Will it be beneficial for SMEs when the
CESL applies to their contracts?
An analysis of implied terms under Dutch
and English law and the CESL
Master thesis
Author: Floor van der Pol Student number: 10758682
Master track: European Private Law Supervisor: mw. dr. M. (Marija) Bartl
2 Submission date: 24 July 2015
Table of contents
Introduction .………. 3
1. The weaker position of SMEs ……….. 6
1.1 (In what way) are SMEs a weaker party and (why) do they need protection? .….. 6
1.1.1 Relational weakness ..……….. 6
1.1.2 Internal market grounds for the protection of SMEs: cross border trade …...…... 8
2. The United Kingdom ……… 10
2.1 Implied terms in English contract law …..………..… 10
2.1.1 Implication in fact ………... 10
2.1.2 Implication in law ………... 11
2.2 Influence on the position of SMEs in the United Kingdom ………... 13
3. The Netherlands ……… 17
3.1 Implied terms in Dutch contract law ….………. 17
3.1.1 Haviltex ………... 17
3.1.2 Entire agreement clause ………. 18
3.2 Influence on the position of SMEs in the Netherlands ………...… 21
4. The Common European Sales Law ……….… 24
4.1 Implied terms under the CESL ………...……… 25
4.2 Influence on the position of SMEs when the CESL applies to their contracts …... 28
5. Comparison and evaluation ……….… 30
5.1 Influence of the use of the CESL on the position of SMEs in the United Kingdom with regard to implied terms ………..……….… 30
5.2 Influence of the use of the CESL on the position of SMEs in the Netherlands with regard to implied terms ……….….…. 31
Conclusion ……….… 33
3 Introduction
It often happens that parties to a contract disagree on the interpretation thereof. Many legal disputes start with parties to a contract contesting the content and scope of the terms of that contract. In many cases, a dispute arises about a matter which is not explicitly regulated by the contract between the parties. In most legal systems, the courts may provide for such a mat-ter by implying (an) additional contract mat-term(s) into the contract. That means that a provision is introduced into a contract by the courts, without it being directly stated in written or spoken words by the contract parties. Such a provision is called an ‘implied term’.1 This may seem odd, since traditionally the basic principle of contracts is freedom and autonomy. Contracts are agreements between parties; they negotiate and decide by themselves what terms they want to include in the contract and thus what rights and obligations stem from the contract. It is an extraordinary phenomenon that – if a matter is not explicitly regulated by the agreement between the parties – a court (thus someone who is not a party to the contract) can decide to imply a term into the agreement, to which the parties are then bound, while parties did not (explicitly) agree to that term. It is therefore a very controversial issue of contemporary con-tract law what role courts should play in the construction of the contents of concon-tracts.2 But as we will see, courts can have very good reasons to do so. The question that triggered me was whether one of those reasons could be to protect weaker parties, more specifically small busi-nesses3 as a weaker party. Not everybody agrees on whether SMEs should be treated as a weaker party. That is why I will start in the first chapter by explaining why I am of the opin-ion that SMEs are a weaker party that needs protectopin-ion.
I chose to focus my research on SMEs because there is little to no European legislation that protects this particularly weak group. The Common European Sales Law4 (hereafter: CESL) is the first European instrument that clearly pays attention to the weaker position of SMEs. At the time of this writing, it has been announced that the proposal for a CESL has been withdrawn. However, as I will explain, it is still valuable to discuss this instrument. It
1 http://www.businessdictionary.com/definition/implied-term.html.
2 Marchetti, Ignoring the parties’ silence, Global Jurist 2012/2, p. 1 [online].
3 From now on, when I talk about small businesses, I will refer to them as SMEs (short for small- and
medium-sized enterprises).
4 Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law,
4 would be interesting to find out whether national legal systems already pay attention to the weaker position of SMEs or whether the CESL would change or better their position largely.
As I will explain, a better position for SMEs means something else in the national legal systems than it does under the CESL. The European Commission focusses on a better eco-nomic position on the internal market (more cross-border trade) while national legal systems focus on more protection for them in their contracts vis-à-vis bigger companies. For my re-search, both strands are important, since both are aimed at benefiting SMEs.
The question I wanted to find an answer on with my research was whether SMEs will be better off by applying the CESL to their contracts than they currently are. Will it be beneficial for SMEs when the CESL applies to their contracts? I will focus on implied terms; how would the choice of the CESL influence the position of SMEs with regard to implied terms?
It was obvious from the beginning that the method to come to an answer on that research question would be a comparative analysis. The position of SMEs without the CESL has to be compared with their position when they use the CESL. To do that, I had to choose national legal systems to compare the CESL with, since the CESL is not replacing any European legis-lation or is a choice next to European legislegis-lation, but is a choice next to national regimes. So what I had to do to come to an answer on my research question was to compare implied terms under national legal systems with implied terms under the CESL.
Obviously, the scope of this thesis did not allow me to look into all Member States’ na-tional systems, so I chose two; the Netherlands and the United Kingdom. I chose to involve the Netherlands in my research because I am Dutch and already have great knowledge of Dutch contract law. SMEs are in the Netherlands already regarded a weaker party that needs protection, and Dutch law already contains some rules to protect them. This makes it interest-ing to research whether the CESL will provide them with even more protection there. The reason that I chose England is because English contractual interpretation rules, at first sight, seem to differ a lot from the rules in the CESL. Also, I thought it would be interesting to see the differences between a common law and a civil law system and the differences in influence the CESL would produce there. Another reason for the selection of the legal systems of the Netherlands and the United Kingdom is language. Because I have a Dutch background, and I also master the English language, there would be no language barrier and I would not have a problem understanding the sources.
The sources I have used to come to an answer on my sub-questions and eventually my re-search question are legislation, case law, doctrine and legal literature. The most important source of my research is case law, because courts/judges are the ones to interpret contracts
5 and to apply the rules about the interpretation of contracts and implied terms. But of course, it is very important what has been written about these judgments in the doctrine and legal litera-ture, to see how these judgments are conceived and understood.
As regards the structure of this thesis; I will start in chapter 1 by explaining why SMEs should be considered a weaker party that needs protection. Chapter 2 is about the legal system of the United Kingdom. I will start by describing how the UK deals with the interpretation of con-tracts when it comes to implied terms, and in the second part of the chapter elaborate what influence this has on the position of SMEs in the UK. In chapter 3 and 4, I will do the same for the Netherlands respectively the CESL. Chapter 5 consists of a comparison and evalua-tion. The question how the choice of the CESL would influence the position of SMEs in the UK respectively the Netherlands with regard to implied terms is dealt with and answered. In the end, in the conclusion, I will summarize shortly everything that has been discussed and provide an answer to the research question.
6 1. The weaker position of SMEs
1.1 (In what way) are SMEs a weaker party and (why) do they need protection?
The aim of this chapter is to explain that SMEs are a weaker party that needs protection, and why this is the case. The reason why this needs to be emphasized is that freedom of contract is the main standard. Any protective measure is a modification of this norm, for which one must thus have very good reasons.5 These good reasons for the protection of SMEs will be set out below.
