Judicial Review of Commercial Contracts: A Handbook 9781509931774, 9783406743986

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Reemers Publishing Services GmbH O:/Beck/Pfeiffer_978-3-406-74398-6/3d/002_Preface.3d from 18.10.2021 21:14:23 3B2 9.1.580; Page size: 160.00mm  240.00mm

Preface The use of standard contract terms is an essential element of contract law practice in cross-border commercial transactions, yet surprisingly comparative legal resources on the judicial review of such terms are scarce. This comparative handbook contributes to closing this gap. It comprises chapters on the relevant legal rules in numerous continental European jurisdictions, the United Kingdom, and, as a commitment to a planned extension of this book, Taiwan, while also offering an overview on choice of law- and choice of forum-clauses under European Private International Law. Each chapter follows a similar structure and specifically addresses business-to-business contracts, including aspects of both general contract law and rules specifically targeted at standard contract terms. We hope that this comparative handbook which, for obvious reasons, can offer only an overview on the matter, will nonetheless be a helpful tool for legal practice as well as comparative legal scholarship. As a reliable survey on a large number of national legal systems can only be made possible with the support of national experts, we are especially grateful to all contributors who have enriched this book with their specialist expertise. Our thanks also extend to Dr. Jonathon Watson, who not only provided a nativelanguage review of most contributions but also made the editors’ work much easier by providing substantial editorial comments. Finally, it goes without saying that comments and suggestions from our readers are welcome. Of course, we would be particularly pleased if the interest in this work justifies further editions and the inclusion of additional legal systems in the future. The editors Hannes Wais Thomas Pfeiffer

Heidelberg August 2021

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List of Authors Wei-Yu Chen is a (full-time) associate professor at the National Taiwan University. He holds a Dr. iur. from Heidelberg University, Germany, and is a qualified lawyer in Taiwan. James Devenney is professor of transnational commercial law and head of the School of Law at the University of Reading, UK and Full Visiting Professor at University College Dublin, Ireland. Rui Dias is a professor at the Faculty of Law of the University of Coimbra, having studied in Porto, Heidelberg, Coimbra and New York. Inter alia, he is executive editor of the Direito das Sociedades em Revista, a deputy director of the Revista Internacional de Arbitragem e Conciliação, a co-editor of the blog Conflict of Laws (www.conflictoflaws.net), and a vice president of the PortugueseGerman Lawyers Association (DLJV). Rolf Dotevall is a full professor for private and commercial law at University of Gothenburg. He is also a visiting professor in commercial law at Lund University. He holds a jur. Dr. from the University of Stockholm and served as a visiting professor at the Southern Methodist University, Dallas, Texas, and has served as an adjunct judge at the court of appeal in Gothenburg. Monika Feigerlová is a research fellow in the areas of international dispute settlement, protection of trade and foreign investment, and corporate responsibility at the Institute of State and Law of the Czech Academy of Sciences, and a member of this institute’s Centre for Climate Law and Sustainability Studies. She obtained a PhD at the Charles University (Prague) and a Master in International Dispute Settlement at the Graduate Institute and University of Geneva. She was admitted to the Czech Bar Association and practises law in Prague. Juha Karhu, professor of law (emeritus), University of Lapland, Finland, was professor of contract law and tort law at the Law Faculty of University of Lapland (1993 – 2017). He was also dean of the Faculty of Law (2013 – 2017) and served as the vice rector of the University of Lapland (1999 – 2004). He holds a Dr. iur. from the University of Helsinki and a Dr. iur. hc. from the University of Gothenburg and the University of Turku. His research focuses on the foundations of commercial law, including the role of legal principles in dynamic contractual networks, the legal protection of business assets in cooperation projects, and the role of fundamental and human rights in new global economy. His research is characterised by strong comparative perspectives. Irene Kull is a professor of civil law and head of the Department of Private Law at the University of Tartu. She serves as an advisor to the Civil Law Chamber of the Estonian Supreme Court and has been a member of the Supervisory Board of the Bank of Estonia. Her main research areas are digital contract law, European and comparative private law. Gea Lepik is a junior lecturer in civil law at the University of Tartu, Estonia, where she teaches intellectual property law and private international law. She is also the director of the Intellectual Property and Competition Law Division at the Ministry of Justice and works as a part time adviser to the Civil Chamber of the Supreme Court of Estonia. She holds an MA from the University of Tartu and an MJur of University of Oxford and is pursuing a PhD at the University of Tartu. Quincy C. Lobach studied law at the universities of Groningen, Vienna, Munich and Heidelberg and is currently a research fellow at the Institute for Comparative Law, Conflict of Laws and International Business Law at Heidelberg University. Friedrich Niggemann studied law at and holds a Dr. jur. degree of the University of Cologne (Germany). He is admitted to the national bars in Germany and France. He practises in Paris and works with Alérion Law Firm in the fields of international arbitration and international commercial matters, in particular in the French–German context. Friedrich Niggemann is the author of a considerable number of legal publications about French arbitration, civil and commercial law. Dolores Palacios González is a professor of civil law at the University of Oviedo (Spain). She teaches at the Faculty of Law and at the Faculty of Economics and Business. She is also a corresponding member of the Royal Asturian Academy of Jurisprudence.

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List of Authors Francesco Paolo Patti is associate professor of private law at the University Bocconi, Milan. He received an LL.M. from the Westfälische Wilhelms‐Universität Münster (2011) and a PhD from the Università degli Studi Sapienza Rome (2014). He was a research assistant at the European University Institute (2016) and senior research fellow at the Max Planck Institute for Comparative and International Private Law (2018). His research focuses on European and comparative contract law, comparative succession law and blockchain technology. Thomas Pfeiffer is chair (full professor) for private law, the conflict of laws, comparative law and international dispute resolution at Heidelberg University and director of this university’s Institute for Comparative Law, the Conflict of laws and International Business law. Inter alia, he holds a Dr. iur. of Frankfurt am Main, a Dr. iur h.c. of International Hellenic University and served as a visiting professor in Leuven, Verona, Malibu, Georgetown, at the Hong Kong City University and as a part time appeals court judge in Hamm, Germany. Pascal Pichonnaz is chair (full professor) for private law, Roman law and European consumer law at the University of Fribourg (Switzerland). He is president of the European Law Institute (ELI), and president of the Swiss Federal Commission for Consumer Issues. Inter alia, he holds a Dr. iur. utr. and a habilitation of Fribourg University Faculty of Law, an LL.M. of University of California at Berkeley and served as visiting professor in many universities, in particular at Georgetown University Law Center, Hong Kong City University, Shanghai ECUPL, Paris Panthéon-Sorbonne (Paris I), Paris Panathéon-Assas (Paris II), Pontificia Santiago de Chile, Liège, Rome Tor Vergata (Rome II), Trento, Montpellier, Bilgi University Istanbul, Clermont-Ferrand. He is also an international commercial arbitrator and a member of the Court of Arbitration in Sports (Lausanne). Jerzy Pisuliński is chair (full professor) for private law, head of the Department of Private Law and dean of the Faculty of Law and Administration at the Jagiellonian University in Cracow. He was a member of the Expert Group on a Common Frame of Reference in the area of European Contract Law (2010–2011) and a vice-president of the Codification Commission of Civil Law by the Ministry of Justice of the Republic Poland (2011–2015). He is a member of the Committee of Law Science at the Polish Academy of Science and a president of the Law Committee at the Polish Academy of Science and Art in Cracow. Ionuţ-Florin Popa is Dr. jur. professor for private law (law of obligations), European contract law and international sales law at ‘Babeş-Bolyai’ University Cluj-Napoca and a Notary Public in Cluj (Klausenburg). Dr. iur Rita Simon, LL.M., B.A., is a scientific researcher at the Institute of State and Law of the Czech Academy of Sciences since 2017 and at the Centre for Comparative Law of the Charles University in Prague since 2011. Her focus is on consumer protection and competition law using comparative perspectives. She finalised her PhD studies at the University of Cologne in 2005, and worked for various German institutions, such as the Centre for European Integration Studies in Bonn and the Eastern Law Institute at the University of Cologne; she also served as an associate in the Bureau for Civil Law Codification at the Hungarian Ministry of Justice. Maria Inês Viana Oliveira Martins is professor of civil and commercial law at the Faculty of Law of the University of Coimbra, a member of the Institute for Legal Research of the same University and a private legal consultant in Portugal and Brazil. She was a visiting scholar at the Max-Planck Institut für ausländisches und internationales Privatrecht, Hamburg, at the Faculdade de Direito da Universidade de São Paulo, and at the Centre de Droit Privé, Faculté de droit et de criminologie, Universite Catholique de Louvain, and a speaker at conferences and in post-graduate courses in the fields of insurance law, tort law and personal data in several countries. Hannes Wais is a lecturer (Privatdozent) at Heidelberg University. He holds a Dr. iur. and a habilitation from Heidelberg University and an LL.M. from the University of Cambridge. His research focuses on national and comparative contract law, conflict of laws and international litigation. Gheorghe Liviu Zidaru is associate professor for civil procedural law at the University of Bucharest Faculty of Law. He holds a Dr. iur. of the University of Bucharest and served as a visiting professor in Würzburg. He is also a full-time appeals court judge in Bucharest, Romania.

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PART 1 COUNTRY REPORTS A. Czech Republic* Bibliography: von Bar/Clive/Schulte-Nölke (ed.), Draft Common Frame of Reference (DCFR) – Outline Edition (Sellier 2009); Bejček, ‘Některá úskalí racionality obchodních podmínek’ [Some pitfalls in the rationality of business conditions] (2015) 18 Právní rozhledy 611–621; Bejček, ‘Nekálé obchodní praktiky mezi podnikateli a smluvní Svoboda’ [Unfair business practices between traders and contractual freedom] (2015) 1 Časopis pro právní vědu a praxi 3–8; Bejček, ‘Smluvní svoboda a ochrana slabšiho obchodníka’ [Contractual freedom and protection of the weaker business party] (2016) 557 Acta Universitatis Brunensis, Iuridica Editio Scientia; Bejček/Kotásek/Přikazská et al., ‘Obchodní podmínky’ [Business Practices] (2016) 574 Acta Universitatis Brunensis – Iuridica Editio Scientia; Bělohlávek, Římská úmluva a Nařízení Řím I.díl – II.díl: komentář [Rome Convention and Rome Regulation Part I – Part II: Commentary] (C.H. Beck 2009); Bělohlávek, ‘Public Policy and Public Interest in International Law and EU Law’ in: Bělohlávek/Rozehnalová (ed.), CYIL – Czech Yearbook of International Law: Public Policy and Ordre Public (JurisPublishing 2012) 117–147; Ben-Shahar, ‘Fixing unfair contracts’ (2011) 63 Stanford Law Review 869–906; Bříza et al (ed.), Zákon o mezinárodním právu soukromém. Komentář [Act on Private International Law: Commentary] (C.H. Beck 2014); Eliáś et al., Nový občanský zákoník s aktualizovanou preambulí a indexem pojmů [The New Civil Code with Updated Preamble and Index of Terms] (Sagit 2012); Hesselink, ‘Good Faith’ in: Hartkamp et al (ed.), Towards a European Civil Code (2nd edn., Kluwer 1998); Hulmák et al., Občanský zákoník V. Závázkové právo (§§ 1721–2054) [Civil Code V. Commitment Law. General Part (§§ 1721–2054)] (C.H. Beck 2014); Hulmák/Bezouška, ‘Obchodní podmínky, smluvní pokuty a jiná ujednání’ [Business terms, contractual penalty and others agreements] (2018) 1 Právní rozhledy 7–11; Kaiser, ‘Take It or Leave It: Monsanto v McFarling, Bowers v Baystate Technologies and the Federal Circuit’s Formalistic Approach to Contracts of Adhesion’ (2004) 80 Chicago-Kent Law Review 487–514; Kučera, Mezinárodní právo soukromé [Private International Law] (7th edn., Doplněk, Aleš Čermák 2009); Lavicky et al., Občanský zákoník I. Obecná část (§§ 1–654) [Civil Code I. General Part (§§ 1–654)] (C.H. Beck 2014); Liška, ‘Legal Regulation of General Business terms in the New Civil Code’ (2013) 1 Facultatis Iuridicae Universitatis Comeniane Tomus XXXII; Melzer/Tégl, Občanský zákoník Velký komentář § 1–117 – Svazek I Obecná ustanovení [Civil Code Commentary § 1–117, Vol. I] (Leges 2016); Micklitz, ‘Do Consumers and Businesses Need a New Architecture of Consumer Law? A Thought-Provoking Impulse’ ELI Working Papers No. 2012/23; Ministry of Justice of the Czech Republic, ‘Důvodová zpráva’ [Explanatory memorandum on the new Civil Code]; Pelikánová ‘Aktuální otázky obligačního práva a jeho kodifikace v evropském a českém kontextu’ [Current issues of commitment law and its codification in the European and Czech context] (2007) 18 Právní rozhledy 656–669; Pauknerová/ Rozehnalová/Zavadilová, Zákon o mezinárodním právu soukromém. Komentář [Act on Private International Law] (Wolters Kluwer 2013); Šilhán, Náhrada škody v obchodních vztazích a možnosti její smluvní limitace [Compensation of damages in business relations and the possibility of its contractual limitation] (C.H. Beck 2011); Skalská, Postavení slabé smluvní strany při uzavírání smluv v obchodním styku [The position of the weaker contractual party at contract conclusion in business relations] (Charles University Praha 2014); Švestka et al., Občanský zákoník V. Závázkové parvo (§§ 1721–2054) [Civil Code V. Commitment Law. General Part (§§ 1721–2054)] (Wolters Kluwer 2014); Tichý, ‘Kontorla smlouvy, všeobecné obchodní podmínky, formulářové smlouvy a nekálé (zneužívající) klauzule’ [Court Review of Contract, Standard Business Terms, Contract of Adhesion and Unfair Clauses] (2015) 3 Acta Universitatis Carolinae – Iuridica 43–76.

* Monika Feigerlová is author of Part IV. Her work was created under subsidies for long term conceptual development of the Institute of State and Law of the Academy of Sciences of the Czech Republic, v.v.i (RVO: 68378122).

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Part 1. Country Reports Contents I. Overview ........................................................................................................... 1. Dualism of Czech law until 2012............................................................ 2. Distinction between contractual and standard terms according to Czech law...................................................................................................... 3. Autonomy of will as the main principle under the new Czech Civil Code..................................................................................................... II. Regulatory framework.................................................................................... 1. Applicable general principles ................................................................... a) Good morals........................................................................................... b) Good faith and fair dealing................................................................. c) Weaker party protection...................................................................... 2. Requirements for standard terms and contracts of adhesion .......... 3. Generally unenforceable contractual terms .......................................... III. Requirements and legal consequences ....................................................... 1. Content of the B2B contract in general/standard terms ................... a) Incorporation of contractual terms and standard business terms in the contract ............................................................................ b) Incorporation of other business terms ............................................. c) Incorporation of standard business terms prepared by interest organisations .......................................................................................... d) Clauses in contracts of adhesion and the protection of the weaker party ........................................................................................... 2. Particular judicial review mechanisms for the different types of B2B contract terms..................................................................................... 3. General principles as control mechanisms in the judicial review ... a) Good morals – review of contractual penalties.............................. b) Good faith............................................................................................... c) Weaker party protection...................................................................... 4. Generally prohibited terms....................................................................... 5. Control of contracts of adhesion ............................................................ a) Illegible and incomprehensible clauses ............................................ b) Particularly disadvantageous clauses ................................................ 6. Control mechanisms for standard business terms.............................. a) Surprising terms .................................................................................... b) Unilateral change of terms in the case of long term performance............................................................................................ IV. International application ............................................................................... 1. Overriding mandatory rules..................................................................... 2. Public policy exception (ordre public) ...................................................

mn. 1 2 4 6 10 11 12 17 19 22 33 35 35 37 38 45 46 50 53 55 61 63 66 69 69 71 74 74 78 84 86 97

I. Overview 1

Before presenting the current approach to judicial review of B2B contracts in the Czech Republic, it is prudent to refer to the development of the recodification of the Czech Civil Code (Občanský zákoník), in particular the dualistic regulation of B2B and B2C/C2C relations before 2012, the formalistic distinction between contractual and standard business terms, and finally some key changes in the recodification, which influence the possible extent of judicial review.

1. Dualism of Czech law until 2012 2

Prior to the recodification of the Civil Code in 2012, Czech law strictly distinguished between contractual and standard business terms for B2B and B2C contracts, whereby 2

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separate Codes regulated the different legal transactions: the former Civil Code1 included the norms for C2C and B2C transactions, whereas the norms for B2B transactions were contained in the former Commercial Code (Obchodní zákoník)2. Some norms for judicial reviews of contracts could be found in both Codes. The essential rules for reviewing unfair contract terms per the Unfair Terms Directive in B2C relationships were implemented into §§ 55–56 of the former Civil Code, but some control instruments, e.g. specific unfair terms, were also included in the former Commercial Code, although very unsystematically and taxonomically3. The former Commercial Code did not contain a general control of B2B contracts, either in the form of a ‘reasonableness test’, or ‘prohibited clauses with the possibility of evaluation’. With regard to B2B relationships, the legislator has historically assumed a very high level of professionalism, which has been manifested concerning contractual relations in the expectation that the entrepreneur acts as a professional in his field, and thus a relatively high level of knowledge and carefulness are to be expected from him4. The judicial review of B2B contracts was based mainly on general principles, e.g. principle of good faith or good morals; and on the aforementioned provisions of the former Commercial Code, such as disproportionally high contractual penalties. It should be mentioned that the principles of contractual autonomy5 and professional care influenced the yardstick of contract control in B2B relations, and thus the control approach was very liberal. The majority of scholars evaluated it as a well-working system,6 though the minority considered it hardly effective against unfair contract terms7. Special norms for protecting a weaker party were not included either in the former 3 Civil Code or in the former Commercial Code. For weaker parties, the competition law in general8 was obliged to ensure sufficient general protection. The legislator saw the necessity to only regulate some issues between the supplier and a buyer with significant market power in a particular field, namely for agricultural and food products.9 The ‘Act on significant market power in the sale of agricultural and food products and its abuse’ prescribes written forms of contracting between buyers with significant market power and suppliers; and prohibits the abuse of significant market power by naming eleven particular examples of abuse according to § 4(2) of 395/2009 Sb. This legislation is still in force, and determining what is an essential part of the contract in practice eliminates the possibility of creating a significant imbalance in the rights and obligations of the parties.

2. Distinction between contractual and standard terms according to Czech law Previous Czech law distinguished between contractual and standard terms in a very 4 formalistic manner. All terms included in the main contract text (mainly with a focus 1 See zákon č. 40/1964 Sb. Občanský zákoník ze dne 26. února 1964 (previous Civil Code), which was extensively amended by the Act No. 509/1991 Coll, which was in force from 1 January 1992. 2 Zákon č. 513/1991 Sb. Obchodní zákoník ze dne 5. listopadu 1991 (previous Commercial Code). 3 See §§ 301, 343a, 439, 565, 622, 672a etc. of previous Commercial Code. 4 See Bejček (‘Smluvní svoboda’) and Skalská. 5 Autonomy of will or is the main principle of contracting is often cited in court decisions e.g. Decision of the Constitutional Court of 5 October 2005 sp. zn. II ÚS 691/04 (private law autonomy of contracting parties), see also Bejček (‘Nekálé obchodní praktiky’) 8. 6 ibid. 7 See the comparative analyses in Tichý. 8 Zákon č. 143/2001 Sb. o ochraně hospodářské soutěže ze dne 4. dubna 2001. 9 Zákon č. 395/2009 Sb. o významné tržní síle při prodeji zemědělských a potravinářských produktů a jejím zneužití ze dne 9. září 2009.

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Part 1. Country Reports

on the essential elements of the contract) were defined as contract terms, which were presumed to be individually negotiated because they were signed by the parties. All other terms were viewed as (in this respect, non-negotiated) standard business terms. However, the literature did not clarify which clauses should be included in contracts and which could be dealt with under standard terms;10 the positioning of the terms of the contract therefore allowed the parties to enjoy a very high level of contractual autonomy. This extensive autonomy was also stated by the Constitutional Court (Ústavní soud) in an earlier decision: “…Legal norms do not specify what contractual arrangements must be stated directly in the text of the contract and what arrangements may become part of the contract by specifying them in the standard business terms. The choice of which part of the arrangement will be contained in the standard business terms is entirely at the discretion of the parties.”11 5

Earlier legislation also distinguished between standard business terms and other business terms.12 Standard business terms – in a more restrictive sense – were defined as exclusively business terms prepared by a professional or interest organisation (such as the chamber of commerce). All other business terms were called ‘other business terms’. A more structured distinction was neither provided in the former Commercial Code nor by the legislator or the courts. The literature generally regarded this distinction as artificial,13 but it continues to remain in force in the Civil Code.

3. Autonomy of will as the main principle under the new Czech Civil Code 6

The recodification of the Czech Civil Code in 2012 closed the period in Czech legal history where the national Code deviated significantly from both continental European legal standards and the national legal tradition.14 The reform works followed the ideological basis of the government proposal for the Czechoslovak Civil Code in 1937, and of the Austrian ABGB, and was inspired mainly by the German BGB and the Swiss ZGB, but also by the recent modernisations of the Civil Code of Quebec and, in some respects, the Dutch BW, and to some limited extent international codification projects such as the UNIDROIT Principles (PICC), the Principles of European Contract Law (PECL), and the Code europeen des Contrats, Avant-projet,15 were taken into consideration. The new Civil Code ended the dualism of the former Civil and Commercial Code, and transformed the regulation of both Codes into one (new) Civil Code. The new Civil Code replaces the earlier purpose, namely, that the Civil Code serves as a tool for managing society, with the purpose ‘to allow and guarantee the free formation of private life, and thus to leave the freedom of the individual to use his or her initiative as freely as possible. That is why the content also puts a major emphasis on the aspect of autonomy of will.’16 The autonomy of will features very widely in contract law, in particular in the form of freedom of contract,17 which is emphasised more greatly in B2B relations than in B2C or C2C relations. Similar to the previous Civil Code, the judicial control of B2B contracts is based on general principles such as good faith and 10

Hulmák Občanský zákoník V/Hulmák 150. Decision of the Constitutional Court of 5 October 2005 sp. zn. II ÚS 691/04. 12 See § 273(1) former Commercial Code. 13 Bejček/Kotásek/Přikazská et al. 24; Bejček (‘Některá úskalí’) 612. 14 Ministry of Justice of the Czech Republic 10, available online under http://obcanskyzakonik.justice.cz/ images/pdf/ Duvodova-zprava-NOZ-konsolidovana-verze.pdf. 15 ibid. 430. 16 ibid. 20. 17 See Melzer/Tégl 45. 11

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A. Czech Republic

good morals, but complemented by the principle of weaker party protection etc., by special requirements on standard terms, and by cogent prohibitions of specific contractual provisions e.g. unreasonably high contractual penalties. (The further parts of the report will follow these three-way-classifications.) The distinction between B2B and B2C contract clauses remained the same. The 7 background in the former ‘split’ Codes is unmistakeable18. In B2B legal transactions, the legislator expects a higher level of knowledge and care associated with his profession according to § 5(1) Civil Code and a far-reaching respect for business practices, not just in general but also in the given business sector, unless excluded by legislation or party agreement. According to the second sentence of § 558(2) Civil Code ‘unless otherwise agreed, a business usage is conclusively presumed to take precedence over non-compelling provisions of a statute.’ In other cases, the entrepreneur may invoke a usage if he proves that the other party must have known of a given usage and was aware that it would be followed. Furthermore, the legislator maintained the distinction between contractual and 8 standard terms in the same formalistic manner with regard to their placement in the contract. This approach has been criticised in the literature,19 mainly because it ignores the new technological possibilities to incorporate standard terms into the main contract-text. The new Civil Code retains the distinction between standard business terms and other terms, but it missed the opportunity to give a suitable definition for standard business terms: ‘Regarding business terms, the Czech legislator refrained from any definition.’20 The Code only describes21 how to incorporate different business terms into the contract in a formalistic way, and provides some control mechanisms, albeit in a taxonomic and not in a coherent manner22. Similar to the former Codes, the provisions on unfair contract terms under 9 §§ 1812–1815 Civil Code only apply in B2C contracts. The new Czech Civil Code did not introduce a grey list of contract clauses which are presumed unfair and thus require judicial evaluation. The legislator did not see the necessity to raise the bar of controls with respect to B2B contracts. However, some positive influences from developments in international contract law can be observed in the new Civil Code regarding the control of contractual clauses. Influenced by Arts 2.1.19(2) and 2.1.20 PICC23 and by Art. 2:209(3) PECL, the legislator implemented,24 for example, the prohibition of surprising standard business terms for both B2B and B2B contracts. Following on from the former statutory provisions, the legislator provided a new type of contractual transaction: contracts of adhesion.25 The statutory provisions for contracts of adhesion, which were influenced by Civil Code of Quebec,26 ought to 18

Tichý 72–73. Criticism concerns the formalism of the treatment of the business terms, because the new Civil Code still distinguishes according to whether a term is concluded in the contract-text or been attached in another separate document. Modern technology eases the incorporation of standard terms in the contract-body, therefore the approach of the Civil Code seems old-fashioned, see Švestka Občanský zákoník V/Pelikánová/Pelikán § 1791 mn. 4. 20 ibid. § 17, mn. 3. 21 ibid. to § 1751, § 1791 mn. 4. 22 Tichý 76. 23 Art. 2.1.20 PICC 2010. Comment on Surprising terms see: https://www.unidroit.org/instruments/ commercial-contracts/unidroit-principles-2010/415-chapter-2-formation-and-authority-of-agents-section-1-formation/898-article-2-1-20-surprising-terms. 24 Ministry of Justice of the Czech Republic § 1751, 436–437; Švestka Občanský zákoník V/Pelikánová/ Pelikán § 1751. 25 See Skalská 38. 26 Hulmák Občanský zákoník V/Petrov § 1798 342. 19

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play a relevant role in rebalancing the interests of the weaker party, not only in B2C but also in B2B relations. It is also to be underlined that the protection of the weaker party gained special attention in the new Code as one of the main private law principles according to § 3(2)(c), which also affects some statutory provisions relevant in B2B contracts.27

II. Regulatory framework 10

This section provides an English translation and short commentary on the most relevant provisions of the Czech Civil Code: (i) the applicable general principles; (ii) the particular requirements for standard terms and contracts of adhesion; (iii) the specific provisions that render a contract unenforceable.

1. Applicable general principles 11

Although the principle of the autonomy of will was fundamentally broadened during the recodification of the new Czech Civil Code, it does not have absolute validity, not even in business relations. As in most national civil codes in Europe, three main general principles, namely good morals, good faith and weaker party protection can limit the contractual freedom of businesses.

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a) Good morals. Good morals are a traditional corrective when the courts adjudicate in civil law disputes.28 Breaches of good morals – in a similar way to public order and rights concerning the status of persons – are the highest limit of contractual freedom in the new Czech Civil Code. § 1. Czech Civil Code29 (2) Unless expressly prohibited by a stature, persons can stipulate rights and duties by way of exclusion from a statute; stipulations contrary to good morals, public order or the law concerning the status of persons, including the right to protection of personality rights, are prohibited.

Although this principle was also included in the former Civil Code, the legislator underlines the necessity for the interpretation of the Code according to these main principles and standards as a single literal interpretation of the Code cannot be satisfactory: the courts should search for the real content of the Code.30 14 The importance of compliance with good morals is also mirrored in later requirements: 13

§ 580. Czech Civil Code (1) A juridical act is also invalid if it is contrary to good morals or contrary to a statute, if so required by the sense and purpose of a statute.

15

Interestingly, as long as a breach of the Civil Code per se is not required for invalidity without fulfilling further conditions31 – only if so required by the sense and purpose of a statute – a breach of good morals should automatically be pursued and eliminated. As such, the legislator expects an ex officio action in the event of a violation of good morals: See §§ 433, 630, 1798–1801, 2629, 2898 Civil Code. Melzer/Tégl to § 1 57. 29 An English translation of the Czech Civil Code is available under http://obcanskyzakonik.justice.cz/ images/pdf/ Civil-Code.pdf. 30 Ministry of Justice of the Czech Republic to § 1, 34. 31 The legislator expresses this wish explicitly, ibid. to §§ 580–585, 141. 27 28

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A. Czech Republic § 588. Czech Civil Code A court shall, even of its own motion, take into account the invalidity of a juridical act which is manifestly against good morals or which is contrary to a statute and manifestly disrupting public order. (…)

A violation of good morals is stated as a reason for absolute invalidity, i.e. the 16 juridical act is void from the outset, which is exceptional because in the most cases the Czech legislator – in line with other civil codes in Europe – prefers relative invalidity, i.e. the contract is voidable32. b) Good faith and fair dealing. Similar to the European Civil law tradition33, the 17 principle of honesty and lack of mala fide – bad will and fraudulent intent – is the ruling principle of expressing subjective rights and the fulfilment of legal obligations in Czech Civil law. The Czech legislator points out the difficulty of translating the good faith principle and misunderstanding the distinction between subjective and objective good faith;34 furthermore it provides some case examples of honest and fair trading which can assist the courts in their application of the principle of good faith. § 6. Czech Civil Code (1) Everyone is obliged to act fairly in legal transactions. (2) No one may benefit from acting unfairly or unlawfully. Furthermore, no one may benefit from an unlawful situation which the person caused or over which he has control.

According to the Explanatory Notes, the Czech legislator aimed at the formulation 18 that everyone should act honestly and fairly in legal relations,35 which should be understand as an objective understanding of the principle.36 Unlike the former Codes, the new Civil Code includes a presumption of good faith regarding legal acts, and therefore the burden of proving the lack of good faith rests on the person who denies the existence of good faith.37 c) Weaker party protection. As already mentioned, the new Czech Civil Code was 19 supplemented with a new principle of weaker party protection. This general principle applies not only in B2C but also in B2B contracts: § 433. Czech Civil Code (1) A person who acts as an entrepreneur with respect to other persons in economic transactions may not abuse his expertise or economic position to create or take advantage of the dependence of the weaker party and to achieve a clear and unjustified imbalance in the mutual rights and duties of the parties.

While consumers are presumed to be weaker parties without any further condi- 20 tions, § 433 does not provide a further clarification for entrepreneurs, but just adds a presumption: (2) It is presumed that the person who, in economic transactions, acts with respect to the entrepreneur in a manner unrelated to his own business activities is always the weaker party.

Weaker party protection features across the Code, e.g. with regard to contracts of 21 adhesion, compensation for damage caused etc. Accordingly, it will be very interesting to see how the future case law will apply this principle in B2B contracts. The literature 32

ibid. 142. See e.g. Article 1:201 PECL; Art. I.–1:103 DCFR. 34 ibid. to § 6, 37. 35 ibid. 36 See also Melzer/Tégl to § 6, 106. 37 Ministry of Justice of the Czech Republic to § 7, 37. 33

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criticises the formulation of the principle as it is seen as a more structured derivate of fairness and prohibition of the abuse of law; as practically a subcategory of good morals.38 The general standards of professionalism and fair dealing, which were traditionally expected under the former Commercial Code39 and also the lex artis provision according to § 5 of the new Civil Code40, can be a relevant argument against determining the weakness of one of the professional parties. Although the Explanatory Notes do generally provide help for the courts, they just state that weaker party protection follows a general nature; it is fundamental and follows from Book 4 on Relative Property Rights (Law of Obligations)41. It remains open whether some criteria to confirm the weakness of one business party – e.g. market share, influence or dependence – could be transposed from other statues, such as the Competition Act or the Act on significant market power in the sale of agricultural and food products and its abuse. This also poses the question of how well the causality42 between the abuse of economic position and achieving a clear and unjustified imbalance at the expense of the weaker business party can be determined. Nonetheless, the extent to which this principle will gain importance will depend on the caution or recklessness of the courts.

2. Requirements for standard terms and contracts of adhesion 22

The new Civil Code also includes requirements for the content of B2B contracts that can differ regarding whether the parties negotiated the contract clauses individually, where one party simply subjected the weaker party to his – non-negotiated – contract terms. It is generally possible in both B2C and B2B relationships to determine a contract according to standard terms; the reference to standard terms is easier in B2B scenarios, though only if the standard terms were prepared by professionals or an interest organisation. These rules show the heritage of the former Codes. § 1751. Czech Civil Code (1) A part of the contents of a contract may be determined by reference to standard commercial terms which are attached to the offer by the offeror or of which the parties are aware. Any stipulations in the contract that derogate from the standard commercial terms shall prevail over the text of the standard commercial terms.

And regarding B2B contracts:

23

§ 1751. Czech Civil Code (3) In the case of a contract concluded between entrepreneurs, a part of the contents of the contract may be determined simply by a reference to standard commercial terms prepared by professional or interest organizations.

24

In the event of contradictory standard terms (‘battle of the forms’), the so-called knock-out rules, inspired by Art. 2.1.22 PICC, apply as according to § 1751(2): § 1751. Czech Civil Code (2) If, in an offer and the acceptance thereof, the parties make a reference to standard commercial terms which are contradictory, the contract is still concluded with the content determined to the extent to which the standard commercial terms are not contradictory; 38

Bejček (‘Nekálé obchodní praktiky’) 52. See §§ 265, 292 former Commercial Code. 40 § 5(1) Civil Code: A person who offers professional performance as a member of an occupation or profession, whether publicly or in dealings with another person, demonstrates his ability to act with the knowledge and care associated with his occupation or profession. If the person fails to act with such professional care, he bears the consequence. 41 Ministry of Justice of the Czech Republic to §§ 429–435, 110. 42 Bejček (‘Nekálé obchodní praktiky’) 52. 39

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A. Czech Republic this also applies where such a conclusion is excluded by the standard commercial terms. If it is excluded without undue delay by any of the parties no later than after exchanging the expressions of will, the contract is not concluded.

The choice of these new rules represents a deviation from the former, more restrictive 25 ‘no contract’ rules used in judicial practice because of the lack of concrete provisions in either the former Commercial or Civil Codes.43 The new concept provides more space for party autonomy. Furthermore, the legislator created special rules for unilaterally changing standard 26 terms regarding a long-term obligation, where the nature of the obligation itself can indicate the necessity of the changes. This possibility is allowed in B2B and B2C contracts, although general principles, such as good faith and fair dealing, prohibition of the abuse of law and special limitations on contracts of adhesion, should be preserved also with regard to these unilateral changes.44 § 1752. Czech Civil Code (1) If, in the ordinary course of business, a party concludes contracts with a number of persons and such contracts oblige the parties to provide a long-term recurrent performance of the same kind with reference to standard commercial terms, and the nature of the obligation already indicates in the course of the contract negotiations that subsequent changes thereto will reasonably be necessary, the parties may stipulate that a party may amend the standard commercial terms to an appropriate extent. The stipulation is valid if at least the manner in which the change is to be notified to the other party is stipulated in advance, and if the party becomes entitled to refuse the changes and, as a result, terminate the obligation with a notice period sufficient to procure similar performances from another supplier; however, a stipulation which links the termination to a special duty encumbering the terminating party is disregarded. (2) If the parties do not stipulate the extent of changes to the standard commercial terms, changes caused by such a change in the circumstances which the party referring to the standard commercial terms must have expected at the conclusion of the contract, or changes induced by a change in the party’s personal or property situation are disregarded.

The regulation of the enforceability of surprising terms is a novelty. § 1753 Civil 27 Code – following Art. 2.1.20 PICC – makes surprising terms, which the adhering party could not have reasonably expected, invalid, notwithstanding its acceptance of the standard terms as a whole.45 Surprising terms can equally be effective if they were expressly accepted by the adhering party. The Explanatory Notes state that such a provision could also be considered as an arrangement for excluding the liability of the party for fulfilling particular contractual obligations, although the contract itself evokes a reasonable anticipation that liability for fulfilment would be unaffected.46 § 1753. Czech Civil Code A provision of the standard commercial terms that the other party could not have reasonably expected is ineffective, unless expressly accepted by that party; any stipulation to the contrary is disregarded. Whether or not a provision is of such a nature shall be assessed with regard to its content, as well as to the manner in which it is expressed.

Finally, this Division of the Code also contains the rules for interpreting contract 28 terms in business relations. In first line, for B2B contracts, the chosen rule of 43

See Bejček (‘Některá úskalí’) 18. Ministry of Justice of the Czech Republic to §§ 1751–1754, 437. 45 Art. 2.1.20 PICC 2010. Comment on Surprising terms see: https://www.unidroit.org/instruments/ commercial-contracts/unidroit-principles-2010/415-chapter-2-formation-and-authority-of-agents-section-1-formation/898-article-2-1-20-surprising-terms. 46 Liška 195. 44

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interpretation should be respected; second, general business usage is decisive. Deviation in favour of the weaker party should be possible only in B2C contracts where the burden of proof regarding the knowledge by the other party of the rule of interpretation rests with the trader47. § 1754. Czech Civil Code (1) If the parties use a contractual clause provided in the rules of interpretation which the parties use, the parties are presumed to have used the clause with the intention to produce legal effects provided by the rules of interpretation to which they referred in the contract, or by those rules of interpretation which are generally used with regard to the nature of the contract. (2) If one of the parties is not an entrepreneur, the meaning of the clause may be invoked with respect to that party only if it is proved that that party was aware of its meaning.

29

Contracts of adhesion do not constitute a special type of contract but rather denote a particular way of contracting.48 Nevertheless, the legislator regulated contracts of adhesion in the new Civil Code because this specific manner of contracting renders it difficult for the weaker party to actively influence the content of the contract. As a newly assessed rule, the legislator first provides a definition and presumption for contracts of adhesion. § 1798. Czech Civil Code (1) The provisions on contracts of adhesion apply to any contract whose essential terms were determined by one of the parties or according to the party’s instructions, without the weaker party having any real opportunity to affect the contents of these essential terms. (2) If a contractual form used in business dealings or another similar means is used to conclude a contract with the weaker party, the contract is presumed to have been concluded as a contract of adhesion.

30

Furthermore, the legislator states in which case a contract clause can refer to external standard terms, but interestingly it is satisfactory if the weaker party gains knowledge of a reference to standard terms outside of the contract; detailed knowledge of the standard terms is not relevant for the legislator and unfortunately the legislator does not answer the question – not even in the Explanatory Notes – of whether the ordinary rules on incorporating standard terms (attaching to the offer or awareness) are valid regarding these contracts, too. § 1799 just delivers a remark on the referring clause. According to § 1799: § 1799. Czech Civil Code A clause in a contract of adhesion that refers to the terms stipulated outside the actual text of the contract is valid if the weaker party has been acquainted with the clause and its meaning or if it is proved that the meaning of the clause must have been known to him.

31

Inspired by the Draft Common Frame and Reference and the Code europeen des contracts – Avant-project49 the legislator provides some limitations on the enforceability of illegible or incomprehensive clauses or particular disadvantageous clauses. § 1800. Czech Civil Code (1) If a contract of adhesion contains a clause which can only be read with particular difficulties or a clause which is incomprehensible to a person with average intelligence, such a clause is valid if it causes no harm to the weaker party or if the other party proves that the meaning of the clause was sufficiently explained to the weaker party. Ministry of Justice of the Czech Republic to §§ 1751–1754, 437. ibid. to §§ 1798–1801, 444. 49 ibid. 47 48

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A. Czech Republic (2) If a contract of adhesion contains a clause which is particularly disadvantageous to the weaker party without any reasonable ground, in particular if a contract significantly and for no special reason derogates from the usual terms stipulated in similar cases, the clause is invalid. If required by the fair arrangement of rights and duties of the parties, a court shall decide in accordance with § 57750 by analogy.

The discrepancy between these protections is disregarded for B2C but not for B2B 32 contracts. It should be noted that the extent to which these protective requirements can have an effect is very limited in B2B contracts because the legislator strongly restricts the applicability of these protective rules.51 § 1801. Czech Civil Code If the parties derogate from §§ 1799 or 1800 or exclude any of these provisions, it is disregarded. This does not apply to contracts between entrepreneurs, unless one of the parties proves that a clause stipulated outside the text of the contract and proposed by the other party is grossly inconsistent with business usages and the principle of fair business dealings.

3. Generally unenforceable contractual terms Specific provisions that, on a general level, render contractual terms unenforceable, 33 can be separated into three groups: those which are absolutely invalid; those which have relative invalidity and some further action by the disadvantaged party is expected to make them valid; and those clauses, such as waiver of compensation for damages, where the invalidity of the clauses can be stated just in favour of a weaker party. The question arises whether the legislator would allow a possibility to combat usury, laesio enormis, in B2B relations, to some extent, because, according to § 1797: § 1797. Czech Civil Code An entrepreneur who concluded a contract in the course of his business is not entitled to require that the contract be cancelled under § 1793(1), and may not invoke the invalidity of the contract under § 1796.

It is conceivable that an entrepreneur concludes contracts outside of the course of his 34 business, and conducts them for a purpose other than his business, or for the conduct of a company generally established for a purpose other than business (e.g. an NGO). If such cases arise, the court should assess the entrepreneurs individually according to circumstances52. Nevertheless, the Explanatory Notes seem to reject this interpretation. The legislator underlines that it is not possible to challenge a contract under such strikingly unfavourable conditions as laesio enormis or usury, if such a contract was concluded between businesses.53 The reasoning is based on the professionalism of the entrepreneurs and on the lack of information asymmetry, unlike in B2C cases; as such, the rule of reduction of disproportionate prices does not apply to his benefit. According to the literature, the protection of both of these institutes can only be used in a small set of situations where the B2B contract is not for business purposes,54 but it remains to be seen just how relevant it will be in legal practice. 50 § 577 Civil Code: If the reason for invalidity only consists in an unlawful determining of quantitative, temporal spatial or other scope, a court shall change the scope so that it is consistent with an equitable arrangement of rights and duties of the parties; in doing so, the court is not bound by the parties’ motions, but shall consider whether a party would have made the juridical act had the party ascertained its invalidity in time. 51 See mn. 36. 52 Hulmák Občanský zákoník V/Petrov 341. 53 Ministry of Justice of the Czech Republic § 1797, 444. 54 Hulmák Občanský zákoník V/Petrov 341.

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Part 1. Country Reports Table 1 Unenforceable contractual terms regarding the Czech Civil Code §

Contract term

Result in B2B contracts

630

Shortening or extension of the prescription period at the expense of the weaker party

Generally disregarded

1755

Waiver of generally asserting defences to the validity of a contract

Generally disregarded

1793

Laesio enormis (disproportionate reduction)

Acc. § 1797 just an entrepreneur, who concluded a contract outside of the course of his business is entitled to invoke its invalidity

1796

Usury

Acc. § 1797 just an entrepreneur who concluded a contract outside of the course of his business is entitled to invoke its invalidity

1916

Exclusion of obligation from statutory liability for defective performance

Generally disregarded, but it is possible if an acquirer waives his right from a defective performance in advance, but only in a written form, in which such an expression of will is required.

1964

Agreement on the time of performance, which derogates from the usual provisions of § 196355 and an agreement which derogates from the statutory default interest rate if such stipulations are grossly unfair to the creditor

Right to invoke the ineffectiveness of a stipulation (relative invalidity)

1972

Agreement on default interest that derogates from the Act in a way that, having regard to all the circumstances and conditions of the case, worsens the position of the creditor.

Right to invoke the ineffectiveness of a stipulation (relative invalidity)

2050

No double compensation. If a contractual penalty has been stipulated, the creditor is not entitled to compensation for damages resulting from the breach of those duties that are subject to the contractual penalty.

Generally disregarded, (but the contractual parties may agree, that the contractual penalty does not affect the creditor's right to seek compensation for damages resulting from the breach of contractual duties.)

2051

Excessively high amount of contractual penalty

Court may reduce it at the request of the debtor (relative invalidity)

2168

Reduction of the period for asserting the rights arising from a defective performance.

Generally disregarded

55 §§ 1963, 1964 and 1972 implement the Late Payment Directive 2011/7/EU, but in contrast to the Directive, which prohibits unfair contractual terms and practices relating to the date or period for payment, the rate of interest for late payment or the compensation for recovery costs, the Czech Civil Code prohibits similar standard terms, but not in general contractual terms. Whether this shrinking of the meaning of the Directive does not necessary lead to a jurisdiction not in conformity with EU law, will be shown, but the literature already doubts the conformity of the implementation. See Bejček/Kotásek/ Přikazská 176.

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A. Czech Republic §

Contract term

Result in B2B contracts

2174

Reduction of buyer’s rights from a defect of a thing, before a buyer can assert his right arising

Generally disregarded

2898

Exclusion or limitation of compensation for harms caused intentionally or due to gross negligence.

Generally disregarded, and also the right to compensation may not be lawfully waived by the weaker party

III. Requirements and legal consequences 1. Content of the B2B contract in general/standard terms According to § 1725 Civil Code, a contract is concluded once the parties have 35 stipulated its content. Based on the principle of freedom of contract, the parties are free to conclude a contract and determine its content. Statutory limitations on B2B contracts only apply in very exceptional cases. The content of the contract may be determined partly by reference to standard terms, but it is generally valid that any contractual agreement (placed in the main contract body) derogating from other stipulations shall prevail, as according to the second sentence of § 1751(1) Civil Code. The consent requirements on the parties56 vary depending on two factors: on the placement of the term and, in the case of standard terms, to which type of standard term the term belongs. Regarding the former, all contractual terms in the main contract-text should be called contractual terms57, and all other terms outside the main contract should be called standard business terms58. Czech literature does not contain a uniform definition of ‘standard business terms’. 36 Some define standard business terms in a wider sense,59 whereas others very restrictively60. Several typologies are used by scholars.61 In this chapter, we will follow the ancestry of the former regulation and make four main subdivisions. (i) contract terms placed in the main contract text; (ii) so-called other terms; (iii) standard terms prepared by a professional or interest organisation; (iv) standard terms prepared or determined by just one of the parties (clauses in contracts of adhesion). Where necessary, we will make a special remark on long-term recurrent performance contracts with a large number of clients (e.g. energy supply contract)62. a) Incorporation of contractual terms and standard business terms in the con- 37 tract. With regard to contractual terms, the Czech legislator assumes active negotiation 56

ibid. 24. Hulmák Občanský zákoník V/Hulmák § 1751 151. 58 Bejček/Kotásek/Přikazská 19. 59 Tichý 73, Švestka Občanský zákoník V/Pelikánová/Pelikán § 1751; also Liška 195. 60 Hulmák Občanský zákoník V/Hulmák § 1751 155. 61 Bejček recommends making three main subdivisions. In the first group are standard terms prepared by a professional or interest organisation; in the second standard terms prepared or determined by just one of the parties (Contract of adhesion); in the third are long-term recurrent performance contracts with a number of clients (e.g. energy supply contract) see Bejček (‘Některá úskalí’) 612. Another subdivision made by Tichý categorises contract terms into three subdivisions: general standard terms §§ 1751–1753, contracts of adhesion §§ 1798–1801, and unfair contract terms §§ 1810–1819, see Tichý 74. 62 Bejček defines this group as an independent group, because of the nature of the obligation, which already indicates that subsequent changes thereto will be reasonably necessary, although in our chapter it will be just mentioned here. See Bejček ibid. 57

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between the parties. Case law not only expects written63 contracts to be signed by both parties (also in the event the contract is amended) but also considers ‘all clauses above’ the parties’ signatures to have been agreed by the parties64. As already mentioned, standard business terms – if they are placed in the main contract-body – share the fate of other contractual terms. They should be accepted by the other party65 in the same way as other contractual agreements. The same also applies to any changes to a given clause.66 According to the standard case law of the Supreme Court (Nejvyšší soud) concerning the former Codes, ‘whether standard business terms are part of the contract, the consent of both contractual parties is required, inclusively of these terms’67. The same regime – as for other contractual terms – is applicable also to changing the standard terms that are part of the contract. A further judgment of the Supreme Court underlines this fact: ‘If the parties did not agree, in the contract or in the standard terms, on a special way of changing standard terms (e.g. single delivery to the other party), the same legal regime applies to their changes as for changing the content of the contract.’68 It is also noted in an older decision that a unilaterally issued, new version of a contract term could not change the effective content of the former contract because the parties did not integrate it into the contact69. b) Incorporation of other business terms. According to § 1751(1) Civil Code, a part of the content of a contract may be determined by reference to standard business (‘commercial’) terms. The condition for the validity of the terms is that they must be attached to the offer by the stipulator or they are known by both parties70. This rule also applies in general to other types of standard terms, unless some special norms in the Civil Code would prevent their explicit incorporation. 39 Concerning the incorporation of standard terms into the contract, the Czech case law is relatively generous and formalistic at the same time. Courts mainly ascertain whether the acceptant of the standard terms signed the main contract. A signature on the standard terms is not necessary, according to the Higher Court in Prague71. 40 Deeper or more specific fact-finding by the courts in contract disputes is not often demonstrable. Case law shows that the court very rarely clarifies which version of the standard terms the parties agreed on, and the acceptant of the standard terms is very rarely asked if he really received the standard terms with the offer or if he actually knew the disputed terms. A signature on the main contract assumes all are known, but a mere possibility of becoming familiar with them via the internet is not sufficient72. A further judgment of the Supreme Court demonstrates this claim: 38

“…it is clear from the factual findings that the main leasing contract expressly states that the General Terms and Conditions of Full-Service Lease verse 01/2005, which were attached to this contract and the parties signed the main contract, are an integral part of the contract. If, therefore, the contractual terms and conditions contained in Article 11.1 contain an arbitration clause, and the two parties, including the claimant, 63 Although a contract can also be agreed verbally, the judicature can hardly cover such legal transactions. 64 Skalská 41. 65 Hulmák Občanský zákoník V/Hulmák § 1751 153. 66 ibid. 67 Judgment of the Supreme Court of 28 April 2010 sp. zn. 23 Cdo 4895/2009. 68 Judgment of the Supreme Court of 27 February 2013 sp. zn. 23 Cdo 1098/2012. 69 Judgment of the Higher Court of Prague of 29 June 1998 sp. zn. 5 Cmo 55/97. 70 Hulmák Občanský zákoník V/Hulmák or Bejček/Kotásek/Přikazská 51. 71 Judgment of the Senate of 24 February 1998 sp. zn. 5 Cmo 318/97. 72 Decision of the Constitutional Court of 18 November 2008 sp. zn. I. US 2619/08.

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A. Czech Republic

have expressed their consent by their written signature on the contract, to which the general terms were an integral part; it is not admissible that the arbitration clause was not validly agreed and that there was no apparent agreement on the content of the arbitration agreement.”73 The Constitutional court gave a similarly generous summary in another case, when 41 the extension of court competence through a clause in the standard contract terms outside of the contract text was affirmed with the rationale: “…in the leasing contract, the reference to the General Terms and Conditions [‘GTC’] was sufficiently precise; the GTC were specified (01/2001) and the contracting party declared that it was acquainted with the content of these GTC and that the other party took it over.” The court underlined, that “…it was explicitly stated in the General Terms and Conditions that the user agrees to the agreement on the different local court competence of the court by signing the lease… The choice, which part of the arrangement will be contained in the standard business terms, is entirely at the discretion of the parties, and there is nothing to be objected to in this respect against the inclusion of the extension agreement in the GTC.”74 On the other hand, standard contract terms do not replace main contracts. The 42 Supreme Court has stated that ‘contractual obligations cannot be stipulated only on the bases of standard contract terms and delivery conditions if they were not mentioned in the order and were not even referred to the order’75. In this case, the Court ruled that the applicant made a new offer for contracting, but an acceptance of the defendant’s order cannot be seen as an acceptance of the contract.’ In this case, the Supreme Court also criticised the lower court for not seeking detailed proof of whether the standard contract terms were known by the other partner. It is possible in a B2B relationship that both parties attach standard terms to the 43 contract. The new Civil Code implemented the third solution of the Art. 2.1.22 PICC or Art. 2:209 PECL variations, the so called ‘knock out-rule’76, which applies in the event of a ‘battle of the forms’. However, as long as both mentioned international regulations base an agreement on its terms, they are common in substance; the Czech legislator – according to § 1751(2) Civil Code – limits the content of the contract determined to the extent to which the standard business terms are not contradictory. The reasoning for this special Czech approach cannot be derived from the reasoning in the statute or from commentaries.77 Actual judgments concerning the knock-out-rules are still not available, and so scholars debate their expected applications of this norm.78 A final important point should be made, namely that in some regulated sectors, such 44 as post, energy, electronic communication and transport, but also banking and insurance services, particular content of standard terms is subject to sector-specific statutes.79 It is also possible that, in some specific cases, the sector regulator approves the standard 73

Judgment of the Supreme Court of 28 April 2010 sp. zn. 23 Cdo 4895/2009. Decision of the Constitutional Court of 5 October 2005 sp. zn. II. ÚS 691/04. 75 Judgment of the Supreme Court of 28 October 2010 sp. zn. 23 Cdo 55/2010. 76 Bejček/Kotásek/Přikazská 98; Hulmák Občanský zákoník V/Hulmák 157. 77 Bejček/Kotásek/Přikazská 91. 78 ibid. 99. 79 See ibid. 223 or Bejček (‘Některá úskalí’) 615. 74

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terms in advance or stipulates them directly.80 However, a detailed analysis is beyond the scope of this report. 45

c) Incorporation of standard business terms prepared by interest organisations. The legislator’s rules regarding the incorporation of standard terms determined by professionals or interest organisations are very liberal. According to § 1751(3) Civil Code, a simple reference to the terms suffices for the validity of the standard clauses. The clauses therefore neither need to be attached the clauses to the offer nor must they have been known by the other party at the time of contracting, as it would normally be for other business terms. The legislator does not expect that the other party will need to become familiar with the terms; the knowledge of such standard terms is already presumed. Attempts to stiffen the requirement of knowledge during the legislative procedure were unsuccessful.81 This liberal concept is criticised by the literature,82 and it points out that the legal competence of the entitled organisation is unclear. Another critical point concerns competition issues, because standard terms prepared by professional organisations may also include clauses that prevent horizontal competition. Preventing horizontal competition is prohibited by § 3 of the Czech Act on restraints on competition83. Case law contains decisions that confirm the validity of a single reference to these types of standard terms.84

d) Clauses in contracts of adhesion and the protection of the weaker party. In the era of mass consumption, the most usual form of contracting is when one of the parties prepares all essential contractual terms in advance and the other party has no opportunity to modify the contract terms (‘take it or leave it’85). The Czech legislator, inspired by Arts 1379, 1432–37 Civil Code of Quebec, saw the necessity to give greater protection to the weaker party in these so-called ‘contracts of adhesion’86, in both B2B and B2C relationships.87 Similar to the Civil Code of Quebec, the Czech norms reduce the applicability of illegible, incomprehensible and abusive clauses, but the practical validity of this protection in B2B relationships is very limited because, alongside the norms in the Civil Code of Quebec, the Czech legislator also transplanted Art. II.–9:405DCFR.88 While the legislator’s aim to create special protection for the weaker party in contracts of adhesion should be highlighted, in future it will more likely play a more significant role in B2C than B2B relationships. 47 A significant limitation of the applicability of this norm in B2B relationships derives from the general norm of weaker party protection. According to § 433(2) Civil Code, only private persons who act with respect to the entrepreneur in areas unrelated to their own business activities are presumed to be a weaker party (typically consumers89). Otherwise, the weaker contractual party has to prove that the entrepreneur abused his professional or economic position to create or take advantage of his dependence to 46

See e.g. § 7 of 458/2000 Sb. or § 6 29/2000 Sb. Hulmák Občanský zákoník V/Hulmák § 1751 156. 82 Tichý 74. 83 Bejček/Kotásek/Přikazská 26. 84 Judgment of the Higher Court of Prague of 24 February 1998 sp. zn. 5 Cmo 318/97. 85 Kaiser 488. 86 See mn. 70 et seq. 87 Hulmák Občanský zákoník V/Petrov § 1798, 343. 88 Art. II.–9:405 DCFR states that ‘[a] term in a contract between businesses is unfair for the purposes of this Section only if it is a term forming part of standard terms supplied by one party and of such a nature that its use grossly deviates from good commercial practice, contrary to good faith and fair dealing.’ Pelikánová/Pelikán call it a Czech curiosity see Švestka Občanský zákoník V/Pelikánová/Pelikán § 1801, mn. 6, but also Skalská 89 Decision of the Constitutional Court of 23 November 2017 sp. zn. I. ÚS 2063/17. 80 81

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achieve a clear and unjustified imbalance in the mutual rights and duties of the parties. A similar interconnection between contracts of adhesion and weaker party protection is missing from the Civil Code of Quebec, which increases the applicability of those norms, unlike the Czech norms.90 Where the incorporation of clauses into the contract is concerned, the level of 48 consent in contracts of adhesion is not much higher than the general norms.91 With regard to contractual clauses, the general contract rules apply, and for clauses that are placed outside of the contract text (standard business terms or other terms), only a slightly higher level of consent is expected. According to § 1799 Civil Code, if the contract of adhesion includes a clause that refers to terms which are stipulated outside of the actual contract text; this referring clause is valid if the weaker party has become acquainted with the clause and its meaning or if it is proved that the meaning of the clause must have been known to the weaker party. In that sense, the Czech legislator requires a greater duty to inform from the stipulator of the referring clause than under the Civil Code of Quebec.92 Contrary to the Civil Code of Quebec, the Czech Civil Code provides that the stipulator not only informs the adhering party of the existence of external clauses but must also ensure that the weaker party understands the meaning of the referring clause. Although the Czech legislator expected a higher level of knowledge of the referring term, two shortcuts should be mentioned. First, a higher information duty regarding the referring term does not assume an explicit acceptance of these terms; it only serves to rebalance the information asymmetry between the parties.93 Second, the legislator does not provide further information obligations regarding external clauses. Although this can be justified in a B2B situation, it is questionable whether in a B2C scenario it will give sufficient protection against contract penalty clauses, for example, or some other fees that have a significant impact on the obligations of the weaker party. One interesting older judgment of the Supreme Court defines the nature of contracts of adhesion compared with individual agreements: “…This contract, its range, structure, and choice of font are closer to individually negotiated contracts than standard contracts of adhesion, for which a long, unclear text, written in a miniature, hardly legible font or even a reference to such business terms is typical.”94 At present, there are no judgments that are available that could challenge the 49 incorporation of standard terms in a contract of adhesion. Nevertheless, it is likely that the key issue for the validity of the clauses referring to external terms will be whether the party who dominates the contract can prove that a clause referring to external terms was known by the adhering party. Scholars presume that the stronger party will always argue that the adhering party confirmed his acquaintance with and understanding of the referring term with his signature, which results from the general court practice, even regarding B2C contracts.95 This would not raise the level of protection afforded to the adhering party; it would just make the norm a ‘paper tiger’.

90

More about this limitation: Bejček/Kotásek/Přikazská 69. See mn. 38 et seq. 92 Hulmák Občanský zákoník V/Petrov § 1799 343. 93 Bejček/Kotásek/Přikazská 72. 94 Judgment of the Supreme Court of 29 June 2010 sp. zn. 23 Cdo 1201/2009. 95 See Judgment of the Supreme Court of 29 June 2010 sp. zn. Cdo 1201/2009 and also Skalská 40. 91

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2. Particular judicial review mechanisms for the different types of B2B contract terms As already mentioned, Czech judicial contract review follows the dual protection model, which provides a different treatment of B2C and B2B contracts96. The review mechanisms for B2B contract terms can be divided into general control mechanisms and control mechanisms for weaker parties, with regard to terms not individually negotiated. The new Civil Code significantly reworked the review mechanisms and, besides the already existing general principles, implemented new general control mechanisms, such as the prohibition of surprising terms or unreadable and incomprehensive terms. However, the Czech legislator neither widened the scope of the Unfair Terms Directive to B2B contract terms nor did produce a grey list of unfair B2B contract clauses for which there was the possibility of judicial review. 51 Some scholars consider the approach to bring the highest level of justice ex-post into a contract as too ambitious, although the solution seems optimal for protecting the weaker party.97 According to these scholars, more aggressive regulatory intervention into B2B contractual relationships can be harmful, and have a negative influence on the willingness of the stronger partner to cooperate with the weaker.98 Instead, they recommend that courts apply the minimum level of intervention that is tolerable and use a gap-filling methodology to repair faulty contracts. 52 The scope of the review needed for B2B contract terms depends mainly on where the term is placed; therefore, the new Civil Code should have distinguished between the contract terms in the main contract body and standard business terms outside of the main contract. We can sub-categorise the control mechanisms for contractual terms into three classes: (i) general principles as control mechanisms; (ii) generally prohibited terms; (iii) control of adhesion contracts. 50

3. General principles as control mechanisms in the judicial review 53

The liberal concept of contractual freedom regarding B2B relations is not unlimited: § 1(2) Civil Code states that this freedom could be expressly prohibited under certain provisions of the Code. Other rubrics for evaluating the appropriateness of contractual agreements are good morals, public order, and rights concerning the status of the party. While good faith and its sub-category ‘good faith and fair dealing’ are the most dominant principles in B2B relations, weaker party protection is also decisive as protecting the status of a person. It seems problematic to clarify the relationship between good morals and good faith, because the former case law often considered the two principles as complementary or used them as synonyms, or found that a violation of ‘good faith and fair dealing’ violated good morals.99 This interaction can be illustrated with a judgment by the Supreme Court, which summarised when good morals are violated: “Good morals are contravened if a legal act does not correspond to the moral principles or cultural and social norms that are generally accepted in a particular society, thus generating a general view of what is acceptable to this society and considered to be honest and fair dealing. The discrepancy between a juridical act and good morals must be assessed individually, taking into account, in particular, the 96

See Micklitz 16. Bejček (‘Nekálé obchodní praktiky’) 191. 98 Ben-Shahar 905. 99 Cf. Melzer/Tégl 120 and Pelikánová 663. 97

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circumstances of the parties’ conduct at the relevant time, and the generally recognised view of the acceptability of the content of their conduct.”100 As a practical guideline for the identification of good morals or good faith, the 54 literature agrees that, as long as good morals create a fundamental value basis, good faith is a particular standard for negotiations which should be applied beyond good morals. With good faith, a higher level of trust and loyalty should be expected between the parties. On the other hand, good morals can also be invoked outside of party relations.101 It should also be noted that this principle of weaker party protection is also supported by other principles, such as good faith102, and prohibition of the abuse of law (§ 8 Civil Code), but mostly because weaker party protection alone is an adequate protection principle in B2C contracts. a) Good morals – review of contractual penalties. Good morals are stated as one of 55 the main principles of the new Civil Code. They were also explicitly named in the former Civil Code (in § 3), not as a main general principle but rather as a limitation on exercising rights and obligations – though the Supreme and Constitutional Courts elevated the significance of the good morals to the level of a fundamental principle. The Supreme Court provided that: “Good morals are interpreted as a set of social, cultural, and moral norms that, in historical development, witness a certain immutability, represent essential historical tendencies, and are shared by a decisive part of society, and have the nature of basic norms.”103 The Constitutional Court had defined good morals as “a set of ethical, generally respected and recognised principles, the observance of which is often ensured by legal rules so that each act is in accordance with the general moral principles of a democratic society. This general horizon, which with the development of society also develops its moral content in space and time, must also be considered in terms of specific cases at a given time, at a given place, and in the mutual acting of the participants of the legal relationship.”104 As an acknowledged general principle, the good morals test is used by the court 56 to determine whether the contract was drawn up and implemented lawfully by the parties,105 but, as already mentioned,106 it is necessary to use further individual guides to determine the moral standards in relation to the particular problem. In most cases, therefore, although some other principle or standard also appears, the court only states there has been a violation against good morals in the absence of any concrete criteria. This tendency is clearly visible in contractual penalty107 cases, which form the majority of ‘good morals’ cases, in relation to both B2B and B2C contracts. 100

Judgment of the Supreme Court of 10 April 2001 sp. zn 29 Cdo 1583/2000. Melzer/Tégl to § 6, 120. 102 Lavicky Občanský zákoník I/Lasák to § 433 1651. 103 Judgment of the Supreme Court of 28 August 2012 sp. zn. 23 Cdo 460/2012. 104 Decision of the Constitutional Court of 26 February 1998 sp. zn. II ÚS 249/97). 105 Melzer/Tégl to § 1, 57. 106 See mn. 34. 107 Concerning contractual penalty it should be noted, that this institution is not just a sanction for breaching the contractual duties, but according to § 2048 – and previously according to § 544 of the 40/ 1964 Sb. – also a compensation for damage, therefore the creditor is not entitled to ask for extra compensation resulting from the breach of the duty which is subject to the contractual penalty. 101

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For contractual penalties in B2B contracts, the court should assume whether the relevant contractual arrangement (or its performance) corresponds with good morals at a given time and place according to an objective criterion.108 The former Commercial Code contained an explicit possibility in B2B contracts to reduce an excessively high contractual penalty by courts according to § 301 of the 531/1991 Sb.; however such norm of reduction was missing from the former Civil Code. This gap was filled by the intensive usage of good moral principle in B2C relationships. Later, the new Civil Code filled this gap with § 2051, and essentially transported the former B2B rule into the Civil Code but with general validity. 58 A different judicial review is visible depending on the person of the contractual parties. B2C relations A relatively strict evaluation of the courts can be seen in B2C contracts;109 though in contrast an excessively level of the penalty was not enough reasoning for invalidity of the term of a B2B contract, another circumstance – typically one violating good morals – was necessary for the court to reduce the contractual penalty.110 59 More recent decisions of the Supreme111 and the Constitutional Court112 stated that, in B2C relations in general, an agreement on contractual penalty cannot be agreed effectively in the standard terms. These terms should be contained in the main contract body, because ‘standard terms should have a more technical and descriptive character’113. 60 In comparison, the courts allow much more freedom for the autonomy of will of the parties and the level of the judicial review is much lower in B2B contracts. Older court practice stressed that an entrepreneur is a ‘professional who must be aware of the economic risk of a contractual penalty. Therefore, more strict conditions are imposed on entrepreneurs114. Business executives, on the other hand, can validly agree on contractual penalties in the standard terms. Furthermore, the court reasoned that the moderation of excessively high penalties in B2B relations is possible ‘only if a contractual fine was disproportionately high and the circumstances in which the contractual penalty was agreed would be attributable to good morals’115. For the limitation of contractual penalties, the court therefore continued to follow the practice of the former Commercial Code that a violation against good faith and fair dealing had to be present. It is possible to moderate a contractual penalty ‘only in very exceptional circumstances, which would be connected with the application of the right to payment of a contractual penalty, e.g. vexatious enforcement of the right, which would be clearly damaging to the other party’116. The case law underlined that courts must establish all circumstances of the contracting.117 A double sanction – a contractual penalty and parallel default interest rate118 – in the contract, and also such a high contractual penalty in the event of termination of an accountancy contract, which would force the plaintiff to stay in the 57

108

Decision of the Constitutional court of 3 May 2006 sp.zn. III. ÚS 649/05. In B2C relations a 0.67 % per day contractual penalty at credit contracts was satisfactory for the determination of the violation against the good morals, see Judgment of Supreme Court of 25 November 2009 sp. zn. 33 Cdo 1682/2007. 110 Judgment of Supreme Court of 14 October 2009 sp. zn. 31 Cdo 2707/2007 or Judgment of City Court Prague 8 of 27 May 2015 sp.zn. 30 C 138/2014. 111 Judgment of the Supreme Court of 28 February 2017 sp. zn. 32 ICdo 86/2015. 112 Decision of the Constitutional Court of 11 November 2013 sp. zn. I. ÚS 3512/11. 113 ibid. See also Hulmák/Bezouška. 114 Judgment of the Supreme Court of 14 October 2009 sp. zn. 31 Cdo 2707/2007. 115 Judgment of the Supreme Court of 4 April 2016 sp. zn.23 Cdo 1749/2015. 116 ibid. 117 Judgment of the Supreme Court of 28 May 2008 sp. zn. 32 Odo 202/2006. 118 Judgment of City Court v J of 28 January 2014 sp. zn. 22 C 343/2013-38. 109

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contractual obligation119, was recognised as a violation against good morals. On the other hand, ‘a contractual fine that has been agreed as reasonable, and only the high amount of the debt, which had risen due to the duration of the debtor’s delay’120, was not sufficient reason for moderating the contractual penalty as a breach of the principle of good faith and fair dealing. Nor can a contractual penalty of 1 % per day be seen as sufficient reason for moderating B2B contracts without further facts of the case that would constitute a violation of good morals.121 b) Good faith. The new Civil Code does not contain an express definition of the 61 principle of good faith; § 6 Civil Code just lists behaviour that is contrary to good faith. The Czech literature defines good faith and delimits it from bona fide behaviour with the help of the Art. I.–1:103 DCFR and states,122 that as long the first is suspected as objective, the second as a subjective category.123 ‘Good faith and fair dealing’ expresses a particular standard of behaviour in legal relations, which – similar to Art. I.–1:103 DCFR – shows honesty, openness, and consideration for the interest of the other contractual partner. The former civil Code did not manifest neither good faith nor bona fide as a general principle, but although bona fide was named in various rules of the Civil Code, good faith was not even mentioned. On the other hand, good faith and fair dealing was named in § 265 of the former Commercial Code as general principle, which stated ‘The exercise of the law, which is contrary to the principles of fair trade, does not enjoy legal protection’. The new Civil Code elevated good faith to a general principle, where fair dealing should be expected for the parties not just at the moment of conclusion of contract but also in contract negotiations.124 § 7 Civil Code presumes bona fide behaviour.125 Nevertheless, the literature delivers several functions of this principle, such as corrective, interpretive or supplementary,126 and agrees with Hesselink127, that a theoretical variety of the satisfaction of this principle has not been greatly relevant; the more significant aspect is how the courts apply this principle. Interestingly, the former court practice dealt more with the principle bona fide 62 behaviour than with good faith, but in several cases is hard to distinguish whether the court meant good faith or bona fide.128 The most citied case for good faith – beyond the upon described cases, where good morals and good faith are interfering – concerns the refusal by an insurer to perform his obligations under the insurance contract on the basis that the terms of insurance were not sufficiently defined and comprehensible. The Supreme Court stated: ‘However, this inequitable benefit is a factual inequality due to the fact that the insurance company, with the help of its professional body, formulates the insurance conditions itself, while the client’s possibilities to examine the conditions in detail are limited, especially if they exceed the associated costs (e.g. legal aid or missed time) a possible benefit. In such a situation, the court of appeal considers it fair that the 119 Judgment of Supreme Court of 19 June 2018 sp. zn. 23 Cdo 1747/2018-526, also held by the decision of Constitutional Court of 13 November 2018 sp. zn. I. ÚS 3210/18. 120 Judgment of the Supreme Court of 4 April 2016 23 Cdo 1749/2015. 121 Judgment of the Supreme Court of 14 October 2009 sp. zn. 31 Cdo 2707/2007. 122 Melzer/Tégl to § 6, 105. See Lavicky Občanský zákoník I/Lavicky to § 6. 123 Some scholars are against these subjective/objective distinguishing see Švestka Občanský zákoník V/ Pelikánová/Pelikán 36. 124 Lavicky Občanský zákoník I/Lavicky to § 6 77. 125 A person who acted in a certain way is presumed to have acted fairly and in good faith. See Melzer/ Tégl to § 7, 130. 126 Lavicky Občanský zákoník I/Lavicky to § 6 78. 127 Hesselink 288. 128 See Decision of the Constitutional court of sp.zn. II. ÚS 3/06 or II. ÚS 2877/10.

