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URL: http://www.bailii.org/scot/other/SLC/Report/2005/199(7).html
Cite as: [2005] SLC 199(7) (Report)

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    PART 7
    INTERNATIONAL CONTRACTS AND CHOICE OF LAW
    INTRODUCTION

    7.1      UCTA has three provisions dealing with international contracts and choice of law issues: section 26, section 27(1) and section 27(2).

    (1) Section 26 creates an exemption from UCTA's controls for the cross-border sale or supply of goods.
    (2) Section 27(1) creates an exemption from UCTA's controls for contracts that are subject to the law of a part of the UK only by virtue of the parties' choice of law (and would otherwise be governed by the law of another country).
    (3) Section 27(2) applies UCTA to any contract despite a choice of foreign law if (i) that choice of law has been adopted to evade the provisions of the Act; or (ii) the contract was concluded with a UK-resident consumer who took all necessary steps to conclude the contract in the UK.

    7.2      The UTCCR have just one such provision which is closely based on Article 6(2) of the Directive. Regulation 9 provides that the UTCCR shall apply notwithstanding any term that applies the law of a non-Member State if the contract has a close connection with the territory of the Member States.

    7.3      We took a close look at these provisions to see whether they should be replicated or substituted in the new legislation. In the process we encountered a number of difficult issues including the UK's compliance with international treaty obligations and EU legislation. The question of whether and how to replace section 27(2) gave rise to the greatest difficulty in relation to consumer contracts. The question of whether and how to replace section 26 presented greater difficulties in relation to business contracts.

    CONSUMER CONTRACTS
    Cross-border contracts

    7.4      At present, UCTA exempts cross-border contracts for the sale or supply of goods.[1] There is no similar exemption in the UTCCR. In the Consultation Paper, we said that the new legislation could not have a blanket exemption for international contracts (such as in UCTA). This is because neither the Directive nor the SCGD provides an exemption for international contracts.[2] Thus no exemption could apply to those parts of the new legislation that implement the Directive. Nor could it apply to legislation within the scope of the SCGD (which covers clauses excluding liability for breach of any of the four implied terms of correspondence and quality in consumer contracts for the sale of goods). We concluded that there should be no exemption for cross-border consumer contracts. Thus UCTA section 26 should not be replicated for consumer contracts of sale or supply of goods.[3]

    7.5      A large majority of consultees agreed with our proposal that the controls in the new legislation should apply to cross-border contracts for the supply of goods to consumers in the same way as they would apply to domestic contracts. Therefore, we recommend that there should be no exemption for cross-border consumer contracts of sale or supply of goods.

    7.6      We recommend that UCTA section 26 on international contracts for the sale or supply of goods should not be replicated for consumer contracts.

    Choice of the law of a part of the UK in foreign contracts

    7.7      UCTA section 27(1) provides that where the law of a part of the UK is chosen by the parties as the governing law but, were it not for that choice, the law of some other country would be the proper law, many of the protections afforded by the Act will not apply. To reproduce section 27(1) in its present form would mean that, in many contracts where the consumer is resident abroad, the supplier would be able to impose a choice of Scots or English law without having to pay regard to the statutory consumer protections. We are bound under the Directive to protect consumers who are resident in other Member States.[4] A provision which allowed suppliers to evade the Directive's regime by imposing an English or Scottish choice of law in cases involving consumers resident in other Member States would not adequately implement its terms.

    7.8      We stated in the Consultation Paper[5] that in the new legislation this exemption should not apply to consumer contracts. A large majority of consultees agreed with our provisional proposal that there should be no special treatment of consumer contracts to which the law of a part of the UK applies only through the choice of the parties. We therefore recommend that the consumer contract controls should apply to contracts governed by an English or Scottish choice of law even where the contract has little, or no, connection with the UK.

    7.9      We recommend that UCTA section 27(1) should not be replicated for consumer contracts.

    Evasion by choice of non-UK law

    7.10      The question now to be addressed is when the consumer protection provisions in the new legislation should be applicable notwithstanding the choice of a foreign proper law. UCTA section 27(2) provides that the choice of a foreign law is to be respected unless the choice of law "appears to the court, or arbitrator or arbiter to have been imposed wholly or mainly for the purpose of enabling the party imposing it to evade the operation of this Act";[6] or the consumer was habitually resident in the UK and "the essential steps necessary for the making of the contract were taken there, whether by him or by others on his behalf".[7] Regulation 9 of the UTCCR[8] is a similar provision to UCTA section 27(2)(a). It implements Article 6(2) of the Directive, which imposes an obligation on Member States to ensure that consumers do not lose protection "by virtue of the choice of the law of a non-Member country as the law applicable to the contract" where the contract has a close connection to a Member State. Regulation 9 stays close to the wording of Article 6(2) and also refers to the choice of a non-Member State's law rather than the choice of a non-UK law.

