Standard provisions … but original questions (Europe/EU)

Overview

Standard provisions are considered as time and money savers. However, they are not always free of risks and may raise several questions about contract law, consumer law and competition law.

Contract law

Standard provisions may amount to legal usages. This may impact three different matters:

The first one relates to interpretation. As usages, standard provisions may lead to implied terms. These terms are effective even though they are not drafted in the contract. Article 1160 of the French Civil Code states: "Clauses which are commonly used in a contract shall be filled in, even though they have not been inserted." In order to determine whether the clause is standard, parties have to evidence that the clause is generalized in a determined area of business. Thus, the French Court of cassation has ruled that in a contract for computer services, the client was bound to grant to the service provider a learning phase before he could ask for damages (Cass. civ. 1ère, July 2, 2014, n°13-10076). This interpretation was not rendered based on a clause but on usages.

The second impact relates to revision of contracts. Article 1152 of the French Civil Code empowers the judge to modify a penalty clause whose amount is "manifestly excessive." When appreciating that the amount is manifestly excessive, the judge will take into account the amount of penalties generally applied (Court of appeal of Caen, January 7, 2014, n°12/03215).

Finally, a third impact concerns legal malpractice. Standardization of a provision may create an expectation of finding a provision in a contract. Lawyers have to consider this expectation when drafting a contract. If a lawyer forgets to recommend a standard provision in the contract that was favorable to his client, he may be found in breach of his obligation to counsel and a duty to be efficient.

Consumer law

Consumer law is particularly concerned with standard provisions and contracts as many of them carry abusive clauses. In Europe, standard provisions are regulated through the Directive 93/13 of April 5, 1993. According to article (3)1 of the Directive, unfair terms are defined as the terms causing significant imbalances between the rights and obligations of the parties. The annex "Indicative and non-exhaustive list of terms" explicates further terms that may be seen unfair.

A. France

Law 78-22 of January 10, 1978 was the first French approach to standard provisions, codified under article L 132-1 of the French Consumer Code. This Law aimed at introducing the administrative control of unfair terms before the "Commission des Clauses abusives." Starting 1991, the Court of cassation also authorized judicial review of unfair contractual terms. The transposition of the Directive was made effective with the enactment of Law 95-96 of February 1, 1995. The benchmark provided by article L 132-1 of the Consumer Code continued to be used in assessing the fairness of the clauses based on the article 3(1) of the Directive. Currently, article R 132-2 of the French Consumer Code adopts a list of unfair terms.

As an example, article R 132-2 6° of the French Consumer Code forbids in consumer contracts, clauses whose aim or effect is to reserve the professional party the right to unilaterally amend the characteristics of the goods to be delivered or the service to be rendered. It is usual to find such clauses in electronic communications contracts.

The Law of March 17, 2014 increased the judge's power. According to article L 141-4 of the French Consumer Code, the judge may deem a clause null and void when the latter is mentioned in a black list. Moreover, third parties with legitimate interests may also take part in the procedure and challenge the fairness of the terms as introduced by the criteria in article L 423-1 and following.

In addition, article L 421-1 of the French Consumer Code allows consumer associations to exercise their rights towards direct or indirect prejudices to collective interest through class actions. At the request of consumers associations, the judge will pronounce the nullity of all the unfair terms, not only in the subject matter of the contract, but also in all identical contracts presented by the defendant. This innovation has made available new means to consumer associations in order to prevent the use of abusive clauses. As a result, class actions surpass the frame of individual litigation to touch the essence of the consumer contract.

B. England

Prior to the implementation of the Directive, English judges had adopted a protective attitude towards the review of standard contracts. Standard contracts were only accepted when a reasonable notice was brought to the weakest party.

In 1999, the Directive was transposed by the Unfair Terms Regulation. This regulation tests terms by the means of a fairness test. Article 5 (1) of the Directive defines the circumstances that characterize the unfairness of the terms as a significant imbalance in the parties' rights and obligations arising under the contract to the consumer's detriment.

The English legislation embodied in the Act of October 26, 1977 and the Regulation of July 22, 1999 raised criticism. First, it contains provisions that would sometimes contradict of overlap that of the Directive. Thus, the Act automatically blacklisted unfair terms, whereas, the Regulation necessitates an unfairness test to judge on the nullity. Second, article 7 of the Directive has caused difficulties. This text forces member States to introduce provisions in order to assure that the terms can be challenged for a legitimate interest by third parties to the benefit of consumers. However, England did not immediately introduce the general right of standing for consumer associations. The right of standing for consumer associations was only introduced in 1999 with the Regulation.