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interpretation of the unclear provisions of the policy conditions has to be borne by the insurer, which has itself formulated it129.’ Therefore, the insurer cannot be released of his obligation in the case that he caused the incomprehensibility of the contract provisions. c) Weaker party protection. The principle of weaker party protection gained a fundamental status in the new Civil Code130 and is reflected in some special norms, such as laesio enormis, usury, contract of adhesion, and shorting of the limitation period or the limiting of compensation for damages at the expense of weaker party. As already mentioned,131 the legislator left a very narrow scope to apply this principle in B2B contracts. Although the Civil Code does not provide concrete factors for determining the stronger party, the literature refers to financial strength, vertical integration, information asymmetry and the advantage of access to advanced technologies.132 Whether it will be possible for the courts to deliver some analogy from competition law (e.g. abuse of dominant position) into contract law is still disputed, and so the answer stays open and vague. Nevertheless, the literature warns of taking too wide a determination of a weaker party position, because in the broad application of § 433 Civil Code to transactional practices (for example, in the context of distressed transactions, if the seller of a declining plant (such as through classical Sales and Purchase Agreements) should be viewed automatically as the weaker party). A similar widening could completely paralyse standard practices in the area of mergers and acquisitions.133 64 Current case law contains just two cases that addressed problems with the protection of the weaker party. One dealt with a controversial bill of exchange in a leasing contract; the other with arbitration clauses and, within them, the appointing authority of the stronger party. In the first case, the argumentation of the lessee regarding the necessity to protect the weaker party was unsuccessful;134 in the second, the Court of Appeal did take the protection of the weaker party into consideration: 63

‘Generally it is valid, if an entrepreneur has the knowledge and experience acquired in the course of his business or otherwise as an expert, it is his advantage that he can use it in his own business. However, if he abuses this advantage at the expense of the protection of the weaker party, the provisions of § 433 should be applied.’135 65

After balancing the freedom of appointing authority and the right to fair procedure, the court deliberated whether the stronger party has an exclusive right to appoint one special person, who has a financial interest in cooperating with the stronger party – because he handled more than one hundred cases a year for the stronger party. ‘Consequently, arbitration agreements whereby an arbitrator who is not designated in a transparent manner is to decide solely on the basis of the principle of fairness and at the same time is deprived of his right to bring an action before a civil court is considered inadmissible as a result of a violation of the right to a fair trial within the meaning of Art. 36 (1) of the Charter of Fundamental Rights and Freedoms No. 2/1993 Coll. It has been repeatedly stated by settled case-law that if parties to a private law relationship waive the right to judicial protection guaranteed 129

Judgment of Supreme Court of 5 August 2008 sp.zn. 28 Cdo 864/2008. See § 433 Civil Code. 131 See mn. 21. 132 Lavicky Občanský zákoník I/Lavicky to § 433 1653. 133 ibid. 134 Judgment of the Supreme Court of 30 November 2016 sp. zn. 29 Cdo 4819/2015. 135 Judgment of the county Court Hradec Králové of 31 July 2017 sp. zn. 27 Co 139/2017. 130

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by the State by arbitration clause, this does not mean that there is room for arbitrariness (…).’136 The County Court of Hradec Králové therefore annulled the decision of the arbitrator according to § 433 Civil Code, interestingly with an absolute invalidity, although in the literature it is undisputed that only relative invalidity can be stated that in a case of weaker party protection.

4. Generally prohibited terms As Table 1 on unenforceable contractual terms showed,137 the legislator differentiates 66 between whether it is a private person or a legal entity, that he wishes to protect, and also how far it wants to ensure the protection. Some terms, such as the exclusion of obligations due to statutory liability, compensation for damage caused intentionally or due to gross negligence, and reduction of the period for asserting rights arising from defective performance are generally prohibited in both B2C and B2B contracts. Others, such as the agreement on the time of performance or statutory default interest rate, if they derogate from the usual provisions, are only invalid if they are grossly unfair to the creditor. Where most of the terms listed in Table 1 are concerned, case law regarding the new Civil Code is lacking, therefore the most important former judicial review practice regarding to limiting liability and shortening the prescription period will be mentioned. The former Civil Code did not deal with the problem of exclusion or limitation of 67 compensation for damage, but the courts often solved this problem with applying the general prohibition to waive future rights according § 574 of the former Civil Code.138 For B2B contracts, the majority of the scholars139 agreed on the possibility of excluding or limiting compensation for damage according to § 386 Commercial Code but the courts were not consistent. While one Supreme Court judgment disallowed the limitation of damages in one contract on providing legal services,140 another failed to evaluate the problem of the exclusion and eventually allowed the limitation based on the contractual freedom.141 It will be interesting to see whether the courts will apply weaker party protection in such cases of compensation waiver. It is strongly debated in the literature whether these rules apply only for tortious (delictual) or also for contractual liability.142 § 630 Civil Code (which was inspired by Art. III.–7:601 DCFR) allows the prescrip- 68 tion period to be changed, unlike the previous regulation,143 but this freedom is not unlimited. The prescription period can be neither longer nor shorter than the prescribed minimum and maximum – which are, according to § 630(1), between 1 and 15 years – if it would result disadvantages for the weaker party.

5. Control of contracts of adhesion a) Illegible and incomprehensible clauses. According to § 1800 (1) Civil Code, the 69 legislator protects weaker parties – both in B2B and B2C contracts – against illegible 136

ibid. See above, mn. 34. 138 Judgment of the Supreme Court of 27 February 2013 sp. Zn. 23 Cdo 1098/2012. 139 Šilhán 92. 140 Judgment of Supreme Court of 27 March 2008 sp. zn. 32 Odo 1651/2005. 141 Judgment of Supreme Court of 30 September 2008 sp. zn. 32 Odo 739/2006. 142 Melzer/Tégl to § 2898 69. 143 Ministry of Justice of the Czech Republic § 630, 152. 137

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and incomprehensible contract clauses in contracts of adhesion. However, this is not in every case. Invalidity of the clause requires it to harm the weaker party or that the clause was not sufficiently explained to the adhering party. The benchmark regarding incomprehensibility is a person of average intelligence, but we can see a substantial distinction in the cogency of invalidity depending on whether B2C and B2B contracts are at issue. Illegible and incomprehensible terms are generally invalid in B2C contracts, the parties cannot waive this, e.g. by a contractual agreement; however, invalidity in B2B relationships generally applies just for clauses outside of the main contract body (for standard terms), providing that the stipulator of the contract acts in a manner that is grossly inconsistent with normal business practices or contrary to the principle of fair dealing. In B2B contracts, these norms are not binding for contractual clauses; the contractual partners can waive such rights and obligations and the weaker party’s protection only extends over a very restricted spectrum.144 The provisions, which were inspired by Art. II.–9:405 DCFR, lose their fundamental importance, because their applicability is very limited in the Czech Civil Code.145 Unlike the Civil Code, the rule under the DCFR also applies if the unreadable and incomprehensible term is placed in the main body of the contract. 70 The former case law defined business practices very broadly: all uses, which are established and respected among business partners count as business practices, but not every common behaviour by a business partner.146 These practices may be applicable to trade in general, to a sector a particular type of business, or may be limited by a particular business field. Regarding fair business dealing, judgments mention that, besides good morals, the principles of honest business conduct allow for the particularities of the professional relationships in the business environment and its specific ethics,147 but it is not used as a corrective factor in relationships with weaker parties. Some other judgments underline that ‘the correction of the principles of fair business dealing should apply as an ultima ratio, in exceptional cases, to mitigate or eliminate the excessive hardness of the juridical act in a situation where granting the claimed right would be extremely unfair’148. b) Particularly disadvantageous clauses. Similar to illegible and incomprehensible terms, the new Civil Code deems particularly disadvantageous clauses as invalid in order to protect the weaker parties in B2B and B2C contracts. The precondition for invalidity is that there is no reasonable ground for that disadvantage. One of the examples listed is if a contract significantly and for no special reason derogates from the usual terms stipulated in similar cases. 72 These norms have a subsidiary effect, as a corrective requirement for rebalancing disproportionate business relations, if no other special norm is available e.g. lesion according to § 1793 Civil Code, generally prohibited terms (see above) or incomprehensible clauses. § 1800(1) Civil Code would affect. The practical effect of these requirements is that they lead to different contractual consequences, compared to other previously named special norms. The main result of particularly disadvantageous clauses can be that the clause is rendered invalid, but if the fair arrangement of rights and duties of the parties necessitates the second sentence of § 1800(2) Civil Code, modification of the contract by the court may be allowed.149 Whether the reason for 71

144

See also Hulmák Občanský zákoník V/Petrov 355. Similar ibid.; Skalská 51. 146 Judgment of the Supreme Court of 22 March 2011 sp. zn. 32 Cdo 4932/2009. 147 Judgment of the Supreme Court of 20 January 2009 sp. zn. 29 Cdo 359/2007. 148 Judgment of the Supreme Court of 21 February 2012 sp. zn. 32 Cdo4267/2010. 149 See also Hulmák Občanský zákoník V/Petrov 351. 145

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invalidity only consists of determining the quantitative, temporal, spatial or other scope to be unlawful, according to § 577 a court shall change the scope so that it is consistent with an equitable arrangement of the rights and duties of the parties. However, in B2B contracts the invalidity applies generally just for clauses outside of the main contract body (for standard terms), similar to unreadable and incomprehensive terms. How far these control mechanisms will gain importance in the future court practice is 73 an open question. The subsidiarity of these norms can help in problematic cases where the weaker party cannot base its argumentation in legal disputes on other specific norms.

6. Control mechanisms for standard business terms a) Surprising terms. As already mentioned, surprising terms are an important 74 exception from applicable clauses in standard terms. Similar to the PICC, the Czech legislator states, that the surprising character of the term can be based not only on its content, but also on the language or presentation of the term – according to the second sentence of § 1753 Civil Code, on the manner in which the term is expressed.150 The norm applies in B2B and B2C relationships. For the provision to be applicable, the literature underlines the necessity of one 75 subjective and one objective element to fulfil the requirement of ‘surprising’. In B2B contracts, surprising should be stated objectively, in accordance with the usual customs of the specific business field and to the special contract type or usual content of these contracts, e.g. usual guarantee commitments or previous business customs between the two parties.151 The subjective element is the concrete effect on the adhering party but, according to the general rules of § 4 Civil Code, the intellect of an average individual and the ability to use it with ordinary care and caution is presumed of the adhering party. As this party is a professional, he should also handle his affairs with professional care according to § 5(1), which means he should be able to act with the knowledge and care associated with his occupation or profession. The specific business field can be important.152 According to scholars, the court should in future scrutinise the specific circumstances of the contract, e.g. the placement of the term, its special lettering e.g. bold letters for the terms and if the adhering party eventually signed this special, unusual term. Some literature also delivers guidance for businesses on how to avoid the invalidity of surprising terms.153 As an analogy to the invalidity of unfair contract terms in consumer contracts according to § 1815, scholars agree on the ex tunc ex officio effect of surprising clauses,154 but some also mention their erga omnes effect,155 which can be controversial because of the subjective element in the application of the statute. The formal element of a surprising term was examined under the former case law, 76 particularly regarding the placement of guarantee commitments,156 prolongation of the contract,157 and identification of the real estate,158 but the courts did not find the placement of these clauses outside of the main contract body to be problematic and therefore no surprising element was found in these cases.159 Some courts however refer 150

Eliáś et al. 716. See more detail in Hulmák Občanský zákoník V/Hulmák 170–171. 152 ibid. 153 ibid. 171; Bejček/Kotásek/Přikazská 170. 154 Bejček/Kotásek/Přikazská 160. 155 ibid. 156 Judgment of the Supreme Court of 18 August 2015 sp. zn. 23 Cdo 129. 157 Judgment of the Supreme Court of 6 September 2016 sp. zn 23 Cdo 240/2015. 158 Judgment of the Supreme Court of 30 November 2016 sp. zn. 22 Cdo 2526/2016. 159 See also Hulmák/Bezouška 10. 151

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to more strict formal conditions regarding the transfer of business shares, but have no problem with placing the price agreement outside of the main contract text.160 According to the Supreme Court ‘it is not excluded that the price agreement on the transfer of the business share forms a part of the annex to the contract. However, such an agreement must always be in written form, given the prescribed written form of the contract for the transfer of the business share.’ 77

Regarding contractual penalties in standard terms, the judgment under the former Civil and Commercial Codes differed between B2C and B2B contracts. A more restrictive approach is visible for B2C contracts, and the Constitutional Court prohibited161 the use of contractual penalty clauses in standard terms. A similar fate was met by arbitration clauses in consumer contracts,162 and a decision of the Constitutional Court163. It should be underlined that this prohibition does not apply to any business group, even for SMEs. According to the prevailing jurisprudence, the content of the standard terms is unlimited; different fees, technical documentation and geometric plans could also be part of the annexes to the contract.164 In the past, surprising or invalid terms in B2B contracts were presumed as just standard terms, which were contradictory to cogent legal norms.165 Whether the case law will take a more restrictive approach also in B2B relationships in the future cannot be presumed.

b) Unilateral change of terms in the case of long term performance. Unlike the former Civil and Commercial Codes, the new Civil Code sets limits on the modification of general business terms in the case of long-term recurrent performance contracts, if the contracting party deals with a several persons. According to § 1752 Civil Code, if the nature of the obligation already indicates that subsequent changes of standard terms will reasonably be necessary, the parties may agree that the stipulator amends the standard terms, but just to an appropriate extent. Two cumulative conditions are necessary for the validity of the amendment-agreement according to the second sentence of § 1752 (1) Civil Code: first, the manner in which the change should be announced must be agreed; and second, the adhering party should gain the right to reject the amendments, and in parallel also to withdraw from the obligation in due time. 79 § 1752 Civil Code, which is applicable to B2B and B2C relationships, introduces many new but unclear definitions, which should be clarified by the courts. The definition of ‘due time’ seems problematic. According to the provision it means that the adhering party can negotiate with another supplier on similar performances: ‘…with a notice period sufficient to procure similar performances from another supplier’ is how the norm describes it, although it is uncertain whether this can go further than similar sector-specific acts: for example, the Act on electronic communication166 requires withdrawal rights. 80 It is interesting that the legislator protects the right to withdrawal in the case of unilateral changes of standard terms, including those in B2B relationships. The last half sentence of § 1752 Civil Code negates withdrawal clauses which link termination to a special duty at the expense of the terminating party. Such protective requirements are 78

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Judgment of the Supreme Court of 5 April 2006 sp. zn. 29 Odo 221/2005. Decision of 11 November 2013 sp. zn. I. ÚS 3512/11. 162 Judgment of the Supreme Court of 11 May 2011 sp. zn. 31 Cdo 1945/2010. 163 Decision of the Constitutional Court of 27June 2017 sp. zn. I. ÚS 1274/16. 164 Judgment of the Supreme Court of 16 November 2004 sp. zn. 22 Cdo 356/2004. 165 Judgment of Higher Court in Olomouc of 27 March 1997 sp. zn. 2A 9/96. 166 § 63 (6) of zákon č. 127/2005 Sb. ze dne 22. února 2005 (Act on Electronic Communication). 161

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exclusively known in B2C relationships, not in B2B, so we could claim that this norm treats B2B relationships with an exceptionally high level of care, similar to B2C relations. It is unclear whether the legislator left open the acceptable extent of amendment; 81 § 1752(2) just stipulates that the modification is invalid if the extent of the modification was not justified by two circumstances: if the reasons for the changes are based on conditions that the stipulator must have expected at the contracting time; or if it is caused by changes in his personal or property situation. Scholars cite particular market developments or unexpected regulatory changes as valid reasons for amendments.167 The new rules are already controversial, as discussed in the literature.168 The critics argue that, regarding B2C contracts, a similar prohibiting norm already exists in Annex 1(j) Unfair Terms Directive; therefore double-regulation is not necessary. The scholars also claim that the legislator should not regulate this issue regarding B2B contracts, but instead leave it flexible according to business practice, because the courts have been dealing with unilateral contract changes for a long time, in an appropriate way169. The case law based on the former Codes addressed changes of contracts and standard 82 terms with the same formalities – with the exception of when the parties expressly agreed on them – as when first concluding the contract. The key rule in past practice was that written contractual clauses could only be changed in written form, a principle that also applied to standard terms if the parties did not agree otherwise in the contract.170 The main argument by the court was that the Commercial Code (or the Civil Code) does not provide for the change of standard terms – which are part of the main contract – for any regime than for the contract itself. Therefore, if the contractual parties did not agree in the contract or in the standard terms, on a special way of changing the standard terms (for example, by simply delivering to the other party), the same conditions apply as for changing the content of the contract itself.171 For the same reasons, the Supreme Court judged that the unilateral delivery of the 83 proposal on Supplement No 1 on the defendant’s Standard Terms did not change the content of their commitments.172 The former case law also created a limitation for changes of terms in the case of long term-performance, whereby the court clarified that changes should be based on objective criteria. In the case of mortgage contracts, a change to the basic interest rate therefore cannot be based on the criterion of how the interest rate of the interbank deposit market is changing according to the bank’s own resources, because ‘own resources’ is not objective.173 Whether and how court practice might change in the future is yet not predictable.

IV. International application This section briefly addresses whether the Czech rules on the control of contract 84 content can be understood as overriding mandatory provisions in the sense of Art. 9 167 Hulmák Občanský zákoník V/Hulmák 164. The literature is against a wider invalidity, how other scholars presume it, see Švestka Občanský zákoník V/Pelikánová/Pelikán 72. 168 Bejček/Kotásek/Přikazská 201; Hulmák Občanský zákoník V/Hulmák 162; Liška 192. 169 More detailed Bejček/Kotásek/Přikazská 201. 170 Judgment of the Supreme Court of 29 May 2008 sp. zn. 32 Odo 890/2006, Judgment of the Supreme Court of 30 March 2010 sp.zn. 32 Cdo 4167/2008. 171 Judgment of Supreme Court of 27 February 2013 sp. zn. 23 Cdo 1098/2012. 172 ibid. 173 Judgment of the Supreme Court of 31 May 2006 sp. zn. 29 Odo 1000/2004.

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Rome I and if the application of foreign law or recognition and enforcement of judgment disregarding the rules on the control of contract contained in the Czech Civil Code would be refused on grounds of incompatibility with the public policy (ordre public) of the Czech forum. 85 As regards the legal regulations it has to be noted that the Czech Republic, as an EU Member State, in the first place applies the EU instruments harmonising conflict of laws rules and conditions of recognition and enforcement of foreign court judgments. In B2B contractual relations the Rome I and Brussels I bis Regulation are particularly relevant.174 Czech law provides for an express regulation of overriding mandatory rules and public policy exception in the Private International Law Act.175 This Act only applies outside of the scope of the directly applicable provisions of the EU law and promulgated international treaties by which the Czech Republic is bound.

1. Overriding mandatory rules The main question is whether Czech rules on the control of contract content are of such nature that a Czech court would apply them in an international commercial dispute even where the parties chose different law as the lex contractus. 87 In the terminology of private international law the rules that shall be applicable irrespective of the law otherwise applicable to the situation are referred to as overriding mandatory rules (in German Eingriffsnormen). Although the concept of these rules has long been part of the Czech legal doctrine,176 the terminology is not unified; the Czech official translation of the EU instruments also did not bring coherence. The inconsistency in the designation of the rules such as ‘imperativní’, ‘absolutně kogentní’, ‘nutně použitelné’, ‘mezinárodně kogentní’ requires in international cases a careful differentiation between internal mandatory rules which can be derogated from by a parties’ consent and the international mandatory rules (in the sense of Art. 9 Rome I) which can override the actually applicable law. 88 The Czech legal theory defines overriding mandatory provisions as mandatory rules that cannot be contracted out by the parties by choosing the law of another country.177 Since the recodification in 2014, Czech law (not only legal doctrine) has expressly recognised the existence of overriding mandatory rules which derive from (i) lex fori (i.e. the law of the state where the deciding body is seated)178 and (ii) the law of third countries which are also concerned with the subject-matter of the case.179 The latter category is under the autonomous Czech law construed more broadly than a compromise solution achieved in Art. 9(3) Rome I which includes only the relevant rules of lex loci solutions (i.e. of the law at the place of performance of the contract). 89 The characterisation of a certain rule as an overriding mandatory provision is not a clear-cut exercise. Traditionally, these rules were mainly provisions of public law provenience, such as price regulation, import and export restrictions, various tariff provisions, payment periods in banking transactions, rules on cartels and building safety codes, environmental and employees’ protection rules.180 With the move towards ‘publicization of private law’ the rules governing contracts can also have the nature of overriding rules. The Explanatory Report on the Czech Private International Law Act 86

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For details see the contribution by Pfeiffer, in this volume. Act No. 91/2012 Coll., on Private International Law (Private International Law Act). 176 Kučera 235–253; Pauknerová/Rozehnalová/Zavadilová 31–36; Bříza et al. 19–23. 177 Kučera 236; Pauknerová/Rozehnalová/Zavadilová 34. 178 See § 3 Private International Law Act. 179 See § 25 Private International Law Act. 180 Kučera 236; Pauknerová/Rozehnalová/Zavadilová 34; Bříza 22. 175

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refers to provisions that regulate contracts and have public law features, e.g. consumer protection rules.181 The consequences of the application of overriding mandatory rules or the recognition of their effects are usually twofold. A contract concluded in violation of the relevant legal provision is invalid or the performance of the contract becomes legally impossible.182 The Czech courts dealt with the issue of overriding mandatory rules sporadically. Case 90 law concerning the application of relevant provisions of the Rome I Regulation, its predecessor the Rome Convention and the Czech Private International Law Act is almost non-existent and, therefore, no detailed guidance on the characterisation of overriding mandatory provisions is available in B2B relations. The Supreme Court of the Czech Republic rendered a judgment dealing with overriding mandatory rules in 2008, in a dispute concerning involuntary termination of an employment relationship in which foreign law was chosen.183 The Constitutional Court touched upon this topic only recently in 2019 when reviewing the constitutionality of the Act on Register of Contract.184 In its judgment, the Supreme Court emphasised that mandatory provisions in the 91 sense of Art. 7 Rome Convention cannot be identified with mandatory rules of Czech law. Certain provisions of the previous Czech Labour Code dealing with the content of a termination notice and reasons for which the employer can unilaterally terminate the employment relationship185 are not, as such, mandatory rules in accordance with Art. 7 Rome Convention. The provisions in question protected the employee against termination of the employment relationship without a reason and imposed a requirement that the employer’s termination notice must contain a factual determination of the ground for which the employee is dismissed. It should be mentioned that at that time the previous Czech Labour Code,186 taken as a whole, was recognised as a mandatory rule from which parties to the employment relationship could not validly derogate and regulate their rights and obligations differently. As to the determination of overriding mandatory rules, the Supreme Court under- 92 lined that their subject matter must be of such an importance that the rules have to be applied, within their scope of application, irrespective of the law otherwise applicable to the situation. Considering the democratic values of the Czech Republic and the fundamental rights and freedoms which create the Czech legal order it is indisputable that, for example, provisions of the Czech Labour Code prohibiting direct and indirect discrimination in employment relations187 represent the type of rule which cannot be excluded by choosing foreign law. The fact that these rules are also ‘ordinary’ mandatory rules in the Czech legal order is not decisive; ‘the essential and irretrievable societal importance of the subject matter that they regulate’ is decisive.188 181

The Explanatory Report to Act No. 91/2012 Coll., on Private International Law, para. 3. Pauknerová/Rozehnalová/Zavadilová 35. 183 Judgment of the Supreme Court of 8 December 2008 sp. zn. 21 Cdo 4196/2007. 184 Judgment of the Constitutional Court of 22 January 2019 sp. zn. Pl. ÚS 32/17. 185 §§ 44 (2) and 46 (1) (a)-(f) of Act no. 65/1965 Coll., Labour Code. 186 The Labour Code in question was replaced by a new Labour Code (Act no. 262/2006 Coll.) with the effects as of 1 January 2007. 187 The Supreme Court referred to §§ 1(4) to 10 of Act no. 65/1965 Coll., Labour Code. 188 The Constitutional Court concurred with the reasoning of the Supreme Court as regards the narrow scope of overriding mandatory rules in decision sp. zn. I. ÚS 491/09 by which it dismissed constitutional complaint filed in the same dispute. The Constitutional Court ruled that not all mandatory rules of legis loci laboris have the nature of overriding mandatory rules. Unfortunately, the judgment mixes public policy exception with the institute of overriding mandatory rules while concluding that in the case at hand the application of the foreign law does not contravene the overriding mandatory rules of legis fori. At the same time the Constitutional Court emphasised that it did not analyse the scope of the overriding mandatory rules in the given case. 182

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In light of the Supreme Court’s judgment and Czech legal doctrine, it can be said that a rule to have the overriding effect will not protect merely private interest but an element of public interest will always need to be present. Provisions of private law aimed purely at re-balancing parties’s rights in a contractual relationship will probably not suffice.189 An overriding mandatory rule is usually a provision, clearly determinable which specifically defines its personal and territorial sphere of application and it is, thus, being applied in this specific narrow framework, unlike standard civil law rules.190 94 Whether some provisions of Czech civil law – particularly Czech B2B contract law – could belong to such overriding mandatory rules, resulting in some provisions in international B2B contracts being deemed invalid or impossible to perform because of their collision with the Czech rules, would need to be assessed individually in the actual case. The Civil Code contains a number of provisions which the parties in domestic transactions cannot derogate from but which in the context of international transactions can be contractually eliminated. In principle, mandatory rules of the Czech Civil code will not meet the parameters of the overriding mandatory rule. 95 Czech legal commentaries191 provide examples of overriding mandatory provisions that have their origin in the contract law at a general level, without specifying concrete pieces of legislation, which shall have such an effect. For instance, it is suggested that ‘some’ provisions regulating agency contracts, in particular minimum notice period, compensation after termination, lease contract,192 protection of consumers, restrictive provisions in deposit account agreements, and agreements on the management of security portfolios, are irreplaceable rules.193 96 Overriding mandatory rules limiting the parties’ autonomy in entering into contractual relationships have been recently formulated in the Act on Register of Contracts.194 Private-law contracts concluded as from 1 July 2016 are subject to mandatory disclosure in the Register of Contracts, provided that at least one contracting party is a public organisation.195 The definition of the public organisation is broadly construed and can encapsulate a B2B transaction. A contract becomes effective only upon its disclosure in the Register and if not disclosed, it shall be deemed invalid from the beginning.196 The Act expressly stipulates that its provisions are overriding mandatory rules.197 In its 93

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Bříza 21. Kučera 237. 191 Pauknerová/Rozehnalová/Zavadilová 34; Bříza 22. See also Bělohlávek (‘Public policy’) 143. 192 Whether certain provisions aimed at protecting tenants are of overriding mandatory nature is disputable. See Pauknerová/Rozehnalová/Zavadilová 35. 193 In the past certain provisions of the old Czech Commercial Code (Act no. 513/1991 Coll.) regulating financial and property transactions between related parties were considered overriding mandatory rules in accordance with Art. 9(3) Rome I. See Bělohlávek (‘Římská úmluva’) 1345. Even though § 196a of the former Commercial Code imposed restrictions on conclusion of loan agreements, purchase contracts and security instruments, the source of the restrictions lied in the company law which is outside the scope of this analysis. 194 Act no. 340/2015 Coll., on Special Conditions for the Effectiveness of Certain Contracts, the Disclosure of These Contracts and the Register of Contracts (Act on the Register of Contracts). 195 e.g. the Czech Republic, a local government unit, a state contributory organisation, a public research institution or a public university, a state or national company, a health insurance company, a legal entity in which the state or a local government unit has direct or indirect majority ownership, etc. 196 The sanction applies to contracts concluded on or after 1 July 2017. 197 § 8 (1) of the Act states: ‘This Act is applicable irrespective of the law governing the contract as determined in accordance with private international law rules.’ It must be noted that certain contracts are exempted from their mandatory disclosure, for instance contracts to be performed largely outside the Czech Republic or concluded with the public organisation which is a legal entity incorporated under foreign law and carries its activities largely outside the Czech Republic. 190

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recent judgment,198 the Constitutional Court confirmed the overriding effect of the Act in the sense of § 3 of the Czech Private International Law Act and Art. 9 Rome I, emphasised the purpose of the Act and the fundamental interest of the Czech legislature in its application in international relations.199

2. Public policy exception (ordre public) The institute of overriding mandatory provisions is closely linked with the ordre public. Even though the mechanisms operate differently they are often dealt with together or are even interchanged in the practice.200 Under the public policy exception, a legal provision of another state is not applied if the effects of such application would contravene the public order of the Czech Republic.201 Likewise, it is also not possible to recognise any foreign judgments, foreign arbitral awards or other documents or to recognise any legal relations or any facts, which have arisen abroad or according to foreign law on the same grounds.202 Ordre public embodies absolutely fundamental values on which the existence of the State depends and the principles of the rule of law.203 Public policy is far more narrowly defined category than public interest. In the employment case described in the preceding section,204 the Supreme Court held that reservation in favour of public policy is an exceptional institution that can only be taken into account where a certain provision of the foreign law, if applied in an actual case, would lead to consequences manifestly contrary to the public policy of the forum (ultima ratio). If, as a result of the choice of law, foreign law was applied which, unlike Czech law, were not to provide protection of the employment relationship as regards the specific reasons for which the employee can be dismissed and the mandatory description of the factual determination of such reason in the termination notice, such circumstance would not have effects that would conflict with Czech public policy in the sense of § 36 Czech Private International Law Act to such a degree that would infringe upon the fundamental principles of Czech legal order.205 The same considerations apply to the refusal of recognition and enforcement of foreign judgment on the grounds of the public policy defence. Legal regulations whose content could result in the application of the public policy exception on a national scale are, in particular, the Constitution of the Czech Republic (Constitutional Act no. 1/1993 Coll.), including the Charter of Fundamental Rights and Freedoms (promulgated under no. 2/1993). § 2(3) Civil Code sets out basic principles, 198

Judgment of the Constitutional Court of 22 January 2019 sp. zn. Pl. ÚS 32/17. The Constitutional Court held that the goal pursued by the Act (the access to information concerning contracts concluded with entities managing public resources) is of such importance that it elevates to public interest, which must be safeguarded even in international relations. 200 Decision of the Constitutional Court of 16 March 2009 sp. zn. I. ÚS 491/09. 201 Art.9 Rome I, § 4 of the Czech Private International Law Act. 202 See Art. 21 Rome I and § 4 of Act no. 91/2012 Coll., on Private International Law, 203 The Explanatory report to Act No. 91/2012 Coll., on Private International Law, para. 4 suggests that the corrective of ordre public shall include not only fundamental principles aimed at satisfying the basic interests of the State and society but also good morals. The Czech leading commentaries are silent on the latter point and assessment of the institute of good morals from the perspective of private international law has been so far unheeded. 204 Judgment of the Supreme Court of 8 December 2008 sp. zn. 21 Cdo 4196/2007. 205 The dispute before the Czech court over the termination of the employment relationship involved a Croatian citizen employed as a marketing manager by the Czech branch of Radio Free Europe, a legal entity incorporated in the United States. The workplace was agreed to be in the Czech branch office. The employee and the employer agreed that law of the United States of America, District of Columbia will govern their employment relationship. 199

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on which private law relies,206 and will be the starting point for assessing the compatibility of the effects of foreign law with Czech public policy in contractual relationships. The extent in which these principles attain the kind of gravity that would allow the court to take recourse to the public policy clause must be assessed in each individual case. On the basis of the reviewed case law the control by the public policy exception in B2B contracts is strictly limited. Objectionable will be in particular provisions of foreign law whose effect will lead to discrimination on the grounds of sex, nationality or race.207 On the other hand, a high contractual penalty or different prescription periods upon which rights become unenforceable are not to contravene the Czech ordre public. Nor can we find any indication whether a violation of the principle of weaker party protection would reach the sufficient gravity. The Supreme Court held that the enforcement of foreign decision awarding aggravate/punitive/damages should not be automatically denied even though the Czech legal system does not recognise the concept of sanction damages. However, the enforcement shall be refused on public policy grounds if the amount of such damages manifestly exceeds the caused harm.208 Similarly, a corrective mechanism might be applied with respect to B2B contractual exclusion or limitation of compensation for harm caused to a person’s natural rights, intentionally or due to gross negligence.209 206 The principles express the following values: (a) everyone has the right to protect his life and health, as well as freedom, honour, dignity and privacy, (b) family, parenthood and marriage enjoy special statutory protection, (c) no one may sustain unjustified harm due to insufficient age, mental capacity or dependency; however, no one may unreasonably benefit from his own inability to the detriment of others, (d) a promise is binding and contracts are to be executed, (e) right of ownership is protected by statutes, and only a statute can prescribe how the right of ownership is created and extinguished, and (f) no one may be denied what he is rightfully entitled to. 207 Standpoint of the Supreme Court of 27 August 1987 sp. zn. no. Cpjf 27/98. 208 Judgment of the Supreme Court of 22 August 2014 sp. zn. 30 Cdo 3157/2013. 209 § 2898 Civil Code.

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B. England & Wales Bibliography: Bradgate, ‘Unreasonable Standard Terms’ (1997) 60 Modern Law Review 582–593; Bridge, ‘Uniformity and Diversity in the Law of International Sales’ (2003) 15 Pace International Law Review 55–89; Devenney/Howells, ‘Performance and Breach’ in: Chen/DiMatteo (eds), Chinese Contract Law – Civil and Common Law Perspectives (CUP 2017) 323–350; Halson, Liquidated Damages and Penalty Clauses (OUP 2018); Havelock, ‘The “unitary exercise” of contractual interpretation’ (2017) 76 Cambridge Law Journal 486–489; Howarth, ‘The meaning of objectivity in contract’ (1984) 100 Law Quarterly Review 265–281; Law Commission, Unfair Terms in Contracts (Law Com. No. 292, 2005); Macneil, ‘Relational contract theory: Challenges and queries’ (2000) 94 Northwestern University Law Review 877–907; McMeel, ‘The rise of commercial construction in contract law’ [1998] Lloyd’s Maritime and Commercial Law Quarterly 382–393; O’Callaghan, ‘Protection from Unfair Suretyships in Ireland’ in: Colombi Ciacchi (ed.), Protection of Non-Professional Sureties in Europe: Formal and Substantive Disparity (Nomos 2007) 339–352; Peel, Treitel: The Law of Contract (15th edn., Sweet & Maxwell 2020); Stone/Devenney, The Modern Law of Contract (13th edn., Routledge 2019).

Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... III. Requirements and legal consequences ....................................................... 1. Statutory regulation of terms ................................................................... a) General regulation and the approach of the courts ...................... b) Other significant regulation................................................................ 2. Common law regulation of terms........................................................... a) Incorporation ......................................................................................... b) Interpretation ......................................................................................... c) Good faith – the winds of change? ................................................... d) The recognition of relational contracting........................................ e) More specific regulation of particular contractual terms ............ IV. International application ...............................................................................

mn. 1 2 7 7 7 16 21 21 24 35 47 53 58

I. Overview Although the law of England and Wales does not have provisions allowing for the 1 review of all terms in B2B contracts, a number of such clauses are subject to review through a patchwork of statutory and non-statutory provisions. Central to the statutory regulation in this area is the Unfair Contract Terms Act 1977 (‘UCTA 1977’). The title of this Act is misleading in that it generally only applies to exclusion or limitation clauses, although, as will be noted,1 a wide definition of such clauses is adopted. Where UCTA 1977 is applicable, it operates in two broad ways. In some situations UCTA 1977 renders clauses, at least to some extent, unenforceable.2 In other situations, UCTA 1977 subjects clauses to a reasonableness test by, to some extent, rendering them unenforceable unless reasonable.3 UCTA 1977 is flanked by the Misrepresentation Act 1967, s 34 (which essentially regulates the use of clauses excluding or limiting liability for misrepresentation) 1

See mn. 4. See, for example, UCTA 1977, s 2(1). 3 See, for example, UCTA 1977, s 3 in relation to particular standard form contracts. 4 Discussed below at mn. 16 et seq. 2

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and various common law devices5. In respect of the latter, this chapter will consider various common law mechanisms which, to some extent, allow for the review of particular clauses in B2B contracts. For example, a clause may be reviewed on the basis that it is potentially an unreasonable restraint of trade or in some other way potentially contravenes public policy.6 An agreed damages clause can also be reviewed by the courts to determine whether it is a valid liquidated damages clause or an invalid penalty clause,7 although the courts have been reluctant to interfere with agreed damages clauses in B2B contracts. This chapter will also consider recent case law which, despite a traditional hostility to general duties of good faith in the law of England and Wales, recognises that sometimes a contract may contain an implied term of good faith; and it will place this in the context of the emerging recognition of the concept of ‘relational contracting’ in England and Wales.

II. Regulatory framework The most significant general8 statutory provisions on the review of terms in B2B contracts in England and Wales are found in the Unfair Contract Terms Act 1977. Prior to 1 October 2015,9 this legislation contained provisions relating to B2B contracts and also (more favourable) provisions relating to B2C contracts. As a result of the Consumer Rights Act 2015 (CRA 2015), there is a much clearer separation between B2B and B2C contracts in England and Wales; and essentially UCTA 1977 now only regulates particular terms in B2B contracts, whereas the CRA 2015 only regulates particular terms in B2C contracts. Interestingly, prior to the CRA 2015 reforms, a company could sometimes be a consumer for the purposes of UCTA 1977, with the result that it received the greater protection afforded to consumers.10 However, the CRA 2015 applies only to ‘an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession’11 meaning that companies cannot be consumers under the CRA 2015 and so now only come within the more modest B2B protections in UCTA 1977.12 3 In addition to now generally only being applicable to B2B contracts, the application of UCTA 1977 is also limited in a number of other ways. First, a number of types of contract are excluded (or partially excluded) from its scope. For example, UCTA 1977 generally does not apply to insurance contracts, contracts concerning the creation or transfer of an interest in land, contracts concerning the creation or transfer of intellectual property rights, or contracts relating to the creation or transfer of securities.13 Moreover, UCTA 1977 has limited application to certain shipping contracts and contracts of employment.14 4 Secondly, the provisions of UCTA 1977 generally only apply in the context of ‘business liability’ which is defined as ‘…liability for breach of obligations or duties arising from things done or to be done by a person in the course of a business (whether 2

5

Discussed at mn. 21 et seq. See below at mn. 53. 7 See below at mn. 53 et seq. 8 There are also some very specific provisions such as under the Defective Premises Act 1972, s 6(3) which will not be discussed here. 9 See Consumer Rights Act 2015 (Commencement No. 3, Transitional Provisions, Savings and Consequential Amendments) Order 2015/1630. 10 See R & B Customs Brokers v UDT [1988] 1 All ER 847. 11 CRA 2015, s 2(3). 12 Compare the recommendations of the Law Commission in relation to small businesses: Law Commission, Part 5. 13 See UCTA 1977, Schedule 1. 14 ibid. 6

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his own business or another’s); or (b) from the occupation of premises used for business purposes of the occupier…’.15 Thirdly, and perhaps most significantly in the current context, UCTA 1977 does not regulate all types of contract term; rather UCTA 1979 focuses regulation on exclusion or limitation clauses. This, of course, raises the question of what constitutes an exclusion or limitation clause. In theory, the law of England and Wales recognises a difference between clauses which exclude/limit liability and clauses which define obligations.16 However, from a practical point of view, in many cases it is possible to rewrite an exclusion or limitation clause in terms of a clause which defines obligations. In other words, clever drafting can potentially frustrate the statutory regulation of exclusion or limitation clauses.17 UCTA 1977 responds to this challenge partly by adopting a wide definition of an exclusion/limitation clause: s 13. UCTA 1977 Varieties of exemption clause (1) To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents – (a) making the liability or its enforcement subject to restrictive or onerous conditions; (b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy; (c) excluding or restricting rules of evidence or procedure; and (to that extent) sections 2 , 6 and 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty. (2) But an agreement in writing to submit present or future differences to arbitration is not to be treated under this Part of this Act as excluding or restricting any liability.

Thus ‘disclaimers’ – which seek to prevent a duty of care in tort arising (for example, 5 ‘no responsibility is accepted’) – have been held to come within s 13 and, therefore, UCTA 1977;18 although the courts have struggled to articulate when a disclaimer is an exclusion/limitation clause for these purposes and when it is merely defining obligations.19 As noted above, UCTA 1977 is flanked by the Misrepresentation Act 1967, s 3 and 6 various common law devices, both of which will be discussed below.20 15 UCTA 1977, s 1(3). An exemption to this principle is UCTA 1977, s 6(4) in relation to liability arising under certain statutory terms: see below at mn. 19 et seq. 16 See Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57 at [36] per Lord Toulson: ‘If a decorator agrees to paint the outside woodwork of a house except the garage doors, no-one can seriously regard the words of exception as anything but a convenient way of defining the obligation; it would surely make no difference if the promise were to paint the outside woodwork with a clear proviso that the contractor was not obliged to paint the garage doors, or if there were a definition clause brought to the promisee’s attention saying that “outside woodwork” did not include the garage doors. Such provisions do not … deprive the promisee of a right of a kind which social policy requires that he should enjoy, nor do they … give the promisor the advantage of appearing to promise more than he is in fact promising’. 17 Compare Cremdean Properties v Nash [1977] 2 EGLR 80 per Bridge LJ: ‘But I would go further and say that if the ingenuity of a draftsman could devise language which would have that effect, I am extremely doubtful whether the court would allow it to operate so as to defeat section 3. Supposing the vendor included a clause which the purchaser was required to, and did, agree to in some such terms as “notwithstanding any statement of fact included in these particulars the vendor shall be conclusively deemed to have made no representation within the meaning of the Misrepresentation Act 1967”, I should have thought that that was only a form of words the intended and actual effect of which was to exclude or restrict liability, and I should not have thought that the courts would have been ready to allow such ingenuity in forms of language to defeat the plain purpose at which section 3 is aimed’. 18 See Smith v Eric S Bush [1990] AC 831. 19 Compare IFE Fund SA v Goldman Sachs International [2007] EWCA Civ 811 and Aurora Fine Arts Investment Ltd v Christie, Manson and Woods Ltd [2012] EWHC 2198 at [136]–[146] per Newey J. 20 Discussed at mn. 16 et seq.

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III. Requirements and legal consequences 1. Statutory regulation of terms 7

a) General regulation and the approach of the courts. The most significant general statutory provisions on the review of terms in B2B contracts in England and Wales are found in the Unfair Contract Terms Act 1977 (UCTA 1977). Where UCTA 1977 is applicable, it operates in two broad ways. In some situations UCTA 1977 renders clauses, at least to some extent, unenforceable. Thus UCTA 1977, s 2(1) provides that a ‘person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.’21 Similarly UCTA 1977 s 6(1) provides: s 6. UCTA 1977 Sale and hire purchase Liability for breach of the obligations arising from – (a) section 12 of the Sale of Goods Act 1979 (seller’s implied undertakings as to title, etc.) 22…cannot be excluded or restricted by reference to any contract term.

This is extended and adapted to other supply of goods contracts by virtue of UCTA 1977, s 6(1)(b) and s 7(3A). 9 In other situations, UCTA 1977 subjects clauses to a reasonableness test by, to some extent, rendering them unenforceable unless reasonable. Thus UCTA 1977, s 2(2) provides: ‘[in cases of loss other than death or personal injury], a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.’ Similarly in sale of goods contracts not failing within the scope of the Consumer Rights Act 2015 liability for breach of the implied obligations that the goods correspond to description,23 are of satisfactory quality,24 are fit for purpose25 and correspond with sample26 cannot be excluded or limited unless the relevant term satisfies a test of reasonableness.27 Of more general application is s 3: 8

s 3. UCTA 1977 Liability arising in contract (1) This section applies as between contracting parties where one of them deals on the other’s written standard terms of business. (2) As against that party, the other cannot by reference to any contract term – (a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or 21 Emphasis added. Negligence is defined in s 1 as ‘…the breach – (a) of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract; (b) of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty); (c) of the common duty of care imposed by the Occupiers’ Liability Act 1957…’. 22 The most powerful of these obligations is contained in the Sale of Goods Act 1979, s 12(1): ‘In a contract of sale, other than one to which subsection (3) below applies, there is an implied term on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass.’ 23 Sale of Goods Act 1979, s 13. 24 Sale of Goods Act 1979, s 14(2). 25 Sale of Goods Act 1979, s 14(3). 26 Sale of Goods Act 1979, s 15. 27 UCTA 1977, s 6. A similar position is found in relation to similar obligations in other contracts for the supply of goods: see s 6(1A) and s 7.

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B. England & Wales (b) claim to be entitled – (i) to render a contractual performance substantially different from that which was reasonably expected of him, or (ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness. A number of points need to be made in respect of this provision. First, ‘written 10 standard terms of business’ is not defined but it is probably the case that the individual negotiation of some of the terms of the agreement will not necessarily prevent them from being ‘standard’. In St Albans City and District Council v International Computers Ltd28, the Court of Appeal rejected an argument that the terms were not ‘standard’ because the contract had been preceded by negotiation and in African Export-Import Bank v Shebah Exploration and Production Co Ltd29 the Court of Appeal held that a party could still be said to deal on the ‘other’s written standard terms of business’ if there had been insubstantial amendments to those terms. It has sometimes been suggested that in such cases the exclusion clause itself must remain part of the standard package although in African Export-Import Bank v Shebah Exploration and Production Co Ltd the Court of Appeal stated, in a slightly obscure way, that there was no requirement that there had to be negotiation in relation to the relevant exclusion clauses for s 3 to be inapplicable.30 Regularity of use may point towards terms being ‘standard’ but it is not necessary that they are always used by the relevant party.31 Secondly, s 3(2)(b) explicitly extends the range of clauses caught by s 3. This 11 provision was considered in Paragon Finance plc v Staunton32, a case where a mortgage contract gave a mortgage provider a complete discretion to alter the interest rate payable by the customer. The Court of Appeal held that s 3(2)(b) was not engaged as this was not a situation where the mortgage provider was claiming to be able to render a substantially different performance in respect of its own performance; rather this was the mortgage provider altering the performance of the other party.33 Where, as with s 3, a term is subjected to a test of reasonableness, what factors are 12 relevant to that assessment? UCTA 1977, s 11 provides a quite general stating point: s 11. UCTA 1977 The “reasonableness” test (1) In relation to a contract term, the requirement of reasonableness…is that the term shall have been a fair and reasonable one to be included having regard to the circumstances 28

[1996] 4 All ER 481. [2017] EWCA Civ 845. 30 ibid., at [36]. 31 Chester Grosvenor Hotel v Alfred McAlpine Management Ltd (1991) 56 BLR 115 and African ExportImport Bank v Shebah Exploration and Production Co Ltd [2017] EWCA Civ 845. More recently in University of Wales v London College of Business Limited [2015] EWHC 1280 (QB) at [93] HHJ Keyser QC stated: ‘I do not consider that the retention of a stock of forms is necessary; a set of terms may be both written and standard even if it is held on the computer and printed as and when necessary. Negotiation or even minor modification does not necessarily preclude the application of section 3; if it did, the effect of the section could be easily avoided.’ 32 [2002] 2 All ER 248. 33 However, the Court of Appeal implied a term that the rate of interest would not be set dishonestly, capriciously or arbitrarily. See also British Telecommunications Plc v Telefónica O2 UK Ltd [2014] UKSC 42 at [37] per Lord Sumption: ‘As a general rule, the scope of a contractual discretion will depend on the nature of the discretion and the construction of the language conferring it. But it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously’. 29

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Part 1. Country Reports which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made… (4) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to – (a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and (b) how far it was open to him to cover himself by insurance. (5) It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does.”

UCTA 1977, s 11 is supplemented by UCTA 1977, Schedule 2:

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Schedule 2 UCTA 1977 “Guidelines” for application of reasonableness test The matters to which regard is to be had in particular for the purposes of sections 6(1A), 7 (1A) and (4), 20 and 2134 are any of the following which appear to be relevant – – the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met; – whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term; – whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); – where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable; – whether the goods were manufactured, processed or adapted to the special order of the customer.35

14

UCTA 1977, s 11(1) makes it clear that the reasonableness of a clause36 is to be assessed as matters appeared at the time the contract was concluded, although the courts have sometimes suggested that subsequent factors may also be relevant.37 UCTA 1977, s 11(5) makes it clear that the burden of proof is on the party claiming that a particular clause is reasonable and the House of Lords (now the Supreme Court) was of the opinion that an appeal court should be slow to depart from the a trial judge’s assessment of reasonableness.38 Overall the courts in England and Wales have been very reluctant to find clauses in a B2B context to be unreasonable.39 For example, in Watford Electronics Ltd v Sanderson CFL Ltd40 Chadwick LJ stated: “Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should in my view be taken to be the best judge of the commercial 34 These factors have been applied more generally under UCTA 1977: see Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 2 Lloyd’s Rep 273. 35 Formatting added by author. 36 Generally, this means the whole clause: see Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600. However, where a clause contains, in effect, two separate parts, it may be appropriate to assess those parts individually: see Regus (UK) Ltd v Epcot Solutions [2008] EWCA Civ 361. 37 See, for example, Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 2 Lloyd’s Rep 273. 38 See George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803. 39 See Stone/Devenney, 261 et seq. 40 [2001] EWCA Civ 317.

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fairness of the agreement which they have made; including the fairness of each of the terms in that agreement. They should be taken to be the best judge on the question whether the terms of the agreement are reasonable. The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other – or that a term is so unreasonable that it cannot properly have been understood or considered – the court should not interfere.”41 Similarly, in Granville Oil & Chemicals Ltd v Davis Turner & Co Ltd42 Tuckey LJ 15 commented (pre-CRA 2015): “I am pleased to reach this decision. The 1977 Act obviously plays a very important role in protecting vulnerable consumers from the effects of draconian contract terms. But I am less enthusiastic about its intrusion into contracts between commercial parties of equal bargaining strength, who should generally be considered capable of being able to make contracts of their choosing and expect to be bound by their terms.”43 b) Other significant regulation. UCTA 1977 also made provision for clauses which 16 purport to exclude or limit liability and/or remedies for misrepresentation by substituting a new s 3 into the Misrepresentation Act 1967: s 3. Misrepresentation Act 1967 Avoidance of provision excluding liability for misrepresentation (1) If a contract contains a term which would exclude or restrict – (a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or (b) any remedy available to another party to the contract by reason of such a misrepresentation, that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.

As is the case with the provisions in the main body of UCTA 1977, there can 17 sometimes be difficult questions as to whether a particular term excludes/limits liability (and is, therefore, caught by s 3) or whether it merely defines obligations (and is, therefore, not caught by s 3).44 Similarly, there is the policy not to allow statutory regulation to be side-stepped merely by clever drafting.45 In recent years, the courts have needed to explore whether or not non-reliance or equivalent clauses (clauses which seek to avoid any liability for misrepresentation on the ground that the putative misrepresentee states, whatever the true position, that they did not rely on any representation) fall within s 3 and, until recently, a rather incoherent body of case law had emerged.46 Some clarity has been given to this area by the Court of Appeal decision in First 18 Tower Trustees Ltd, Intertrust Trustees Limited v CDS (Superstores International) Limited.47 Two substantive judgments were given in this case (Lewison and Leggatt LJJ with Sir Colin Rimer concurring with both judgments). The Court of Appeal accepted 41

ibid., at [55]. [2003] EWCA Civ 570; [2003] 2 Lloyd’s Rep 356. 43 ibid., at [31]. 44 Compare JP Morgan Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm) at [602]–[603] per Gloster J. 45 See Cremdean Properties v Nash [1977] 2 EGLR 80. 46 Stone/Devenney, 307–309. 47 [2018] EWCA Civ 1396. 42

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that some clauses may define the parties’ obligations and that such clauses would not be subject to s 3 Misrepresentation Act 1967.48 The Court of Appeal also considered the principle of so-called ‘contractual estoppel’ whereby ‘parties can bind themselves by contract to accept a particular state of affairs even if they know that state of affairs to be untrue’.49 In so doing, the following passage from the judgment of Aikens LJ in Springwell Navigation Corp v JP Morgan Chase Bank50 was approved:51 “If A and B enter into a contract then, unless there is some principle of law or statute to the contrary, they are entitled to agree what they like…[T]here is no legal principle that states that parties cannot agree to assume that a certain state of affairs is the case at the time the contract is concluded or has been so in the past, even if that is not the case, so that the contract is made upon the basis that the present or past facts are as stated and agreed by the parties.”52 19

However, that is not the end of the matter. A valid contractual estoppel may still be subject to, for example, s 3 of the Misrepresentation Act 1967.53 Lewison LJ held: “I would hold…that a clause which simply states (as clause 12.1 of the agreement for lease and clause 5.8 of the lease do) ‘that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the landlord’ is a contract term which would have the effect of excluding liability for misrepresentation; and consequently is subject to the test of reasonableness.” Leggatt LJ went even further:

20

“For the reasons I have given, as well as those given by Lewison LJ, I would hold that whenever a contracting party relies on the principle of contractual estoppel to argue that, by reason of a contract term, the other party to the contract is prevented from asserting a fact which is necessary to establish liability for a pre-contractual misrepresentation, the term falls within section 3 of the Misrepresentation Act 1967. Such a term is therefore of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11 of UCTA.”54

2. Common law regulation of terms 21

a) Incorporation. Where a contract is signed, the general rule under the law of England and Wales is that clauses in that written contract are incorporated into the contract.55 In other cases, a clause may be incorporated by reasonable notice56 being given of the clause before the contract is concluded, by a consistent course of dealing57 or by custom.58 For present purposes, it is the first of these methods (reasonable notice) that is 48

ibid., at [43] and [96]. ibid., at [47] and [97]. 50 [2010] EWCA Civ 1221. 51 See [2018] EWCA Civ 1396 at [47]. 52 [2010] EWCA Civ 1221 at [143]. 53 ibid., at [66]. 54 ibid., at [111] (emphasis added). 55 See L Estrange v Graucob [1934] 2 KB 394, particularly at 403 where Scrutton LJ stated: ‘In cases in which the contract is contained in a railway ticket or other unsigned document, it is necessary to prove that an alleged party was aware, or ought to have been aware, of its terms and conditions. These cases have no application when the document has been signed. When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.’ 56 Parker v South Eastern Railway (1877) 2 CPD 416. 57 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125. 58 British Crane Hire Co Ltd v Ipswich Plant Hire Ltd [1975] QB 303. 49

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of interest. At times this method of incorporation has not required a high degree of notice (as in Thompson v London, Midland and Scottish Railway59 where a clause in a railway timetable (a copy of which had to be purchased separately to the railway ticket) was held to be incorporated in a contract of carriage with an illiterate person). More recently, however, a line of authority has emerged holding that there is a higher threshold of notice for a party wishing to incorporate a particularly onerous or unusual term (Denning LJ famously stated that some clauses might need to be highlighted by a printed red hand pointed towards them!60). The leading case is Interfoto Picture Library v Stiletto Visual Programmes61 where a particularly onerous ‘holding charge’ in respect of photographic transparencies could not be enforced as insufficient notice of it had been given. This, it has been argued,62 creates a common law test of ‘reasonableness’ in relation to some terms. Indeed, there has been some judicial concern around the potential implications of the Interfoto line of authority as potentially ‘distorting the contractual relationship between the parties and the ordinary mechanisms of making contracts’.63 Yet it is not clear that the case law goes this far for a number of reasons. First, the 22 courts have not used consistent language in outlining when the Interfoto principle might apply.64 Secondly, the question of reasonable notice and the reasonableness of a particular clause are, in theory, separate65 even if there has been some conflation of these issues in this line of authority.66 Thirdly, although the Interfoto principle has been consistently approved, there has been little case law where it has been successfully argued;67 and it may be that it is more likely to be applied where there is a significant inequality of bargaining power between commercial parties.68 Finally, it may be that there is no need for a common law test of ‘reasonableness’ given the provisions of UCTA 1977. Before leaving incorporation one more issue needs to be noted, namely that it is 23 unclear whether or not the Interfoto principle can be used, by analogy, in the context of signed written contracts.69 b) Interpretation. In England and Wales it is settled law that the courts take an 24 objective approach to contractual interpretation.70 In other words, the courts interpret the words used in accordance to how a reasonable person would interpret those words.71 59

[1930] 1 KB 41. See J Spurling Ltd v Bradshaw [1956] 1 WLR 461 at 466. 61 [1988] QB 433. 62 See Bradgate, 582 et seq. 63 AEG (UK) Ltd v Logic Resource Ltd [1996] CLC 265 at 277 per Hobhouse LJ (dissenting). 64 In Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371 the Court of Appeal noted some of the differences in the language used in the relevant case law (extortionate, Draconian etc.) and also provided a reminder that exclusion clauses are not automatically onerous or unusual. 65 Again, in Goodlife Foods Limited v Hall Fire Protection Limited [2018] EWCA Civ 1371 Coulson LJ stated (at [35]): ‘…I consider that these two principles (namely incorporation at common law on the one hand, and the reasonableness of any term incorporated pursuant to UCTA, on the other) are separate, and the questions to be decided in respect of each are distinct. There may be some overlap in the matters that fall to be considered under each principle, but that is all.’ 66 ibid. 67 It is also useful to compare Interfoto with Photolibrary Group Ltd v Burda Senator Verlag GmbH [2008] EWHC 1343. 68 See Kaye v Nu Skin UK Ltd [2009] EWHC 3509. However, in further proceedings in this matter HHJ Denyer QC ([2012] CTLC 69 at [43]–[59]) stated: ‘I have to say that I find it slightly difficult to characterise an arbitration clause as being on its face unreasonable and/or extortionate. It is an extremely common clause in many commercial contracts.’ See also [2012] EWCA Civ 1069. See also Hawksford Trustees Jersey Limited v Halliwells LLP (In Liquidation) [2015] EWHC 2996 (Ch) at [63] per HHJ Pelling QC. 69 Compare Do-Buy 925 Limited v National Westminster Bank Plc [2010] EWHC 2862. 70 See Smith v Hughes (1871) LR 6 QB 597. 71 On the precise meaning of ‘objectivity’ see Howarth 265 et seq. 60

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Traditionally this was combined with (i) a ‘rule’ in written contracts that parties were not allowed to ‘add to, vary or contradict that writing’72 and (ii) a literal approach to interpretation where ‘agreements…were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations.’73 This approach was, however, subject to a contra proferentem rule which provided that where a clause was ambiguous, it would be interpreted against the party who had advanced it.74 Particularly in relation to exemption clauses, this, as was famously remarked upon by Lord Denning MR in George Mitchell (Chesterhall) Ltd. v Finney Lock Seeds Ltd,75 provided the courts in England and Wales with some scope to regulate clauses: “None of you nowadays will remember the trouble we had – when I was called to the Bar – with exemption clauses. They were printed in small print on the back of tickets and order forms and invoices. They were contained in catalogues or timetables. They were held to be binding on any person who took them without objection. No one ever did object. He never read them or knew what was in them. No matter how unreasonable they were, he was bound. All this was done in the name of ‘freedom of contract.’… Faced with this abuse of power – by the strong against the weak – by the use of the small print of the conditions – the judges did what they could to put a curb upon it. They still had before them the idol, ‘freedom of contract.’ They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called ‘the true construction of the contract.’ They used it with great skill and ingenuity. They used it so as to depart from the natural meaning of the words of the exemption clause and to put upon them a strained and unnatural construction. In case after case, they said that the words were not strong enough to give the big concern exemption from liability; or that in the circumstances the big concern was not entitled to rely on the exemption clause.”76 25

Indeed, as was suggested by Lord Denning MR in this passage, the courts sometimes took a rather artificial approach to construction in an attempt to regulate terms, particularly where there was an inequality of bargaining power and the deployment of a standard form contract. This also manifested itself, for example, in a number of somewhat artificial rules of construction, such as the so-called ‘negligence construction test’ which was underpinned by a desire to regulate the exclusion of liability for negligence77 and arguably in the fundamental breach rule.78 72

See Henderson v Arthur [1907] 1 KB 10. See Prenn v Simmonds [1971] 2 All ER 237 at 239 where Lord Wilberforce was criticising this approach. 74 See Andrews v Singer [1934] 1 KB 17. 75 [1983] QB 284. 76 ibid., at 296–298 (emphasis added). 77 In Canada Steamship Lines Ltd v The King [1952] AC 192 at 208 Lord Morton famously stated: ‘Their Lordships think that the duty of a court in approaching the consideration of such clauses may be summarized as follows: (1) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called “the proferens”) from the consequence of the negligence of his own servants, effect must be given to that provision…(2) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens…. (3) If the words used are wide enough for the above purpose, the court must then consider whether “the head of damage may be based on some ground other than that of negligence,” to quote again Lord Greene in the Alderslade case. 18 The “other ground” must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it; but subject to this qualification, which is no doubt to be implied from Lord Greene’s words, the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of his servants.’ 78 Compare Karsales v Wallis [1956] 2 All ER 866. 73

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In more recent times there has been a shift in the law of England and Wales from the 26 literal approach to construction to a contextual approach to construction.79 The classic statement of this more modern approach to interpretation was given by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society:80 “Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation they were in at the time of the contract.”81 The relevant background knowledge (or factual matrix) is very wide but excludes 27 evidence of prior negotiations.82 Such an approach can, in effect, lead to a ‘re-writing’ of the agreement where: “…the context drives one to the conclusion that this must have happened, it is no answer that the interpretation does not reflect what the words would conventionally have been understood to mean.”83 An interesting example of such an approach is Prudential Assurance Co Ltd v 28 Ayres84. This case involved a complicated attempt at assignment of an underlease to a partnership (T) without liability potentially attaching to the personal assets of the partners of T. The latter aspect was provided for in a supplemental deed, one of the key clauses of which provided: ‘Consequently, any recovery by the Landlord against the Tenant [T] or any previous tenant under the Lease for any such default shall be limited to the assets of the Partnership…’. Ultimately the defendant, a partner in a firm which was a previous tenant but not party to the supplemental deed, argued that, as a ‘previous tenant’, it had the benefit of the protection contained in this clause by virtue of the Contracts (Rights of Third Parties) Act 1999. The trial judge thought this was a surprising result but upheld the defendant’s claim on the wording. The Court of Appeal, however, reversed this decision on the basis that the context made it clear that only the ‘tenant’ (T) was to have the protection of the clause. The effect was that the clause should have read as ‘Consequently any recovery by the Landlord or any previous tenant under the Lease against the Tenant for any such default shall be limited to assets of the Partnership’. Yet the extent to which the contextual approach to interpretation can be used to, in 29 effect, review clauses is currently uncertain for, at least, three reasons. First, there has sometimes been a reluctance, as exemplified in Bominflot Bunkergesellschaft für Mineraloele mbH & Co KG v Petroplus Marketing AG85, to revisit the meaning of a particular clause where there is a ‘long established consensus’86 in the case law about the meaning of that clause. Secondly, whilst Lord Hoffmann in Investors Compensation Scheme Ltd v West 30 Bromwich Building Society87 stated that ‘almost all the old intellectual baggage of “legal” 79 Some would argue that the shift has been to a ‘commercial’ approach to interpretation: see McMeel, 382 et seq. 80 [1998] 1 WLR 896. 81 ibid., at 912. 82 Confirmed in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38. 83 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 at [24] per Lord Hoffmann. See also R & S Pilling (trading as Phoenix Engineering) v UK Insurance Ltd [2019] UKSC 16. 84 [2008] 1 All ER 1266. 85 [2010] EWCA Civ 1145. 86 ibid., at [62]. 87 [1998] 1 WLR 896.

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interpretation has been discarded’88, the extent to which this is the case is not entirely clear. Admittedly, the doctrine of fundamental breach has disappeared,89 but the continuing role of the contra proferentem rule is less clear90 although, in cases of ambiguity, it can still probably be supported on the ground that ‘parties are not lightly to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect.’91 Similarly, the position in relation to the negligence construction test in B2B contracts is less than clear; the courts still refer to Lord Morton’s principles in the Canada Steamship92 case albeit with a warning of the need to avoid artificial or strained approaches to construction.93 31 Thirdly, and most controversially, there has been some debate about the extent to which the ‘commercial common sense’ can be used to shape or re-shape the contract.94 In Rainy Sky S. A. and others v Kookmin Bank95 Lord Clarke famously stated: “The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”96 32

By contrast in Arnold v Britton97 Lord Neuberger (with whom Lord Sumption and Lord Hughes agreed) noted the limits of the use of business common sense: “First, the reliance placed in some cases on commercial common sense and surrounding circumstances (e.g. in Chartbrook, paras 16–26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.”98 88

ibid., at 912. Suisse Atlantique Société d’Armemente SA v Rotterdamsche Kolen Centrale NV [1967] 1 AC 361. 90 Persimmon Homes Ltd v Ove Arup and Partners Ltd [2017] EWCA Civ 373. 91 Hut Group Ltd v Nobahar-Cookson [2016] EWCA Civ 128 at [18] per Briggs LJ. 92 See, for example, EE Caledonia Ltd v Orbit Valve plc [1994] 1 WLR 1515; Shell Chemical v P & O Tankers [1995] 1 Lloyd’s Rep 297; Toomey v Eagle Star Insurance [1995] 2 Lloyd’s Rep 88; and Monarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698. 93 See Persimmon Homes Ltd v Ove Arup and Partners Ltd [2017] EWCA Civ 373. 94 See generally Havelock. 95 [2011] UKSC 50. 96 ibid., at [21] (emphasis added). 97 [2015] UKSC 36. See also BP Gas Marketing Ltd v LA Societe Sonatrach [2016] EWHC 2461 (Comm). 98 ibid., at [17]. 89

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Subsequently in Wood v Capita Insurance Services Limited99 Lord Hodge (with whom 33 Lord Neuberger, Lord Mance, Lord Clarke and Lord Sumption agreed) stated that Arnold v Britton was not a recalibration of Rainy Sky. In Lord Hodge’s opinion, interpreting a contract is a unitary exercise where the court has to balance the language used (Arnold v Britton) with the implications of rival constructions (Rainy Sky). In determining the weight to be given to these factors, a court should consider the quality of the drafting and whether one party has actually just made a bad bargain.100 There does, therefore, seem to have been a stronger focus on the words used in recent 34 case law with, arguably, less scope for the courts to reshape the terms of a contract through ‘commercial common sense’. This also chimes with the approach which the UK Supreme Court has taken recently in Rock Advertising Ltd v MWB Business Exchange Centres Ltd101 in relation to ‘no oral modification clauses’. The case concerned a contractual licence of serviced offices. Clause 7.6 of the agreement provided: ‘This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect’ (emphasis added). The licencee fell into arrears and proposed a revised schedule of payments (which included some of the arrears being spread over the remainder of the term). Ultimately the operator of the serviced offices disputed that the original agreement had been varied and locked the licencee out of the premises. In turn the licencee claimed damages for wrongful exclusion. The key issue for present purposes was the effect of the ‘no oral modification clause’ in clause 7.6 on an alleged variation. The Court of Appeal102 held that clause 7.6 did not affect the validity of this oral variation – whilst recognising the uncertainty in the case law, principles of party autonomy and freedom of contract meant that parties could agree to vary or waive a NOM clause.103 The Supreme Court104 disagreed with Lord Sumption stating: “In the Court of Appeal, Kitchin LJ observed that the most powerful consideration in favour of this view is ‘party autonomy’: para 34. I think that this is a fallacy. Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed. There are many cases in which a particular form of agreement is prescribed by statute: contracts for the sale of land, certain regulated consumer contracts, and so on. There is no principled reason why the parties should not adopt the same principle by agreement.”105 c) Good faith – the winds of change? It is generally accepted that the law of England 35 and Wales does not currently recognise a general duty of good faith in contract law.106 99

[2017] UKSC 24. ibid., at [9]–[11]. 101 [2018] UKSC 24. 102 [2016] EWCA Civ 553. 103 In so doing, the Court of Appeal approved the view of Cardozo J in the New York Court of Appeals in Alfred C Beatty v Guggenheim Exploration Co (1919) 225 NY 380 at 387–388: ‘Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again …’ 104 [2018] UKSC 24. 105 ibid., at [11] (Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed). 106 See generally Devenney/Howells, 361–362. 100

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In support of this proposition it is commonplace to cite Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd107 where Bingham LJ famously stated:108 “In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as ‘playing fair,’ ‘coming clean’ or ‘putting one’s cards face upwards on the table.’ It is in essence a principle of fair and open dealing…” However Bingham LJ noted that:

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“English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness. Many examples could be given. Thus equity has intervened to strike down unconscionable bargains. Parliament has stepped in to regulate the imposition of exemption clauses and the form of certain hire-purchase agreements. The common law also has made its contribution, by holding that certain classes of contract require the utmost good faith, by treating as irrecoverable what purport to be agreed estimates of damage but are in truth a disguised penalty for breach, and in many other ways.”109 This statement from Interfoto was, to some extent, reinforced by the decision of the House of Lords in Walford v Miles110 where a general duty to negotiate in good faith was denied.111 On the other hand, as Bingham LJ acknowledged in Interfoto, the law of England and Wales has developed other responses to such issues; and, of course, parties sometimes include an express good faith obligation.112 38 More recently, however, in Yam Seng Pte Ltd v International Trade Corp Ltd113 Leggatt J considered at length, in the context of a commercial distribution agreement, whether or not a duty of good faith could be an implied term of a particular commercial contract. In so doing, Leggatt J was of the opinion that the law of England and Wales was ‘swimming against the tide’114 in not recognising a general duty of good faith in contract law. However, he noted115 that a number of European legal systems recognised such a duty and there had been some infiltration of such a duty into the law of England and Wales as a result of EU harmonisation initiatives.116 Unsurprisingly in this context Leggatt J referred to the Unfair Terms in Consumer Contracts Regulations 1999 which, of course, at one time transposed the Unfair Terms Directive. More interestingly Leggatt J also referred to non-binding European instruments in illustrating his opinion that the law of England and Wales was ‘swimming against the tide’: 37

“Attempts to harmonise the contract law of EU member states, such as the Principles of European Contract Law proposed by the Lando Commission and the European Commission’s proposed Regulation for a Common European Sales Law on 107

[1989] 1 QB 433. ibid., at 439. 109 ibid. 110 [1992] 2 AC 128. 111 ibid., at 138 per Lord Ackner. 112 See, for example, CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch). 113 [2013] EWHC 111 (QB). 114 ibid., at [124]. 115 ibid. 116 ibid. 108

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which consultation is currently taking place, also embody a general duty to act in accordance with good faith and fair dealing. There can be little doubt that the penetration of this principle into English law and the pressures towards a more unified European law of contract in which the principle plays a significant role will continue to increase.”117 Leggatt J also surveyed case law from the United States,118 Canada,119 Australia120 39 and, to a lesser extent, New Zealand121 in noting that a general duty of good faith is not alien to all common law systems.122 Nevertheless the learned judge, whilst recognising that such a duty might arise in particular contexts under the law of England and Wales,123 conceded that it was unlikely that ‘English Law has reached the stage…where it is ready to recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts.’124 In other words Leggatt J was of the opinion that such a duty would not be implied in law125 into a contract. However, that left the question of whether or not such a term might be implied in 40 fact126 into commercial contracts and Leggatt J also considered this question. A term implied in fact into a contract is essentially implied into the contract on the ground that it represented the unexpressed intention of the parties.127 Over the years various tests have been deployed to ascertain whether or not such a term should be implied, most notably the ‘officious bystander test’128 and the business efficacy test.129 More recently to Yam Seng, in Attorney General of Belize, ECOM Limited, Belize Telecommunications Limited v Belize Telecom Limited, Innovative Communication Company LLC130 Lord Hoffmann had linked the implication of terms to the construction of the contract: “The court has no power to improve upon the instrument which it is called upon to construe….It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means…It is the meaning which the instrument would convey to a reasonable person having all the background knowledge 117 [2013] EWHC 111 (QB) at [124]. The citation of these instruments found resonance with the statement of AG Trstenjak in C-137/08 VB Pénzügyi Lízing Zrt. ECLI:EU:C:2010:401: ‘As long as there is no uniform European civil law, the [CJEU] continues to be dependent on the information provided by the national courts… for the purposes of interpreting the concept of unfairness under Art 3(1) of Dir 93/ 13 in relation to a specific term. That said… the [CJEU] could… also draw… on codification models developed by European academics, such as the… DCFR [which, to some extent inspired the proposed Common European Sales Law]… to find appropriate solutions to disputes…’ Similarly, the statement AG Trstenjak, in C-618/10 Banco Español de Crédito ECLI:EU:C:2012:74: ‘Consumer protection law in the EU is currently undergoing a series of legislative adjustments, which bear witness to the Commission’s efforts to consolidate and modernise the acquis by its Proposal… on a CESL, the Commission has initiated a… proposal which will make it possible in future to apply that legislation on a voluntary basis to cross-border sales contracts, upon an express agreement of the parties…Even though these legal acts are not applicable ratione temporis to the main proceedings, they will undoubtedly have an important influence on further developments in the field of consumer protection law.’ 118 Wigand v Bachmann-Bechtel Brewing Co, 222 NY 272. 119 Transamerica Life Inc v ING Canada Inc (2003) 68 OR (3d) 457. 120 Renard Constructions (ME) Pty v Minister for Public Works (1992) 44 NSWLR 349. 121 Bobux Marketing Ltd v Raynor Marketing Ltd [2002] 1 NZLR 506 (Thomas J dissenting). 122 [2013] EWHC 111 (QB) at [124]–[129]. 123 For example, in the employment context: see [2013] EWHC 111 (QB) at [131]. 124 [2013] EWHC 111 (QB) at [131] (emphasis added). 125 On which see Peel, para. 6–067 et seq. 126 ibid. 127 ibid. 128 See Shirlaw v Southern Foundries [1939] 2 KB 206. 129 See The Moorcock (1889) LR 14 PD 64. 130 [2009] UKPC 10.

