Cover Page
The handle http://hdl.handle.net/1887/57986 holds various files of this Leiden University dissertation.
Author: Hage, C.A.
Title: Handhaving van privaatrecht door toezichthouders
Issue Date: 2017-12-13
Summary
ENFORCEMENT OF PRIVATE LAW BY REGULATORY AUTHORITIES
Public regulatory authorities are, on the basis of European judicial regulations, increasingly burdened with the supervision of important sectors of private law, especially contract law. The origin of enforcing private law by regulatory authorities is based on the idea that the enforcement of private law is flawed in certain respects. This might involve protection of the weaker party, promot- ing smooth market function and/or ensuring the independence of former state- owned companies. There is then a ‘system failure.’
To achieve the aforementioned public enforcement of rules based on private law by public regulatory authorities, a legal connection must be made between the rules based on private law and the enforcement tools of administrative law. Two ways are possible, namely the translation of rules based on private law to rules based on administrative law or by referencing to the Dutch Civil Code in administrative law.
Europeanisation and internationalisation have been putting pressure on the separation between public and private law for some time. This mixture is all the more relevant in sector-specific regulations. It is unclear whether the enforcement of private law differs per sector-specific regulatory authority and whether the regulatory authorities take the private law context of their function into consideration.
This research is descriptive on the one hand and normative on the other hand. The descriptive question is how regulatory authorities implement rules based on private law. The starting point of this descriptive question is that rules based on private law are increasingly enforced in an administrative manner. The following questions will be addressed: which rules of private law are enforced, why has the legislator chosen for administrative enforcement and what public law instruments are being used for this purpose. For the purpose of this research, I will focus primarily on contract law.
From the answer to this descriptive question arises the normative question:
to what extent are rules based on private law suitable for enforcement with administrative tools? Sub-questions that will be addressed are: does the back- ground and vision of regulatory authorities go against civil law (or not) and why would administrative enforcement be more suitable than private enforce- ment to achieve the objectives of a smooth market function and consumer
protection? To answer these questions, decisions of regulatory authorities are analysed and further problematized from a private law point of view using case studies in the areas of telecommunications law, consumer law and finan- cial law. This analysis and problematization includes, inter alia, a comparison of the interpretation and application of rules based on private law by regulat- ory authorities with the interpretation and application of these rules by the civil courts, an assessment of the way in which administrative and private law enforcement tools relate to one another and suggestions to, where possible, diminish any friction.
Chapter 2 focuses on the background of the problems of enforcement of rules based on private law by regulatory authorities. Private law and public law have different objectives. The objective of private law is to organise the re- lations between citizens. Administrative law governs the relationship between citizens and the government. It is not easy to distinguish the boundary between public and private law, partly as a consequence of steering European regula- tions.
Private law and public law have their own enforcement tools to achieve their different objectives. Private law enforcement tools are, except for the decrees and injunctions, usually remedial sanctions and designed to re-establish the previously existing situation. Aside from remedial sanctions, administrative law also has punitive sanctions. Punitive sanctions have a deterrent effect and are therefore also preventive.
Private sanctions have their limitations. The preventive effect is missing to a large extent, re-establishment of the previous situation is not always an option and the intent is not always to serve the public interest. Administrative sanctions are, in relation to the subject of this book, therefore seen as a supple- ment to private sanctions.
Regulatory authorities are also focused on achieving the objectives of the European Union. This concerns the promotion of the internal market, consumer protection and fair competition. However, private enforcement tools are not sufficient in the free internal market to achieve the intended objectives.
The functioning of regulatory authorities is criticised. A particular vulner- ability is the independence of the regulatory authorities with regards to market participants and politics. Another sensitive issue is the limited budget and the subsequent prioritising of the regulatory authorities. Additionally, the enforcement of open standards in relation to the principle of legality and the discretionary power of administrative bodies are bottlenecks in the enforcement by regulatory authorities and can lead to legal uncertainty. In the context of discretionary power the risk is the possibility that an administrative body will then have the freedom to assess independently whether or not the conditions for legitimate performance of its right or authorities have actually been met (discretion).
Summary 469
In chapter 3 the supervision of the Dutch Authority for Consumers & Markets (ACM) on the telecoms market is analysed. It concerns a so-called network market which is deregulated. To lower the entry barriers for newcomers, and in doing so stimulating the free market, a number of legal rules have been created, to be found in the Dutch Telecoms Act.
The function of theACM, in addition to the imposition of fines and periodic penalty payments, is to settle disputes. In dispute settlement theACMmakes decisions that should settle one or more disputes between two market parti- cipants. The decisions influence the private relationship between market participants.