    7.11      When writing the Consultation Paper, we took the view that where the contract has a close connection with the UK the consumer protection provisions of the new legislation should apply even if the contract is governed by the law of another Member State. We proposed that

    It should be made clear that the rules on unfair clauses in consumer contracts are mandatory so that, if the contract has a close connection to the UK, they will be applied under the Rome Convention despite a choice of another system of law.[9]

    7.12      Consultees offered broad support for the principle that consumer contract rules should be mandatory. However, we received requests to articulate more clearly how we envisaged our provisions relating to the Rome Convention. The following paragraphs set out our thinking in this area.

    7.13      The Rome Convention (which is implemented in the UK by the Contracts (Applicable Law) Act 1990) provides that an express or implied choice of law is to be respected but, in the absence of a choice, the governing law will be the law of the country with which the contract is "most closely connected".[10] However, even where there is an express choice, various articles of the Rome Convention provide for the choice of law to be overridden in relation to certain contractual issues and for the law of another country to be applied. The following Articles may apply to international contracts with consumers:[11]

    (1) Article 5(2) provides that a consumer is not to be deprived of the protection afforded by the mandatory rules of his country of habitual residence if:
    (a) in that country the conclusion of the contract was preceded by a specific invitation addressed to him or by advertising, and he had taken in that country all the steps necessary on his part for the conclusion of the contract; or
    (b) the other party or his agent received the consumer's order in that country; or
    (c) the contract is for the sale of goods and the consumer travelled from that country to another country and there gave his order, provided that the consumer's journey was arranged by the seller for the purpose of inducing the consumer to buy.
    (2) Article 3(3) provides that, where the contract is wholly connected to another country, an express choice of law shall not "prejudice the application" of the mandatory rules of that country.
    (3) Article 7(2) provides that an express choice of law shall not "restrict the application" of the mandatory rules of the forum where they are mandatory irrespective of the law otherwise applicable to the contract.

    7.14      In the course of the project, we considered whether it might be possible to rely on the independent operation of these provisions of the Rome Convention to ensure the application of our consumer protections in all the situations contemplated by Article 6(2) of the Directive, irrespective of the choice of law of a non-Member State. We eventually decided the Rome Convention would not achieve this objective independently. Instead it would be necessary to include express provisions in the new legislation which nullified attempts to evade its consumer protections by means of a choice of foreign law. In part, this is because Article 5(2) is limited in respect of the consumers to whom and the circumstances in which it applies:[12] in part, it is because we thought it necessary to ensure that the new legislative controls should be "mandatory in a conflicts sense".[13]

    7.15      In exploring the exact scope and nature of the relevant provisions in the new legislation, we were persuaded by the suggestion that a clause replicating the wording of Article 6(2) (as Regulation 9 of the UTCCR does) would give UK consumers less protection than a clause enforcing UK mandatory provisions in wider circumstances, for instance whenever the consumer is living in the UK and takes the necessary steps to conclude the contract there.[14] This is because UK law gives consumers stronger protection than is required by the Directive and which the consumer would not necessarily have under the law of another Member State. But even if the law of the other Member State is equally or more protective, it will still benefit the consumer to be able to rely on the protection of UK law. As Dr Simon Whittaker said in his initial report for the DTI on the consolidation of unfair terms legislation:

    From the point of view of practical consumer protection, the choice of, say, Italian or Dutch law for the regulation of a consumer contract will by no means help a United Kingdom consumer's task in any dispute with a seller or supplier. The substantive law of Italy or the Netherlands may in fact be as protective as United Kingdom law here (it may, indeed, be more so) but it will be difficult and very expensive for a United Kingdom consumer to establish this.

    7.16      We take the view that it is desirable to provide extra "practical consumer protection" by overriding the parties' choice of law of another Member State in certain cases where the contract is, from the consumer's perspective, closely connected to the UK. Usually this will be because the consumer ordered the goods or services here. We consider that in these cases consumers can justifiably expect their "home" law to apply.

    7.17      Our policy is that UK consumers should have the benefit of UK protective legislation in cases where the contract is, from the consumer's perspective, closely connected to the UK because he or she ordered the goods or services there.

    7.18      We would not want to encourage businesses to attempt to evade the restrictions by insisting that the order is placed abroad even though the consumer was the object of a sales pitch in the UK and took all the necessary steps here. Therefore we think it desirable to provide that UK consumers should have the benefit of the new legislation not only when they place their order with the supplier in the UK but also where they take the necessary steps to do so. In these circumstances, we think UK consumers can justifiably expect their own "home" law to apply.[15]

    7.19      Thus we recommend that the new legislation should be applied despite a choice of foreign law if:–

    (a) when the contract was made, the consumer was living in the United Kingdom and
    (b) all the steps necessary for the conclusion of the contract were taken there by the consumer or on his or her behalf.[16]

    7.20      We did consider drafting a provision that would apply the protective regime of the new legislation to all contracts which could be said to have a close connection to the territory of the Member States. We decided against this on the ground that it would be inappropriate to apply UK law to contracts with a more substantial connection to another Member State, especially when by virtue of our existing rules of private international law that State's own Directive-compliant regime would normally apply to protect the consumer. Therefore, in cases not covered by the provisions set out above, we recommend that the laws of other Member States should be applied if they would be applicable by virtue of existing rules of private international law as long as the consumer is afforded the protections contemplated by the Directive.