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which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912–913. It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument….”131 Thereafter His Lordship stated:

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“The proposition that the implication of a term is an exercise in the construction of the instrument as a whole is not only a matter of logic (since a court has no power to alter what the instrument means) but also well supported by authority…It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson’s speech that this question can be reformulated in various ways which a court may find helpful in providing an answer – the implied term must ‘go without saying’, it must be ‘necessary to give business efficacy to the contract’ and so on – but these are not in the Board’s opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”132 42

In applying Attorney General of Belize, ECOM Limited, Belize Telecommunications Limited v Belize Telecom Limited, Innovative Communication Company LLC, to the case in front of him Leggatt J stated that the ‘relevant background’ included ‘…shared values and norms of behaviour. Some of these are norms that command general social acceptance; others may be specific to a particular trade or commercial activity; others may be more specific still, arising from features of the particular contractual relationship.’133 A particular challenge, of course, relates to the identification of all such shared values and norms. Such a challenge has also been seen at a wider level in the context of EU harmonisation initiatives. For example, in the (consumer) case of Director General of Fair Trading v First National Bank plc134 Lord Bingham, in the context of the meaning of ‘good faith’ under the then Unfair Terms in Consumer Contracts Regulations 1999, stated that: “Good faith in this context is not an artificial or technical concept; nor, since Lord Mansfield was its champion, is it a concept wholly unfamiliar to British lawyers. It looks to good standards of commercial morality and practice.”135

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However the test of ‘good standards of commercial morality’ appears loaded with social, cultural and economic norms and the difficulty, from an EU harmonisation perspective, is that there are differences in such norms throughout the EU.136 Nor is it 131

ibid., at [16]. [2009] UKPC 10 at [19]–[21]. More recently in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72 Lord Neuberger (with whom Lord Sumption and Lord Hodge agreed) stated that Lord Hoffmann’s ‘observations [in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10] should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms’. Thus we revert back to previous tests and it is particularly noteworthy that Lord Neuberger regarded the ‘business necessity and obviousness’ tests as alternatives (see [21]). This has not affected the Yam Seng line of authority. 133 [2013] EWHC 111 (QB) at [134]. 134 [2001] UKHL 52. 135 ibid., at [17]. 136 See O’Callaghan, 339 et seq. 132

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clear that these norms are necessarily shared domestically. Perhaps to deal with such concerns in the current context, Leggatt J sought to identify some examples of such norms.137 For example, Leggatt J referred to expectations of honesty138 and co-operation.139 Such obligations might be regarded as relatively uncontroversial but other potential obligations are less clear and/or more controversial. For example, Leggatt J referred to obligations not to act unconscionably or improperly.140 Similarly, Leggatt J referred to obligations of disclosure.141 However, Leggatt J was at pains to stress that much depended upon the context: 44 “English law has traditionally drawn a sharp distinction between certain relationships – such as partnership, trusteeship and other fiduciary relationships – on the one hand, in which the parties owe onerous obligations of disclosure to each other, and other contractual relationships in which no duty of disclosure is supposed to operate. Arguably at least, that dichotomy is too simplistic. While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer term relationship between the parties which they make a substantial commitment. Such ‘relational’ contracts, as they are sometimes called, may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long term distributorship agreements.”142 The learned judge also stressed that the meaning ‘good faith’ in any given context 45 should be approached objectively, in accordance with general principles of construction.143 Undoubtedly, some are concerned about the impact of developing an implied duty of good faith in contract law on the ground that it might undermine commercial certainty.144 Of course, as noted145 by Leggatt J and also discussed above, some uncertainty is inherent in modern approaches to construction.146 Indeed, remembering Bominflot Bunkergesellschaft für Mineraloele mbH & Co KG v Petroplus Marketing AG,147 to what extent, if at all, is the ‘traditional English hostility towards a doctrine of good faith’ part of the factual matrix against which a contract has to be interpreted?148 137

[2013] EWHC 111 (QB) at [135] et seq. ibid. 139 [2013] EWHC 111 (QB) at [139]. 140 ibid., at [138]. 141 ibid., at [141]–[142]. 142 ibid. 143 [2013] EWHC 111 (QB) at [150]. 144 Compare MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789 at [45] per Moore-Bick LJ. 145 [2013] EWHC 111 (QB) at [152]. 146 See above at mn. 24 et seq. 147 [2010] EWCA Civ 1145, discussed above at mn. 29. 148 In TSG Building Services plc v South Anglia Housing Limited [2013] EWHC 1151 (TCC) at [46] Akenhead J stated: ‘Because cases and contracts are sensitive to context, I would not draw any principle from this extremely illuminating and interesting judgment which is of general application to all commercial contracts. I do not see that implied obligations of honesty or fidelity to the contractual bargain impinge in this case at all. There is certainly no suggestion or hint that there has or might have been any dishonesty in the decision to terminate. So far as fidelity to the bargain is concerned, that 138

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Yam Seng has received a cautious reception in the courts with some keen to stress that it does not mean that is now a general duty of good faith in the law of England and Wales: “There is in my view a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement. The danger is not dissimilar to that posed by too liberal an approach to construction, against which the Supreme Court warned in Arnold v Britton [2015] UKSC 36, [2015] AC 1619.”149

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d) The recognition of relational contracting. Yam Seng Pte Ltd v. International Trade Corp Ltd150 was, however, an important part of the recognition of the concept of relational contracting in England and Wales. Traditionally the law of England and Wales tended to view contracts as ‘discrete’ or ‘one-off’ in nature, with no continuing or ‘relational’ aspect;151 and this is reflected in the classical rules of contract law in England and Wales which, for example, struggle with the flexibility that is often required in longer term contracts.152 By contrast, for many years Professor Macneil argued that ‘… effective analysis of any transaction requires recognition and consideration of all essential elements of its enveloping relations that might affect the transaction significantly.’153 Professor Macneil also argued that: “Relational contracts…give rise to an intensification in exchange relationships of several…common contract behaviours, and hence to their norms. Primary among these are…role integrity…contractual solidarity, harmonisation with the social matrix [supracontractual norms]…flexibility…”154

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Arguably the relational background was relevant ‘factual matrix’ for the more recent contextual approach to interpretation in England and Wales.155 Yet, for many years it was unclear whether or not the law of England and Wales recognised such a concept as was demonstrated by the judgment of Lord Steyn in Total Gas Marketing Ltd v Arco British Ltd & Ors:156 “The central question is whether on a correct construction of a long term contract for the sale of gas it was discharged by reason of the non-occurrence of a condition. It is a contract of a type which is sometimes called a relational contract. But there are no special rules of interpretation applicable to such contracts… That is not to say that in an appropriate case a court may not take into account that, by reason of the changing conditions affecting such a contract, a flexible approach may best match the reasonable expectations of the parties. But, as in the case of all contracts, loyalty to the contractual text viewed against its relevant contextual background is the first principle of construction.”157 depends upon what the bargain actually was. In any event, fidelity to the bargain is largely already covered by the expressed terms of Clause 1.1 and, at least to that extent, does not have to be implied as well.’ 149 MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789 at [45] per MooreBick LJ. 150 [2013] EWHC 111 (QB). 151 See Stone/Devenney, 13 et seq. 152 ibid. 153 Macneil, 881 (emphasis added). 154 ibid., 987. 155 See above at mn. 27 et seq. 156 [1998] CLC 1275. 157 ibid., at 1286.

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More recently in Alan Bates and Others v Post Office Limited (No. 3: Common 49 Issues)158 Fraser J stated: ‘the concept of relational contracts is an established one in English law.’159 This was a ‘common issues’ trial in group litigation by approximately 550 claimants (largely sub-postmasters) against the Post Office. The dispute centred around a new electronic point-of-sale and accounting system. Essentially the claimants contended that there were problems with the relevant software. The claimants contended that this resulted in unexplained shortfalls which the defendant (the Post Office) required them to cover. Some of the claimants paid (under protest) the shortfall, some of their contracts terminated and some even received criminal convictions. This part of the litigation essentially focused on issues of contractual construction (rather than issues of breach etc.). Fraser J ultimately held that: 50 “…the contracts formed between the Post Office and SPMs [sub-postmasters] are relational contracts, which means that there is an implied duty of good faith in the agreement. This means that the Post Office is not entitled to act in a way that would be considered commercially unacceptable by reasonable and honest people.”160 For present purposes this case is significant for three reasons. First, it clearly 51 recognises the concept of a relational contract.161 In recognising the concept of a relational contract, Fraser J built on a number of recent cases, including Yam Seng and Amey Birmingham Highways Ltd v Birmingham City Council162 where Jackson LJ stated: “Any relational contract of this character [the Court of Appeal were considering a private finance initiative contract with Birmingham City Council] is likely to be of massive length, containing many infelicities and oddities. Both parties should adopt a reasonable approach in accordance with what is obviously the long-term purpose of the contract. They should not be latching onto the infelicities and oddities, in order to disrupt the project and maximise their own gain.”163 Secondly, it found an implied duty of good faith in the context of a relational 52 contract.164 Thirdly, it held that ‘good faith’ was not necessarily limited to being honest: 158

[2019] EWHC 606 (QB). ibid., at [705]. 160 ibid., at [1113]. 161 The learned judge stated at [142]: ‘I consider the following characteristics are relevant as to whether a contract is a relational one or not: 1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract. 2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship. 3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain. 4. The parties will be committed to collaborating with one another in the performance of the contract. 5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract. 6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships. 7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty. 8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment. 9. Exclusivity of the relationship may also be present.’ 162 [2018] EWCA Civ 264. 163 ibid., at [93]. 164 ‘These cases, both appellate and first instance, all demonstrate in my judgment that there is no general duty of good faith in all commercial contracts, but that such a duty could be implied into some contracts, where it was in accordance with the presumed intention of the parties. Whether any contract is relational is heavily dependent upon context, as well as the terms. The circumstances of the relationship, defined by the terms of the agreement, set in its commercial context, is what decides whether a contract is 159

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“I consider that there is a specie of contracts, which are most usefully termed ‘relational contracts’, in which there is implied an obligation of good faith (which is also termed ‘fair dealing’ in some of the cases). This means that the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people. An implied duty of good faith does not mean solely that the parties must be honest.”165 53

e) More specific regulation of particular contractual terms. There are various other powers for the courts in England and Wales to review particular clauses in B2B contracts. For example, a clause may be reviewed on the basis that it is potentially an unreasonable restraint of trade166 or in some other way potentially contravenes public policy.167 An agreed damages clause can also be reviewed by the courts to determine whether it is a valid liquidated damages clause or an invalid penalty clause,168 although the courts have again been reluctant to interfere with agreed damages clauses in B2B contracts.169 One of the classic statements of the difference between a penalty clause and a liquidated damages clause was given by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd: “The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted preestimate of damage…”170

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Such an approach focused on whether or not the specified sum was a genuine preestimate of the loss likely to arise.171 relational or not.’ (Alan Bates and Others v Post Office Limited (No. 3: Common Issues) [2019] EWHC 606 (QB) at [721] per Fraser J). 165 [2019] EWHC 606 (QB) at [711] (emphasis added). See also Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm) at [175] per Leggatt J: ‘….In Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 , para 288, in the Federal Court of Australia, Allsop CJ summarised the usual content of the obligation of good faith as an obligation to act honestly and with fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained. In my view, this summary is also consistent with the English case law as it has so far developed, with the caveat that the obligation of fair dealing is not a demanding one and does no more than require a party to refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.’ Compare Times Travel (UK) Ltd v Pakistan International Airlines Corp [2019] EWCA Civ 828. 166 See, generally, Nordenfelt v Maxim Nordenfelt Gun Co [1894] AC 535 and Tillman v Egon Zehnder Ltd [2019] UKSC 32. 167 See, for example, Ailion v Spiekerman [1976] Ch 158 (illegal premium severed from a contract). In Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 at [11] Lord Sumption (with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed) was of the opinion that a ‘no oral modification’ clause was not contrary to public policy: ‘These are all legitimate commercial reasons for agreeing a clause like clause 7.6. I make these points because the law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law’. 168 See generally Halson. 169 See, for example, Philips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR 41. See also Murray v Leisureplay [2005] EWCA Civ 963 at [114] per Buxton LJ: ‘I venture to disagree with that approach because it introduces a rigid and inflexible element into what should be a broad and general question. It is also inconsistent with warnings by judges of high authority that, at least in connexion with commercial contracts, great caution should be exercised before striking down a clause as penal; and with the tests that they have postulated to that end’. 170 [1915] AC 79 at 86. 171 Although compare Murray v Leisureplay [2005] EWCA Civ 963.

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B. England & Wales

In Makdessi v Cavendish Square Holdings BV and ParkingEye Ltd v Beavis172 the 55 Supreme Court (re-)considered, in detail, the operation of the penalty rule, the first time the Supreme Court (or House of Lords) had done so for a century.173 In so doing the Supreme Court resisted calls for both the abolition and extension of the penalty rule in relation to contracts. The case actually involved two conjoined appeals. The first case (Makdessi) concerned a share purchase contract, in respect of a marketing company, between commercial parties. Under the agreement the seller agreed not to compete with the marketing company. The contract provided that if the non-competition stipulation was breached (i) no further instalments would be payable under the contract (clause 5.1) and (ii) the buyer would have an option to buy the seller’s remaining shares at a reduced price (as it would disregard goodwill, clause 5.6). The seller breached the non-competition stipulation and the buyer sought to exercise clauses 5.1 and 5.6. The seller claimed that these clauses were unenforceable on the ground that they were penalty clauses. This claim was rejected at first instance but accepted by the Court of Appeal. The second case (ParkingEye) involved a car park where parking was free for the first two hours but, if that period was exceeded, a fee of £85 was payable. The defendant parked his car for almost three hours and subsequently refused to pay the £85 fee on the ground that it was a penalty clause. At first instance and in the Court of Appeal the defendant’s argument failed. The Supreme Court, in effect, recast the rule relating to penalty clauses. More 56 specifically the Supreme Court held that a penalty clause is a secondary obligation that bears no proportion to the legitimate interest, if any, that the innocent party has in the enforcement of the primary obligation(s). Applying this to the facts of Makdessi the Supreme Court held that the relevant clauses were not penal. The buyer had a legitimate interest in the compliance with non-competition stipulations that were crucial to the health of the company. Moreover, both parties were experienced commercial parties with the benefit of legal advice. As regards ParkingEye the Supreme Court also held that the fee was not penal in nature. Although it did not represent the loss that the claimant would suffer as a result of the defendant staying beyond two hours, the claimant had a legitimate interest in the efficient functioning of the car park and was comparable to charges in the locality. Anchoring of the test for a penalty clause to the vague concept of the legitimate 57 interest of the innocent party may fuel further litigation.

IV. International application The law of England and Wales may, and indeed often is,174 used as the governing law 58 in international commercial contracts. However, it should be noted that not all of the foregoing provisions would necessarily form part of such international contracts. For example, UCTA 1977, s 27(1) provides: s 27. UCTA 1977 Choice of law clauses (1) Where the law applicable to a contract is the law of any part of the United Kingdom only by choice of the parties (and apart from that choice would be the law of some country outside the United Kingdom) sections 2 to 7…of this Act do not operate as part of the law applicable to the contract.175 172

[2015] UKSC 67. See [1] per Lord Neuberger and Lord Sumption. 174 Bridge, 58. 175 Emphasis added. 173

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This provision does not extend to the exclusion of liability under the Misrepresentation Act 1967, s 3 (which, as noted above,176 was inserted into that Act by UCTA 1977). 60 Moreover UCTA 1977, s 26 deals with ‘international supply contracts’ which are defined in s 26(3)–(4): 59

s 26. UCTA 1977 International supply contracts (3) Subject to subsection (4), that description of contract is one whose characteristics are the following – (a) either it is a contract of sale of goods or it is one under or in pursuance of which the possession or ownership of goods passes; and (b) it is made by parties whose places of business (or, if they have none, habitual residences) are in the territories of different States (the Channel Islands and the Isle of Man being treated for this purpose as different States from the United Kingdom). (4) A contract falls within subsection (3) above only if either – (a) the goods in question are, at the time of the conclusion of the contract, in the course of carriage, or will be carried, from the territory of one State to the territory of another; or (b) the acts constituting the offer and acceptance have been done in the territories of different States; or (c) the contract provides for the goods to be delivered to the territory of a State other than that within whose territory those acts were done.177

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In relation to such international supply contracts, UCTA 1977 (and, in contrast to the position under UCTA 1977, s 27, this also extends to the Misrepresentation Act 1967, s 3) is essentially disapplied by s 26(1)–(2): s 26. UCTA 1977 International supply contracts (1) The limits imposed by this Act on the extent to which a person may exclude or restrict liability by reference to a contract term do not apply to liability arising under such a contract as is described in subsection (3) below. (2) The terms of such a contract are not subject to any requirement of reasonableness under section 3…

176

See mn. 16 et seq. An interesting case in this regard is Trident Turboprop (Dublin) Ltd v. First Flight Couriers Ltd [2009] EWCA Civ 290 where an aircraft was delivered in the UK but the buyer immediately flew it to India. The Court of Appeal held that this nevertheless satisfied s 26(4)(a) (‘carried, from the territory of one State to the territory of another’). 177

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C. Estonia Bibliography: Garoupa/Ogus, ‘A Strategic Interpretation of Legal Transplants’ (2003) CEPR Discussion Paper No. 4123; Haanappel/Mackaay, New Netherlands Civil Code/Nouveau code civil néerlandais (Kluwer 1990); Jankelevitš, ‘Avalik kord ja imperatiivsed sätted rahvusvahelises eraõiguses’ (2002) 7 Juridica 479–486; Lando/Beale (ed.), Principles of European Contract Law, Part 1. Performance, Non-performance and Remedies (Martinus Nijhoff Publishers 1995); Piir, ‘Eingreifen oder nicht eingreifen, das ist hier die Frage. Die Problematik der Bestimmung und des Anwendungbereichs der Eingriffsnormen im internationalen Privatrecht’ (2010) 17 Juridica International 199–206; Piir, ‘Application of the Public Policy Exception in the Context of International Contracts – The Rome I Regulation Approach’ (2015) 23 Juridica International 26–32; Piir/Sein, ‘Law Applicable to Consumer Contracts: Interaction of the Rome I Regulation and EUdirective-based Rules on Conflicts of Laws’ (2016) 24 Juridica International 63–70; Säcker et al. (ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch – Vol. I (8th edn., C.H. Beck 2018); Schwenzer, ‘International B2B Contracts – Freedom Unchained?’ (2015) 4 Penn State Journal of Law and International Affairs 34–46; Sein, ‘Estland – ein Versuchsfeld für das Europäische Privatrecht? Estnische Erfahrungen mit der Anwendung der Prinzipien des vereinheitlichten Europäischen Privatrechts’ (2013) 1 Zeitschrift für das Privatrecht der Europäischen Union 13–24; Varul et al., Tsiviilseadustiku üldosa seadus. Kommenteeritud väljaanne (Juura 2010); Varul et al., Võlaõigusseadus I. Kommenteeritud väljaanne (Juura 2016).

Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... 1. Judicial review of standard terms ........................................................... 2. Good faith .................................................................................................... 3. Good morals and public order ................................................................ 4. Change of circumstances .......................................................................... 5. Open terms .................................................................................................. 6. Limitation and exclusion of liability ...................................................... III. Requirements and legal consequences ....................................................... 1. Judicial review of standard terms ........................................................... a) Definition of standard terms (§ 35 LOA) ....................................... b) Incorporation of standard terms into the contract ....................... c) Interpretation of standard terms ....................................................... d) Judicial review........................................................................................ 2. Good faith .................................................................................................... 3. Good morals and public order ................................................................ a) Global collaterals ................................................................................... b) Takeover of a company ....................................................................... c) Immoral disproportionality of mutual obligations (high interest rate) ........................................................................................... d) Penalties and interest on late payments .......................................... e) Share sale contract ................................................................................ 4. Change of circumstances .......................................................................... 5. Terms deliberately left open..................................................................... 6. Limitation and exclusion of liability ...................................................... IV. International application ...............................................................................

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I. Overview Contractual relations between businesses are regulated in the Law of Obligations Act (võlaõigusseadus1; hereinafter LOA) which is one of the five laws that together form the Estonian Civil Code (Eesti tsiviilseadustik2). Another important legal act is the General Part of Civil Code Act (tsiviilseadustiku üldosa seadus; hereinafter GPCCA)3 which deals with transactions in general, including transactions between businesses. Estonian contract law is based on the freedom of contract: § 1(1) LOA provides that parties are free to design their contracts as far as the content of the contract is not in conflict with the content and spirit of the law. Freedom of contract as a general principle is based on § 19 of the Constitution of the Republic of Estonia (Eesti Vabariigi põhiseadus4) which guarantees to everyone the right to free self-realisation. 2 Judicial review is a process whereby the contract is reviewed by a judge. In the Estonian legal system, judges cannot create law or legal principles, but have to apply the law. However, there are a number of provisions that govern the judicial review of contract terms. The review of the content of contracts is based on specific legal provisions and on the general principles underlying private law. A court is entitled to review the terms of a B2B contract, in particular if the contract is in violation of good morals and public order (§ 86 GPCCA), if the contract is concluded on standard terms (§§ 35–45 LOA) or contains open terms (§ 26(11) LOA), if the circumstances underlying the contract have changed (§ 97 LOA), if liability has been limited or excluded in a standard term (§ 42(1) and (3)(1) LOA) or in an individual agreement (§ 106 LOA). Judicial review is specific in cases of violation of the principle of good faith (§ 6 LOA, § 138 GPCCA) which provides for only limited possibilities to intervene in contractual relations. 3 A review of the terms and conditions of a contract based on a conflict with good morals and public order can be exercised by courts ex officio. In all other cases the review is based on the respective claim of the parties to the contract. 4 In order to understand the regulation and exercise of judicial control in Estonia, it is necessary to note that civil law reform in Estonia started in 1991 after independence was regained. The main aim of the legal reforms was not to create an original private law de novo but rather to transplant from other jurisdictions, international conventions and soft law.5 The purpose was to create a private law which is based on generally accepted and widely known principles and which supports reorganisation of the society and creation of the legal culture of a modern and liberal market economy.6 The time for transplanting legal ideas and concepts not only from other civil codes but also from instruments of international soft law was quite fortunate due to the fact that it coincided with the movements and events which we can now refer to as the process of harmonisation of European private law. The Principles of European Contract Law7 1

1

1 July 2002. Available in English at www.riigiteataja.ee/en/eli/508082018001/consolide. The five legislative Acts comprising the Estonian Civil Code are the General Part of Civil Code Act (2002), Property Law Act (1993), Family Law Act (2010), Law of Succession Act (2008), Law of Obligations Act (2002). 3 1 July 2002. Available in English at www.riigiteataja.ee/en/eli/ee/502012019003/consolide/current. 4 30 July 1992. Available in English at www.riigiteataja.ee/en/eli/530102013003/consolide. 5 In 1992 the Estonian Parliament adopted the decision on the continuity of legislation and on following the legal traditions valid in Estonia before 1940 which were based mainly on legal systems from the Germanic legal family. See Resolution of the Estonian Parliament (Riigikogu) concerning the continuity of legislation. State Gazette (Riigi Teataja) 1992, 52, 651 (in Estonian). 6 See more about the transplants in private law systems in Garoupa/Ogus 3–4. 7 See Lando/Beale. 2

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C. Estonia

(hereinafter PECL) and the UNIDROIT Principles of International Commercial Contracts (hereinafter PICC) were available from 1994 and used widely in drafting the general part of the LOA. The Estonian LOA was influenced also by law reforms in the Netherlands8 and Germany9. The outcome resembled cherry picking: the Estonian private law system is based on the best solutions from different legal systems, on restructured and modified concepts from different national, international and model laws, and can be called an experimental legal system.10 Estonian private law is monistic, which means that all transactions (including B2B contracts) are regulated in the LOA. Taking into account that Estonia regained its independence in 1991 and that the 5 population of Estonia is small (less than 1.5 million11), the case law of the Supreme Court (Riigikohus) is limited and therefore the judgments of lower courts are also used in this report.12

II. Regulatory framework 1. Judicial review of standard terms § 35. LOA Definition of standard term (1) A contract term which is drafted in advance for use in standard contracts or which the parties have not negotiated individually for some other reason, and which the party supplying the term uses with regard to the other party who is therefore not able to influence the content of the term, is deemed to be a standard term. (2) It is presumed that standard terms have not been negotiated individually in advance. (3) Standard terms may be embodied in a contract or form a separate part of a contract. Standard terms may be terms of a contract regardless of the scope of the terms, the manner in which the terms are expressed in the contract or the form in which the contract is entered into. (4) The general provisions for entering into contracts apply to entering into contracts with standard terms unless otherwise provided for in this Division. (5) Agreements which derogate from the provisions of §§ 35–39 or 41–45 of this Act to the detriment of the party with regard to whom the standard terms were applied are void. § 36. LOA Application of provisions (1) The provisions of this Division do not apply to contracts concerning relationships under the law of succession or family law or to contracts for the foundation of companies, other legal persons and civil law partnerships, or for the management thereof. […] 8 English translation of Book 6 of the Dutch New Civil Code was published in 1990. See Haanappel/ Mackaay, available at www.researchgate.net/publication/228142172_Netherlands_Civil_Code_-_General_ Part_of_the_ Law_of_Obligations_English-French. 9 In the course of drafting the Estonian Law of Obligations Act, the final proposals of the German Commission for the Revision of the Law of Obligations (Abschlussbericht der Kommission zur Überarbeitung des Schuldrechts, Bundesanzeiger 1992) were largely used. 10 On the use of PECL and PICC in drafting the Estonian Law of Obligations Act see Sein 13–24. 11 According to the revised data of Statistics Estonia, the population on 1 January 2021 totalled 1,329,460. Data is available at https://www.stat.ee/en/find-statistics/statistics-theme/population/population-figure. 12 The judgments of the Estonian Supreme Court are available in Estonian at www.riigikohus.ee. The judgments of courts of appeal (Circuit Court) and courts of first instance (County Court) are available in Estonian at www.riigiteataja.ee.

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Part 1. Country Reports § 37. LOA Standard terms as part of contract (1) Standard terms are part of a contract if the party supplying the standard terms clearly refers to them as part of the contract before entering into the contract or while entering into the contract and the other party has the opportunity to examine their contents. Standard terms are also part of a contract if their existence could be presumed from the manner in which the contract was entered into and the other party was given the opportunity to examine their contents. (2) The parties may, taking into account the provisions of subsection (1) of this section, agree in advance that standard terms apply to certain types of contracts. (3) Standard terms the contents, wording or presentation of which are so uncommon or unintelligible that the other party cannot, based on the principle of reasonableness, have expected them to be included in the contract or which the party cannot understand without considerable effort are not deemed to be part of the contract. § 38. LOA Standard terms and individual agreement If the content of a standard term contradicts a term individually agreed upon by the parties, the term individually agreed upon applies. § 39. LOA Interpretation of standard terms (1) Standard terms shall be interpreted according to the meaning that reasonable persons of the same kind as the other party would give to them in the same circumstances. In the case of doubt, standard terms shall be interpreted to the detriment of the party supplying the standard terms. (2) A standard term which is void shall not be interpreted such as to give it content by which the term is valid. If a term can be divided into several independent parts and one of them is void, the other parts remain valid. § 40. LOA Conflicting standard terms (1) If, upon entering into a contract, the parties each refer to their own standard terms, the contract is deemed to have been entered into under the terms which are not in conflict with each other. The provisions of law concerning the type of contract concerned apply in lieu of any conflicting terms. (2) In the case of conflicting standard terms, the contract is not deemed to have been entered into if one party has explicitly indicated before the contract is entered into or without delay thereafter and not by way of the standard terms that the party does not deem the contract to have been entered into. A party does not have this right if the party has performed the contract in part or in full or has accepted performance by the other party. § 41. LOA Validity of contract with standard terms If a standard term is void or is deemed not to be part of the contract, the rest of the contract is valid unless the party supplying the term proves that such the party would not have entered into the contract without the standard term which is void or is deemed not to be part of the contract. The provisions of law concerning the type of contract concerned apply in lieu of such terms. § 42. LOA Invalidity of standard terms (1) A standard term is void if, taking into account the nature, contents and manner of entry into the contract, the interests of the parties and other material circumstances, the term causes unfair harm to the other party, particularly if it causes a significant imbalance in the parties’ rights and obligations arising from the contract to the detriment of the other party. Unfair harm is presumed if a standard term derogates from a fundamental principle

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C. Estonia of law or restricts the rights and obligations arising for the other party from the nature of the contract such that it becomes questionable as to whether the purpose of the contract can be achieved. Invalidity of standard terms and the circumstances relating thereto shall be assessed as at the date of entry into the contract. (2) A standard term is not deemed to be unfair if it relates to the main subject matter of the contract or to the relationship between the price and the value of the services or goods supplied in exchange or if the contents of the term is based on such legislation which must not be derogated from pursuant to an agreement between the parties. (3) In a contract where the other party is a consumer, a standard term is considered to be unfair if, in particular, the term: 1) precludes the liability arising from law of the party supplying the standard term or restricts such liability in the case where the death of the other party or damage to the health of the other party is caused or in other cases where damage is caused intentionally or due to gross negligence; 2) precludes the use of legal remedies of the other party vis a vis the party supplying the terms, including the opportunity to set off claims, or unreasonably restricts the use thereof in the event of the party supplying the terms fails to perform the contractual obligation or performs it improperly, including delays the performance; 3) precludes or unreasonably restricts the other party’s right arising from law to refuse acceptance of performance of an obligation and to refuse performance of the party’s obligations in the case of a mutual contract, especially if the right to refuse is made subject to admittance of a deficiency by the party supplying the term; 4) [repealed] 5) prescribes that the other party shall, in the event of non-performance of the party’s obligations, pay an unreasonably high contractual penalty to the party supplying the term or an unreasonably high predetermined amount of compensation for damages or other compensation, or the other party is deprived of the opportunity to prove the actual size of the damage; 6) restricts the obligation of the party supplying the term to perform obligations undertaken by a representative of the party or makes performance of the obligations of such party subject to compliance with a particular formality on unreasonable grounds; 7) prescribes that a third party is liable for non-performance of the obligations of the party supplying the term; 8) precludes or restricts rights which the other party could exercise pursuant to law with regard to a third party if the rights arising from the contract to the party supplying the term transfer to such third party; 9) prescribes an unreasonably short term for the other party to submit claims, including an unreasonably short limitation period for claims arising from the contract or law; 10) deprives the other party of the opportunity to protect the party’s rights in court or unreasonably hinders such opportunity from being exercised; 11) unreasonably restricts the other party’s right to use evidence or imposes on the party a burden of proof which, according to law, should lie with the party supplying the term; 12) prescribes that, in the event of a breach of the contract by the party supplying the term, the other party may exercise the party’s legal remedies against the party supplying the term only if the other party has previously filed a claim against a third party with a court; 13) prescribes that performance of the obligations of the party supplying the term is made subject to a circumstance the occurrence of which depends on the party’s will alone, at the same time as the other party undertakes an obligation which is binding on the party regardless of such circumstance; 14) prescribes the right of the person supplying the term to alter the terms or conditions of the contract unilaterally for a reason or in a manner not provided by law or specified in the contract; 15) prescribes that the party supplying the term has the right to determine or increase the price of a movable or service at the time of delivery of the movable or provision of the service without the other party having the right to terminate the contract, except in cases where such terms are lawful terms for price indexation and expressly prescribe the method of adjusting the price;

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Part 1. Country Reports 16) provides the party supplying the term with a unilateral right to deliver a movable without good reason or provide a service with characteristics other than those agreed upon; 17) provides the party supplying the term with the right to unilaterally determine whether the movable delivered or service supplied or the performance of any other obligation is in conformity with the terms and conditions of the contract; 18) provides the party supplying the term with the exclusive right to interpret the contract terms; 19) provides the party supplying the term with the right to unilaterally determine the term for the performance of the party’s obligations or prescribes an unreasonably long or unspecified term for the performance of the obligations of the party supplying the term; 20) [repealed] 21) prescribes the obligation of the other party to make an unreasonably large advance payment before the party supplying the term performs the obligations thereof; 22) provides the party supplying the term with the right to require security of unreasonably high value; 23) prescribes the obligation of the other party to accept goods or services which were not ordered in addition to the goods and services agreed upon; 24) prescribes the obligation of the other party to enter into another contract with the party supplying the term or a third party, unless entry into such other contract is reasonable taking into account the relationship between such contract and the contract with standard terms; 25) provides the party supplying the term with the right to transfer the rights and obligations thereof arising from the contract to a third party without the consent of the other party where this may serve to reduce the likelihood of the contract being performed; 26) precludes or unreasonably restricts the right of the other party to assign claims; 27) prescribes that, at the end of the term of a contract for a specified term, the contract is automatically extended for a period exceeding one year without the other party making a corresponding request; 28) prescribes that a contract for a specified term is extended at the end of the term if the other party does not give notice of the opinion of the party with regard to the extension of the contract at an unreasonably early time before the end of the term; 29) provides the party supplying the term with the right to terminate the contract without giving reasons for the termination if the same right is not provided to the other party; 30) prescribes that, upon unilateral termination of the contract by the party supplying the term, the party may refuse to refund the sums paid by the other party for obligations which the party supplying the term has not yet performed, or the party supplying the terms is permitted keep the money paid by the other party if the other party does not enter into or perform the contract, and if the other party is not prescribed as large a compensation in the event the supplier of the term does not enter into or perform the contract; 31) prescribes an unreasonably long term of advance notice for the other party to terminate the contract; 32) prescribes an unreasonably short term of advance notice for the party supplying the term to terminate the contract; 33) provides the party supplying the term with the right to terminate a contract entered into for an unspecified term without good reason and without a reasonable period of advance notice; 34) [repealed] 35) prescribes that declarations of intent are to be made in a manner other than that provided by law and this causes harm to the other party, except where such specification applies to the format of the declaration of intent of the other party or unless it is prescribed that the party supplying the term may deem the address given thereto by the other party to be correct until the party supplying the term is notified of a new address; 36) enables the party supplying the term to make use of an unreasonably long or insufficiently determined term for acceptance or refusal of an offer;

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C. Estonia 37) prescribes that, upon performance or non-performance of a particular act, a declaration of intent of a party is deemed to have been made or not to have been made, unless the party supplying the term undertakes to specifically notify the other party of the consequences of the other party’s conduct and gives the other party a reasonable term for confirming the declaration of intent. § 43. LOA Specifications concerning credit institutions (1) The terms specified in clause 42 (3) 14) of this Act is not deemed to be unfair for the other party if a credit institution or other supplier of financial services reserves the right under the standard terms to alter, with good reason and without advance notice, the rate of interest or other charge for financial services to be paid by the other party or to the other party, on the condition that the credit institution or other supplier of financial services is required to immediately inform the other party or other parties of such alteration and that the other parties have the right to terminate the contract immediately. (2) The terms specified in clause 42 (3) 14) of this Act is not deemed to cause unfair harm to the other party if a credit institution or other supplier of financial services reserves the right under the standard terms to unilaterally alter the terms of a longterm contract without a good reason specified in the contract if alteration of the terms is not unfair with regard to the other party and if the credit institution or other supplier of financial services undertakes to give advance notice to the other party of any alteration of the terms and to grant the other party the right to terminate the contract immediately. § 44. LOA Contracts relating to economic or professional activities If a standard term specified in subsection 42 (3) of this Act is used in a contract where the other party to the contract is a person who entered into the contract for the purposes of the economic or professional activities of the person, the term is presumed to be unfair. § 45. LOA Requirement to terminate application of unfair standard terms (1) A person or body provided by law may, pursuant to the procedure provided by law, require that a party supplying an unfair standard term terminates application of the term and that the person recommending application of the term terminates and withdraws such recommendation. (2) The requirement specified in subsection (1) of this section may be filed, inter alia, by a non-profit association whose objectives as specified in the articles of association thereof include protection of the rights of undertakings or persons engaged in professional activities and who is actually able to protect these interests resulting from the organisation and financing of the activities thereof. (21) The non-profit association specified in subsection (2) of this section may submit a claim for termination of the use of the contract terms or practices concerning such term of payment, penalty for late payment or compensation for collection costs or recommendation for the use thereof which, based on the circumstances, are grossly unfair with regard to the obligee. Such claim may also be submitted in the case of an individually agreed term. (3) The provisions of the second sentence in subsection 39 (1) of this Act shall not apply upon settlement of the requirement provided for in subsection (1) of this section.

2. Good faith § 6. LOA Principle of good faith (1) Obligees and obligors shall act in good faith in their relations with one another. (2) Nothing arising from law, a usage or a transaction shall be applied to an obligation if it is contrary to the principle of good faith.

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Part 1. Country Reports § 138. GPCCA Principle of good faith (1) Rights shall be exercised and obligations shall be performed in good faith. (2) A right shall not be exercised in an unlawful manner or with the objective to cause damage to another person. § 32. GPCCA Principle of good faith in mutual relations The shareholders or members of a legal person and the members of the directing bodies of a legal person shall act in accordance with the principle of good faith and consider each other’s legitimate interests in their mutual relations.

3. Good morals and public order § 86. GPCCA Transaction contrary to good morals or public order (1) A transaction which is contrary to good morals or public order is void. (2) A transaction is contrary to good morals, inter alia, if a party knows or must know at the time of entry into the transaction that the other party enters into the transaction arising from his or her exceptional need, relationship of dependency, inexperience or other similar circumstances, and if: 1) the transaction has been entered into under conditions which are extremely unfavourable for the other party or 2) the value of mutual obligations arising for the parties is out of proportion contrary to good morals. (3) If the value of mutual obligations referred to in clause (2) 2) of this section is unreasonably out of balance in a manner that is contrary to good morals, it is presumed that the party knew or should have known of the other party’s exceptional need, relationship of dependency, inexperience or other similar circumstances.

4. Change of circumstances § 97. LOA Alteration of balance of contractual obligations (1) If the circumstances under which a contract is entered into change after the entry into the contract and this results in a material change in the balance of the obligations of the parties due to which the costs of one party for the performance of an obligation increase significantly or the value of that which is to be received from the other party under the contract decreases significantly, the injured party may demand amendment of the contract from the other party in order to restore the original balance of the obligations. (2) Amendment of a contract under the circumstances specified in subsection (1) of this section may be demanded if: 1) at the time of entry into the contract, the injured party could not have reasonably expected that the circumstances might change, and 2) the injured party could not influence the change in the circumstances, and 3) the risk of a change in the circumstances is not borne by the injured party pursuant to the law or the contract, and 4) the injured party would not have entered into the contract or would have entered into the contract under significantly different terms if the party had known of the change in the circumstances. (3) Amendment of a contract may also be demanded if the circumstances under which the contract was entered into had already changed before the contract was entered into but became known to the injured party after the contract was entered into. (4) The injured party may also demand amendment of the contract retroactively, but not as of a time earlier than the time when the balance of the obligations changed. (5) If the bases for amendment of a contract exist but, due to the circumstances, amendment of the contract pursuant to subsection (1) of this section is not possible or

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C. Estonia would not be reasonable with respect to the other party, the party aggrieved by alteration of the balance of the obligations may withdraw from the contract or, in the case of a long-term contract, cancel the contract pursuant to the procedure provided for in § 196 of this Act.

5. Open terms § 26. LOA Terms deliberately left open (1) When entering into a contract, the parties may leave some of the terms open with the intention of reaching an agreement on such terms in the future or leaving the terms to be determined by one party or a third party (terms deliberately left open). (2) If the parties do not reach an agreement on a term left open or if a party or a third party does not determine the term left open, the validity of the contract is not affected unless it can be presumed that the parties intended otherwise. (3) If a term left open is to be determined by a party or a third party, the term must conform to the principles of good faith and reasonableness. […] (9) A party may require that a term left open be determined by a court if: 1) the parties fail to reach an agreement on the term; 2) a third party fails to determine the term during the agreed period of time or, if no such agreement exists, during a reasonable period of time before the time by which performance of the obligation may be required; 3) the other party fails to determine the term left open after the right to determine the term has transferred to the other party pursuant to the provisions of subsection (7) of this section. (10) A court shall determine the terms left open in a contract based on the nature and purpose of the contract. (11) A party may also require that a court determine a term left open if the term determined by the other party or a third party does not conform to the principles of good faith and reasonableness.

6. Limitation and exclusion of liability § 106. LOA Agreement to release person from liability or to restrict liability (1) An obligor and an obligee may agree in advance to preclude or restrict liability in the case of non-performance of an obligation. (2) Agreements under which liability is precluded or restricted in the case of intentional non-performance or which allow the obligor to perform an obligation in a manner materially different from that which could be reasonably expected by the obligee or which unreasonably exclude or restrict liability in some other manner are void.

III. Requirements and legal consequences 1. Judicial review of standard terms a) Definition of standard terms (§ 35 LOA). The regulation of standard terms in 6 B2B contracts can be found in §§ 35–45 LOA. The regulation of standard terms is regulated on the basis of the Unfair Terms Directive, the former German Law on General Business Conditions (Gesetz zur Regelung der allgemeinen Geschäftsbedingungen13), also German and CJEU case law, the Dutch Civil Code, the Austrian Civil Code, the Swiss Code of Obligations and the Greek Civil Code. The establishment of the nullity of a standard term is the duty of the court, as it constitutes application of the law 13

In force until 1 January 2002.

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under § 438(1) Code of Civil Procedure (tsiviilkohtumenetluse seadustik14). The court must check the validity of standard terms even if the parties did not rely on it.15 Judicial review of standard terms is not specific to B2C contracts, but pertains in accordance with §§ 36(3) and 44 LOA to contracts entered into in economic or professional activities as well.16 The Estonian Supreme Court has clarified that the judicial review of B2B contracts is justified if there is an inequality of negotiating positions, and that the freedom of contract means only the freedom to conclude an agreement.17 On the other hand, businesses are expected to act professionally and it is much easier for them to negotiate contract terms or understand their content. Therefore, the regulation of standard terms is applied taking into account § 44 LOA, according to which the standard terms listed in § 42(3) LOA are presumed to be unfair (‘grey list’). All other aspects, such as the definition of a standard term, the burden of proof, the transparency requirement, the principles of conclusion of a contract and of its interpretation, are applied in the same manner, regardless of the specific qualities of the parties. The regulation of standard terms also applies to unilateral declarations of intent such as offer and acceptance, contracts in oral form, annexes to the contract, or standard contracts. Control of standard terms is also applicable to preliminary agreements. A standard term is a contractual term, the content of which is not capable of being influenced by the party against whom it is used. In Estonian law, the concept of standard term has an important role in the judicial control of standard terms in B2B contracts. In accordance with § 35(2) LOA the burden of proof that the standard term was negotiated and individually agreed lies on the provider of the standard term.18 This also applies in the case of B2B contracts, but it is much easier for businesses to reverse the burden of proof as long as the negotiating power appears to be equal and there are no other specific circumstances. For example, the Supreme Court explained that the mere fact that the party was ready to return what was obtained under the contract and that no other terms were proposed does not prove that the termination agreement did not contain standard terms.19 It is important to mention that in 2017 the Estonian Supreme Court applied for the first time the regulation of standard terms to state procurement contracts, explaining that there is a presumption that state procurement contracts are concluded on standard terms, i.e. terms which are not negotiable. Furthermore, the technical description which is added to the tender documents can consist of standard terms, if the rights and obligations of the parties are described therein.20 Thus, in case law there is a presumption which applies also to B2B contracts, that if the contract is drafted in advance or for some other reason non-negotiable and presented to the other party in the form of a standard contract (with the same wording for all clients), the burden of proof provided 14

1 January 2006. Available in English at www.riigiteataja.ee/en/eli/ee/514122018001/consolide/cur-

rent. 15 Judgments of the Estonian Supreme Court of 24 November 2011 in civil case no. 3-2-1-109-11, para. 12; of 17 June 2008 in civil case no. 3-2-1-56-08, para. 13 and of 30 October 2013 in civil case no. 3-21-106-13, para. 24. 16 Explained by the Estonian Supreme Court in the judgment of 17 June 2008 in civil case no. 3-2-1-5608, para. 13. 17 Judgment of the Estonian Supreme Court of 11 June 2007 in civil case no. 3-2-1-64-07, para. 9. 18 There are some judgments where the burden of proof was put on the consumers, however, in recent judgments the Estonian Supreme Court has interpreted § 35(2) of the LOA in conformity with the ECJ case law. See C‐137/08 VB Pénzügyi Lízing ECLI:EU:C:2010:659. 19 Judgment of the Estonian Supreme Court of 6 February 2013 in civil case no. 3-2-1-182-12, para. 12. 20 Judgments of the Estonian Supreme Court of 13 December 2017 in civil case no. 2-15-2810, para. 13; of 19 December 2017 in civil case no. 2-15-15662, para. 21.

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for in § 35(2) LOA is applicable to B2B contracts, if not reversed by the provider of the standard contract.21 b) Incorporation of standard terms into the contract. The Unfair Terms Directive 11 gives Member States the opportunity to choose how to implement the requirement of transparency and the fairness control. Estonia has chosen the so-called ‘two-step’ test, i.e. compliance with the requirement of transparency (§ 37(3) LOA) is checked after it has been established that the standard term has become part of the contract (§ 37(1) LOA). The party supplying the term has to refer clearly to the term or it must be possible to presume the use of the term from the manner of conclusion of the contract, and the other party must be provided with an opportunity to examine the content of the term. There are some judgments in which the question of incorporation of a standard term has been under discussion. As the Supreme Court does not assess evidence, such matters have been referred for a new hearing in a court of lower instance. For example, whether the reference to ‘Full Protection TCT’ in an insurance policy issued by the defendant may have been understood as a reference to the standard terms and conditions of the insurance contract, is a factual circumstance and has to be established by the lower court.22 There are only very few cases on incorporation of standard terms into a contract 12 which have focused on the non-transparency or unintelligibility of the term. Standard terms the contents, wording or presentation of which is so uncommon or unintelligible that the other party cannot, based on the principle of reasonableness, have expected them to be included in the contract, or which the party cannot understand without considerable effort, are not deemed to be part of the contract (§ 37(3) LOA). For example, the Supreme Court did not find to be uncommon and therefore surprising a term that the policyholder must ensure reasonable and elementary conditions for the insured object which was intended to be kept off-site, and a term containing a list of conditions that the insurer considers reasonable and elementary.23 The Supreme Court also explained that standard terms which are drafted by using the text of a legal act cannot be unintelligible and therefore void.24 c) Interpretation of standard terms. Pursuant to § 39(1) LOA standard terms shall 13 be interpreted according to the meaning that reasonable persons of the same kind as the other party would give to them in the same circumstances. In the case of doubt, standard terms shall be interpreted to the detriment of the party supplying the standard terms. This rule has been referred to in three cases heard by the Supreme Court.25 In the first case the Supreme Court came to the conclusion that a standard term in a technical specification according to which all ambiguities are interpreted in favour of the contracting authority is contrary to § 39(1) LOA and void.26 In the second case the Supreme Court applied the second sentence of § 39(1) LOA and interpreted a term of the insurance contract to the detriment of the party supplying the standard term.27 In 21

Judgment of the Estonian Supreme Court of 5 January 2014 in civil case no. 3-2-1-156-13, para. 10. Judgment of the Estonian Supreme Court of 19 March 2014 in civil case no. 3-2-1-152-14, para. 10. Judgment of the Estonian Supreme Court of 7 June 2017 in civil case no. 3-2-1-58-17, para. 11.1. 24 Judgment of the Estonian Supreme Court of 16 December 2015 in civil case no. 3-2-1-150-15, para. 14. 25 Judgments of the Estonian Supreme Court of 19 December 2017 in civil case no. 2-15-15662, para. 21; of 19 March 2015 in civil case no. 3-2-1-152-14, para. 12; of 7 June 2017 in civil case no. 3-21-58-17, para. 11.3. 26 Judgment of the Estonian Supreme Court of 19 December 2017 in civil case no. 2-15-15662, para. 21. The proceedings were terminated due to a judicial compromise. 27 Judgment of the Estonian Supreme Court of 19 March 2015 in civil case no. 3-2-1-152-14, para. 12. In this case it was under dispute whether the insurance risks described in the contract excluded the 22 23

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the third case the Supreme Court found that an insurance contract had to be interpreted to the detriment of the insurer, stating that as the contract did not provide for an exhaustive and mandatory list of reasonable and elementary storage conditions, the policyholder could choose appropriate measures themselves.28 14

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d) Judicial review. The Estonian system of judicial review is based on a three-stage fairness control. This means that it must be ascertained whether (i) the term is a standard term; (ii) the standard term has become part of the contract; and (iii) the term is valid. Validity of the term is assessed in accordance with a general unfairness test (§ 42(1) LOA) and grey and black lists of unfair terms (§ 42(3) LOA). There are 34 terms listed in § 42(3) LOA which are void in B2C contracts and disputable (presumably unfair) in B2B contracts. There are cases where a term has been reviewed and declared void by the Supreme Court, as well as cases where the Supreme Court has referred the matter for a new hearing in lower courts with guidance concerning the possible nullity of the standard term. In the following cases the Supreme Court only referred to the possibility that a standard term is void and gave some guidance on how to assess its validity. The Supreme Court explained that it may be important whether the contract concluded between the parties was fixed-term or open-ended. Presumably, an openended contract must, at least to some extent, allow for a periodic adjustment of the payment provided for in the contract. It follows that a term which excludes the right to periodically adjust the agreed amount of payment in a long-term contract (e.g. a lease contract) might be void as unfair under § 42(3)(14) LOA.29 The Supreme Court explained that a term in a public procurement contract according to which the risk that there is an essential difference between the necessary renovation work described in the offer and the real situation of the object lies on the contractor, might be unfair. This term may be in violation of § 42(1) LOA which provides that unfairness of the term is presumed if it derogates from a fundamental principle of law. For the same reason a term which provides that all ambiguities in the contract are interpreted in favour of the contracting authority might be void.30 The Supreme Court accepted the reasoning of the Circuit Court who declared standard terms which allowed the defendants to claim, in addition to a contractual penalty, loss of profit for the same time period, to be void. Such terms are unreasonably damaging and void pursuant to § 42(3)(5) LOA. In the same case the Supreme Court explained that the Circuit Court has to check the validity of the term which allows the contractor to demand a penalty of 0.1 % of the contract price (3,102.39 EUR per day) if the license is not issued by the agreed deadline. This penalty payment might be unreasonably high and therefore unfair (§ 42(3)(5) LOA).31 In the following cases the Supreme Court declared nullity of a standard term itself. The Supreme Court explained that under § 367(3) LOA, if the object of lease remains in the ownership of the lessor after termination of the lease contract, the value of the object of lease at the time of return of the object to the lessor must be taken into account upon determining the amount of the claim for reimbursement of expenses, particularly the purchase price of the object of lease and the costs of financing the purchase price to the obligation of the insurer to compensate the loss incurred. The Supreme Court held that in interpreting an unclear term to the detriment of the insurer, the list of excluded risks must be considered exhaustive. 28 Judgment of the Estonian Supreme Court of 7 June 2017 in civil case no. 3-2-1-58-17, para. 11.3. The proceedings were terminated due to a judicial compromise. 29 Judgment of the Estonian Supreme Court of 30 October 2013 in civil case no. 3-2-1-106-13, para. 25. 30 Judgment of the Estonian Supreme Court of 19 December 2017 in civil case no. 2-15-15662. 31 Judgment of the Estonian Supreme Court of 13 December 2017 in civil case no. 2-15-2810, paras 15, 18.

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extent to which these are not covered by the lease payments already paid. Therefore, pursuant to § 42(1) LOA, an agreement according to which the value of the object of lease remaining to the lessor is not taken into account or is taken into account to an unreasonably small extent in calculating the lessor’s claim for compensation, is void. This applies also if the other party is not a consumer, but concluded the contract in economic or professional activities, and to the sureties in lease contracts.32 The Supreme Court reviewed a term providing for the amount of interest for late payment and found that in the case of a contract concluded in an economic activity, an agreed interest rate of 0.2 % of the delayed payment per day would not be in conflict with the law even if it was a standard term.33 Parties in B2B contracts are free in a lease contract to agree on an interest rate on late payments which is significantly higher than the rate specified in § 113(1) LOA even as a standard term, especially if it is not exceptional in the relevant field of business and abusive, taking into account all circumstances of the contractual relationship.34 The Supreme Court noted that a standard term in the contract of sale of heat energy may be void under § 42(1), (3)(5) and (3)(11) LOA if the term provides that the consumption of heat determined by the counterparty is deemed to be unrealistic if the quantity of consumption is 30 % less than the calculated quantity and that in such case the seller of heat energy has the right to issue the invoice based only on the calculated data. The Supreme Court found that § 42(1), (3)(5) and (3)(11) LOA prohibit unreasonable compensation procedures and unreasonable allocation of the burden of proof not only in B2C but also in B2B contracts.35 The Supreme Court assessed a term in a first demand guarantee agreement, which provided that the risk of receiving a declaration of intent is on the defendant (the recipient), i.e. in the event of a dispute the claimant has to prove only that he has sent the letter by registered mail to the defendant (five working days shall have passed from the posting of the letter). The Supreme Court found that this provision is in conflict with § 69(3) GPCCA which provides that a declaration of intention relating to a contract, which is directed at a party not present, is deemed to be received when it has been delivered to such place of business of the recipient which is most related to the performance of the contract and the recipient has had a reasonable opportunity to review the declaration. Pursuant to § 69(3) GPCCA, the sender bears the risk of receiving the letter. There is a significant difference in who bears the risk of delivering/ receiving a declaration of will. Taking into account that the contract was concluded between businesses, there is a possibility that the claimant can prove that the use of that kind of clauses is usual in business transactions. If no such evidence is provided, the condition shall be deemed void.36 Finally, the Estonian Supreme Court has in some cases discussed circumstances affecting the validity of a standard term, concluding that the term in question is valid. For example, the Supreme Court found that a standard term, under which a bank has the right to terminate the agreement and demand immediate performance of obligations by notifying the borrower in writing if the borrower fails to fulfil its obligations under 32 Judgments of the Estonian Supreme Court of 5 January 2014 in civil case no. 3-2-1-156-13, para. 11; of 29 April 2008 in civil case no. 3-2-1-33-08, para. 17; of 17 June 2008 in civil case no. 3-2-1-56-08, para. 14; of 8 October 2008 in civil case no. 3-2-1-77-08, para. 17. 33 Judgment of the Estonian Supreme Court of 18 December 2014 in civil case no. 3-2-1-139-14, para. 13. 34 Judgment of the Estonian Supreme Court of 30 April 2013 in civil case no. 3-2-1-5-13, paras 48–49. 35 Judgment of the Estonian Supreme Court of 7 November 2005 in civil case no. 3-2-1-118-05, paras 35–36. 36 Judgment of the Estonian Supreme Court of 25 April 2012 in civil case no. 3-2-1-151-11, para. 13.

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credit agreements with other financial institutions, is valid in B2B contracts. The Supreme Court noted, however, that this standard term may, in other circumstances, cause unreasonable damage to the other party. The assessment of this standard term must take into account, inter alia, whether the borrower is a consumer or not and the type of contracts used. For example, in a situation where a bank terminates a consumer credit agreement due to a breach of a credit card agreement, the standard term may cause unreasonable harm to the consumer and has to be declared void.37

2. Good faith The principle of good faith was introduced into the Estonian legal system in 1994, when the GPCCA entered into force (§ 108 GPCCA).38 The relevant provision retained its original wording also in the adapted version of the GPCCA in 2002 (§ 138 GPCCA). It has to be mentioned that § 138(1) GPCCA partly repeats § 6(1) LOA. Therefore, § 138(1) GPCCA and § 6(1) LOA are often referred to together in court judgments. 25 § 138(2) GPCCA contains a rule which is partly similar to the prohibition of chicanery under German law (Schikaneverbot; § 226 BGB). According to § 138(2) GPCCA, a right shall not be exercised in an unlawful manner or with the objective to cause damage to another person. In practice courts often use § 138(2) GPCCA and § 6(2) LOA as legal grounds for preventing abuse of rights in contractual relations. If it is established that the purpose of exercising a right is to cause harm to another person, the court may refuse to enforce the right, but not invalidate the contract or some of its terms. For example, the Estonian Supreme Court applied § 138(2) GPCCA to prevent the exercise of rights in a situation where a creditor acted controversially when informing the court about an overdue deadline in order to prevent the commencement of reorganisation proceedings, although the creditor knew about the overdue deadline at the time when materials for the reorganisation ruling were collected and documents prepared.39 26 In addition to the general obligation provided for in § 138(1) GPCCA that rights shall be exercised and obligations shall be performed in good faith, § 32 GPCCA provides for a general obligation of shareholders or members of a legal person and the members of directing bodies of a legal person to act in accordance with the principle of good faith and consider each other’s legitimate interests in their mutual relations. The Estonian Supreme Court has clarified that the legal relationship between the company’s shareholders with the company and also between the shareholders is not contractual. However, the members of a legal person must take into account each other’s interests and act in good faith when exercising their rights.40 For example, the Supreme Court came to the conclusion that although the law does not explicitly stipulate that a shareholder must vote in favour of the decision approving the annual report, such an obligation may arise from §§ 334(1) and (2) Commercial Code (äriseadustik41) in conjunction with §§ 32 and 138 GPCCA and §§ 60 and 71 Commercial Code on the basis of the principle of good faith.42 27 The principle of good faith is defined in the Law of Obligations Act specifically for contracts and other sources of obligations.43 § 6(2) LOA refers to different sources, 24

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Judgment of the Estonian Supreme Court of 29 March 2010 in civil case no. 3-2-1-5-10, para. 13. Sources of the provision were §§ 226 and 242 BGB; § 2 Swiss Code of Obligations. 39 Regulation of the Estonian Supreme Court of 11 May 2010 in civil case no. 3-2-1-28-10, para. 15. 40 Judgment of the Estonian Supreme Court of 31 March 2010 in civil case no. 3-2-1-7-10, para. 31. 41 1 September 1995. Available in English at www.riigiteataja.ee/en/eli/522062017003/consolide. 42 Judgment of the Estonian Supreme Court of 7 November 2018 in civil case no. 2-17-9986, para. 17. 43 The main sources of § 6(1) LOA, e.g. of the definition of the principle of good faith were § 242 BGB, Arts 3:12, 6:2, 6:248 BW, Art. 1.7. PICC 1994 and Art. 1:201 PECL. 38

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reinforcing the principle that abuse of the rights derived from the law, contract or usages is not allowed. This rule gives judges a remarkably wide discretion as to whether or not to apply certain provisions of the LOA or any other legal act, usage or contract.44 During the past 20 years, Estonian courts have developed a quite consistent and 28 predictable practice in using the principle of good faith to protect parties from unfair behaviour in contractual relations. The Estonian Supreme Court declared that the principle of good faith provides a behavioural standard for the parties in a contractual relationship, but it cannot be used as a legal ground for judicial review of the contract.45 In most cases the principle has been used as a tool by courts to prevent the abuse of rights.46 For example, termination of the contract may be prohibited under § 138 GPCCA and § 6 LOA, taking into account all circumstances of the contractual relationship, even if the ground used for the termination was agreed between the parties to the contract.47 Also, a claim of interest for late payment may be against the principle of good faith if, due to the circumstances of the case, claiming interest for late payment does not correspond to the nature of the contractual relationship, the purpose of the contract, or to socially acceptable moral standards (e.g. it is unjust).48 Thus, the principle of good faith allows for the dismissal of claims arising from law, 29 usage or contract, and thereby enables to assess the behaviour of the parties, but it does not give judges the right to assess the content of the contract.

3. Good morals and public order The principle of freedom of contract forms the basis of Estonian private law. 30 Freedom of contract means that the parties are free to conclude any kind of contract they desire as long as the contract is not in conflict with the content and spirit of the law (§ 1(1) LOA). It also allows derogation from the provisions of the law unless it is expressly provided or indicated by the nature of a provision that derogation is not permitted, or unless derogation is contrary to public order or good morals or violates the fundamental rights of a person (§ 5 LOA). The parties’ freedom to agree on the content of their contracts is not unlimited. A contract that violates public morality or public order is null and void (§ 86 GPCCA). The term good morals (boni mores) comprises both legal (public order) and extra-legal (good morals) standards and the legal doctrine and case law do not give different meanings to these two grounds of invalidity.49 § 86 GPCCA was formulated on the basis of § 138 BGB, Art. 3:40 BW and 31 Art. 19 Swiss Code of Obligations. While the concepts of ‘good morals’ and ‘public order’ are not defined by the Estonian legislator, the meaning of these concepts can be found in Estonian judgments. For example, the Estonian Supreme Court has defined a transaction which is against good morals as a transaction which is in contradiction with the honest and fair mindedness of people, their sense of justice and basic values and the general principles of law or which is, according to the prevailing understandings in society, immoral and non-acceptable.50 A transaction can be against good morals due to 44

The Dutch Civil Code was the main role model for such solution. Judgment of the Estonian Supreme Court of 29 March 2004 in civil case no. 3-2-1-41-04, para. 24. 46 A general clause derived from the principle of good faith, namely exceptio doli i.e. the defence of the claimant’s unclean hands, is enshrined in § 138(1) GPCCA. § 138(2) GPCCA provides that a right shall not be exercised in an unlawful manner or with the objective of causing damage to another person. 47 Judgment of the Estonian Supreme Court of 6 April 2018 in civil case no. 2-15-3965, para. 16. 48 Judgment of the Estonian Supreme Court of 23 October 2007 in civil case no. 3-2-1-41-07, para. 27. 49 Varul et al. (‘Tsiviilseadustiku’), 269–270. 50 Judgments of the Estonian Supreme Court of 23 May 2018 in civil case no. 2-16-9415, para. 13; of 31 January 2018 in civil case no. 2-14-21710, para. 47; of 5 March 2014 in civil case no. 3-2-1-186-12, 45

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the immoral purpose of the transaction or immoral conduct of a party to the transaction.51 In assessing the compatibility of a transaction with good morals and public order, all relevant circumstances, including the nature of the transaction and the specific circumstances of the transaction, must be taken into account.52 32 There are few cases where the Estonian Supreme Court has found that a B2B contract is void as a result of being against good morals and public order. The matters where § 86 GPCCA has been invoked in B2B contracts are the following: 33

a) Global collaterals. The Supreme Court explained that a collateral agreement may be in conflict with good morals and thereby void if it does not adequately define the future claims to be secured, or if it ensures that all the mortgagee’s claims against the owner of the immovable or a third party are secured by the mortgage, unreasonably restricting the economic freedom or future livelihood of the owner of the immovable.53

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b) Takeover of a company. In the opinion of the Supreme Court, the transactions of a shareholder for the purpose of taking over control of a company or of its business activities, if concluded unfairly at the expense of other shareholders, cannot be considered compatible with good morals. The same applies if one shareholder (or more), without the knowledge of the other shareholders, transfers the company’s assets under the control of a certain shareholder, leaving the other’s participation substantially inert.54

c) Immoral disproportionality of mutual obligations (high interest rate). A high interest rate cannot itself be against good morals. For example, the Supreme Court explained in 2002 that even in contracts between private persons an annual interest rate of 72 % cannot be declared void and against good morals because as a matter of principle, the lender has the right to decide on the interest rate at which the loan is granted, as any business has the right to agree on the price of the goods or services offered. The court does not have the right to intervene in the free economic activity of persons or to control the price without a basis provided for by law. In addition, the court may reduce the penalty to a reasonable amount at the request of the party obligated to pay the penalty (§ 162(1) LOA). 36 The use of § 86 GPCCA in cases of high interest rates is justified only if there are circumstances provided for in § 86(2) GPCCA.55 It is interesting to mention that German court practice is described in the commentary on § 86 GPCCA56 as a model to be followed. It is stated that in German case law an agreement is against good morals if the difference between the obligation and the counter-obligation is more than 100 % and that this model can also be used in Estonian law.57 However, the position taken already in 2002 that gross disproportionality between the obligations of the parties will 35

para. 22; of 1 November 2008 in civil case no. 3-2-1-111-08, para. 23; of 13 February 2008 in civil case no. 3-2-1-140-07, para. 30; of 16 October 2002 in civil case no. 3-2-1-80-02, para. 10. 51 Judgment of the Estonian Supreme Court of 23 September 2005 in civil case no. 3-2-1-80-05, para. 23. 52 Judgments of the Estonian Supreme Court of 24 May 2001 in civil case no. 3-2-1-76-01; of 29 April 2002 in civil case no. 3-2-1-29-02, para. 9. 53 Judgment of the Estonian Supreme Court of 5 November 2008 in civil case no. 3-2-1-104-08, para. 19. 54 The same reasoning could be used also to prevent the abuse of rights under § 138 GPCCA and claim damages under § 1043 LOA. See judgment of the Estonian Supreme Court of 31 March 2010 in civil case no. 3-2-1-7-10, para. 37. 55 Judgment of the Estonian Supreme Court of 22 October 2002 in civil case no. 3-2-1-108-02, para. 11. 56 See Varul et al. (‘Tsiviilseadustiku’), 276. 57 See Armbrüster, in Münchener Kommentar, § 138 BGB mn. 115.

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by itself not suffice and there have to be also objective circumstances which justify the judicial review of the contract, has not been overruled.58 d) Penalties and interest on late payments. In principle, penalties and interest on 37 late payment cannot be against good morals merely because the rates are too high. The Estonian Supreme Court has explained that a court may reduce the penalty to a reasonable amount at the request of the party obligated to pay the penalty, taking into account in particular the extent to which the obligation has been performed by the party, the legitimate interests of the other party and the economic situation of the parties (§ 162(1) LOA) which guarantees the protection of the parties’ legal interests. However, an agreement concerning a penalty payment may be void if the formation of the final amount of the contractual penalty is unclear and the other party’s exceptional need and dependency were abused.59 e) Share sale contract. The Supreme Court has clarified that a share sale contract 38 may be void under § 86 GPCCA if the purpose of the disposition of ownership of the shares was to avoid the restriction on voting rights provided for in § 303(1) Commercial Code. Under Estonian law, transfer of ownership (disposition) is separated from the obligation to transfer ownership and must be distinguished also when the shares are disposed of (§ 6(3) GPCCA). The nullity of the obligational transaction does not automatically lead to the nullity of the disposition transaction, and the validity of a disposition is not contingent upon the validity of the transaction which requires the transfer of the right or obligation (abstraction principle, § 6(4) GPCCA). Immorality can generally only concern the underlying transaction of the disposition. However, by way of exception, the Supreme Court has upheld the immorality of the disposition if the purpose of the disposition itself is against good morals.60 By way of exception, a person who is not a party to the disposition may rely on the nullity of such a transaction if it affects his or her rights.61 When assessing the immorality of the contract, all relevant circumstances, including the content of the contract and the circumstances in which it is concluded, must be taken into account.62 The Circuit Court, in its second review of the case, considered the sale of shares void due to contradiction with good morals.63 The court considered the purpose of the transaction, which was to limit the rights of minority shareholders, contrary to good morals while shares were sold by the same person also before previous general meetings of shareholders in order to avoid the exercise of voting rights by minor shareholders.

4. Change of circumstances Estonia introduced a mechanism intended to correct a situation which may arise 39 when performance of a contractual obligation, although not completely impossible, has 58 In the judgment of 10 May 2017 (in civil case no. 3-2-1-41-17, para. 15) the Estonian Supreme Court explained that even an extremely large loan between businesses cannot be against good morals, except in cases where the contract was concluded on the circumstances provided for in § 86(2) GPCCA (exceptional need, relationship of dependency, inexperience or other similar circumstances). 59 See judgment of the Tallinn Circuit Court of 15 May 3018 in civil case no. 2-17-103651. 60 Judgments of the Estonian Supreme Court of 23 September 2005 in civil case no. 3-2-1-80-05, para. 26; of 13 February 2008 in civil case no. 3-2-1-140-07, paras 30–31. 61 Judgments of the Estonian Supreme Court of 13 February 2008 in civil case no. 3-2-1-140-07, paras 13–14; of 15 January 2007 in civil case no. 3-2-1-132-06, para. 20. 62 Judgments of the Estonian Supreme Court of 10 December 2012 in civil case no. 3-2-1-156-12, para. 11; of 24 May 2001 in civil case no. 3-2-1-76-01; of 29 April 2002 in civil case no. 3-2-1-29-02, para. 9. 63 Judgment of the Tallinn Circuit Court of 5 March 2013 in civil case no. 2-10-38846/63.

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become so excessively and disproportionately onerous that it would be grossly unjust to hold parties to the contract, for the first time in 2002 (§ 97 LOA). As § 97 LOA was drafted mainly on the basis of Arts 6.2.2. and 6.2.3 PICC, Art. 6:111 PECL and § 313 BGB, the provision is a combination of different doctrines. In § 97 LOA one can find the Oertmann’s theory of collapse of the foundation of contract (Wegfall der Geschäftsgrundlage) and also the concept of hardship based on the PICC. 40 Under § 97(1) LOA a party may demand amendment of the contract from the other party in order to restore the original balance of the obligations if the circumstances under which a contract is entered into change after the entry into the contract and this results in a material change in the balance of the obligations of the parties due to which the costs of one party for the performance of an obligation increase significantly or the value of that which is to be received from the other party under the contract decreases significantly. The change of circumstances can be used as the basis for amendment or termination of the contract only in exceptional circumstances.64 41 There are two main preconditions which need to be present: firstly, the circumstances must be the basis of the contract and secondly, the circumstances must have changed significantly since the contract was entered into. The parties may have different objectives when concluding a contract. However, only the circumstances which, by the common understanding of the parties, existed at the moment of the conclusion of the contract or had to appear or continue to exist during the contractual relations, are relevant. Also, the decision of the parties to conclude the contract must have been based on these circumstances. Expectations of one party, if not communicated to the other party, do not constitute the basis of the contract, unless they should have been taken into account by the other party acting in good faith. For example, concerning the risk of finding finances for the purchase, the Estonian Supreme Court came to the conclusion that as a rule, only one contracting party, the buyer, carries the risk of financing the sale transaction. This applies unless the financing of the transaction in the future is one of the circumstances underlying the conclusion of the contract.65 42 There is only one judgment in which the Estonian Supreme Court has found that a claim to amend the contract in order to restore the original balance of the obligations on the basis of § 97 LOA is justified. The Estonian Supreme Court found in a judgment from 2016 that the global recession and crisis in Estonia between 2008–2010 are factors which materially changed the balance between the obligations of the parties. According to the contract, the claimant was obliged to pay rent which, in the circumstances of the economic crisis, appeared to be significantly higher than the market price. The Supreme Court explained that the risks associated with the economic crisis have to be shared between the lessee and the lessor while the contract was concluded on the basis of the parties’ expectation that the economic environment remains stable and that it is possible for the parties to perform the lease agreement.66 The right to claim amendment of the terms of the contract will not end even upon termination of the contract.67 The Circuit Court followed the guidance given by the Supreme Court and upheld the claim retroactively from the beginning of the crisis until the termination of the contract and reduced the rent by more than 50 % (from 9.59 EUR to 4.47 EUR per m2).68 64

Judgment of the Estonian Supreme Court of 26 October 2010 in civil case no. 3-2-1-76-10, para. 11. Judgment of the Estonian Supreme Court of 26 October 2010 in civil case no. 3-2-1-76-10, para. 13. 66 Judgment of the Estonian Supreme Court of 5 May 2016 in civil case no. 3-2-1-179-15, paras 34–35. 67 It is interesting to mention that in judgment of 12 December 2012 in civil case no. 3-2-1-143-13 the Supreme Court changed its position taken in judgment of 12 December 2012 in civil case no. 3-2-1-12 that § 97 LOA can be used as a basis for a claim only during the existence of the contract. 68 Judgment of the Tartu Circuit Court of 2 April 2018 in civil case no. 2-11-45657/146. 65

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There are a number of judgments where the claim was dismissed which proves that there must be extraordinary circumstances for application of § 97 LOA: In two cases, the Estonian Supreme Court dismissed the claim for amendment of the terms of the contract based on the change of circumstances on the grounds that the party relying on the change of circumstances could reasonably foresee the change of circumstances (§ 97(2)(1) LOA).69 The Supreme Court explained that in the case of a sale of immovable property, the conclusion of the contract is generally based on the parties’ common understanding that the value of the property sold in a stable economic environment does not change significantly. The Supreme Court explained that if the value of the immovable changes significantly due to an economic bubble, then a claim based on a change of circumstances is justified. The value of real estate must be evaluated at the time of the judgment. However, if the seller was involved in the development of real estate in his economic and professional activities, the real estate market and the associated price increases and deviations should be known and predictable to her. In 2012 the Estonian Supreme Court dismissed a claim to reduce the interest rate used in a credit contract retroactively based on § 97 LOA due to the financial crisis which caused economic difficulties and delay of payments.70 The Court found that the claimant had not put forward any evidence to suggest that the balance between the contractual obligations had changed materially. The value of money had not increased and the interest rates of loans on the market had not dropped drastically. The fact that the claimant encountered economic difficulties which made the making of loan payments difficult, does not mean that the claimant’s obligations would be substantially increased compared to the original amount or that the value of the benefit received by the claimant under the loan agreement (the right to use the agreed amount of money) would have decreased.71 In 2011, the Supreme Court stated that risk cannot be divided between the parties on the basis of circumstances which occurred after the breach of the contract. This must derive from the law or the contract itself. The risk that performance of obligations becomes more burdensome or expensive, as a rule, has to be borne by the debtor, unless otherwise agreed by the parties. If, on agreement of the parties, the buyer is allowed to pay the purchase price after the conclusion of the contract, the risk of change of market prices between the time when the contract was concluded and the time when it was performed has to be borne by the buyer.72 Placing the risk of price changes on the seller cannot be justified even by the fact that the buyer paid interest for late payment. In a second case from 2011 the Estonian Supreme Court dismissed a claim to amend the terms of a transportation contract under § 97 LOA.73 The claim was based on the change of balance between the obligations due to a material change in transit volume in Estonia in the second half of the year 2007. The court agreed with the carrier that the volume of transit was the basis of the contract. However, the claimant could not prove a material change in its transit volume compared to the time when the parties agreed on the contract term which the claimant sought to amend (§ 97(1) LOA). 69 Judgments of the Estonian Supreme Court of 26 October 2010 in civil case no. 3-2-1-76-10, para. 15; of 21 December 2011 in civil case no. 3-2-1-136-11, para. 22. 70 Judgment of the Estonian Supreme Court of 12 December 2012 in civil case no. 3-2-1-162-12. The credit contract was concluded for the period 2005–2010. 71 Judgment of the Estonian Supreme Court of 12 December 2012 in civil case no. 3-2-1-162-12, paras. 8 and 14. 72 Judgment of the Estonian Supreme Court of 21 December 2011 in civil case no. 3-2-1-136-11, para. 22. The same position was taken by the Supreme Court in judgment of 22 November 2010 in civil case no. 3-2-1-99-10, para. 13. 73 Judgment of the Estonian Supreme Court of 4 May 2011 in civil case no. 3-2-1-24-11, para. 13.

