Regulation of the European Parliament and of the Council on a Common European Sales Law states that the CESL can be applied only if the seller is a trader. If both parties are traders, then the CESL may be used if »at least one of those parties is a small or medium-sized enterprise (SME)«. Pursuant to the article 7(2) of the CESL an SME is a trader which employs less than 250 employees, and has an annual turnover which does not exceed 50 million euros, or an annual balance sheet which does not exceed 43 million euros. The reason for such regulation is that »SME protection belongs to the widely recognized policies of the Union in the context of the international trade«.12 This is a very important aspect that has to been taken into consideration, when analyzing the relevant legal norms of the CESL. Namely, the intention to protect SMEs can be indirectly noticed in several legal norms of the CESL.

All B2B transactions (and thus also the legal relationships) are based on a contract. Indeed, the CESL cannot be applied if there is no contractual relationship related to the sale of goods that should be regulated. Assuming that the CESL is the applicable law for the legal relationship between a buyer and a seller, it is clear that the CESL has to contain rules that can be enforced. Moreover, the CESL has to contain rules, which does not directly benefit either of the parties. It has been stated that: »In the language of law, a contract is fair when the value of the promise is proportional to the value of the consideration.«13

There are four basic values of a legal order: 1) certainty, 2) consistency, 3) stability, and 4) predictability.14 When analyzing the relevant rules of the CESL and the legal relationship between buyers and sellers, these values should be taken into consideration and used as one of the criteria for assessing the efficiency of legal norms.

3. AN INSIGHT IN THE LEGAL RELATIONSHIP BETWEEN A BUYER AND A SELLER PURSUANT TO THE CESL

The term »legal relationship« within the framework of this article means the mutual balance and interaction of the rights and duties of a buyer and a seller. As the market of international sale of goods is not perfect, for example, there exists informational asymmetry15, also buyers and sellers are not in an equal position in their sales transaction. Therefore, it is necessary to analyze how the particular legal rules affect the existing imbalance of the parties and whether they help to decrease this imbalance, or, the other way round, increase it even more.

The legal relationship of a buyer and a seller in a sales contract can be analyzed from many perspectives. In this article the author has chosen to look at few basic issues: 1) contract formation; 2) burden of proof; 3) duty to inspect the goods; 4) remedies. By analyzing the previously mentioned legal aspects, it is possible to get an overall insight in the legal relationship between a buyer and a seller pursuant to the CESL.

In order to have a more detailed analysis, additionally to the economic perspective (transaction costs, allocation of risks and legal certainty), the CESL regulation of the above mentioned legal tools, inter alia, will be compared also to the CISG and national laws of the EU member states.

3.1. Contract formation

The basis of the legal relationship between a buyer and a seller is the sales contract, concluded between them. Therefore, the first logical step is the analysis of the relevant contract formation rules.

Pursuant to article 6 of the CESL a sales contract may be concluded by all means, and it does not require any particular form, unless stated differently in the CESL. It means that the contract does not have to be written; it can also be concluded orally (for example, via Skype) or even by direct actions of the parties (for example, the seller sends goods and invoice, and the buyer accepts the goods and pays the invoice).

In the legal theory it has been admitted that: »Freedom from formal requirements is also important in international sale of goods transactions.«16 There is no doubt that each additional action or duty that the parties have to carry out, increases the transaction costs and, thus, may also decrease the overall efficiency of the transaction. Drafting a contract is related to additional legal and administrative costs, which can be saved if the contract does not necessarily have to be in a written form. Moreover, the lack of mandatory requirement of a written contract also saves time. Nowadays, international sales transactions happen very fast. If the parties were obliged to conclude a written agreement for each of their transaction and for each needed amendment, the efficiency of their transaction would certainly decrease. Drafting an agreement, agreeing upon its terms and their formulations and at the end collecting the signatures take time.