    7.21      We recommend that where the contract is not closely connected to the UK but is nevertheless closely connected to the territory of the Member States, the consumer-protective laws of other Member States should be applied as they would normally be under the existing rules of private international law.[17]

    7.22      There may be a small remainder of cases where the contract is closely connected to the territory of the Member States but the rules of private international law do not guarantee the application of consumer protections. In these cases, in order to comply with Article 6(2) of the Directive, we recommend that the new legislation should apply by default. Thus the Draft Bill provides that in cases where a consumer contract has a close connection with the territory of the Member States but the provisions discussed at paragraph 7.19 do not apply,

    this Act has effect in relation to the contract unless, according to the law of the forum, the provisions of the law of a member State (other than the United Kingdom) which give effect to the Directive have effect in relation to the contract.[18]

    7.23      The only loophole in the protection afforded by such a clause is if the Member State whose laws are applied has implemented EC Directive 93/13 but has not done so properly and the laws do not, in fact, afford consumers the proper range of protections. But we do not think that our duty under Article 6(2) of the Directive extends to closing loopholes caused solely by another Member State's breach of its Community obligations.

    7.24      We recommend that the new legislation should contain a default provision to ensure that it applies to any contract which is closely connected to the territory of the Member States but which is not covered by the other recommended choice of law provisions.

    7.25      Given the wording of the Directive, inevitably our recommendations revolve around the category of contracts that have a "close connection to the territory of the Member States". When exploring this category we became concerned that its inherent indeterminacy – which confers, in effect, a degree of discretion on the Court – might lead to an undesirable expansion of the Directive's sphere of influence. We thought that jurisprudence in this area might develop incrementally to subsume contracts with a weaker and weaker connection to the territory of the Member States into the general category. In particular, we were concerned that a practice might develop where export contracts under which goods and services are exported to non-EU consumers, come within the category merely because the supplier, or exporter, is located within the territory of the Member States and the goods are delivered from that location. This would be undesirable because the additional layer of consumer regulation that would be applicable to such contracts would undermine the competitive standing internationally of our domestic businesses vis-à-vis other businesses. We think that it is important to state that contracts under which goods and services are exported outside the EU should prima facie be regarded as falling outside the provisions of Article 6(2) (as they are transposed into the new legislation).

    7.26      We recommend that the new legislation should presumptively provide that contracts for the sale or supply of goods and services to be delivered or supplied outside the territory of the Member States are not to be regarded as closely connected to the territory of the Member States if the consumer took all steps necessary for the conclusion of the contract overseas.[19]

    BUSINESS CONTRACTS
    Choice of law of a part of the UK in a foreign contract

    7.27      As we have seen, UCTA section 27(1) provides that, where the law of a part of the UK is chosen by the parties as the governing law but, were it not for that choice, the law of some other country would be the proper law, UCTA sections 2 to 7 and 16 to 21 will not apply.

    7.28      We recommend retaining this provision in relation to business contracts on the grounds that where foreign commercial parties choose English or Scots law to govern their relationship, their background understanding is that it is a law where freedom of contract prevails. This can only have been reinforced by section 27(1) and, in the absence of any demand for change, we see no reason to apply the new legislation in these circumstances.

    7.29      We recommend that the new legislation should contain a provision replicating UCTA section 27(1) in relation to business contracts.[20]

    Evasion by choice of non-UK law

    7.30      UCTA section 27(2)(a)[21] provides that the protective provisions of the Act apply notwithstanding any choice of foreign law where

    The term appears to the court… to have been imposed wholly or mainly for the purpose of enabling the party to evade the operation of [the] Act….

    7.31      This section has been criticised on the grounds that it introduces a highly subjective element into the law.[22] We felt that it was important to investigate alternative means by which inappropriate evasion of the new legislation might be prevented. Following a suggestion made by Dr Simon Whittaker in his Report to the DTI, we looked at the possibility of introducing a provision along the lines of Article 3(3) of the Rome Convention. That Article provides that the application of the mandatory rules of the country with which a "situation" is wholly connected shall not be prejudiced by the parties' different choice of law clause in the contract.

    7.32      Although adding a welcome degree of objectivity, this approach might allow businesses to evade the controls of the new legislation in a wider range of circumstances than section 27(2)(a) would do. Depending on the circumstances of the case, section 27(2)(a) could potentially apply in any case where the parties adopt a choice of foreign law. On the other hand, a provision modelled on Article 3(3) would only prevent evasion in those cases where the contract, apart from the choice of law, is wholly connected to the UK.