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5. Terms deliberately left open 48

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The parties may leave the price or any other term open with the intention of reaching an agreement on such terms in the future or leaving the terms to be determined by one party or a third party (§ 26(1) LOA). This does not prevent the formation of a valid contract. The determination must be in conformity with the principles of good faith and reasonableness (§ 26(3) LOA). If it is not, the court may intervene to protect the debtor against the creditor fixing the term abusively. The Estonian Supreme Court has applied § 26 of the LOA in three judgments. In 2009 the Supreme Court annulled the judgment of the Circuit Court and referred the matter for a new hearing in the County Court because the Circuit Court had refused to determine an open term, although such an obligation is imposed by § 26(9) LOA. The Supreme Court explained that the court may itself determine the boundaries of the immovable property resulting from the division of the immovable if the parties do not reach an agreement pursuant to § 26(9) LOA.74 In the second judgment the Supreme Court referred the matter for a new hearing in the Circuit Court who found that parties left the amount of rent for the use of land open with the intention to reach an agreement in the future if more land will be used by the lessor. The Court stated that as far as the agreement was not reached, there is no legal ground to intervene into the contractual relations. The Supreme Court had explained that under § 26(9)(1) LOA, the courts have an obligation to determine an open term if the parties fail to reach an agreement.75 However, the Circuit Court refused to determine the amount of the rent for the second time and found that as long as there is no agreement on the amount of the rent, there is no right to demand any payment for the use of the land.76 In the third case the Estonian Supreme Court referred the matter for a new hearing in the Circuit Court because the Circuit Court had not assessed whether the contract was concluded on open terms, and gave instructions according to which the court can determine the charge for pollution exceeding the standard not determined by one party under § 26(2), (10) and (11) LOA even if the charge has got features of a payment under public law.77 There are some judgments of lower courts where terms determined by one party were reviewed by the court on the basis of § 26(9) LOA. For example, the court determined the amount of rent in a case where the parties did not reach an agreement, on the basis of § 26(9)(1) and § 26(10).78 Usually the court determines the open term on the basis of either previous agreements, market prices or taking into account the term proposed by one party, if justified by the circumstances.

6. Limitation and exclusion of liability 53

Exemption clauses in agreements between the parties are valid as long as the legitimate expectations of the other party are protected, and general principles of good faith and fair dealing are followed. The parties are free to modify and derogate from the general remedies for non-performance and design their own liability system within the 74 The County Court came to the conclusion that the term concerning the boundaries of the immovable property was not left open and they can be identified by interpretation of the agreement. Judgment of the Viru County Court of 23 May 2011 in civil case no. 2-06-38569. 75 Judgment of the Estonian Supreme Court of 17 January 2018 in civil case no. 2-17-101031, para. 14. 76 Judgment of the Tallinn Circuit Court of 29 June 2018 in civil case no. 2-17-101031. 77 Judgment of the Estonian Supreme Court of 1 February 2011 in civil case no. 3-2-1-125-10, para. 52. 78 Judgments of Harju County Court of 26 January 2015 in civil case no. 2-14-15494/19 and of Viru County Court of 19 March 2014 in civil case no. 2-13-27614/39.

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limits of § 106(2) LOA. The sources for § 106 LOA were Art. 7.1.6. PICC, Art. 8:109 PECL, also § 276(3) BGB. The main difference of § 106 LOA from the models used in its drafting is that under Estonian law, an agreement violating the requirements of § 106 (2) LOA is void. There are only two Supreme Court cases where the validity of exemption clauses has 54 been under discussion, but the clauses were not declared void. In the first case, there was a clause in a lease contract which excluded the right of the lessee to terminate the lease contract or use other remedies in the case of defects existing at the moment of transfer of the object of the lease, including hidden defects, or in cases of impediments preventing the use of the leased object. The Supreme Court explained that the exemption clause may be invalid pursuant to § 106(2) LOA. The matter was referred for a new hearing to the Circuit Court.79 In the second case, the Supreme Court explained that the parties may exclude or limit, by agreement, the liability of the seller, inter alia, for violations of the obligations arising from pre-contractual negotiations (§ 14 LOA). This right of the parties arises from the principle of party autonomy under § 5 LOA (i.e. the dispositive nature of the law) and the fact that after the conclusion of a contract, the relationship between the parties (including pre-contractual relations) is to be regarded as a single contractual relationship.80 The case was referred to a new hearing in the Circuit Court, but the court proceedings were terminated due to a compromise. In conclusion, Estonian case law shows that courts seem to be modest in using the 55 right to review the content of B2B contracts. If possible, the weaker mode of intervention into contractual relations is used in the form of applying § 6(2) LOA which grants the right not to apply the law, usage or contract if it would be contrary to the principle of good faith. There are no differences in the judicial review of contracts between large, small- or medium-sized or micro businesses. The main reason is that around 90 % of all enterprises in Estonia are micro-enterprises (with fewer than 10 employees).81 There were no cross-border cases on judicial review of B2B contracts. Also, differences between the review of B2B and B2C contracts can be seen mainly in cases of standard terms where courts take into account the qualities of the parties and apply lower standards of protection in reviewing B2B contracts. The courts try to avoid the weakness of the ‘grey and black list’ system which lies in the possibility that the courts’ assessment of whether the content of the terms is unreasonably harmful or not is affected by the practices applied in the case of consumer contracts.82

IV. International application The question of mandatory provisions as basis for judicial review of B2B con- 56 tracts has been discussed in Estonian legal literature.83 The Private International Law 79 Judgment of the Estonian Supreme Court of 26 November 2015 in civil case no. 3-2-1-112-15, para. 16. The County Court did not assess the validity of the exemption clause. The court applied a rule that would not allow the exclusion clause to be applied if the seller knew or ought to have known that the goods are non-conforming and did not inform the buyer (§ 221(3) LOA). 80 Judgments of the Estonian Supreme Court of 25 May 2015 in civil case no. 3-2-1-50-15, para. 20; of 19 November 2007 in civil case no. 3-2-1-111-07, para. 14. 81 Data available at www.stat.ee/valjaanne-2017_eesti-statistika-kvartalikiri-2-17. 82 About the problem in German case law see Schwenzer 37. 83 About the overriding mandatory rules in the law applicable to consumer contracts see Piir/Sein, available at www.juridicainternational.eu/index.php?id=15641&highlight=mandatory,provisions#_ftnref57; Jankelevitš, summary available at www.juridica.ee/article.php?uri=2002_7_avalik_kord_ja_imperatiivsed_s_tted_rahvusva helises_era_iguses&lang=en); Piir (‘Public Policy’) available at www.juridicainternational.eu/index.php?id=15568.

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Act84 provides that foreign law shall not be applied if the result of such application would be in obvious conflict with the essential principles of Estonian law (public order) (§ 7 PILA). There are mandatory rules in Estonian legal acts which deal with the private international law matters. For example, § 36(3) LOA which provides that if the parties to a contract with standard terms act for purposes relating to their economic or professional activities and their places of business related to the contract or the performance thereof are in Estonia, the provisions of this Division apply to the contracts entered into between them regardless of which state’s law is applicable to the contract. 57 However, commentators of this rule express the opinion that Art. 9 Rome I Regulation applies which means that this rule can be applied only to the extent to which it will not contradict the rules on applicable law provided for in Rome I.85 There is an opinion that doctrine of overriding mandatory law in private international law cannot be deviating from the German doctrine.86 Since we do not have the case law, it is not possible to state with certainty which norms of private law are overriding mandatory rules and which are not. 84 Rahvusvahelise eraõiguse seadus (Private International Law Act), 1 July 2002. Available in English at www.riigiteataja.ee/en/eli/ee/526062017004/consolide/current. 85 Varul et al. (‘Võlaõigusseadus I.’), 198. 86 Piir (‘Eingreifen’), 199–206.

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D. Finland Bibliography: Husa/Karhu, ‘The Constitutionalisation of Contract Law in Finland’ in: Siliquini-Cinelle/ Hutchison (ed.), More Constitutional Dimensions of Contract Law (Springer 2019) 15–39; Norr, ‘Perusoikeuksien horisontaalivaikutus sopimusoikeudellisen kohtuuden ja hyvän tavan tulkinnassa’ (2019) 3–4 Lakimies 363–386; Pöyhönen, Sopimusoikeuden järjestelmä ja sopimusten sovittelu (Suomalainen Lakimiesyhdistys 1988).

Contents I. Background issues........................................................................................... 1. Nordic background .................................................................................... 2. Legislation..................................................................................................... 3. Consumer contracts regulation ............................................................... II. Overview ........................................................................................................... 1. Standard terms under Finnish contract law......................................... 2. Judicial review by reference to unfairness before reform of Section 36 FCA............................................................................................ III. Regulatory framework.................................................................................... 1. Constitutional issues .................................................................................. 2. The FCA as the general framework for B2B contracts...................... 3. Invalidity of contracts according to the FCA ...................................... 4. Adjustment of contracts according Section 36 of FCA ..................... 5. How to adjust – substantial points in adjustment.............................. IV. Requirements and legal consequences ....................................................... 1. Standard terms in legal practice of the Finnish Supreme Court..... 2. Definition of standard terms ................................................................... 3. Attachment of standard terms to individual contracts...................... 4. Surprising and harsh standard terms..................................................... 5. The interpretation of standard terms .................................................... V. International application ............................................................................... VI. Concluding remarks ....................................................................................... VII. Further reading................................................................................................

mn. 1 1 2 3 4 5 6 8 8 9 10 11 26 39 40 42 43 44 45 46 47 53

I. Background issues 1. Nordic background The Finnish legal system belongs to the family of Nordic law systems. Nordic legal 1 systems do not have comprehensive codifications in private law, but instead adopt substantial legislation in private law. Key areas for business law, such as contract law, company law, and property law, have been prepared in co-operation between Finland, Sweden, Norway, Denmark, and to a more varying degree even including Iceland. This applies especially to Nordic contract laws which were prepared and enacted in the beginning of 20th century in a great harmony in substance in all the Nordic countries. Nevertheless, the Nordic Contracts Act is not an exhaustive codification of contract law principles and rules – it only provides rules for formation and invalidity of contracts, and rules on agency. Notwithstanding, the Nordic Contracts Act has been seen to give also a solid foundation and an anchoring point for the general part of Nordic contract

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laws, including rules establishing private autonomy through respect for freedom of contact and also a strong role and significance given to the principle of reliance in all contractual relations.

2. Legislation 2

Finland enacted its version of the Nordic Contract Act in 1929 (the Finnish Contact Act, ‘FCA’), therefore some time after Sweden (1915), Denmark (1917) and Norway (1918). After the enactment, the further characteristics of Finnish contract law have been constructed mainly by legal practice and especially by the decisions given by the Finnish Supreme Court (korkein oikeus) clarifying and developing Finnish contract law. The most significant change in the law on contract terms took place through statute in 1983: a general clause enabling courts to adjust and modify contract terms and even entire contract in a situation of unfairness was included in the FCA. This particular clause had a Nordic background, though it was not a common Nordic endeavour. As the FCA is applicable to all contracts with economic dimensions (generally, therefore, to all contracts with monetary content), similar general rules are thus provided for B2B contracts as for other contracts with economic content. After Finland became an EU Member State in 1995, the Finnish legal system has been adjusted to the acquis communitaire for those matters regulated by EU law. However, for the most part the changes made in legislation relevant for contract law issues have been minor and perceived by the Finnish legislator mostly only as clarifications.

3. Consumer contracts regulation 3

It is typical for Nordic legal systems that the 1960s saw the enactment of highly protective consumer protection legislation. This legislation was mandatory so that a B2C contract could not contain individual contract terms that circumvented or sought to circumvent the legislative provisions. Moreover, a special branch of public administration was established to implement the principle of consumer protection through monitoring, and where appropriate, negotiations with businesses (e.g. to establish balanced standard terms for the business branch in question) by a special authority (Consumer Ombudsman, ‘CO’) and also to enable consumers a swift special procedure to make claims against businesses in individual matters (Consumer Disputes Board, ‘CDB’). These arrangements have had the effect that the Finnish law concerning consumer contracts has to a great extent concretely been shaped and kept up to date by the practices adapted by consumer authorities and businesses together or the practice of CO and CDB. Even though the decisions by the CDB are merely recommendations and are not formally binding they have been followed in most cases by the business parties and the business branch in question. When analysing the judgments by the Finnish Supreme Court it is important to notice that, although a substantial part of them are related to consumer contracts, some of these judgments are given a more general formulation and thus these judgments have bearing on the whole area of contract law, including B2B contracts. However, in Finland, as elsewhere, most disputes between business partners which cannot be solved through internal negotiations are legally decided by arbitration courts. The awards of these courts are not public and therefore, even if they would be very relevant to establish the content of Finnish contract law for B2B contracts, the practice adopted by arbitration courts cannot be referred to as a source of Finnish contract law. Nonetheless, there is a widely shared view that strong, internationally-held assumptions typical for B2B contracts such as the principle of rigor commercialis would have played an even a more prominent role in the 78

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arbitration practice than in the practice of the Finnish Supreme Court. This view cannot be confirmed, and therefore it is not taken as a background assumption in this chapter.

II. Overview It is one element of the Nordic approach to have two different legal instruments to 4 deal with unfair contract terms in B2B contracts. The same duality is also present in B2C contracts. There is both a collective and an individual instrument of review. The collective review is founded on special legislation enabling the Market Court (markkinaoikeus) to deal with the issues. The following refers to both of these review methods. Although the specific judicial criteria used when applying these two methods are different – one emphasises the typical unfairness on a general level and the other individual and specific unfairness – the key perspective is similar. I would summarise this perspective with a reference – again – to a Nordic legal view that contractual relations are to be understood as cooperation for mutual benefits and that neither party to a contractual relation should gain benefits at the expense of the other in an unbalanced way or randomly because of unexpected change of circumstances.

1. Standard terms under Finnish contract law Finnish law distinguishes between individually negotiated terms and standard 5 terms. This distinction is specifically mentioned in the consumer protection legislation, however it was also the basis for the proposal on a specific law on standard terms1. The proposal never became a government bill and was therefore not put forward for the legislative process at the Parliament. However, that proposal was based on the best understanding of the unwritten law at hand at that time. As mentioned, there is a collective review of standard terms in B2B contracts. This is based on the law 3.12.1993/1062, which provides that B2B contracts cannot include a term or implement practice that is unfair towards the other party to that contact. Moreover, the unfairness is to be established taking into consideration the need to protect the weaker party against such term or practice. All the relevant circumstances of the situation must also be taken into consideration. The Market Court can also forbid the dominant party to use that unfair term or to implement that unfair practice under the pain of monetary sanctions.

2. Judicial review by reference to unfairness before reform of Section 36 FCA The amendment of Section 36 FCA entered into force in 1983, and before the 6 amendment the court decisions on unfairness were only applicable to contract terms concerning monetary penalties for breaches of contract (often translated into English as ‘liquidated damages’; in German Vertragsstrafe). The aim of the former Section 36 FCA was to avoid the application of the contract terms on liquidated damages in such a way that the outcome would become unfairly burdensome to the breaching party in relation to the nature of the breach and thus constitute a penalty. Furthermore, it was to be reviewed that the innocent party did not get such compensation through the liquidated damages term that would be grossly exceeding the damage that the innocent party had suffered because of the breach. The former Section 36 FCA was applied in the legal practice quite frequently, in older cases especially concerning contracts in the area of forestry. 1

Km 1990:20.

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It should be mentioned that prior to the 1983 amendment of Section 36 FCA there was a lively discussion in the Finnish and Nordic contract law literature on the theme whether the adjustment sections already existing in other, more specific legislation would give grounds for the conclusion that such possibility is also part of the general doctrines of contract law (meaning that all contracts could be adjusted because of unfairness).2 Concretely, this discussion was significant for those special contract types regulated by legislation that not contain such a possibility for adjustment. The academic discussion was strongly polarised. Those denying such a possibility on general level referred to the principle of pacta sunt servanda: any review undermines and even violates this principle, and indirectly also the principle of freedom of contract. The contrasting view referred to the changes in economy and society which were reflected in that practically all the new legislation on special contract types contained such a review possibility. It was also argued that Finnish contract law had grown to contain principles other than just freedom of contract and pacta sunt servanda, and that both the principle of fairness and the principle of the protection of weaker parties should be taken seriously as elements of Finnish contract law. Even if the 1983 amendment ended the discussion on its practical outcomes – after the amendment all contracts falling under the FCA could be reviewed and adjusted if needed – these varying attitudes influenced the interpretations given to the new Section 36 FCA in the contract law literature. For example, the question remained whether Section 36 FCA should be constructed in the contract law system as a main rule or as an exception, having influence on the interpretation of the scope of application in concrete cases. Moreover, there was also discussion of relevance and even of possibility to have the judgments clarifying Section 36 FCA. It was claimed that, because of the wide scope of its application, decisions on Section 36 FCA must always be made on a case-by-case basis, and therefore the judgments would become too case specific. This fear has not proven to be sound, and the Finnish Supreme Court has given many significant judgments on the application of Section 36 FCA.

III. Regulatory framework 1. Constitutional issues 8

The Finnish Constitution contains a modern chapter on fundamental rights and liberties. It is an established view that rights relating to economic positions based on contracts are protected as one form of property. This means that legislation restricting the enjoyment of contractual rights is first subject to a weighing and balancing between the societal reasons behind that legislation and the significance of the restriction it would mean for this enjoyment. In Finland, this weighing and balancing is primarily done by the Constitutional Committee at Finnish Parliament. This Committee has in its opinions made clear that the protection of legal positions created by using of freedom of contract does not reach out to such positions which would mean giving protection to unfair or unreasonable contractual relations. Concretely this means that legislation providing for a review of B2B contracts is not estopped for constitutional counter arguments. Even more, such legislation could be retroactive to cover also contractual positions created before the enactment of the new legislation (Section 36 FCA). 2

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Pöyhönen. See also SOU 1974:83 summarising the Nordic discussion.

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2. The FCA as the general framework for B2B contracts The FCA is the most general piece of legislation in the contract law field. Its scope of 9 application is wide in the sense that it applies to all contracts with economic content or economic consequences; it therefore applies to all B2B contracts. The FCA contains three main areas and various miscellaneous provisions. Chapter 1 FCA contains the rules on formation of contract through offer and acceptance. Offer and acceptance are binding, reflecting the principle of binding force of contracts. Moreover, the principle of reliance is visible in the rules concerning the protection of the legitimate expectations of the party receiving the legal transaction by the other party. Chapter 2 FCA contains the rules on agency, and Chapter 3 contains the rules on invalidity and adjustment of contracts.

3. Invalidity of contracts according to the FCA Sections 28–31, 33 contain the provisions regarding invalidity of contracts.

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Section 28 (1) A transaction into which a person has been coerced shall not bind him/her if the coercion consisted of physical violence or a threat involving imminent danger to life or health (grave duress). (2) However, if the coercion was exercised by a third person and the person to whom the transaction was directed was in good faith, the coerced party shall, if he/she wants to invoke the said coercion in relation to the other party, without undue delay after the coercion has ceased notify that party thereof at the risk of the transaction otherwise becoming binding. Section 29 A transaction entered into under coercion not constituting grave duress, as referred to in section 28, shall not bind the coerced party if the coercion was exercised by the person to whom the transaction was directed or if this party knew or should have known that the other party was coerced into the transaction. Section 30 A transaction into which a person has been fraudulently induced shall not bind him/her if the person to whom the transaction was directed was himself/herself guilty of such inducement or if he/she knew or ought to have known that the other party was so induced. Section 31 (1) If anyone, taking advantage of another’s distress, lack of understanding, imprudence or position of dependence on him/her, has acquired or exacted a benefit which is obviously disproportionate to what he/she has given or promised or for which there is to be no consideration, the transaction thus effected shall not bind the party so abused. […] Section 33 A transaction that would otherwise be binding shall not be enforceable if it was entered into under circumstances that would make it incompatible with honour and good faith for anyone knowing of those circumstances to invoke the transaction and the person to whom the transaction was directed must be presumed to have known of the circumstances.

4. Adjustment of contracts according Section 36 of FCA The general clause in the Section 36 FCA reads as follows: 11 (1) If a contract term is unfair or its application would lead to an unfair result, the term may be adjusted or set aside. In determining what is unfair, regard shall be had to the entire contents of the contract, the positions of the parties, the circumstances prevailing at and after the conclusion of the contract, and to other factors. Karhu

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(2) If a term referred to in paragraph (1) is such that it would be unfair to enforce the rest of the contract after the adjustment of the term, the rest of the contract may also be adjusted or declared terminated. (3) A provision relating to the amount of consideration shall also be deemed a contract term. 12 Section 363 FCA is a ‘can and must’ rule. It has a dual nature. On the one hand, it is a rule giving to the courts the authority to review valid contracts. This is the legal significance of the ‘can’ side. On the other hand, Section 36 needs to be applied in a way matching with its aims and fulfilling the principle of equality. Therefore, the court is obliged to consider in its legal reasoning all the circumstances mentioned in Section 36 FCA. This is the legal significance of the ‘must’ side. 13 Section 36 FCA is the most important contract law rule providing for review of all contracts, including B2B contracts. This scope of application covers also such situations where a contract later gets another legal characteristic. A particular example here is the by-laws of a company – these by-laws are originally made by the founders of the company as an agreement, and therefore the Supreme Court established that these by-laws can be adjusted based on their unfairness.4 Even contracts with a public law background can be adjusted if the contractual elements of the arrangement are similar as comparable private contracts. For example, terms in hunting licenses have been seen as possible targets for adjustment.5 However, an outcome based on the application of other laws cannot be adjusted even if that outcome forms a part of the contracting parties’ relations. Section 36 FCA does not give a direct authority to adjust parliamentary legislation. It must be pointed out, however, that if the outcome of the application of the other legislation is part and parcel of the contractual relationship it can indirectly become one of the circumstances which is taken into account in an overall assessment of the unfairness of the contract. There are still quite many particular sections on adjustment in other legislation concerning special contract types. Even if these sections are formally applied in adjustment cases there is no essential deviation in the material application of those sections in relation to Section 36 FCA. In this sense Section 36 FCA is the paradigm of adjustment of contracts because of unfairness. Moreover, it is required by the coherence of the whole contract law system that the material legal reasoning based on the collective review of (standard) contract terms and individual review of specific B2B contract terms should be similar. This similarity means that all the circumstances considered legally relevant in one form of reasoning should also be relevant in the other form of reasoning, despite the formal threshold that a decision on collective review cannot be given formal binding effect in individual cases and vice versa. According to Section 36 FCA also key parts of B2B contracts can be adjusted. It was previously unclear whether also terms concerning price could be adjusted. It is the reason that price is now especially mentioned in Section 36(3) FCA as one of the terms open for adjustment. When doing this reasoning concerning price the reference is the market price, but also other circumstances (such as business judgements made in the case at hand) influence the reasoning. An adjustment can mean lowering a price but also raising it. 14 As is clear from the wording of Section 36 FCA the reasoning is meant to be an overall one. All relevant circumstances can and must be considered when deciding if a situation of unfairness is at hand. The Finnish Supreme Court specifically stated that generally no single circumstance gets a conclusive role in an adjustment reasoning.6 3

See mn. 6. KKO 1999:42. 5 KKO 1986 II 78. 6 KKO 2001:27. 4

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What is worth mentioning is that also circumstances outside the contract can and must be considered, not only the whole content of the contract. The target of the adjustment can be either a contract term as such or the application 15 of the said term in a specific situation. The adjustment in the Nordic contract law systems is not restricted narrowly to only the content of the contract aside from its application in a particular situation. So even if a standard term would not generally be seen unfair its application in a specific case can be seen to lead to unfairness. However, this concrete review can also lead to an opposite conclusion for standard terms which are generally seen to be unfair but in a specific case does not lead to unfair outcomes. Sometimes the unfairness of a term on the general level is such that it cannot become a part of any valid contract. It has been established by the Finnish Supreme Court that limitation of liability terms giving a party indemnity also when that party causing harm to the other contract party has behaved grossly negligent or by purpose are null and void because of unfairness.7 The whole content of the contract means that no single term of the contract should 16 be reviewed separately from the whole contract (with the aforementioned exception, typically unfair terms). More specifically, this means that when a claim of unfairness is made and directed to one term of the contract, a judge must always consider the interaction of that contract term with other terms. An overall evaluation means that not only the contract at hand is evaluated but in situations where the contract is part and parcel of a larger arrangement also other contractual and even non-contractual circumstances can become relevant. For example, in B2B contracts business outcomes of the whole arrangement are always relevant facts in an adjustment case. Moreover, the evaluation of the business outcomes is branch specific in the sense that, depending on the area of business and the relevant markets, an outcome normally seen harsh can be considered still not sufficiently unfair to give rise to an adjustment. The position of the parties can and must be considered. Before the amendment of 17 Section 36 FCA many of the adjustment sections in the special legislation were for contract types where the other party was structurally and normally seen to be in a weaker position in relation to its contract partner. There was an imbalance between the parties, for example in an employment relationship, in insurance contracts, in consumer contracts, in sales agent contracts, etc. It was indeed one of the most important social goals of the amendment of Section 36 FCA to strengthen the possibility of adjustment of contracts between parties with unequal contract positions (cf. inequality of bargaining power in common law). There are several background features for this inequality, and some of them are clearly applicable to B2B contracts, too. The inequality is most commonly connected to economic resources. SMEs making business contracts with large firms and multinational corporations are clearly in a weaker bargaining position. Very often small businesses are in a ‘take-it-or-leave-it’ situation in relation to the standard terms used by multinationals. For example, it is typical in the tourism industry that the small local travel agencies or tourism entrepreneurs arranging tours and other activities for the tourists must comply with the standard terms of global travel companies, and through these terms accept an asymmetric division of possible liabilities for the tourists in cases of any kind of disturbances. This example also reveals as one source of imbalance which is due to the dependence of the smaller local businesses on a larger international company. Besides pure economic grounds, an imbalance might be the outcome of difference in professional knowledge, including legal knowledge. Sometimes this imbalance is strengthened because of the pace of concluding the contract 7

KKO 1983 II 91.

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where the weaker negotiating party does not have enough time to make thorough acquaintance with the content of the contract. In short, and again as mentioned in the preparatory works for the amendment of Section 36 FCA, small enterprises can be in trade, commerce, and industry in an inferior and dependent position vis-à-vis a large company, and these positions might be reflected in the contracts. Typical situations are supply chains between the small supplier and the large assembly company, between the supermarket franchisee in relation to the franchisor centrally operating storage of goods, and on one hand the farmer or fisher and on the other the company buying their products. In turn, if the businesses are economically on equal footing and if there is no other significant source of imbalance, adjustment because of unfairness should be used very cautiously. Adjustment of contracts because of unfairness is not meant to be a possibility to correct poorly-made business judgements or conscious risk taking. Consequently, the Finnish Supreme Court has referred to this point in its judgments denying the adjustment claim.8 18 Circumstances at hand when the contract was made refer especially to the negotiating procedures. It is legally evident that if the party could make a reference to the special sections on invalidity of contracts in Third Chapter of FCA, such party can demand an adjustment based on Section 36 FCA. But notwithstanding that a claim on full-scale invalidity is not successful, the same facts can be evoked to support a claim for adjustment. Adjustment is in other words open for arguments relating to the specific invalidity sections, but which are not enough to fulfil the requirements thereof. For example, if the contract negotiations in a B2B contract have contained aggressive negotiation tactics, surprising proposals and taking advantage of the poor language skills of the other party, these circumstances might give rise to an adjustment although they are normally not sufficient for any of the special invalidity sections. On the other hand, even innocent mistakes on information (the party making and/or causing the mistake was not aware and should not have been aware of the consequences of its mistake) might be taken into account under adjustment reasoning, although they are normally not enough for the invalidity ground of mistake. 19 There is an important discussion and legal practice on the theme of the legal significance of the awareness of the unfairness on the side of the contract party claiming for adjustment. In short: is the awareness of the unfairness enough to block the possibility of an adjustment? The answer is according to Finnish law: no, but such awareness will be considered as a circumstance against the adjustment. The outcome is the same if there are grounds to expect that contracting party should have been aware of the unfairness when the contract was made. In B2B contracts this means that the adjustment threshold is higher than generally for two circumstances. Firstly, adjustment is not meant to correct the risk taking inherent in all business decisions. Secondly, everybody, including small businesses, is expected to know the basic features of the business in question, leading to a strong assumption that all business parties, even the weaker party, should be aware of any imbalance in the content of contract. As a consequence, in an adjustment case concerning a B2B contract, the references made to features of contract negotiations should be rather extraordinary to become strong grounds for adjustment, or then a highly significant position of dependence by the small company to its large contract partner company should be shown. Therefore, normally the most common line of argument in B2B contracts is the subsequent unexpected change of circumstances after the contract was made. The contract was fair and balanced when made but it later, for example in the execution phase turns out 8

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For example KKO 2001:27 and KKO 2017:71.

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to unfairly favour one party with the effect that the special circumstances strengthen that party’s position. There is a connection in relation to B2B contracts to doctrines such as laesio enormis. A party can be deprived of full demands of performance in situations where this would be unfair to the other party due to unexpected change of circumstances in detriment of that party’s position as a contract partner. Of course, now change is the new rule and remaining of old circumstances as they 20 were have become the exception in any business context. Notwithstanding, there are different kind of changes, and some of these are very relevant and successful as reasons for a claim of adjustment. But this statement needs to be carefully constructed, and again in relation to B2B contracts there are extra caveats. I will follow in this construction the argumentation used and developed by the Finnish Supreme Court in its adjustment cases relating to business contracts. Business contracts are based, and legally they are strongly presumed to be based, on an appropriate business judgement. The capacity for business judgement is legally expected for all those getting involved in business relations. Adjustment is not meant to function as a correction instrument for poor business decisions. Parties to a business contract create mutual but not necessarily similar risk positions in relation to their common market relevant activity based on the contract. These risk positions contain both the expected gains and the possible losses. Even in a win-win situation there is no legal presumption that the gains should be divided between the business contract parties in an exact similar way as their investments. It is not contrary to common sense in business that also the losses can hit much harder only one of the contract partners. However, there are special or exceptional situations where unexpected changes in circumstances making up the foundation of the contract (Geschäftsgrundlage) might become reasons for an adjustment. For example, both contract parties have expected key legislation forming the framework of their common business not to change, and these kind of changes can randomly favour one party over the other (e.g. making some of the normal and usual contract terms used in that kind of business contracts null and void for public policy reasons). Several kinds of risks can feature in long-term business relations. Again, normally 21 markets are all the time changing making the common business based on the mutual contract more profitable or less profitable. These kinds of changes do not call for adjustment, and the threshold for adjustment based on changed market conditions is high (older devaluation of currency cases9, more recent real estate market collapse cases10). The threshold is very high if there are speculative elements in the B2B contract on the side of the party claiming for adjustment, and there must be a high degree of unexpected nature in the change causing the need for adjustment. This reflects the idea that also in normal business relations any change needs to be significant to enable adjustment. To show the legal complexity of an adjustment context one can refer to B2B cases 22 concerning arbitration clauses. In 1996 the Finnish Supreme Court had to evaluate whether an arbitration clause in a franchise agreement was binding to the franchisee.11 The franchise in question related to a nationwide chain of corner shops. Even if the Supreme Court took into consideration the inequality of the size and economic resources of the parties in the franchising agreement under scrutiny, the court pointed out that the franchisee got a ready elaborated business environment from the franchisor. Therefore, the arbitration clause was considered as a part and parcel of this overall franchise relationship, and an arbitration clause in that setting was not overly harsh or 9

KKO 1973 II 26. KKO 1994:96. 11 KKO 1996:27. 10

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surprising. The arbitration clause was considered binding also towards the small business of the franchisee in question. This decision was taken – and sometimes still is – in the Finnish contract law literature and more widely in the contract law legal community to be a sign of the importance of rigor commercialis also in Finnish contract law. However, in 2003 the Supreme Court came to an opposite conclusion.12 And in this case the branch in question was by its nature speculative, namely stock exchange investment. The Supreme Court has recognised the special nature of contracts in these contexts even in relations between private individuals and investment bankers, emphasising the speculative nature of stock exchange investments.13 The case in question concerned a small investment company that wanted to make claims on its investment activities to the bank from which it had received loans for these investments. The loan agreements contained an arbitration clause, and the bank opposed the claims in the proceedings in general court by reference to the arbitration clause. The Supreme Court did not uphold the arbitration clause. The investment company was bankrupt, and in the Finnish practice of arbitration proceedings the arbitration court will not start proceedings before the parties have made a guarantee deposit covering the fees and expenses of the proceedings. The investment company had no resources for the deposit payment. The bank had denied the request to pay more than its share (50 %) of this guarantee deposit. It was pointed out by the Supreme Court that in these circumstances the investment company would have no access to court at all if the arbitration clause would be binding. Therefore, the arbitration clause was seen in these circumstances to lead to an unfair outcome, and the investment company was given the possibility of proceedings in a general court of law. 23 To describe the legal situation from another perspective I will still shortly give some characterisations of situations calling for adjustment due to changed circumstances. Sometimes contracts are made for a very long period, even without any time period (‘eternal contracts’). It would easily be a source of unfairness if the party could not terminate such a contract at all. A balanced outcome can very often be reached by settling a fair period for termination and/or considering the benefits the other party has already gained through the contract and/or the losses that party would suffer if the contract was terminated. If the losses suffered by the other party are rather insignificant, but it is unreasonably burdensome for the obliged party to keep up its duties, then adjustment would often be a proper means if the contract has already been followed a substantial amount of time (in this kind of situations there is a sense of misuse of (contractual) rights in the demand of pacta sunt servanda in the sense that the contract would not bring any substantial gain to the privileged party but still cause much harm obliged party). Likewise, if the changes impact on a B2B contract meant to be a long-term contract right at the beginning of the contract period, adjustment might be a better means to correct the situation than letting burdensome contract continue for long time causing incentives for the obliged party to make efforts to avoid them or a constant ‘race to the bottom’ for the expenses of fulfilment. As a concrete example of this kind of contract law reasoning a reference can be made to a recent judgment.14 The case concerned the sale of a grain mill by the farmers owning it as shareholders to an outside buyer in 1895. As a part of the sale the sellers (farmers) were given an eternal right to grind in the mill without making payment. In June 2011 the new owner terminated the grain mill contract with effect from the end of 2011. The termination was due to closure of the mill. The farmers claimed that the right to 12

KKO 2003:60. Clearly in KKO 2015:93. 14 KKO 2019:13. 13

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grind should be upheld or they should at least get compensation. The contract contained no termination clause. The Supreme Court reasoned that even if normally contracts should be fulfilled according to their terms this does not mean that a contract party is permanently bound to a contract without a time limit without a possibility to withdraw. This is because circumstances after the contract was made might change unexpectedly in such a manner that allowing the contract to be applied as it was concluded would lead to unfair outcomes, and even to outcomes that were not originally meant. However, in the case at hand the Supreme Court reasoned that the arguments allowing termination must be very weighty taking into consideration that the wording, the background and the aim of the contract and the fact that the contract had been performed as agreed for over one hundred years. The threshold for termination is therefore high. Notwithstanding, the company was given the right to terminate by notice. Finnish society had changed, as had the grain markets over the one hundred year period. The need for graining by the farmers in question had lessened as also the amount used according to the contract. On the other hand, the company had substantive expenses to keep the mill running. These expenses had become disproportionate in relation to the gain for the farmers. The company had offered to pay compensation to the farmers based on their amount of use of the mill. The notice period of six months was considered reasonable, and also took into consideration that it covered one whole grain season from summer to the end of the same year, and the company could terminate this ‘eternal’ contract by notice of six months. Lastly, Section 36 FCA contains a ‘catch all’ criterion of ‘other circumstances’. I will 24 just give a short list of them in the light of the preparatory works and legal practice. The main aim of the contract or the aim of the specific contract clause must be given significance. It is easier to adjust to enable the original aim of the clause take effect, and thus if the contract parties both meant and aimed for an outcome (now) claimed unreasonable, it is an argument against adjustment. The (hidden) aim to circumvent the law by the contract can be given significance. How this inappropriate aim effects depends on the more concrete situation, for example which party attempted to circumvent the law and who was to gain by it. It would be against the principle ‘no man shall profit from his own wrong’ if a party could successfully use his own effort to circumvent the law later as an adjustment ground. One important ‘other circumstance’ is the parties’ behaviour in executing the contract. If the party claiming for adjustment has by her own behaviour partly produced the unfairness, it is a circumstance opposing the adjustment. A special case is the situation where a party has already delivered her own part of the contract without making any reservations. This can be illustrated by the following example: if the party delivering did not have any other choice than just to deliver (resembling a ‘take-it-or-leave-it’ situation in contract negotiations) then that fact is not speaking against adjustment. Sometimes in long-term contracts payments have been made a long time without any reservations or remarks by either party. Again, a context is needed. If the payments have been mistakenly high or mistakenly low, special further circumstances need to be considered. In the lack of specific contract provisions, situations of this kind often fall back to considerations on legitimate expectations and good faith. There are no specific rules concerning the limitation period of adjustment claims. 25 This means that they must be made in reasonable time. Adjustment procedures feature a special legal opportunity to keep this time to react flexible. The time elapsed can be given significance as an argument opposing the adjustment claim. More generally, the arguments fall under the theme of the significance of passivity in private law. Karhu

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5. How to adjust – substantial points in adjustment 26

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A measure for fairness, or more exactly ‘not unfair’ is needed for adjustment. One clear measure is given by mandatory and non-mandatory legislation. Of course, no adjustment is needed where a contract violates a mandatory provision. However, sometimes mandatory legislation for a contract type can play a role. For example, sometimes a B2B contract can resemble an employment contract if the small business only has one customer, and that one customer is a large corporation. Sometimes a B2B contract features elements belonging to several already established and regulated contract types. Franchising is comprised of co-operation terms but also very often sale of goods contracts, lease contracts, various kinds of rent contracts, sales agent contracts, etc. In Nordic legal systems non-mandatory legislation is often meant to reflect a legal balance between the different parties to the activity in question. Thus, non-mandatory legislation can often be used as an adjustment measure, especially if there is an explicit legal policy aim in the background of that legislation. However, the measure of nonmandatory legislation is not without exceptions – in some contexts the outcome might not be fair and reasonable due to the specific circumstances. Public law regulation can sometimes be used as a yardstick for fairness. Again, a caveat must be made because even public law regulations are not always fair and balanced. B2B contracts involve a market of some kind. Therefore, the appropriate behaviour on that market from the market law and competition law perspective might offer a measure. Although the judgments are not made for concrete contractual relations, the decisions by the Market Court set up a mode for behaviour. In some specific areas there are even very concrete outcomes such as FRAND (Fair And Non-Discriminatory) terms in intellectual property rights for licensing contracts. Usages and practices in the field in question and that one adapted by the businesses in question must be taken into account. It is a strong presumption in Nordic law that established usages and practices seldom are unfair. To sum up the way Finnish contract law approaches B2B contracts for a possible review I shall present more thoroughly one borderline case which is much discussed in the legal literature. It shows more specifically how Finnish contract law approaches B2B contracts in situations of imbalance of the parties. It is easy to find in this overall assessment all the concrete characteristics of an adjustment reasoning although the legislative provision applied is not always Section 36 FCA. The case concerned a franchising relationship concerning a petrol station.15 It was a question on the changes of the business framework by the franchisor to add a small supermarket to the services in each station besides the petrol pumps and a small cafeteria on each station. The franchisees in question were an elderly couple who had run the petrol station across almost two decades. They were not at all interested in enlarging their business. The franchisor referred to the needs of the whole chain to be able to compete on the market – a competitor had just successfully started a new chain with such a combination of petrol station, cafeteria and supermarket. However, the Supreme Court did not find these business reasons sufficient to enable the franchisor to terminate the contract because of this non-compliance. The Supreme Court emphasised the rather long period of wellfunctioning business by the franchisee without problems. Moreover, the franchising contract itself required a valid reason for the termination by the franchisor. The contract had been drafted by the franchisor, and therefore it had to be interpreted against the 15

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franchisor. The termination clause listed economic non-profitability and the hindrance by the franchisee to participate in the running of the business as examples. However, the termination clause referred also to similar situations as valid grounds for termination by notice. Even if the situations mentioned in the termination clause were to be examples, they could not randomly be extended to any reason claimed to be valid by the franchisor. The Supreme Court emphasised that in long-term business relations like the one in question, the strategic choices made by the franchisor or any contract party should be adjusted to the already existing contracts and not vice versa. Otherwise unforeseeable market changes could randomly benefit only one party in such a way that the other party falls in an unfair position. Even if some changes in the circumstances might cause the contract to become economically unviable for both parties – whereby a lack of termination possibility should not be an obstacle for smart business choices – in the case at hand the franchisor had not been able to demonstrate this. Market changes had been presented as a threat, but no evidence had been given on the actual detriments. Nor was there any evidence that the petrol station in question could not have been run profitably also in the changed business environment without a supermarket. There were dissenting opinions in the judgment. Two justices emphasised that in long-term B2B contracts changes in the markets are always to be expected, and that these changes are notoriously difficult to translate into detailed and exhaustive contract clauses. Therefore, termination clauses contain flexibility, and this flexibility has a sound business reason in behind. This flexibility does not fall under the category of ‘unclear contract terms’ and does not therefore enable the contra proferentem rule to be applied. The termination clause requiring only the franchisor to have valid ground for termination would be too onesided in a co-operation contract. In view of the market changes and the whole of the franchise (approx. 100 petrol stations across Finland) the dissenting justices found that weighty business reasons require the possibility for the franchisor to be able to terminate the contracts in a reasonable time. The franchisee had already during the 16 years of its business benefited from the franchising chain and there were no claims of investments by the franchisee which would not be returned if the termination were effective. The termination period of one year was considered reasonable by the dissenting justices. My conclusion: a hard case under Finnish contract law, and a borderline case. The description of adjustment due to unfairness above has been presented not only 32 by reference to Section 36 FCA but also based on concrete cases. The emphasis has been to give a comprehensive picture of the contract law reasoning applied in Finnish courts. As already pointed out, the Finnish review of B2B contracts is done both on individual and collective level. The adjustment is the most general individual means of review. Specific doctrines used in individual review, including those dealing with standard terms, are presented below.16 From the point of view of the coherence of the legal system these two review means, individual and collective, should be as congruent and compatible as possible. However, on the formal legal level a judgment via either way is not binding in the proceedings under the other. Even if the Supreme Court would have judged a standard clause unfair in one case or even in several similar cases these judgments do not by themselves justify similar judgment by the Market Court. And vice versa, even if the Market Court would have found some standard terms collectively unfair, a (small) business in a general court could not base its judgment on that decision only without attaching its argument to the concrete case at hand. Notwithstanding, there is no disagreement in contract law scholarship or even in the references made in connection to government bills concerning legislation establishing collective review that 16

See mn. 43 et seq.

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the substantial reasoning leading to the conclusion ‘unfair or not unfair’ is similar in both collective and individual reasoning. Therefore, the description given on the reasoning in general courts in relation to a single concrete case can be applied mutatis mutandis also in the reasoning made by the Market Court in cases of collective review. The most essential difference being, however, that under the collective review no significance can be given to the single particular consequences of the clause under scrutiny. The Market Court views the term in question with eyes on the future significance and consequences of the term. In this sense the collective review remains more abstract than the individual review. The focus in the collective review is on typical cases, and there is an emphasis to find out whether the term would have typically unfair outcomes. This difference should not be exaggerated, however. To use one the previous examples, an arbitration clause containing no exception for situations where the other party has become insolvent would not be seen binding under the collective scrutiny. The insolvency of one party is not the normal situation in B2B contracts, yet it is not entirely unexpected either. And even if there has been in Finland – and other Nordic countries – discussion whether the limitation of liability clauses containing indemnity for the breaching party also in gross negligence situations could have acceptable business reasons in individual cases, it would not be (yet?) a strong argument to accept them on a collective level. In the collective review there is sometimes a need to block also those terms that violate mandatory legislation. The reason for this is to protect also such contract parties that are not familiar with legislation against the use of such standard terms. In individual cases no review is necessary because terms violating mandatory legislation are null and void. 33 The analysis above leads to the conclusion that judicial review of B2B contracts based on individual means like adjustment is not effective enough to cover all or even most of the basic problems. The legal protection SMEs and microentrepreneurs need can also be achieved – and perhaps more effectively – through norms regulating the whole collective of small businesses. Some means of regulation familiar in consumer protection could be used for this goal. This idea of a collective form of regulation is the background for the law on unfair standard terms in B2B contracts. Unlike consumer protection there is – at least now – no comparable publicly-funded special administration to execute these norms. The execution is left to the involved parties themselves, and especially organisations representing SMEs. The law in question has been in force for 25 years, yet there is markedly little legal practice on its implementation. There is a huge difference in this respect with the practical significance of comparable consumer protection norms even if the basic substantive criterion (‘unfair’) is the same. There is a significant and updated practice on consumer protection issues kept up by the CO, CDB, and other consumer authorities. Moreover, also general courts and the Supreme Court have given important judgments in various issues. In comparison, the Market Court has only given some judgments concerning the collective review of standard terms in B2B contracts; three of these judgments will now be discussed: MT:2001:014, MAO:42/10, and MAO:236/10. 34 The first case concerned the transportation of turf.17 The transportation contracts between the turf power company and the small carriers contained a price review term which afforded the power company the unilateral right to make changes to the price. The term was considered unfair even if these changes were in the term related to the general cost level of transportation and to the regional level of transportation costs. Three reasons combined were decisive. Firstly, the power company was itself a 17

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dominant player on the regional transportation market in question. Secondly, unlike the power company, the small carriers had no access to the information on transportation prices generally. Thirdly, the transportation contracts were normally long-term contracts requiring the small carriers to make investments relying on the contracted price. Even if the term as such was neutral in its content (prices could go up or down), the Market Court considered the risk of possible detrimental changes to be in practice only on the small carriers. The second case was in media field.18 The contracts under scrutiny were between a news corporation and freelance journalists and other contributors of news material (pictures, etc.). These contracts contained various terms on the time of fee payment, on the right to later use of the material, and other such terms. The payments were bound to the decision to publish, and this was not considered to be unfair towards the freelance journalists. Neither was the term on transfer of economic rights and modification rights, also for future use, by the freelance journalist to the news corporation considered typically unfair. Even if there could be individual situations of unfairness the Market Court did not find this rather common contract term and practice as such unfair. Thirdly, it was the issue on the indemnity clause requiring the freelance journalist to take responsibility of any violation of third party’s rights concerning the material she delivered to the news corporation. Even this term was not considered to be unfair, especially because already the guidance of best practices by the journalists’ association required a professional journalist to be aware and alert to such rights. The third case (actually a pair of two cases) was in the field of music business.19 The terms in the X Factor programme format for finding new talents between the television company and the performers (candidates) were not considered to fall under the application of the law because it was not a contract where the other parties would be small entrepreneurs. In the second situation contract terms concerning non-recording income between the artists and the record company were not considered unfair even if the artists must pay a certain amount of fees for performances to the record company. The Market Court emphasised that a record company needs new business models because of the falling number of record sales and that the record company typically made its investments for long-term relationship with the artists. Moreover, there was competition between the music business enabling even an artist in the beginning of her career to choose from various record companies. Insurance contract law contains an enlargement beyond the (original) area of consumer protection all individuals and even small companies. This is the same logic as in the collective review and as comparable position as a consumer. These enlargements seem to be an effective means particularly for micro enterprises. They might benefit legally also from the special provisions widening the scope of application of some special rules protecting the employees to private individuals in comparable positions. Besides these formally legal measures there have also been systems initiated by industrial organisations to enable SMEs to have their cases dealt with a special board. One of these soft law boards (Enterprise Contract Board) existed from 1988 until 2002 at the Chamber of Commerce. This board, however, could only give recommendations and not legally-binding decisions. Its impact on individual and standard terms in B2B contracts was assessed to have been minor. And finally, the enactment of the law 3.12.1993/1062 introducing the collective review system to B2B contracts replaced the need for such an informal channel for B2B disputes. 18 19

MAO:41/10. MAO:236/10.

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IV. Requirements and legal consequences 39

The adjustment of contracts on grounds of unfairness is a special legal characteristic of the Nordic contract law systems; and thus is to be examined here in some detail. In any B2B contract dispute there is of course the possibility to make claims concerning the flaws in the formation of the contract. These sections are in the third chapter of the FCA, and they resemble much other European contract law systems and are also reflected in the PECL and the DCFR in its contract law parts. It is worth mentioning that the Finnish Supreme Court has referred to these European sets of rules.20 Among these invalidity sections there is a section called the small general clause, and that is Section 33 FCA having the requisite of ‘honour and good faith’ in its wording. It is worth mentioning that this section is one of the background inspirations for Art. 1:201 PECL on ‘good faith and fair dealing’. In Finnish legal practice, Section 33 FCA has been applied not only in protecting private individuals lacking the capacity to make a fully rational judgment (such as the very old, and people strongly influenced by alcohol) but also in ‘private’ B2B arrangements. A famous case concerns the sale of shares in a family company where the seller’s side (an estate) did not have the accurate information on the development and restructuring plans made by the buyer’s side and having a significant impact on the value of the shares.21 The Supreme Court considered the sale to have been made under such conditions that no one with respect for appropriate and decent manners would be entitled to claim the validity of such promises (literal translation of the wording in Section 33 FCA). Even if all the invalidity sections are still available for B2B disputes, it is evident that the existence of Section 36 limits their usefulness, especially as the legal consequence of the invalidity provisions normally is full invalidity (null and void ab initio). On the other hand, it is as evident that these other provisions are still available in B2B disputes and depending on the evidence they might offer a more focused possibility for the SME to present the case to the court.

1. Standard terms in legal practice of the Finnish Supreme Court Already before the amendment of Section 36 FCA in 1983, the specific sections on adjustment of unfair terms were meant to deal with standard terms. For example, in the preparation material for the legislation concerning bills of exchange, and its Section 8, it was specifically mentioned that banks use in their credits standard terms which have been prepared unilaterally by the banks cooperating only with each other. Besides this unilateral preparation, the background to Section 36 FCA also referred to the fact that standardised terms do not always fit well into individual situations. Generally, the use of standard terms is a fact that lowers the threshold for adjustment. 41 Standard terms are seen to give rise to some special themes of contract law. These themes contain possibilities for a review of standard terms attached to B2B contracts. From the point of view of the Finnish contract law system one can say that they offer alternatives focusing on specific facts in comparison with the adjustment focusing on all relevant facts. Firstly, there are specific criteria for the attachment of standard terms as a part and parcel of the contract. Secondly, there is the doctrine denying the validity of surprising and harsh standard terms. Thirdly, there is solidly established rule of interpretation of unilaterally drafted standard terms, ‘contra proferentem’, i.e. against the drafting party. 40

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2. Definition of standard terms Finnish contract law does not contain a general definition of standard terms. 42 Notwithstanding, it is generally accepted in legal practice and legal scholarship that standard terms are contract terms which are meant to be used, and are normally used, with several contract parties in similar contracts. Standard terms might be drafted unilaterally. If the standard terms in question are drafted together by the contracting parties, or by organisations representing both parties in question, this is given relevance in legal reasoning. When implementing the Unfair Terms Directive, Finland limited its application only to contract terms which have not been specifically negotiated by the parties (non-negotiated terms). However, this limitation was not meant to restrict the possibilities to adjust individual terms in all consumer contracts. Moreover, in legal scholarship it has been argued that even after this limitation there is no need to establish a specific new branch of law for standard term contracts.

3. Attachment of standard terms to individual contracts Standard terms become a part of the contract through the acceptance by the other 43 party (opposite party to the party using standard terms in its contracting). This acceptance needs the terms to be clearly communicated to the other party. If the standard terms are more or less hidden in other correspondence during the negotiation it is doubtful that they would be considered to have attached in an appropriate manner. Battle of forms situations are decided under Finnish law by an overall legal assessment of the situation at hand, in accordance with the European proposal emphasising ‘the extent that they are common in substance’ (Art. 2:209 PECL). Acceptance by silence is possible, especially in situations where the contracting parties have already previously used such standard terms in their contracts. It is more discussed and disputed whether some standard terms could be seen to have become usages and practices in that specific branch of business, and binding because of that fact. Moreover, sometimes standard terms might become attached because of the passivity of the other party, for example through neglected reclamation. The party using the standard terms can effectively demand that a reclamation is sent if the other party has not reclaimed in reasonable time after it received those terms. This exception is not applicable if the standard terms are sent only after the contract already was made, for example in a bill or the product’s packaging. It is not uncustomary in Finland that businesses withhold a right to make unilateral changes in the standard terms. Under Finnish law these terms are normally not considered binding because they transfer an essential right in a contractual relation to one party only, and thus easily become a source for unfairness.

4. Surprising and harsh standard terms Another review mechanism besides the requirements for a valid attachment of 44 standard terms is the doctrine setting special requirements for the binding force of surprising and harsh standard terms. It has been frequently used by the Finnish Supreme Court. A standard term can be surprising and harsh if it deviates from the non-mandatory legislation in detriment to the other party. Moreover, the party using the standard terms can be expected to follow the normal usages and practices in the area of business. Thus, there is a general aim to protect the normal expectations of the other party. Supplementary arguments may also gain importance how the term is presented and communicated, and even the lay-out of the contract documents can be Karhu

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relevant.22 However, when the other party is a business enterprise the requirements for communication are lower than in consumer contracts. It is to be noted that even if the requirements for clear communication and information could block the application of the doctrine of surprising and harsh standard terms the term in question can be adjusted based on Section 36 FCA.

5. The interpretation of standard terms 45

There are two important interpretation rules established in Finnish contract law. Firstly, individually negotiated terms take precedence over standard terms. Secondly, standard terms are interpreted against the party who drafted them (in dubio contra proferentem). It is evident that in many cases these interpretation rules have the same function as the doctrine of surprising and harsh standard terms. There is a typical Nordic practical reason behind the contra proferentem rule. The party drafting the standard terms could have avoided the need for interpretation by expressions which would not be open for interpretation, and therefore it is well founded that that same party also bears the risks of any confusion. In B2B contracts there is also an evident relation to the requirement ‘know your business’ in the sense that the capacity to formulate clear standard terms is one element of professional business management. Even if the core meaning of the contra proferentem rule in situations where the possibility of several interpretations has already been established there are several decisions by the Finnish Supreme Court where the rule has been applied to reason for the dismissal of the claim for an extended interpretation by the party using the standard terms. In one particular case, a bank had used in non-consumer loans (debtors were municipalities) a standard term enabling the bank unilaterally to raise the interest rate if bank’s own expenses increased unexpectedly.23 The bank claimed that the international banking crisis after 2008 had significantly raised the margins banks had to pay and, because the ECB had lowered its interest rates, banks were getting less income from the loans already given their customers. The Supreme Court took as the starting point the wording of the standard term. The expression ‘bank’s expenses in funding’ was considered open to many interpretations. Even if the interpretation claimed by the bank was possible, the Supreme Court emphasised the impression the debtors had at the time of the conclusion of the loan contract. The bank had failed to show that the debtors would have understood ‘bank’s expenses’ to refer only to the ratio between ECB’s interest rate and the interest percentage in specific loan agreements. If all the bank’s expenses were taken into consideration the bank had not been able to prove such raise in its expenses fulfilling the criterion set in the standard term (unilateral raise was only possible in relation to expenses that ‘the bank could not reasonably have foreseen’). It also worth mentioning that in B2C contracts the contra proferentem rule is directly based on a section of consumer protection law (Section 4:3), implementing the Unfair Terms Directive.

V. International application 46

The strong status of Section 36 FCA is reflected in B2B contracts with international dimensions. The law concerning the applicable law for contracts with international aspects contains an ordre public section. The government bill leading to this legislation gives an example for the future application of this ordre public section, namely a contract where one party (or both) would give up its possibility to make claims based 22 23

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on unfairness. There is Nordic-wide discussion on such choice of law clauses which would refer to Nordic contract law (or more specifically any of the laws of the nation states in question) without Section 36 in that legislation. In other words, any possibility of adjustment would be excluded, but the normal contract law rules and principles would be applied. At least under Finnish law such a reference would not be held valid because of the key role Section 36 FCA plays in the Finnish contract law system. More practically, most if not all the facts of the case falling under Section 36 FCA would be relevant for other rules and doctrines. Such dispersed and partial reasonings would in most cases lead to not applying these other rules and doctrines even if a straightforward application of Section 36 FCA could give a different outcome. A choice of law clause excluding Section 36 FCA would therefore lead to a structural bias in relation to one of the foundations of Finnish contract law, and therefore distort the Finnish law in an unacceptable manner by depriving a contract party an essential means of protection.

VI. Concluding remarks The Finnish law regulating and relating to the review of B2B contracts consists of 47 various elements, certainly also aspects rooted in EU law. This variety of sources boils down to typical Nordic features, a two-fold system of regulation to legally combat the outcomes of imbalance in bargaining power in business contracts. Firstly, there is a collective system open only for cases of widespread use (planned or already realised use) of typically unfair contract terms. The Market Court can issue an injunction to stop the use of such unfair terms. This injunction does not have a direct legal effect for the individual B2B contracts where such a term is used. Secondly, and as one of the fundamental elements of Finnish contract law system (a kind of ‘ordre public interne’ of Finnish contract law), a contract party can make an individual claim for adjustment because of unfairness of the contract or any contract term. A general court must then make an overall evaluation based on all relevant facts to establish whether there really is unfairness in that case. If so, and adjustment is made to legally wipe away that unfairness but normally letting the contract in question remain in force. Recent Finnish discussion concerning the review of B2B contracts often points out 48 that the need for protection extends beyond SMEs to microenterprises consisting practically only a few employees besides the owner of the firm who is herself or himself also the main entrepreneur. Moreover, in many occasions there is an evident legal analogy between the contracts made by these microenterprises with their main or sole business customer and those made between business actor and a consumer. Both situations feature a structural lack of skills, knowledge, and resources in questions of contracting in general and contract law issues in particular. Finnish society and the Finnish economy have changed in the last decades to embrace but also to require and to promote more of these self-employing measures, including establishing one’s own enterprise. There is a common social and political understanding that these changes give rise to the need for better legal protection of the small entrepreneurs. On the other hand, the Finnish contract law climate has become more oriented towards freedom of contract. As an open economy very dependent on international trade, Finnish contract law cannot remain on the protective level it reached – together with other Nordic countries – during the last decades of 20th century. Moreover, there is pressure from EU membership not to hamper the competition position of Finnish industry and bigger enterprises on European and global markets. To sum up, Finnish contract law contains diffuse and even contradictory sources of law, sometimes dating back to different Karhu

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periods of time. This diffuse and contradictory background is reflected in the legal situation of review of B2B contracts. Unlike in the case of consumers, microentrepreneurs or SMEs do not have special mandatory substantive contract law provisions of their own. Nor do they have similar publicly-funded special administrative bodies to help and support their legal needs as consumers do. In legal practice, the Finnish Supreme Court has constantly emphasised that contracts in general and B2B contracts in particular must be implemented and interpreted based on their wording. Certainly, the sections of the FCA providing for invalidity of contracts because of coercion, undue influence, misrepresentation and even ‘bad faith’ (disloyalty) are open to parties of B2B contracts too. They all represent concrete rules based on the idea of good faith and fair dealing. Even so, to claim invalidity of a B2B contract requires quite strong evidence of inappropriate behaviour by the other (normally stronger) party. Under some circumstances there often are some failures and neglect by the weaker party in its own actions. For instance, a claim of invalidity is most often used as a shield against a straightforward payment claim or other implementation claims by the other party. If the contract has already been acted upon invalidity often comes too late because there is a natural counter argument of any reaction coming too late. Section 36 FCA seems to offer an escape. It is open for claims based on circumstances after the contract was made. It is also always an overall assessment of all relevant facts. And it notifies especially the position of the parties. Section 36 FCA truly is a general clause. However, even if the possibility to adjust all contracts, including B2B contracts, based on unfairness is a strong main rule in Finnish contract law, the adjustment based on Section 36 FCA is not meant to become the main rule instead of pacta sunt servanda. There is a difference in seeing the possibility as a main rule and the reality or frequent application leading to adjustment as a main rule. The former is a genuine main rule in Finnish contract law, whereas the latter is not. And again, an adjustment should be used restrictively, especially in B2B contracts – though the precise meaning of ‘restrictive use’ is a subject of discussion amongst Finnish contract law scholars, in particular because every legal decision on adjustment has the nature of an in casu judgment because it must take into consideration all relevant circumstances. Nevertheless, these judgments also contain some elements of more general nature. Perhaps the key characteristics of Section 36 FCA opening for these generalisations is the same that also requires such an in casu decision making. The need for an overall assessment of every relevant aspect of the situation opens the door besides in casu arguments also to give significance of arguments valid for the whole branch of business in question,24 the risk positions of such parties in similar arrangements and the level of losses still to be tolerated,25 the level of business skills required in a B2B contract, the various forms of interdependence between the businesses in question in making a straightforward assessment on difference in the turnover of the contract parties, or the pure size of the businesses in question is too narrow, the significance of competence and market law issues in concrete adjustments, the role of fundamental and human rights in the adjustment argumentation.26 In a recent decision the Swedish Supreme Court argued in a case dealing with the interpretation of liability insurance contract that courts should use whenever possible an overall reasoning typical for an adjustment instead of the more restricted special doctrines.27 It remains to be seen how Finnish courts would face a similar question – now the relationship between adjustment and other contract law doctrines has been that 24

KKO 2015:26, on the whole field of financial leasing. KKO 2008:19, on typical risk positions in the construction sector. 26 See Husa/Karhu, 15–39; Norr, 363–386. 27 NJA 2018 p. 834. 25

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of ‘happy’ overlapping on the side of the facts and rather sharp difference on the side of legal consequences. The Swedish line of action would dramatically change that situation. It seems that a more thorough and effective regulation on the review of B2B contracts will not be an easy legal undertaking, as explained by economic, societal, and legalcultural reasons. Economically, more effective review possibilities would mean, at least in short term, less predictability in contracting, and thus increased transaction costs for the businesses. There is no unanimity of the size and seriousness of the problem, and therefore the legal means of more effective review possibilities is far from clearly being an important social goal needed to justify new legislation. Business is about risk taking and business judgment is the means to encounter that problem, not law. From a societal perspective the need for protection has become more urgent also because of the stronger emphasis on entrepreneurship in Finland. This has led to growing number of microenterprises on top of the SMEs which have always been numerically overwhelming part of Finnish business life. But legal-cultural attitudes in 21st century do not support the idea of public regulation of private matters. Moreover, small entrepreneurs are expected to cherish the spirit of entrepreneurship. This means also to endure the hardships necessarily involved in all business activities. In this context it is probable that EU norms for the protection of SMEs in business relations will take a prominent place also in the Finnish legal development. Until this development for more concrete measures (like the maximum payment period norms and similar) takes real pace I would like to highlight three possible tendencies in the theme of review of B2B contracts. Firstly, and this is already visible today, a demand to review business contracts will be a subsidiary demand in many business disputes. Adjustment of contract based on Section 36 FCA is a catch-all norm open to a legal discretion taking into consideration all possible situations. This tendency also means that most adjustment claims will be dismissed on factual grounds. And on the collective level it is very unlikely that the Market Court would find enough ground and evidence of a typically unfair contract term in a normal competition dispute case between businesses on the same branch. A second tendency will be the political discussions on a possible Ombudsman for B2B contracts and the scope of their jurisdiction. Such an Ombudsman would be similar to the Consumer Ombudsman (and their office) with resources enabling proactive measures besides helping small industries and possibly also microenterprises in their contractual difficulties. The political support to get this proposal through has been until now too weak. This is due to the complexity of the position of organisations representing SMEs. Even if these organisations want more effective means to combat the differences in bargaining power in contracts between big businesses and SMEs these organisations are by nature hesitant to get more public authorities to become involved in business relationships. The concrete outcome of this background might be the system of very focused Ombudsmen with narrowly regulated authority. The first example of this is the proposed Food Ombudsman to be established during the coming years. A third tendency also partly caused by the complexity of the political and social background is the soft law used and tried to encounter the imbalance. The means with longest duration was the Enterprise Contract Board. This board had no legal authority to give binding judgments, only recommendations. Its procedures were secret, and only the outcomes were made public. There were no substantive legal fees involved for the SMEs initiating the procedures. Unfortunately, the Enterprise Contract Board had only a very small amount of cases during all the years of its existence (1988–2002). Concretely this meant that its recommendations were too few to become a basis of any compact line of judgments to establish good practices in business contracts. SME related Karhu

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organisations also give public declarations and letters of concern relating to contractual matters. It is difficult to evaluate the concrete results of this kind of soft law activity.

VII. Further reading 53

There are two recent books on Nordic contract law in English: Lando et. al. (ed.), Restatement of Nordic Contract Law (Jurist-og Ökonomforbundets förlag 2016) includes a comprehensive overview of rules and doctrines relevant for the Nordic Contracts Acts, including the FCA. For the celebration of 100 years of Nordic contracts acts one volume of the Festschrifts was published in English: The Nordic Contracts Act (2015) contains essays written by contract law experts on various themes, and thus making the legal reasoning based on Nordic contracts act concrete and easily comprehensive. Finnish legislation in contract law is only scarcely available in English. One short chapter on Contract and Tort Law written by me is included in Pöyhönen (ed.), An Introduction to Finnish Law (1993). General features of Nordic legal systems are dealt with by Jaakko Husa in many of his publications, see for example Husa, An Advanced Introduction to Comparative Law (Edward Elgar 2016). Moreover, worth reading is also Nuotio (ed.), Introduction to Finnish Law and Legal Culture (Faculty of Law, University of Helsinki 2012). The Finnish Ministry of Justice has given unofficial translations to some legislation, including FCA, which can be found on webpage www.finlex.fi. Government bills are normally only in Finnish, as also the statements by Parliamentary Committees concerning the bill. Decisions by the Finnish Supreme Court are in full text available only either in Finnish or Swedish. However, there is a novel system of choice of judgments of interest for European legal systems in English, available on the webpage www.finlex.fi. Lastly, many law firms maintain information on Finnish contract law on their webpages – even if mostly short and concise, this information is normally accurate and reliable.