If from the perspective of transaction costs it can be concluded that the article 6 of the CESL is efficient, then a slightly different conclusion might be, if the same legal norm is analyzed from the perspective of allocation of risks. There is no doubt that a written contract gives additional safety, because it is a direct and almost undisputable proof of the agreed terms of the particular legal relationship. Therefore, the situation that there is no written evidence of the contractual relationship might increase the risks; change the allocation of them, thus affecting the transaction as such.

Usually it is assumed that parties of a commercial transaction are risk-neutral, i.e., they do not see any risk affected difference between their choices and possible outcomes.17 The same can be said about the sales transaction pursuant to the CESL. Parties – traders – are neither risk seeking, nor risk-averse.

If a sales contract is not in a written form, the main risk is that one of the parties might fail to fulfill any of its obligations or might even deny existence of such contract. However, at the moment of concluding the contract, such risk is equally allocated – there is a risk that both parties might fail to perform their duties.

Although the CESL contains a flexible regulation regarding the contract formation, it should be born in mind that several issues still require a written form. For example, if the parties wish to solve their disputes in a court of arbitration, then most of jurisdictions require that the arbitration clause has been written and signed.18

Article 6 of the CESL complies with the article 11 of the CISG. The latter is a predecessor of the relevant regulation of the CESL.19 This factor can be used as evidence that the article 6 of the CESL can be considered as efficient, because it contains already widely accepted and used regulation.

The relevant regulation regarding the contract formation can be admitted as efficient. It provides flexibility and ability to react fast if there is such need.

3.2. Burden of proof

In total the CESL contains four articles, where the burden of proof has been mentioned.20 However, after having looked at their content, it can be concluded that they regulate the burden of proof issues only in B2C transactions. Thus, it is unclear who bears the burden of proof in B2B transactions. As the same is with the CISG regulation, i.e., the CISG does not really regulate the burden of proof issues either, the conclusions of scholars related to the CISG can be transplanted to the analysis of the CESL. The opinions are not unambiguous: some authors think that, as CISG does not govern it, domestic law should be applied. Others at the same time indicate that the problem could be solved by applying lex fori, taking into consideration that the burden of proof is a question of procedural law.21

Indeed, as the burden of proof is a question of procedural law, then the particular laws of the jurisdiction, in which the CESL is applied, most likely will be used. Although at the first moment it might seem to be uncertain, because most likely parties are not aware of each other’s national procedural law rules, they can agree upon the jurisdiction, when concluding the sales contract, thus indirectly choosing the applicable procedural law rules. Moreover, parties may also agree to solve disputes in a court of arbitration and let the burden of proof be regulated by the relevant arbitration rules.

As well as pursuant to the CISG, also in the CESL the principle of ei incumbit probatio, qui dicit, non qui negat can be found.22 It means that the party, which claims something, has to prove it. This approach to the allocation of the burden of proof allows concluding that the transaction at the moment of proving becomes less efficient to the party that has to prove something. However, if at the end the expected result is achieved, then again the balance between the parties changes.

Burden of proof is directly connected to transaction costs: the party, who has to prove something, has to provide the evidence, and ensuring evidence costs either time, or other resources. However, there is a possibility that pursuant to national laws the party who wins the case may ask for remuneration of the litigation costs, which, inter alia, may include certain costs, related to gathering the evidence.23

At the same time there is also risk that it will turn out to be impossible to prove something. For example, if a contract is concluded orally without witnesses, then it might be rather impossible to prove certain contractual terms, e.g. agreed date of delivery. Therefore, when concluding the contract and when performing it, parties all the time have to make sure that they will be able to prove their actions later. On the one hand such situation may decrease the legal certainty of the transaction, but on the other hand it requires professional attitude towards the transaction. Moreover, additional and higher responsibility is to be required from the buyers and sellers in the B2B transactions, because they are commercial entities and can be considered as informed (or more informed) market players. It means that they have to pay attention to every detail that may affect the outcome of the transaction, including the possible risks regarding the burden of proof. Moreover, they can be required to predict the possible risks and, therefore, by mutually negotiating contractual terms, allocate them in the most efficient way. After having looked at some duties of the parties, it can be concluded that the buyer bears higher burden of proof. Particularly such assumption is based on the analysis of the relevant rules, regulating the buyer’s duty to inspect the goods which is the subject of the analysis in the next chapter.