    7.33      We decided that the possible objection did not offer a compelling reason for rejecting the proposed approach. Given that we are recommending stricter controls over contracts with small businesses which will make it harder to evade the protective regime by a choice of foreign law, we think that a small degree of relaxation in the controls over contracts between larger businesses is acceptable. This is particularly compelling where there is a foreign element to the contract, as there must be for the contract to fall outside the terms of the proposed anti-avoidance provision. We found support for this view in the fact that we are not aware of any authorities in which section 27(2)(a) has played a key role in determining a party's contractual rights. If parties seeking to bring themselves within UCTA's protections do not now rely upon the broader provisions of section 27(2)(a), it should not matter if those provisions are restricted. Therefore we recommend that the revised UCTA-type regime which is instituted by the business contracts clauses of the new legislation should apply notwithstanding a choice of foreign law, where the contract is otherwise wholly connected to the UK.

    7.34      We recommend that the business contracts part of the new legislation should apply notwithstanding a choice of foreign law where the contract is, in every other respect, wholly connected to the UK.[23]

    Cross-border contracts

    7.35      As we have seen, UCTA section 26 exempts cross-border contracts for the sale or supply of goods. Section 26 has a considerable history. The desirability of such a clause has been considered twice by the Law Commissions[24] and was previously incorporated into the Sale of Goods Act 1893, section 62(1) by the Supply of Goods (Implied Terms) Act 1973, section 7. The language of the section owes much to Article 1 of the Uniform Law on the International Sale of Goods ("ULIS"). Despite the extensive attention the text received prior to its final enactment in UCTA, there are still some significant flaws and the section has recently been criticised by the Court of Appeal.[25]

    7.36      In their First Report on Exemption Clauses in Contracts, the Law Commissions offered three policy justifications for including the precursor to section 26 in the appended draft legislation:–

    [(1)] In the first place, where goods are exported from the United Kingdom to another country, it is for the legal system of that country rather than for our own to specify how far contractual freedom should be limited or controlled in the interests of consumers or other purchasers. [(2)] In the second place, contracts of an international character ordinarily involve transactions of some size between parties who are engaged in commerce and who wish to be free to negotiate their own terms. They would stress, and we would agree, that in such contracts contractual freedom is of particular importance. [(3)] In the third place, it has been represented to us by persons with experience of international commerce that it would be undesirable to make proposals which would place United Kingdom exporters under restrictions which would not apply to some of their foreign competitors.[26]
    The Commissions went on to adopt the definition of international contract in Article 1 of ULIS as an appropriate model.

    7.37      Excepting the assumption that international contracts will be contracts of a fair size – which no longer holds necessarily true – the justifications offered by the Law Commissions seem just as valid today as they were in 1969.

    7.38      Following the Law Commissions' First Report on Exemption Clauses, the Supply of Goods (Implied Terms) Act 1973, section 7 was enacted incorporating the section supplied by the Commissions based on ULIS. The definition of international contracts thus incorporated was the subject of severe academic criticism in an article by Mr Clifford Hall, International Sales and the Supply of Goods (Implied Terms) Act 1973.[27] Hall made many points against the section – not least that it should not have been adapted so as to apply to individual consumers – but of particular concern to the Law Commissions was his comment that the clause did not match up to their avowed policy objectives. Hall argued that the clause did not protect consumers and other purchasers because many importers into the UK would be able to bring themselves within the definition and so escape the controls. Furthermore, many export contracts would not amount to international contracts.[28] His proposed solution was to redraft the section so as more accurately to identify non-UK contracts, rather than contracts with an international, or cross-border, flavour.

    7.39      Even today, the enacted version of section 26 appears to be oddly drafted given the Law Commissions' avowed policy objectives in 1969, which emphasised only the importance of freeing UK exporters from control. On its face, the section applies just as much to UK consumers importing foreign goods for private consumption and to contracts involving the supply of goods within the UK.[29] We have already addressed the need to remove consumer contracts from the ambit of any section exempting international supply contracts. The oddity as regards non-consumer imports remains.

    7.40      It is now apparent that the Law Commissions were trying to achieve more than merely to implement the policy objectives outlined in their First Report. This accounts for the apparent departure from those policy objectives. Although the Law Commissions were keen to release UK exporters from restrictions that might make them less competitive in foreign markets, whilst still protecting domestic consumers, they were also mindful of the UK's treaty obligations. Under the Hague Convention on the International Sale of Goods 1964 each state was obliged to respect the autonomy of the international business community by allowing businesses to have their contracts governed by ULIS, unmodified by statutory implied terms or other regulatory adjustments.[30] Thus, the territory-unspecific policy of deregulating the international commercial environment within which large businesses operate was thought to take precedence over the Law Commissions' territory-specific policies of protecting UK consumers (or purchasers) and assisting UK exporters to remain competitive.

    7.41      Since the Law Commissions wrote their Second Report, the force of ULIS has declined. Twelve states signed the Hague Convention, but only eight of those ratified it and one further State (Gambia) acceded to it. Of those who ratified the Convention only San Marino, Gambia and the United Kingdom have not adopted the United Nations Convention on Contracts for the International Sale of Goods ("CISG"), signed at Vienna. All those States signing up to CISG have denounced the Hague Convention as they are required to do by Article 99(3) of the Vienna Convention. The regulatory force of ULIS therefore only binds the three remaining States: the UK, Gambia, and San Marino. As a rationale for reshaping the law of contract our international obligations under the Hague Convention have lost most of their justificatory force.