1.1.1 Relational weakness
The question whether SMEs should be treated as weaker parties can be addressed by making a comparison with consumers, since weaker party protection rules enacted thus far have been almost exclusively dealing with consumer protection, and SMEs seem to share some im-portant characteristics with consumers that led to their treatment as ‘weaker party’.6
The reasons that justify the protection of consumers (i.e. the reasons that justify the de-parture from the norm of freedom of contract) are threefold. The first is the so-called ‘take-it-or-leave-it’ argument. Because consumers have no market power, businesses are not willing to bargain with them. Consumers only have the choice of accepting the offer of the business as it is made, or refusing it. There is a huge inequality of bargaining power. As a result, busi-nesses can abuse their stronger position and are able to exploit consumers. In other words: the first argument for protection of consumers is that they are in a weaker position in their rela-tions to businesses. Secondly, consumers deserve to be protected because they lack infor-mation about the product and the contract terms, which inforinfor-mation businesses do have be-cause of their experience with it. This is the ‘information asymmetry’ argument. Consumers are not only often incompletely informed, but also the information they do have is often too complicated or too extensive or the circumstances in which it was given were not such that the consumer could process it rationally. All of this leads to the risk that consumers agree to a contract under an error. There is thus also a huge inequality when it comes to expertise. Hence, they deserve to be protected. The third argument is that, even though consumers and businesses can both make mistakes, businesses are not entitled to protection because of their commercial nature. The result of mistakes of businesses will be that they go bankrupt, which is considered to be part of the risk/reward structure that is inherent to running a business.
5 Klijnsma, Contract law as fairness, 2014, p. 101. 6 Ibid, p. 93.
7 Apart from the fact that this is thus an assumed risk, it also advances competition, because “bad” businesses will disappear from the market, which will leave more capital for more suc-cessful businesses. The success of the lives of consumers can naturally not be subjected to the same kind of reasoning, which leads to the conclusion that it is justified to differentiate in the treatment of consumers and businesses.7
The next step to take is to apply these reasons for the protection of consumers on SMEs, to see if they would also apply to them and thus would also be a justification for the special treatment of SMEs. The first argument, the take-it-or-leave-it argument, applies equally to SMEs as it does to consumers. In business-to-business (B2B) relations, equality of arms is presumed. However, SMEs, just as consumers, are not in a position to bargain with and influ-ence negotiations with larger businesses. They face the same risk of exploitation as consumers do. The second argument, the information asymmetry and rationality argument, can also be applied to SMEs. The stronger position of bigger companies here is that they are able to hire staff and lawyers to check information and make sure no mistakes are made, but most SMEs will not have the resources to do so thus for them this would be way too expensive. Both the arguments of inequality of bargaining power and of information asymmetry/lack of expertise gain strength when the companies concerned are smaller. The third argument would at first sight seem to be hard to apply to SMEs, since it has been said that protection as a consumer is more important for the success of a person’s life than protection in running a business. How-ever, a person who owns an SME will often need protection to be able to run his business which is needed for him to make his living. Another reason that the third argument also ap-plies to SMEs is that most big companies have a legal separation between personal assets and the company’s debt, while many small enterprises do not enjoy such separation (e.g. self-employed persons).8
All in all, it can be concluded from the above that SMEs also fall within the category of weaker parties that need protection9, and that consumer law should be re-conceptualized as weaker party protection law.10 In a way very similar to consumers, SMEs also often lack spe-cific expertise, experience, information and bargaining power. SMEs are just as good as con-sumers a weaker party that needs protection.11
7 Klijnsma, Contract law as fairness, 2014, p. 102-103. 8 Ibid, p. 104-105.
9 Ibid, p. 109. 10
Ibid, p. 143.
11 Klijnsma is not the only one who has written about this. See e.g. Beale, A law for big business and competent
8
1.1.2 Internal market grounds for the protection of SMEs: cross border trade
The most important rationale underlying the protection of SMEs as a weaker party in the above view is found in the relational weakness of one party, the SME, versus its counterparty, the bigger company.12 This is mostly the rationale underlying the protection of SMEs in na-tional legal systems, which is, as we will see in the next chapters, also the case in England and in the Netherlands. However, the rationale for the protection of SMEs can also be seen in an-other light, that is, with regard to their position on the internal market. The protection of SMEs would then not be aimed at improving or correcting their position vis-à-vis bigger companies, but would be aimed at making cross-border trade easier for them; facilitate overall access to the internal market for them. That is, not surprisingly, what European legislation aims at. This is, inter alia, evident from the explanatory memorandum of the CESL, where it is stated that
“differences in contract law between Member States hinder traders who want to engage in cross-border trade within the internal market”,
and that
“the obstacles which stem from these differences dissuade traders, SMEs in par-ticular, from entering cross-border trade or expanding to new Member States’
markets”.
In cross-border dealings, traders need to adapt to different national contract laws that may apply, which makes cross-border dealing more complex and costly than domestic trade. This is particularly because of the difficulty in finding out about the provisions of a foreign con-tract law, obtaining legal advice, negotiating the applicable law (in B2B concon-tracts) and adapt-ing to the requirements of consumer law (in B2C contracts). These extra costs weigh much more heavily on SMEs than on bigger companies, and are sometimes even disproportionate to the value of the transaction for them. That these legal differences are important costs also be-came clear from the in-depth impact assessment the European Commission carried out, draw-ing on data from, inter alia, surveys and statistics, which provided an economic analysis of the identified problems.13 The “protection” that the European legislator aims to give SMEs, at least with the CESL, is to better their (economic) position on the internal market, meaning:
Paper 2007/03, p. 13-21 [online]; Hesselink, Towards a sharp distinction between B2B and B2C?, European Review of Private Law 2010/18, p. 93-100; and Micklitz, Do consumers and businesses need a new architecture
of consumer law?, EUI Working Papers LAW no 2012/23 [online].
12
Klijnsma, Contract law as fairness, 2014, p. 108.
13 An executive summary of the impact assessment can be found here:
9 facilitating the expansion of cross-border trade/making cross-border trade less complex and less costly for them.14
10 2. The United Kingdom
2.1 Implied terms in English contract law
The doctrine of implied terms is a classical common law doctrine, derived from English law.15 This is surprising, since courts intervene on the contract when they imply (a) term(s), which seems to go against the principles of freedom and autonomy that are sacred to common law contract lawyers. Common law scholars and courts therefore had to do a lot of effort to find sufficient justifications for their power to imply terms into contracts. The most solid basis for this power is the presumed common will of the parties to the contract.16 As I will describe later in this chapter when I discuss the English jurisprudence on implied terms, the terms that courts imply into the contract are the terms that they presume the parties would have chosen if they did regulate the particular matter.