3.3. Time period of the duty to inspect the goods

The author would like to argue that the duty to inspect the goods is the core issue of the legal relationship between a buyer and a seller, which directly indicates the CESL’s intention to protect the seller more than the buyer. Duty to inspect the goods by itself is important issue, which very often is the reason for disputes and litigations. As more than 50 percent of all cases, where the CISG has been applied, have dealt with quality standards of goods and the duty to inspect them,24 it can be assumed that, when the CESL comes into force and is practically applied, the situation might be similar as it is currently with the CISG.25

The importance of the duty to inspect the goods is there that the CESL by coming into the force will introduce a completely new and so far unknown regulation regarding the time limit, within which the buyer will have to inspect the goods. Therefore, it is worth looking more in details at this part of the legal relationship of a buyer and a seller.

The buyer’s duty to inspect the goods is regulated by articles 121 and 122 of the CESL. Especially important is the first paragraph of the article 121, which states that: »In a contract between traders the buyer is expected to examine the goods, or cause them to be examined, within as short a period as is reasonable not exceeding 14 days from the delivery of the goods (…).« Such regulation is contrary to the article 38(1) of the CISG, which states that: »The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances.« As it can be seen, the difference of time limits is obvious: on the one hand there is exact, precise time limit, expressed in days; on the other hand there is a flexible legal term that has to be interpreted in each and every case individually. Taking into consideration this difference, I will analyse the possible impact on efficiency that might be created by the article of the 121(1) CESL.

Inspection of goods is always directly related to transaction costs. As the buyer has to provide the inspection procedure, he bears higher transaction costs than the seller does. Moreover, as the inspection procedure is a practical process, the costs, related to the inspection procedure, directly depend on the needed and used resources.

There is no doubt that there are a lot of different goods, which are daily sold all over the world. Some goods (for example, simple furniture or gardening equipment) can be inspected very fast and the inspection procedure does not require a lot of resources. However, at the same time there are more complex goods (for example, chemical substances or advanced technologies), which require a proper inspection procedure, which is more costly and time consuming. Therefore, it can be assumed that not all goods can be inspected in an equal time period.

Article 121(1) of the CESL draws a strict borderline (deadline) – 14 days – that cannot be exceeded. If a buyer fails to inspect the goods within two weeks, he loses the rights to indicate to possible defects.26 This regulation leads to situations that buyers will have to use additional resources in order to manage to properly inspect the goods. Thus, the transaction costs of buyers will increase. In the author’s opinion due to such a strict regulation parties might want to draft their contracts more thoroughly, by clearly stating all possible issues and risks, related to the examination procedure and agreeing upon each party’s responsibility and liability. Nevertheless, still it can be admitted that even the most precise contractual terms could hardly equalize the imbalance, created by the article 121(1) CESL.

Next issue, that has to be looked at, is risks. If a buyer has to inspect the goods within 14 days, he bears a risk that he might leave some defects unnoticed. Moreover, if such defective goods are later sold to consumers, even more negative consequences may appear.

The CESL does not provide buyers with a possibility to extend the term, given for the inspection procedure. Therefore, no matter what type the goods are or what the quantity of the is, the buyer has to carry out the inspection procedure »within as short a period as is reasonable not exceeding 14 days from the delivery of the goods«.

The basis of the article 121(1) of the CESL can be found at the beginning of the last decade, when the »Communication from the European Commission to the Council and the European Parliament on European Contract Law« was published.27 However, only on January 7th, 2010, the European Commission published the Green Paper on Policy Options for Progress Towards a European Contract Law for Consumers and Businesses28.