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France Bibliography: Ancel/Fauvarque-Cosson (ed.), Le Nouveau droit des contrats, Guide bilingue (LGDJ 2019); Ancel/Lequette, Les grands arrêts de la jurisprudence française en droit international privé (5th edn., Dalloz 2006); Avena-Robardet, Clauses abusives dans les contrats de téléphonie mobile: encore et toujours, (2004) Dalloz AJ 635; Barbet/Rosher, Les clauses des résolution de litige optionnelles (2010) 1 Revue de l’arbitrage 45–84; Mercadal, Memento Lefebvre – Droit commercial 2019 (Francis Lefebvre 2019); BeharTouchais, Le déséquilibre significatif dans le Code civil (2016) 14 La Semaine Juridique, Édition générale 662–665; Bloch, JurisClasseur Synthèse, Responsabilité civil et Assurance, Responsabilité des transporteurs aérien et terrestre, 2020 (LexisNexis); Boubli, Repertoire de droit civil, Contrat d’entreprise, (Dalloz 2016); Calais-Auloy/Temple, Droit de la consommation (9th edn., Dalloz 2015); Cartwright/Whittaker, ‘New provisions of the Code civil (Articles 1100‐1386‐1) in Ancel/Fauvarque-Cosson (ed.), Le Nouveau droit des contrats, Guide bilingue (LGDJ 2019) 449–529; Chagny, Le domaine d’application de la règle sur le déséquilibre significatif’ (2017) 3 Revue trimestrielle de droit commercial et de droit économique 593–610; Chantepie/Latina, Le nouveau droit des obligations (2nd edn., Dalloz 2018); Chaudouet, Le déséquilibre significatif (Thesis Montpellier 2018); Deshayes/Genicon/Laithier, Réforme du droit des contrats, 1 edn. (LexisNexis 2016); Dondero, La présomption de solidarité en matière commerciale: une rigueur à modérer (2009) 16 Recueil Dalloz 1097–1104; Gaudemet-Tallon, JurisClasseur Droit International, fasc. 552‐15, Convention de Rome du 19 Juin 1980 et Règlement “ Rome I ” du 17 Juin 2008 – Détermination de la loi applicable – domaine de la loi applicable (2020), Lexis Nexis; Gayard, Le déséquilibre significatif est sanctionné même s’il profite (prétendument) au consommateur: Amazon condamnée à 4 millions d’euros d’amende, Place du marché 2019; Goldi-Genicon, Droit commun et droit spécial (2013) 7 Revue de droit d’Assass 23–46; Gouëzel, JurisClasseur Code civil Art. 6 fasc. Unique, (2018), LexisNexis; Grimaldi, Les limites à la libre détermination du contenu du contrat dans le nouveau droit des contrats, (2016) 215 Petites Affiches 6–11; Heyraud, Les contrats internationaux à l’épreuve des dispositions impératives de la réforme du droit français des obligations, (2018) 2 Journal de droit international privé (Clunet) 535–561; Hontebeyrie, Art. 1171 contre L. 442‐6, 2º: la prescription dans la balance (2016) 37 Recueil Dalloz 2180–2182; Houcieff, La Semaine juridique – Edition générale 2010, 787; Huet, JurisClasseur Code civil, Art. 1641–1649, fasc. 30, (2018), LexisNexis; Huet, JurisClasseur Code civil, Art. 1641–1649, fasc. 60, (2018), LexisNexis; Jault-Seseke, (2011) 1 Journal du droit international (Clunet) 91–97; Kessedjian, JurisClasseur Droit international, fasc. 571‐20, Contrats de distribution – Introduction générale – Droit international privé (2017), LexisNexis; Kröll/Mistelis/Perales Viscasillas (ed.), UN Convention on Contracts for the International Sale of Goods – A Commentary (2nd edn., C.H. Beck 2018); Lagarde, Questions autour de l’article 1171 du code civil (2016) 37 Recueil Dalloz 2174–2179; Lamazerolles, JurisClasseur Contrats‐Distribution, fasc. 405 (2018), LexisNexis; Latil, JurisClasseur Droit International, fasc. 552‐10, Lois de police (2019), Lexis Nexis; Le Bescond de Coatpont, JurisClasseur Contrats-Distribution, fasc. 262 (2018), LexisNexis; Loir, Clauses relatives à la formation du contrat, SJ ed. E 2014, Nr. 26, p. 31; Martel, A la découverte de la clause attributive de juridiction potestative, (2012) 42 Recueil Dalloz 2876–2879; Mazeaud, Clauses limitatives de réparation, la fin de la saga? (2010) 28 Recueil Dalloz 1832–1835; Mekki, Projet de réforme du droit de la responsabilité civile: des retouches sans refonte, Gazette du Palais 2017, 12–15; Mestre, Des clauses originales mais illicities au regard des droit fondamentaux, (2006) 3 RTD civ. 557; Mouly-Guillemaud, Déséquilibre significatif et rupture brutale: variations introduites par la refonte du Titre IV du Livre IV du Code de commerce (2019) 7/8 Revue Lamy Droit Civil 10; Mouial-Bassilana, JurisClasseur Concurrence-Consommation, fasc. 730, (2018), LexisNexis; Niggemann, AGB-Kontrolle im kaufmännischen Geschäftsverkehr nach der Reform des französischen Code Civil? (2018) 10 Recht der internationalen Wirtschaft 658–664; Niggemann, Eine Entscheidung der Cour de cassation zu Art. 23 EUGVVO – Fehlende Einigung, fehlende Bestimmbarkeit des vereinbarten Gerichts oder Inhaltskontrolle? (2014) 2 Praxis des Internationalen Privat- und Verfahrensrechts 194–199; Niggemann, Le grand élan de justice contractuelle de l’article 1171 Code civil – un regard au-delà de nos frontières (2019) 3 Contrats – Concurrence – Consommation 3 Nr. 12, étude 21; Poumarède, Droit de la responsabilité et des contrats, in Le Tourneau (ed.), Droit de la responsabilité et des contrats, Dalloz Action 2018–2019 (Dalloz); Ravel d’Esclapon, Droit des assurances: clauses abusives et charge de la preuve. Dalloz actualité (8.6.2016); Raymond/Pimbert, JurisClasseur Concurrence-Consommation, fasc. 820 (2018), LexisNexis; Revet, Les critères du contrat d’adhésion (2016) 30 Recueil Dalloz 1171–1178; Schiller, Contrat d’adhésion – Acte rédigé par un notaire – Enjeu de la qualification, (2017) 39 La Semaine Juridique. Notariale et Immobilière I 1271; Stoffel‐Munck, Faurecia

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Part 1. Country Reports 3: La Cour de cassation restaure l’efficacité des clauses limitatives de réparation dans les contrats de services informatiques, Semaine juridique Edition générale 2010, 1790; UNCITRAL, Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods – 2016 Edition (United Nations 2016); Witz, Droit uniforme de la vente internationale de marchandises, (2012) 18 Recueil Dalloz 1144–1157

Contents I. Introduction ..................................................................................................... II. Regulatory framework.................................................................................... 1. Civil code...................................................................................................... 2. Commercial code........................................................................................ 3. Consumer code ........................................................................................... III. Requirements and legal consequences ....................................................... 1. General provisions...................................................................................... a) Differences .............................................................................................. b) Scope of application ............................................................................. c) Art. L 442‐1 Ccom ................................................................................ aa) Concepts........................................................................................... i) Commercial partner ............................................................... ii) Subjection.................................................................................. iii) Imbalance.................................................................................. bb) Application ...................................................................................... cc) Effects................................................................................................ d) Art. 1171 Cciv ........................................................................................ aa) Background...................................................................................... bb) Role of consumer law.................................................................... cc) Application to commercial contracts ........................................ 2. Specific provisions ...................................................................................... a) Limitation of liability clauses.............................................................. b) Seller’s warranty – hidden defects..................................................... c) Other limitations of party freedom in commercial contracts; construction law .................................................................................... IV. The international context.............................................................................. 1. The applicable law...................................................................................... a) Choice of law issues.............................................................................. b) The applicable law to an action based on Art. L 442‐1 Ccom... c) Art. 1171 Cciv or any other article of the Civil code’s 3rd book as ‘loi de police’?.................................................................................... 2. Jurisdictional issues .................................................................................... a) Jurisdiction in contract litigation ...................................................... b) Jurisdiction in tort matters ................................................................. V. Final remarks ...................................................................................................

mn. 1 4 4 19 25 29 29 31 36 39 40 40 41 43 45 52 57 57 58 63 69 69 75 80 83 84 85 94 98 103 104 111 115

I. Introduction 1

French contract law is based on party autonomy. Art. 1102 of the French Code civil (‘Cciv’)1 provides: Everybody is free to contract or not to contract, to choose its contract partner and to determine the content and the form of the contract within the limits of the law. 1 The French Civil code is quoted in the version of the reform of its 3rd book ‘Des sources des obligations’ (The sources of the obligations) by ordonnance 2016‐131 of 10.2.2016, JORF 0035 of 11.2.2016, and its ratification law of 20.4.2018, Journal Officiel de la République Française (‘JORF’) No. 0093 of 21.4.2018, Texte 1.

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Whilst our review of commercial contracts under French law will focus on the limits of 2 party autonomy, it must not be forgotten that limitations to the freedom to contract are the exception to the rule. It may be true that French law is not as liberal as the laws of some other countries.2 A number of commercial and other contracts are regulated by mandatory provisions. More generally speaking, the French legislator has a tendency to protect the weaker party against the more powerful one; this is even one of the principles of the Code civil’s contract law reform in 20163. Commercial contracts were as a whole not subject to a general judicial review. It was obvious though that in many cases there is no equal bargaining power even between professionals. The problem was dealt with sector wise: specific legislation was passed to regulate the relations between big retailers and their suppliers4, for sub-contractor relations5 and in the transport business6, to give some examples. The general issue of unfair contract terms in commercial transactions was left open. A first attempt was made in 20087 by enacting Art. L 442‐6 I No. 2 Code de commerce (‘Ccom’) incriminating significantly imbalanced provisions in commercial contracts. For reasons, analysed below,8 this provision addressed only a small part of the problem and was limited in its purpose. At the occasion of the reform of the Code civil’s general contract law in 2016 Art. 1171 Cciv was adopted, which provides that significantly imbalanced contract terms in pre-established general contract terms (‘GCT’) are deemed not written. This will be our main subject, but we will reach beyond and present other key matters, which are regulated by mandatory provisions and where contractual freedom is limited. The first chapter contains the main regulatory framework (II.). Subsequently, we will 3 examine the details and application of provisions about significantly imbalanced contract terms (III.1.), followed by other mandatory provisions of relevance to our subject, in particular limitation of liability clauses (III.2.). We will then shift the focus to the international level and the application of French law in international contracts (IV.) before making some concluding remarks (V.).

II. Regulatory framework 1. Civil code9 One of the main subjects of our contribution has been introduced into French law by the 4 recent reform of the contract law of the French Code civil in 201610. Following minor modifications in the ratification law of 20.4.201811 the relevant provisions are the following: Art. 1171. Cciv provides: In a standard form contract any term, which is non-negotiable and determined in advance by one of the parties and which creates a significant imbalance (‘déséquilibre significatif’) in 2 Gouëzel, JurisClasseur Code civil Art. 6 (fasc. Unique), mn. 10–11 emphasises that the principle of égalité in the sense of protection of the weaker party has often been opposed to party autonomy. There are other less philosophical but more economical and political considerations which lead the French legislator and the French Cour de cassation to limit party autonomy in certain situations, ibid. 3 Rapport au Président relatif à l’ordonnance No. 2016‐131, JORF No. 0035, 11.2.2016, Texte 25. 4 Mouial-Bassilana, JurisClasseur Concurrence-Consommation (fasc. 730) mn. 1–7. 5 Loi 75‐1351 of 31.12.1975. 6 Art. L 132‐8 Ccom, law No. 98‐69 (‘loi Gayssot’) of 6.2.1998, JORF 7.2.1998, p. 1975. 7 Law of 4.8.2008, No. 2008‐776, JORF 0181, Texte 1. 8 See below mn. 36‐38 9 The English translations are taken from Cartwright/Whittaker. 10 See fn. 1 11 Chantepie/Latina, 200 at mn. 230. Cf. Niggemann (2018) 659 (in German) in particular in fn. 32–35.

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5

The notion of ‘standard form contract’ (‘contrat d’adhésion’) is defined in Art. 1110 (2) Cciv: A standard form contract is one which comprises a set of non-negotiable clauses, which are determined in advance by one of the parties.

6

Art. 1119 Cciv sets the requirements for GCT to be part of the contract: General conditions put forward by one party have no effect on the other, unless they have been brought to the latter’s attention and the party has accepted them.

Art. 1119 Cciv corresponds to the legal situation before the reform.12 In case the GCT are contained in another document, to which reference is made, that reference has to be made clearly and the GCT must be easily accessible.13The other party must have had knowledge of the GCT before or at the occasion of conclusion of the contract or have been able to obtain this knowledge without difficulties. Art. 1120 Cciv further provides that silence alone is not an acceptance, unless the law, trade usages, contract relations or particular circumstances lead to another result. This concept corresponds as well to the traditional legal situation under French law: ‘silence circonstancié’14. The sending of an order confirmation including the GCT for the first time after the contract has been concluded, or even the printing of the GCT on the reverse side of the invoice cannot lead to the inclusion of the GCT into the contract.15 Previous business relations which prove that the GCT had been accepted in the past may lead to another result, provided a reference to the GCT has been made in the new contract.16 8 In circumstances of differing standard terms (‘battle of the forms’) Art. 1119(2) Cciv provides: 7

In case of inconsistency between general conditions relied upon by each of the parties, incompatible clauses have no effect.

Where one or several clauses are declared not written or null and void, Art. 1184 Cciv distinguishes between not written and invalid clauses. In case the stipulation is null and void (‘nulle’), the contract is nullified if the invalid clause is an essential element (‘un élément determinant’). Clauses deemed not written do not lead to invalidity of the contract. 10 Art. 1170 Cciv contains a further fundamental provision: 9

Any contract term which deprives a debtor’s essential obligation of its substance is deemed not written.

11

The Code civil further contains interpretation rules (Art. 1188–1192 Cciv17). Contracts are construed according to the common intention of the parties rather than stopping at the literal meaning of its terms (Art. 1188 Cciv). The contract clauses are to 12

Chantepie/Latina, ibid. Mercadal, Memento Lefebvre Droit commercial, 2019, mn. 12139. 14 Cass.civ. 1ère, 24.5.2005, No. 02‐15.188; Cass.com., 15.3.2011, No. 10‐16.422. See also Chantepie/ Latina, 205 at mn. 238–240. All decisions of the Cour de cassation are available on its website https:// www.courdecassation.fr/jurisprudence_2/ and under www.legifrance.gouv.fr under jurisprudence judiciaire by searching with the date of the decision and the docket number. 15 Cass.civ. 1ère, 18.10.2005, No. 03‐18467; 11.3.2014, No. 12‐28.304. 16 Cass.civ. 1ère, 30.6.1992, No. 90‐21.491; 18.10.2005, No. 03‐18.467; Chantepie/Latina, 201 at mn. 230. 17 These articles are in line with the traditional interpretation rules of French law, Chantepie/Latina, 447–453 at mn. 501 et seq. 13

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be construed as a whole; several contracts concluded for the same operation are to be interpreted as a whole (Art. 1189). Art. 1190 Cciv contains the contra proferentem rule: 12 In case of ambiguity, a bespoke contract is interpreted against the creditor and in favour of the debtor and a standard form contract is interpreted against the person who put it forward.

Clauses capable of two meanings are to be construed in a sense which makes them 13 produce effect. (Art. 1191 Cciv). Art. 1105 Cciv deals with the relation between general and special rules:18 14 Whether or not they have their own denomination, contracts are subject to general rules, which are the subject of this sub-title. Rules particular to certain contracts are laid down in the provisions special to each of these contracts. The general rules are applied subject to these particular rules.

Party autonomy is limited by Art. 6 and 1102 Cciv in so far as the parties may not derogate from rules which are an expression of public order. Art. 1162 Cciv repeats this principle by stating that a contract may not derogate from public order neither by its terms nor by its purpose, irrespective of whether the latter (i.e. the content of public order) was known to all the parties. The French wording of Art. 1102 and Art. 6 Cciv is peculiar and its meaning probably not fully expressed in the English translation. A derogation from rules ‘qui intéressent l’ordre public’ is not permitted. This text, unchanged since 1804, expresses a concept which adapts itself to changes of common societal convictions and morals.19 It has been used to allow the courts to extend public order to matters which were not taken into consideration before; in recent decades this has particularly concerned fundamental rights.20 Within the contract law book of the Code civil, the following articles provide that they are mandatory and cannot be set aside by contractual stipulations: – Art. 1104: good faith in negotiation, conclusion and execution of contracts; – Art. 1112‐1(5): Precontractual duty to inform; stipulations excluding or limiting this duty are not valid; – Art. 1169: remunerated contracts (‘contrat à titre onéreux’) are invalid if, at the time of conclusion, the counterpart is derisory or illusory; – Art. 1210: permanent obligations are invalid and can be terminated according to the rules on termination of contracts with undetermined duration; – Art. 1231‐5: moderating power of the courts in case of excessive contract penalties; – Art. 1356‐2: clauses about the burden of proof cannot be relied upon against irrefutable legal presumptions. This list is exhaustive only in so far as it contains the legislative provisions which explicitly state that they cannot be modified; there are others, which may by their substance be considered as ‘loi de police’ and where the French courts may decide that they fall into that category.21 These provisions are mandatory in a national context and are part of ‘public order’ (Art. 1102 and 1162). In chapter IV. we will discuss their application in an international context.22 18

On the relevance of this article see below mn. 63–69. Gouëzel, JurisClasseur Code civil Art. 6 (fasc. Unique) mn. 17, 20, 36 et seq. 20 ibid. mn. 17–21, 36. 21 See mn. 16 and Gouëzel, fns 19 and 20 22 See below mn. 94–102 for the discussion of these provisions in an international context. 19

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2. Commercial code23 19

In 200824 the following provision concerning unfair contract terms was introduced into Art. L 442‐6 of the French Code de commerce (‘Ccom’), replacing the rule whereby the abuse of economic dependence and of purchasing power constituted an offence in tort giving rise to a claim for damages:25 I. – Any producer, trader, manufacturer or person recorded in the trade register who commits the following offences shall be held liable and obliged to make good the damage caused: (…) 2° subjecting or seeking to subject a trading partner to obligations that create a significant imbalance (‘déséquilibre significatif’) in the rights and obligations of the parties;26 (…)

This provision is part of the section entitled ‘restrictive competition practices’ (‘pratiques restrictives de concurrence’), which concerns situations common in relations between the big retail companies in France and their suppliers, who suffer from the strong market power of these companies. This sector has been a centrepiece of French legislation in matters of unfair dealings and fair competition to balance the unequal bargaining power between the big retailers and their suppliers.27 21 In order to fully understand the legal mechanism of this provision it is important to know that court actions can be initiated by competitors and contract partners (‘any person having a legitimate interest’) (Art. L 442‐4 I Ccom), and the French Ministry for the Economy and Finance, which acts through its General Directorate for Competition Policy, Consumer Affairs and Fraud Control (‘DGCCRF’28). This institution leads, inter alia, enquiries into restrictive competition practices, which may result in court actions, in which the authority may claim nullity of the incriminated clauses, cessation of the incriminated practices and significant fines in relation to the profits earned through these practices (until 2019, Art. L 442‐6 III Ccom). 22 The section on restrictions of competition was redrafted in 2019 and a new numbering system applied.29 The modified content of Art. L 442‐6 is now found in Art. L 442‐1 I No. 2 Ccom: 20

Anyone in the field of production, distribution or services who commits, in the frame of commercial negotiations, conclusion or execution of contracts, any of the following offences, shall be held liable and be obliged to make good the damages caused: 1. (…) 2. subjecting or seeking to subject the other party to obligations that create a significant imbalance in the rights and obligations of the parties.

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Any party having a legitimate interest may forthwith not only claim for damages but also cessation of the incriminated practices and request to have the incriminated clauses declared null and void (Art. L 442‐4 I(2) Ccom). The claims of competitors and contract partners are thus significantly extended. 23 The official translation of the French commercial code has been updated until 2013 only. The translations of later texts are our own. 24 Loi No. 2008‐776, 4.8.2008 (loi ‘LME’), JORF 5.8.2008, Texte 1. 25 Mouial-Bassilana, JurisClasseur Concurrence-Consommation (fasc. 730) mn. 1–7. 26 Translation from https://www.legifrance.gouv.fr/Traductions/en-English/Legifrance-translations. 27 Mouial-Bassilana, JurisClasseur Concurrence-Consommation (fasc. 730) mn. 1. 28 Direction Générale de la concurrence, de la consommation et de la répression des fraudes. 29 Ordonnance No. 2019‐359, 24.4.2019, JORF 25.4.2019.

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Failing a specific provision, the law enters into force upon its publication. However, it 24 does not apply retroactively for contracts concluded prior to its publication.30 At present the former and the latter texts apply depending on when the contract was concluded.

3. Consumer code Consumer law exerts an important influence beyond its direct application. Although 25 it is not part of the in-depth analysis, the legal framework would be incomplete without reference to consumer law. Art. L 212‐1 Code de la consommation (Cconso) reads as follows:31 26 Clauses in contracts concluded between professionals and consumers are considered abusive, the object or the effect of which is to create a significant imbalance between the rights and the obligations of the parties to the disadvantage of the consumer. Without prejudice to the interpretation rules in Art. 1188, 1191 and 1192 of the civil code the abusive character of a clause has to be determined by taking into account all circumstances prevailing at the time of conclusion of the contract as well as to all other clauses of the contract. Additionally, the appreciation has to take into account contract stipulations in another contract, provided these contracts are legally connected by their conclusion or their execution. The appreciation of the abusive character in the sense of the first paragraph does not bear either on the definition of the principal object of the contract or on the adequacy of the price or the remuneration for the sold object or the offered service, provided that the clauses are clearly and understandably drafted. A decree taken by the Council of State, after having obtained the opinion of the commission for abusive clauses, determines the type of stipulations, which according to the seriousness of infringing on the balance of the contract must irrefutably be considered as abusive in the sense of the first paragraph. A decree taken under the same conditions determines a list of presumably abusive stipulations; in case of a lawsuit concerning a contract with such a clause, the professional has to prove the non-abusive character of the litigious stipulation.

In application of this text, two decrees were published in 2008,32 the first of which lists 27 12 clauses, which are irrefutably abusive (R 212‐1 Cconso, the ‘Black list’) and a second list of 10 clauses, which are abusive, unless the professional proves that they are not (R 212‐ 2 Cconso, the ‘Grey list’).33 Both lists are based on the Annex to the EU Unfair Terms Directive, but contain some additional clauses.34 They were last amended in 2016.35 A direct application of these texts to commercial relations is not possible, since their 28 application is limited to contracts between consumers and ‘professionnels’.36 However, as shall be seen,37 examples of significantly imbalanced clauses figuring in these two lists 30

Mouly-Guillemaud, 17. There is no official translation of the current French consumer code. Unless indicated otherwise, the translations are our own. 32 When in 1995 France brought its legislation in compliance with the EU Unfair Terms Directive the list of abusive clauses had merely an indicative character in the sense that in spite of a clause featuring in the list it was not automatically or presumably abusive. This was changed only in 2008, when the legal consequences of the black and grey lists were fixed by law. Furthermore, the French government did not wish to have only the courts decide on these matters and instituted a commission on abusive clauses (‘Commisson des clauses abusives’, CCA), the function of which was (and still is) to issue opinions and recommendations for the courts and the public about specific sets of general contract terms. The role of the courts was thus reduced. Cf. Raymond/Pimbert, JurisClasseur Concurrence-Consommation (fasc. 820) mn. 17–18; Calais-Auloy/Temple, 164, 177–179. 33 Décret No. 2009‐302, 18.3.2009, JORF 0667 of 20.3.2009, 5030. 34 Cf. Calais-Auloy/Temple, 172–177. 35 Décret No. 2016‐884, 29.6.2016, JORF 0151, 30.6.2016. 36 Article liminaire Cconso. 37 See mns 45, 58–62. 31

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may exert an influence on the interpretation of Art. L 442‐6 I No. 2 Ccom and Art. 1171 Cciv.

III. Requirements and legal consequences 1. General provisions French law contains three sets of rules dealing with unfair contract terms: commercial law (Art. L 442‐1 No. 2 Ccom), civil law (Art. 1171 Cciv), and consumer law (Art. L 212‐ 1 Cconso). All three revolve around the central notion of ‘déséquilibre significatif’: ‘significant imbalance’. 30 The different legal frameworks present various questions concerning their relationship to one another, their respective scope of application and relevance in commercial contracts. Each of these aspects will be discussed in more detail below. 29

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a) Differences. In contrast to the new Art. 1171 Cciv, neither the Commercial nor the Consumer code require the use of preformulated general contract conditions. Whereas Art. L 442‐1 I No. 2 Ccom concerns ‘significantly imbalanced obligations’, the Consumer code targets only ‘clauses’. The Commercial code further requires that the unfair obligations must be a result of subjecting or seeking to subject the other party to such obligations. This is an essential condition of its application. Both the Civil and the Consumer code exclude the adequacy between the price and the principal object of the contract from the issue of unfair terms. However, under the Consumer code this exclusion depends on the condition that the contract clauses in this respect (price and object) are themselves clearly written (Art. L 212‐1(3) Cconso). The Commercial code contains no such qualification. According to the Civil and Consumer codes, unfair clauses are deemed not written (Art. 1171(2) Code civil; Art. L 241‐1 Cconso); the rest of the contract is thus maintained (Art. 1184 Cciv; Art. L 241‐1(2) Cconso). With respect to Art. L 442‐1 Ccom the clause is null and void (‘nulle’), which means that the whole contract may be become invalid if the clause is an essential element (Art. 1184 Cciv). There are two procedural differences between ‘not written’ and ‘null and void’. In cases where the application of Art. L 442‐ 1 Ccom is sought, a specific request to declare the clause null and void has to be made; such a request is subject to a time bar of five years.38 In consumer and civil matters, no such explicit request is required and the action is not limited by a prescription period.39 In consumer matters, the tribunal has to apply the consumer protection provisions ex officio,40 which is not the case in either civil or in commercial matters. Under the commercial code, there is an additional claimant, namely the Ministry for the Economy and Finance. Through its General Directorate for Competition Policy, Consumer Affairs and Fraud Control, the Ministry may lead investigations, which enable the Ministry to obtain much better factual and market knowledge than a private claimant may have. Its actions are thus the mightier weapon under Art. L 442‐1 Ccom. b) Scope of application. The scope of Art. L 442‐1 Ccom increased in 2019 as a result of the legislative changes. Between 2008 and 2019 the provision applied to producers, traders, manufacturers, and persons recorded in the ‘répertoire des métiers’ 38

Cass.civ. 13.5.2019, No. 017‐23.169; cf. Mouly-Guillemaud, 13. Cass.civ. ibid. 40 Art. R 632‐1 Cconso; cf. Calais-Auloy/Temple, 178. 39

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(trade register). The law of April 2019 has widened the application to all activities of production, distribution and services.41 Since the provisions of the Consumer code apply to contracts between consumers 37 and ‘professionnels’42 they do not directly apply to commercial contracts, but may exercise an influence on the interpretation of the two other provisions. The application of Art. 1171 Cciv and the other articles of the Civil code are not 38 limited to any category of persons. The Civil code is and – since its creation in 1804 – has been a law for everybody. Commercial law is lex specialis to the Civil code.43 However, the relationship between commercial and civil law is not so simple to grasp, since civil law is in many aspects the basis of commercial law, whereas other provisions modify the civil law provisions.44 The respective scopes of application of Art. 1171 Cciv and Art. 442‐1 No. 2 Ccom are part of this issue.45 With respect to our topic, the application of Art. L 442–1 Ccom to commercial contracts is a certainty, whereas the application of Art. 1171 Cciv is a – serious – possibility. c) Art. L 442‐1 Ccom. Upon its introduction in 2008, Art. L 442‐6 I No. 2 Ccom – 39 the predecessor of Art. L 442‐1 No. 2 Ccom – was much feared to become the basis for judicial review of unfair contract terms in commercial contracts.46 Since then, a large number of court decisions applied this provision and have given it clear structures and limits. The extensive case law is best summarised and analysed in the annual reports of the Faculty of Law at the University of Montpellier. In addition, we rely on the annual summary of the court decisions by the DGCCFR.47 aa) Concepts. 40 i) Commercial partner. The courts have construed the notion of ‘commercial partner’ literally, requiring not only one contractual relationship but indeed a series of contracts with an established relationship.48 This has proven an obstacle for parties objecting against specific clauses in an isolated contract; the potential claimant had to wait until the use of the imbalanced clauses had become a repeated feature. ii) Subjection. The expressions used by the courts to describe the acts which may 41 qualify as ‘subjection’ are very strong, including ‘intimidating’, or ‘threat’ or ‘leaving no alternative’.49 The courts take the market position of the parties into consideration, 41 Mouly-Guillemaud, 17. Case law had already extended the application of Art. L 442‐6 I Ccom to these three sectors and even beyond, cf. Le Bescond de Coatpont, JurisClasseur Contrats-Distribution (fasc. 262) mn. 7. 42 Article liminaire Cconso, see above mn. 28. 43 See Art. 1105(3) Cciv, which provides for the principle of lex specialis derogat legi generali. 44 The major examples are joint and several liability for which there is no presumption in civil law, Art. 1310 Cciv, contrary to commercial law, see Dondero, and the means of evidence: Commercial acts can be proven with all means, Art. 110‐3 Ccom, whereas civil law requires written evidence for all judicial acts with a value above 1500 €, Art. 1359 Cciv and décrét 2004‐836, 20.8.2004. Cf. for a general view Goldi-Genicon. 45 See below mn. 63–68. 46 Mouial-Bassilana, JurisClasseur Concurrence-Consommation (fasc. 730) mn. 6. 47 Bilan des décisions judiciaires (Faculté de droit de Montpellier) and Bilan des décisions administratives et judiciaires by the DGCCRF, both issued annually, available on the website of the French Ministry for the Economy and Finance, under https://www.economie.gouv.fr/cepc/etudes-commission. The annual summary and analysis of the Faculty of Law at the University of Montpellier will be referred to as ‘Bilan Montpellier’ followed by the year, the summary of the court decisions rendered subsequent to claims of the DGGCRF will be referred to as ‘Bilan DGRCCRF’ and the year. We indicate that we refer to the DGCCRF’s report on its judicial activity, but not to its annual report. 48 Bilan Montpellier (2018) 70. This interpretation has remained the same since 2008; cf. the Bilan Montpellier of the previous years under Art. L 442‐6 I No. 2. 49 ibid. 71.

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namely whether one party had a market position allowing it to impose its conditions on the other.50 An important element in establishing subjection is whether the contract terms have been imposed a such without the possibility to negotiate.51 42 The element of subjection has proven to be a high obstacle for individual claimants. In cases where the court procedure followed an investigation by the DGCCRF, the rate of success is much higher.52 The individual claimant may have indications and some evidence about the superior market position of the other party, but it fails to have access to the same data and information which the DGCCRF may dispose of via a thorough market analysis. Additionally, the claimants often fail to establish that they do not have a viable alternative to contract with another party. iii) Imbalance. The imbalance may be contractual, economical or financial.53 The courts do not limit their analysis to contractual matters and clauses, but include price and remuneration elements into their judgment.54 From an economic angle, the imbalance may result from the absence of a counterpart or a disproportion between the obligations of the parties.55 The economic consequences of termination of contract or a suspension of the contractual relationship are taken into consideration56. Price clauses or price variations in annual contracts have been held to be invalid57. 44 Another indication for an imbalance may be that there is no legitimate reason for differing contractual rights for the two parties.58 43

bb) Application. Art. L 442‐6 I No. 2 Ccom has also been applied to contract clauses which would be held unfair in consumer matters. There are cases where undefined delivery periods, exclusion or excessive limitations of liability, unjustifiably different grounds for termination and difficulties of access to the courts have been held to be significantly imbalanced.59 The following two cases, concerning the application of Art. L 442‐6 I No. 2 Ccom, give an insight into the methodology of argument and application of this legal provision. 46 In Amazon – decided by the Regional court of Paris in September 201960 – the DGCCRF had investigated Amazon Marketplace, namely the Amazon platform, on which manufacturers and suppliers sell their products via Amazon. The case did not concern the consumer side of Amazon’s operations. The DGCCRF investigations began in 2015 and lasted for two years, during which period the competition authority interviewed a number of Amazon’s partners about the application of Amazon’s contract patterns. The action was brought against three companies of the Amazon group, two of 45

50 See Bilan DGCCRF (2014) 7–8; (2015) 8–9; (2016) 8–10; (2017) 5–7; (2018) 7–8, all under https:// www.economie.gouv.fr/cepc/etudes-commission. See also the Amazon and Expedia cases below mn. 46 and 50. 51 Bilan Montpellier (2018) 71. 52 ibid. 70–71. 53 Bilan Montpellier (2014) 31; Cass.com., 2.3.2015, No. 13‐27.525 and No. 14‐10.907 (‘Eurauchan’), CCC , May 2015, 50 (no real negotiation margin at the occasion of annual negotiation of the contract; threat of contract termination, pressure on the price for a new contract period). 54 Bilan Montpellier (2018) 71 and Bilan DGCCRF (2018) 7–8. See as well the Amazon and Expedia cases mns 46 and 50. 55 TC Paris, 2.9.2019, No. 2017050625 (‘Amazon’) 13–14; Mouial-Bassilana, JurisClasseur ConcurrenceConsommation (fasc. 730) mns 64 et seq. 56 TC Paris, 2.9.2019, No. 2017050625 (‘Amazon’); Gayard. Even though the decision is one of a lower court, it has not been challenged by Amazon, since part of the litigation had been settled. 57 Cass.com., 2.3.2015, No. 13‐27525 (‘Eurauchan’), see fn. 53. 58 For instance, CA Paris, 24.6.2016, No. 13/20422, Bilan Montpellier (2016), 54. 59 Bilan Montpellier (2018) 70–71, with further references; CA Paris, 21.6.2017, No. 15/18784 (‘Expedia’); Chagny, 598. 60 TC Paris, 2.9.2019, No. 2017050625 (‘Amazon’).

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which were based in France, and one in Luxembourg, whereby the latter for the most part rendered only financial services. The pursuit against this latter company was not upheld by the court. The first part of the decision examines the notion of ‘subjection’. The court relies on circumstantial evidence, including imbalanced economic power, one party being market leader and indispensable for the others, no real negotiation power and the same clauses in all contracts. Amazon had admitted that the non-negotiability of the contracts was an essential feature of its marketplace business and justified this argument by the fact that it deals with 170,000 partners thus rendering negotiation impossible. The court came to the result that Amazon’s contract partners were subjected to accept the contracts, as Amazon’s market position was so overwhelming they had no choice but to work with it. With respect to the content of the contract, the DGCCRF was concerned by eleven clauses, of which the court accepted a significant imbalance in seven cases. The criteria used to determine the significant imbalance were of contractual and economical nature, namely the absence or the serious disparity of a fair equivalent, the potestative character of a condition depending solely on one party’s (Amazon’s) discretion and clauses favouring exclusively one party’s interests. Certain criteria which are present in consumer protection cases were also applied. Thus, the unclear clauses about the content of the contract was declared invalid. Furthermore, the possibility to unilaterally modify some contract provisions (in particular about the level of Amazon’s commission), the unilateral termination and suspension rights, the performance criteria applied by Amazon, the vague wording of the accounting system and the stipulation about merchandise returned by the customer were considered significantly imbalanced. The court considers the possibility to discuss unilateral decisions ex post as insufficient to protect the rights of Amazon’s partners, since the unilateral decisions were applied immediately, which placed the partner in an unfavourable and difficult position.61 It is further immaterial whether a clause has effectively been applied or not. The choice of law and choice of jurisdiction clauses both opting for the courts and the law of Luxembourg were disregarded. The action based on Art. L 442‐6 I No. 2 Ccom is in tort. The applicable law is determined according to Art. 4(1) Rome II. Since the damages occurred to a great extent in France, French law is applicable. Furthermore, Art. L 442 is a mandatory (‘loi de police’) provision. The choice of forum clause was disregarded, since it cannot be opposed against an action brought by the DGCCRF. In earlier litigation concerning the DGCCRF’s opposition to the travel platform Expedia, the Paris Court of Appeal and recently the Cour de cassation62 had to decide on two standard stipulations of Expedia’s hotel booking system, which the DGCCRF considered to be significantly imbalanced, namely the guarantee of granting the best price to Expedia and its right to dispose of all vacant rooms. The Appeal Court held the two clauses to be significantly imbalanced. The first one violates as well Art. L 442‐6 II d) Ccom, according to which “most favoured” clauses are invalid. The reasoning and the method are exactly the same as in the Amazon case: subjection resulting from circumstantial evidence, in particular Expedia’s important market position, and significant imbalance of the clauses due to absence of an equivalent counterpart. The Cour de cassation considers though that the last available chamber clause has to be construed in a narrower sense, namely that it does not oblige the hotel operators to rent their last room via Expedia, but merely contains an opportunity for them to use the Expedia 61 The DGCCRF is entitled to impose a fine (Art. L 442‐6 III Ccom, since 2019 Art. L 442‐1 III Ccom). The court reduced the fine of 9.5 million euros fixed by the DGCCRF to 4 million euros. 62 CA Paris, 21.6.2017, No. 15/18784, notes Delpech and Chagny, Cass.com., 8.07.2020, No. 17‐31536.

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platform. Due to this narrower interpretation the clause is not significantly imbalanced. With respect to the applicable law and jurisdiction, Expedia, being an English company, stipulated English law and the jurisdiction of the English courts. The same arguments as in the Amazon case lead to the competence of the French courts and the application of French law. 51 The above decisions are by no means isolated; they are in line with previous decisions of the Cour de cassation.63 52

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cc) Effects. Although the cases referred to above were decided under the former Art. L 442‐6 I No. 2 Ccom, they are still relevant under the new Art. 442‐1 No. 2 Ccom. The modifications brought about by the new provision have enlarged the circle of those who may be liable for the use of unfair contract terms.64 The requirement that the subjected party had to be a ‘commercial partner’ (‘un partenaire commercial’) has been dropped.65 Furthermore, the commercial parties may claim nullity of the unfair provision; the previous text gave them the right to claim for damages only. This limitation was a serious obstacle, since the parties were often unable to quantify a loss suffered by an unfair clause This led some courts to extend the sanctions provided for in Art. L 442‐ 6 II No. 2 Ccom to the nullity of the incriminated clauses. These decisions were contra legem, but showed the need for an enlargement.66 The extension to nullity may well lead to a wider and, from the claimants’ side, more efficient application of Art. L 442‐ 1 No. 2 Ccom, but they still have to overcome the hurdle of ‘subjection’. Only 4.6 % of the claims raised by private parties were successful, the rate of success of the actions brought by the DGCCRF being much higher.67 This is a steady feature over the years. The reasons mainly lie in the quite high thresholds required by the courts, in particular for the notions of ‘commercial partner’ and ‘subjection’. Art. L 442‐6 No. 2 Ccom was rather a provision protecting fair dealing and competition than a barrier against significantly imbalanced clauses. The low success rate of individual claims shows that it was used by the courts in this sense. The high requirements for the notion of commercial partner and for subjection together with the limitation to obtain just damages were not only obstacles against the use of this provision against unfair contract terms but clear indications that this was not the purpose of this article. The reform of 2019 has removed two of these barriers and has widened its application to larger groups of commercial parties. The interpretation of the term “significantly imbalanced” is flexible and allows the use of Art. L 442‐1 No. 2 for the control of unfair contract terms. We have seen that the elements of consumer protection have been integrated into the notion of significant imbalance. They are not applied as such, but as guideline or concept of what is significantly imbalanced. We have also seen that economic considerations are an important element in the application of Art. L 442‐6 I No. 2 Ccom, since the market position, adequacy of the price and of the object are included in the assessment of the significant imbalance. With respect to the requirement of subjection or the attempt to subject the courts have regularly considered that imposing 63

Cass.com, 21.10.2008, No. 07‐12336. Cf. above mn. 19. 65 Rapport au Président de la République relatif à l’ordonnance No. 2019‐359, sub Art. L 442‐1, PRF 0097 of 25.4.2019, Texte 15. 66 Bilan Montpellier (2018) 73. However, this tendency slowed down and the courts respect the sanction provided in law, Bilan Montpellier (2015) 42; (2016) 47; (2018) 72. 67 Bilan Montpellier (2018) 70–71. This is a steady feature over the years, see the Bilan Montpellier of the earlier years under Art. L 442‐6 I No. 2. 64

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standard terms on a commercial partner is an important element in constituting subjection, but does not suffice by itself. It would be only a rather small step to consider that imposing standard terms is a decisive element of subjection. This notion has been developed in a remarkable contribution by Chaudouet68 and is worth serious consideration. d) Art. 1171 Cciv. aa) Background. French civil law never contained provisions 57 about unfair stipulations or about general contract terms (‘GCT’).69 The EU Unfair Terms Directive was integrated into French law in 1995 as part of the Consumer code70 and has remained limited to that sector, unlike in Germany71. The reform of the Civil code’s contract law was the occasion to legislate on unfair terms and general contract terms. Due to the fact that the initial reform of February 2016 was implemented by an ordonnance, which is promulgated by the government and not discussed in parliament,72 there is very little legislative material about the text. The only available and authoritative document is the report of the government to the President of the French Republic.73 According to this report, the new provisions are destined to fill the gap in civil law between consumer (Art. L 212‐1 Cconso) and commercial law (Art. L 442‐6 I No. 2 Ccom) and to strengthen coherence in the battle against imbalanced clauses.74 With respect to the interpretation of the notion ‘déséquilibre significatif’, the report to the President makes specific reference to the two lists in the French Consumer code (Art. 212‐1 and R 212‐2 Cconso) and the list annexed to the Unfair Terms Directive; these lists are considered to contain the essence of significantly imbalanced clauses.75 The ratifying legislation made some modifications to the wording.76 Only clauses in non-negotiable GCT can be challenged on the basis of Art. 1171, excluding negotiated clauses in contracts which use GCT.77 Its application is not limited to mass contracts,78 which is an important indication, since most of the contracts which were successfully challenged under Art. L 442‐6 II No. 2 Ccom were mass contracts. The general contract terms must be a set of rules and not only one stipulation (Art. 1110(2) Cciv).79 It is 68

Chaudouet, 412 at mn. 533. Chantepie/Latina, 386 at mn. 440. 70 Cf. fn. 27. 71 § 310(1) 2nd sentence German BGB. See for a comparison Niggemann (2018) 2. See also the contribution by Wais, in this volume. 72 According to the French Constitution of 1958, Art. 34(5) 5th hyphen, civil law is a matter which has to be regulated by law, which has to be discussed in parliament. Art. 38 of the Constitution provides, however, the possibility to pass a law of authorisation, on the basis of which the matter can be dealt with by an ordonnance without discussion in parliament. This ordonnance must be ratified within two years after the date of the ordonnance by formal legislation (Art. 38(3) 1958 Constitution). 73 Rapport au Président relatif à l’ordonnance No. 2016‐131, JORF No. 0035, 11.2.2016, Texte 25. 74 In the draft of the 2016 ordonnance the consequences of significantly imbalanced clauses were not tied to the use or their featuring in standard terms. The text of the ordonnance finally provided that clauses in contracts using preformulated terms (‘contrats d’adhésion’, Art. 1110(2) Cciv) are deemed not written. This extended the control to the negotiated part of the contract. The ratification law limited the scope to clauses figuring in the GCT; see Rapport au Président (fn. 73) and Chantepie/Latina, 393 at mn. 446. 75 Rapport au Président and Chantepie/Latina, ibid. 76 The official parliamentary documentation contains a survey of and the text of all documents, discussions and proposals. It is available under https://www.legifrance.gouv.fr/affichLoiPreparation.do? idDocument=JORFDOLE 000032851308&type=general&typeLoi=proj&legislature=14. See for details Niggemann (2018) 659, references in fn. 20–21; Chantepie/Latina, 17–18 at mn. 23–24. 77 Chantepie/Latina, 393 at mn. 446. 78 This has been stressed in the parliamentary discussions. This concern has to be seen on the background of the situation under Art. L 442‐2 No. 1 Ccom, where the investigations of the DGCCRF concern mass contracts only. 79 A standard form arbitration clause for instance is in itself not a ‘contrat d’adhésion’. 69

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essential that they are not negotiable; it is irrelevant how often they have been used or will be used and who drafted them.80 bb) Role of consumer law. With respect to the interpretation of the notion ‘déséquilibre significatif’ we have already indicated the opinion formulated in the report to the President81 that the consumer law provisions are the essence of this notion. However, not all share this opinion. Renowned authors diverge and opine that criteria, which have been developed in application of Art. L 442‐6 I No. 2 Ccom should also apply.82 Others argue that Art. R 212‐1 and R 212‐2 Cconso should not be applied by the letter but should consider the particularities of commercial contracts.83 Both publications support such an interpretation, the central notion not being an ‘abusive clause’ but a significant imbalance, which can only be analysed by considering all circumstances of the case. There is no case law yet. 59 Gaining a complete picture of Art. 1171 Cciv requires examination of the use and interpretation of Art. L 221‐1 Cconso and the black and grey lists in Art. R 212‐1 and R 212‐2 Cconso. 60 It is extremely difficult to analyse the court decisions for our purpose, not only because they concern types of contracts that are not commercial in nature (gambling, retirement homes, telephone and internet services) but also because they limit their decision to the statement of a significant imbalance without necessarily tying it to a specific legal provision or element of the black or grey list.84 Accordingly, we have instead analysed for this purpose the reports and recommendations published by the Commission des clauses abusives (CCA) since 2014.85 The CCA is a particular feature of French consumer law. Even tough particular provisions for consumer protection date back until 197886, the consumer protection policy of the French governments has long been to limit the role of the judiciary in favour of public bodies such as the CCA87. The CCA issues opinions (‘avis’) upon request by the courts and recommendations upon other requests. Neither its opinions nor recommendations are binding.88 Its reputation has gained over the years through the quality of its work. We have in particular focused on two recommendations of 2014 and 2017 on GCT in social media contracts and of furniture movers with storage.89 These two recommendations are excellent examples of the method used; additionally, they gave rise to a great number of critical observations (46 and 29, respectively). 58

80 Cf. for details Niggemann (2018) 659–660. Art. 1171 Cciv is to apply to all kinds of contracts; even notarial deeds may not be excluded; see Chantepie/Latina, 140 at mn. 149 and 392 at mn. 445. There are of course opinions which are against such an application, see Revet; Schiller. 81 See fn. 78. 82 Chantepie/Latina, 396 at mn. 447. 83 Deshayes/Genicon/Laithier, 306. 84 The analysis in Raymond/Pimbert, JurisClasseur Concurrence-Consommation (fasc. 820) mn. 66–88, is of this kind. It lacks a more analytical view of the criteria used by the courts. 85 http://www.clauses-abusives.fr/. 86 Loi 78‐23 of 10.1.1978 (‘loi Scrivener’), see Calais-Auloy/Temple, 164. 87 Calais-Auloy/Temple, 165 et seq. The reasons for such an approach are not easy to grasp. They have their origin in a more sceptical position of the executive power in France against the judiciary, a very limited public budget, poor funding of consumer associations and the issue/difficulty of extending the res judicata effects of a decision to similar clauses in other contracts. 88 See for further background Calais-Auloy/Temple, 179. 89 Recommendation 14/2, contrats de fourniture de services de réseaux sociaux; Recommendation 16/1, Contrats de déménagement, garde meuble et stockage en libre-service, both available on the CCA’s website (fn. 85). Contracts for mobile phone services are as well a perfect example for the unbound imagination of drafting to the detriment of the consumer. See CA Versailles, 4.2.2004, No. 03/07368, note Avena-Robardet, D 2004, AJ 635.

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Most of the observed violations concern the black list or Art. R 212‐1 Cconso. For 61 those which may conflict with Art. R 212‐2 Ccom, namely where the user/professional has to prove that they are not significantly imbalanced, the observations are formulated with greater caution since the other side could not be heard. Other violations result from legal provisions outside of consumer protection such as data protection and privacy rights. Other admonitions result from a lack of clear drafting (Art. L 212‐1 Cconso) and the lacking integration into the contract (R 212‐1 No. 1). Other complaints concern deviations from provisions of civil law. Art. L 212‐1 Cconso is also directly applied without relying on an additional source of law, for example when clauses provide for too short or unequal time periods or for discriminating preconditions of the parties’ rights. Some complaints arise from violations of other norms of consumer law. Case law yields telling examples. GCT have been disregarded because they infringed 62 legal provisions,90 when they contain a unilateral right for the user to modify the contract,91 with respect to unclear stipulations, where the consumer could not clearly determine or understand its rights,92 and where the burden of proof had been shifted to the detriment of the consumer93. cc) Application to commercial contracts. Whereas one may question whether Art. 1171 Cc can be applied in commercial matters in addition to Art. L 442‐1 Ccom, the further question also arises whether there is still room or a necessity for its application after the reform of Art. L 442‐1 Ccom in 2019. The report to the President accompanying the reform bill of the Civil code in 2016 addresses the relationship between Art. 1171 and its corollary in Art. L 442‐6 I No. 2 Ccom.94 It is said that the civil law provisions should be excluded by those in the Commercial code, if and to the extent that it is impossible to apply them simultaneously without a contradictory result. This statement refers to Art. 1105 (3) Cciv. This discussion was reignited during the deliberations of the ratifying legislation. Once again, it was said that Art. 1171 Cciv is excluded where Art. L 442‐6 I No. 2 (now Art. L 442‐1 No. 2) Ccom applies.95 However, the expression used by the members of parliament (and on one occasion by a member of the ministry of justice) lack specificity; it remains unclear whether Art. L 442‐6 I No. 2 Ccom prevents Art. 1171 Cciv from applying altogether in commercial matters or whether it remains applicable outside the realm of Art. L 442‐6 I No. 2 Ccom. It is not surprising that the opinions in legal doctrine diverge. A minority favours the exclusion of Art. 1171 Cciv from B2B-contracts,96 a majority favours application97. The main argument for an exclusion is Art. 1105(3) Cciv and Art. L 442‐1 No. 2 Ccom as lex specialis. These authors also refer to the special competence of some commercial courts for competition matters.98 Authors, who share the latter opinion, are not quite clear how far Art. 1171 Cciv should apply in commercial matters. Some attribute a lex Cass.civ. 1ère, 13.12.2005, No. 04‐13772, Mestre. CA Versailles, 4.2.2004, D. 2004 AJ 635 note Avena-Robardet. 92 Cass.civ. 1ère, 20.3.2013, No. 12‐14432, Bull. I No. 53. 93 Cass.civ. 1ère, 20.3.2013, No. 14‐24698, Dalloz Actu, 8.6.2016 note Ravel d’Esclapon. 94 Rapport au Président (fn. 73). 95 Rapport No. 22 (Senat); Rapport No. 247, 61; Rapport No. 639, 23 all to be found within the documents indicated in fn. 76. 96 Behar-Touchais; Hontebeyrie; Chaudouet, 734 at mn. 949. 97 Deshayes/Genicon/Laithier, 301 et seq.; Lagarde 2176; Grimaldi 6. 98 Behar-Touchais. 90 91

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specialis function to Art. L 442‐1 No. 2 Ccom only within the realms of its reach99 – it would be excluded in the sectors of production, distribution and services;100 Art. 1171 Cciv can be applied in the other fields. Those who advocate a cumulative application of both articles, stress the differences between the two norms and argue that, in case of cumulative application, there would not be contradictory results. They do not perceive the special competence of some courts to be problematic since Art. 1171 Cciv may be pleaded before the specialised courts, too. 67 From our point of view, the substantive conditions of both articles largely overlap.101 Art. 1171 Cciv is more restrictive with respect to the use of preformulated GCT; it excludes the object of the contract and the price. Art. L 442‐1 Ccom contains the requirement of ‘subjection’. With respect to the central notion of ‘significant imbalance’, Art. L 442‐1 Ccom is more influenced by economic considerations, whereas – presumably – Art. 1171 Cciv will be more limited to legal arguments. As Chaudouet rightly points out there is a wide congruence102 and a small area of difference. We fail to see a danger of contradiction. A claim may be based on both articles. It may succeed on the basis of Art. 1171 Cciv and the incriminated clauses will be rendered void. It may be based additionally on Art. L 442‐1 Ccom and the result may be both invalidity and damages. The results may be different, but they are not contradictory. French procedural law provides for a limited number of commercial courts having exclusive jurisdiction over competition matters, which include claims based on Art. L 442‐1 Ccom.103 Consequently, a claim based on Art. L 442‐1 Ccom may only be raised before such specialised courts. There is no such special competence for suing on the basis of Art. 1171 Cciv. A claimant may therefore sue based on both articles in front of the specialised courts104 or on Art. 1171 Cciv before every commercial court having general jurisdiction. We fail to see any serious problems.105 Even if jurisdictional problems may arise, they do not fall under of Art. 1105(3) Cciv, but are part of procedural law. 68 The present state of the law is, however, far from satisfactory since two norms apply to essentially the same situation. This is likely to create some confusion and is an obstacle to legal predictability and certainty. It would be preferable to disentangle Art. L 442‐1 Ccom and to apply it only in instances of unfair competition. Judicial control of significantly imbalanced clauses in commercial contracts should be based on Art. 1171 Cciv, but it should be modified to require consideration of the particularities of commercial contracts. Additionally, some areas of commercial law might be exempted from the general conditions of control or specific conditions should be prepared. Leaving this important task to the courts alone would mean a high degree of uncertainty for a long period of time.

2. Specific provisions 69

a) Limitation of liability clauses. The reform of contract law in the Civil code deliberately excludes (with one exception, Art. 1170 Cciv) provisions about legality and limitation of liability clauses. This issue is to be dealt with in the reform of contractual 99

Chantepie/Latina, 389 at mn. 444. Le Bescond de Coatpont, JurisClasseur Contrats-Distribution (fasc. 262) mn. 7. 101 Chaudouet, 285 et seq.; mn. 368 et seq. Her work yields to bring together the different angles of interpretation under consumer law and commercial law. One of her most considerable thoughts is to measure the imbalance against the balance of interests found in civil law in general. 102 Chaudouet, 734 at mn. 949. 103 Art. 442‐4 III, R 442‐3 and Annex 4‐2‐1 Ccom. 104 Chaudouet, 707 at mn. 925. 105 Contra ibid. 734 at mn. 949. 100

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and extra contractual liability initiated in 2017, which should follow the contract law reform. A first draft of the text was made available by the Ministry of Justice in April 2017.106 With respect to the issues of interest here, the reform does not aim to innovate but rather to codify over 200 years of development via case law.107 The reform process has, however, stalled and has not been pursued further. Since the contract law reform contains only one provision on this topic (and which confirms the previous case law), the legal situation as it was before the reform still prevails.108 Limitation of liability clauses are valid under French law,109 albeit with specific limits. A limitation of liability clause cannot be relied upon in case of deliberate and grossly negligent breach of contract.110 Art. 1170 Cciv further provides that a clause depriving the essential contractual obligation of its substance is deemed not written; it is essentially the result of case law which developed over 15 years mainly in a series of decisions in the Chronopost and the Faurecia cases. In the Chronopost cases111, the courier service ‘Chronopost’ had belatedly delivered documents drawn up by architects for public tenders, with the result that the tender offers arrived after the tender procedure was closed. Chronopost relied on its general business terms, which limited the amount of damages to the price of the courier service. The French Cour de cassation formulated two principles in respect of two separate but similar limitation clauses in the contract: a limitation of liability clause is invalid if it contradicts the contractual commitment and deprives it of its substance. In case gross negligence is proven, the author of the breach cannot rely on the clause either.112 In Faurecia, the claimant, a supplier of automotive parts, had contracted with Oracle the elaboration of a computer system for some of its production sites. The parties had negotiated the contract and in particular a limitation of liability clause. The clause limited damages to a low amount, but Oracle had made other significant concessions. The project failed and Faurecia claimed damages in the amount of 60 million euro. After a series of decisions113, the French Cour de cassation held in 2010114 that the limitation of liability clause did not contradict Oracle’s essential obligations. It had been freely negotiated and took the price and the sharing of risks into consideration. The financial limitation was not insignificant either. The violation of an essential obligation is distinct from gross negligence; the first is not tantamount to the second. Art. 1171 Cciv may have an impact on the validity of such clauses, provided they are part of GCT. If the opinion prevails that consumer law principles influence the application of Art. 1171 Cciv, it may be argued that Art. R 212‐1 No. 6 Cconso (black clause) might apply. It provides indeed that an exclusion or limitation of liability of the 106 Available on the website of the French ministry of Justice, http://www.justice.gouv.fr/publication/ Projet_de_ reforme_de_la_responsabilite_civile_13032017.pdf. 107 Cf Mekki. 108 Chantepie/Latina, 380 et seq. at mn. 436 et seq.; Poumarède, mn. 3225.13. 109 Poumarède, mn. 3225.11 with numerous references to court decisions. 110 Cass.com., 12.3.2013, 11‐25183; civ. 1ère, 29.10.2014, 13‐21980; civ. 3ième, 13.11.2014, 13‐20530; com. 7.2.2018, 16‐18140; 16‐368; com. 7.2.2018, 16‐20352. See for further examples Poumarède, mn. 3225.12. Gross negligence is defined as extremely serious negligence close to deliberate action showing the debtor’s incapability to accomplish its contractual obligations, see Cass.ch.mixte, 22.4.2005, No. 03‐14112; Cass. com., 12.3.2013, 11‐25183; Poumarède, mn. 3225.12. 111 Cass.com., 22.10.1996, 93‐18632, Bull. IV No. 261; Cass.com. 9.7.2002, No. 99‐12554, D 2002, 2329 note Chevrier; Cass.ch.mixte, 22.4.2005 (two decisions), No. 03‐14112 and 02‐18326. Cf. for a summary Poumarède, mn. 3225.13. 112 In a subsequent decision the formulations used in the Chronopost case has been confirmed, Cass. com. 21.2.2006, No. 04‐20139, Bull. IV No. 48. 113 Cass.com., 13.2.2007, No. 05‐17407, Bull. IV No. 43; CA Paris, 26.11.2008, 07/07221. 114 Cass.com., 29.6.2010, No. 09‐11841, notes Mazeaud, Houcieff, Stoffel-Munck.

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professional in case of breach is not valid. There is an established case law for commercial contracts which the legislator did not intend to change. Even if consumer protection principles will play a role in the application of Art. 1171 Cciv, they cannot apply as such without being adapted to the commercial context and reality.115 75 76

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b) Seller’s warranty – hidden defects. An exclusion of party autonomy of great practical relevance results from case law in the matter of the seller’s warranty. According to Art. 1641 Cciv, the seller warrants (‘garantie’) that the object (‘la chose’) is free from hidden defects116 (‘vices cachés’), which render it unfit for its intended use or which impairs the use to an extent that the buyer would not have bought the object or would have only paid a lesser price, if he had known of the defects. The seller is liable for the reduction of the purchase price, reimbursement of the purchase price, and damages (Art. 1644 and 1645 Cciv). Art. 1645 Code civil provides that a seller, who was aware of a defect and who acted in bad faith, has to pay full damages to the buyer, in addition to reimbursement of the purchase price. Since the 1960s the Cour de cassation has interpreted Art. 1645 Cciv in a sense that any professional seller is irrefutably deemed to have known and been aware of the defects of its products117; this also applies where the seller is not the producer but only the reseller.118 This interpretation is a legal and irrefutable presumption and cannot be countered by evidence that the seller in fact did not know about the defect. It is a pure fiction of bad faith.119 Due to this considerable risk, importers into France seek to avoid the application of French law.120 Clauses containing a limitation of liability for hidden defects are therefore invalid.121 The only exception to this rule is a sale between professionals of the same specialisation, i.e. where both are active in the same field of business and have the same level of knowledge.122

c) Other limitations of party freedom in commercial contracts; construction law. There are numerous other examples of compulsory legal provisions in B2B-contracts, however the detailed discussion would exceed the scope of this chapter. We merely hint at freight contracts by road, rail, sea, and air, which all contain limitations of liability of the carrier in case of loss or damage to the cargo.123 Although these are not particular to French law, construction law does requires particular attention because it is quite singular on the international level and plays a role in the international application of mandatory French law.124 81 Warranties under French construction law are dealt with in Art. 1792 et seq. Cciv. The law provides for three types, which only apply in contracts for the construction of 80

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Chantepie/Latina, 396 at mn. 447. A defect is ‘hidden’ if the purchaser could not discover it by applying usual diligence upon receiving it, Huet, JurisClasseur Code civil, Art. 1641–1649 (fasc. 30) mn. 66 et seq. 117 Cass.civ., 3.1.1984, No. 81‐14326, Bull. III No. 4; Poumarède, mn. 3225.31. 118 Huet, JurisClasseur Code civil, Art. 1641–1649 (fasc. 60), mn. 22. 119 This jurisprudence is not uncontested and for valid grounds; cf. Poumarède, mn. 3225.32, but the critics had no influence on the courts yet. 120 Whether the application of the CISG or opting for a foreign law can avoid this risk will be discussed below mn. 92 et seq. 121 For instance, Cass.civ. 3ième, 25.5.2011, 10‐10790; more generally Poumarède, mn. 3225.31; Huet, JurisClasseur Code civil, Art. 1641–1649 (fasc. 60), mn. 19. 122 Cass.com., 23.6.1992, 90‐15045: 31.1.1995, 93‐10536; Cass.com. 19.3.2013, No. 12‐23346; civ. 1ère, 15.5.2015, 11‐19275; Cass.civ. 1ère, 3.11.2016, 15‐18340; 1.6.2017, 16‐14402; summarised in Huet ibid. mn. 37 et seq. 123 Bloch, JurisClasseur Synthèse, Responsabilité civil et Assurance, mn. 9, 13 17 et passim. 124 See infra (fn. 150). 116

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buildings and infrastructure: the ‘garantie de parfait achèvement’ (warranty of perfect achievement, Art. 1792‐6(2) Cciv), the ‘garantie de fonctionnement’ (warranty of function, Art. 1792‐3 Cciv) and the ‘garantie décennale’ (ten year warranty after acceptance, Art. 1792, 1792‐2, 1792‐4‐1 Cciv).125 Several parties, which the law defines as ‘constructeurs’ (constructors, Art. 1792‐1 Cciv) are jointly and severally liable under these warranties: the builder, the architect technicians and other persons which are linked to the builder by works contracts. Art. 1792‐5 Cciv provides specifically that contract clauses limiting or excluding the scope of these warranties or the joint and several liability of the constructors are deemed not written. These three legal warranties cover make good and damages. Damages include those 82 affecting the building as such but also ensuing consequential and financial damages. The French courts hold that Art. 1792‐5 Cciv renders any limitation even of indirect economic damages non written.126

IV. The international context The following concerns the application of the above described legislation and case law 83 in an international context, focusing especially on the applicable law, French law as mandatory overriding provisions (‘lois de police’), and jurisdiction issues.

1. The applicable law As general conflict of law and jurisdiction matters are dealt with in a separate 84 contribution,127 we focus on particularities from the French perspective including the applicable law in tort matters. a) Choice of law issues. The Rome I Regulation applies in France to determine the applicable law of contractual obligations.128 From the French perspective there are several aspects which require special attention. In case of a sales contract for goods (and provided the parties have opted for the application of French law or if French law applies by virtue of Art. 4 Rome I), one has to examine the application and the provisions of the CISG, of which France is a member state.129 Applying French law implies the application of the CISG (Art. 1 (1)(b) CISG), unless the parties have entirely or partly excluded its application (Art. 6 CISG).130 This ‘opt out’ has to be made explicitly or may result from conclusive acts of the parties.131 The CISG is (as far as its scope reaches) lex specialis to the Civil code.132 Four matters are of particular interest here: (i) Art. 4(a) CISG provides that the Convention is not concerned with the validity of the contract or any of its provisions. The question therefore arises whether 125 The law provides for compulsory insurance coverage for all of these warranties, Art. L 241‐1 Code des assurances. Such an insurance cover is seldom without a limitation. Hence there may be an uncovered risk for the ‘constructeurs’. 126 Cf. Boubli, mn. 625 with further references. 127 See the contribution by Pfeiffer, in this volume. 128 For more detail see the contribution by Pfeiffer, in this volume. 129 Ratified by France, Decrét 87‐1034 of 22.12.1987. 130 Cass.com., 13.9.2011, 09‐70305 (general reference to French law means application of CISG); Mistelis, Art. 6 mn. 15 et seq. in Kröll/Mistelis/Perales Viscasillas. 131 Cass.civ. 1ère, 25.10.2005, 99‐12879, (tacit exclusion by pleading (both parties) only the provisions of the Code civil). Cf. Lamazerolles, JurisClasseur Contrats-Distribution (fasc. 405), mn. 10. 132 Cass.com. 13.9.2011, 09‐70305.

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Art. 1171 and as well Art. 1170 Cciv apply as being outside the realm of CISG. There is case law in Germany stating that the validity of GCT is an issue not governed by CISG.133 International legal doctrine also supports this position.134 It is specifically said that ‘invalidity’ includes ‘deemed not written’, which is only a legislative technique for achieving the same result.135 At present, there is no case law in France with respect to this question, which is hardly surprising as Art. 1171 Cc is relatively new. (ii) With respect to the conclusion of the contract and even the battle of the forms, the CISG contains its own rules (Art. 14–24 CISG), which exclude the application of the corresponding provisions of the Civil code (Art. 1113–1122)136. (iii) A much more sensitive issue is the ‘vice caché’ problem. By treating all professional sellers as acting in bad faith through an extensive application of Art. 1645 Cciv, any limitation of liability for the consequences of non-conformity of the goods is null and void.137 Art. 40 CISG deals with a seller acting in bad faith. Such a seller is not entitled to rely on the provisions of Art. 38 and 39 CISG if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer. Art. 38 CISG provides for the buyer’s obligation to examine the goods and Art. 39 CISG contains the loss of the seller’s rights for nonconformity if no specific notice of a defect is given in time. Thus, CISG limits the consequences of the seller’s bad faith to the content of Art. 40. The French Cour de cassation held in 2005 that the bad faith presumption of French domestic law prevails by virtue of Art. 4(a) CISG138. However, a more recent decision of the Cour de cassation139 holds that, in case the CISG applies, there is no presumption that the professional seller knew of the non-conformity. Application of the CISG may thus allow to adapt the seller’s warranty and to reduce its liability. It further results from this decision that the vice caché case law of the Cour de cassation is not mandatory on the international level. (iv) With respect to the validity of clauses excluding or limiting contractual liability this issue is one of Art. 7(2) CISG (internal ‘gaps’)140. In 2015, the CISG Advisory Board adopted the position that ‘the Convention does not pre-empt (i.e. govern) provisions for the protection of the obligee under the applicable law or rules of law, relying on notions such as intentional or wilful breach, gross negligence, breach of an essential term, gross unfairness, unreasonableness, or unconscionability, but that in the application of these provisions, the international character of the contract and the general principles underlying the CISG are to be observed, including the principles of freedom of contract and reasonableness.’141 Hence, the issue of validity of limitation of liability clauses remains a problem of domestic French law. One also has to ask whether the choice of law other than French law is valid in respect of the ‘hidden defects’ problem. It is astonishing to state that there are no 133

Djordjevic, Art. 4 mn. 25 (references in fn. 66), in Kröll/Mistelis/Perales Viscasillas. ibid. mn. 25 with further references. 135 Djordjevic, Art. 4 mn. 12 (fn. 39), in Kröll/Mistelis/Perales Viscasillas. 136 Djordjevic, Art. 4 mn. 24, in Kröll/Mistelis/Perales Viscasillas. 137 See supra, mn. 76–80. 138 Cass.com., 4.10.2005, 02‐15981. 139 Cass.com., 4.11.2014, 13‐10776. 140 Djordjevic, Art. 4 mn. 46 and Art. 74 mn. 38, in Kröll/Mistelis/Perales Viscasillas. The decision quoted under Art. 4, n 143, Cass.civ., 13.2.2007, 05‐10424, does not support the authors’ opinion. 141 CISG Advisory Council, Opinion No. 17 (adopted 16.10.2015) 7, available under http://www.cisg. law.pace. edu/cisg/CISG-AC-op17.pdf. 134

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specific court decisions on this issue, though one may rely on two very strong indications: there is a quite old decision of the Cour de cassation of 1989, in which the Court held that the lower courts are obliged to determine the applicable law for the validity of an exclusion of liability for ‘vice caché’142. If the ‘vice caché’ position of French law would be mandatory in the international field, a determination of the applicable law would be superfluous; French law would apply anyway. Huet is against considering Art. 1645 Cciv as an overriding mandatory provision on the international level.143 A second strong indication that Art. 1645 Cciv is only nationally mandatory can be drawn from a 2014 decision of the Cour de cassation in respect to Art. 40 CISG.144 If Art. 1645 Cciv gives way to the CISG, this is a clear sign that its application is not extended beyond the national context and the application of domestic French law. b) The applicable law to an action based on Art. L 442‐1 Ccom. Since court review of B2B-contracts will be based on Art. 1171 Cc but also on Art. L 442‐1 No. 2 Ccom (previously Art. L 442‐6 II No. 2 Ccom), it is necessary to examine the applicable law to this kind of action. One may opine that even in case of Art. L 442‐1 Ccom the parties are contractually bound and have agreed on an applicable law to their contract. On the other hand, Art. L 442‐1 Ccom is a claim in tort, to which Rome II Regulation applies. This issue has been dealt with in the Amazon and Expedia cases discussed above.145 In both cases the contracts at stake provided for the application of another than French law (Luxembourg law and English law, respectively). The court of first Instance in Expedia had followed the defendant in his approach and applied English law, but had nevertheless overruled the chosen law by the application of Art. L 442‐6 II No. 2 Ccom as ‘loi de police’ (Art. 9 Rome I). The Cour d’appel in Expedia and the Tribunal de Commerce Paris in Amazon went the other way. Both considered that Art. 442‐II No. 2 Ccom is a tort action, to which Rome II applies. Art. 4 Rome II provides to apply the law of the country where the damage has occurred, which in these cases was France –Expedia concerned bookings with hotels in France, whereas in Amazon the vast majority of the suppliers were French. The court in Amazon added that a contractual choice of law stipulation cannot be opposed to an action by the French administration. It is important to note that both courts based their decision not only on Art. 4 (1) Rome II, but additionally on Art. 16 Rome II, which provides the overriding application of lois de police of the deciding court. They did not argue step-by-step and did not treat the loi de police argument as overriding, setting aside the normal application of the conflict of law rule of Art. 4 (1) Rome II. The loi de police argument is simply added to the application of Art. 4 (1) Rome II and is superfluous from a logical point of view. In our opinion, the reason for stressing the loi de police argument is to make it abundantly clear that in any case Art. L 442-I Ccom and Art. L 442‐1 Ccom are mandatory and cannot be set aside contractually. Yet there is an additional problem. If, as we have argued, Art. 1171 Cciv and Art. L 442‐1 No. 2 Ccom both apply in commercial matters, the action based on Art. 1171 Cciv remains contractual and is governed by Rome I. This requires an examination of whether Art. 1171 (and Art. 1170 Cc) are themselves overrid142 Cass.civ. 1ère, 4.10.1989, No. 87‐13020, Bull.civ. I No. 304; cf. Huet, JurisClasseur Code civil Art. 1641–1649 (fasc. 60), mn. 29. 143 Huet, ibid., mn. 29. 144 Cf. Cass.com. 4.11.2014, 13‐10.776; see above fn. 139 and mn. 92 et seq. 145 See above mn. 46 et seq. and 50.

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ing mandatory provisions in terms of Art. 9 Rome I (or ‘loi de police’ in French terminology). This would lead to their application even if the parties had not agreed on French law. 98

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c) Art. 1171 Cciv or any other article of the Civil code’s 3rd book as ‘loi de police’? Art. 1171 Cciv is a mandatory provision in French law. In terms of domestic French law it is a ‘loi de police’.146 However, a distinction has to be drawn between ‘loi de police’ in a national context and on the international level. Being mandatory on the national level does not mean that a norm is mandatory internationally; the notion of ‘overriding mandatory provision’ in Art. 9 Rome I must be construed more narrowly than the category of national mandatory provisions.147 Does Art. 1171 Cciv qualify as an ‘overriding mandatory provision’ in terms of Art. 9 Rome I and require application, even if another national law governs the contract? This is not the place to debate in depth Art. 9(1) Rome I. There is ample ECJ case law on the criteria which a national provision has to fulfil,148 but nonetheless still a lot of uncertainty. None of the various domains where the ECJ had to intervene149 bears any resemblance to that of Art. 1171 Cciv. It would not be appropriate to treat Art. 1171 Cciv like a consumer or labour protection provision, since there are very specific legal rules for both fields nationally and in Rome I. Furthermore, it will be difficult to find as strong a link to France as, for instance, building sites,150 or fair competition on the French market.151 In case of individual contract relations, the connection with France may exist, but it will be of a different character. Art. 1171 Cciv only protects private interests, not competition in a market segment or business sector. There are strong reasons that Art. 1171 Cc does not qualify as ‘loi de police’ under Art. 9 Rome I. It would extend protection of the weaker party to matters which Rome I has not deemed appropriate to protect.152 Our position is not the same for all legal provisions of the 3rd book of the Civil code, which are nationally mandatory. With respect to Art. 1170 Cciv we are inclined to defend it on the international level. This provision should, however, rather be applied by virtue of Art. 21 Rome I (public order).153 There are still others such as Art. 1231‐4 (moderating role of the courts in case of excessive contractual penalties) or Art. 1112‐1(5) 5 (precontractual obligation to reveal) and no permanent obligations (Art. 1210 Cciv) which should not be qualified either as loi de police or as part of public order, since they are more technical and their content of justice is weaker than that of Art. 1170 or 1171 Cc. We are, however, at the beginning of their application in practice and nothing can be forecast with certainty. 146 Heyraud, mn. 30. The reform of the 3rd book of the Cciv completely neglected its international application and impact. 147 Recital 37 Rome I. As examples of French mandatory provisions which are not ‘mandatory’ in an international context Cass.com., 13.7.2010, 10‐12154, note Jault-Seseke (direct payment claim of the carrier against the forwarder and the consignee); Cass.civ. 1ère, 16.9.2015, 14‐10373 (mandatory mentions on an act of personal guarantee). Cf. Gaudemet-Tallon, JurisClasseur Droit International (fasc. 552‐15) mn. 94 et seq. 148 Gaudemet-Tallon, ibid.; Latil, JurisClasseur Droit International (fasc. 552‐100) mn. 23–59. 149 Labor and consumer law in particular, cf. Latil, ibid. mn. 23–37. 150 Direct claim of a subcontractor based on the French law on subcontracting of 31.12.1971: choice of law clause in favour of German law, French law applicable as loi de police: Cass.ch.mixte., 30.11.2007, 06‐14006. 151 Like in the Amazon and Expedia cases, mn. 46 et seq. and 50. Cf. Latil, JurisClasseur Droit International (fasc. 552‐100) mn. 56–60. 152 Heyraud, mn. 18 et seq. 153 ibid. mn. 32.