2.1.1 Implication in fact
In English law, different kinds of implied terms are known. First, there are the terms implied in fact. These are terms that are being read into the contract from the facts, although not ex-plicitly included. The courts have developed two kinds of tests that lead to a term implied in fact, namely the ‘business efficacy test’ and the ‘officious bystander test’.17
The first test leading to a term implied in fact, the business efficacy test, means that with-out the implication of the term, a contract would make no sense business-wise. To give the contract business meaning, a term has to be implied.18 The business efficacy test has its origin in The Moorcock-case from 1889, in Lord Bowen’s judgment. He stated that:
“An implied warranty (…) really is in all cases founded on the presumed intention of the parties, and upon reason. The implication of which the law draws from what must obviously have been the intention of the parties, the law draws with the
object of giving efficacy to the transaction and preventing such a failure of con-sideration as cannot have been within the contemplation of either side; and I be-lieve if one were to take all the cases of implied warranties or covenants in law, it
will be found that in all of them the law is raising an implication from the pre-sumed intention of the parties with the object of giving to the transaction such
ef-ficacy as both parties must have intended that at all events it should have.”
He continues:
15 Marchetti, Ignoring the parties’ silence, Global Jurist 2012/2, p. 2 [online]. 16
Ibid, p. 4.
17 Klik, Conformiteit bij koop, 2008, p. 144. 18 Ibid.
11
“What the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party prom-ise in law as much, at all events, as it must have been in the contemplation of both
parties that he should be responsible for in respect of those perils or chances.”19
When something is so obvious that it goes without saying, the officious bystander test is ap-plicable. This test has its origin in the Southern Foundries (1926) Ltd v Shirlaw judgment of 1940, where MacKinnon LJ formulated it as follows:
“Prima facie that which in any contract is left to be implied and need not be ex-pressed is something so obvious that it goes without saying; so that, if, while the
parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a
common ‘Oh, of course!’”20
In BP Refinery (Westernport) Pty Ltd v Shire of Hastings, Lord Simon of Glaisdale put the business efficacy test and the officious bystander test together and formulated five conditions that have to be satisfied in order to justify the implication of a term in fact: 1) it must be rea-sonable and equitable; 2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; 3) it must be so obvious that ‘it goes without saying’; 4) it must be capable of clear expression; 5) it must not contradict any express terms of the contract.21
Another important case with regard to implication in fact is Nash v Paragon Finance plc, because in that case Dyson LJ put forward another requirement for a term to be implied. He held that to imply a term into a contract, that term has to be “necessary in order to give effect
to the reasonable expectations of the parties”.22 As we will see in paragraph 3.1, this makes the test more alike to the Dutch.
2.1.2 Implication in law
The second category of implied terms in England are terms implied in law. Terms implied in law are general provisions or rules that are always being read into every contract of a certain type. It may concern a statutory rule or a rule that is being applied and developed in case law.
19 CA 01-01-1889, [1889] 14 PD 64 (the Moorcock) [online]. 20
HL 17-03-1939, [1939] 2 KB 206 (Southern Foundries (1926) Ltd v Shirlaw) [online].
21 CA 27-07-1977, [1977] 180 CLR 266 (BP Refinery (Westernport) Pty Ltd v Shire of Hastings) [online]. 22 CA (civil division) 15-10-2001, [2001] EWCA Civ 1466 (Nash v Paragon Finance plc) [online].
12 The distinction between terms implied in law and terms implied in fact can be defined as a difference between respectively ‘general default rules’ and ‘ad hoc gap fillers’.23 Lord Wright gives a clear explanation of the distinction in Luxor (Eastbourne) Ltd v Cooper:
“The expression ‘implied terms’ is used in different senses. Sometimes it denotes some term which does not depend on the actual intention of the parties but on a rule of law, such as the terms, warranties or conditions which, if not expressly
ex-cluded, the law imports. (…) But a case like the present is different because what it is sought to imply is based on an intention imputed to the parties from their
ac-tual circumstances.”24
Most comprehensive is the description of the distinction given by Lord Denning in Shell UK
Ltd v Lostock Garage Ltd. He defines the first category of implied terms, terms implied in
law, as comprehending
“all those relationships which are of common occurrence. Such as the relation-ship of seller and buyer, owner and hirer, master and servant, landlord and ten-ant, carrier by land or by sea, contractor for building works, and so forth. In all those relationships the courts have imposed obligations on one party or the other,
saying they are “implied terms”. These obligations are not founded on the inten-tion of the parties, actual or presumed, but on more general considerainten-tions. (…) The problem is not to be solved by asking what did the parties intend? Or would they have unhesitatingly agreed to it, if asked? It is to be solved by asking: has the
law already defined the obligation or the extent of it? If so, let it be followed. If not, look to see what would be reasonable in the general run of those cases. In these relationships the parties can exclude or modify the obligation by express words; but unless they do so, the obligation is a legal incident of the relationship
which is attached by the law itself.”
Lord Denning continues with defining the second category of implied terms, which according to him comprehends
“those cases which are not within the first category. These are cases - not of common occurrence - in which from the particular circumstances a term is to be
implied. In these cases the implication is based on an intention imputed to the parties from their actual circumstances. Such an imputation is only to be made when it is necessary to imply a term to give efficacy to the contract and make it a workable agreement in such manner as the parties would clearly have done if they
had applied their mind to the contingency which has arisen. (…) In such cases a
23
Klik, Conformiteit bij koop, 2008, p. 145 and also House of Lords 20-07-2000, [2000] UKHL 39 (Equitable Life Assurance Society v Hyman) [online].
13
term is not to be implied on the ground that it would be reasonable: but only when it is necessary and can be formulated with a sufficient degree of precision.”25
An example of a judgment where the court implied a term in law is Liverpool City Council v
Irwin. In this case it was decided that the legal relationship between landlord and tenant
al-ways implies a duty for the landlord to keep the common parts of hired estates in decent re-pair.26
Another example is the relationship between an employee and his/her employer. In Scally
v Southern Health and Social Services Board, the House of Lords held that the employers had
breached a contractual duty, implied into the employment contracts, to properly inform their employees about their rights.27 In Malik and Mahmud v Bank of Credit and Commerce
Inter-national SA, the House of Lords unanimously held that a term of mutual trust and confidence
is implied into every employment contract between an employer and an employee.28
2.2 Influence on the position of SMEs in the United Kingdom
Before we start answering this question, it is important to state that in England, there is no single, unified concept of small business. Individual authors are tempted to define SMEs based on the subject or theme they are studying. Also, courts have not defined SMEs as such and there is no definition to be found in codified law. That is why, when I speak about SMEs in this chapter, I mean a company that is much smaller than its counterparty and which lacks bargaining power and/or expertise in this regard. I do not think it is necessary to draw a pre-cise line here regarding the number of employees or the annual turnover over the company. As we will see later on, English courts will determine on a case to case basis whether a com-pany is considered to be an SME or not.