C. Spain

Consumer's rights are constitutionally consecrated in Article 51 of the Spanish Constitution. However, the Spanish law was not equipped with legislation on unfair contract terms until the passing of Law 50/1980 of October 8, 1980. The Law 26/1984 of July 19, 1984 on Consumer Protection established a richer regime on unfair contract terms in consumer contracts.

The originality in Spanish law on unfair terms lays in a preventive control of registered standard terms. This control works thanks to the recording of unfair terms judged by previous court decisions and allows third parties to invoke the unfair clauses recorded. However, the Spanish law has failed to transpose articles 5 and 6 of the Directive as requested by the European Court of Justice in the decision C-70/03 of September 9, 2004 regarding unfair practices in service contracts, and unfair clauses on termination.

Competition law

Standard provisions may have an impact on both restrictive practices that refer to private anti-competitive action brought by an individual or a legal entity against another one and antitrust law that refers to cartels and abuses of dominant position.

The difference between these two legal areas relates to the effect on the market. The French Commercial Code declares restrictive practices null and void regardless of their effect on the market. On the contrary, cartels and abuses of dominant positions impose an analysis of the effect of the clauses on the market.

A. Restrictive practices

Article L 442-6 of the French Commercial Code lists a number of unfair practices between business partners that shall be punished by injunctions to stop the practices concerned, the invalidity of the relevant clauses or contracts and damages.

The Law of August 2, 2008 states that standard provisions may be sanctioned on the grounds of significant imbalance. Indeed, article L 442-6 I 2° of the French Commercial Code provides that traders who "submit or attempt to submit a business partner under obligations creating a significant imbalance in the parties' rights and obligations" may be held liable. Imposing standard clauses or contracts without negotiation is a behavior concerned by this article. The utilization of the verb "submit" indicates that the clause is imposed on the other party. This implies a submission by the weaker party of the significant imbalance to the party that benefits from it. Nevertheless, a prior situation of dependency or a situation of inferiority by one of the parties is not a condition for the application of this article. Abusive pressures, absence of reciprocity, or asymmetry of the situation between parties may also illustrate the lack of negotiation.

According to an opinion rendered by the French Commission examining commercial practices dated of September 16, 2013 (n° 13/10), the "Price parity clause" illustrates the originality of standard provisions. As imposed by online reservation centers such as Booking.fr, this clause requires hotels to provide on their website the same or higher price than the one shown on the central reservation. Such standard clause deprives hotels from their own commercial policy and prevents them from being competitive by prohibiting the motion of giving lower prices directly to the customers.

B. Antitrust

Standard provisions may be sanctioned on the grounds of cartels and abuses of dominant positions by French and European law. An anti-competitive effect on the market shall be demonstrated.

European law punishes the standard provisions through article 101 of Treaty on the Functioning of the European Union. Thus, the most favored client clause will be problematic as it will compel the supplier to propose the most advantageous conditions to another partner. If standard provisions are added in a different contract, it may result in the uniformity in behavior of the competitors, and more precisely on their price policy. This could deter the competition by the price.

Standardization of clauses plays an important role on antitrust infractions: the multiplication of the same clauses on different contracts may impact the market.

The appearance of cartels will arise, as the sole clause cannot produce an antitrust effect to the same extent as its reproduction does. This is commonly referred to as the cumulative effect. For instance, the franchise contract is generally standardized, meaning that the franchisor will present the same contract to all its franchisees. If most of the contracts contain the same provisions that impact antitrust law, the addition of all these provisions may affect the market and thus be qualified as a cartel.

Similarly to other cartels, an exemption is conditioned by European regulation 330-2010. Article 4 of this regulation expressly evokes the notion of cumulative effect.

The imposition of a standard provision may also amount to an abuse of dominant position under article 102 of Treaty of the Functioning of the European Union. In June 29, 2000, the Court of appeal of Paris considered that a contractual clause imposed by an undertaking in a dominant position which requires its contractors to give him equal terms preference may be sanctioned because there is an abuse of its dominant position. According to the court, this standard clause prevented the development of existing or potential competitors.

CONCLUSION

Standardization of contracts raises various legal questions. European Union law is particularly concerned with such issues which lead to a certain standardization of rules. However, each national system keeps its specifics which may lead to original local answers.

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