In the researched decisions of theACM in relation to the pre-contractual phase, the commitment to negotiations stands out from a private law per- spective. Private law does not know such a far-reaching commitment to nego- tiations. Nevertheless, the legislator has considered civil law jurisprudence to be applicable to the commitment to negotiations in the Telecoms Act. The question remains whether this commitment to negotiations is comparable to the doctrine developed in private law jurisprudence and if declaring this case law applicable to the commitment to negotiations in the Telecoms Act is desirable. As a result of the commitment to negotiations in the Telecoms Act there is no freedom of choice to negotiate or not if there is a reasonable request.
In the context of its function as a dispute settler, theACMshould also assess whether or not the parties are in agreement. A difference in approach between theACMand a civil court is that the civil court not only considers the presence of a written agreement, but also takes the other circumstances of the case into account in the assessment whether there is consensus between the parties. With regard to the content and explanation of agreements, in the researched cases theACMseems to exercise restraint regarding the explanation of the intention of parties in the event of ambiguities about provisions in contracts. In such cases theACMfrequently refers to the civil court, which could result in multiple civil and administrative proceedings.
Direct intervention by theACMin contractual relationships, based on the dispute settling powers (article 12.2 paragraph 2 of the Dutch Telecoms Act), is shown most clearly in the determination of the (maximum) price level.
Determining the prices dramatically limits the freedom of contract and is unusual from a private law point of view. With the incorporation of (maxi- mum) prices the iustrum pretium doctrine is inserted in private law through the back door. Determining (maximum) prices is very steering in nature and should be a temporary measure. The question is whether that is realistic, given the characteristics of the market.
The disadvantages of administrative enforcement by regulatory authorities are also demonstrated in the enforcement of decisions. The ACM only has administrative tools at its disposal (penalty and order for periodic penalty payments). These means of enforcement cannot be used, for example, to reclaim overpayments. In these cases, civil court proceedings are inevitable.
After theACMhas ascertained, on grounds of article 12.2 section 2 of the Dutch Telecoms Act, that there is a conflict with the stipulations in or pursuant to the Dutch Telecoms Act, theACMcan establish rules. Currently, the legal consequence of an identified conflict with the Dutch Telecoms Act based on article 12.2 paragraph 2 of the Dutch Telecoms Act is ‘automatic’ nullity. This is not in line with civil jurisprudence in respect of article 3:40 of the Dutch Civil Code. Before theACMcan nullify conditions from an agreement, theACM
should make an assessment under article 3:40 of the Dutch Civil Code with due observance of the associated jurisprudence.
In chapter 4 the consumer protection by theACMis researched. The purpose of the legislation that theACMhas to enforce is to facilitate fair trade between companies and consumers. The legal tasks are therefore the prevention of collective contraventions of consumer law. This concerns a more generic supervision. In doing so, the section unfair commercial practices from Book 6 of the Dutch Civil Code is maintained completely under administrative law.
Since there are very few private law rulings, it is difficult to compare the administrative and private enforcement of the articles 6:193a etc. of the Dutch Civil Code. Consumer law is a clear example of a judicial area in which a regulatory authority tries to ‘steer’ the behaviour of contracting parties by imposing fines.
The amount of lists (misleading and aggressive business practices and information requirements) raises the question whether, all things considered, there even is such a thing as enforcement of private law rules and whether the term regulatory law isn’t more appropriate. In any case there is legislation with a strong punitive character that is ‘included’ in private law.
The information obligations and enforcement tools for consumers seem to be more accessible and therefore implemented faster by consumers than the Unfair Commercial Practices Act. This is particularly evidenced by the appeal to article 6:230m etc. of the Dutch Civil Code (7:46c (old) Civil Code) by consumers themselves. This regulation seems to be effective because it provides consumers with a strong tool to force a seller who fails to fulfil the information obligations.
The moderation of fines by the administrative court in many cases, is likely to be explained by the tasks and missions of theACM. After all, theACM is a regulatory authority, entrusted with the task of monitoring the market position of the consumer. TheACMis focused at providing additional pro- tection to a group of vulnerable consumers. An independent court, both in administrative law and private law, will consider the interests of the parties involved even more. Also, politics might exert a certain amount of pressure on theACM.
The definition of the average consumer is not clear. The civil court seems to assume that consumers are informed, cautious and attentive. A consumer studies the general terms and conditions and looks beyond advertisements.
Summary 471
Additionally, in assessing whether or not essential information was omitted or concealed, it can be taken into account if the information was made available to the consumer by other means. TheACMis (or can be) less attentive to this issue.
The tension between open standards and article 7 of the ECHR can also be seen in the described rulings. TheACMitself believes that de standards are not ‘open’ to such an extent that it cannot be expected of a professional enter- prise to comply with the relevant standards. Admittedly, there will be very little misunderstanding about most of the standards mentioned in this chapter, but there is certainly room for interpretation. In any event, entrepreneurs from the field are asking for more tools.