The Green Paper indicates several aims of the CESL: first, the need for the legal certainty; second, elimination of the obstacles, which prevent an efficient use of the Single market; and last but not least, the unification of sales law in the European Union. Article 121(1) of the CESL resembles all of these aims.

Indeed, the article 121(1) gives legal certainty and, thus, facilitates the use of the Single market. Also it offers one unified regulation. Therefore, traders do not have to negotiate upon applicable substantive law. From the perspective of legal certainty it can be admitted that the article 121(1) of the CESL is more certain than the article 38(1) of the CISG. However, at the same time it is not completely certain. If the particular legal norm is carefully and literally analyzed, then it turns out that it is not clear if the 14 days long time period applies to all cases and buyers can always rely on those two weeks. In other words, is there still a requirement for inspection within as a short period as it is reasonable? The author believes that this question will be answered only when the first judgments, related to this issue, appear.

When talking about the time limit for the inspection procedure and how the courts deal with application of the article 38(1) CISG, the author would like to mention the Court of Salzburg decision in the Hydraulic Crane Case29, where the court stated that: »The length of the short period for examination pursuant to the article 38(1) CISG is to be determined considering the size of the buyer’s company, the type of goods, their complexity or deleteriousness or their character as seasonal goods, the amount of goods sold, the effort required for examination, and so forth.« This clearly shows the main characteristic of the article 38(1) CISG, i.e. its flexibility. When applying the article 121(1) CESL courts will not be able to referrer to factual circumstances; they will have to strictly follow the precise term, stated in the article 121(1) CESL.

Another issue, which can be related to the legal certainty, is that the CESL regulation, regarding the buyer’s duty to inspect the goods, is contrary not only to the CISG, but also to the many national regulations of the EU member states. It can be seen in the following table.30

As it can be clearly seen, none of the EU member states, which relevant regulation has been looked at, contains precise (expressed in days) time period for the inspection period. There author believes that there might be several reasons for that. One of them could be direct transplantation of the relevant regulation from the CISG. For example in the Commercial Code of Latvia the regulation of commercial purchase transactions was introduced only at the beginning of 2010. As in that time Latvia had already joined the CISG, it is understandable that the national regulation was made similar to the CISG, in order to follow the demands of legal certainty and aims to harmonize sales law.

The fixed time period puts the buyer under additional pressure, which negatively impacts the transaction as such, and decreases its overall efficiency. The previously mentioned proves that, at least regarding the buyer’s duty to inspect the goods, the CESL protects the seller more than the buyer.

It is clear that by introducing strict remedies the legislator has tried to motivate both parties to act with good faith and voluntarily ful?ll their contractual obligations. Such approach by itself can be justi?ed, because the less disputes there are, the more ef?cient is the overall turnover of the goods, and, thus, the whole market situation is improved as well.

3.4 Remedies

The CESL grants the parties wide range of remedies for the possible breach of a contract by the either party. Pursuant to the article 106 the buyer in general has the following remedies: 1) require of performance; 2) withhold the buyer’s own performance; 3) terminate the contract; 4) reduce the price; 5) claim damages. However, pursuant to the article 106(2)(a) if the buyer is a trader his rights to exercise any remedy, except withholding of performance, are subject to cure by the seller.

At the same time pursuant to the article 131 of the CESL the seller has the following remedies: 1) require performance; 2) withhold the seller’s own performance; 3) terminate the contract; 4) claim interest on the price or damages. Pursuant to the articles 106(6) and 131(4) remedies which are not incompatible may be cumulated.

Although the remedies are quite similar to both parties, there are some differences that change the balance between the parties. Namely, the article 106(2), which sets specific rules if the buyer is a trader (as it is in the B2B transactions), can be the reason for additional transaction costs for the buyer and disputes between the parties. For example, if the buyer wants to terminate the contract, he must inform the seller about that. Then pursuant to the article 116 of the CESL: »A buyer may terminate the contract before performance is due if the seller has declared, or it is otherwise clear, that there will be a non-performance, and if the nonperformance would be such as to justify termination.« However, at the same time pursuant to the articles 134 and 135 the preconditions for a seller to terminate the contract are less strict.