The use of implied terms by English courts can be summarized as that the traditional basis for implying terms in the UK is that it has to be presumed that parties would have agreed on them anyway. Marchetti points out that this traditional theoretical approach is unrealistic. He, cor-rectly in my view, states that in cases where the court is asked to imply a term, the plaintiff and the defendant do not agree on a common intention. Otherwise, they would not have to
25 CA 30-05-1976, [1976] 1 WLR 1187 (Shell UK Ltd v Lostock Garages Ltd) in: Text, cases and materials on
contract law, 2014, p. 241-242 [online].
26 HL 31-03-1976, [1977] AC 239 (Liverpool City Council v Irwin) [online]. 27
HL 01-01-1991, [1992] 1 AC 294 (Scally v Southern Health and Social Services Board) [online].
28 HL 12-06-1997, [1997] UKHL 23 (Mahmud and Malik v Bank of Credit and Commerce International SA)
14 seek the assistance of the courts. The real task of the courts in such cases is to decide which parties’ interests he will protect. In most cases, one of the parties wants the court to intervene and add a certain duty into the contract, while the other party does not want the court to inter-fere with the content of the contract.29
According to Marchetti,
“a proper understanding and evaluation of the actual trends of implication of terms is strongly linked to the more general question of the desirability of judicial
correction of the parties’ expressed will”.30
This ‘correcting of the parties’ expressed will’ through implicating terms happens a lot in for example consumer law, where contract freedom and autonomy are restricted to protect con-sumers as a weaker party. Those who are in favour of broadening the protection of weaker parties beyond the protection of consumers, might be in favour of implying terms every time this seems profitable to correct a significant disparity of bargaining power or expertise be-tween the parties. The underlying basis or rationale for implication of terms is then more technical, namely the correction of significant bargaining power or expertise disproportions.31 See also chapter 1 under ‘relational weakness’.
From the case law discussed in the above paragraph, the conclusion can be drawn that English courts are more flexible towards the implication of terms when there exists a signifi-cant disproportion in the bargaining power or in expertise between the parties to the contract. The implication-by-law test is more flexible than the implication-by-fact test and is often used to protect weaker parties. Like Dyson LJ stated in Crossley v Faithful & Gould Holdings Ltd, for terms implied in law one should
“not focus on the elusive concept of necessity (…) but should recognize that (…) the existence and scope of standardized implied terms raise questions of
reasona-bleness, fairness and the balancing of competing policy considerations”.32
In other words, the suggested term in law has to be a reasonable one, the presence of which would make the contract a better or fairer one. The purpose of implied terms in England is thus often to achieve fairness between the parties. For example in the cases mentioned earlier, where the House of Lords chose to protect the interests of two simple citizens in need of a
29 Marchetti, Ignoring the parties’ silence, Global Jurist 2012/2, p. 5-6 [online]. 30
Ibid, p. 7.
31 Ibid, p. 7-8.
15 decent accommodation and the interests of employees, as weaker parties in their relationships with their landlord (the City Council) and their employer.33
As discussed in chapter 1, there is considered to be a significant disparity of bargaining power in a contract between a bigger company and an SME. The SME is in this relationship considered to be a weaker party that needs protection. The English courts seem to agree with this statement, since they are not very reluctant when it comes to implying terms in favour of smaller companies in their contracts with bigger companies, in line with the implication-in-law-doctrine. An example is CEL Group Ltd v Nedlloyd Lines UK Ltd & Anor. In this case, CEL, an SME34, and Nedlloyd Lines (a bigger company35) entered into a written agreement whereby CEL would provide road haulage and transportation services for Nedlloyd Lines for a three-year period. That contract gave CEL the exclusive right to provide such services for Nedlloyd Lines. However, a few months later, Nedlloyd Group merged with another compa-ny, which had its own haulage business. As a result, CEL was no longer afforded exclusive haulage rights. The judge held that there was an implied term in the contract that
“Nedlloyd Lines would do nothing of their own motion to put an end to the ‘state of circumstances’ whereby Nedlloyd Lines requires services by way of overland
haulage within the United Kingdom”.
The judge considered the voluntary merger and loss of an identifiable discrete business a breach of this term. The Court of Appeal upheld this decision of the judge.36
In this case, however, the court does not state that the size of the company argumentative-ly makes a difference. This is just a case that is cited much as an example of a case where the court implied terms into the contract, thus more a general contract law case. It can thus be the case that it just happened to be a contract between an SME and a bigger company but that this does not make a difference in the outcome of the case. But this conclusion cannot be drawn too easily. Namely, it ís clear that courts in England frequently imply terms in case of signifi-cant bargaining power or expertise disproportions. Also, (as argued in chapter 1) there is con-sidered to be a significant disparity in bargaining power and expertise between SMEs and bigger companies. England recognizes this. The protection of SMEs is considered to be im-portant in England. They are recognized as a weaker party. For example, the government has
33 HL 31-03-1976, [1977] AC 239 (Liverpool City Council v Irwin) [online] and HL 01-01-1991, [1992] 1 AC
294 (Scally v Southern Health and Social Services Board) [online].
34 Checked through www.companycheck.co.uk. 35
Ibid.
36 CA (civil division) 26-11-2003, [2003] EWCA Civ 1716 (CEL Group Ltd v Nedlloyd Lines UK Ltd & Anor)
16 given SMEs some tax favours, but also other areas of regulation focus on reducing the bur-dens on SMEs.37 What is also important in this regard is that solutions to legal disputes in common law systems such as England are generally based on the facts of the case in question, rather than that there are developed general rules.38 So the fact that the English courts have not (yet) developed a more general rule to be implied in contracts between SMEs and bigger companies that would protect SMEs in this regard, does not mean that English courts are not likely to protect SMEs through implication by law. In my view, they are. Based on the fact that English courts use terms implied in fact to correct significant disparities in bargaining power and/or expertise and that SMEs are recognized as being a weaker party (with regard to bargaining power and expertise) in their relationships with bigger companies, as well as the fact that courts do not often develop general rules but generally decide on the basis of the facts of the particular case in question, it can be concluded that courts are likely to protect SMEs on a case to case basis through implication by law.
In conclusion, it can be said that when SMEs are considered to be in a weaker position in their contracts with bigger companies, English courts will correct that significant disparity of bargaining power and/or expertise by implying terms by law on a case to case basis, depend-ing on the circumstances of the particular case. “Implied terms as a tool to protect quasi
con-sumers”, as Marchetti puts it so well.39
37
Freedman, Small business taxation, in: Taxing small business, 2003, p. 22 [online].