Since the rules leave room for interpretation, the power of the preventive function of the rules diminishes and spontaneous compliance by market participants is reduced. This complicates the consideration of the AFM to fine infringements, since it is afraid that it might not lead to a conviction. Spon- taneous compliance by market participants would best be stimulated by rules that are clear and easy to follow. In addition, it should be obvious what the responsibility of the consumer or the entrepreneur is.
However, I will not disguise my reservations about the solution to imple- ment (even more) policies in the open, flexible standards of administrative law. I also wonder whether this benefits the coherence of the enforcement.
The different enforcement tools from private law and administrative law simply interfere. A solution could be found in adapting the penalty system.
Penalties require clear rules that leave little to no room for interpretation. The
ACMattempts to create clarity via an informal approach. Perhaps more guid- ance and clarity can be provided by theACMthrough instructions and periodic penalty payments.
In chapter 5 the supervision of the Dutch Authority for Financial Markets (AFM) is addressed. The AFM is responsible for the supervision of conduct on the financial markets. Supervision of conduct is focused on orderly and transparent financial market processes, integrity in relations between market participants and careful treatment of clients. The public interest of the financial sector benefits significantly from proper protection of the consumer. In addition to products that are by themselves harmful to a proper functioning of the market, there are also financial products that are not per se damaging to the public interest. Since they are sold on a large scale and depend on factors with a general nature, these products can pose a risk to the public interest.
A number of rules based on private law are converted into public standards within the supervision of conduct. The best known example of this are the various duties of care. This translation of duties of care from civil law to administrative law is responsible for blurring the distinction between the care
and information duties of civil law (error) and the information duties of administrative law (such as providing information on the sale of an address, CoC number etc.).
The term ‘civil duty of care’ in this book includes the civil information duties on one hand and the other (pieces of the) duties of care on the other.
The information duties are the duty to investigate (to inform themselves) and the duty to notify or warn (requirement to inform the other). With the term information obligations affiliation is sought with the way in which the obliga- tion to inform is managed in the doctrine of error. The so-called basic informa- tion obligations, address information, CoC number etc. were disregarded in this context, since they do not appear in the Dutch Financial Supervision Act.
The other (pieces of the) duties of care shall in particular mean the protection of the weaker party.
In the special duties of care, a more active attitude is expected from banks and financial institutions in their social position of expert service providers.
There is a more extensive warning obligation and to comply with this obliga- tion financial service providers should also investigate the desires and expecta- tions of the clients more extensively.
The rulings related to information obligations based on article 4:19 and 4:20 of the Dutch Financial Supervision Act demonstrate that the administrative court and the civil court may rule differently on similar facts relating to the question whether or not the information supply by the financial service pro- vider was sufficient. In the assessment, the civil court, unlike the administrative court, does take into consideration the fact that the consumer has already received all the required information by other means. This is a clear expression of the different objective of private law and administrative law; the individual interest versus the general interest.
The AFM seems to have adopted the more strict demand for information, derived from civil justice, in the application of article 4:20 of the Dutch Finan- cial Supervision Act. This would halt the divergence between private law and administrative law. A consequence would be that the AFM will then impose a stricter standard than the MiFID. The intended purpose of MiFID, which is maximum harmonisation, is then threatened. One could wonder whether there is room for a difference between administrative duty of care and civil duty of care in the MiFID era.
The (special) duty of care referred to in article 4:23 of the Dutch Financial Supervision Act demands an active approach of the financial service provider.
The administrative duty of care is a translation of the civil duty of care, although the AFM itself states that the administrative duty of care is based on multiple sources. This civil duty of care has been developed in the judge- ments regarding options trade and has been further developed in securities lease cases. The civil special duty of care is based on good faith and aims to protect private counterparties from the dangers of personal rashness or lack of understanding. The duty of care then depends on the circumstances of the
Summary 473
case, in which the expertise and experience of the counterparty concerned, the complexity of the investment product and the connected risks and the regulations which the (securities) institution is obliged to fulfil including the rules of conduct must be taken into account.
It is inevitable that the interpretation of the rules will divert in both areas.
After all, the individual case requires a different interpretation than when the rule is applied in an abstract manner. Furthermore, the private duty of care is not necessarily equal to the public duty of care. As private duty of care is embedded in a framework of good faith and this is not included in the admin- istrative assessment. It is therefore inevitable that the private duties of care must be addressed differently than the administrative duties of care.
Pertaining to the decisions on over-indebtedness (article 4:34 of the Dutch Financial Supervision Act in conjunction with article 115 of the Dutch Market Conduct Supervision (Financial Institutions) Decree) the AFM can only review whether the criteria to prevent over-indebtedness have been drawn up and if they are applied. The AFM attaches great importance to these codes of conduct. The AFM has a very active role in the implementation of open standards in over-indebtedness. The AFM has developed a wide interpretation of the requirement of determinability by considering that the foreseeability of the open standard can result from the civil duty of care, irrespective of whether or not that open standard is explicitly implemented by laws and regulations at that time. The civil court carries out the duty of care in relation to fighting over-indebtedness on the basis of good faith and with due observ- ance of the circumstances. The outcome in such a case can be that good faith prevents the forced payment of debt obligations by a debtor.