    7.42      The Law Commissions' territory-specific policy objectives, outlined in their First Report, remain an effective justification for section 26. In relation to business contracts today, Hall's observation that the Law Commissions' draft term achieved neither of their two avowed policy objectives – protection of UK consumers and deregulation of UK exports – really begins to bite. A provision which was designed to be sensitive to these policy objectives would have differentiated between, on the one hand, international export contracts and other contracts for the supply of goods abroad and, on the other hand, all contracts of supply in or to the UK including both international import contracts and purely domestic contracts.

    7.43      Accordingly, we provisionally settled on a draft clause that would exempt only those contracts under which the goods are exported or supplied abroad.

    Article 12 EC Treaty

    7.44      During the consultation exercise it was drawn to our attention that the existing exemption for international contracts, in UCTA section 26, had been the subject of criticism on the grounds that it may amount to unlawful discrimination under Article 12 of the EC Treaty.[31] It was therefore desirable to investigate whether our suggested alternative could be said to be discriminatory.

    7.45      Article 12 provides:–

    Within the scope of application of this Treaty, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited.

    7.46      Article 12 has been given a wide interpretation by the ECJ in several different contexts. First, it is clear that it applies to legal as well as natural persons.[32] Secondly, "nationality" here encompasses residence and domicile as well as nationality proper.[33] Thirdly, it is likely that "all that matters for indirect discrimination is that the clear majority of those disadvantaged by the provision are foreign nationals".[34]

    7.47      Given that section 26 removes the UCTA controls which predominantly (but not wholly) benefit the purchaser,[35] it has been argued that the effect is to put a buyer in another state at a disadvantage compared with a buyer in the UK. Whereas British buyers can object to exclusion clauses in their contracts, the overseas resident buyer cannot.[36] In short, there will be circumstances where, when dealing with a UK seller, buyers will be protected if they are based in the UK but not protected if they are based abroad. In the light of the wide interpretation that Article 12 has received, this begins plausibly to look like discrimination.

    7.48      Yet the issue is not as simple as first appears. For example, section 26 applies equally to contracts between British purchasers and foreign sellers, when the goods are to be imported into the UK.[37] The threshold criterion for the application of section 26 is the movement of goods across borders or the fact that negotiation and agreement take place at a distance: in either case the parties must also be resident in different states. A contract between a UK buyer and a foreign supplier will often also amount to an international supply contract. This means that a UK business buying imported goods may find itself subject to a valid exemption clause just as much as a foreign purchaser would in an export contract from the UK. It began to look to us as though the issue concealed at the heart of the question of discrimination is what is being subjected to comparison.

    7.49      First, let us compare the situation of (i) a UK supplier supplying a UK business with (ii) a UK supplier supplying, say, a German business. Although there could be said to be discrimination between the two buyers because only the latter contract is likely to be exempt from UCTA's controls, we think that the arguments are not clear-cut. It could be argued that it is not particularly relevant to compare purchasers in two different markets. The overseas purchaser will very likely be protected by the laws of its "home" state when it buys from a UK supplier whereas a UK purchaser must rely entirely on the protections afforded by UCTA.[38]

    7.50      Secondly, if the comparison is made between parties competing in the same market, the pattern produced by section 26 looks different.

    (1) If two sellers, one in the UK and one in France, are competing to supply the same buyer in the UK (in each case under English law), then section 26 produces the result that the buyer can challenge the terms in the contract with the UK seller but not those in any contract with the French seller. There would seem to be discrimination against the English seller.
    (2) However, if the same two sellers are competing to sell (again under English law) to a buyer in France, then section 26 and section 27(1) taken together mean that the sellers can compete on equal terms. The English seller's terms would be exempt from UCTA by virtue of section 26 while the French seller's terms would be exempt by virtue of section 27.
    Were section 26 to be repealed, the position would be the other way about, with discrimination in case (2) but not in case (1).

    7.51      Thus we suspect that no clear case either for or against replicating section 26 can be made on the grounds of discrimination alone.

    7.52      We have sought expert advice on the question of how the ECJ might deal with this question. We have been told that the question is difficult and that it cannot be said with any confidence which model the European Court would choose. The issue has not been debated with rigour in the case law or in academic commentary. The Court's approach to discrimination is not consistent and has been criticised across a wide range of areas: gender, taxing fruit, regulating pollution and trade law generally. Discrimination tests are slippery and the fundamental question in nearly every case appears to be whether like is being compared with like.

    7.53      Our suggested replacement does not track exactly the provisions of section 26. Rather it distinguishes between contracts for the supply of goods in the UK (not exempt) and contracts for the supply of goods abroad (exempt). At first sight, this exemption might appear to be sailing close to the wind since it is foreign businesses that can generally be expected to buy goods which are exported abroad. It is they rather than UK businesses that will be deprived of UCTA's controls over contracts for the supply of goods. Nevertheless, we have decided to make the recommendation. Our reasons for doing so are set out in the following paragraphs.