38 Cartwright, Contract law, 2013, p. 12.
17 3. The Netherlands
3.1 Implied terms in Dutch contract law
In contrast to common law traditions, a somehow ‘paternalistic vision’ of contractual rela-tions, as Marchetti names it, has long been culturally accepted in civil law traditions. Outside intervention on contracts’ content has never been regarded as particularly problematic. The implication of terms into contracts by courts in civil law is based on the general principle of good faith. A justification for the intervention of courts in this regard has traditionally been considered primarily as a consequence of the duty to respect good faith standards in the exe-cution of the contract.40
Just like in the UK, the idea that some things are self-evident and do not need to be addressed (see ‘officious bystander test’) is widely known in Dutch law. Already in 1937, in an annota-tion to a judgment of the Dutch Supreme Court (Hoge Raad), Meijers pointed out that a term can be presumed into a contract when it is about a circumstance that a contractor should have expected even without an explicit statement of the other party. In 1947, in another annotation, to the Doorverkochte loods judgment, Meijers reformulated this statement. This time, he stat-ed that the reason that a term is assumstat-ed to be implistat-ed is that it is about a circumstance about which was given no assurance only because it could be taken for granted.41 In other words: judges imply a term into a contract when things are considered to be obvious or self-evident.
3.1.1 Haviltex
Since 1981, the interpretation of contracts in the Netherlands is governed by the so-called Haviltex-standard, named after the eponymous Haviltex judgment. In this judgment, the Hoge Raad has determined that the linguistic meaning of the terms in a contract are not exclusively decisive. The Hoge Raad ruled that judges have to interpret contracts according to the mean-ing that the parties to the contract, in the specific circumstances of the case, could reasonably attribute to the agreement. Important is what parties could reasonably have expected from each other in this respect. To which social circles parties belong and which knowledge of the law can be expected from such parties can be taken into account. A subjective interpretation is paramount; judges focus particularly on what the intention of the parties was and what they should have understood.42
40
Marchetti, Ignoring the parties’ silence, Global Jurist 2012/2, p. 3 [online].
41 Klik, Conformiteit bij koop, 2008, p. 250-251.
18 The underlying idea is that when parties disagree about the explanation of a contract term or when parties did not include certain clauses at all, it will as a rule not be easy to determine the common intention of the parties from the words of the contract. To come to a reasonable explanation, the courts have to take into account additional, sometimes more objective, cir-cumstances like the nature of the agreement, the negotiations and the behavior of the parties after the conclusion of the contract.43
3.1.2 Entire agreement clause
After two judgments of the Hoge Raad in 200744, in which the Hoge Raad ruled that a con-tract between professional parties, that was concluded after careful consideration, may in principle be interpreted linguistically, various authors assumed that the intention of the parties that is central in the Haviltex-standard should not play such a big role in the interpretation of commercial contracts, especially when parties used an entire agreement clause.
With a so-called ‘entire agreement clause’, parties try to delimit the interpretation of the terms in their contract such that previous agreements, including the negotiating history, can be ignored; a purely linguistic interpretation of the agreement is intended. In the beginning, the entire agreement clause worked as intended; the clause was one of the reasons for the courts to hold on to the linguistic meaning of the respective contract.45 An example that is often cited in this regard is the PontMeyer judgment. A contract between, on the one hand Meyer Europe, and on the other side PontMeyer, contained the following provision:
“This agreement contains the entire agreement of the parties in relation to its subject matter. From the moment that its agreement is signed, all previous
agree-ments and arrangeagree-ments made by the parties in relation to its subject matter, if any, shall terminate.”
Meyer Europe was of the opinion that the text of a certain term in the agreement was not what the parties had agreed to before or at the time of the conclusion of the contract. PontMeyer invoked the above cited entire agreement clause. The Hoge Raad, in principle, considered that the Haviltex-standard should be used to interpret the contract: important is what sense the parties might reasonably award to the controversial term in the given circumstances and what they could reasonably expect from each other in this respect. But when it considered which circumstances should be taken into account and what weight should be given to them, it stated
43 Malchus, Contractsuitleg anno 2014, 2014, p. 8 [online]. 44
HR 19-01-2007, ECLI:NL:HR:2007:AZ3178 (Meyer Europe/PontMeyer) [online] and HR 29-06-2007, ECLI:NL:HR:2007:BA4909 (Derksen/Homburg) [online].
19 that the entire agreement clause was of decisive importance. The Hoge Raad concluded that, because of the entire agreement clause, the Haviltex-standard was not applicable and the most obvious linguistic meaning of the words of the terms of contract was the meaning that should be assigned to it.46
The entire agreement clause seemed to work as intended; to hold on to the linguistic meaning of the contract. However, in the Lundiform/Mexx judgment of April 2013, the Hoge Raad nuanced this starting point. In a contract between Lundiform, a shop interiors supplier, and Mexx, a clothing brand (and a much bigger company than Lundiform), the following clause was included:
“This agreement constitutes the entire agreement between the parties and super-sedes any earlier written or oral arrangements and agreements made between the
parties.”
When Mexx and Lundiform got into a discussion about the settlement of the agreement, Lun-diform relies on something the parties would have agreed on in the negotiation phase. Mexx states that statements made in that phase are irrelevant and do not matter, whereby it relies on the entire agreement clause in the contract. Mexx states that the contract, in which the agree-ments Lundiform talks about are not included, should be interpreted linguistically and that there is no room for additional party intentions. The Hoge Raad does not agree with this con-ception of Mexx and considers that the Haviltex-standard is also applicable to the interpreta-tion of provisions of contracts between professional parties in which an entire agreement clause is included. Such an entire agreement clause is only one of the relevant circumstances in the interpretation of an agreement, whereby the meaning that has to be attached to it de-pends on the particular circumstances of the case. This ‘particular circumstances of the case’ include, according to the Hoge Raad, the wording of the clause, the nature, the content, the scope and the level of detail of the contract. Also, the way in which the clause is included into the contract during negotiations is of importance.47 This enumeration of circumstances corre-sponds to those that are tested in the Haviltex standard. The importance of this Lundi-form/Mexx judgment lies in the fact that in some cases an entire agreement clause does not prevent that agreements are being interpreted differently than literally.48 As Dousi explains clearly, the purpose of the entire agreement clause is not to exclude evidence that parties want to adduce to explain or interpret the contract. The only purpose of the entire agreement clause
46
HR 19-01-2007, ECLI:NL:HR:2007:AZ3178 (Meyer Europe/PontMeyer) [online].
47 HR 05-04-2013, ECLI:NL:HR:2013:BY8101 (Lundiform/Mexx) [online]. 48 Briaire, ‘Entire agreement clause’ genuanceerd [online].
20 is to exclude evidence to proof that there are other (additional) agreements made than the agreements in the written contract.49 Dousi relies on paragraph 3.5.3 of the judgment in this regard. However, the Hoge Raad also stated, in paragraph 3.5.5, that an entire agreement clause does not preclude that in addition to the agreements in the written contract also other agreements between the parties apply, as long as those are agreements about other subjects than the agreements in the written contract.50
From the conclusion (which is an advice to the Hoge Raad) of Advocate General mr. Timmerman to the Lundiform/Mexx judgment, it becomes clear that what has been of great importance to the Hoge Raad when it decided that there should not be attached much weight to the entire agreement clause, is that parties did not negotiate about the written agreement, that Lundiform was not assisted by a lawyer or a legal expert and that the model-contract was drafted by the legal department of Mexx. Those three circumstances made the court decide not to attach much weight to the linguistic meaning but also look at the other circumstances of the case (apply the Haviltex-standard). The fact that Mexx presented a contract that was not negotiable and that Lundiform was under great time pressure, was also of importance.51 As I will explain in the next paragraph (3.2), these considerations are important for the position of SMEs.