The role and importance of remedies has been stated as follows: »The economic function of contract remedies, then, is to alter the incentives facing the party who regrets entering into the contract, which will directly affect the probability of performance and indirectly affect the number and type of contracts people make, the level of detail with which they identify their mutual obligations, the allocation of risks between the parties, the amount they invest in anticipation of performance once a contract is made, the precautions they take against the possibility of breach, and the precautions they take against the possibility of a regret contingency.«31

»The general aim of damages for breach of contract is to put the claimant into as good a position as if the contract had been performed.«32 Pursuant to the article 131(1)(d) the seller is entitled to claim interest on the price or damages. However, the amount of possible interest has not been stated or limited. Moreover, »the seller may claim interest for the full range of the prescription period even where the buyer’s non-performance is permanently excused.«33 This legal norm leads to assumption that such remedy does not comply with the economic function of remedies. In the author’s opinion remedies certainly help to equalize the relationship between contractual parties in case of a possible breach of contract. However, they should not put one party into a better position than it would be, if the contract were properly performed.

It is clear that by introducing strict remedies the legislator has tried to motivate both parties to act with good faith and voluntarily fulfill their contractual obligations. Such approach by itself can be justified, because the less disputes there are, the more efficient is the overall turnover of the goods, and, thus, the whole market situation is improved as well.

As it turns out that the buyer has to fulfill additional requirements, in order to be able to use the remedies, again it can be concluded that the transaction costs of the buyer will be higher. Thus, it is proved that the CESL, regarding available remedies and the use of them, is more favorable to the seller, than to the buyer.

By researching buyer’s remedies, scholars have admitted that: »Specifically as regards B2B sales contracts, the approach of foreseeing rules that apply without distinction to any type of trader is questionable, taking into account that the objective of foreseeing an additional protection specifically for SMEs and the effectiveness of these rules remain to be proven in practice to account their non-mandatory nature.«34

4. CONCLUSION

The CESL will provide traders with an optional regulation for cross-border sales transactions. It is meant to be a substantive law, directly applicable to the sales contracts, if the parties have expressly chosen it. The EU Commission has anticipated that the new regulation will increase trade within the EU and, thus, will help to develop the economies of the member states.

A brief analysis from the economic perspective of the relevant CESL legal norms, regulating the contract formation, burden of proof, time period for the duty to inspect the goods and remedies, allows having an insight into the legal relationship between a buyer and a seller under the CESL. It shows that the legal relationship between a buyer and a seller is in imbalance, i.e., due to several reasons, including market failure, parties cannot be considered as equal.

The freedom of the contract form can be admitted as efficient and promoting cross-border trade. Indeed, the lack of a mandatory requirement of a written form allows parties to be more flexible and does not unnecessarily increase their transaction costs. Although it raises additional risks, these risks are equally allocated between parties, and parties by themselves can choose any appropriate means how to decrease those risks.

Issues, related to the burden of proof, are not directly regulated by the CESL. Therefore, in case on necessity, parties will be dependent on the relevant lex fori law rules, as the burden of proof is a question of procedural law. As there are more possible situations in which the buyer might have to prove something, it can be admitted that the buyer bears higher burden of proof.

The buyer’s duty to inspect the goods is one of the core elements, which help to describe and analyze the legal relationship between a buyer and a seller. The relevant legal norms of the CESL clearly show that the regulation of the duty to inspect the goods, regarding the time limit for the inspection procedure, is intended to protect the seller more than the buyer.

The precise time limit, expressed in days, may be considered as increasing legal certainty, but at the same time it increases the risks and transaction costs of the buyer. Moreover, such regulation is contrary not only to the relevant regulation of the CISG, but also to many national regulations of the EU member states. That might be another reason why the parties would not be willing to choose the CESL as the applicable law to their contractual relationship.