    7.54      First, we think it is at least arguable that, under the suggested provisions, the location of the purchaser is not decisive. This is because the exemption will apply just as much to purchasers resident and domiciled in the UK that buy goods abroad – whether foreign goods or UK exports. There may be many reasons why UK businesses take delivery of goods abroad: these include goods for use in satellite offices abroad or goods ordered remotely to be delivered to clients and trading partners in other countries. Therefore we do not think that it can be said that the exemption will operate exclusively to the disadvantage of foreign businesses – although we accept that the majority of those affected are likely to be foreign companies.

    7.55      Secondly, we believe that there is some merit in the argument that other Member States should look after the interests of purchasers located there. Where other states have legislation that covers business contracts, the purchaser can pursue its remedy in the courts of its "home" state. If the purchaser pursues its remedy in the courts of a part of the UK then it may find that the protective laws of its "home" jurisdiction are applied anyway under the rules of private international law, for example under Article 3(3) of the Rome Convention.

    7.56      Thirdly, specialists have advised us that our recommended substitute for section 26 was a plausible alternative. Although there might be a debate about whether or not it is compatible with EU law, the outcome would not be clear-cut. In these circumstances, we have decided to resolve the uncertainty in favour of UK businesses exporting goods abroad. Not to have done so might have meant wasting a valuable opportunity to ensure the continued competitiveness of UK businesses in foreign markets.

    7.57      Therefore we recommend replacing section 26 with a clause creating an exemption for business contracts for the supply of goods[39] to be delivered overseas. The controls will still apply to business contracts for the supply of goods to be delivered in the UK, whether the seller is in the UK or overseas.

    7.58      We recommend replacing UCTA section 26 in the new legislation with a clause creating an exemption for business contracts under which goods are exported overseas.[40]

    SMALL BUSINESS CONTRACTS
    Cross-border contracts

    7.59      Having recommended an "export contracts" exemption for businesses generally, the question remains whether those dealing with small businesses should be subject to the restrictions of the new legislation in cases of international supply contracts. The policy considerations adopted in the Consultation Paper would suggest that we should protect small companies. However, since our existing recommendation is that the international contracts exemption should focus on export contracts, the small businesses that might fall within the exemption can only be small domestic exporters or foreign purchasers.

    7.60      As to small exporters, the controls would only apply when the exporter was contracting on terms which had been put forward by the foreign buyer as its standard terms of business. Almost inevitably, those standard terms would seek to have the contract governed by the foreign rather than English law. It would thus be a question of providing that the controls should apply despite any choice of foreign law. We have, of course, proposed something similar for consumers but it is our belief that UK businesses engaged in exports would generally find the controls cumbersome rather than beneficial. Equally, we do not see a case for protecting foreign purchasers even if they are small businesses. These policy considerations suggest that we should remove controls from small business contracts for the export of goods abroad just as we recommend doing for business contracts in general.

    7.61      We recommend that the intended replacement for UCTA section 26 (exempting business contracts for the supply of goods abroad) should also operate to exempt relevant contracts from the small business controls.[41]

    Choice of law of a part of the UK in a foreign contract

    7.62      As we have seen, UCTA section 27(1) provides that where the law applicable to a contract is the law of a part of the United Kingdom only by choice of the parties, the contractual controls implemented by the Act do not apply. We recommend that this provision be retained for small business contracts as well as for business contracts in general. If the contract is substantially unconnected to the UK then it is less likely that the parties are located here and there is less reason to protect them. In addition, as stated above, we think that where foreign commercial parties – of any size – choose English law to govern their relationship, their background understanding is that it is a law where freedom of contract prevails. According to this recommendation, small business contracts governed by English or Scots law only by virtue of the parties' choice of law, and which otherwise would be governed by the law of another country, will be exempt from both the preserved UCTA regime and the specific small business controls.

    7.63      We recommend that the intended provision replicating UCTA section 27(1) should also apply to small business contracts.

    Evasion by choice of non-UK law

    7.64      In the case of small business contracts, the point of the restrictions we have imposed is to afford small businesses protection against larger businesses who are able to impose their standard terms on the contract. The very point and purpose of these protections would be wholly undermined if the protective regime could be avoided by means of a choice of law clause to the contrary. Other than in international supply contracts (as defined), the section echoing the terms of Article 3(3) that we have recommended for business contracts to replace UCTA section 27(2)(a) will, to a certain extent, fulfil the task of entrenching the protective provisions in cases where the contract is wholly connected to the UK. However, we thought it would be desirable to incorporate a section more generous to small businesses to enable them to claim the protection of the new legislation in a wider range of circumstances. In drafting this clause we used as our model the draft clause intended to ensure that consumers receive the protections of the new legislation in circumstances where they might justifiably expect to do so.

    7.65      Thus we now recommend that the new legislation should be applied, despite a choice of foreign law, if:–

    when the contract was made, the small business had a place of business in the United Kingdom and
    (a) the making of the contract was preceded by an invitation addressed specifically to the small business, or by advertising, about the main subject matter of the contract and all the steps necessary for the conclusion of the contract were taken in the United Kingdom by the small business through its place of business there or on its behalf; or
    (b) the small business's order was received by or on behalf of the other business in the United Kingdom.