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2. Jurisdictional issues The matter could quite easily be dealt with if it were not for Art. L 442‐1 Ccom being 103 an action in tort. We will discuss at first some particular issues from the French point of view with respect to contractual matters before we approach the jurisdictional side of Art. L 442‐1 Ccom. a) Jurisdiction in contract litigation. Two situations may be distinguished: cases where the Brussels I bis Regulation applies (i) and where not (ii). (i) The first setting is dealt with elsewhere in this volume.154 The various places of jurisdiction – Art. 4, domicile of the defendant, Art. 7(1) place of performance of the obligation which is the subject of the litigation, special jurisdictions in Art. 10 (insurance matters, Art. 17 Consumer litigation, Art. 20 employment matters and Art. 24 (exclusive jurisdiction) – have to be considered. Art. 25 Brussels I bis raises one issue which is particular in France and which has not yet been submitted to the ECJ, namely prorogations, where one party has the choice of different places of jurisdiction which the other party has not. One often finds jurisdiction clauses which provide for the competence of the courts at the seat of the party having set the GCT. Additionally, this party has the option to sue the other party at its seat or domicile or any other place having jurisdiction. The ECJ decided in a number of cases on the issue of specificity of jurisdiction clauses.155 Its position can be summarised that the clause must contain the elements allowing the court to determine its jurisdiction.156 However, there are no decisions in which the ECJ controlled whether a jurisdiction clause is balanced or equitable; Art. 25 Brussels I bis does not contain any such element or condition.157 In a decision handed down in 2012,158 the Cour de cassation invalidated a clause allowing a bank to sue its customers at their domicile or place of business, whereas the customer had to sue at the bank’s seat. In the matter at hand, a customer sued a Luxembourg bank in Paris; the bank opposed the prorogation in favour of the courts in Luxembourg. The Cour de cassation held that the clause contained a voluntary element allowing the bank to decide where to sue. Contractual commitments depending on the obligee’s discretion are invalid in French law (Art. 1304‐ 2 Cciv)159. It has to be stressed that the claimant in this case was not a consumer or at least did not avail itself of consumer protection provisions (such as Art. 15 Brussels I bis). The decision of the Cour de cassation is part of quite a number of cases where the French courts disregarded such optional prorogations.160 All the quoted decisions concern commercial contracts. (ii) In situations where EU law is not applicable, French law allows international prorogation between commercial parties provided there is no mandatory French 154

See the contribution by Pfeiffer, in this volume. ECJ, C-269/95 Benincasa ECLI:EU:C:1997:337; C-387/98 Coreck ECLI:EU:C:2000:606. 156 ECJ, Coreck ibid.; more recently ECJ, C-222/15 Hőszig ECLI:EU:C2016:525. 157 One may recall Art. 17 (4) Brussels Convention, where a prorogation exclusively in favour of one party allowed this party to sue the other party as well at its place of business (and not the opposite). 158 Cass.civ. 1ère, 26.9.2012, No. 11‐26.022.Cf. Niggemann (2014) 194; more recently Cass.civ., 3.10.2018, No. 17‐21309. 159 ‘condition potestative’ previously Art. 1174 Cc, see Chantepie/Latina, 702 et seq. at mn. 770 et seq. 160 CA Paris, 5.7.1989, No. 89/4373; Cass com., 24.4.1990, No. 88‐19877; CA Rennes, 29.9.1990, (1993) Droit maritime français 308; CA Rouen, 17.1.1991, (1992) Droit maritime français 136. The two latter decisions concern bills of lading. See also Barbet/Rosher. 155

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national jurisdiction.161 Unfortunately, this case law may gain new applications after ‘Brexit’. b) Jurisdiction in tort matters. Actions based on Art. L 442‐1 Ccom (and previously on Art. L 442‐6 I Ccom) are, by their explicit formulation, tort actions. We have seen in Amazon and Expedia,162 that the French courts are competent for any action brought by the French Ministry for the Economy and Finance, irrespective of any choice of forum clause. In Expedia, the Paris appeal court held that the competence flows from Art. 5 (3) Brussels I (now Art. 7(3) Brussels I bis).163 The Amazon decision is less specific; it is simply said that French law applies to the case as far as jurisdiction and the merits are concerned.164 112 With respect to claims raised by commercial claimants, one has to examine whether there is a choice of forum clause between the parties. The Cour de cassation accepts in international and even non-European tort cases the validity of a choice of forum clause.165 In Monster Cable the parties had chosen the courts of San Francisco/ California; the French dealer claimed damages on the basis of Art. L 442‐6 I No. 5 Ccom, for undue termination.166 Even though that damages claim is, like Art. L 442‐6 I No. 2 Ccom, a tort claim and based on a French ‘loi de police’, the Cour de cassation maintained the validity of the choice of forum stipulation.167 The clause must, however, be worded in broad terms to include any claim arising out of or in connection with the contract, its execution and termination.168 According to the ECJ, claims for damages may be raised at the chosen forum, provided the claim arose out of the contract or in close connection with it.169 113 The ECJ uses the criterion of surprise: if the other party could not expect such a claim raised at the contractual forum it should be able to avail itself of the ordinary tort jurisdiction forum.170 In a 2018 decision the ECJ held that actions based on Art. L 442‐ 6 I No. 5 Ccom are closely linked to contract execution and fall into the ambit of the choice of forum clause.171 114 If the action is not covered by the jurisdiction clause or if there is none, another choice has to be made: does such an action fall under Art. 7(1)(a) or (b) (place of performance) or Art. 7(3) (tort action; place where the tort act was carried out or where the damage occurred). The terms of EU Brussels I bis are construed by the ECJ autonomously, disregarding national concepts;172 the national concepts are disregarded in favour of the European principles of interpretation. Hence it is irrelevant whether 111

Cass.civ.1ère, 17.12.1985, 84‐16338; see also Ancel/Lequette, mn. 72. See above mn. 46 et seq. and 50. 163 CA Paris, 21.6.2017, No. 15/18784; see above mn. 50. 164 TC Paris, 2.9.2019, No. 2017050625, 11; see above mn. 46 et seq. 165 Cass.civ. 1ère, 22.10.2008, No. 07‐15823 ‘Monster Cable’; in the same sense Cass.civ. 1ère, 18.1.2017, No. 15‐26105 Rivera Motors v. Aston Martin. In this decision the court examined the wording of the clause which has to be wide enough to include tort actions for undue termination. 166 ‘Abrupt’ termination of a commercial relationship (not only a contract) with too short a notice period. 167 This decision has triggered a great number of comments in legal doctrine, most of which was hostile to so much ‘liberal thoughts’, see Kessedjian, JurisClasseur Droit international (fasc. 571‐20) mn. 88. It is indeed very likely that the foreign court will give much less weight to the French mandatory provisions. 168 Cass.com. 20.03.2012, No. 11- 11570 ; civ. 1ère, 18.01.2017 No. 15‐26105. 169 ECJ, C-352/1321 CDC Hydrogen Peroxide ECLI:EU:C:2015:335, paras 68–70; ECJ, C-196/15 Grannarolo ECLI:EU:C:2016:559, para. 28; cf. Cass.com., 20.9.2017, No. 16‐14812. 170 Cf. ECJ Grannarolo ibid. 171 ECJ, C-595/17 Apple Sales International ECLI:EU:C:2018:854, paras 28–30. 172 ECJ, C-548/12 Brogsitter ECLI:EU:C:2014:148, paras 18 and 29; ECJ, C-189/87 Kalfelis ECLI:EU: C:1998:459, paras 15–16. 161 162

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French law qualifies an action based on Art. L 442‐1 Ccom as tort or contractual. The ECJ holds that claims for damages resulting from the performance (or non-performance) of a contract, are contractual matters.173 The competent court is to be determined by application of Art. 7(1) Brussels I bis.

V. Final remarks We have come to the end of our voyage through the meanders of French law on 115 unfair terms in business contracts. And ‘meanders’ there are. It is far from being merely a discussion about GCT or the validity of certain clauses. Competition law enters the arena as do tort actions. Additionally, there is an air of a Comedy of Errors, not with twins but rather with triplets. The whole becomes quite notable on the international scene, where we have choice of law and jurisdiction issues to which a third spice is added, namely the issue of overriding mandatory provisions. One of the challenges of our contribution was to give you an Ariadne’s thread to help you through the maze. This slightly meta-juridical view has a serious background: The legal situation is 116 complex, or for those, who are opposed to regulation of business transactions, it is an ideal playground. Unless one is caught in the DGCCRF’s mesh, there are, in particular on the international level, ways to avoid the maze, provided the choice of law and the jurisdiction clauses are well drafted. You will certainly have realised that the present contribution is of a high actuality due 117 to the two major legal changes in 2016/2018 and 2019. Both have strengthened the arsenal against imbalanced contract terms. It is certainly regrettable that the result is confusing, but the recent nature of the changes partly explains the situation. It may be that we are witnesses of a fundamental change to look at business transactions under a more egalitarian angle even on the international level. As a practicing lawyer, one observes abuse of party autonomy in commercial contracts in cases of unequal bargaining power, but one remains closely attached to the principle as such. We will have to keep looking for intelligent compromises. 173

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F. Germany Bibliography: Beck-Online–Großkommentar zum Zivilrecht (BeckOGK) (C.H. Beck 2020); Dannemann/ Schulze (ed.), German Civil Code: Commentary (C.H. Beck 2020); Jauernig Bürgerliches Gesetzbuch (17th edn., C.H. Beck 2018); Graf von Westphalen/Thüsing (ed.), Vertragsrecht und AGB-Klauselwerke (45th edn., C.H. Beck 2020); Leuschner (ed.), AGB-Recht im unternehmerischen Rechtsverkehr – Kommentar zu den §§ 305–310 BGB (C.H. Beck 2020); Leuschner, ‘Die Kontrollstrenge des AGB-Rechts’ (2016) 17 Neue Juristische Wochenschrift 1222–1225; Miethaner, ‘AGB oder Individualvereinbarung – die gesetzliche Schlüsselstelle “im Einzelnen ausgehandelt”’ (2010) 43 Neue Juristische Wochenschrift 3121–3127; Münchener Kommentar zum BGB: Band 2 (§§ 241–310) (8th edn., C.H. Beck 2019); Münchener Kommentar zum BGB: Band 12 (Internationales Privatrecht) (5th edn., C.H. Beck 2010); Palandt Bürgerliches Gesetzbuch (79th edn., C.H. Beck 2020); Pfeiffer, ‘Die Abwahl des deutschen AGB-Rechts in Inlandsfällen bei Vereinbarung eines Schiedsverfahrens’ (2012) 17 Neue Juristische Wochenschrift 1169–1174; Pfeiffer, ‘Entwicklungen und aktuelle Fragestellungen des AGB-Rechts’ (2017) 13 Neue Juristische Wochenschrift 913–918; Staudinger Kommentar zum BGB – Buch 2: Recht der Schuldverhältnisse: §§ 305–310; UKlaG (18th edn., Sellier/de Gruyter 2019); Stoffels, AGB-Recht (3rd edn., C.H. Beck 2015); Ulmer/Brandner/Hensen (ed.), AGB-Recht (12th edn., Otto Schmidt); Wais, Selbstbestimmungskonflikte als Regelungsgegenstand des AGB-Rechts (forthcoming 2021); Wolf/Lindacher/Pfeiffer (ed.), AGB-Recht (7th edn., C.H. Beck 2020).

Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... 1. Specific judicial review of standard business terms............................ 2. Public policy and good faith .................................................................... III. Requirements and legal consequences ....................................................... 1. Judicial review of standard business terms........................................... a) Order of analysis ................................................................................... b) Scope ........................................................................................................ aa) Contract terms................................................................................ bb) Pre-formulated for more than two contracts .......................... cc) Unilateral implementation........................................................... dd) Individual negotiation................................................................... c) Incorporation into the contract ......................................................... d) Individually agreed terms.................................................................... e) Rules of interpretation ......................................................................... aa) Objective interpretation................................................................ bb) Ambiguity ........................................................................................ cc) Accepting the ineffectiveness of a term .................................... f) Surprising terms .................................................................................... g) Unfairness of standard terms ............................................................. aa) Application ...................................................................................... bb) Unreasonable disadvantage contrary to good faith................ cc) Deviation from essential principles of a statutory provision dd) Jeopardising the purpose of the contract ................................. ee) The role of §§ 308, 309 BGB....................................................... ff) Terms excluded from the substantial fairness requirement. gg) Transparency................................................................................... h) Consequences of ineffectiveness ........................................................ i) Selected clauses ...................................................................................... aa) Exclusion and limitation of liability .......................................... bb) Choice of law clauses, jurisdiction agreements and arbitration clauses ..........................................................................

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F. Germany cc) Further examples of effective and ineffective terms in B2B contracts ........................................................................................... 2. Additional grounds for judicial review.................................................. a) Public policy ........................................................................................... b) Good faith............................................................................................... IV. International application ...............................................................................

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I. Overview Under German law, §§ 305–310 BGB (Bürgerliches Gesetzbuch; German Civil Code) 1 govern the judicial review of standard terms in business contracts.1 These provisions are applicable if, and to the extent that, the terms of the contract qualify as standard business terms within the meaning of § 305(1).2 Significantly, it is not necessary to ascertain a weaker position of the non-drafting party and thus the definition affords a rather broad scope to the judicial review of standard business terms. As §§ 305–310 were originally intended to serve the purpose of consumer protection,3 the judicial review applies to B2B contracts with slight modifications, which are regulated by § 310 (1). This provision is not addressed to B2B contracts as such. It merely requires the counterparty to be an ‘entrepreneur’4 (thus, technically, also a contract between a consumer and a business is caught by this provision, provided that the consumer is the user of the standard term subject to review). The two most common grounds for the ineffectiveness of a standard business term 2 are governed by § 305c(1) and § 307(1) 1st St., respectively. A term is ineffective under § 305c(1) if it is ‘surprising’. A term is ineffective under § 307(1) 1st St. if it puts the counterparty at an unreasonably disadvantage that is contrary to good faith.5 Furthermore, §§ 308, 309 contain two lists of clauses that are prohibited. These lists are directly applicable only if the counterparty is not a business (more precisely: an entrepreneur pursuant to § 14), but according to settled case law of the Federal Court of Justice (Bundesgerichtshof, ‘BGH’) they indicate the ineffectiveness of a term also in B2B contracts. Besides §§ 305–310, judicial review is to some extent provided by § 138 (public policy) and § 242 (good faith), but their practical relevance in B2B contracts is rather limited. For the purposes of explaining the relevant provisions, this chapter uses the 3 English translation of the BGB available from the German Federal Ministry of Justice and Consumer Protection.6 It should be noted that this translation is literal rather than semantic, which, to some extent, permits the user to determine the meaning of the provisions through a literal interpretation. However, this is complicated by the noticeable influences of German sentence construction and the drafting style used in legislation.

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Unless indicated otherwise, all legislative provisions referred to in this chapter are those of the BGB. See mn. 4 et seq. 3 BT Drs. 7/3919 from 6.8.1975, p. 1. 4 As defined in § 14; see Beurskens, in Dannemann/Schulze, German Civil Code, 2020, § 14 BGB. 5 On good faith (‘Treu und Glauben’) see Schulze, in German Civil Code, § 242 BGB. 6 The translation can be retrieved under https://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb.pdf (last accessed in June 2020). It is to be noted that the translation is not official, but merely for convenience. 2

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II. Regulatory framework 1. Specific judicial review of standard business terms § 305 BGB Incorporation of standard business terms into the contract7 (1) 1Standard business terms are all contract terms pre-formulated for more than two contracts which one party to the contract (the user) presents to the other party upon the entering into of the contract. 2It is irrelevant whether the provisions take the form of a physically separate part of a contract or are made part of the contractual document itself, what their volume is, what typeface or font is used for them and what form the contract takes. 3Contract terms do not become standard business terms to the extent that they have been negotiated in detail between the parties. (2) Standard business terms only become a part of a contract if the user, when entering into the contract, 1. refers the other party to the contract to them explicitly or, where explicit reference, due to the way in which the contract is entered into, is possible only with disproportionate difficulty, by posting a clearly visible notice at the place where the contract is entered into, and 2. gives the other party to the contract, in an acceptable manner, which also takes into reasonable account any physical handicap of the other party to the contract that is discernible to the user, the opportunity to take notice of their contents, and if the other party to the contract agrees to their applying. (3) The parties to the contract may, while complying with the requirements set out in subsection (2) above, agree in advance that specific standard business terms are to govern a specific type of legal transaction. § 305a BGB Incorporation in special cases Even without compliance with the requirements cited in § 305(2) nos. 1 and 2, if the other party to the contract agrees to their applying the following are incorporated, 1. the tariffs and regulations of the railways issued with the approval of the competent transport authority or on the basis of international conventions, and the terms of transport approved under the Passenger Transport Act [Personenbeförderungsgesetz], of trams, trolley buses and motor vehicles in regular public transport services, 2. the standard business terms published in the gazette of the Federal Network Agency for Electricity, Gas, Telecommunications, Post and Railway [Bundesnetzagentur für Elektrizität, Gas, Telekommunikation, Post und Eisenbahnen] and kept available on the business premises of the user, a) into transport contracts entered into off business premises by the posting of items in postboxes, b) into contracts on telecommunications, information services and other services that are provided direct by the use of distance communication and at one time and without interruption during the supply of a telecommunications service, if it is disproportionately difficult to make the standard business terms available to the other party before the contract is entered into. § 305b BGB Priority of individually agreed terms Individually agreed terms take priority over standard business terms.

7 The translation of the relevant sections of the BGB is provided by the Federal Ministry of Justice and Consumer Protection in cooperation with juris GmbH, except for several subsections of §§ 308, 309 BGB for which the translations from Dannemann/Schulze, German Civil Code have been used.

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F. Germany § 305c BGB Surprising and ambiguous clauses (1) Provisions in standard business terms which in the circumstances, in particular with regard to the outward appearance of the contract, are so unusual that the other party to the contract with the user need not expect to encounter them, do not form part of the contract. (2) Any doubts in the interpretation of standard business terms are resolved against the user. § 306 BGB Legal consequences of non-incorporation and ineffectiveness (1) If standard business terms in whole or in part have not become part of the contract or are ineffective, the remainder of the contract remains in effect. (2) To the extent that the terms have not become part of the contract or are ineffective, the contents of the contract are determined by the statutory provisions. (3) The contract is ineffective if upholding it, even taking into account the alteration provided in subsection (2) above, would be an unreasonable hardship for one party. § 306a BGB Prohibition of circumvention The rules in this division apply even if they are circumvented by other constructions. § 307 BGB Test of reasonableness of contents (1) 1Provisions in standard business terms are ineffective if, contrary to the requirement of good faith, they unreasonably disadvantage the other party to the contract with the user. 2An unreasonable disadvantage may also arise from the provision not being clear and comprehensible. (2) An unreasonable disadvantage is, in case of doubt, to be assumed to exist if a provision 1. is not compatible with essential principles of the statutory provision from which it deviates, or 2. limits essential rights or duties inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardised. (3) 1Subsections (1) and (2) above, and §§ 308 and 309 apply only to provisions in standard business terms on the basis of which arrangements derogating from legal provisions, or arrangements supplementing those legal provisions, are agreed. 2Other provisions may be ineffective under subsection (1) sentence 2 above, in conjunction with subsection (1) sentence 1 above. § 308 BGB Prohibited clauses with the possibility of evaluation In standard business terms the following are in particular ineffective 1. (Period of time for acceptance and performance) a provision by which the user reserves to himself the right to unreasonably long or insufficiently specific periods of time for acceptance or rejection of an offer or for rendering performance; this does not include the reservation of the right not to perform until after the end of the period of time for withdrawal under § 355 subsections (1) and (2); 1a. (Period for payment) a provision by which the user reserves to himself an unreasonably long period of time for the performance of a payment claim of the other party to the contract; if the user is not a consumer, in cases of doubt it is to be assumed that a period is unreasonably long if it exceeds 30 days after receipt of the consideration, or if after receiving the consideration the obligor receives an invoice or equivalent statement of payment, 30 days after receipt of this invoice or statement of payment.8 1b. (Examination and acceptance period) a provision by which the user reserves to himself to fulfil the payment claim of the other party to the contract only after an unreasonably 8

Translation from Dannemann/Schulze.

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2. 3. 4.

5.

6. 7.

8.

long period of time for the examination or acceptance of the consideration; if the user is not a consumer, in cases of doubt it is to be assumed that a period of time exceeding 15 days after receipt of the consideration is unreasonably long.9 (Additional period of time) a provision by which the user, contrary to legal provisions, reserves to himself the right to an unreasonably long or insufficiently specific additional period of time for the performance he is to render; (Reservation of the right to revoke) the agreement of a right of the user to free himself from his obligation to perform without any objectively justified reason indicated in the contract; this does not apply to continuing obligations; (Reservation of the right to modify) the agreement of a right of the user to modify the performance promised or deviate from it, unless the agreement of the modification or deviation can reasonably be expected of the other party to the contract when the interests of the user are taken into account; (Fictitious declarations) a provision by which a declaration by the other party to the contract with the user, made when undertaking or omitting a specific act, is deemed to have been made or not made by the user unless a) the other party to the contract is granted a reasonable period of time to make an express declaration, and b) the user agrees to especially draw the attention of the other party to the contract to the intended significance of his behaviour at the beginning of the period of time; (Fictitious receipt) a provision providing that a declaration by the user that is of special importance is deemed to have been received by the other party to the contract; (Reversal of contracts) a provision by which the user, to provide for the event that a party to the contract revokes the contract or gives notice of termination of the contract, may demand a) unreasonably high remuneration for enjoyment or use of a thing or a right or for performance rendered, or b) unreasonably high reimbursement of expenses; (Unavailability of performance) the agreement, admissible under no. 3, of the reservation by the user of a right to free himself from the duty to perform the contract in the absence of availability of performance, if the user does not agree to a) inform the other party to the contract without undue delay, of the unavailability, and b) reimburse the other party to the contract for consideration, without undue delay. § 309 BGB

Prohibited clauses without the possibility of evaluation Even to the extent that a deviation from the statutory provisions is permissible, the following are ineffective in standard business terms: 1. (Price increases at short notice) a provision providing for an increase in payment for goods or services that are to be delivered or rendered within four months of the entering into of the contract; this does not apply to goods or services delivered or rendered in connection with continuing obligations; 2. (Right to refuse performance) a provision by which a) the right to refuse performance to which the other party to the contract with the user is entitled under § 320, is excluded or restricted, or b) a right of retention to which the other party to the contract with the user is entitled to the extent that it is based on the same contractual relationship, is excluded or restricted, in particular made dependent upon acknowledgement of defects by the user; 3. (Prohibition of set-off) a provision by which the other party to the contract with the user is deprived of the right to set off a claim that is uncontested or has been finally and non-appealably established; 4. (Warning notice, setting of a period of time) a provision by which the user is exempted from the statutory requirement of giving the other party to the contract a warning notice or setting a period of time for the latter to perform or cure; 9

Translation from Dannemann/Schulze.

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F. Germany 5. (Lump-sum claims for damages) the agreement of a lump-sum claim by the user for damages or for compensation of a decrease in value if a) the lump sum, in the cases covered, exceeds the damage expected under normal circumstances or the customarily occurring decrease in value, or b) the other party to the contract is not expressly permitted to show that damage or decrease in value has either not occurred or is substantially less than the lump sum; 6. (Contractual penalty) a provision by which the user is promised the payment of a contractual penalty in the event of non-acceptance or late acceptance of the performance, payment default or in the event that the other party to the contract frees himself from the contract; 7. (Exclusion of liability for injury to life, body or health and in case of gross fault) a) (Injury to life, body or health) any exclusion or limitation of liability for damage from injury to life, body or health due to negligent breach of duty by the user or intentional or negligent breach of duty by a legal representative or a person used to perform an obligation of the user; b) (Gross fault) any exclusion or limitation of liability for other damage arising from a grossly negligent breach of duty by the user or from an intentional or grossly negligent breach of duty by a legal representative of the user or a person used to perform an obligation of the user; letters (a) and (b) do not apply to limitations of liability in terms of transport and tariff rules, authorised in accordance with the Passenger Transport Act [Personenbeförderungsgesetz], of trams, trolley buses and motor vehicles in regular public transport services, to the extent that they do not deviate to the disadvantage of the passenger from the Order on Standard Transport Terms for Tram and Trolley Bus Transport and Regular Public Transport Services with Motor Vehicles [Verordnung über die Allgemeinen Beförderungsbedingungen für den Straßenbahn- und Obusverkehr sowie den Linienverkehr mit Kraftfahrzeugen] of 27 February 1970; letter (b) does not apply to limitations on liability for state-approved lotteries and gaming contracts; 8. (Other exclusions of liability for breaches of duty) a) (Exclusion of the right to free oneself from the contract) a provision which, where there is a breach of duty for which the user is responsible and which does not consist in a defect of the thing sold or the work, excludes or restricts the right of the other party to free himself from the contract; this does not apply to the terms of transport and tariff rules referred to in no. 7 under the conditions set out there; b) (Defects) a provision by which in contracts relating to the supply of newly produced things and relating to the performance of work i) (Exclusion and referral to third parties) the claims against the user due to defects in their entirety or in regard to individual parts are excluded, limited to the granting of claims against third parties or made dependent upon prior court action taken against third parties; ii) (Limitation to cure) the claims against the user are limited in whole or in regard to individual parts to a right to cure, to the extent that the right is not expressly reserved for the other party to the contract to reduce the purchase price, if the cure should fail or, except where building work is the object of liability for defects, at its option to revoke the contract; iii) (Expenses for cure) the duty of the user to bear the expenses necessary for the purpose of cure, in particular to bear transport, workmen’s travel, work and materials costs, is excluded or limited; iv) (Withholding cure) the user makes cure dependent upon prior payment of the entire fee or a portion of the fee that is disproportionate taking the defect into account; v) (Cut-off period for notice of defects) the user sets a cut-off period for the other party to the contract to give notice of non-obvious defects which is shorter than the permissible period of time under double letter (ff) below; vi) (Making limitation easier) the limitation of claims against the user due to defects in the cases cited in § 438(1) no. 2 and § 634a(1) no. 2 is made easier, or in other cases a limitation period of less than one year reckoned from the beginning of the statutory limitation period is attained;

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Part 1. Country Reports 9. (Duration of continuing obligations) in a contractual relationship the subject matter of which is the regular supply of goods or the regular rendering of services or work performance by the user, a) a duration of the contract binding the other party to the contract for more than two years, b) a tacit extension of the contractual relationship by more than one year in each case that is binding on the other party to the contract, or c) a notice period longer than three months prior to the expiry of the duration of the contract as originally agreed or tacitly extended at the expense of the other party to the contract; this does not apply to contracts relating to the supply of things sold as belonging together, to insurance contracts or to contracts between the holders of copyright rights and claims and copyright collecting societies within the meaning of the Act on the Administration of Copyright and Neighbouring Rights [Gesetz über die Wahrnehmung von Urheberrechten und verwandten Schutzrechten]; 10. (Change of other party to contract) a provision according to which in the case of purchase, loan or service agreements or agreements to produce a result a third party enters into, or may enter into, the rights and duties under the contract in place of the user, unless, in that provision, a) the third party is identified by name, or b) the other party to the contract is granted the right to free himself from the contract; 11. (Liability of an agent with power to enter into a contract) a provision by which the user imposes on an agent who enters into a contract for the other party to the contract a) a liability or duty of responsibility for the principal on the part of the agent himself, without any explicit and separate declaration to this effect, or b) in the case of agency without authority, liability going beyond § 179; 12. (Burden of proof) a provision by which the user modifies the burden of proof to the disadvantage of the other party to the contract, in particular by a) imposing on the latter the burden of proof for circumstances lying in the sphere of responsibility of the user, or b) having the other party to the contract confirm certain facts; letter (b) does not apply to acknowledgements of receipt that are signed separately or provided with a separate qualified electronic signature; 13. (Form of notices and declarations) a provision by which notices or declarations, which are to be given to the users or a third party, are subjected a) to formal requirements more stringent than the written form in a contract for which notarial recording is prescribed by statute, or b) to formal requirements more stringent than the text form in contracts other than those named under letter (a), or c) to particular receipt requirements;10 14. (Waiver of lawsuit) a provision by which the other party to the contract may enforce his claims against the other party in court only after he has attempted to reach an amicable agreement through extrajudicial dispute resolution;11 15. (Advance payments and security deposits) a provision by according to which the user, in the case of a contract to produce a work, a) can demand advance payments from the other party to the contract for partial performance which are significantly higher than the advance payments to be made pursuant to § 632a(1) and § 650m(1), or b) is not required to provide security under § 650m(2) or only a lesser amount.12 § 310 BGB Scope of application (1) 1§ 305(2) and (3) and sections 308 and 309 do not apply to standard business terms which are used in contracts with an entrepreneur, a legal person under public law or a 10

Translation from Dannemann/Schulze. Translation from Dannemann/Schulze. 12 Translation from Dannemann/Schulze. 11

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F. Germany special fund under public law. 2§ 307(1) and (2) nevertheless apply to these cases in sentence 1 to the extent that this leads to the ineffectiveness of the contract provisions set out in §§ 308 and 309; reasonable account must be taken of the practices and customs that apply in business dealings. 3In cases coming under sentence 1, § 307(1) and (2) do not apply to contracts in which the entire Award Rules for Building Works, Part B [Vergabeund Vertragsordnung für Bauleistungen Teil B – VOB/B] in the version applicable at the time of conclusion of the contract are included without deviation as to their content, relating to an examination of the content of individual provisions. (2) 1§§ 308 and 309 do not apply to contracts of electricity, gas, district heating or water suppliers for the supply of electricity, gas, district heating or water from the supply grid to special customers to the extent that the conditions of supply do not derogate, to the disadvantage of the customer, from orders on general conditions for the supply of standard-rate customers with electricity, gas, district heating and water. 2Sentence 1 applies with the necessary modifications to contracts for the disposal of sewage. (3) In the case of contracts between an entrepreneur and a consumer (consumer contracts) the rules in this division apply with the following provisos: 1. Standard business terms are deemed to have been presented by the entrepreneur, unless they were introduced into the contract by the consumer; 2. § 305c(2) and §§ 306 and 307 to 309 of this Code and Article 46b of the Introductory Act to the Civil Code [Einführungsgesetz zum Bürgerlichen Gesetzbuche] apply to preformulated contract terms even if the latter are intended only for non-recurrent use on one occasion, and to the extent that the consumer, by reason of the preformulation, had no influence on their contents; 3. in judging an unreasonable disadvantage under § 307(1) and (2), the other circumstances attending the entering into of the contract must also be taken into account. (4) 1This division does not apply to contracts in the field of the law of succession, family law and company law or to collective agreements and private-sector works agreements or public-sector establishment agreements. 2When it is applied to employment contracts, reasonable account must be taken of the special features that apply in labour law; § 305(2) and (3) must not be applied. 3Collective agreements and private-sector works agreements or public-sector establishment agreements are equivalent to legal provisions within the meaning of § 307(3).

2. Public policy and good faith § 138 BGB Legal transaction contrary to public policy; usury (1) A legal transaction which is contrary to public policy is void. (2) In particular, a legal transaction is void by which a person, by exploiting the predicament, inexperience, lack of sound judgement or considerable weakness of will of another, causes himself or a third party, in exchange for an act of performance, to be promised or granted pecuniary advantages which are clearly disproportionate to the performance. § 242 BGB Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.

III. Requirements and legal consequences 1. Judicial review of standard business terms a) Order of analysis. In a first step, the court will apply § 305(1) in order to 4 determine whether the terms of the contract are subject to judicial review. This requires an analysis of the terms with regard to the definition of ‘standard business terms’ in Wais

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§ 305(1) 1st St. and whether they are excluded from review pursuant to § 305(1) 3rd St. In a second step, the court will examine the agreement between the parties to see whether the terms are incorporated into the contract. For this purpose, it is relevant whether the counterparty is an ‘entrepreneur’ as, in accordance with § 310(1) 1st St., this has consequences for the requirements of incorporation. The court will then apply § 305c(1) to render ineffective a term that is surprising. Thereafter, the court will analyse whether the terms fall under § 307. The court will first turn to § 307(3) 1st St. in order to determine whether the terms are subject to the test of substantial fairness pursuant to § 307(1) 1st St., (2). If the test of substantial fairness is applicable, the court will then examine whether a term is ineffective under § 307(2); for this purpose it will also assess whether a term falls under any of the categories of ineffective terms listed in §§ 308, 309. Pursuant to § 307(1) 1st St., the court will ultimately also consider whether there are other reasons which are not caught by § 307(2) but nonetheless render the terms unfair and thus ineffective. Regardless of the test of substantial fairness, the courts will also enquire into the transparency of the term under § 307(1) 2nd St. Furthermore, § 310(1) 2nd St. states that when applying any of the provisions contained in § 307, the practices and customs that apply in business dealings must be taken reasonable account of. Following the case law of the BGH, however, courts will only rarely find sufficient grounds that justify a different standard of review for businesses. 5

b) Scope. § 305(1) defines ‘standard business terms’. With the exception of contracts between a business and a consumer (B2C contracts), the terms of a contract are subject to §§ 305–310 only if they satisfy this definition. § 305(1) 1st St. sets out all relevant criteria to determine whether the terms are ‘standard business terms’ for the purposes of this legislation. § 305(1) 3rd St. provides an exception: although terms may satisfy the criteria under § 305(1) 1st St., they are excluded from this specific judicial review if they were individually negotiated.13 In contrast, § 305(1) 2nd St. merely states the obvious and has no regulatory meaning. It is important to note that the application of §§ 305–310 is not subject to an imbalance of power between the parties.

6

aa) Contract terms. In principle, standard business terms can form part of any contract. The nature of the specific contract is irrelevant. Accordingly, the definition encompasses contracts that, under German law, create obligations as well as contracts by which real rights are transferred or modified, contracts that have procedural effects, etc.14 However, § 310(4) excludes the application of §§ 305–310 to contracts in the field of the law of succession, family law and company law, and to collective agreements.

bb) Pre-formulated for more than two contracts. A term is ‘pre-formulated’ if it is drafted in advance in order to make it readily available to the user. For the purposes of § 305(1) 1st St., the term need not be in writing; a term memorised by the user may be considered pre-formulated.15 The term need not be pre-formulated by the user himself: a contract form or a single term retrieved by the user from the internet or from a collection of model contracts is also to be considered pre-formulated.16 8 The terms must be pre-formulated with the intention of multiple use. The official English translation of § 305(1) 1st St. is slightly misleading in this respect as it appears to 7

13

See mn. 10 et seq. Basedow, in Münchener Kommentar (Band 2), § 305 BGB mn. 9; Pfeiffer, § 305 BGB mn. 9, in Wolf/ Lindacher/Pfeiffer (ed.), AGB‐Recht. 15 BGH, 13.5.2014 – XI ZR 170/13: NJW-RR 2014, 1133, 1134; BGH, 12.6.2001 – XI ZR 274/00: NJW 2001, 2635, 2636. 16 Basedow, in Münchener Kommentar (Band 2), § 305 BGB mn. 14; Pfeiffer, in AGB‐Recht, § 305 BGB mn. 14. 14

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follow already from the translation that any intended use for more than two contracts is sufficient. The original German wording is, however, less specific as the words ‘eine Vielzahl von Verträgen’ corresponds to a translation as ‘a number of contracts’ or ‘a multitude of contracts’ or ‘multiple contracts’. The English translation is accurate when read in conjunction with the case law of the BGH, according to which ‘eine Vielzahl von Verträgen’ must in fact be interpreted as meaning ‘at least three contracts’.17 Inconsistencies aside, it is to be emphasised that an actual multiple use is not required. The sole intention at the point of drafting to use pre-formulated terms at least three times satisfies the legal definition of standard business terms in § 305(1) 1st St.18 This approach takes account of the fact that the contract terms, when drafted for multiple use, will usually be more complex and extensive as the multiple use will allow the user to spread the (higher) drafting costs across each individual use. Moreover, as only the intended use is relevant, such terms may already fall under §§ 305 et seq. when they are used for the first (or even one single) time. The BGH does not require that the terms be used with different counterparties; contract terms may thus qualify as standard business terms where a multiple use is intended in relation to one and the same counterparty.19 Furthermore, where the drafter and actual user of pre-formulated terms differ (for instance where model contracts are made available), the user’s intention of a single use does not prevent the terms from being caught by § 305(1) 1st St.20 Arguably, however, it is also sufficient if (only) the user at the time of implementation has the intention of multiple use as otherwise he could bypass the judicial review simply by appropriating terms that a third party had pre-formulated for single use only. cc) Unilateral implementation. A further requirement is that the terms are ‘pre- 9 sented’ to the counterparty. The party who presents the terms is considered the user.21 Determining the user is important as the judicial review under §§ 305 et seq. only operates in favour of the counterparty and against the user. The wording of the English translation of § 305(1) 1st St. may again be somewhat misleading as it is supposed to describe a unilateral act by which the user arranges for his terms to become part of the contract.22 The mere fact that the user offers the counterparty the choice of various sets of pre-formulated terms does not suffice to rebut the assumption that he has ‘presented’ the terms.23 Only where the user provides the counterparty with a real opportunity to make his own proposals and implement them into the contract, no case of unilateral presentation of terms may be assumed.24 Again, the requirements are rather strict: the mere fact that the user asked the counterparty to inform him of any amendments the counterparty wishes to make does not eliminate the unilateral nature of the presentation.25 Furthermore, there are cases in which neither party has presented the terms that have become part of the contract, e.g. where a notary provides the terms to the parties. In such instances, the terms – albeit 17 BGH, 27.9.2001 – VII ZR 388/00: NJW 2002, 138, 139; BGH, 1.12.2003 – VII ZR 31/03: NJW 2004, 1454. 18 BGH, 27.9.2001 – VII ZR 388/00: NJW 2002, 138, 139; BGH, 13.9.2001 – VII ZR 487/99: NJW-RR 2002, 13, 14. 19 ibid.; BGH, 15.4.1998 – VIII ZR 377/96: NJW 1998, 2286, 2287. 20 BGH, 17.2.2010 – VIII ZR 67/09: NJW 2010, 1131; BGH, 23.8.2016 – VIII ZR 23/16: NJW-RR 2017, 137, 138. 21 ibid; BGH, 1.3.2013 – V ZR 31/12: NJW-RR 2013, 1028, 1029. 22 BGH, 22.7.2009 – IV ZR 74/08 NJW-RR 2010, 39. 23 BGH, 20.1.2016 – VIII ZR 26/15: NJW 2016, 1230, 1231; BGH, 7.2.1996 – IV ZR 16/95: NJW 1996, 1676, 1677. 24 BGH, 17.2.2010 – VIII ZR 67/09: NJW 2010, 1131. 25 BGH, 20.1.206 – VIII ZR 26/16: NJW 2016, 1230, 1232.

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contract terms pre-formulated for multiple use – do not fall under the regime of §§ 305 et seq., though they may be subject to review under the general principle of good faith or public policy26. If, on the other hand, the third party acts in some manner for, or even on behalf of, one party, that party is considered to have presented the terms and, accordingly, be the actual user.27 For example, this may be the case where the notary drafted the terms specifically for one party.28 dd) Individual negotiation. Pursuant to § 305(1) 3rd St., standard terms are not subject to judicial review to the extent that they have been ‘negotiated in detail’. Again, the English translation is misleading as the German ‘im Einzelnen’ rather translates as individually, i.e. the term itself must have been subject to negotiation. Nothing in the German version of § 305(1) 3rd St. suggests that the terms must be negotiated ‘in detail’. As regards the scope of § 305(1) 3rd St., the provision pre-empts judicial review only to the extent that the terms have been individually negotiated. Hence, where some terms have been subject to negotiation and others have not, the latter will still be caught by § 305(1) 1st St.29 The courts have adopted a rather strict approach to the interpretation of § 305(1) 3rd St. to the extent that in practice its requirements are almost never satisfied. The relevant case law thus renders the provision rather meaningless.30 11 According to the BGH, each term must be examined separately: if the user expresses his sincere31 willingness to dispense with a specific term that derogates from a legal provision and, by doing so, provides the counterparty with the opportunity to implement its own rules that are more suitable, this term may be viewed as ‘negotiated individually’.32 Numerous BGH decisions emphasise that usually the requirement of sincere willingness is met only if the term in question was in fact modified during the negotiations.33 Conceptually, however, the modification of the term cannot be regarded an indispensable requirement. This is because § 305(1) 3rd St. is a legal exception to § 305(1) 1st St. As such, § 305(1) 3rd St. renders § 305(1) 1st St. inapplicable, but a term that is modified during the negotiations cannot be regarded a pre-formulated term and will thus not even fall under § 305(1) 1st St. It is perhaps on this basis that the BGH stresses that it is not per se inacceptable that a term may be considered ‘individually negotiated’ where it is has not been modified. Such cases are rare. The BGH is ready to accept this only under two conditions: (i) the user must give the counterparty a full explanation of the meaning and the effects of the term and (ii) the counterparty must want the term to be included into the contract because ultimately he is convinced that it is objectively justified.34 Conversely, it follows that where the counterparty accepts the term merely because he has no other choice, all efforts to inform the counterparty have no such effect. The same hold true for a purely formal declaration by the counterparty that ‘all terms have been negotiated individu10

26

See mn. 36 et seq. BGH, 27.1.2017 – V ZR 130/15: NJW 2017, 1540, 1541; BGH, 1.3.2013 – V ZR 31/12: NJW-RR 2013, 1028, 1029. 28 BGH, 14.5.1992 – VII ZR 204/90: NJW 1992, 2160, 2163; BGH, 20.3.1985 – Iva 223/83: NJW 1985, 2477. 29 BGH, 6.3.1986 – III ZR 195/84: NJW 1986, 1803. 30 cf. Miethaner. 31 BGH, 19.5.2005 – III ZR 437/04: NJW 2005, 2543, 2544. 32 BGH, 20.3.2014 – VII ZR 248/13: NJW 2014, 1725, 1727; BGH, 23.1.2003 – VII ZR 210/01: NJW 2003, 1805, 1807. 33 BGH, 3.11.1999 – BIII ZR 269/98: NJW 2000, 1110, 1111; BGH, 23.1.2003 – VII ZR 210/01: NJW 2003, 1805, 1807; BGH, 22.11.2012 – VII ZR 222/12: NJW 2013, 856. 34 BGH, 3.4.1998 – V ZR 6/97: NJW 1998, 2600, 2601; BGH, 22.11.2012 – VII ZR 222/12: NJW 2013, 856, 857. 27

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ally’.35 In addition, the BGH is only prepared to accept that a term was individually negotiated if the user was willing to dispense with the term as a whole – the willingness to merely reduce the extent or scope of the term does not suffice. For example, where a counterparty managed to negotiate a considerable reduction of a certain fee contained in the terms, the BGH refused to accept that the specific term was individually negotiated because the user was not ready to forgo the fee altogether.36 The fact that every term must be analysed individually also has repercussions for the rather typical ‘trade of terms’ in negotiations where one party accepts a term and the other party dispenses with another in return. Since the courts look into the terms separately, § 305(1) 3rd St. does not recognise this common strategy in negotiations.37 Arguably, the case law of the BGH has rendered standard terms under German law unfit for use in real world business transactions; unsurprisingly, a great number of authors and practitioners has heavily criticised this specific case law.38 Drawing the line between the contract terms that were not ‘presented’ to the 12 counterparty under § 305(1) 1st St. and the terms that were presented first but then ‘individually negotiated’ is important for the burden of proof: it is for the counterparty to furnish proof of the facts required under § 305(1) 1st St.39 Once the courts have established that the terms fall thereunder, it is for the user to prove that they have been subject to individual negotiation and are thus excluded form judicial review by virtue of § 305(1) 3rd St.40 c) Incorporation into the contract. Once it is established that a term falls under § 305 13 (1) 1st St. and does not satisfy the requirements of § 305(1) 3rd St., the court will examine the effective incorporation of the term into the contract. Terms that are not incorporated do not bind the counterparty. Generally, the relevant provision in this regard is § 305(2), but the application of this provision in B2B contracts is precluded by virtue of § 310(1) 1st St. In these cases, the incorporation is governed by general principles. The parties must agree on the incorporation of the terms, but the agreement need not be express.41 If the terms would theoretically be incorporated effectively under § 305(2), it is also permissible to accept their incorporation into a B2B contract, since the requirements of this provision are stricter than the general rules.42 Outside the scope of § 305(2), however, the test is a matter of interpretation: where the behaviour of the counterparty may be construed as an acceptance of the terms, these are deemed to be incorporated into the contract.43 The counterparty is held to have accepted the terms if he knew or ought to have known that the user wanted his terms to govern the contract and did not preclude the incorporation of the terms.44 Generally, the counterparty ought to have known of the relevant intention of the user if the use is customary in the specific branch or profession.45 Where the use of BGH, 20.3.2014 – VII ZR 248/13: NJW 2014, 1725, 1727. BGH, 22.10.2015 – VII ZR 58/14: BeckRS 2015, 18772. 37 BGH, 19.3.2019 – XI ZR 9/18: NJW 2019, 2080, 2081. 38 cf. the summary in Wais; see also Leuschner; Pfeiffer (‘Entwicklungen’). 39 BGH, 14.5.1992 – VII ZR 204/90: NJW 1992, 2160, 2162. 40 BGH, 3.4.1998 – V ZR 6/97: NJW 1998, 2600, 2601; BGH, 9.10.1986 – VII ZR 245/85: NJW-RR 1987, 144, 145. 41 Grüneberg, in Palandt, § 305 BGB mn. 41; Pfeiffer, in AGB-Recht, § 305 BGB mn. 124 et seq. 42 Basedow, in Münchener Kommentar (Band 2), § 305 BGB mn. 103; Pfeiffer, in AGB‐Recht, § 305 BGB mn. 123. 43 Grüneberg, in Palandt, § 305 BGB mn. 49. 44 BGH, 10.10.1985 – I ZR 124/83: NJW 1986, 1434; BGH, 20.6.1996 – I ZR 94/94: NJW-RR 1996, 1313; BGH, 4.5.1995 – I ZR 90/93: NJW 1995, 2224, 2225. 45 Basedow, in Münchener Kommentar (Band 2), § 305 BGB mn. 103; Pfeiffer, in AGB‐Recht, § 305 BGB mn. 134. 35 36

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such terms is not customary, the counterparty ought to have known of the terms if the parties have established a long standing business relationship in which the user has continuously expressed that his terms govern the contracts.46 On a more factual basis, a reference to the standard terms that are contained in the contract document is usually sufficient.47 Yet, the conclusion of the contract may not be interpreted as acceptance of the terms if the counterparty was not in the position to take notice of the terms without unreasonable effort.48 Importantly though, the user need not make available his terms without being specifically asked by the counterparty.49 Unreasonable effort may also be assumed where the terms are entirely illegible.50 In cases where both parties refer to their own terms prior to the conclusion of the contract, the BGH in older cases held that the terms that were last presented would prevail (so-called ‘last shot theory’), provided that the counterparty did not expressly object to them.51 More recently, however, the BGH held that the terms of both parties would be incorporated into the contract to the extent that they do not contradict each other, if this is supported by the conduct of the parties.52 A term according to which ‘terms of the counterparty have no effect’ precludes the effectiveness not only of the conflicting terms but also of those terms that, without being contradictory, merely add rules to the regulatory framework of the contract.53 If the parties enter into contracts under the scope of an existing framework agreement, the standard terms are automatically incorporated into the contract at the time of conclusion, if the framework agreement so provides – the requirements set forth in § 305(3) need not be satisfied in B2B contracts.54 In international contracts governed by German law (predominantly pursuant to Arts 3, 4 Rome I55), valid incorporation of standard terms usually requires express reference in an internationally accepted language or one that the counterparty understands.56 14

d) Individually agreed terms. Where a standard term conflicts with a term that was individually agreed by the parties, § 305b stipulates that the latter prevails; the purpose of standard terms is to substantiate the agreement of the parties, not narrow down or render the actual agreement ineffective.57 ‘Individually agreed term’ in § 305b refers not only to terms than are caught by § 305(1) 3rd St. but also comprises terms that were first drafted during negotiations and as such resemble no negotiated deviation from what was originally a standard term. As § 305(1) 3rd St. does not apply in these cases, the nature of the drafting process need not satisfy the requirements under this provision. The interpretation of individually agreed terms is subject to the general principles that govern the interpretation of contracts; the rules specific to the interpretation of standard terms58 do not apply.59 46 BGH, 12.2.1992 – VIII ZR 84/91: NJW 1992, 1232; BGH, 4.5.1995 – I ZR 90/93: NJW 1995, 2224, 2225; BGH, 24.10.2002 – I ZR 104/00: NJW-RR 2003, 754, 755. 47 BGH, 24.10.2002 – I ZR 104/00: NJW-RR 2003, 754, 755. 48 BGH, 3.2.1982 – VIII ZR 316/80: NJW 1982, 1749, 1750; BGH, 3.2.1986 – II ZR 201/85: NJW-RR 1986, 1311. 49 BGH, 3.2.1982 – VIII ZR 316/80 NJW 1982, 1749, 1750. 50 BGH, 3.2.1986 – II ZR 201/85: NJW-RR 1986, 1311. 51 BGH, 29.9.1955 – II ZR 210/54: NJW 1955, 1794, 1795; BGH, 26.9.1973 – VIII ZR 106/72: NJW 1973, 2106, 2107. 52 BGH, 20.3.1985 – VIII ZR 327/83: NJW 1985, 1838, 1839; BGH, 23.1.1991 – VIII ZR 122/90: NJW 1991, 1604 1606. 53 BGH, 24.10.2000 – X ZR 42/99: NJW-RR 2001, 484, 485. 54 Stadler, in Jauernig, § 305 BGB mn. 21; Pfeiffer, in AGB‐Recht, § 305 BGB mn. 114. 55 See the contribution by Pfeiffer, in this volume. 56 Grüneberg, in Palandt, § 305 BGB mn. 58. 57 ibid. 58 See mn. 15 et seq. 59 BGH, 16.6.1982 – IVa ZR 270/80: NJW 1982, 2776, 2778.

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e) Rules of interpretation. aa) Objective interpretation. Standard terms must be 15 interpreted objectively and uniformly; §§ 133, 157, which govern the interpretation of contracts in general,60 do not apply.61 Reference must be made to the understanding of prudent and fair contract parties and their relevant interests.62 An objective assessment against the comprehension of a typical counterparty in a contract of that kind who has not enjoyed previous legal education is required.63 It follows from this generalised standard that the specific interests of the individual case at hand are irrelevant.64 Importantly, however, if both parties subjectively interpret the term in the same manner that deviates from the objective interpretation, the common understanding of the parties prevails.65 bb) Ambiguity. A clause is ambiguous within the meaning of § 305c(2) if it can be 16 given two or more plausible meanings.66 Where ambiguity can be established, the term must be given the meaning that is more favourable to the counterparty (i.e. contra proferentem). If neither possible interpretation would result in the ineffectiveness of the term under the relevant provisions of §§ 305 et seq., it must be given a meaning according to which the application of the term has the least adverse effects on the interests of the counterparty.67 A different approach is due where one of the possible interpretations is so disadvantageous that it would render the term ineffective, e.g. pursuant to § 305c(1) or § 307(1) 1st St. In this case, the court is required to choose the prima facie disadvantageous interpretation as the ineffectiveness of the term is in fact the most favourable solution for the counterparty.68 cc) Accepting the ineffectiveness of a term. The courts must not interpret an 17 ineffective term in such a restrictive manner so as to prevent it from being ineffective (‘Verbot der geltungserhaltenden Reduktion’).69 For example, if a term provides for a general exclusion of liability, the courts must not interpret it as excluding liability only to an extent that is compatible with § 307(1) 1st St, (2). The BGH has stressed that this principle also applies to B2B contracts.70 Were the courts permitted to uphold a term by interpreting in in such a way that it is only just compatible with the requirements set forth in §§ 305–310, the user could greatly disadvantage the counterparty without risking any adverse consequences for the use of the terms. However, this principle does not prevent the courts from isolating the ineffective parts in a term that is separable (so-called ‘blue pencil test’71). For example, a term that stipulates an automatic contract renewal every two years and an exclusion of liability is separable because any of For more detail on §§ 133, 157 see the corresponding comments by Wais in German Civil Code. BGH, 20.1.2016 – VIII ZR 152/15: NJW-RR 2016, 526, 527; BGH, 18.7.2007 – VIII ZR 227/06: NJWRR 2007, 1697, 1700. 62 BGH, 17.2.2016 – XII ZR 183/13: NJW-RR 2016, 572, 573; BGH, 9.5.2001 – VIII ZR 208/00: NJW 2001, 2165, 2166. 63 BGH, 9.4.2014 – VIII ZR 404/12: NJW 2014, 2269, 2271. 64 BGH, 9.5.2001 – VIII ZR 208/00: NJW 2001, 2165, 2166. 65 BGH, 20.1.2016 – VIII ZR 152/15: NJW-RR 2016, 526, 527; BGH, 16. 6. 2009 – XI ZR 145/08: NJW 2009, 3422, 3423. 66 BGH, 9.5.2012 – VIII ZR 327/11: NJW 2012, 2270; BGH, 20.1.2016 – VIII ZR 152/15: NJW-RR 2016, 526, 527. 67 Stadler, in Jauernig, § 305c BGB mn. 7. 68 BGH, 23.1.2003 – III ZR 54/02: NJW 2003, 1237, 1238; BGH, 21.4.2009 – XI ZR 78/08: NJW 2009, 2051. 69 BGH, 3.12.2015 – VII ZR 100/15: NJW 2016, 401, 402; BGH, 3.11.1999 – VIII ZR 269/98: NJW 2000, 1110, 1113. 70 BGH, 28.1.1993 – I ZR 294/90: NJW 1993, 1786, 1787; BGH, 2.10.1995 – I ZR 172/9: NJW 1996, 1407, 1408. 71 See mn. 31. 60 61

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the two parts can be a term on its own. In this case the court may uphold the automatic contract renewal while rendering ineffective the exclusion of liability. f) Surprising terms. One of the cornerstones of the judicial review of standard terms under German law is § 305c(1), which provides for the ineffectiveness of a ‘surprising’ term. It is of particular importance for the judicial review of terms that, pursuant to § 307 (3), are not subject to the test of reasonableness under § 307(1) 1st St. and (2).72 § 305c(1) applies to all standard terms, regardless of whether they form part of a B2C or B2B contract.73 However, the requirements may be less strict if the counterparty is an ‘entrepreneur’ (§ 14).74 Under § 305c all circumstances must be taken into account when determining whether or not the term is surprising because it is significantly unusual. Determining how unusual a term is requires an objective assessment against the expectation of a typical counterparty in a contract of the kind at hand.75 In order to substantiate these expectations, reference must be made to the (default) law that, for lack of a specific agreement, would govern the relationship between the parties, as well as the process and content of the individual negotiations and the objective appearance of the contract itself.76 For example, as a rule of thumb, terms through which the user seeks to establish additional payment obligations that have no connection to the nature of the specific contract are surprising.77 Furthermore, there can be an overlap between § 305c(1) and § 307(1) 1st St., whereby a term is ineffective if it is particularly unfair, as sometimes a term may seem surprising precisely because it is so unfair.78 Accordingly, a term may be considered unusual because it significantly deviates from a default legal provision; e.g. a drastic shortening of a limitation period.79 The surprising effect may also be due to formal circumstances: a term may be usual for the contract in question and still fall under § 305c(1), if its positioning in the contract itself is unusual.80 According to the BGH, the user can avoid the surprising effect of a term if he individually and specifically informs the counterparty about its existence.81 The user may also mitigate the surprising effect of a term by highlighting it in the text or using bold letters.82 19 Without a basic knowledge of the relevant German law it is rather difficult to determine whether the substance of a term is surprising, as the default rules usually serve as the main point of reference. Nonetheless, the following examples of terms that are deemed effective or ineffective under § 305c(1) provide some guidance: a term according to which a service that is typically free is provided only against remuneration is surprising and therefore ineffective;83 so is a term according to which the seller of a plot of land is entitled not only to the fixed sales price but also to certain development fees.84 In contrast, 18

BGH, 10.11.1989 – V ZR 201/88: NJW 1990, 576, 577. ibid. 74 ibid; BGH, 30.10.1987 – V ZR 174/86: NJW 1988, 558, 559. 75 BGH, 30.6.1995 – V ZR 184/94: NJW 1995, 2637, 2638; BGH, 23.5.1984 – VIII ZR 27/83: NJW 1985, 850, 851. 76 BGH, 21.6.2001 – IX ZR 69/00: NJW-RR 2002, 485, 486; BGH, 30.10.1987 – V ZR 174/86: NJW 1988, 558, 560. 77 BGH, 24.9.1980 – VIII ZR 273/79: NJW 1981, 117, 119. 78 Basedow, in Münchener Kommentar (Band 2), § 305c BGB mn. 5. 79 BGH, 19.2.1992 – VIII ZR 65/91: NJW 1992, 1236, 1237. 80 BGH, 9.12.2009 – XII ZR 109/08: NJW 2010, 671, 672; BGH, 21.7.2010 – XII ZR 189/08: NJW 2010, 3152, 3153. 81 BGH, 15.1.2014 – VIII ZR 100/13: NJW-RR 2014, 937, 938; BGH, 20.3.2002 – IV ZR 93/01: NJW 2002, 2710, 2711. 82 BGH, 20.2.2014 – IX ZR 137/13: NJW-RR 2014, 937, 938; BGH, 24.9.1980 – VIII ZR 273/79: NJW 1981, 117, 119. 83 Grüneberg, in Palandt, § 305c BGB mn. 5. 84 BGH, 29.9.1983 – VII ZR 225/82: NJW 1984, 171, 173. 72 73

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a non-assignment clause in a sales contract is not surprising,85 nor is the reservation of ownership.86 A clause in a guarantee contract according to which the guarantor is liable to the bank for all current and future claims is surprising.87 A clause which extends the liability of the guarantor to interests and other fees that stem from the credit contract is not surprising,88 unless the guarantee contract contains a specific maximum liability cap.89 An arbitration clause in an international commercial contract is not surprising.90 g) Unfairness of standard terms. aa) Application. § 307 contains two distinct fair- 20 ness requirements: substantive fairness and transparency. § 307(1) 1st St. provides the general rule underpinning the test of substantial fairness, whereby the existence of an unreasonable disadvantage contrary to the principle of good faith constitutes the decisive element. § 307(2) specifies the conditions which, when satisfied, must be considered as putting the counterparty at an unreasonable disadvantage. § 307(1) 2nd St. stipulates the requirement of transparency. Pursuant to § 307(3) 1st St., the test of substantial fairness under § 307(1) 1st St. and (2) applies only to specific standard terms. The transparency requirement, on the other hand, applies to all standard terms, regardless of their content (§ 307(3) 2nd St.). §§ 308, 309 specify in detail when the courts consider a term ineffective due to its 21 unfairness. Pursuant to § 310(1), §§ 308, 309 do not apply if the counterparty is an entrepreneur. According to the BGH, §§ 308, 309, although not applicable, do serve as an indicator of unfairness when applying § 307(1) 1st St. to B2B contracts. The consequence of this case law is that the counterparty is to a great extent protected by the same standard of fairness, irrespective of whether he is a consumer (§ 13) or an entrepreneur (§ 14). With regards to B2B contracts, the order of the test is as following: pursuant to § 307 22 (3) 1st St. it must first be ascertained whether the term in question is subject to the test of substantial fairness. If the answer is in the affirmative, the courts will enquire whether it falls under the list in § 308 or § 309. If this is the case, the test requires an analysis whether that particular prohibition is a substantiation of § 307(2). Where this is confirmed, the term is usually ineffective. Where the term is not listed in §§ 308, 309, the court must enquire whether it is nonetheless caught by § 307(2). Where § 307(2) does not apply, the courts must analyse whether the ineffectiveness of the term may result from § 307(1) 1st St. directly. In contrast, in order to analyse the transparency of a term, the term need not meet specific requirements under § 307(3) 1st St., because pursuant to § 307(3) 2nd St., all terms, regardless of their object, fall within the scope of the transparency test. Importantly, according to § 310(1) 2nd St., the ‘Award Rules for Building Works, Part B [Vergabe- und Vertragsordnung für Bauleistungen Teil B – VOB/ B]’ – separate legislation concerning terms and conditions for construction work – are not subject to the test of substantial fairness. bb) Unreasonable disadvantage contrary to good faith. In order to determine 23 whether a term puts the counterparty at an unreasonable disadvantage, the court must compare the term with the default rules of law that would govern the matter in absence of the standard term in question.91 A disadvantage is unreasonable if the user puts his interests first without paying due regard to the counterparty and making reasonable concessions to BGH, 24.9.1980 – VIII ZR 273/79: NJW 1981, 117, 118. Grüneberg, in Palandt, § 305c BGB mn. 6. 87 BGH, 1.6.1994 – XI ZR 133/93: NJW 1994, 2145. 88 BGH, 6.12.1983 – IX ZR 73/82: BeckRS 1983, 31078780. 89 OLG Nürnberg, 20.6.1990 – 9 U 3650/89: NJW 1991, 232. 90 OLG München, 16.8.2017 – 34 SchH 14/16: BeckRS 2017, 126222 mn. 70. 91 BGH, 23.9.2010 – III ZR 21/10: NJW 2010, 3568, 3569; BGH, 26.1.1994 – VIII ZR 39/93: NJW 1994, 1069, 1070. 85 86

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him in order to achieve a balance between their conflicting interests.92 In order to ascertain whether this is the case, the courts must not examine the term merely by itself but must take into consideration the contract as a whole and the relationship between its individual terms.93 Where an unreasonable disadvantage results only from a combination of different terms, each of these terms is ineffective.94 The test requires a comprehensive analysis addressing the nature of the specific contract, the interests that are usually involved, and, where applicable, the typical commercial customs.95 This appears to suggest a different standard of review for B2C contracts on the one hand and B2B contracts on the other, but the BGH has been very reluctant to uphold a term against an entrepreneur that would be ineffective had it featured in a contract with a consumer. Furthermore, a user will regularly argue that the use of terms that are disadvantageous to the counterparty allows him to offer his performance at a lower price, but the courts routinely reject this argument.96 24

cc) Deviation from essential principles of a statutory provision. § 307(2) further substantiates the applicable standard of fairness. Pursuant to § 307(2) No. 1, a term is deemed to imply an unreasonable disadvantage for the counterparty if it is not compatible with essential principles of a statutory provision from which it deviates. Such essential principles are, for example, the principle that liability usually requires fault (§§ 280, 276)97, that a party may void a declaration he made by mistake (§ 119),98 that a creditor must set a deadline if he wants to revoke a contract due to delay of the debtor (§ 323)99, that the creditor may not be charged for actions of the debtor which are in the debtor’s interest and as such cannot be considered a contractual performance (in the case at hand a service fee for the conclusion of credit contract).100 Theoretically, the presumption stipulated in § 307(2) is rebuttable. The user must demonstrate that upon an analysis of all relevant circumstances the term does not appear unreasonable.101

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dd) Jeopardising the purpose of the contract. Under § 307(2) No. 2, rights and duties that are essential for the correct performance of the contract must not be limited, if, as a consequence of such limitation, the attainment of the purpose of the contract would be jeopardised. Whether an obligation is essential depends on the nature of the contract.102 Where a contract is regulated by specific statutory provisions, these provisions substantiate the nature of the contract.103 In these cases, however, No. 2 is only of minor importance as a term that deviates from statutory law in such a manner will usually already be ineffective under § 307(2) No. 1. Hence, § 307(2) No. 2 is relevant particularly 92 BGH, 17.9.2009 – III ZR 207/08: NJW 2010, 57, 58; BGH, 17.1.2008 – III ZR 74/07: NJW 2008, 1064, 1065. 93 BGH, 17.1.1989 – XI ZR 54/88: NJW 1989, 582. 94 BGH, 9.12.2010 – VII ZR 7/10: NJW 2011, 2125, 2127; BGH, 5.4.2006 – VIII ZR 152/05: NJW 2006, 2115, 2116. 95 BGH, 24.3.2010 – VIII ZR 304/08 NJW 2010, 2793, 2795; BGH, 4.7.1997 – V ZR 405/96: NJW 1997, 3022, 3023. 96 BGH, 29.10.1956 – II ZR 79/55:NJW 1957, 17, 19; BGH, 29.9.1960 – II ZR 25/59: NJW 1961, 212, 213; BGH, 4.7.2013 – VII ZR 249/12: NJW 2013, 2502, 2504. 97 BGH, 5.10.2005 – VIII ZR 16/05: NJW 2006, 47, 50; BGH, 9.4.2002 – XI ZR 245/01: NJW 2002, 1950, 1952. For more detail on §§ 276, 280 see Schulze, in German Civil Code. 98 BGH, 28.4.1983 – VII ZR 259/82: NJW 1983, 1671, 1672. For more detail on § 119 see Wais, in German Civil Code. 99 BGH, 25.3.1987 – VIII ZR 71/86: NJW 1987, 2506, 2507. For more detail on § 232 see M Oehm, in German Civil Code. 100 BGH, 4.7.2017 – XI ZR 233/16: WM 2017, 1652; BGH, 5.6.2018 – XI ZR 790/16: NJW 2018, 2950, 2952. 101 BGH, 28.1.2003 – XI ZR 156/02: NJW 2003, 1447, 1448. 102 Grüneberg, in Palandt, § 307 BGB mn. 34. 103 ibid.

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where a specific contract is not regulated by default law and as such is not protected through ‘essential principles of a statutory provision’ under No. 1.104 Where no such provisions exist, the court will determine the nature of the contract on the basis of the general expectations of the public.105 Where no customary content can be established, it is for the court to substantiate the nature of the contract by enquiring into the reasonable expectations of fairness in the relevant field of business.106 Essential obligations are usually mutual obligations which safeguard that the parties reciprocally honour their contractual obligations.107 Accessory obligations can be essential if they are paramount for the protection of the counterparty.108 Finally, the requirement that the purpose of the contract must be in jeopardy does not imply that it must be precluded altogether.109 ee) The role of §§ 308, 309 BGB. §§ 308, 309 contain an enumeration of terms that 26 are considered to be possibly ineffective or always ineffective, respectively. § 310(1) 1st St. states that, to a large extent, §§ 308, 309 are not applicable in B2B contracts. Nonetheless, the BGH considers most of the prohibitions of §§ 308, 309 to indicate the ineffectiveness of a term in B2B contracts under § 307(1) 1st St., (2), unless the principal argument of the relevant prohibition does not hold true in B2B transactions.110 This case law is less problematic when it comes to the indirect application of § 308, as the ‘possibility of evaluation’ leaves room for the court to pay due regard to the particular needs of B2B transactions. In contrast, it is quite problematic when reference is made to § 309, as a ‘possibility of evaluation’ is not provided. This means that frequently a term that pursuant to § 309 would be ineffective in a B2C contract will be held ineffective in a B2B contract.111 Methodically, the indirect application of §§ 308, 309 in B2B contracts is based primarily on § 310(1) 2nd St., according to which the inapplicability of §§ 308, 309 does not preclude a prohibited term from being ineffective under § 307(1) 1st St, (2). The obvious advantage of this case law of the BGH is that it provides the courts (and everyone interested) with a guideline for the interpretation of the rather vague requirements in § 307. Arguably, this is also the reason why in many cases the courts will find that the special requirements of B2B transactions do not justify a different standard of fairness, as this would put the onus back onto the court. Relevance of the prohibitions contained in § 308 in B2B contracts Provision

Relevance

Comments

No. 1 (period of time for acceptance and performance)

Yes112

Economic flexibility plays a major role for businesses. They must not be left in unreasonable uncertainty with regard to the conclusion of a contract or its performance. Specific business practices may justify shorter timeframes.113

Stadler, in Jauernig, § 307 BGB mn. 12; Pfeiffer, in AGB‐Recht, § 307 BGB mn. 133. ibid. 106 ibid. 107 BGH, 24.10.2001 – VIII ARZ 1/01: NJW 2002, 673, 675; BGH, 23.2.1984 – VII ZR 274/82: NJW 1985, 3016, 3018. 108 BGH, 31.10.1984 – VIII ZR 226/83: NJW 1985, 320, 322; BGH, 20.6.1984 – VIII ZR 137/83: NJW 1985, 914, 915. 109 BGH, 11.11.1992 – VIII ZR 238/91: NJW 1993, 335, 335. 110 BGH, 10.9.2014 – XII ZR 56/11: NJW 2014, 3722, 3726; BGH, 19.9.2007 – VIII ZR 141/06: NJW 2007, 3774, 3775. 111 See the table below. 112 Grüneberg, in Palandt, § 308 BGB mn. 10; Stadler, in Jauernig, § 308 BGB mn. 3. 113 Stadler, in Jauernig, § 308 BGB mn. 3. 104 105

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Part 1. Country Reports Relevance of the prohibitions contained in § 308 in B2B contracts Provision

Relevance

Comments

No. 1a (period for payment)

Yes

Direct application to B2B contracts pursuant to § 310(1) 1st St.

No. 1b (examination and acceptance period)

Yes

Direct application to B2B contracts pursuant to § 310(1) 1st St.

No. 2 (additional period of time)

Yes114

‘Additional period of time’ refers to the requirement in e.g. § 281(1) and § 323(1) according to which a creditor who wants to revoke the contract or seek damages because of a delay of the performance must set the debtor a deadline for the fulfilment of his obligations.

No. 3 (reservation of the right to revoke)

Yes115

The underlying principle is considered to be relevant in B2B contracts. However, a less restrictive assessment of an objective justification is required; in particular, the existence of a commercial practice may be decisive.116 The user need not specify the reasons for revoking the contract with the same precision that is required for B2C contracts.117

No. 4 (reservation of the right to modify)

Yes118

Such term is mostly used to avoid that a performance may deemed defective due to a discrepancy of the actual condition of a performance and the condition it ought to be in.

No. 5 (fictitious declarations)

Yes119

Arguably, the user need not specifically point out the consequences of his silence to a counterparty who is a business.120

No. 6 (fictitious receipt)

Yes121

Unlike fictitious receipt, fictitious declarations do not fall under this provision.122

No. 7 (reversal of contracts)

Yes123

Determining whether the remuneration or reimbursement is ‘unreasonably high’ requires a comparison to the sum normally provided for under the statutory provisions.124 The term may provide for a lump sum, but it must not exceed the average amount due under those provisions in a typical situation.125

114

ibid., mn. 4. BGH, 29. 10. 2008 – VIII ZR 258/07: NJW 2009, 575, 576; BGH, 12.1.1994 – VIII ZR 165/92: NJW 1994, 1060, 1064. 116 Grüneberg, in Palandt, § 308 BGB mn. 23. 117 BGH, 12.1.1994 – VIII ZR 165/92: NJW 1994, 1060, 1064; BGH, 14.11.1984 – VIII ZR 283/83: NJW 1985, 738. 118 Stadler, in Jauernig, § 308 BGB mn. 5. 119 BGH, 10.9.2014 – XII ZR 56/11: NJW 2014, 3722, 3726; BGH, 17.9.1987 – VII ZR 155/86: NJW 1988, 55. 120 Grüneberg, in Palandt, § 308 BGB mn. 34. 121 Stadler, in Jauernig, § 308 BGB mn. 8. 122 Grüneberg, in Palandt, § 308 BGB mn. 36. 123 Grüneberg, in Palandt, § 308 BGB mn. 45. 124 BGH, 29.5.1991 – IV ZR 187/90: NJW 1991, 2763, 2764. 125 BGH, 22.3.1983 – VI ZR 108/81: NJW 1983, 1491, 1492. 115

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F. Germany Relevance of the prohibitions contained in § 308 in B2B contracts Provision

Relevance

No. 8 (unavailability of performance)

No126

Comments Such clauses are considered normal in B2B contracts and are not generally unreasonable.127

Relevance of the prohibitions contained in § 309 in B2B contracts Provision

Relevant

Comments

No. 1 (price increases at short notice)

No128

Only § 307(1), (2) constitute the relevant standard of review for such terms in B2B contracts. These terms may be permissible even if the counterparty is granted no right to rescind or terminate the contract, so long as his interests are adequately protected.129 When analysing the fairness of the term, all circumstances must be considered, in particular the nature and the duration of the contract.130

No. 2 (right to refuse performance)

No131

§ 309 No. 2 aims to protect § 320 and § 273, which provide a right to refuse performance and a right to retention primarily if the other party refuses to perform his obligation.132 The exclusion of § 320 and § 273 is generally permissible, but in any case must be objectively justified.133

No. 3 (prohibition of set-off)

Yes134

§ 309 No. 3 substantiates § 307(2) No. 1.

No. 4 (warning notice, setting of a period of time)

Yes135

Warning notices are required in particular where the creditor seeks damages for the delay of a performance under §§ 280(1), (2), 286(1).136 The setting of a period of time usually is a requirement for the right to revoke a contract under § 323(1) and to damages under § 281(1).