All in all, it seems that the entire agreement clause can freeze the contents of a contract, as long as it is negotiated well between equivalent parties (in the sense of bargaining power and expertise), and only for the subjects that are discussed in the contract. It does however not say anything about the way in which unclear terms in the contract will be interpreted; inter-pretation is done on the basis of the normal rules of interinter-pretation (Haviltex).52 It does, how-ever, prevent courts from implying terms into the contract about subjects that are already be-ing discussed in the contract (again, if the parties can both be seen as professionals with equal bargaining power). If there is nothing like an entire agreement clause included in the contract, courts are free to imply terms into the contract when that is in line with what they think the parties intended and could reasonably have expected, judging from all the circumstances of the case.
49 Dousi, De entire agreement clause naar Amerikaans en Nederlands recht, Contracteren 2013/4, p. 131
[on-line].
50 HR 05-04-2013, ECLI:NL:HR:2013:BY8101 (Lundiform/Mexx) [online]. 51
Conclusion of Advocate General mr. Timmerman in the Lundiform/Mexx case of 5 April 2013, ECLI:NL:PHR:2013:BY8101 [online].
21 In conclusion, it can be said that courts have a huge discretion when it comes to implied terms and which circumstances they can take into account when implicating terms. The only way in which this discretion can be limited is by including a well-negotiated entire agreement clause into the contract.
3.2 Influence on the position of SMEs in the Netherlands
In the Netherlands, just as in the UK, no exact definition of SMEs is given in codified law or in case law. There are however a lot of websites that provide a definition of SMEs. The one which I attached most weight to is the website of the Central Government (Rijksoverheid), which refers to the definition that the European Commission gave to SMEs, namely: fewer than 250 employees and an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.53 As we will see in chapter 4, this is also the definition that is included in the CESL.
Under current legislation, there is no direct protection for SMEs in Dutch contract law. In some cases however, SMEs can enjoy comparable protection as consumers through ‘re-flexwerking’ of consumer law. ‘Re‘re-flexwerking’ is the application of a law or rule on persons to whom the law or rule is not intended originally. In some situations, an SME can claim con-sumer protection in a contract he enters into, because he is in a similar position as a concon-sumer and can therefore rely on the ‘reflexwerking’. The idea behind the ‘reflexwerking’ is that in certain circumstances there is such little distinction between a business or a consumer that it would be unreasonable not to give them the same protection. However, concretely, there are just few situations in which reliance on the ‘reflexwerking’ is possible. Assigning the ‘re-flexwerking’ on a law or rule is a matter of discretion of the judge, who sets high standards here. It depends on the company, its management style, the amount of staff, the expertise of the company compared to a consumer and whether or not the company contracts out of its profession or business. An appeal to the ‘reflexwerking’ is not adopted very easily. However, in some cases it will be assigned by the judge and SMEs will be protected by it.54 For exam-ple, Dutch courts have assigned ‘reflexwerking’ to the ‘Colportagewet’ (a Dutch law that pro-tects consumers against aggressive sales methods)55 and to several labour law rules56.
53 http://www.rijksoverheid.nl/documenten-en-publicaties/brochures/2014/05/01/handleiding-definitie-mkb.html. 54 Kempen, De kleine ondernemer in zijn recht, 2013, p. 10-12 [online].
55 E.g. Rb Utrecht 28-07-2010, ECLI:NL:RBUTR:2010:BN2763 [online] & rb Utrecht 02-02-2011,
ECLI:NL:RBUTR:2011:BP3292 [online].
56 E.g. Rb Zwolle-Lelystad 28-04-2009, ECLI:NL:RBZLY:2009:BI2857 [online] & rb Zwolle-Lelystad
22 ing ‘reflexwerking’ can be seen as a form of implying terms into a contract, more or less like the English implication by law as we saw in paragraph 2.1.2.
As we saw in paragraph 3.1, courts are free to imply terms into a contract when that is in line with what they think the parties intended and could reasonably have expected. To do so, courts take into account all the circumstances of the case, valued according to standards of reasonableness and fairness. There is a very long list of circumstances that can be factored, but there are only some that are of importance for the protection of SMEs. The first circum-stance which I think is important for the protection of SMEs is the relationship between the parties, namely whether they are equal parties or whether there is one ‘stronger’ contractor and one ‘weaker’. In the latter case, the contract will, when in doubt, be interpreted in favor of the weaker party. Secondly, the drafting history is of importance. The extent to which parties have negotiated about certain terms in the prehistory of the contract plays a role, as well as whether the parties have sought advice from expert advisors. The third factor which I think is important is the reasonableness and fairness.57 The three I have mentioned here, can be used by courts to imply terms in favour of SMEs into their contracts with bigger companies, for there is one stronger and one weaker party. The second argument can be used since, as we saw in chapter 1, when an SME contracts with a bigger company, there is usually no(t much) negotiation about the terms. Also, bigger companies mostly seek advice from expert advisors, while SMEs do not have the resources to do so. If the courts take this into account when in-terpreting the contract, there is a big chance they will imply terms in favour of SMEs. As for the third argument, the reasonableness and fairness; we saw in chapter 1 that SMEs are in a weak position and that they need help so that they will not be exploited by bigger companies, just as consumers. This means it is not more than reasonable that they get a little help from the courts, which they can get through implied terms. Also, reasonableness and fairness can be an argument to apply the ‘reflexwerking’.
As I described in the above paragraph (3.1) as well, these arguments and circumstances also influenced the court in the Lundiform/Mexx case. The fact that Lundiform was a much smaller company than Mexx, that there has not been much negotiation (if there was any) about the written agreement (more specifically, the entire agreement clause), that Lundiform did not have a legal expert advising her, that the model-contract was drafted by the legal de-partment of Mexx (which thus did have legal support from (an) expert(s)) and presented by them as not negotiable and that Lundiform did not have much time to think about whether it
57 Ras, Het uitleggen van overeenkomsten, 2010, p. 15-17 [online]. Ras mentions more conditions, but they are in
23 wanted to accept the contract stated that way or not, influenced the court to decide to protect Lundiform in this case. Where is actually boils down to is that the inequality of bargaining power between Lundiform and Mexx made the court decide to protect Lundiform, the smaller company, as a weaker party.
All in all, the huge discretion courts have in implying terms into the contract and which circumstances they can take into account when doing so, means they also have great discre-tion in protecting SMEs. When the parties are not equal, when the terms are not negotiated (well), when one of the parties has sought advice from experts and the other not, or just when they think it is reasonable or fair judging from all the circumstances, courts are free to imply terms in favour of SMEs. The only way in which this discretion can be hollowed out is with a well-negotiated entire agreement clause, which will not be easily accepted as such by the courts in a contract between an SME and a bigger company.