    7.66      We recommend that small businesses should have the benefit of UK protective legislation in cases where the contract is closely connected to the UK because the small business took the necessary steps to order the goods or services here.[42]

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Note 1    UCTA, s 26.    [Back]

Note 2    It appears that in this respect the SCGD has not been correctly implemented in the UK because the SSGCR leave exclusions of the seller’s obligations to be regulated by UCTA (as amended by the SSGCR) without apparently noticing that UCTA does not apply to international sales contracts.     [Back]

Note 3    See Consultation Paper, para 4.82, which argued that the rule rendering certain clauses of no effect should apply whether the contract is one of sale (and therefore covered by the SCGD) or of hire (which is not).    [Back]

Note 4    By virtue of Art 6(2). That is, wherever the contract has a close connection to the territory of the Member States.    [Back]

Note 5    See paras 4.83 – 4.85.    [Back]

Note 6    UCTA, s 27(2)(a).    [Back]

Note 7    UCTA, s 27(2)(b).    [Back]

Note 8    See para 7.2, above.    [Back]

Note 9    Consultation Paper, para 4.194.    [Back]

Note 10    In general (and as specified by Art 4(1) – (2) Rome Convention), a contract has its closest connection with the country where the party who is to effect characteristic performance has their habitual residence or central administration. Where, however, the contract is made in the course of that party’s trade or profession, the country of closest connection is where the principal place of business is situated or, where the contract provides that the contract is to be performed through another place of business, the country where that other place of business is situated.    [Back]

Note 11    Article 7(1) is not listed here as it does not apply in the UK: Contracts (Applicable Law) Act 1990 s 2(2). It does apply in other Member States, which may be called upon to apply UK law according to their own rules of private international law.    [Back]

Note 12    Our chief concern was that Art 5(2) will not benefit a consumer who is only temporarily resident in the Member State with which the contract is most closely connected. One aspect of this problem is that habitual residence is quite a stringent requirement: an au pair or student visiting a part of the EU for a year probably would not qualify as habitually resident there. In our opinion, a contract can still be closely connected to the territory of the EU even when a person is within the relevant territory on a temporary basis. Another aspect of the problem is that the circumstances listed in subsections (1) to (3) must occur within the same part of the EU that constitutes the consumer’s habitual residence – and not another part. We think that a contract may be closely connected to the EU when these qualifying requirements occur in different Member States. We were also concerned about the related issue of how Art 5(2) applies as between the different parts of the UK. Under the Rome Convention, by virtue of Art 19(1), each territorial unit of the UK is treated as a separate country for the purpose of applying the Convention. Therefore, a provision such as Art 5(2) is not engaged unless all the qualifying requirements occurwithin one part of the UK. In the new legislation we would want the statutory protections to apply even where the qualifying requirements occur in different parts of the UK.    [Back]

Note 13    See Jackson “Mandatory Rules and Rules of ‘ordre public’” in North (ed), Contract Conflicts (Oxford: North-Holland Publishing Company 1982) p 65. We did consider the possibility that if Art 5(2) could not guarantee the application of the new legislative controls in the range of situations contemplated by Art 6(2) of the Directive, Art 7(2) might operate to cover most of the unprotected cases. However, we no longer think that the independent operation of Art 7(2) can, without more, guarantee the application of the new legislation in these situations. Art 7(2) applies the mandatory rules of the forum but only such rules as are expressed to be mandatoryirrespective of the governing law of the contract. (The default rule is that a United Kingdom statute does not normally apply to a contract unless the governing law of the contract is English law or Scots law.) Art 7(2) will not be engaged unless the new legislation contains express provisions prohibiting evasion by choice of law.    [Back]

Note 14    It is not, in fact, safe to assume that the UK courts will always be dealing with a UK consumer. Cases on unfair terms may arise where the consumer is the claimant. An EU consumer is entitled to sue the seller in the courts of the place where the seller is domiciled, by virtue of Art 14 of the Brussels and Lugano Conventions (as amended) (Art 16 of the “Brussels I” Regulation). The UK courts may also have and accept jurisdiction over cases involving consumers domiciled outside the EU/EFTA in accordance with Art 4 of the “Brussels I” Regulation/the Brussels Convention/the Lugano Convention. In such cases, permission to serve the claim form out of the jurisdiction may be required in accordance with the requirements of Civil Procedure Rules, rule 6.20.    [Back]

Note 15    It will be observed that our recommendations now begin to look very much like the text of Art 5(2) of the Rome Convention. That should not be surprising. We believe that Art 5(2) represents a sound attempt at identifying the circumstances in which consumers are most deserving of the protection of their “home” laws. However, we would want our legislation to apply in the qualifying circumstances not only where the consumer is habitually resident in the UK (as required by Art 5(2)) but also where he or she is merely resident here. This is a more generous and, we believe, appropriate test. It would enable a student, say, who had come to study in the UK from outside the EU, to rely on the protection afforded by UK law rather than the law of another Member State.    [Back]