The precise time limit, expressed in days, may be considered as increasing legal certainty, but at the same time it increases the risks and transaction costs of the buyer. Moreover, such regulation is contrary not only to the relevant regulation of the CISG, but also to many national regulations of the EU member states.

The analysis of the possible remedies of the parties show that, although the remedies are quite equal, the buyer has to deal with additional requirements, in order to be able to use the remedies. These additional requirements can also be admitted as ones who may increase the transaction costs of the buyer, thus increasing the already existing imbalance between a buyer and a seller.

The overall conclusion of this article is that the CESL in B2B transactions protects the sellers more. I believe that there might be at least three reasons for that: 1) as one of the parties of a B2B transaction must be a SME, then by creating a seller-favorable regulation the EU has tried to facilitate commercial activities (wish to sell and, thus, also produce, and actively take part in the market) particularly of SMEs; 2) it has been assumed that by supporting the sellers the amount of transactions will increase; 3) as the CESL also regulates B2C transactions, in which undoubtedly the buyer is the one who is protected more, the EU has tried to equalize the balance of the regulation.


1 R. Cooter, T. Ulen, Law and Economics, sixth edition, Boston, Pearson Education, Inc., 2011, p. 9. See: »Common European Sales Law to boost trade and expand consumer choice«. Available on http://ec.europa.eu/justice/newsroom/ news/20111011_en.htm, (15.12.2012).

2 European Commission 2011. A Common Sales Law for Europe. General Fact sheet. Available on http://ec.europa.eu/justice/newsroom/ news/20111011_en.htm, (15.12.2012.).

3 G. P. Miller, »Law and Economics versus Economic Analysis of Law«, (2011) 19 Am. Bankr. Inst. L. Rev. (American Bankruptcy Institute Law Review) 459, at p.459.

4 »Symposium on Efficiency as a Legal Concern«, (1980) 8 Hofstra L. R. (Hofstra Law Review) 485 (1979-1980), at p.486 [the author of the article has not been indicated].

5 A. Marciano, E.L. Khalil, »Optimization, Path Dependence and the Law: Can Judges promote Efficiency?« (2012) 32 Int’l Rev. L. & Econ. (International Review of Law & Economics) 72, at p.72.

6 U. E. Reinhardt, »Reflections on the Meaning of Efficiency: Can Efficiency be Separated from Equity?«, (1992) 10 Yale L. & Pol’y Rev. (Yale Law and Policy Review) 302, at p. 302.

7 See: European Commission – Press release »European Commission proposes an optional Common European Sales Law to boost trade and expand consumer choice«. Available online: http://ec.europa.eu/justice/contract/ files/common_sales_law/i11_1175_en.pdf (last visited 5 January, 2013.).

8 Ibid.

9 R. Schulze (ed.), Common European Sales Law (CESL) Commentary, Baden-Baden, Nomos Verlagsgesellschaft, 2012, p. 30.

10 See I. Schwenzer (ed.), Commentary on the UN Convention on the International Sale of Goods (CISG) third edition, New York, Oxford University Press, 2010, p. 29-47.

11 With few exceptions the EU regulations are mandatory and directly applicable in all EU member states. For more information regarding the forms of the EU law see: N. Foster, EU Law, third edition, Oxford, Oxford University Press, 2010, p. 97-119.

12 R. Schulze (ed.), Common European Sales Law (CESL) Commentary, Baden-Baden, Nomos Verlagsgesellschaft, 2012, p. 53.

13 R. Cooter, T. Ulen, Law and Economics, sixth edition, Boston, Pearson Education, Inc., 2011, p. 279.

14 M. Reimann, Conflict of Laws in Western Europe, A Guide Through the Jungle, New York, Transnational Publishers Inc., 1995, p. 12-17.