24 4. The Common European Sales Law
To begin with, before starting to elaborate on the CESL proposal, it is important to describe its current status. The existing proposal was withdrawn in December 2014. However, this does not mean that the proposal is not of importance anymore. It is still valuable to discuss, since the reason given for the withdrawal is “modified proposal in order to fully unleash the
potential of e-commerce in the Digital Single Market”.58 In order words, the proposal for a CESL is likely going to be used for the Digital Single Market proposal.
First, before the discussion of implied terms under the CESL and the influence thereof on SMEs, it is important to draw a general picture of the CESL, its rationale and its scope of ap-plication. The European Commission proposed the CESL to facilitate cross-border transac-tions in the single market. The proposal is largely based on a preceding Feasibility Study59 completed by an Expert Group appointed by the Commission, in which several problems have been recognized in the fact that buying and selling of goods in the EU is still governed by different national contract laws. These differences make it complex and costly to trade across borders, because businesses have to identify the applicable provisions of the law of the coun-try they are dealing with and negotiate the applicable law. Also, additional costs stem from translation, legal advice and adaption of contracts to different laws, for which businesses have to hire experts. The cost and complexity dissuade many traders, especially SMEs, from enter-ing into cross-border trade or expandenter-ing into more Member States. With the CESL, the Euro-pean Commission wants to overcome this. The idea of the CESL is that it will give traders the choice to apply the CESL to their cross-border sales contract. It is a single set of contract rules which would stand as an alternative alongside the national contracts laws of the Member States. It will not replace national laws, but will allow sellers to choose an optional system of contract rules that is identical in all European countries. By express statement, one can choose to apply it. Those who do not want to use it can simply continue using the existing national rules. At last, what is very important to emphasize with regard to the subject of this thesis, is that the target groups of the CESL are consumers and SMEs. The main goal is to enhance their position.60
The CESL proposal consists of several parts. The first part is the explanatory memoran-dum, then the recitals and then the regulation, consisting of 16 articles. Annex 1 contains the
58 http://www.epln.law.ed.ac.uk/2015/01/07/proposal-for-a-common-european-sales-law-withdrawn/. 59
http://ec.europa.eu/justice/contract/files/feasibility_study_final.pdf.
60 http://ec.europa.eu/justice/contract/cesl/index_en.htm, as well as the explanatory memorandum and the recitals
25 actual text of the CESL (consisting of 186 articles), followed by two appendixes (model in-structions on withdrawal and a model withdrawal form). Annex 2, an example of a Standard Information Notice, is the last part.
It is clear from recital 13 to the CESL that it is available for cross-border contracts, the nature of which should in B2B contracts be assessed on the basis of the habitual residence of the parties. The cross-border nature in B2C contracts is present when the general address indi-cated by the consumer, the delivery address of the goods or the billing address indiindi-cated by the consumer are located in a Member State, but outside the State where the trader has its ha-bitual residence. In recital 14 it is stated that the use of the CESL should also be available to facilitate trade between Member States and third countries, and should not be limited to cross-border situations involving only Member States. Member States can even decide to make the CESL available to parties for use in an entirely domestic setting (recital 15). See also article 4 of the Regulation for the territorial scope. As regards the subject matter for which the CESL can be chosen, recital 16 states that this should be the sale of movable goods (including the manufacture or production of such goods) and recital 17 adds the supply of digital content hereto. This includes certain services provided by the seller that are directly and closely relat-ed to specific goods or digital content supplirelat-ed on the basis of the CESL (recital 19). This can also be read in article 5 of the Regulation. After the territorial and the material scope, the per-sonal scope of the CESL is set out, which according to recital 21 should cover all B2B con-tracts and B2B concon-tracts where at least one of the parties is an SME. Member States are free to make the CESL available for contracts between traders, neither of which is an SME. See also article 7 of the Regulation for the personal scope. Article 13 of the Regulation sets out the options that Member States have to make the CESL available for national trade and/or for B2B contracts where none of the parties is an SME.
4.1 Implied terms under the CESL
Since the CESL is intended as a second national regime, national courts (and of course the CJEU) are the ones to use it to interpret contracts where the parties chose to apply the CESL to it. Chapter 6 of the CESL is about interpretation of contracts. A contract is to be interpreted according to the common intention of the parties, even if this differs from the normal meaning of the expressions used in it.61 If the common intention cannot be determined, the contract is to be interpreted according to the meaning which a reasonable person would give to it.62 The
61 Article 58 paragraph 1 CESL. 62 Article 58 paragraph 3 CESL.
26 relevant matters to which the court has to have regard in interpreting a contract are: the cir-cumstances in which it was concluded, including the preliminary negotiations; the conduct of the parties, even subsequent to the conclusion of the contract; the interpretation which has already been given by the parties to expressions which are identical to or similar to those used in the contract; usages which would be considered generally applicable by parties in the same situation; practices which the parties have established between themselves; the meaning commonly given to expressions in the branch of activity concerned; the nature and purpose of the contract; and good faith and fair dealing.63 Expressions used in the contract are to be in-terpreted in the light of the contract as a whole.64 If there is more than one language version of the contract, and none is stated to be authoritative, the version in which the contract was orig-inally drawn up is to be treated as the authoritative one where there is a discrepancy between the versions.65 Contract terms which have been individually negotiated prevail over those which have not been individually negotiated, to the extent that there is an inconsistency.66 A contract term is, according to article 7, not individually negotiated if it has been supplied by one party and the other party has not been able to influence its content. Perhaps superfluously, article 63 states that an interpretation which renders the contract terms effective prevails over one which does not. The last two articles of chapter 6 contain contra proferentem-rules. Where there is doubt about the meaning of a contract term between a trader and a consumer, the interpretation most favourable to the consumer prevails (unless the term was supplied by the consumer). The application of this rule may not be excluded or derogated from to the det-riment of the consumer.67 More in general, contract terms that have not been individually ne-gotiated (within the meaning of article 7) shall be interpreted against the party who supplied it, when there is doubt about the meaning of such a contract term (in contracts that don’t fall under the previous article).68
With regard to the more specific question whether courts are allowed to imply terms un-der the CESL and if yes, when, and having regard to what, chapter 7 of the CESL is im-portant. This part deals with the contents and effects of commercial contracts. It is stated that the terms of a contract are derived from: the agreement of the parties, subject to any mandato-ry rules of the CESL; any usage or practice by which parties are bound by virtue of article 67; 63 Article 59 CESL. 64 Article 60 CESL. 65 Article 61 CESL. 66 Article 62 CESL. 67 Article 64 CESL. 68 Article 65 CESL.
27 any rule of the CESL which applies in the absence of an agreement of the parties to the con-trary; and any contract term implied by virtue of article 68.69 It follows from article 67 that, in contracts between traders, the parties are bound by any usage which they have agreed should be applicable and by any practice they have established between themselves. The same goes for a usage which would be considered generally applicable by traders in the same situation as the parties. When there is a conflict between usages and practices and contract terms that have been individually negotiated or are mandatory rules of the CESL, the usages and practices are not binding. Article 68, paragraph 1, provides that
“Where it is necessary to provide for a matter which is not explicitly regulated by the agreement of the parties, any usage or practice or any rule of the Common European Sales Law, an additional contract term may be implied, having regard in particular to (a) the nature and purpose of the contract; (b) the circumstances
in which the contract was concluded; and (c) good faith and fair dealing.”