Note 16    See Draft Bill, clause 18. We did consider drafting provisions to echo Art 5(2) of the Rome Convention, which in effect provides that protections afforded by the law of a consumer’s habitual residence cannot be overridden by a choice of foreign law in the circumstances listed. However, in the event we decided to use wording based on UCTA, s 27(2)(b) which was clearly designed to summarise the circumstances listed in Art 5(2)(c). This wording has the virtue of greater simplicity but, strictly speaking, allows a consumer to claim the protection of UK law in circumstances where he or she has sought out a foreign business and placed an order without having been induced to do so by advertising or invitation. We are not aware that the UCTA formulation has caused any problems to date.     [Back]

Note 17    See Draft Bill, clause 18(2) – (3).    [Back]

Note 18    See Draft Bill, clause 18(3).    [Back]

Note 19    See Draft Bill, clause 18(4).    [Back]

Note 20    See Draft Bill, clause 19(1).    [Back]

Note 21    UCTA, s 27(2)(b) applies only to consumers.    [Back]

Note 22    See Hartley, “Consumer Protection Provisions in the EEC Convention” in North (ed), Contract Conflicts (Oxford: North Holland Publishing 1982) at p 121.    [Back]

Note 23    See Draft Bill, clause 19(2).    [Back]

Note 24    In the Law Commissions’ First and Second Reports on Exemption Clauses in Contracts (Law Com Nos 24 and 69, Scot Law Com Nos 12 and 39).    [Back]

Note 25    In Amiri Flight Authority v BAE Systems plc [2003] EWCA Civ 1447. It was also described as “not altogether clear and suffer[ing] from shifts in language” by Hallgarten J in Ocean Chemical Transport Inc v Exnor Craggs Ltd (unreported July 26, 1999, quoted in the Court of Appeal judgment in the same case: [2000] 1 All ER (Comm) 519, 526).    [Back]

Note 26    Law Com 24, Scot Law Com 12, para 120.    [Back]

Note 27    (1973) 22 ICLQ 740.     [Back]

Note 28    Ibid, p 745 - 6. For example, a contract made in London between two French businesses for the export of goods to France would not be an international supply contract within the terms of s 27 because the parties do not have places of business in different States. See also Hartley, supra n 22 at p 120.    [Back]

Note 29    In the latter case, the act of either offer or acceptance must be done abroad by a party resident there.    [Back]

Note 30    This was made clear in the Second Report on Exemption Clauses, Law Com No 69. See para 235.    [Back]

Note 31    See Burbridge, “Selling in the single market – the control of exemption clauses under EC law” [2000] NLJ 1544.    [Back]

Note 32    See, for example, R v Inland Revenue Comrs , ex p Commerzbank AG Case C-330/91 [1993] 4 All ER 37, [1993] ECR I-4017 (in relation to the former Article 7 EEC Treaty).    [Back]

Note 33    Burbridge cites Factortame [1992] 2 QB 680 and Cowen v Le Tresor Public [1989] ECR 195 in support of this proposition.    [Back]

Note 34    Supra, n 31 at 1545.    [Back]

Note 35    For example, controls over attempts to exclude liability for breach of implied conditions as to title to the goods, their fitness for the purpose, their quality etc.    [Back]

Note 36    Supra, n 31.    [Back]

Note 37    Burbridge’s statement that “clearly the vast majority of buyers who have their place of business… in another state will be non-nationals” is misleading. Section 26 does not require that buyers have their business in another state, merely that the parties are in different states from one another. Therefore, it applies to foreign sellers selling to English purchasers. This was, in fact, Clifford Hall’s objection to the clause (see (1973) ICLQ 740).    [Back]

Note 38    It could also be argued that to repeal the s 26 exemption would be discriminatory. It would mean that a UK seller to an overseas buyer would, if the contract were subject to English or Scots law, have to comply with UCTA. However, an overseas seller supplying the same overseas buyer, if it was agreed that the contract should be governed by English or Scots law, would be exempt from UCTA by reason of s 27(1). Thus the simple removal of s 26, without additional changes to s 27(1), would not remove discrimination. It would, in effect, shift the discrimination from one party to the other.    [Back]

Note 39    If the main justification for the exemption is to lift the burden of regulation incumbent upon UK exporters, at first sight it may seem somewhat arbitrary to exclude contracts for services to be performed abroad. On reflection, we believe that extending the international contracts exemption to contracts for the supply of services would present the following problems: 1. It would leave business people relatively unprotected when they make arrangements to travel abroad on business. 2. It would present serious drafting difficulties. The idea of performance in a particular jurisdiction may be easy to apply to engineers and technicians, but it is not so easy to apply to consultants, accountants and lawyers who provide cross-border advice. The difficulty is that with services there is not always something tangible, whereas with goods there is something tangible which can be identified in a particular jurisdiction.    [Back]

Note 40    See Draft Bill, Sch 3, para 8.    [Back]

Note 41    See Draft Bill, Sch 3, para 8.    [Back]

Note 42    See Draft Bill, clause 20.    [Back]

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