15 » When sellers know more about a product that do buyers, or vice versa, information is said to be distributed asymmetrically in the market.« See: R. Cooter, T. Ulen, Law and Economics, 3rd edition, Addison-Wesley, 2000, p. 43.

16 I. Schwenzer (ed.), Commentary on the UN Convention on the International Sale of Goods (CISG) third edition, New York, Oxford University Press, 2010, p. 205.

17 R. Cooter, T. Ulen, Law and Economics, 3rd edition, Addison-Wesley, 2000, p. 47.

18 See, e.g., article 492(1) of the Civil Procedure Code of the Republic of Latvia. Available online: http://www.likumi.lv/doc.php?id=50500 (last visited 5 January 2013.).

19 R. Schulze (ed.), Common European Sales Law (CESL) Commentary, Baden-Baden, Nomos Verlagsgesellschaft, 2012, p. 103.

20 See articles 21, 26, 41(5), 85(a).

21 F. Ferrari, Burden of Proof under the CISG. Available on http://cisgw3. law.pace.edu/cisg/biblio/ferrari5.html, (27. 12. 2012.)

22 For further information see: F. Ferrari, Burden of Proof under the CISG. Available on http://cisgw3.law.pace.edu/cisg/biblio/ferrari5.html, (27. 12. 2012.)

23 See: article 44(1)(3) of the Civil Procedure Code of the Republic of Latvia. Available online at: http://www.likumi.lv/doc.php?id=50500, (01. 01. 2013.).

24 I. Schwenzer, »Buyer’s Remedies in the Case of Non-conforming Goods: Some Problems in a Core Area of the CISG«, (2007) 101 Am. Soc’y Int’l L. Proc. (American Society of International Law Proceedings) 416, at p. 416.

25 For more information about the economic analysis of the duty to inspect the goods see: Ratniece L., »An Economic Analysis of the Duty to Inspect the Goods pursuant to the CISG and CESL«, Riga, Riga Graduate School of Law, 2012, available online: http://www.rgsl.edu.lv/en/research -at-rgsl/publications/rgsl-research-papers/, (03. 03. 2013).

26 However, it has to be stated that this principle is not absolute. In certain cases the buyer still can use his rights, even if the 14 days time period has been exceeded. See the article 122(6) of the CESL.

27 L. Smith, »The European Commission’s Draft Common European Sales Law«, (2012) 15 No. 8 J. Internet L. (Journal of Internet Law) 16, at p. 16.

28 The European Commission, Green Paper on Policy Options for Progress Towards a European Contract Law for Consumers and Businesses. Available on: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0348:FIN:en:PDF..

29 See the judgment of the District Court of Salzburg (2 February, 2005, unreported). Available on: http://cisgw3.law.pace.edu/cases/050202a3. html, (03. 03. 2013).

30 The countries have been chosen, depending on the availability of the relevant regulation in the English language and its accessibility.

31 P. G. Mahoney, »Contract remedies: general« in G. de Geest (ed.), Contract Law and Economics, volume 6, Encyclopedia of Law and Economics, second edition, Cheltenham, Edward Elgar Publishing, Inc., 2011, p. 155156.

32 P. Van Wijck, »Foreseeability« in G. de Geest (ed.), Contract Law and Economics, volume 6, Encyclopedia of Law and Economics, second edition, Cheltenham, Edward Elgar Publishing, Inc., 2011, p. 225.

33 R. Schulze (ed.), Common European Sales Law (CESL) Commentary, Baden-Baden, Nomos Verlagsgesellschaft, 2012, p. 577.

34 Feltkamp R., Vanbossele F., »The Optional Common European Sales Law for European Contract Law: better Buyer’s Remedies for Seller’s Non -performance in Sales of Goods«, published in European Review of Private Law, Vol.19, No.6, 2011, p. 905.

The efficiency of the european patent system as a regulatory mechanism for the software industry

Goran Klemenčič: predsednik KPK