Paragraph 2 adds that
“Any contract term implied under paragraph 1 is, as far as possible, to be such as to give effect to what the parties would probably have agreed, had they provided
for the matter.”
When parties deliberately left a matter unregulated, accepting that one or other party would bear the risk, paragraph 1 does not apply (paragraph 3). According to article 2, sub (b) of the Regulation,
“‘good faith and fair dealing’ means a standard of conduct characterized by hon-esty, openness and consideration for the interests of the other party to the
transac-tion or relatransac-tionship in questransac-tion.”
In recital 31 this is further elaborated. There, it is stated that the concrete requirements result-ing from the principle of good faith and fair dealresult-ing should depend, amongst others, on the relative level of expertise of the parties. It is also stated that, in transactions between traders, good commercial practice in the specific situation concerned should be a relevant factor. Arti-cle 69 states that contract terms may be derived from certain pre-contractual statements. If a trader or someone advertising or marketing for the trader makes a statement about the charac-teristics of what is to be supplied by that trader under the contract, before the contract is con-cluded, that statement shall be incorporated as a term of the contract (unless the other party knew or should have known the statement was incorrect or the statement could not have
28 enced the other party’s decision to conclude the contract). The application of this article may not, to the detriment of the consumer, be excluded or derogated from in B2C contracts.70 An-other important article for the purpose of this research is article 72, which states that
“Where a contract in writing includes a term stating that the document contains all contract terms (a merger clause), any prior statements, undertakings or agreements which are not contained in the document do not form part of the con-tract. Unless the contract otherwise provides, a merger does not prevent the par-ties’ prior statements from being used to interpret the contract. In a contract be-tween a trader and a consumer, the consumer is not bound by a merger clause. The parties may not, to the detriment of the consumer, exclude the application of
this article or derogate from or vary its effects.”
Obviously, there is no case law on the CESL (yet). The interpretation of European legislation needs to be autonomous. Autonomous interpretation means that terms and notions are being interpreted independently of the meaning that has been given to those terms and notions in the context of other European legislation or national legislation.71 This means that, apart from the guidelines stated in the document itself (as elaborated above), it is impossible to predict how the CESL will be interpreted and used.
4.2 Influence on the position of SMEs when the CESL applies to their contracts
For the purposes of the CESL, an SME is a trader who employs fewer than 250 persons and has an annual turnover not exceeding € 50 million or an annual balance sheet total not exceed-ing € 43 million (or the equivalent amounts in the currency of another country).72
As already indicated, benefiting the position of SMEs under the CESL is aimed at provid-ing overall access to the internal market for them, not particularly at makprovid-ing them stronger in their relationships with bigger businesses. It is, however, hard to see how implied terms can be used to provide a better position on the internal market. Implied terms can only be an in-strument to correct a relationship between parties. Thus, we arrive again at the relational weakness of SMEs vis-à-vis bigger, stronger companies. This relational weakness is the ra-tionale behind the provisions on unfair contract terms and pre-contractual information duties, the aim of which is to protect consumers and SMEs as weaker parties in their relationships with bigger companies. A lot has been written about those subjects by legal scholars, since these kinds of rules have been common in consumer protection for a long time. In legal
70
Article 69 CESL.
71 http://media.leidenuniv.nl/legacy/samenvatting--h-c-k-senden.pdf, p. 7. 72 Article 7 paragraph 2 of the Regulation.
29 ture, the question whether rules on unfair contract terms and pre-contractual information du-ties could also be used to protect SMEs in their relationships with bigger companies, was raised frequently. However, implied terms are never thought of as a protection tool. To this day, there are no legal scholars who have written about the possibility of using implied terms for the protection of SMEs. This is surprising, since, as we saw in chapter 2 and 3, national courts do use implied terms to protect weaker parties and correct disparities in bargaining power and expertise (and protect SMEs in this regard).
Is this also possible under the CESL rules on implied terms? In my view, it is. As we saw, according to art. 68 of the CESL, when a judge wants to imply a term into a contract, he has to have regard to, inter alia, good faith and fair dealing. Recital 31 explains that this includes having regard to the relative level of expertise of the parties. Since the level of expertise of SMEs is usually much lower than the level of expertise of bigger companies, e.g. because they do not have the resources to hire experts (see chapter 1), recital 31 seems to refer to the relational weakness of SMEs vis-à-vis bigger companies. It thus seems to be the case that courts need to take into account the weaker position of SMEs when they want to imply a term into a contract between an SME and a bigger company.
Also, (one of) the main goal(s) of the CESL is to enhance the position of SMEs (see the beginning of this chapter). This rationale should be borne in mind when reading and interpret-ing the provisions of the CESL.
30 5. Comparison and evaluation
5.1 Influence of the use of the CESL on the position of SMEs in the United Kingdom with regard to implied terms
At first instance, one would think that the system of implied terms under the CESL would make a huge difference in the United Kingdom, because of the notion of good faith that is stated in article 68. In England, the notion of good faith has traditionally not been known and one even looks at it with certain distrust. As known, England does not have a written civil code, so also not a general provision of good faith. But the courts also want to know nothing about it. However, good faith is an open norm, the content of which cannot be established in abstracto but appears only when concretely used in a specific case. A lot of rules that are based on the notion of good faith in continental European countries, are acceded in England, but just not seen as manifestations of the notion of good faith.73 It seems to be the case that, although the English courts did not name it that way, they have already fleshed the notion of good faith when it comes to implied terms.
In paragraph 2.2, we saw that the English courts imply terms by law into contracts to pro-tect weaker parties, and that they use implied terms to achieve fairness between the parties to a contract. Since SMEs are recognized as being a weaker party (with regard to their bargain-ing power and expertise) in their relationships with bigger companies, it can be concluded that English courts are likely to protect SMEs on a case to case basis through implication by law.
Under the CESL, my conclusion was similar. It is stated in the CESL that, when implying a term into a contract, good faith and fair dealing should be taken into account, which means that courts should have regard to the relative level of expertise of the parties. To make the contract a fairer one, courts can imply terms in favour of the party which is considered to be weaker, meaning that it has a lower level of expertise. Also, (one of) the main goal(s) of the CESL is to enhance the position of SMEs. The provisions on implied terms should be read with that rationale in mind. Just as in England, implied terms under the CESL are thus likely to be used to protect SMEs.
Having regard to the above, it seems that the CESL will, with regard to implied terms, not change the position of SMEs in England very much. The way the notion of good faith under the CESL rules on implied terms has to be interpreted (having regard to, i.e., the relative level of expertise of the parties) is very similar to the way the English courts already deal with