Wurmnest, in Münchener Kommentar (Band 2), § 308 No. 8 BGB mn. 8. ibid. 128 Stadler, in Jauernig, § 309 BGB mn. 2; Grüneberg, in Palandt, § 309 BGB mn. 7. 129 BGH, 16.1.1985 – VIII ZR 153/83: NJW 1985, 853, 854. 130 ibid. 131 BGH, 10.10.1991 – III ZR 141/90: NJW 1992, 575, 576; BGH, 10.10.1991 – III ZR 141/90: NJW 1992, 575, 577. 132 For details on these provisions see Schulze, § 273 BGB, and M. Oehm, § 320 BGB, in German Civil Code. 133 BGH, 4.3.2010 – III ZR 79/09: NJW 2010, 1449, 1450. 134 BGH, 27.6.2007 – XII ZR 54/05: NJW 2007, 3421, 3422; BGH, 1.12.1993 – VIII ZR 41/93: NJW 1994, 657, 658. 135 For warning notices: Grüneberg, in Palandt, § 309 BGB mn. 23; for setting an additional period of time: BGH, 18.12.1985 – VIII ZR 47/85: NJW 1986, 842, 843. 136 For details on § 286 see the Schulze’s comments in German Civil Code. 126 127

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Part 1. Country Reports Relevance of the prohibitions contained in § 309 in B2B contracts Provision

Relevant

Comments

No. 5 (lump-sum claims for damages)

Yes137

Contrary to § 309 No. 5(b) the right to present proof that the damage or decrease in value is lower need not be permitted expressly; it is sufficient if the right as such is granted.138

No. 6 (contractual penalty)

No139

Penalty clauses are not per se unreasonable in B2B contracts, but are ineffective under § 307(1) if the counterparty, in the individual case, is put at an unreasonable disadvantage. This is the case if the penalty is higher than the user’s interest in the performance protected by the penalty clause.140 In particular, the penalty must not be disproportionate to the breach and the consequences thereof.141

No. 7 (exclusion of liability for injury to life, body or health and in case of gross fault)

Yes

No. 8 (other exclusions of liability for breaches of duty)

Yes: a)142 b) aa)143 b) bb)144 b) cc)145 b) dd)146 b) ff)147 No: b) ee)148

See mn. 33.

The subject of § 309 No. 8 is the limitation of rights of the creditor where the debtor is in breach of contractual obligations; the short description mentions only liability and is as such misleading.149

137 BGH, 19.9.2001 – I ZR 343/98: NJW-RR 2002, 1027, 1029; BGH, 27.11.1990 – X ZR 26/90: NJW 1991, 976, 977. 138 BGH, 12.1.1994 – VIII ZR 165/92: NJW 1994, 1060, 1068. 139 BGH, 12.3.2003 – XII ZR 18/00: NJW 2003, 2158, 2161; BGH, 30.6.1976 – VIII ZR 267/75: NJW 1976, 1886, 1887. 140 BGH, 31.8.2017 – VII ZR 308/16: NJW 2017, 3145; BGH, 7.5.1997 – VIII ZR 349/96: NJW 1997, 3233. 141 BGH, 31.8.2017 – VII ZR 308/16: NJW 2017, 3145 in which the BGH considered ineffective a term that provided for a penalty of 2,500 € for every failure to honour a beer delivery contract between a brewery and a pub. For further examples see Grüneberg, in Palandt, § 309 BGB mn. 38. 142 BGH, 29.10.2008 – VIII ZR 258/07: NJW 2009, 575, 576; BGH, 20. 3. 2003 – I ZR 225/00: NJW-RR 2003, 1056, 1060; BGH, 26.5.1986 – VIII ZR 218/85: NJW 1986, 3134. 143 BGH, 26.1.1993 – X ZR 90/91: NJW-RR 1993, 560, 561. 144 BGH, 2.2.1994 – VIII ZR 262/92: NJW 1994, 1004, 1005. 145 BGH, 9.4.1981 – VII ZR 194/80: NJW 1981, 1510. 146 Grüneberg, in Palandt, § 309 BGB mn. 77. 147 BGH, 20.4.1993 – X ZR 67/92: NJW 1993, 2054, 2055. 148 Grüneberg, in Palandt, § 309 BGB mn. 80. 149 ibid. mn. 58.

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F. Germany Relevance of the prohibitions contained in § 309 in B2B contracts Provision

Relevant

Comments

No. 9 (duration of continuing obligations)

No

When applying § 307(1) 1st St., (2), the courts must analyse whether the user has legitimate interests in establishing longstanding obligations and to what extent the economic freedom of the counterparty is restricted.150 In particular, large investments may serve as a justification.151 Usually the duration must not be longer than 10 years.152

No. 10 (change of other party to contract)

No153

The courts must rather analyse whether a change in the person of the user interferes with the interests of the counterparty, in particular where the reliability of the contractual partner is important.154

No. 11 (liability of an agent with power to enter into a contract)

Yes155

Such clauses are often used when the contract is intended to bind both a juridical person and the natural person acting on its behalf.156

No. 12 (burden of proof)

Yes157

The statutory provisions on the burden of proof are deemed essential principles of fairness. However, the courts must examine whether the relevant statutory provision that is deviated from is applicable to businesses.158

No. 13 (form of notices and declarations)

No159

No. 13 only deals with notices and declarations of the counterparty; it is not applicable to notices and declarations of the user.160

No. 14 (waiver of lawsuit)

No161

The provision is based on a decidedly consumer-orientated reasoning by the legislator.

No. 15 (advance payments and security deposits)

Yes: a)162 No: b)163

§ 309 No. 15 a) must be read in conjunction with § 650m(1), according to which advance payments that amount to more than 90 % of the agreed remuneration may not be requested. § 309 No. 15 b) is tailored specifically to complement § 650m (2), according to which a consumer may request a security deposit for the correct implementation of the contractor’s work.

150

ibid. mn. 96. BGH, 8.12.2011 – VII ZR 111/11: NJW-RR 2012, 626, 627; BGH, 6.12.2002 – V ZR 220/02: NJW 2003, 1313, 1315. 152 BGH, 3.11.1999 – VIII ZR 269/98: NJW 2000, 1110, 1113. 153 Wurmnest, in Münchener Kommentar (Band 2), § 308 No. 8 BGB mn. 8. 154 BGH, 29.2.1984 – VIII ZR 350/82: NJW 1985, 53, 54. 155 Stadler, in Jauernig, § 309 BGB mn. 20. 156 Wurmnest, in Münchener Kommentar (Band 2), § 309 No. 11 BGB mn. 10. 157 BGH, 5.10.2005 – VIII ZR 16/05: NJW 2006, 47. 158 Wurmnest, in Münchener Kommentar (Band 2), § 309 No. 12 BGB mn. 22. 159 Grüneberg, in Palandt, § 309 BGB mn. 114; Stadler, in Jauernig, § 309 BGB mn. 22. 160 Grüneberg, in Palandt, § 309 BGB mn. 111. 161 Wurmnest, in Münchener Kommentar (Band 2), § 309 No. 14 BGB mn. 17. 162 ibid., § 309 No. 15 BGB mn. 18. 163 ibid., mn. 17. 151

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It should be noted again that where a prohibition is relevant in B2B contracts, the term in question is usually ineffective pursuant to § 307(1), (2), unless there are specific reasons as to why the standard of review in B2B contracts should be a different one. It follows that notwithstanding the relevance of §§ 308, 309, the courts must still ascertain the ineffectiveness of any such term in a B2B contract. Furthermore, the irrelevance of a prohibition under §§ 308, 309 for B2B contracts does not by any means prevent the courts from applying § 307 to the standard term in question.

28

ff) Terms excluded from the substantial fairness requirement. Not all standard terms are subject to the strict fairness test under § 307(1) 1st St., (2). Terms that do not derogate from, or supplement, legal provisions, are precluded by virtue of § 307(3) 1st St. This is particularly important for terms pertaining directly to the subject of a principal obligation (kind, quantity, quality, price etc.) as usually the law does not regulate the specifics of the subject of a contract. In this case, a standard term is caught by § 307(3) 1st St. because there is no legal provision from which to derogate.164 However, terms that reduce or erode the principal obligations stipulated in the agreement are not precluded from the judicial review under § 307(1) 1st St., (2).165 Terms that concern the price are usually precluded,166 but not where the effects on the price are only indirect.167 Terms in the latter sense usually derogate from legal provisions and are subject to judicial review under § 307(1) 1st St., (2), e.g. terms that concern the due date of the price,168 the advance performance of an obligation,169 discounts,170 or price-caps.171 Terms that stipulate a price for the performance of accessory obligations are precluded from the judicial review, unless it follows from the contract that by default the performance of such an obligation is free,172 or where no actual obligation is concerned, e.g. a service fee for the signing of a credit contract.173 A term may also be excluded under § 307(3) 1st St. for the simple fact that it merely repeats the content of the relevant legal provision.174

29

gg) Transparency. Pursuant to § 307(1) 2nd St., a term may also be unreasonable for the sole reason that it is not transparent. Importantly, the test of transparency also applies to terms that by virtue of § 307(3) 1st St. are excluded from judicial review under § 307(1) 1st St., e.g. a term that directly stipulates the price of the good does not fall within the scope of § 307(1) 1st St., but it may be ineffective under § 307(1) 2nd St. This provision applies to B2C and B2B contracts alike.175 The user is required to stipulate the rights and duties of the counterparty in a clear, simple and precise manner.176 However, 164 BGH, 9.5.2001 – IV ZR 121/00: NJW 2001, 2014, 2016; BGH, 29.4.2010 – Xa ZR 5/09: NJW 2010, 1958, 1960. 165 BGH, 29.4.2010 – Xa ZR 5/09: NJW 2010, 1958, 1960; BGH, 17.10.2007 – VIII ZR 251/06: NJW 2008, 214, 215. 166 BGH, 24. 3. 2010 – VIII ZR 178/08: NJW 2020, 2789, 2791. 167 BGH, 9.10.2014 – III ZR 32/14: NJW 2015, 328, 329; BGH, 17.9.2009 – Xa ZR 40/08: NJW 2009, 3570, 3572. 168 BGH, 9.7.1981 – VII ZR 139/80: NJW 1981, 2351, 2354. 169 OLG Düsseldorf, 21.12.1994 – 15 U 181/93: NJW-RR 1995, 1015, 1016. 170 Grüneberg, in Palandt, § 307 BGB mn. 47. 171 BGH, 12.10.2007 – V ZR 283/06: NJW-RR 2008, 251, 253. 172 BGH, 13.2.2001 – XI ZR 197/00: NJW 2001, 1419, 1420; BGH, 18.4.2002 – III ZR 199/01: NJW 2002, 2386, 2387. 173 BGH, 4.7.2017 – XI ZR 562/15: NJW 2017, 2986, 2988. 174 BGH, 15.7.2009 – VIII ZR 56/08: NJW 2009, 2667, 2669; BGH, 9.4 2002 – XI ZR 245/01: NJW 2002, 1950, 1951. 175 BGH, 25.10.2017 – XII ZR 1/17: NJW-RR 2018, 198, 199. 176 BGH, 19.5.2016 – III ZR 274/15: NJW-RR 2016, 842, 844; BGH, 5.3.2008 – VIII ZR 95/07: NJW 2008, 1438, 1439.

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F. Germany

the applied standard must not be too strict; in particular, the user need not provide a thorough explanation of each term.177 A term is transparent if the information is accessible to a (fictitious) attentive and 30 diligent counterparty who engages in legal transactions of the kind at hand.178 The lack of transparency as such provides sufficient grounds for the ineffectiveness; there need not be a particular disadvantage.179 A lack of transparency may be assumed in particular where a term is incomprehensible,180 uncertain181 or has the objective potential to deceive the counterparty182. h) Consequences of ineffectiveness. § 306 specifies the consequences for the re- 31 mainder of the contract that stem from the ineffectiveness of a term. Generally, if a contract is partially ineffective, it is presumed to be ineffective in its entirety. The purpose of this principle, which is contained in § 139, is to protect the parties from being bound by a contract that they never intended to be bound by.183 § 139 does not apply if the partial ineffectiveness relates to standard terms. In this case, the contract as such is presumed to be effective. Default legal provisions will fill the gaps in the contract caused by the ineffective standard terms. The same applies if the ineffectiveness of a term stems from the non-incorporation into the contract under §§ 305, 305c. Importantly, unless a term consists of separable individual parts, the ineffectiveness always comprises the whole term. If the term is separable, the ineffectiveness of one part usually does not comprise the remaining parts. In order to determine whether a term is separable, the BGH makes use of the so-called ‘blue pencil test’: after striking out the ineffective part of the term, the remainder must be perfectly understandable and sensible by itself.184 For example, this was held to be the case where a term stipulated both the duration and the beginning of a deadline185, where the punctuality of different performances was protected by the same penalty clause186, where a term addressed the distribution of risk for both partial damage and full destruction of an object187. The user cannot circumvent the effects of § 306(1) by stipulating that a certain term 32 applies only to the extent that is compatible with the law. Such a term is considered not sufficiently transparent and as such is ineffective under § 307(1) 2nd St.188 Where a term that deviates from a default legal rule (‘statutory provision’) is ineffective, the default legal rule will apply. Such a default legal rule need not be a codified provision: it may also be an uncodified but generally accepted legal principle.189 Where the ineffective term concerns a situation for which the law does not provide rules, the courts must fill the gap in the contract through the means of supplementary interpretation. The judge must therefore find a rule that most closely resembles what the parties, based on their 177 BGH, 19.5.2016 – III ZR 274/15: NJW-RR 2016, 842, 844; BGH, 10.7.1990 – XI ZR 275/89: NJW 1990, 2383, 2384. 178 Grüneberg, in Palandt, § 307 BGB mn. 23; Pfeiffer, in AGB‐Recht, § 307 BGB mn. 244. 179 BGH, 24.5.2006 – IV ZR 263/03: NJW 2006, 2545, 2546. 180 BGH, 5.3.2013 – VIII ZR 137/12: NJW 2013, 1668. 181 BGH, 26.10.2005 – VIII ZR 48/05: NJW 2006, 996, 997. 182 BGH, 27.9.2000 – VIII ZR 155/99: NJW 2001, 292, 296. 183 For details see Wais, comments on § 139 in German Civil Code. 184 BGH, 25.3.1998 – VIII ZR 244/97: NJW 1998, 2284, 2286; BGH, 25.1.2006 – VIII ZR 3/05: NJW 2006, 1059, 1060. 185 BGH, 24.3.1988 – III ZR 21/87: NJW 1988, 2106, 2107. 186 BGH, 18.1.2001 – VII ZR 238/00: NJW-RR 2001, 738, 739. 187 BGH, 25.3.1998 – VIII ZR 244/97: NJW 1998, 2284, 2286. 188 BGH, 5.5.2015 – XI ZR 214/14: NJW 2015, 2412, 2413; BGH, 5.3.2013 – VIII ZR 137/12: NJW 2013, 1668. 189 BGH, 14.5.1996 – XI ZR 257/94: NJW 1996, 2092, 2093; BGH, 13.1.1994 – IX ZR 79/93: NJW 1994, 864, 865.

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Part 1. Country Reports

legitimate interests, would hypothetically have agreed on, had they been aware of the ineffectiveness of the term in question (‘ergänzende Vertragsauslegung’).190 Importantly, the user may not circumvent the effects of § 306(2) by providing in his terms that in case of a term being ineffective the contract should be given a meaning that most closely resembles the content of the ineffective term.191 If the court fails to find a hypothetical rule to fill the gap in the contract, e.g. because it would imply the court arbitrarily setting a price, the contract will be ineffective in its entirety.192 In exceptional cases, the contract may also be deemed ineffective where by application of § 306(2) the contract must be modified to such an extent that enforcing it against the user would imply an unbearable hardship for him. Yet, a mere disadvantage for the user is not sufficient for the assumption of hardship. Since most standard terms deviate from the law to the benefit of the user, any ineffectiveness is less favourable for the user. Were any such disadvantage to imply hardship for the user, there would be no scope of application for § 306(1), according to which the contract remains effective. 33

i) Selected clauses. aa) Exclusion and limitation of liability. Of all prohibitions in § 309, No. 7 is arguably the most important in B2B contracts. The underlying principles of § 309 No. 7 a) and b) are both relevant in the context of business transactions.193 In order to make this provision clearer it should first be mentioned that the exclusion of liability for intent is per se ineffective by virtue of § 276(3)194 (unless it refers to damage already done) and as such need not be specifically mentioned in § 309 No. 7. In contrast, the exclusion of liability for intent of third parties that are used to perform the obligation of the user is generally permissible under § 278(3),195 hence it is specifically addressed in § 309 No. 7. Applying the principles underlying No. 7 a) to B2B contracts, the BGH held that with regard to injury to ‘life, body or health’ (this expression is adopted from § 823(1), which provides the basic rule for tort liability), the user may neither exclude nor limit his liability for his own negligence or the negligence or intent of a third party he uses to perform his obligations.196 In a similar vein, the court found that with regard to damages not pertaining to life, body or health, the user may not exclude in a B2B contract his liability for gross negligence or intent or gross negligence of third parties within the meaning of § 309 No. 7 (and § 278), either.197 However, a limitation of his liability is permissible if it pertains only to damages that are atypical and unpredictable;198 the same holds true for the limitation of liability for intent or gross negligence of third persons within the meaning of § 309 No. 7 (and § 278).199 In other words, in these cases liability that covers typical and predictable damages must be guaranteed. A term that excludes liability for simple negligence that does not pertain to damages to life, body or health falls outside the (theoretical) scope of § 309 No. 7, but is in any case caught by § 307(2) No. 2. In this regard, the BGH held that the user may not exclude his liability for simple negligence where this negligence relates to the breach 190 BGH, 29.4.2008 – KZR 2/07: NJW 2008, 2172, 2174; BGH, 9.7.2008 – VIII ZR 181/07: NJW 2008, 2840, 2841. 191 BGH, 3.12.2015 – VII ZR 100/15: NJW 2016, 401, 402; BGH, 26.3.2015 – VII ZR 92/14: NJW 2015, 1952, 1954. 192 BGH, 8.5.2007 – KZR 14/04: NJW 2007, 3568, 3570. 193 BGH, 19.9.2007 – VIII ZR 141/06: NJW 2007, 3774, 3775; BGH, 19.6.2013 – VIII ZR 183/12: NJW 2014, 211, 213; BGH, 15.9.2005 – I ZR 58/03: NJW-RR 2006, 267, 269. 194 For details see Schulze, § 276 BGB, in German Civil Code. 195 For details see Schulze, § 278 BGB, in German Civil Code. 196 BGH, 19.9.2007 – VIII ZR 141/06: NJW 2007, 3774, 3775. 197 ibid. 198 BGH, 23.2.1984 – VII ZR 274/82: NJW 1985, 3016, 3018. 199 BGH, 15. 9. 2005 – I ZR 58/03: NJW-RR 2006, 267, 269.

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of principal obligations under the contract (so-called ‘Kardinalpflichten’ – obligations that protect and secure the fulfilment of the contract).200 Conclusively, only where the mere breach of non-principal obligations is concerned, the exclusion of liability for simple negligence is considered admissible.201 In very few decisions, the BGH was ready to accept that an exclusion of liability was effective because, due to the facts of the individual case, it did not call into question the fulfilment of the contract, for instance where the counterparty was insured against the realisation of the risks involved202 and where the counterparty was simply held to be well-suited to take on those risks203. However, it is important to note that as these decisions concern very particular cases and as such are rather exceptional,204 they do not allow one to draw general guidelines. In light of these very far-reaching effects of the judicial review in the context of § 309 No. 7, the specific principles for the interpretation of standard terms are most relevant. Since the courts are precluded from giving a term a narrow interpretation so as to secure its effectiveness and must interpret an ambiguous clause in favour of the counterparty, permissible limitations of liability must be extremely precise. bb) Choice of law clauses, jurisdiction agreements and arbitration clauses. A 34 standard term according to which the contract is governed by German law is subject to §§ 305–310. In particular, it is effectively implemented into the contract if drafted in the language in which the parties have negotiated205 or which the counterparty understands.206 In a cross-border contract, a choice of law clause generally is not surprising, unless the contract has no connection to the state whose law is chosen to govern the contract.207 A choice of law clause that is implemented into the contract effectively will usually also be compatible with § 307, in particular because the counterparty is also protected under the special provisions of the Rome I Regulation that apply in certain situations characterised by an imbalance of power.208 National jurisdiction agreements in B2B contracts are primarily governed by § 38 of the German Code of Civil Procedure (Zivilprozessordnung; ‘ZPO’), which deals with the effectiveness of formation of the agreement.209 Outside the scope of § 38 ZPO, national jurisdiction agreements are also subject to §§ 305–310. They are generally permissible unless in the individual case substantial unfairness may be ascertained. For example, an agreement constitutes an unreasonable disadvantage for the counterparty and as such is ineffective under § 307 (1) 1st St., if it is unilateral in that it binds the counterparty while affording the user the right to choose between different courts.210 In contrast, international jurisdiction agreements that fall under Art. 25 Brussels I bis Regulation arguably are not subject to §§ 305–310. This is because Art. 25 Brussels I bis Regulation regulates both the effectiveness of implementation and the question of substantial fairness conclusively, BGH, 23.2.1984 – VII ZR 274/82: NJW 1985, 3016, 3018. Leuschner, 1224. 202 BGH, 20.6.1984 – VIII ZR 137/83: NJW 1985, 914, 916. 203 BGH, 3.3.1988 – X ZR 54/86: NJW 1988, 1785, 1787. 204 BGH, 29.11.1988 – X ZR 112/87: NJW-RR 1989, 953, 956. 205 OLG Hamburg, 1.6.1979 – 11 U 32/79: NJW 1980, 1232, 1233. 206 Spellenberg, in Münchener Kommentar (Band 12, Internationales Privatrecht), Art. 10 Rom I-VO mn. 208; Fehrenbach, in BeckOGK, § 307 Rechtswahlklausel mn. 48. 207 Spellenberg, in Münchener Kommentar (Band 12, Internationales Privatrecht), Art. 10 Rom I-VO mn. 214. 208 Wurmnest, in Münchener Kommentar (Band 2), § 307 BGB mn. 252; Fehrenbach, in BeckOGK, § 307 Rechtswahlklausel mn. 73. 209 An English translation of the German Code of Civil Procedure (ZPO) is available under https:// www.gesetze-im-internet.de/englisch_zpo/englisch_zpo.pdf. 210 Wurmnest, in Münchener Kommentar (Band 2), § 307 BGB mn. 262; against BGH, 28.10.1982 – I ARZ 449/82: NJW 1983, 996. 200 201

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thus leaving no room for §§ 305–310 to apply.211 With regard to international arbitration clauses it should be noted that where they fall under the New York Convention, §§ 305–310 are generally inapplicable. Should, exceptionally, national law be applicable, an arbitration clause in B2B contracts will generally not be considered surprising under § 305c(1).212 An unreasonable disadvantage under § 307(1) 1st St. may, however, be assumed where equality of arms is grossly impaired.213 It should also be noted that in one specific case involving national arbitration, the BGH considered the arbitration clause ineffective under § 307(1) 1st St. because of the likelihood that the arbitral tribunal would not apply §§ 305–310 to the contract correctly.214 35

cc) Further examples of effective and ineffective terms in B2B contracts. The following examples represent just a fraction of the existing case law; they may however be particularly relevant in cross-border contracts. In a commercial agency contract a term was held effective according to which the agent was liable to pay back advance payments of commissions that he did not earn,215 was granted the right to exclusive agency only against remuneration216, was liable to pay a contractual penalty in case of the unauthorised use of customer addresses217. A term according to which the agent was precluded from terminating the contract against the will of the principal was considered ineffective.218 The courts considered a term ineffective according to which the principal was permitted to collect revenues from the agent before they have been credited to his account.219 Arguably, a term that stipulates a minimum amount of revenues the agent in any case has to make is also ineffective.220 In a B2B contract for the sale of new goods, a term according to which the buyer is precluded from his right to demand cure, to revoke the contract or reduce the purchase price (cf. § 437) is ineffective.221 If the seller of a company grants the buyer a guarantee, he may effectively limit the legal consequences from the assumption of that risk.222

2. Additional grounds for judicial review 36

a) Public policy. Under § 138(1) a legal transaction is void if it is contrary to public policy. This may be the case if a contract is concluded in a situation characterised by the abuse of economic power of one party, where, due to the stark imbalance of power, the weaker party cannot realistically decide freely. Where a monopolist uses its superior market power to implement excessive prices223 or to conclude contracts that inappropriately limit the other party’s freedom to act224, a violation of § 138(1) is likely. The same may apply to excessive non-compete-clauses.225 According to § 138(2), a legal transaction is contrary to public policy in particular if one party exploits the ‘predicament, inexperience, lack of sound judgement or considerable weakness of will’ of the 211

ibid., mn. 262. OLG München, 16.8.2017 – 34 SchH 14/16: BeckRS 2017, 126222 mn. 70. 213 ibid., mn. 265. 214 BGH, 10.10.1991 – III ZR 141/90: NJW 1992, 575, 576. 215 BAG, 9.6.2010 – 5 AZR 332/09: NJW 2010, 2455, 2458. 216 BGH, 9.12.1992 – VIII ZR 23/92: NJW-RR 1993, 375, 376. 217 BGH, 28.1.1993 – I ZR 294/90: NJW 1993, 1786, 1787. 218 OLG München, 20.11.1996 – 7 U 3653/96: NJW-RR 1997, 1057. 219 BGH, 8.11.2005 – KZR 18/04: NJW-RR 2006, 339. 220 Grüneberg, in Palandt, § 307 BGB mn. 97. 221 ibid. mn. 101. 222 ibid. mn. 103. 223 BGH, 30.10.1975 – KZR 2/75: NJW 1976, 710, 711. 224 BGH, 17.10.2008 – V ZR 14/08: NJW 2009, 1135, 1136. 225 BGH, 25.10.2012 – VII ZR 56/11: NJW 2013, 2027, 2030. 212

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other party in order to establish a contract that is clearly disproportionate. Whether or not an obvious disproportionality exists depends on the facts of the individual case. Importantly, the distribution of risk must also be considered.226 Further, the stronger party must have purposefully taken advantage of the inferior position of the weaker party. Again, whether the other party was in an inferior position depends on the individual case; it may be due to, for example, an economic or personal predicament which creates the need for a particular good or service. The requirements for the ineffectiveness of a contract under § 138 are very strict. Importantly, unlike § 306(1), the legal consequence under § 138 is the ineffectiveness of the contract as a whole. b) Good faith. Before the legislator took action in 1977 by passing a law that today 37 forms the basis of §§ 305–310, the judicial review of standard terms was entirely based on case law which was in turn based on the principle of good faith (§ 242). Nowadays, the scope of § 242 in the context of pre-formulated terms is very limited. The courts may not apply § 242 in order to create additional grounds for the ineffectiveness of a standard business term that §§ 305–310 do not provide. Only if §§ 305–310 are inapplicable, the application of § 242 is permissible, but must be justified by the facts of the individual case. In particular, § 242 will apply to a situation in which one party abuses the freedom of contract by recklessly and unreasonably pursuing his own interests.227 A structural imbalance between the parties in the individual case is required.228

IV. International application The provisions of §§ 305–310 are not considered overriding mandatory provisions 38 under Art. 9(1) Rome I Regulation, because they aim to protect the individual rather than public interests.229 If the lex fori is not German law, German courts will thus not apply §§ 305–310 to B2B contracts. An exception applies if the parties, both of whom are domiciled in Germany, enter into a contract that has no connection to another state. In this case, by operation of Art. 3(3) Rome I Regulation, the choice of foreign law cannot render §§ 305–310 inapplicable.230 While the application of §§ 305–310 in state court proceedings is relatively straight forward, it remains an open question whether these provisions must also be applied by arbitral tribunals in purely national arbitration proceedings (i.e. proceedings that are not governed by the New York Convention).231 BGH, 8.7.1982 – III ZR 1/81: NJW 1982, 2767. Mansel, in Jauernig, § 242 BGB mn. 43; Schubert, in Münchener Kommentar (Band 2), § 242 BGB mn. 530. 228 BAG, 25.5.2005 – 5 AZR 572/04: NJW 2005, 3305, 3309. 229 cf. BGH, 9.7.2009 – Xa ZR 19/08: NJW 2009, 3371, 3373 (while in the case at hand the applicable conflict of laws rules were different, the reasoning presented by the court holds true also for the Rome I Regulation). 230 OLG Frankfurt a. M., 21.12.1978 – 6 U 57/78: NJW 1979, 985, 986. 231 Pfeiffer (‘Die Abwahl’), 1170. 226 227

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G. Italy Bibliography: Achille, ‘La funzione ermeneutica della causa concreta del contratto’ [2017] Rivista trimestrale di diritto e procedura civile 37; Addis, ‘Clausola limitativa della proponibilità di eccezioni’ in: Confortini (ed.), Clausole negoziali. Profili teorici e applicativi di clausole tipiche e atipiche (Utet 2017) 773; Alpa, ‘Autonomia delle parti e scelta della legge applicabile al contratto interno’ [2013] La nuova giurisprudenza civile commentata II 573; Antoniolli, ‘Good faith and fair dealing’ in: Antoniolli/Veneziano (ed.), Principles of European Contract Law and Italian Law. A Commentary (Kluwer Law International 2005) 49; Balestra, ‘Rilevanza, utilità (e abuso) dell’abuso del diritto’ [2017] Rivista di diritto civile 541; Barba, Studi sull’abuso di dipendenza economica (Cedam 2018); Bargelli, ‘Condizioni generali di contratto – sub Art. 1341’ in: Gabrielli (ed.), Commentario del codice civile (Utet 2011); Battelli, ‘Riflessioni sui procedimenti di formazione dei contratti telematici e sulla sottoscrizione on line delle clausole vessatorie’ [2014] Rassegna di diritto civile 1035; Battelli, Contratti-tipo. Modelli negoziali per la regolazione del mercato: natura, effetti e limiti (Jovene 2017); Benatti, ‘Clausole di esonero della responsabilità’ in: Digesto delle discipline privatistiche, sezione civile III (Utet 1988) 400; Benedetti, ‘Contratto asimmetrico’ in: Enciclopedia del diritto, Annali, V (Giuffrè 2012) 304; Bianca, ‘Condizioni generali di contratto’ in: Enciclopedia giuridica Treccani (Istituto dell’Enciclopedia italiana 1991) 2; Bianca, Diritto civile, 5, La responsabilità (3rd edn., Giuffrè Francis Lefebvre 2021); Bianca, ‘Causa concreta del contratto e diritto effettivo’ [2014] Rivista di diritto civile 251; Bianca, Diritto civile, 3, Il contratto (3rd edn., Giuffrè 2019); Bigliazzi Geri, ‘L’interpretazione del contratto’ in: Busnelli (ed.), Il codice civile. Commentario (Giuffrè 2013); Bonomi, Le norme imperative nel diritto internazionale privato (Schulthess 1998); Boschiero, ‘I limiti al principio d’autonomia posti dalle norme generali del regolamento Roma I’ in: Boschiero (ed.), La nuova legge comunitaria della legge applicabile ai contratti (Roma I) (Giappichelli 2009) 67; Buonanno, ‘Linguaggio della norma ed interpretazione delle categorie nella patologia degli atti negoziali’ [2018] Contratto e impresa 444; Brizzolari/Cersosimo, ‘Organizzazione dei rapporti commerciali tra imprese e “contratti relazionali”’ in: Sirena/Zoppini (ed.), I poteri privati e il diritto della regolazione. A quarant’anni da “Le autorità private” di C.M. Bianca (Roma Tre-Press 2018) 433; Cannizzaro, ‘Lex contractus e contratti interni’ [2013] Nuova giurisprudenza civile commentata II 585; Carbone, ‘Le “norme” applicabili alla responsabilità contrattuale nel regolamento Roma I: il ruolo dell’autonomia privata’ in: Parisi et al. (ed.) Scritti in onore di Ugo Draetta (Editoriale Scientifica 2011) 93; Ceccherini, Responsabilità per fatto degli ausiliari. Clausole di esonero da responsabilità (2nd edn., Giuffrè 2016); Cerdonio di Chiaromonte, ‘Specifica approvazione per iscritto delle clausole vessatorie e contrattazione on line’ [2018] Nuova giurisprudenza civile commentata 404; Cicero, ‘Regole di validità e di responsabilità’ in: Digesto delle discipline privatistiche, sezione civile (Utet 2014); Cusumano, ‘Le condizioni generali di contratto: vessatorietà e bilateralità’ [2016] Nuova giurisprudenza civile commentata 239; D’Adda, ‘Il controllo legale sui patti di esonero da responsabilità negoziale e tutela del credito’ [2012] Annuario del contratto 3; D’Amico, Regole di validità e principio di correttezza nella formazione del contratto (Esi 1996); D’Amico, ‘Giustizia contrattuale e contratti asimmetrici’ (2019) Europa e diritto privato 1; De Cristofaro, ‘Autonomia privata e pattuizioni di esclusione totale della garanzia per vizi nei contratti di compravendita – Note a margine di due recenti pronunce della corte di cassazione’ [2018] Rivista di diritto civile 219; Delfini, ‘Claims-Made Insurance Policies in Italy: The Domestic Story and Suggestions from the UK, Canada and Australia’ (2018) 4 Italian Law Journal 118; Dellacasa, ‘Judicial review of “core terms” in consumer contracts: defining the limits’ (2015) 11 European Review of Contract Law 152; Delogu, Le modificazioni convenzionali della responsabilità civile (Cedam 2000); Di Lorenzo, ‘Clausola sulla decadenza’ in: M Confortini (ed.), Clausole negoziali. Profili teorici e applicativi di clausole tipiche e atipiche (Utet 2017) 1300; Di Marzio, ‘Abuso di dipendenza economica e clausole abusive’ [2006] Rivista del diritto commerciale e del diritto generale delle obbligazioni I 789; De Nova, ‘Nullità relativa, nullità parziale e clausole vessatorie non specificamente approvate per iscritto’ [1976] Rivista di diritto civile II 486; Fabbio, L’abuso di dipendenza economica (Giuffrè 2006); Fabbio, ‘Osservazioni sull’ambito d’applicazione del divieto di abuso di dipendenza economica e sul controllo contenutistico delle condizioni generali di contratto tra imprese’ [2007] Nuova giurisprudenza civile commentata I 902; Farneti, La vessatorietà delle clausole “principali” nei contratti del consumatore (Cedam 2009); Ferrante, ‘Il consenso contrattuale e le sue gradazioni: l’esempio dell’interpretazione contro l’autore della clausola’ in: Sirena/ Zoppini (ed.), I poteri privati e il diritto della regolazione. A quarant’anni da “Le autorità private” di C.M. Bianca (Roma Tre-Press 2018) 267; Ferrante/Koch, ‘Le condizioni generali di contratto: collocazione e limiti del controllo di vessatorietà nella prospettiva italo-tedesca’ [2011] Contratto e impresa Europa 695; Ferri, ‘Nullità parziale e clausole vessatorie’ [1977] Rivista del diritto commerciale e del diritto generale delle

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G. Italy obbligazioni 11; Frignani/Torsello, Il contratto internazionale. Diritto comparato e prassi commerciale (2nd edn., Cedam 2010); Gallo, ‘Decadenze stabilite contrattualmente – Art. 2965’ in: Gabrielli (ed.), Commentario del codice civile (Utet 2011) 867; Garofalo, ‘Meritevolezza degli interessi e correzione del contratto’ [2017] Nuova giurisprudenza civile commentata 1212; Garofalo, ‘La causa: una “storia di successo”? (a proposito delle opere di Vincenzo Roppo sulla causa del contratto)’ [2018] www.juscivile.it 163; And Genovese, L’interpretazione del contratto standard (Giuffrè 2008); And Genovese, ‘La crisi della disciplina del contratto standard’ [2019] Contratto e impresa 1156; And Genovese, ‘Condizioni generali di contratto’ in: Enciclopedia del diritto VIII (Giuffrè 1961) 805; Gorla, ‘Standard Conditions and Form Contracts in Italian Law’ (1962) 11 American Journal of Comparative Law 1; Granelli (ed.), I nuovi orientamenti della cassazione civile (Giuffrè 2017); Graziadei, ‘Control of Price Related Terms in Standard Form Contracts: The Italian Experience’ [2018] Annuario di diritto comparato e di studi legislativi, special edition 193; Grondona, ‘Solidarietà e contratto: una lettura costituzionale della clausola generale di buona fede’ [2004] Rivista trimestrale di diritto e procedura civile 727; Hatzis, ‘An Offer You Cannot Negotiate: Some Thoughts on the Economics of Standard Form Consumer Contracts’ in: Collins (ed.), Standard Contract Terms in Europe: A Basis for and a Challenge to European Contract Law (Kluwer Law International 2008) 43; Hesselink, ‘Unfair terms in contracts between businesses’ in Schulze/Stuyck (ed.), Towards a European Contract Law (Sellier 2011) 131; Hondius, ‘Unfair Contract Terms: New Control Systems’ (1978) 26 American Journal of Comparative Law 525; Jansen/Zimmermann (ed.), Commentaries on European Contract Laws (OUP 2018); Kötz, ‘Der Schutzzweck der AGB-Kontrolle. Eine rechtsökonomische Skizze’ [2003] Juristische Schulung 209; Kötz, ‘Comparative Contract Law’ in: Reimann/Zimmermann (ed.), The Oxford Handbook of Comparative Law (2nd edn., OUP 2019) 902; Kötz/Zweigert, An Introduction to Comparative Law (3rd edn., OUP 1998); Landini, ‘The Worthiness of Claims Made Clauses in Liability Insurance Contracts’ [2016] 2 Italian Law Journal 509; Lando, ‘Unfair Contract Clauses and a European Uniform Commercial Code’ in: Cappelletti (ed.), New Perspectives for a Common Law of Europe (Sijtoff 1978) 267; Leccese, ‘Subfornitura’ in: Digesto delle discipline privatistiche, sezione commerciale (Utet 2008) 744; Lipari, ‘Ancora sull’abuso del diritto. Riflessioni sulla creatività della giurisprudenza’ [2017] Rivista trimestrale di diritto e procedura civile 1; Macario, ‘Genesi, evoluzione e consolidamento di una nuova clausola generale: il divieto di abuso di dipendenza economica’ [2016] Giust civ 509; Maggiolo, Il contratto predisposto (Cedam 1996); Martino, ‘La causa in concreto nella giurisprudenza: recenti itinerari di un nuovo idolum fori’ [2013] Corriere giuridico 1441; Maugeri, Abuso di dipendenza economica e autonomia privata (Giuffrè 2003); Maugeri, ‘Subfornitura’ in Enciclopedia del diritto, Annali VIII (Giuffrè 2015) 775; Mazzoni, Contratti di massa e controlli nel diritto privato (Jovene 1975); Menichino, Clausole di irresponsabilità contrattuale (Giuffrè 2008); Minervini, ‘Clausola vessatoria illeggibile – Clausola vessatoria illeggibile contenuta in un modulo o formulario’ [2019] Giurisprudenza italiana 790; Montinario, ‘Clausole di esclusione o modifica della garanzia per vizi e/o per evizione’ in: Confortini (ed.), Clausole negoziali. Profili teorici e applicativi di clausole tipiche e atipiche (Utet 2017) 385; Morello, ‘Condizioni generali di contratto’ in: Digesto delle discipline privatistiche, sezione civile III (Utet 1988) 334; Natoli, ‘L’abuso di dipendenza economica’ in: Roppo/Benedetti (ed.), Trattato dei contratti V (Giuffrè 2014) 377; Nonne, Contratti tra imprese e controllo giudiziale (Giappichelli 2013); Pagliantini (ed.), Abuso del diritto e buona fede nei contratti (Giappichelli 2010); Pasquino, ‘Clausole di limitazione della responsabilità’ in: Confortini (ed.), Clausole negoziali. Profili teorici e applicativi di clausole tipiche e atipiche (Utet 2017) 477; FP Patti, La determinazione convenzionale del danno (Jovene 2015); FP Patti, ‘Penalty Clauses in Italian Law’ (2015) 25 European Review of Private Law 309; FP Patti, ‘Due questioni in tema di clausola risolutiva espressa’ [2017] Contratti 695; G Patti/S Patti, ‘Responsabilità precontrattuale e contratti standard’ in: Il codice civile. Commentario (Giuffrè 1993); S Patti, ‘Certezza e giustizia nel diritto della prescrizione in Europa’ [2010] Rivista trimestrale di diritto e procedura civile 21; Perlingieri, L’inesistenza della distinzione tra regole di comportamento e di validità nel diritto italo-europeo (Esi 2013); Perlingieri/Zarra, Ordine pubblico interno e internazionale tra caso concreto e sistema ordinamentale (Esi 2019); Pietrangeli, ‘Clausola di individuazione della legge applicabile’ in: Confortini (ed.), Clausole negoziali. Profili teorici e applicativi di clausole tipiche e atipiche (Utet 2017) 1061; Piraino, La buona fede in senso oggettivo (Giappichelli 2015); Ricci, ‘Le clausole vessatorie nei contratti online’ [2014] Contratto e impresa Europa 651; Rodotà, ‘Condizioni generali di contratto, buona fede e poteri del giudice’ in: Condizioni generali di contratto e tutela del contraente debole: atti della Tavola rotonda tenuta presso l’Istituto di diritto privato dell’Università di Catania: 17–18 maggio 1969 (Giuffrè 1970) 84; E Roppo, Contratti standard. Autonomia e controlli nella disciplina delle attività negoziali di impresa (Giuffrè 1975); V Roppo, ‘From Consumer Contracts to Asymmetric Contracts: A Trend in European Contract Law?’ (2009) 5 European Review of Contract Law 304; V Roppo, ‘ Causa concreta: una storia di successo? Dialogo (non reticente, né compiacente) con la giurisprudenza di legittimità e di merito’ [2013] Rivista di diritto civile 957; Sacco/De Nova, Il contratto (4th ed., Utet 2016); Scognamiglio, Dei contratti in generale (Zanichelli 1970); Sirena, ‘L’integrazione del diritto dei consumatori nella disciplina generale del contratto’ [2004] Rivista di diritto civile I 814; Trimarchi, Il contratto: inadempimento e rimedi (Giuffrè 2010); Villa, ‘Danno e risarcimento contrattuale’ in: Roppo (ed.), Trattato del contratto, Vol. II (Giuffrè 2006) 751.

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Part 1. Country Reports Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... 1. Rules on standard conditions and form contracts.............................. 2. Principles and open-ended clauses......................................................... 3. Abuse of economic dependence.............................................................. 4. Exclusions or limitations of liability....................................................... 5. Time constraints for the exercise of a right ......................................... III. Requirements and legal consequences ....................................................... 1. Rules on standard conditions and form contracts.............................. a) Definition of standard conditions and form contracts ................ b) Incorporation of standard conditions .............................................. c) The specific approval in writing ........................................................ d) The list of ‘one-sided’ or ‘onerous’ clauses ..................................... e) The problem of ‘bilateral’ or ‘reciprocal’ clauses ........................... f) Clauses added to a form contract ..................................................... 2. Principles and open-ended clauses......................................................... a) Good faith. Prohibition of abuse of rights ...................................... b) Worthiness and causa contractus ...................................................... 3. Abuse of economic dependence.............................................................. 4. Exclusions or limitations of liability....................................................... 5. Time constraints for the exercise of a right ......................................... IV. International application ............................................................................... V. Conclusion........................................................................................................

mn. 1 6 6 9 11 12 13 14 14 14 19 22 26 30 31 32 32 33 35 39 45 47 52

I. Overview In their renowned work, ‘Introduction to Comparative Law’, Konrad Zweigert and Hein Kötz point out that ‘[t]he special interest of the law in Italy is that the problem of standard terms of businesses has been specifically addressed by the Codice civile as compared with other European civil codes: the rules which seemed modern in 1942 are no longer adequate, largely because they permit only ‘covert’ and ‘camouflaged’ rather than open control of standard terms’.1 The rather severe analysis provided by the German authors is undeniably correct. The Italian rules on judicial review (applicable also to B2B contracts) seemed modern when the Code was enacted, but after a few decades, when in the 1970s other legal systems in Europe began to enact specific regulations concerning the judicial control of standard terms, the Italian legal system was immediately left behind.2 2 Since it came into force in 1942, the Italian Civil Code has provided a rule on the incorporation of standard terms into a contract in its Art. 1341.3 The second provision devoted to standard terms, Art. 1342, states that in cases of conflict between words added by the parties and the preformulated text, the former prevails. Finally, with respect to the construction of contracts, Art. 1370 provides a classic contra proferentem rule, according to which, where there is a doubt, clauses in standard terms or form 1

1 Kötz/Zweigert, 339–340. See also Lando, 270, who writes that the Italian rules ‘cannot help an adhering party against a stipulator who can dictate the terms of the contract’; Jansen, in Commentaries on European Contract Law, 922: ‘Yet, when the first legislation in Europe on standard contract terms was introduced with Arts 1341 and 1342 Italian Codice civile of 1942, those rules still not provide for a mechanism of judicial review’. 2 See for a comparative assessment, as provided in the abovementioned years, Hondius, 525 et seq.; Lando, 267. For a comparison between the Italian and the German legal systems, see Ferrante/Koch, 695 et seq. 3 Unless indicated otherwise, all provisions are those of the Italian Civil Code.

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contracts must be construed in favour of the party on whom they are imposed. The aforementioned rules apply both to consumers and to businesses. Notwithstanding the critics and the requests for a legislative intervention, which first 3 emerged in scholarship by the end of the 1960s,4 the Italian legislature – until now – has never adopted a general set of rules on the substantive judicial review of B2B contracts. The most important innovation in the field of standard terms was the implementation of the Unfair Terms Directive. The implementation of the rules affected only B2C relationships,5 but the European legislative intervention once again raised a debate concerning the need for judicial review of B2B contracts. Interestingly, the question was submitted to the Italian Constitutional Court (Corte costituzionale della Repubblica Italiana). The absence of a protection mechanism for small and medium enterprises could be considered unreasonable in light of Art. 3 of the Italian Constitution (Costituzione della Repubblica Italiana) since legal subjects, no matter whether natural persons or legal entities, may face the same ‘take it or leave it’ situations as consumers do. The Constitutional Court firmly rejected the assertion and referred in its decision to the political aims pursued by the European Union, which were considered non-extendable to B2B relationships.6 Nevertheless, it would be wrong to say that the subject is not of interest for Italian 4 scholars or that under Italian law B2B contracts do not undergo any substantive judicial control. On the one side, Italian scholars are accustomed to adopting the category of ‘asymmetric contracts’ to describe B2B relationships in which one party has more contractual power than the other, and they have affirmed that courts are already empowered to undertake a substantive control of contractual terms.7 On the other side, in certain cases (an ‘indirect’8) judicial control is granted on the basis of openended clauses or particular rules. In fact, in some cases courts have applied the doctrine of abuse of rights (abuso del diritto), based on the principle of good faith, to preformulated terms that grant businesses the right to withdraw ad nutum from a contract. Other judgments have declared the legitimacy of a substantive review, referring to the general clause on the ‘worthiness’ (meritevolezza) of a contract (Art. 1322) and to the notion of causa contractus. In addition, attention must be devoted to special rules which are outside of the Italian Civil Code. The notion of ‘abuse of economic dependence’ (abuso di dipendenza economica), as outlined in Art. 9 Law 19 June 1998, No. 192, can to some extent encompass also the phenomenon of unfair terms in B2B contracts. Finally, Art. 1229 limits contractual freedom in the field of limitations or exclusions of liability. As a final introductory remark, it must be pointed out that the Italian legal system 5 does not provide comprehensive rules on the control of price-related terms. Consumer law is acquainted with the exclusion of any judicial assessment of ‘core terms’ as provided by Art. 4(2) Unfair Terms Directive,9 whereas general contract law establishes 4

cf Rodotà, 84; E Roppo, 272; Mazzoni, 207–218. The Directive was implemented through Law 6 February 1996, No. 52. The new provisions on unfair terms in consumer contracts were inserted into the Italian Civil Code in Arts 1469bis et seq. With Legislative Decree 6 September 2005, No. 206, the same provisions were then transposed into the Italian Consumer Code in Arts 33–36. 6 Corte cost, 22 November 2002, n 469: [2003] Foro it I 332, with comments by Palmieri and Plaia. See also And Genovese (‘La crisi’), 1169, demanding a further intervention of the Constitutional Court. 7 V Roppo (‘From consumer contracts’), 304 et seq.; Benedetti, 304. Contra D’Amico (‘Giustizia’), 30–38. 8 Such a terminology was first adopted by Morello, 344, who refers to rules that are not based on an ‘ad hoc general clause’, namely a general clause provided for the control of standard terms. 9 See generally Farneti; Dellacasa, 158. 5

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only some rules on laesio enormis, which implicate an unfair exploitation of one contracting party and the corresponding existence of a gross advantage being enjoyed by the opposing party.10 Other provisions deal with usury, especially in loan contracts.11

II. Regulatory framework 1. Rules on standard conditions and form contracts Article 1341. Italian Civil Code General conditions of contract (1) General conditions, prepared by one of the parties, are binding on the other party if known by the latter at the time when the contract was concluded or if she or he might have known thereof by using ordinary diligence. (2) At any rate, the conditions do not produce effects, unless specifically approved in writing, when, in favour of the party who has predisposed [drafted] them, they provide limitations of liability, the faculty to withdraw from the contract or to suspend the execution thereof, or burden the other party with time constraints for the exercise of a right or limitations to such party’s power to raise defenses, restrictions on freedom of contract with third persons, tacit extension or renewal of the contract, clauses providing for arbitration or derogations from the usual venue or jurisdiction of the courts. Article 1342. Italian Civil Code Contracts made by means of forms or formularies (1) In contracts made by subscribing to forms prepared for the purpose of regulating in a uniform manner certain contractual relationships, the clauses added to such forms prevail over the original formulated clauses, even if incompatible, and even though the latter have not been stricken out. (2) In addition, the provision of the second paragraph of the preceding Art. is applicable. Article 1370. Italian Civil Code Construction against the author of a clause The clauses inserted in general conditions of contract or in model or form contracts predisposed [drafted] by one of the contracting parties are construed, in cases of doubt, in favour of the other.

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As shown in the reproduced rules, the Italian Civil Code draws a distinction between the more general problem of incorporation of standard conditions (Art. 1341(1)) and the specific problem regarding the incorporation and validity of ‘one-sided’ or ‘onerous’ clauses (Arts 1341(2) and 1342(2)).12 The latter are valid only if there is explicit approval in writing, whereas the general rule for incorporation is that the terms are known or might have been known by using ordinary diligence. The separate treatment of ‘one-sided clauses’ or ‘onerous clauses’ has deprived the general problem regarding incorporation of any practical importance.13 Issues related to incorporation usually arise only for clauses that are not one-sided.14 The latter are subdivided in two groups by Art. 1341(2), and it is understood that the list cannot be extended by analogy.15 10 See Art. 1448, which remarkably refers to a fixed 50 % criterion for establishing a relevant disproportionate bargain. On the historical background and for a comparative assessment, see Lohsse in Commentaries on European Contract Law, 702–704; Kötz, Comparative Contract Law, 917. 11 See, for a general overview, Graziadei, 193 et seq. 12 See Gorla, 3, who recalls the fact that the quoted provisions of the 1942 Code are novel and were not provided by the Civil Code of 1865 nor by the Commercial Code of 1882. 13 Gorla, 5. See also Sacco/De Nova, 348. 14 But see below, mn. 20 on clauses that are not legible. 15 See Cass civ, ord 25 August 2017, n 20397: [2018] Vita notarile 272. But see below, mn. 26 et seq.

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Art. 1342 sets outs the treatment of clauses that are added to a form contract (for the 7 purpose of uniformly regulating multiple contractual relationships, typically with different contracting parties. By stating in the first paragraph that any added clauses prevail over the originally formulated clauses, the Article prescribes a rule of contractual interpretation. The second paragraph simply clarifies the scope of application of Art. 1341(2). It makes clear that the rule on onerous conditions applies also in cases in which the form contract is signed. The contra proferentem rule stated in Art. 1370 has a subsidiary nature.16 In principle, 8 the general conditions must be construed according to the rules on construction of contracts contained in Arts 1362 et seq. Usually, the first criterion indicated in the aforementioned set of rules, which refers to the ‘common will’ of the parties, is not considered applicable because the adherent party does not truly express a will.17 The meaning of the general conditions has to be revealed through objective criteria, having reference primarily to the understanding of the majority of the users of the term under scrutiny. At any rate, Art. 1370 applies only if there is ‘a doubt’ concerning the meaning of the words used. This is an infrequent event.18

2. Principles and open-ended clauses Article 1322. Italian Civil Code Party autonomy (1) The parties can freely determine the contents of the contract within the limits set by the law. (2) The parties may also enter into contracts that do not belong to the types having a particular regulation [in the Civil Code], provided they are intended to achieve interests worthy of protection under the law. Article 1175. Italian Civil Code Fair behaviour The debtor and the creditor shall behave according to rules of fairness. Article 1375. Italian Civil Code Performance in good faith The contract shall be performed according to good faith.

In recent case law, Italian judges have begun to apply the provisions on the worthiness 9 of the interests and on causa contractus to declare the nullity of contractual terms. The terminology used by the courts is not always consistent. Sometimes the tests developed by the judges refer to an abusive advantage of one of the parties, other times to a significant imbalance or to a non-correspondence with the aims which that type of contract should have.19 For our purposes, it should be observed that the envisioned judicial review also affects B2B relationships, mainly in the fields of insurance and banking contracts. Another important – but more limited – development in Italian case law concerns the 10 general clause of good faith.20 A landmark Court of Cassation decision of 2009 expressly referred to the doctrine on the prohibition of abuse of rights.21 The subject matter of the 16 Bigliazzi Geri, 366, who points out that, in matters of construction, Art. 1370 prevails only over Art. 1367, which states that, in cases of doubt, an interpretation which renders the terms of the contract effective is to be preferred over one which would not. 17 G Patti/S Patti, 364–365. 18 And Genovese (‘L’interpretazione’), 24–25; Bigliazzi Geri, 366–67. 19 See generally Garofalo (‘Meritevolezza’), 1212 et seq. 20 For a general overview, see Antoniolli, 52–53. 21 Cass civ 18 September 2009, n 20106: [2010] Foro it I 85 with a comment by Palmieri/Pardolesi. See also the case notes contained in Pagliantini.

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case was a right of withdrawal in a long-lasting contract between a car manufacturer and a car dealer. The judges stated that, independent of the contents of the term that granted to the car manufacturer the right to withdraw ad nutum, the exercise of the right has to be compliant with the duty of good faith. This decision gave rise to a new development focused on withdrawal rights provided in long-term B2B relationships.22 The control mechanism looks more at the behaviour of the contracting party than at the content of the clause. Nevertheless, such case law – even if rather limited – represents a way of protecting the interests of weaker parties in B2B relationships in the absence of a generalised unfair terms control mechanism.

3. Abuse of economic dependence Article 9. Law 19 June 1998, No. 192 Abuse of economic dependence (1) The abuse by one or more businesses of the state of economic dependence in which, in its or in their regard, a client or supplier business is situated, is prohibited. The economic situation in which a business is able to determine, in commercial relations with another business, an excessive imbalance of rights and obligations is considered an economic dependency. The economic dependence is assessed also taking into account the real possibility for the party who has suffered the abuse to find satisfactory alternatives on the market. (2) The abuse can also consist in the refusal to sell or in the refusal to buy, in the imposition of unjustifiably burdensome or discriminatory contractual conditions, in the arbitrary interruption of commercial relations in progress. (3) The pact through which the abuse of economic dependence is realized is null.

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The scope of application of Law 19 June 1998, No. 192 is limited to subcontracting agreements regarding manufacturing activities (Art. 1).23 In recent years, following the suggestions of some scholars,24 Italian courts have begun to consider the abuse of economic dependence as a general clause, applicable also to contracts which are not subcontracting agreements for manufacturing activities.25 On the basis of the proposed enlargement of the scope of application of Art. 9 Law 19 June 1998, No. 192, some authors argue that there exists a general ground for undertaking a substantive control of contractual terms in B2B relationships in Italian law.26

4. Exclusions or limitations of liability Article 1229. Italian Civil Code Clauses excluding liability (1) Every clause that excludes or limits liability for intent [willful acts] or gross negligence is void. (2) In addition, every clause that excludes or limits liability is void if the fact [encompassing conduct] of the debtor or of his/her auxiliaries constitutes an infringement of duties deriving from public order.

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The rules contained in Art. 1229 have a general scope of application, not limited to standard conditions and form contracts. Nevertheless, they acquire a significant im22

On this issue, see especially Brizzolari/Cersosimo 450–456. See generally Maugeri (‘Subfornitura’), 775; Leccese, 744. 24 See Macario, 509 et seq. 25 See Cass civ 23 July 2014, n 16787: [2015] Contratti 241; App Milano, 15 July 2015: [2015] Giur it 2665; Trib Vercelli, 14 November 2014: [2015] Foro it I 3344 stating that Art. 9 Law 19 June 1998, No. 192 is applicable to every kind of relationship between businesses; Trib Massa, 15 May 2014 [2015] Nuova giur civ comm I 218 with a comment by Bachelet; Trib Torino, 21 November 2013 [2014] Foro it I 610. 26 See especially Fabbio (‘Osservazioni’), 902 et seq.; Di Marzio, 789 et seq. 23

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portance with reference to standard contracts because they provide for a substantive review of terms that are often adopted in B2B contracts. In scholarship, it is stated that such a substantive review partially fills the gap connected to the lack of protection in terms of the mere review as to form provided by Art. 1341(2).27 With respect to the relationship of the latter provision with the rules contained in Art. 1229, it must be noted that the review in terms of form as regards an express approval in writing (Art. 1341(2)) applies only to limitations or exclusions of liability for ordinary negligence (colpa lieve), which entail conduct by the debtor that is not contrary to public policy. Exclusions or limitations of liability for wilful acts or gross negligence are void, irrespective of express approval of the term in writing.28

5. Time constraints for the exercise of a right Article 2965. Italian Civil Code Time constraints established by contract The pact trough which parties establish time constraints for the exercise of a right are void if they render the exercise of the right excessively difficult for one of the parties.

The Italian legal system distinguishes between statutes of limitations, or prescription, 13 (prescrizione) (Arts 2934–2963) and statutes of repose (decadenza) (Arts 2964–2969). With respect to prescription, modifications of the legal regime are not possible. The rules are mandatory in nature, and Art. 2936 expressly states that any agreement aimed at modifying the legal regime of prescription is void.29 Nevertheless, parties can fix by agreement time constraints for the exercise of a right (so-called ‘clausole di decadenza’). These clauses cannot render the exercise of the right excessively difficult for one of the parties. If contained in general conditions or form contracts, such terms are subject to the control as regards form provided by Arts 1341 and 1342.

III. Requirements and legal consequences 1. Rules on standard conditions and form contracts a) Definition of standard conditions and form contracts. Initially, there is the need 14 to point out the distinction between standard conditions (Art. 1341) and form contracts (Art. 1342) in order to clarify the scope of application of the review in terms of compliance with required formalities. The first expression refers to the terms prepared by one of the contracting parties and adopted in order to regulate an undetermined series of relationships, whereas the second concerns forms prepared by third parties, even though the forms are not used by one of the parties as her standard conditions.30 In more detail, Art. 1341 refers to blocks of standard conditions, used – as said – to 15 regulate a series of relationships.31 This means that the rule applies if the contracting party that uses the standard conditions exercises an activity that implicates the forma27

See Ceccherini, 202. Before the enactment of the Unfair Terms Directive, see E Roppo, 35 et seq. Bianca (‘Diritto civile 3’), 324; Ceccherini, 204–205. 29 See, for some comparative remarks, Zimmermann in Commentaries on European Contract Law, 1883–1885. 30 Gorla, 11. 31 Cass civ 19 March 2018, n 6753: [2018] Rep Foro it, ‘Contratto in genere’, n 44; Cass civ 15 April 2015, n 7605 Cass civ, ord 7 December 2012, n 22047; Cass civ, ord 7 December 2011, n 26333: [2011] Rep Foro it, ‘Contratto in genere’, n 376. For further references, see Maggiolo, 93. 28

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tion of multiple relationships.32 If the choice to adopt the standard conditions is taken on the basis of a negotiation conducted by the contracting parties, Art. 1341 is inapplicable.33 A negotiation surely exists in cases in which material modifications have been introduced into the standard conditions or the form contract. The onus of proving the nature as standard conditions is on the party who wants to have a term declared as non-effective.34 Such a claim has a ‘constitutive nature’, and therefore the judge can affirm on its own motion the absence of proof. 16 According to the Court of Cassation, if the standard conditions are contained in a deed drafted by a public official (e.g. a notary), Art. 1341 is not applicable.35 Therefore, also where the deed contains onerous clauses, approval in writing is not required. The case law is based on the idea that the form requirements set by the provision on standard conditions is substituted by the notarial form. Some authors have criticised the solution, arguing that a deed does not ensure that the weaker party have been able to influence the content of the contractual provisions through a negotiation.36 17 Art. 1342 applies also if the form prepared by a third party was adopted only once by the contracting party.37 Due to the ‘objective’ standard nature of such a form, the need for protection exists as with standard conditions prepared by one of the contracting parties. In addition, premising the application of Art. 1342 on the contracting party having used the form contract on multiple occasions would make the provision redundant, because Art. 1341(1) would apply directly to standard form conditions (although printed in form contracts).38 Art. 1342 does not apply if the form is chosen not by one of the contracting parties, but by brokers who submit a text to the parties which encompasses particular clauses. 18 The aforementioned rules are not applicable in cases in which the parties adopt a model contract (a so-called ‘contratto-tipo’) drafted by associations who represent different categories of contracting parties.39 A prominent example in Italian case law is found in collective labour agreements.40 It is arguable that the same applies when the parties are members of the trade association which has prepared the contractual terms.41 19

b) Incorporation of standard conditions. Art. 1341(1) states that general conditions are binding if known by the other party at the time when the contract was concluded or if she might have known of them by using ordinary diligence. The onus of proof concerning the knowledge or the possibility of knowing the content of the general 32 Cass civ, 23 May 2006, n 12153: [2007] Foro it I 1896. For B2C contracts, the substantive control mechanism provided by Arts 33–36 Italian Consumer Code requires only that the business has drafted the term. 33 Cass civ 10 August 2016, n 16889: [2016] Rep Foro it, ‘Locazione’, n 39; Cass civ 17 March 2009, n 6443: [2009] Rep Foro it, ‘Contratti pubblici’, n 637. 34 Cass civ 14 March 2014, n 5952: [2014] Assicurazioni 2014, 307; Cass civ 30 September 2005, n 19212: [2005] Rep Foro it, ‘Contratto in genere’, n 411. 35 Cass civ 20 June 2017, n 15237: [2017] Rep Foro it, ‘Contratto in genere’ n 305; Cass civ 21 September 2004, n 18917: [2005] Rep Foro it, ‘Contratto in genere’ n 367; Cass civ 21 January 2000, n 675: [2000] Foro it I 1153; Cass civ 23 April 1998, n 4188: [1998] Rep Foro it, ‘Contratto in genere’, n 325; Cass civ 27 April 1998, n 4269: [1998] Rep Foro it, ‘Contratto in genere’, n 326; Cass sez un 10 January 1992, n 193: [1992] Vita notarile 761. 36 See Bargelli, 555. 37 G Patti/S Patti, 467. 38 ibid. 39 See on the different classifications of ‘contratti-tipo’, Battelli (‘Contratti-tipo’), 55 et seq. 40 Cass civ, sez lav, 28 October 2008, n 25888: [2008] Rep Foro it, ‘ Lavoro (contratto)’, n. 22; Cass civ, sez lav, 6 August 2003, n 11875: [2004] Notiziario giurisprudenza lav. 2004, 8 . 41 Gorla, 16.