The various duties of care are formulated as open standards. An open standard that is enforced by a punitive sanction, is also at odds with the requirement to complain to the regulatory authority concerned first or the requirement of determinability of article 7 of the ECHR. To meet this require- ment to complain to the regulatory authority concerned first, the AFM has laid down policy rules.
Initially, the AFM defended itself against the criticism that the open standards are at odds with article 7 of the ECHR with the argument that the legislator has chosen for principle based legislation. The financial institutions and sector organizations themselves should give substance to the care duties.
The AFM has provided additional guidelines at a later stage. In various decisions, the AFM takes the view that sufficient guidance was provided to the market on how the standard of article 4:23 of the Dutch Financial Super- vision Act should be interpreted. However, personal responsibility of the financial institution remains at the centre, even if there wouldn’t be sufficient guidance. Another important aspect of the imposition of fines on open standards by the AFM is the independence of the regulatory authority. The AFM assesses its own rules.
A difference between enforcement of civil and administrative duty of care is the (own) responsibility of the client that can be taken into consideration when interpreting the personal fault in civil duty of care. In the enforcement of the administrative duty of care it is possible to, based on an assessment of the circumstances, diminish the fine. The standard that is enforced under administrative law is not the same as the standard that is enforced under private law.
Taking the individual circumstances into consideration by a civil court is also of importance in deception (article 5:58 of the Dutch Financial Super- vision Act). In private procedures the criterion or the reference person is deceived. The AFM takes the average investor as a starting point.
Based on article 1:75 paragraph 3 of the Dutch Financial Supervision Act, instructions given by the AFM shall not extend to the infringement of agree- ments between the (legal) person that has received the instruction and third parties. The Dutch Trade and Industry Appeals Tribunal (CBb) interprets this provision as meaning that the instruction must not include an order to change agreements. However, the order to discontinue the offering of ‘prohibited’
activities is a repair for the future and therefore in keeping with article 1:75 paragraph 3 of the Dutch Financial Supervision Act. The CBb is of the opinion that a link must be sought with article 1:23 of the Dutch Financial Supervision Act. The question remains whether this link is intended by the legislator. In the literature it is noted that article 1:23 of the Dutch Financial Supervision Act has a different intention than 1:75 paragraph 3 of the Dutch Financial Supervision Act. It also seems to follow from Dutch parliamentary history that it is not the intention to amend existing agreements. Yet, the only con- clusion can be that the (legal) person imposed with the instruction is forced to adjust the existing (continuing performance) agreement. Resulting in non- performance or dissolution or termination of the existing agreement. Moreover, interests or circumstances of individual contracting parties are not taken into account in the instruction.
Finally, attention is given to the iustrum pretium. Based on article 86c of the Dutch Market Conduct Supervision (Financial Institutions) Decree (BGfo) a provider, mediator or advisor when mediating or advising with regard to, among others, complex products, cannot be provided with or receive direct or indirect provision which is not necessary for enabling the service. Indirectly the AFM is determining the price of the performed work here.
The conclusion of chapter 6 is that this research shows that there are various specialist jurisdictions, together also known as ‘regulatory private law’.
Private law and administrative law are intertwined. The different backgrounds and objectives of private law and administrative law, such as the inclusion of the individual circumstances of the case or not, imply that a standard that is enforced under administrative law is not the same as a standard that is enforced under private law. The type of enforcement is also of (great) influence.
Summary 475
This chapter also provides a modest contribution for a possible avenue to explore for solutions. Attention has been paid to complementarity and hybrid forms of enforcement. Even when one proceeds from complementarity in order to respect the uniqueness of private law and dismiss the hybrid forms of enforcement, the distinction of these legal areas will not be stopped. The classic image of private law cannot remain the same. Is this further specialisation desirable or is this development already an accomplished fact and should we try to make the best of it? Contract law will not stop the evolution of power of the regulatory authorities. On the contrary, regulated contract law will move away even further from general contract law. The demand for effective enforcement should be preferred over doubts with regard to system coherence. Hybrid forms of enforcement could contribute to the promotion of the objectives of enforcement and market regulation and even- tually to the strengthening of the position of the consumer. Persistently clinging to the idea that ‘common’ contract law exists in regulated sectors has proven not to be realistic. Nevertheless, contract law will also remain important in the regulated sectors and will continue to serve as a starting point in the assessment of agreements and the consequences thereof. Where possible, a connection should be made with the system of private law, where this is not possible, it is better to acknowledge this in a clear manner.