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conditions lies with the contracting party who wants to take advantage of them.42 With respect to the ‘possibility of knowing’ the general conditions, the law prescribes ordinary diligence as a parameter that the judge has to apply in the individual case. The reference is to the general rule on diligence provided by Art. 1176. Some authors refer to the characteristic position that the adherent party has with regard to the individual contract and to the possibility that she exercises a professional activity.43 Other authors, and the prevailing approach of the Court of Cassation, affirm that one has to refer to the general behaviour of adherent parties in the context of the type of transaction which is at issue.44 Issues related to transparency fall within the scope of the provision. So if it is not 20 legible45 or if its meaning is obscure, the term is not considered part of the contract.46 In addition, Art. 1341(1) indicates ‘the time when the contract was concluded’ as the relevant moment in time. This means that the general conditions are not part of the contract if they are printed on the invoice and dispatched after the conclusion of the contract.47 The rule is applicable if the standard conditions are printed on the individual contract or on a supplementary sheet to which the former refers.48 A disputed problem in legal writings relates to the consequences of an infringement 21 of the requirement set by Art. 1341(1). It is not necessary to detail the different theories developed on this matter. According to the prevailing view, the literal meaning of the words used by the provision indicates that clauses – which are not known or not knowable with ordinary diligence – do not become part of the contract.49 In this sense, the Italian rule is conceptualised as a tool capable of resolving the problem of ‘incorporation’ of clauses in the contract (according to German terminology, Einbeziehung in den Vertrag). Consequently, both contracting parties theoretically may object that an unknown or an unknowable clause is not part of the contract. The gaps that arise in the contract are filled through default rules.50 c) The specific approval in writing. As it has been stated, the control provided by 22 the Italian Civil Code in Art. 1341(2) is the requirement of express written approval of clauses which are ‘one-sided’ (e.g. limitations of liability). From the Civil Code’s time of enactment, the Italian courts have always required a ‘dual signature’, one for the contract as a whole and one for any one-sided clauses.51 This means that one-sided clauses need not be individually approved by a signature (i.e. a signature for every onesided clause); rather, the provision requires only a second, separate acceptance with a declaration expressed after the first signature which makes mentions of the one-sided clauses.52 Thus, the first signature has the function of proving the existence of an agreement and identifying the contracting party, whereas the second signature should induce the latter to focus on clauses which are particularly onerous and may limit contractual freedom. In theory, the requirement should induce the adherent party to 42

Cass civ 14 March 2014, n 5952: [2014] Assicurazioni 307. Scognamiglio, 263. 44 Bianca (‘Condizioni generali di contratto’), 2; Morello, 337; G Patti/S Patti, 339. In the case law, see Cass civ 26 February 2004, n 3863: [2004] Foro it I 2133 with a comment by Bitetto, concerning a parking contract. 45 See Minervini, 790 et seq. 46 Bianca (‘Condizioni generali di contratto’), 2. For further developments, see Ferrante, 267 et seq. 47 See also Gorla, 17. 48 Bargelli, 553–554. See also Cass civ, ord 12 February 2018, n 3307: [2019] Giur it 787, which clarifies that the rule on incorporation applies also to form contracts, subject to Art. 1342. 49 G Patti/S Patti, 345. 50 See especially De Nova, 486 et seq.; Ferri, 11 et seq. 51 G Patti/S Patti, 352–355. 52 Genovese, 805–806; Sacco/De Nova, 360. 43

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reflect on the content of the terms and take precautions in the event of one-sided clauses. The reality is that often the adherent party faces a ‘take it-or-leave it’ situation and cannot influence the contents of the contract. In Italian legal scholarship it is, therefore, stated that the control mechanism in terms of contractual form is insufficient to protect the interests of weaker contracting parties.53 23 There is a huge amount of jurisprudence of the Court of Cassation dealing with the issue. Judge-made law has forged the requirements of ‘separateness’ and ‘specificity’ of the approval. The Court of Cassation has declared54 that at the bottom of the contract, where the second signature appears, reference to the one-sided clauses may be made by specifying the article or section number that the term has in the contract. However, it is not permissible to refer to a group of terms within which only some of them are onesided. The latter manner of reference is valid only if there is a brief indication of the content of every term. In addition, in some cases, Italian judges have affirmed that the requirements of ‘separateness’ and ‘specificity’ set by Art. 1341(2) are fulfilled only in cases where the manner of referring to one-sided clauses can be expected to raise the attention of the adherent party to clauses that can disadvantage her.55 24 An additional problem concerns online contracts containing one-sided clauses. According to the prevailing opinion, the second signature must be provided through the same technological procedure as the first.56 The idea is that satisfaction of the requirement means having to use a form designed to prompt a further assessment of the onerous clauses. In this way, even without a handwritten signature, the ‘separateness’ and ‘specificity’ of the approval would be established. 25 There are still ongoing discussions in respect of the treatment of one-sided clauses not expressly approved in writing. It would go beyond the scope of the present contribution to list all the different opinions. For our purposes, it should be noted that some scholars refer to an absolute nullity that can be declared in the interest of every person, others speak of a relative nullity that can be declared only in the interest of the adherent party, and a third group of scholars affirm that the issue should be treated as a matter of non-incorporation of the clause into the contract.57 Recently, the Court of Cassation has clearly endorsed the understanding according to which the absence of express, written approval results in the relative nullity of the one-sided clause.58 This means that only the party who is protected by the law, namely the adherent party, can take advantage of the nullity of the term. If a judge declares a term null and void, the contract continues to be binding as to the rest, and the term not expressly approved is ‘substituted’ by default rules. The solution is very similar to the one adopted for consumer contracts by the Italian Consumer Code (Codice del consumo) at Art. 36. According to Art. 36(1), in consumer contracts unfair terms are void while the rest of the contract remains valid. In addition, Art. 36(3) Italian Consumer Code states that nullity operates only for the benefit of the consumer and may be ascertained by the court on its own motion. The attempt – and desire – to harmonise the two different regimes for standard contracts appears clear. Nevertheless, the interpretation of the 53

Bianca (‘Condizioni generali di contratto’), 5. Cass civ 9 July 2018, n 17939: [2018] Rep Foro it, ‘Contratto in genere’, n 121. 55 Cass civ 12 October 2016, n 20606 [2016] Rep Foro it, ‘Contratto in genere’, n 340; Cass civ 27 February 2012, n 2970: [2012] Rivista del notariato 444. 56 See Ricci, 687–689; Battelli (‘Riflessioni’), 1035 et seq.; Cerdonio di Chiaromonte, 404 et seq. 57 The relevant references are provided by Buonanno, 458–469. 58 Cass civ, 21 August 2017, n 20205: [2017] Rep Foro it, ‘Contratto in genere’, n 304; Cass civ, ord 4 June 2014, n 12591; Cass civ 20 August 2012, n 14570: [2012] Rep Foro it, ‘Contratto in genere’, n 462. A different opinion was expressed in the past by Cass civ 15 February 1995, n 1606: [1995] Rep Foro it, ‘Contratto in genere’, n 292, which refers to an ‘absolute’ nullity. 54

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Court of Cassation seems to contradict the literal meaning of the words used in Art. 134 (2), where it is stated that terms not expressly approved in writing will not produce effects as occurs under the preceding paragraph of the article.59 d) The list of ‘one-sided’ or ‘onerous’ clauses. One of the associated problems 26 concerns the correct identification of those clauses that fall under the provision of Art. 1341(2). As has already been mentioned,60 interpretation by way of analogy is not permissible. Nevertheless, in some cases, having regard to the ratio legis of the specific clause, it is possible to provide an ‘extensive interpretation’.61 The difference between analogy and extensive interpretation is not easy to draw.62 Italian courts apply Art. 1341 (2) when it is possible to subsume a term of the contract under one of the clauses set out in the list. There has been considerable litigation related to clauses which as matter of interpretation may be covered by Art. 1341(2). It must be pointed out that, in determining whether Art. 1341(2) applies, courts only consider the nature and reach of a clause (as a question of law). They do not investigate whether the party burdened with the clause is in a weak position.63 It is difficult to provide a thorough inventory of those clauses that have been deemed 27 as onerous, in part because the task of evaluating the character of the clauses is remitted to the lower courts (the first two instances, tribunals and courts of appeal), and their decisions are not as readily available as those of the Court of Cassation. No doubts arise for clauses that correspond to the wording used in the list contained in the aforementioned provision, which takes into consideration clauses that: provide for limitations of liability; give the power to withdraw from the contract or suspend its execution; burden the other party with time constraints on the exercise of a right or limit such party’s power to raise defences; create restrictions on freedom of contract with third persons; entail a tacit extension or renewal of the contract; or provide for arbitration or derogations from the usual venue or jurisdiction of the courts. Pursuant to Art. 1341 (2), the Court of Cassation has held as one-sided: clauses granting withdrawal rights;64 clauses limiting the power to raise defences (e.g. the ‘solve et repete’ clause);65 extension or renewal clauses;66 clauses limiting the freedom of contract with third persons; and arbitration67 and jurisdiction clauses.68 In the absence of a direct reference in the list of Art. 1341, express approval in writing 28 is required for clauses imposing a risk of impossibility of performance on the other party such that the latter has to pay even if she does not receive the intended counterperformance, for clauses which make the offer of a customer irrevocable at the moment 59

See G Patti/S Patti, 356–361. See mn. 6. 61 See especially Gorla, 10; Morello, 339. 62 See Bargelli, 559. 63 Gorla, 11; Sacco/De Nova, 360. 64 Cass. civ., 13 July 1991, n 7805: [1991] Rep Foro it, ‘ Contratto in genere’, n 258; Trib Milano, 19 July 2001: [2003] Danno e responsabilità 85. Conversely, the exclusion of a withdrawal right is not considered a one-sided clause: see Cass civ, 4 June 2013, n 14038: [2013] Rep Foro it, ‘ Contratto in genere’, n 344. 65 Trib Cagliari, 13 November 2007: [2009] Rivista Giuridica Sarda 445. See also Addis, 787–789. It must be observed that in individual contracts, clauses that limit the power to raise defences are regulated by Art. 1462. Under the latter provision, clauses that prevent a party from raising an exception connected to the nullity, to the avoidance or to the rescission (in a case of laesio enormis) of the contract are void. In addition, even if the clause is valid, the judge can suspend a judgment if serious reasons exist. 66 Cass civ 12 October 2015, n 20401: [2016] Nuova giurisprudenza civile commentata 237. 67 Trib Torino, 23 January 1986: [1986] Foro italiano – Repertorio, 1986, ‘Arbitrato’, n 43. Nevertheless, a clause that refers to an informal arbitration proceeding has not been held as onerous: see Trib Pisa, 16 December 1996 [1998] Riv arbitrato 265; Trib Venezia, 19 February 1992: [1994] Giur it I 2 1188. 68 Cass civ 12 February 2018, n 3307: [2008] Nuova giur civ comm I 1234. 60

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when an order is signed,69 and for clauses that exclude guarantees of the seller within a contract of sale.70 Additionally, clauses that oblige one of the parties to sell only products of the drafter71 or to apply a minimum price72 are considered one-sided. 29 On the other hand, the control mechanism does not affect penalty and forfeiture clauses,73 agreed rights of termination in the case of a so-called ‘clausola risolutiva espressa’,74 or clauses providing for the determination of the subject matter of the contract (which often present similarities with limitations of liability clauses).75 The exclusion of the control as regards form for penalty clauses is justified by the presence of a mandatory provision in Art. 1384, according to which the judge can reduce (also on his or her own motion) the amount of the penalty.76 For agreed rights of termination, the possibility to sanction the abusive behaviour of the right-holder was addressed by some judgments through the general principle of good faith.77 Clauses that grant to one of the contracting parties the power to unilaterally modify the contents of the contract also do not fall under the list contained in Art. 1341(1).78 The same was stated by the Court of Cassation in respect of a clause, contained in a tenancy contract, that imposed on the tenant costs that would have otherwise fallen to the landlord79 and in respect of a clause that extended the liability of a carrier also for losses due to theft.80 Further, a clause fixing a precise duration for a long-term contract was not held as one-sided.81 30

e) The problem of ‘bilateral’ or ‘reciprocal’ clauses. With the expressions ‘bilateral’ or ‘reciprocal’ clauses, Italian scholarship refers to clauses that are drafted by one of the contracting parties but that in abstract terms could provide a favourable or negative outcome for both contracting parties.82 In the past, some authors expressed the opinion that such clauses could not be considered onerous because of the equal treatment that they assure to contracting parties. Such a view has been rejected by the majority of scholars and as considered by the Court of Cassation.83 First, notwithstanding the bilateral character of the clause, it is not possible to exclude that the drafter inserted such clause only in order to take advantage of the other party.84 Second, the latter does not have the possibility to influence the contents of the contract. The absence of negotiations pre-empts the adherent party from evaluating the effects that the clause 69

According to Art. 1328, an offer to conclude a contract is revocable. Cass civ 23 December 1993, n 12759: [1993] Rep Foro it, ‘ Contratto in genere’, n 296. With respect to more recent developments, see De Cristofaro, 219 et seq. 71 Cass civ 29 March 1977, n 1214: [1977] Giur it I, 1 1284. 72 Cass civ 23 May 1994, n 5024: [1995] Foro it I 2528. 73 Cass civ 18 March 2010, n 6558: [2010] Rep Foro it, ‘ Contratto in genere’, n 441; Cass civ 23 December 2004, n 23965: [2004] Rep Foro it, ‘ Contratto in genere’, n 481; Cass civ 26 June 2002, n 9295: [2002] Rep Foro it , ‘Contratto in genere’, n 419. 74 Cass civ, ord 5 July 2018, n 17603: [2018] Rep Foro it , ‘ Contratto in genere’, n 105; Cass civ 11 November 2016, n 23065: [2016] Rep Foro it , ‘ Contratto in genere’, n 438; Cass civ 28 June 2010, n 15365: [2010] Rep Foro it , ‘ Contratto in genere’, n 509. 75 See mn. 35 et seq. 76 See for details Patti (‘Penalty Clauses’), 317–322. 77 See mn. 32 et seq. 78 Cass civ 29 February 2008, n 5513: [2008] Rep Foro it , ‘ Contratto in genere’, n 387 , who clarifies that the abovementioned clause does not result in a limitation of liability. 79 Cass civ 12 July 2007, n 15592: [2008] Giur it 693. 80 Cass civ 27 April 2006, n 9646: [2006] Rep Foro it , ‘ Contratto in genere’, n 408. 81 Cass civ 3 September 2015, n 17579: [2015] Rep Foro it , ‘ Contratto in genere’, n 329. 82 See Cusumano, 239. 83 Cass civ 1 March 2016, n 4047 [2016] Rep Foro it, ‘Contratto in genere’, n 348; Cass civ 2 February 2016, n 1911: [2016] Foro it I 1279; Cass civ 12 October 2015, n 20401: [2016] Nuova giur civ comm 237; Cass civ 24 June 2004, n 11734: [2004] Rep Foro it, ‘Contratto in genere’, n 371. 84 Gorla, 10 refers to an ‘irrebuttable presumption that they favour the drafter’. 70

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may have on the contractual relationship. Recently, this problem arose in a case decided by the Court of Cassation, which has clarified once again that the control mechanism at issue applies also to reciprocal clauses.85 f) Clauses added to a form contract. A special rule is provided by Art. 1342 for 31 contracts made by signing forms prepared for the purpose of regulating certain contractual relationships in a uniform manner. Clauses added to such forms prevail over the original formulated clauses, even if incompatible, and even though the latter have not been stricken out. The rule applies regardless whether the added clauses are handwritten or typed.86 The assessment of incompatibility is done by the court. Such an incompatibility does not exist if the added writing is merely aimed at supplementing or clarifying the contents of the contract.87

2. Principles and open-ended clauses a) Good faith. Prohibition of abuse of rights. An important distinction that affects 32 Italian contract law is the difference between rules on conduct/liability and rules on the validity of the contract.88 If there is a breach of a rule of conduct, the legal consequence is usually only the obligation to pay damages, whereas the unlawful behaviour does not affect the validity of the contract. Good faith is considered a rule of conduct, and therefore its violation, even in a pre-contractual stage, does not in principle affect the validity of the contract. Nevertheless, as stated above,89 there are some judgments which can impact the exercise of rights based on contractual terms in B2B relationships. The most prominent example is the case of a term granting a withdrawal right ad nutum in a long-term contract. The Italian Court of Cassation has affirmed that the exercise of a right can be deemed abusive90 and, therefore, unable to produce its intended effect.91 Technically speaking, the validity of a contractual term that granted the right to withdraw was not at issue in that case. Nevertheless, the judgment represents a recognition of the possibility to evaluate the exercise of a right established by a contractual term. Subsequently, the Italian Court of Cassation adopted a similar approach with regards to an explicit dissolution clause (clausola risolutiva espressa).92 In theory, and as regulated by Art. 1456, it is through such clauses that contracting parties identify those breaches that allow for an out-of-court termination of the contract. Thus, the explicit dissolution clause eliminates the possibility of evaluating the fundamental character of the breach (see Art. 1455) which is set as a ground for the judicial termination of the contract. According to the aforementioned judgment, if the behaviour of the creditor is contrary to good faith, the exercise of a right to terminate the contract does not produce effects.93 This happens, inter alia, in cases in which the breach of contract is of minor importance and does not infringe the interests of the creditor.94 Even if there is not a considerable amount of case law dealing with such 85

See especially the wording of Cass civ 12 October 2015, n 20401: [2016] Nuova giur civ comm 237. Cass civ, 13 October 2009, n 21681: [2009] Rep Foro it , ‘ Contratto in genere’, n 309. 87 Sacco/De Nova, 364. 88 See generally D’Amico (‘Regole’), 17 et seq., 99 et seq.; Cicero, 539. For a critical overview, see Perlingieri. 89 See above, mn. 9 et seq. 90 On the concept of ‘abuso del diritto’ and its application in recent Italian case law, see generally Lipari, 1 et seq.; Balestra, 541 et seq. 91 Cass civ 18 September 2009, n 20106: [2010] Foro it I 85. 92 Cass civ 23 November 2015, n 23868: [2016] Contratti 659, with a critical comment by Piraino. But see Cass civ 27 October 2016, n 21740, in Granelli, 357–361. 93 Cass civ 23 November 2015, n 23868: [2016] Contratti 659. 94 See for more examples FP Patti (‘Due questioni’), 700–701. 86

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issues, it is possible to affirm that also in B2B relationships in Italian law there is a certain tendency to evaluate the behaviour of contracting parties according to good faith. 33

b) Worthiness and causa contractus. On a different footing, it is necessary to consider judgments dealing with what are known as ‘claims-made’ clauses in insurance contracts, i.e. is that the insurance coverage is conditional on the circumstance that the claim is reported during the period of validity of the policy.95 Important rulings of the Italian Court of Cassation have affirmed the possibility of challenging the validity of such clauses in B2B contracts according to the general requirement of ‘worthiness of the contract’, as provided by Art. 1322.96 Claims-made policies are beneficial for the insurance industry. For instance, if one underwrites professional liability policies on an occurrence basis (i.e. the claim does not have to be made during the policy period), it is difficult for insurers ascertain their potential exposure. An occurrence-based policy can require indemnification of an insured party for multiple years after the policy has expired, whereas once a claims-made policy expires, the insurer can expect no further claims for that policy period. Nevertheless, the legitimacy of such clauses is questionable. The Italian Civil Code adopts, as a default rule, the loss-occurrence model (Art. 1917). Moreover, claimsmade policies could be detrimental for professionals for different reasons. As an example, if the misconduct that gives rise to the professional liability occurs during the policy period but the claim is not going to be filed in that period, it can be difficult to obtain a new claims-made policy if in the pre-contractual phase for the new insurance policy the contracting party complies with the duty of disclosing circumstances that may result in a prospective claim although not yet made.97 In addition, professionals need to maintain insurance for new claims from year-to-year and must be able to obtain cover for potential claims about which they acquire knowledge in the current year.98 The main rulings in Italian case law are two decisions of the Joint Chambers (Sezioni unite) of the Italian Court of Cassation. With the first,99 the Italian judges stated that so-called ‘mixed’ claims-made policies100 should be declared invalid because the underlying interests sought by the contract do not deserve protection under the applicable law and that such assessment must be carried out, pursuant to Art. 1322(2), by the lower courts (tribunals and courts of appeal). Yet this adoption of Art. 1322(2) was quickly abandoned by a subsequent judgment of the Joint Chambers.101 According to the new ruling, the behaviour of the insurance company, inserting claims-made terms in the contract, could amount to a case of pre-contractual liability. In addition, in cases in which the term is capable of subverting the function that the insurance contract should fulfil, a substantive review of the clause is possible on application of the ‘causa concreta’ doctrine, i.e. in the light of the concrete purpose that the contract has to fulfil.102 It is 95

As defined in Cass civ, sez un, 6 May 2016, n 9140. See generally Landini, 509 et seq.; Delfini, 118 et seq. Delfini, 119. 98 ibid. 99 Cass civ, sez un, 6 May 2016, n 9140: [2016] Foro it I 2014 with a comment by Pardolesi. 100 ‘Mixed’ claims-made policies provide coverage only if: (a) the claim is made during the policy period and also (b) the event (e.g. the professional’s misconduct) occurred in a limited previous period. 101 Cass civ, sez un, 24 September 2018, n 22437: [2018] Foro it I 3512 with a comment by Palmieri/ Pardolesi. 102 For references to previous judgments that apply the doctrine of ‘causa concreta’ and for some critical remarks, see Bianca (‘causa concreta’), 251 et seq.; V Roppo (‘causa concreta’), 957 et seq.; Martino, 1441 et seq.; Achille, 37 et seq. 96 97

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interesting to observe that in a recent comment, such an interpretation was seen as consistent with the new provision of the French Civil Code, contained in Art. 1170 (‘Toute clause qui prive de sa substance l’obligation essentielle du débiteur est réputée non écrite’).103 The aforementioned judgments still appear isolated, and it is difficult to assess 34 whether the proposed interpretations will bring substantive changes in the way in which B2B contractual relationships are treated. Nevertheless, they show a given willingness of Italian courts to limit contractual freedom where the effects of the contract appear irrational relative to the social and typical function that the specific contract should fulfil.

3. Abuse of economic dependence As stated above,104 Art. 9 Law 19 June 1998, No. 192 – concerning the abuse of economic dependence in subcontracting agreements for manufacturing activities – is considered a general clause under Italian case law, one potentially applicable to every B2B contract. Through this regulation, it is possible to declare the nullity of a contractual clause that constitutes an abuse of economic dependence (Art. 9(3)). Certainly, the abuse of economic dependence entails a substantive judicial review of clauses in B2B relationships. The abuse could also concern the price applied by the business which has more contractual power.105 At any rate, there is a fundamental difference between the abuse of economic dependence and a provision that provides for a substantive control of standard terms in B2B transactions, namely because of the elements that must be fulfilled in order to establish such an abuse. The special rules apply only where a given ‘dominance’ of a business over another business is recognisable.106 The dominance is expressed by the fact that the ‘strong’ business can impose unfair terms on the ‘weak’ business because the latter does not have other alternatives on the market. Thus, the provision does not aim to solve the problem of information asymmetry, as occurs in the context of standard terms control,107 but instead looks to prevent the extreme limitation of contractual freedom of one of the parties as a result of the economic power exercised by a stronger party (i.e. a stronger business).108 An often-mentioned example of a void clause concerns terms which are imposed during the renegotiation of a still existing contract.109 The renegotiation should be the result of a change in the circumstances, but sometimes it is sought by the stronger business to the detriment of the weaker business, the latter of which made investments with the expectation of continuing the contractual relationship. By way of renegotiation, the stronger business tries to achieve additional benefits compared to the ones obtain through the initial conclusion of the contract. Art. 9 Law 19 June 1998, No. 192 is applicable also in cases in which the stronger business, according to the contractual provisions, has the right to modify the clauses of the contract (ius variandi).110 The growing number of judgments that advocate an application of the abuse of economic dependence as a general clause could have a relevant impact on practical 103

Garofalo (‘La causa’), 212–213. See above, mn. 11. 105 See Trib Massa, 15 May 2014 [2015] Nuova giur civ comm I 218. 106 See Maugeri (‘Abuso’), 145–155; Di Marzio, 823; Nonne, 241–243; Barba, 30–31. 107 See generally Kötz (‘Der Schutzzweck’), 209 et seq.; Hatzis, 43 et seq.; Hesselink, 131 et seq. 108 Sirena, 814. 109 cf Natoli, 392. 110 Natoli, 393–394. 104

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matters.111 Nevertheless, the peculiarity of the provision, which seems to be more related to competition law than to contract law, cannot be understood as a substitute for a substantive control mechanism for standard terms in B2B relationships.

4. Exclusions or limitations of liability Exclusion or limitations of liability are regulated in general terms112 by Art. 1229. If there is an ‘exclusion of liability’, no obligation to pay damages arises in case of a breach of contract (according to Art. 1218). In terms of a ‘limitation of liability’, the provision intends to capture clauses that reduce the exposure of the breaching party as concerns an obligation to pay damages.113 A limitation of liability exists where parties – ex ante – provide for a cap indicating the maximum amount of payable damages.114 However, the scope of application is considered broader and is able to encompass also other contractual remedies,115 e.g. clauses that limit the possibility to terminate a contract in the presence of a fundamental breach116 or clauses that limit the availability of warranties in a contract of sale.117 40 Art. 1229(1) states that exclusions or limitations of liability provided for intentional or grossly negligent breaches are void.118 Therefore, in principle, only exclusions or limitations of liability for breaches resulting from ordinary negligence are enforceable. Nevertheless, even if the provision does not address the issue, some scholars argue that clauses aimed at excluding or limiting strict liability are valid, albeit with a reduced scope of application, except where they are contrary to public policy.119 41 The aforementioned claim is of importance, because – often – parties shape the wording of the term in a very generic way, without indicating that the clause covers only breaches incurred with ordinary negligence. According to a strict application of Art. 1229, such clauses should be considered void. Therefore, with the aim of safeguarding the effects of the contract, in such cases scholars propose reducing the scope of the clause, in the sense that it covers only breaches committed with ordinary negligence.120 The Italian courts have not taken an express position on the issue, but on the basis of a survey of the case law it has been possible to confirm that courts generally grant to the breaching party the possibility of demonstrating that the breach was not intentional and was not perpetrated with gross negligence.121 If the breaching party is able to provide such an evidence, she can escape liability. 42 The rules typically apply to clauses that exonerate a party from liability for breaches of contractual obligations, even if the performance was provided by a third party who acted as an auxiliary of the contracting party.122 A difficult issue arises with terms that define the subject matter of the contract (i.e. the contractual obligations), which 39

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See Maugeri (‘Subfornitura’), 791–793. Such clauses are also contained in the list of one-sided/onerous clauses as set out in Art 1341(2). 113 See Bianca (‘Diritto civile 5’), 75–77; Ceccherini, 220–223. 114 But also a penalty clause (clausola penale) could be qualified as a limitation of liability if the stipulated payment for non-performance is significantly lower than the foreseeable damage: see Bianca (‘Diritto civile 5’), 70; Villa, 966; Ceccherini, 223. 115 See Benatti, 400 et seq.; Delogu, 13 et seq.; Ceccherini, 217; FP Patti (‘La determinazione convenzionale’), 175. 116 Cass civ 9 May 2012, n 7054: [2012] Giur it 2255 with a comment by Sicchiero. 117 See Montinario, 399. 118 On the justifications for the provision, see Menichino, 77–78. 119 See Trimarchi, 203–4. D’Adda, 7–9. 120 See Delogu, 131 et seq.; D’Adda, 11; Pasquino, 496. 121 D’Adda, 11; Pasquino, 496. 122 Cass civ 7 October 2010, n 20808 [2010] Rep Foro it, ‘Obbligazioni in genere’, n 54. 112

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theoretically are not subject to Art. 1229. The line to draw in this respect can be fine, and the courts have repeatedly been engaged in the exercise of providing an answer to this crucial question because the efficacy of some terms depend on it.123 The main examples in case law are insurance contracts, where the predominant approach is to not consider clauses that define the risk as limitation of liability clauses.124 By contrast, in the field of banker’s liability for loss of items contained in safe deposit boxes, clauses that impose a cap on the value of the items inserted in the boxes are usually considered as limitations of liability.125 In addition, Art. 1229(2) states that every clause that excludes or limits liability is 43 void if the fact of the debtor or of her auxiliaries constitutes an infringement of duties deriving from public policy. The typical example of a clause held void according to the latter provision is an exclusion or a limitation of liability connected to a performance which injures moral or physical integrity or violates criminal law.126 The nullity provided by Art. 1229 usually affects only the individual clause which 44 excludes or limits liability, whereas the rest of the contract remains valid.127 Such a conclusion follows the general rule of Art. 1419 on the ‘partial’ nullity of a contract: The nullity of the single clause results in the nullity of the entire contract only if contracting parties would not have concluded the contract without the part affected by nullity. This is normally not the case when it comes to exclusion or limitation of liability clauses. It means that damages are an available remedy in cases of breach.

5. Time constraints for the exercise of a right Parties can provide time constraints on the exercise of a right (known as ‘clausole di 45 decadenza’). According to Art. 2965, such clauses cannot render the exercise of the right excessively difficult. The provision can be understood as a recognition of contractual freedom, which counterbalances to a certain extent the prohibition against modifying the prescription periods fixed by the law (Art. 2936).128 Time constraints are admissible only in the field of disposable rights. When contained in standard conditions, time constraints are subject to form requirements provided by Art. 1341(2).129 The legal system does not fix a precise limitation on contractual freedom in this 46 regard. The evaluation demanded of the judge as to the difficulty to exercise the right is discretional in nature and decisions are taken on a case-by-case basis.130 The Court of Cassation has clarified that judges have to consider the length of the period established by the agreement for exercise the right and/or the activity that is required of the creditor in order to exercise her right.131 In this context, provisions concerning the suspension or the interruption of the prescription period are not applicable, but parties can stipulate suspension periods by agreement.132 123

See generally Bianca (‘Diritto civile 5’), 76–77; D’Adda, 29–33. See Cass civ 15 May 2018, n 11757: [2018] Arch. circolaz 617. Nevertheless, there are exceptions. The issue is related to an extension of a limitation of risk: see, for instance, Cass civ 7 April 2010, n 8235: [2010] Foro it I 2413. 125 See Cass civ 22 December 2011, n 28314: [2012] Giust civ I 1477; Cass civ 30 September 2009, n 20948: [2009] Rep Foro it , ‘Contratti bancari’, n 25. 126 Bianca (‘Diritto civile 5’), 75; Ceccherini, 307; FP Patti (‘La determinazione convenzionale’), 347. 127 Pasquino, 495–496. 128 See generally S Patti, 36; Gallo 868–869; Di Lorenzo, 1308. 129 See above mn. 22 et seq. 130 Di Lorenzo, 1311. 131 See Cass civ 27 October 2005, n 20909: [2006] Obbligazioni e contratti 211; Cass civ, 25 March 1998, n 3186: [1998] Rep Foro it, ‘Lavoro (rapporto)’, n 1925. 132 Di Lorenzo, 1308. 124

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IV. International application According to well-established case law, the rules provided for by Arts 1341, 1342 and 1370 are part of the domestic ordre public. This means that they are mandatory in nature and cannot be set aside through a contractual agreement.133 Nevertheless, if according to rules on private international law an international contract is subject to the law of a different State, the aforementioned provisions do not apply. In this respect, there are several examples in case law.134 48 The explanation is that the Italian legal system distinguishes between ‘domestic public policy’, composed primarily of mandatory rules, and ‘international public policy’, referring to the fundamental principles of the Constitution.135 If the judgment adopted in a different State infringes Italian international public policy, the ruling is not enforceable in the Italian jurisdiction.136 Arts 1341, 1342 and 1370 do not make up a part of so-called international public policy, and, therefore, the validity of standard terms can be assessed on the basis of the foreign law applicable to the contract.137 Nor can the rules of the Italian Civil Code on general conditions and form contracts be considered ‘overriding mandatory provisions’ (norme di applicazione necessaria) that may in any case be applied by Italian judges even if a law different than the Italian law is applicable to the contract.138 49 With respect to the other mandatory rules put under scrutiny in the present contribution, only rules that protect personality rights and good faith reflect constitutional principles comprising international public policy. For good faith, the assumption is based on the strong connection to the duty of solidarity stated in Art. 2 of the Italian Constitution.139 At any rate, the minimal body of existing case-law prevents the drawing of any general conclusions. The Court of Cassation has in the past stated that mandatory rules on limitations of liability are not ‘overriding mandatory provisions’, except in cases in which the aim of the rule is avoiding a limitation of liabilities in relation to non-economic interests.140 50 A different outcome holds true for purely domestic contracts lacking international connections. In these cases, parties cannot set aside national mandatory provisions through a choice-of-law clause.141 For instance, two Italian parties who concluded a contract in Italy that had to be performed in Italy could not escape the application of Italian mandatory rules by choosing English law as the lex contractus. Therefore, one has to distinguish between national default rules, which can be derogated from by the choice of a foreign law, and national mandatory rules, which cannot be derogated from by a choice of a foreign law. If in a purely domestic contract parties choose the law of a different legal system so as to derogate from the law of the Italian legal system, the 47

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Bianca (‘Condizioni generali di contratto’), 7. Cass civ, 25 March 1961 n 683 [1962] Diritto marittimo 252; Cass civ, sez un, 2 May 1960 n 968: [1961] Foro padano I 1125. 135 See especially Cass civ 30 September 2016, n 19599. International public policy is mentioned by Art. 16 Law 31 May 1995 no. 218. 136 See for a general overview Perlingieri/Zarra. 137 Bianca (‘Condizioni generali di contratto’), 7; Sacco/De Nova, 366; G Patti/S Patti, 361–362. 138 ‘Overriding mandatory provisions’ are regulated by Art. 17 Law 31 May 1995 No. 218. See on the relationship between ‘international public policy and ‘overriding mandatory provisions’, Bonomi, 214–217; Carbone, 104–107. 139 See generally Grondona, 727 et seq.; Piraino. 140 Cass civ, 6 September 1980, n 5156: [1981] Riv dir int priv proc 923. 141 See Bonomi, 19–20; Frignani/Torsello, 126; Alpa, 581. 134

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contract would be subject to the mandatory provisions of both legal systems.142 Such a conclusion is consistent with Art. 3(3) Rome I.143 In these cases, the Italian mandatory rules would apply only if the foreign law chosen by the parties does not provide rules able to adequately safeguard the interests protected by the Italian mandatory rules. The latter are applicable also if the parties have chosen a foreign jurisdiction.144 From a different point of view, it should be observed that choice-of-law clauses are 51 not subject to the control provided for by Arts 1341 and 1342. The latter refer only to jurisdiction clauses and scholars do not consider these provisions applicable to choiceof-law clauses.145

V. Conclusion The first important aspect to note is that Italian law does not provide for the 52 substantive judicial review of standard terms in B2B relationships. The control mechanism of Arts 1341 and 1342 merely relates to form. If a business fulfils the requirements set by the Italian Civil Code – i.e. ‘express written approval’ – it is in principle not possible to challenge the validity of an onerous term. This explains why judicial disputes usually affect only small and medium-sized enterprises, whereas big and well-organised businesses normally do not have any problem in satisfying the form requirements and enforcing one-sided clauses.146 Given the fact that Italian case law is inconsistent and that it is often uncertain whether a term falls under one of the clauses set out in the list of Art. 1341(2), it is advisable to call for a separate signature whenever doubt exists as to the one-sided nature of a clause. In the absence of a mechanism for scrutinising terms for substantive unfairness, 53 there are other ways of protecting the interests of weaker parties in B2B relationships (‘indirect’ judicial control). Some recent judgments demonstrate that where businesses engage in grossly unfair behaviour in relationships with weaker businesses, even if undertaken on the basis of contractual clauses, unpredictable outcomes may result on application of open-ended clauses such as ‘good faith’ and ‘worthiness’, notions which are considered of growing importance also in the field of B2B contracts. In cases in which one of the businesses is in the position of exercising a dominance over another, also rules on abuse of economic dependence, provided by Art. 9 Law 19 June 1998, No. 192, may have an impact on the contractual relationship and cause the nullity of a clause where a business is, in commercial relations with another business, able to realise an excessive imbalance of rights and obligations. Exclusions and limitations of liability are also tackled by general mandatory rules, 54 which prescribe the nullity of a clause in cases of intentional breach and gross negligence, or for breaches that infringe rights related to public policy. The regime of prescription cannot be derogated from by contracting parties. However, it is possible to establish, through a contractual agreement, time constraints on the performance of obligations. Such limitations cannot render the exercise of a right excessively difficult, Art. 2965. The application of the latter provision is subject to the discretionary evaluation of the courts. 142

Pietrangeli, 1090. With respect to the issue discussed in the text, see Cannizzaro, 589; Boschiero, 70–75. 144 Pietrangeli, 1091. 145 Alpa, 582. 146 Morello, 343. 143

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Except for good faith, the rules are usually not considered overriding mandatory rules or rules related to ‘international public policy’, with the result that they do not prevent an Italian court from applying a foreign law – one setting different rules as governing the contractual relationship – to an international contract. However, the rules are mandatory under Italian law, meaning that parties cannot set them aside through a choice of a foreign law in a purely domestic contract.

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H. The Netherlands Bibliography: Ancery/Pavillon, ‘Processuele aspecten van reflexwerking van consumentenrecht’ [2014] Weekblad voor Privaatrecht, Notariaat en Registratie 647–655; Asser, Internationaal vermogensrecht, Vol. 10‐III (Kluwer 2015); Asser, De verbintenis in het algemeen, Vol. 6‐I (Kluwer 2016); Asser, Algemeen deel IPR, Vol. 10‐I (Kluwer 2018); Asser, Algemeen overeenkomstenrecht, Vol. 6‐I (Kluwer 2018); Asser, Algemeen overeenkomstenrecht, Vol. 6‐III (Kluwer 2018); Asser, Opdracht, Vol. 7‐IV (Kluwer 2018); Bakker, ‘Uitleg van commerciële contracten (I)’ [2011] Weekblad voor Privaatrecht, Notariaat en Registratie 477–485; Bakker, ‘Uitleg van commerciële contracten (II, slot)’ [2011] Weekblad voor Privaatrecht, Notariaat en Registratie 502–511; Bakker, ‘Opzegging van duurovereenkomsten – Enkele opmerkingen naar aanleiding van HR 15 april 2016, RvdW 2016/520 (Provincie Noord-Holland c.s./ Gemeente Amsterdam)’ [2016] Maandblad voor Vermogensrecht 167–173; Beale (ed.), Chitty on Contracts (32nd edn., Sweet & Maxwell 2018); Beenders, Bewijs(last) terhandstelling algemene voorwaarden [2009] Maandblad voor Vermogensrecht 46–51; van Bijnen, Aanvullend contractenrecht (Boom 2005); Boeve, ‘Uitleg van overeenkomsten: update van een overzicht naar aanleiding van de uitleg van een WCAM-overeenkomsten’ [2017] Bedrijfsjuridische berichten 75–77; Breeman, ‘Vijf jaar ‘taalkundige uitleg’ van commerciële contracten, een overzicht’ [2012] Maandblad voor Vermogensrecht 327–334; Burgers, ‘Voorlopig oordeel overeenkomstig taalkundige uitleg overeenkomst’ [2020] Bedrijfsjuridische berichten 51–54; Dammingh, ‘Matiging van een contractuele boete: terughoudendheid troef’ [2011] Tijdschrift Overeenkomst in de Rechtspraktijk 30–35; Drion, ‘De innovatieve contractenmaker en de bewijsovereenkomst’ [2004] Nederlands Juristenblad 17; Drion, ‘De status van de redelijkheid en billijkheid’ [2007] Nederlands Juristenblad 433; Drion, ‘Naschrift’ [2007] Nederlands Juristenblad 1234; Drion, ‘Uitleg van uitleg’ [2007] Nederlands Juristenblad 279; Drion/van Wechem, ‘Proportionele redelijkheid en billijkheid’ [2006] Nederlands Juristenblad 567–571; van Duijn-Koopman/van de Pas, ‘Opzegging van duurovereenkomsten en de redelijkheid en billijkheid’ [2018] Contracteren 80–85; van Dunné, Normatieve uitleg (Kluwer 1971); van Dunné, ‘Normatieve uitleg’ algemeen aanvaard, maar ook in de ruime zin, inclusief derogerende werking en aanvulling van leemte (I)’ [2018] Weekblad voor Privaatrecht, Notariaat en Registratie 211–218; Duyvensz, De redelijkheid van de exoneratieclausule (Boom 2003); Farnsworth, ‘Comparative Contract Law’ in: Reimann/Zimmermann (ed.), The Oxford Handbook of Comparative Law (1st edn., OUP 2012) 899–936; Gebauer/Huber (ed.), Rechtsdurchsetzung durch Vertragsstrafe und Aufrechnung (Mohr Siebeck 2018); Hammerstein/Vranken, Beëindigen en wijzigen van overeenkomsten – Monografieёn Nieuw BW A10 (Kluwer 2003); Hartkamp, ‘Civil Code Revision in the Netherlands 1947–1992’ in: Haanappel/Mackaay (ed.), Nieuw Nederlands Burgerlijk Wetboek – Het Vermogensrecht (Kluwer 1990) XIII–XXVII; Hartkamp, ‘Judicial Discretion Under the New Civil Code of the Netherlands’ (1992) 40 American Journal of Comparative Law 551–571; Hartkamp, ‘Boekaankondiging’ [2006] Weekblad voor Privaatrecht, Notariaat en Registratie 468–471; Hartman Kok, ‘De uitleg van overeenkomsten: zuiver commerciële transacties (arrest Uni-Invest)’ [2007] Vennootschap & Onderneming 162–167; Heering, ‘Contra proferentem: uitlegregel of gezichtspunt?’ [2003] Weekblad voor Privaatrecht, Notariaat en Registratie 99–102; Hendrikse, ‘25 jaar nieuw vermogensrecht: uitleg van overeenkomsten in het handelsrecht’ [2017] Nederlands Tijdschrift voor Handelsrecht 133–140; Hesselink, De redelijkheid en billijkheid in het Europese privaatrecht (Kluwer 1999); Hesselink, ‘The Ideal of Codification and the Dynamics of Europeanisation: The Dutch Experience’ in: Vogenauer/Weatherill (ed.), The Harmonisation of European Contract Law (Hart 2006) 39–70; Hijma, Algemene voorwaarden – Monografieёn Nieuw BW B55 (Kluwer 2016); de Jong, Niet-nakoming van verbintenissen – Monografieёn Nieuw BW B33 (Kluwer 2017); Jongeneel/Wessels, ‘Ondernemingen en algemene voorwaarden’ [2010] Vermogensrechtelijke Analyses 15–29; Koopmann, Bevrijdende verjaring – Monografieёn Nieuw BW B14 (Kluwer 2010); Kraaipoel, ‘Er staat wat er staat: de grammaticale uitleg van contracten’ [2007] Bedrijfsjuridische berichten 294–296; Kruisinga, ‘Battle of forms’ in: Wessels/Jongeneel (ed.), Algemene voorwaarden (Kluwer 2017) 37–52; Martens, ‘De matiging van contractuele boetes’ [2018] Bedrijfsjuridische berichten 51–53; van der Minne, ‘Matiging contractuele boete: kans van slagen?’ [2015] Tijdschrift Overeenkomst in de Rechtspraktijk 20–25; Pavillon, ‘De bindende kracht van tweezijdige algemene voorwaarden’ [2013] Nederlands Tijdschrift voor Burgerlijk Recht 367–375; Pavillon, ‘Processuele aspecten van reflexwerking van consumentenrecht’ [2014] Weekblad voor Privaatrecht, Notariaat en Registratie 647–655; Peel, Treitel on The Law of Contract (14th edn., Sweet & Maxwell 2015); Ruygvoorn, ‘Het belang van verzekerbaarheid bij doorbraak van exoneratieclausules’ [2016] Bedrijfsjuridische berichten 217–220; van Schaick, ‘Uitlegregels’ [1998] Weekblad voor Privaatrecht, Notariaat en Registratie 272–277; Schelhaas, Het boetebeding in het

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Part 1. Country Reports Europese contractenrecht (Kluwer 2004); Schelhaas, ‘De uitleg van overeenkomsten ná DSM/Fox’ [2006] Maandblad voor Vermogensrecht 26–32; Schelhaas, ‘Pacta sunt servanda bij commerciële contracten’ [2008] Nederlands Tijdschrift voor Burgerlijk Recht 150–160; Schelhaas, ‘Boeteclausules in het internationale contractenrecht’ in: Wessels/van Wechem (ed.), Contracteren in de internationale praktijk (Kluwer 2011) 233–246; Schelhaas, ‘Het Haviltex-criterium en de uitleg van commerciële contracten – Het Mexx/ Lundiform-arrest nader beschouwd’ [2012] Tijdschrift Overeenkomst in de Rechtspraktijk 35–40; Schelhaas, Redelijheid en billijkheid – Monografieёn Nieuw BW A5 (Kluwer 2017); Schelhaas/Valk, Uitleg van rechtshandelingen (Uitgeverij Paris 2016); Schoordijk, ‘Het betwiste onderscheid tussen uitleg en derogeren te goeder trouw breekt op’ [2007] Nederlands Juristenblad 1233; Snijders, ‘Beperkende werking, een paradox of een instrument?’ [2007] Weekblad voor Privaatrecht, Notariaat en Registratie 6–12; Spanjaard, ‘De grenzen van het recht van vernietiging van algemene voorwaarden verkend’ [2012] Contracteren 107–110; Spanjaard, ‘Recht doen aan wat partijen bedoelen’ [2017] Contracteren 29–33; Spanjaard, ‘Uitleg van overeenkomsten: de brug tussen CAO en Haviltex’ [2017] Aansprakelijkheid, Verzekering & Schade 49–51; Struycken, ‘Boek 10 BW – een grote stap in de codificatie van het internationaal privaatrecht’ [2011] Vermogensrechtelijke Analyses 3–40; Tanja, ‘Een college opzegging van duurovereenkomsten voor onbepaalde tijd’ [2017] Bedrijfsjuridische berichten 210–212; Tjittes, ‘De betekenis van de parol evidence rule in het Amerikaanse contractenrecht’ [2002] Contracteren 4–12; Tjittes, ‘Uitleg van schriftelijke contracten’ [2005] Rechtsgeleerd Magazijn Themis 2–29; Tjittes, ‘Terug naar de tekst – Een herwaardering van de tekstuele uitleg van contracten’ [2007] Weekblad voor Privaatrecht, Notariaat en Registratie 417–423; Tjittes, Uitleg van schriftelijke contracten (Ars Aequi 2009); Tjittes, Rechtsverwerking en klachtplichten – Monografieёn Nieuw BW A6b (Kluwer 2013); van Tongeren, ‘Uitleg, kan het eenvoudiger?’ [2018] Nederlands Juristenblad 2754–2755; Valk, ‘Opzegging van duurovereenkomsten na Gemeente/SNU en Stedin’ [2012] Nederlands Tijdschrift voor Burgerlijk Recht 176–181; Valk, ‘Verder denken over uitleg van rechtshandelingen’ [2018] Nederlands Juristenblad 1950–1957; Vlas, IPR en BW – Monografieёn Nieuw BW A27 (Kluwer 2015); Wallart, ‘Drafting tips & skills: het contractueel regelen van de uitleg’ [2018] Tijdschrift Overeenkomst in de Rechtspraktijk 27–29; van Wechem, Toepasselijkheid van algemene voorwaarden (Kluwer 2007); van Wechem/Spanjaard, ‘Gelding van algemene voorwaarden’ [2012] Tijdschrift voor Bouwrecht 480–484; van Wechem/Wissink, ‘Nogmaals: uitleg van overeenkomsten volgens Haviltex of volgens de CAO-norm’ [2004] Contracteren 105–106; Wessels, ‘Reflexies bij reflexwerking’ [1996] Weekblad voor Privaatrecht, Notariaat en Registratie 725–726; Wibier, ‘Perspectieven op de uitleg van overeenkomsten’ [2018] Nederlands Juristenblad 2749–2753; van der Wiel, ‘De bewijsovereenkomst’ [2002] Weekblad voor Privaatrecht, Notariaat en Registratie 221–230; Wissink, ‘Uitleg volgens Haviltex of de CAO-norm? Over een vloeiende overgang en de noodzaak om toch te kiezen’ [2004] Weekblad voor Privaatrecht, Notariaat en Registratie 407–415; Wissink, ‘Wegcontracteren van de aanvullende werking van de redelijkheid en billijkheid’ [2011] Contracteren 24–26; Wissink, ‘Vertrouwen op tekstuele uitleg’ [2012] Tijdschrift Overeenkomst in de Rechtspraktijk 26–33; Wolters, ‘Uitleg van schriftelijke overeenkomsten’ [2009] Contracteren 14–22; Wolters, ‘De invloed van de verhouding tussen schade en boete op de matiging van boetebedingen – Een empirische analyse’ [2016] Aansprakelijkheid, Verzekering & Schade 109–117; Wolters, ‘De matiging van boetebedingen bij koopovereenkomsten ten aanzien van onroerende zaken – Een empirische analyse van de invloed van het gebruikelijke karakter’ [2017] Weekblad voor Privaatrecht, Notariaat en Registratie 122–128; Wolters, ‘De boetebedingen van de ‘hebberige’ schuldeiser in het licht van de vernietiging en matiging van contractuele boetes’ [2018] Tijdschrift Overeenkomst in de Rechtspraktijk 39–49; van Zeben/du Pon, Parlementaire Geschiedenis van het Nieuwe Burgerlijk Wetboek, Invoering Boeken 3, 5 en 6, Boek 6, Algemeen gedeelte van het verbintenissenrecht (Kluwer 1990); Zimmermann, The Law of Obligations – Roman Foundations of the Civilian Tradition (Clarendon 1990); Zweigert/Kötz, An Introduction to Comparative Law (OUP 1998).

Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... 1. Reasonableness and fairness..................................................................... 2. Standard terms ............................................................................................ 3. Penalty clause .............................................................................................. 4. Exoneration of liability clause.................................................................. III. Requirements and legal consequences ....................................................... 1. Reasonableness and fairness..................................................................... a) General .................................................................................................... b) Groups of cases...................................................................................... aa) Law of prescription and contractual limitation clauses ........

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H. The Netherlands bb) Termination of long-term contracts.......................................... cc) Notice as a condition for rescission of a contract.................. dd) Forfeiture.......................................................................................... c) Legal consequences ............................................................................... d) Party autonomy ..................................................................................... e) Interpretation of contracts .................................................................. aa) General rules of interpretation.................................................... bb) Interpretation of commercial contracts .................................... cc) Entire agreement and interpretation clauses ........................... dd) Interpretation of international commercial contracts ........... 2. Standard terms ............................................................................................ a) Definition of standard terms .............................................................. b) Offer and acceptance; battle of forms .............................................. c) Voidability .............................................................................................. aa) Unreasonably onerous term ........................................................ bb) Opportunity to take cognisance ................................................. d) Exclusions ............................................................................................... aa) Large commercial entities ............................................................ bb) Other party employing the same standard terms................... e) Reasonableness and fairness and reflexive effects ......................... 3. Penalty clauses............................................................................................. a) General .................................................................................................... b) Compensatory or sanctioning penalty clauses ............................... c) Conditions for the assertion of the penalty obligation................. d) Mitigation................................................................................................ e) Additional damages .............................................................................. f) Party autonomy ..................................................................................... 4. Exoneration of liability.............................................................................. a) General .................................................................................................... b) Test and relevant factors ..................................................................... c) Exoneration for intent and gross negligence .................................. IV. International application ............................................................................... 1. Reasonableness and fairness..................................................................... 2. Standard terms ............................................................................................ 3. Penalty clauses and exoneration clauses ...............................................

18 19 20 21 22 23 25 27 29 31 32 33 35 36 36 38 44 44 47 48 50 50 51 55 56 59 60 61 61 62 63 64 64 65 70

I. Overview Commercial contracts often contain precisely formulated clauses on the rights and 1 obligations of the parties, the distribution of risks, and the limitation of liability. The parties to the contract make their cost and price calculations on the basis of these clauses. Judicial interference with the contract could disturb the distribution of rights, obligations, and risks, thereby leading to unexpected liabilities for one of the parties and to windfall benefits for the other. Against this background, it is often stated that commercial parties prefer contractual certainty over fair and just results.1 Whatever merits such a claim may have, this chapter will not address some of the fundamental questions on the functions of contract law and of law and economics. Rather, it will explore the main legal institutions in Dutch law which allow judges to review the terms of commercial contracts. The principle of reasonableness and fairness overarches Dutch private law. In general, 2 it requires the parties to a contract to behave in accordance with good faith. Much like in other legal systems adhering to general principles of good faith and fair dealing, such as 1

See from a Dutch perspective e.g. Tjittes (‘Uitleg’ RM Themis), 20.

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Germany (cf. § 242 BGB) and unlike in England2, the Dutch principle of reasonableness and fairness is a potential source of precisely the legal uncertainty commercial parties typically aim to exclude or at least confine as it may enable judges to scrutinise the terms of a contract in an intrusive manner. However, as will be demonstrated, Dutch courts have proven to be particularly receptive of the commercial nature of the contract and have shown to be willing to accommodate such a circumstance in the application of the principle of reasonableness and fairness. Accordingly, this chapter will discuss interpretation principles for (B2B) contracts as part of the principle of reasonableness and fairness since these two standards are to a great extent linked in Dutch law.3 3 Moreover, the law on standards terms, which are of great practical importance in commercial contracting, generally permits judges to review and potentially void standard clauses. Consequently, this chapter will deal with the Dutch rules governing such terms. 4 This chapter will finally address two contract terms in particular, namely penalty clauses as well as exoneration or limitation of liability clauses. On the one hand, such contractual terms are of particular importance in B2B contracts. From a comparative perspective, on the other hand, many legal systems appear to be reluctant to except their unlimited validity.4 Typically, such clauses are therefore subject to some form of judicial scrutiny. Unlike various other legal systems, Dutch law gives effect to both liquidated damages clauses and sanctioning penalty clauses broadly, while judicial interference is fairly limited. The Dutch rules governing the exclusion or limitation of liability have not been codified, but were rather developed in case law.

II. Regulatory framework 1. Reasonableness and fairness The principle of reasonableness and fairness (redelijkheid en billijkheid) is arguably one of the more prominent characteristics of modern Dutch private law.5 Not only do many provisions contain standards of or correction mechanisms based on reasonableness and fairness, the legislator has accordingly highlighted its paramount importance by dedicating two general norms to the principle, both in the general part of the law of obligations (Art. 6:2 Burgerlijk Wetboek, hereinafter: BW) as well as in the general part of the law of contract (Art. 6:248 BW). 6 When it comes to the functions of the principle of reasonableness and fairness in contract law, Dutch law distinguishes between its supplementary effect (aanvullende werking) and restrictive effect (beperkende werking).6 Both functions can be derived from Arts 6:2 and 6:248 BW alike, more in particular from these norms’ first and second subsections, respectively. This chapter will focus on the contractual principle of reasonableness and fairness as codified in Art. 6:248 BW7: 5

2

cf. Whittaker, mn. 1‐044 et seq., in Chitty on Contracts. cf. e.g. Sieburgh, mn. 364 et seq., in Asser, Algemeen overeenkomstenrecht. 4 See on penalty clause from a comparative perspective inter alia Farnsworth, 928 et seq.; the contributions in Gebauer/Huber; Schelhaas (‘Het boetebeding’); Schelhaas (‘Boeteclausules’); Zimmermann, 95 et seq. 5 cf. Hartkamp (‘Civil Code Revision’), XXI et seq.; Hartkamp (‘Judicial Discretion’), 554 et seq.; Hesselink (‘The Ideal’), 41. 6 cf. Sieburgh, mn. 402 et seq., in Asser, Algemeen overeenkomstenrecht. 7 Translations of legal provisions in this chapter are partially derived from Warendorf Dutch Civil and Commercial Law Legislation, be it with modifications. Most provisions, however, were translated by the author. 3

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H. The Netherlands Art. 6:248 BW (1) A contract does not merely entail the legal effects agreed upon by the parties, but also those applying by virtue of the nature of the contract, the law, usage or the requirements of reasonableness and fairness. (2) A rule binding upon the parties by virtue of the contract does not apply to the extent that this, under the given circumstances, would be unacceptable according to the standards of reasonableness and fairness.

The principle is obviously in need of interpretation and its precise effects, which will 7 be dealt with below, have therefore predominantly been developed by the courts. The Hoge Raad (Supreme Court of the Netherlands) has repeatedly held that particularly the principle in its restrictive function should not be employed lightly and that courts should apply it with restraint.8

2. Standard terms The Dutch rules governing standard terms (algemene voorwaarden) are codified in 8 Arts 6:231‐247 BW. Standard terms are ‘one or more terms drafted with the aim of being included in a number of contracts, safe such terms determining the core of the obligation, insofar as the latter are formulated in a clear and comprehensive manner’ (Art. 6:231 (a) BW). Individual and collective labour law, however, are excluded from the substantive scope of the law on general terms (Art. 6:245 BW)9 and to certain contracts, the provisions apply with deviations10. For the purpose of standard terms legislation, the contracting parties are defined as ‘user’ (gebruiker), i.e. the party employing a set of standard terms, and simply as ‘the other party’ (wederpartij) (Art. 6:231(b) and (c) BW respectively).11 The provisions on standard terms are simple mandatory rules (Art. 6:246 BW).12 In terms of its general structure, the Dutch law on standard terms is most closely related 9 to the (former) German AGB‐Gesetz13.14 In a first step, it has to be assessed whether the standard terms have been incorporated into the framework governing the parties’ contractual relations. Such an inclusion presupposes that the other party has signed for the application of standard terms or has accepted them in any other manner (Arts 6:231(c), 6:217(1) BW), which needs to be assessed on the basis of the ordinary rules on the interpretation of declarations of will (wilsverklaringen) (Arts 3:33, 3:35 BW).15 In the event that standard terms have been accepted, Dutch law explicitly stipulates that the other party is bound by all standard terms, even in the event that ‘the user understood or ought to have understood that the other party was unaware of their content’ (Art. 6:232 BW).16 8 cf. the decisions by the Hoge Raad (hereinafter: HR) from 9.1.1998: NJ 1998, 363 (Gemeente Apeldoorn/Duisterhof); 14.12.2001: NJ 2002, 59 (Bouwkamp/Van Dijke Semo); 15.10.2004: NJ 2005, 141 (GTI/Zürich); 17.12.2004: NJ 2005, 271 (Ampatil/Weggelaar). 9 cf. Hijma, 3; Sieburgh, mn. 486 et seq., in Asser, Algemeen overeenkomstenrecht. 10 Most notably in the field of transportation and shipping law. At the same time, standard terms legislation can accordingly be applicable beyond contract law, such as to standard terms for land leases (erfpachtvoorwaarden), cf. HR 29.4.2016: NJ 2018, 41 (Erfpacht Amsterdam), and standard terms for mortgages (hypotheekvoorwaarden). 11 cf. on both definitions Hijma, 19 et seq., with references. 12 cf. Hijma 4; Sieburgh, mn. 510 et seq., in Asser, Algemeen overeenkomstenrecht. 13 Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen (AGB-Gesetz) v. 9.12.1976, BGBl. I, p. 3317. Repealed by the 2001 reform of the law of obligations and integrated into the BGB in §§ 305 et seq. For details on the German provisions see the contribution by Wais, in this volume. 14 cf. van Zeben/du Pon, 1454 et seq. See also Hartkamp, (‘Judicial Discretion’) 555; Hijma, 9 et seq.; Sieburgh, mn. 503 et seq., in Asser, Algemeen overeenkomstenrecht. 15 cf. HR 21.9.2007: NJ 2009, 50 (Ammerlaan/Enthoven) at 4.2; Hijma, 23 et seq., with references; Sieburgh, ibid. mn. 474; in general also van Wechem. 16 cf. on the doctrinal backgrounds Sieburgh, ibid., mn. 470 et seq.

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Once it has been established that standard terms indeed became part of the contract, a term can, in a second step, be voided (vernietigd) ex nunc by the other party (cf. Art. 3:53 (1) BW)17. To that aim, one of two grounds has to be invoked alternatively. A standard term is voidable (vernietigbaar) (i) ‘if it is unreasonably onerous (onredelijk bezwarend) to the other party, taking into consideration the nature and the further content of the contract, the manner in which the terms and conditions came into existence, the mutually apparent interests of the parties, and the other circumstances of the case’ or (ii) ‘if the user has not given the other party a reasonable opportunity to take cognisance of the general terms and conditions’ (Art. 6:233(a) and (b) BW respectively). With regards to the former, Dutch law, as in the laws of all other EU Member States, contains a ‘black list’ and ‘grey list’ (Art. 6:236, 6:237 BW respectively) as a result of the eventual18 transposition of the Unfair Terms Directive. However, these lists only – at least directly19 – play a role when the ‘other party’ has contracted as a consumer (Art. 6:230g(1)(a) BW). 11 Both grounds for voidability are, however, subject to limitations in various situations of considerable relevance in B2B contracts. First of all, neither ground can be invoked by certain large commercial entities (Art. 6:235(1) BW). Moreover, the other party is barred from relying on the former ground, i.e. unreasonable prejudice, if the party itself on multiple occasions has employed the same or a similar set of standard terms when contracting with third parties (Art. 6:235(3) BW). Finally, Art. 6:247 BW contains a scope rule which fully excludes the applicability of Dutch legislation on standard terms in certain international situations. In practice, these rules will often have the effect that Dutch standard terms legislation does not apply to (international) commercial contracts. 12 Notwithstanding these exclusions, the other party can argue that a standard term violates the principle of reasonableness and fairness. By doing so, it can under certain circumstances prevent the user from relying on a standard term (cf. Art. 6:248(2) BW). From a doctrinal perspective, being barred from relying on a clause does not invalidate the respective term and therefore has to be distinguished from invoking its voidability (vernietigbaarheid) on the basis of standard terms legislation. In practice, however, these dogmatic differences will generally not be material in the sense that under both regimes, the term ultimately cannot be applied. 10

3. Penalty clause 13

The Dutch legislator has devoted four articles (Art. 6:91 BW et seq.) to contractual stipulations entailing a form of penalty in the event of breach of contract.20 A penalty clause (boetebeding) is defined as ‘any stipulation according to which the debtor, in the event that he fails to perform an obligation, is obliged to pay a sum or perform another obligation, irrespective of whether the aim of the clause is to compensate damages or merely to incentivise performance’ (Art. 6:91 BW). Unlike common law systems, such as English law21, Dutch law therefore recognises both compensatory clauses aiming at the 17

cf. ibid., mn. 489. The Dutch legislator had initially been of the opinion that Dutch law was already in full conformity with the Unfair Terms Directive and had therefore refrained from taking legislative measures. Only after proceedings before the CJEU on the violation of the requirement of transparency, various provisions of the Directive were indeed transposed into national law. Cf. CJEU, C-144/99 Commission/Netherlands ECLI:EU:C:2001:257. Cf. also Hesselink (‘The Ideal’), 43 et seq.; Hijma, 6 et seq. 19 See below mn. 37. 20 Special provisions apply to employment contracts (Art. 7:650 et seq. BW) and instalment sale (Art. 7A:1576b BW). 21 cf. traditionally Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79; in recent times particularly Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 6. Cf. also Peel, mn. 20‐129 et seq. For details on English law, see the contribution by Devenney, in this volume. 18

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liquidation of damages as well as sanctioning penalty clauses.22 Under certain circumstances, the judge has the power to mitigate a contractual penalty (matiging) to the benefit of the debtor to the amount of damages ordinarily payable pursuant to the rules on damages (Art. 6:94(1) BW). However, the judge accordingly has the power to award compensation for damages in addition to the amount payable under a compensatory penalty clause to the benefit of the creditor (Art. 6:94(2) BW). Contractual stipulations in deviation from the mitigation provision are null and void (nietig) (Art. 6:94(3) BW), which is a simple mandatory rule (Art. 6:94(3) BW). All other provisions on penalty clauses can be derogated from by agreement.

4. Exoneration of liability clause Dutch law does not contain a general codified rule on the limitation or exclusion of 14 liability (beperking or uitsluiting van aansprakelijkheid, together also: exoneratie and, somewhat archaically, vrijtekening), but various standards have been developed by the Hoge Raad. In addition, the legislator has enacted various specific provisions, e.g. for exonerations in medical treatment contracts (Art. 7:463 BW)23, travel contracts (Art. 7:508 et seq. BW)24 and, most notably, in transportation and shipping law (e.g. Arts 8:382, 8:902, 8:906, 8:1102, 8:1108, 8:1356, 8:1553 BW). These will not be dealt with in this chapter.25 In B2C contracts, limitations of liability are on the grey list (Art. 6:237(f) BW) and are therefore refutably presumed to cause unreasonable prejudice to the consumer.

III. Requirements and legal consequences 1. Reasonableness and fairness a) General. The principle of reasonable and fairness is in essence a composition of 15 numerous non-codified legal norms shaping a legal relationship between two or more persons, particularly, yet not exclusively, that of the parties to a contract.26 The provision of a detailed account of all in concreto requirements of reasonableness and fairness falls well beyond the scope of this chapter. Therefore, this contribution will limit itself to a brief presentation of various groups of cases.27 It will continue by addressing in greater detail the Dutch rules governing the interpretation of (B2B) contracts which in Dutch jurisprudence are habitually dealt with within the framework of reasonableness and fairness. b) Groups of cases. aa) Law of prescription and contractual limitation clauses. 16 The restrictive function of the principle of reasonableness and fairness has played an important role in the law of prescription. It is well established that the debtor will under certain circumstances not be able to invoke the expiration of the regular (liberative)28 or 22

cf. Schelhaas (‘Boeteclausules’), particularly 239 et seq. cf. Tjong Tjin Tai, mn. 458, in Asser, Opdracht. 24 cf. ibid., mn. 536 et seq., with references. 25 In addition, some ‘traditional’ professions (e.g. lawyers and notaries) have to take out a compulsory insurance in accordance with their respective professional regulations and cannot limit their liability to an amount below the level of compulsory professional insurance. Cf. ibid., 211 et seq., with references. 26 Sieburgh, mn. 394 et seq., in Asser, Algemeen overeenkomstenrecht. 27 cf. ibid., mn. 403 et seq., 417 et seq., with references; in general also Hesselink (‘De redelijkheid en billijkheid’); Schelhaas (‘Redelijkheid’). 28 cf. HR 23.10.1998: NJ 2000, 15 on child abuse. 23

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ultimo (extinctive)29 prescription period. In particular, cases involving illness or death caused by asbestos have given rise to a string of decisions, yet the standards developed by the courts are not necessarily limited to such cases.30 17 In addition, relying on a contractual limitation period can under certain circumstance be unacceptable within the meaning of Art. 6:248(2) BW. For example, an insurance company invoking a contractual limitation period for the pursuit of an insurance claim in court within six months after the occurrence of the insured event in spite of the deviative character of such a clause from the insurance sector association’s (non-binding) policy guidelines was not behaving in accordance with the principle of reasonableness and fairness.31 In another insurance case, the Hoge Raad held that the insurer’s reliance on a strict contractual notification clause – despite hardly being prejudiced by and having been compensated for the late notification by means of a 10 % mitigation of the assured sum by the court of appeal – was unacceptable in view of the principle of reasonable and fairness.32 18

bb) Termination of long-term contracts. The Dutch legislator did not provide for a legal regime regarding the termination of long-term contracts (opzegging van duurovereenkomsten). Against that background, the rules governing the termination of indefinite contracts have been developed in case law on the basis of the principle of reasonableness and fairness. As a general rule, indefinite contracts can be terminated also in the absence of a legal or contractual provision to that effect. However, under certain circumstances, a grave cause may be required, a transition period may have to be observed, and the terminating party can be required to offer to pay a sum at once upon termination.33

19

cc) Notice as a condition for rescission of a contract. Dutch law, much like some other legal systems, such as Germany (cf. §§ 281(1)–(3), 286(1), (2), 323(1), (2) BGB), generally requires the creditor to put the debtor in a state of default (verzuim) by serving a dunning notice (ingebrekestelling) with an additional time period for performance before the former can claim damages or rescind the contract (Arts 6:81‐83, 6:74(2), 6:265(2) BW).34 The Hoge Raad has repeatedly held that a debtor invoking the creditor’s failure to serve such a notice can under certain circumstances violate the standards of reasonableness and fairness.35 For example, this may be the case if the parties have corresponded extensively to achieve a satisfactory solution for a delayed performance, while the creditor has nonetheless not served a proper dunning letter.36

20

dd) Forfeiture. The principle of reasonableness and fairness has accordingly played a prominent role in the development of the Dutch doctrine of forfeiture (rechtsverwerking), which is generally considered to be one of the more prominent corollaries of the 29 cf. HR 28.4.2000: NJ 2000, 430 on mesothelioma; declined before for child abuse in HR 25.6.1999: NJ 2000, 16. 30 cf. HR 28.4.2000: NJ 2000, 430; 26.11.2004: NJ 2006, 228. Cf. also Koopman, 6 et seq. 31 cf. HR 12.1.1996: NJ 1996, 683 (Kroymans/Sun Alliance). 32 cf. HR 17.2.2006: NJ 2006, 378 (Royal & Sun Alliance/Universal Pictures), mn. 4.7 et seq.; case note Drion/van Wechem, 567. 33 cf. HR 21.6.1991: NJ 1991, 742 (Mattel/Borka); 21.10.1994: NJ 1995, 78 (Inter-Aid International/ICS); 3.12.1999: NJ 2000, 120 (Latour/De Bruijn); 28.10.2011: NJ 2012, 685 (Ronde Venen/Stedin); 14.6.2013: NJ 2013, 341 (Auping/Beverslaap); 15.4.2016: NJ 2016, 236 (Noord-Holland/Amsterdam); 10.6.2016: NJ 2016, 450 (Alcatel-Lucent Pensioenfonds/Alcatel-Lucent Nederland); 2.2.2018: NJ 2018, 98 (Goglio/SMQ Group). Cf. also Bakker (‘Opzegging’), 167; van Duijn-Koopman/van de Pas, 80; Hammerstein/Vranken, 29 et seq.; Sieburgh, mn. 408 et seq., in Asser, Algemeen overeenkomstenrecht; Tanja, 210; Valk (‘Opzegging’), 176. 34 cf. de Jong, 34 et seq. 35 cf. HR 4.10.2002: NJ 2003, 257 (Fraanje/Götte Beheer); 28.11.2003: NJ 2004, 237 (Van der Heiden/ Bubbels). 36 cf. HR 28.11.2003: NJ 2004, 237 (Van der Heiden/Bubbels).

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principle’s restrictive function37.38 Forfeiture occurs ‘when the creditor has behaved in a manner which according to the standards of reasonableness and fairness is inconsistent with the subsequent enforcement of a right’.39 Generally, forfeiture either requires the debtor’s legitimate expectation that the creditor will no longer enforce a claim or that the debtor is unreasonably prejudiced by its delayed enforcement.40 Against that background, forfeiture can arise in numerous situations and fields of law.41 Nonetheless, the doctrine is not to be applied broadly.42 c) Legal consequences. The legal effects of the principle of reasonableness and 21 fairness come to pass ipso iure, while the court merely articulates them.43 Typically, legal effects can include the construction or limitations of obligations under the contract or a modification of legal consequences.44 Particularly the principle in its limitative function can, in exceptional circumstances, accordingly have the effect of preventing the applicability of simple mandatory provisions.45 As noted above,46 being barred from relying on a legal or contractual provision is distinct from the voidability of such a provision, e.g. for the purposes of the law of restitution.47 d) Party autonomy. Against the backdrop of the scholarly discourse on the inter- 22 pretation of (commercial) contracts,48 Dutch scholars have devoted notable attention to the question whether parties can contractually exclude the applicability of the principle of reasonableness and fairness or, in other words, if the respective provisions are of a dispositive nature. The scholarly opinions range from general negation49 to a preponderantly advocated mediatory solution entailing the possibility of an exclusion of merely the principle’s supplementary function50. A full appraisal of the matter is beyond the scope of this chapter. Nonetheless, if one perceives the principle of reasonableness and fairness to be a source of non-codified law, as indeed the legislator51 and numerous authors52 do, it is hard to see the foundation of and justification for such a private autonomous deactivation of a source of law in its totality. To some extent, however, the parties to a contract can influence the principle’s scope of application.53 37

cf. HR 20.5.2005: RvdW 2005, 75 (Bakker/Zee). cf. Sieburgh, mn. 403 et seq., in Asser, Algemeen overeenkomstenrecht; Tjittes (‘Rechtsverwerking’), 9 et seq., 31 et seq. 39 cf. HR 7.6.1991: NJ 1991, 708 (B/K Bank) at 3.3.1; 24.4.1998: NJ 1998, 621 (W/P) at 3.4. 40 cf. HR 24.4.1998: NJ 1998, 621 (W/P); 24.5.2002: NJ 2003, 267 (Staat/Piek); Tjittes (‘Rechtsverwerking’) 33. 41 cf. Sieburgh, mn. 423 et seq., in Asser, Algemeen overeenkomstenrecht; Tjittes, ibid., 31 et seq., both with references to case law and the literature. 42 cf. HR 20.5.2005: RvdW 2005, 75 (Bakker/Zee). 43 cf. on the principle’s supplementary function e.g. HR 14.6.2013: RvdW 2013, 787 (Aegon Spaarkas/ Koersplandewegkwijt) at 3.5.3; on its limitative function Sieburgh, mn. 414, in Asser, Algemeen overeenkomstenrecht. 44 Sieburgh, ibid., mn. 407 et seq., 416 et seq., with references. 45 cf. HR 28.1.2011: NJ 2011, 167 (Staalbankiers/Elko) at 3.8; 19.12.2014: NJ 2015, 344 (VGZ/G); Sieburgh, ibid. mn. 417 with references. 46 See above mn. 12. 47 cf. Sieburgh, mn. 435 et seq., in Asser, Algemeen overeenkomstenrecht, with references to occasionally equivocal case law. 48 See below mn. 25 et seq. 49 See also Hartkamp (‘Boekaankondiging’), 470; Sieburgh, ibid., mn. 380 with references; Wissink (‘Wegcontracteren’), 24 et seq. 50 van Bijnen, 284; Drion, (‘De status’) 433; Schelhaas (‘Pacta sunt servanda’), at 3.3. 51 cf. van Zeben/du Pon, 1021. 52 cf. Sieburgh, mn. 378 et seq., 401 et seq., in Asser, Algemeen overeenkomstenrecht, with references. 53 See below mn. 30. 38

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e) Interpretation of contracts. When it comes to the interpretation of contracts in writing, Dutch law, like many other continental European jurisdictions and unlike common law systems54,55 attaches dominant weight to the subjective meaning given to a clause by the parties rather than adhering to an objective interpretation of the wording of the contract. While doing so, however, Dutch courts have accordingly accommodated the circumstance that a contract is of a commercial nature. Contrary to the former Dutch civil code (cf. Art. 1378 et seq. former BW), the current code no longer contains codified rules on the interpretation of contract but has opted to leave the matter to the courts’ discretion.56 24 Before addressing the interpretation of contracts under Dutch law, it is necessary to clarify the doctrinal relation between interpretation and the principle of reasonableness and fairness. It has to be pointed out that from a dogmatic stance and in terms of chronology, the contents of a contract will have to be determined by ways of construction of its terms before any rights and obligations under the contract can be added or limited by virtue of the principle of reasonableness and fairness.57 In practice, however, courts are unlikely to strictly distinguish between the two concepts and will often interpret into the terms of the contract the legal consequences dictated by reasonable and fairness.58 23

aa) General rules of interpretation. In its seminal decision on the interpretation of contracts – the so-called Haviltex-judgment – the Hoge Raad held that ‘the interpretation of the terms of the contracts cannot be limited to a mere textual approach’. Rather, the court should interpret a clause by ‘determining the meaning the parties could reciprocally have reasonably conferred upon it in view of the circumstances of the case and by determining what the parties in this regard could reasonably have expected from one another. When doing so, the societal echelons from which the parties stem and the amount of legal knowledge they can be expected to possess can play a role’ (emphasis added).59 26 An implicit assumption of the Haviltex-standard is that the less the parties have actually negotiated on terms of the contract, the more an objective interpretation seems to be called for.60 Against this background, the Hoge Raad has indeed accepted stricter, more objectified interpretational approaches for non-individually negotiated contracts, such as collective labour agreements (so-called CAO-norm)61 and various other texts62, as well as, be it with precaution, certain sets of standard terms63.64 25

54

See for England Peel, mn. 6‐006 et seq., with references. See from a comparative perspective also Zweigert/Kötz, 400 et seq.; from a Dutch perspective Sieburgh, mn. 355, in Asser, Algemeen overeenkomstenrecht; from a historical perspective Zimmermann, 621 et seq. 56 cf. Sieburgh, mn. 354, in Asser, Algemeen overeenkomstenrecht. 57 cf. ibid., mn. 365. 58 As early as HR 20.5.1949: NJ 1950, 72 (Rederij Koppe); also Drion (‘De Status’), 1234; Drion (‘Uitleg’), 279; Schelhaas (‘Pacta sunt servanda’), at 3.1.3; Schoordijk, 1233; Sieburgh, ibid., mn. 365 et seq.; Snijders, 6 et seq.; Wissink (‘Wegcontracteren’), 24. 59 HR 13.3.1981: NJ 1981, 635 (Ermes/Haviltex). 60 cf. Hendrikse, 135 et seq.; Sieburgh, mn. 372, in Asser, Algemeen overeenkomstenrecht; Tjittes (‘Terug naar de tekst’), 419. 61 cf. the decisions by the HR from 17.9.1993: NJ 1994, 173 (Gerritse/Hydro Agri Sluiskil); 24.9.1993: NJ 1994, 174 (Hol/Economisch Instituut voor het MKB); 20.2.2004: NJ 2005, 493 (Fox/DSM); 25.6.2004: NJ 2006, 213 (Zonnehof/S); 9.7.2004: NJ 2005, 496 (Hoevers/Van Dijk); 25.11.2016: NJ 2017, 114 (FNV/ Condor); 4.5.2018: RvdW 2018, 591 (FNV/A). 62 cf. Sieburgh, mn. 374, in Asser, Algemeen overeenkomstenrecht, with references. 63 cf. HR 23.12.2005: NJ 2010, 62 (De Rooij/Van Olphen) on a model contract for the sale of real property; HR 2.2.2007: NJ 2008, 104 (NBA/Management/Meerhuysen) on auction terms. Cf. also Sieburgh, ibid., mn. 375; Tjittes (‘Uitleg’ RM Themis), 12 et seq. 64 See in general Sieburgh, ibid., mn. 373 et seq.; in greater detail also Wissink (‘Uitleg volgens Haviltex’), 407. 55

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bb) Interpretation of commercial contracts. The interpretation of B2B contracts has 27 over the last decade or so received a great amount of scholarly attention.65 Various authors have initially criticised Dutch courts for bringing about legal uncertainty to the detriment of (parties engaging in) commercial transactions and have consequently advocated a textual interpretation as a default approach for commercial contracts.66 Nevertheless, the Hoge Raad has accordingly taken the Haviltex-decision as a standard 28 of interpretation for B2B contracts. Therefore, the subjective meaning of a contractual term ultimately remains decisive.67 In a string of cases, it has, however, provided for certain procedural modifications to said standard. To the extent that the contract itself and the manner in which it was negotiated are indicative of a commercial setting, such circumstances can be taken as prima facie evidence for the appropriateness of a (more) textual interpretation. A party wishing to rely on a subjective mode of interpretation, inter alia in view of the negotiations leading up to the contract, can be admitted to present evidence to the contrary.68 Circumstances indicative of such a commercial setting can include ‘the commercial nature of the transaction, the content, length and detailedness of the contract, the manner in which it was drafted and in particular an entire agreement clause’.69 The fact that a commercial contract was negotiated and drafted by or with the assistance of attorneys or legal counsel can accordingly be of importance.70 Ultimately, however, it is for the judge to determine whether such circumstances calling for a textual interpretation are present in the case at hand.71 In conclusion, it can nonetheless be said that under Dutch law, commercial contracts will often be interpreted in a more objectified manner than in non-commercial situations.72 cc) Entire agreement and interpretation clauses. As noted above,73 an entire agree- 29 ment clause (vierhoekenbeding) may be a strong indication for an intention of the parties to comprehensively arrange their contractual relationship with the document in which the clause is included. Nonetheless, the Hoge Raad has shown to be sceptical to infer any additional consequences from entire agreement clauses and has referred to their origin and function in Anglo-American legal systems74, while emphasising the lack of such a specific function under Dutch law.75 In short, the entire agreement clause is a contract terms 65 See in general, in addition to the other sources cited above and below, and without pretense of exhaustiveness Bakker (‘Parts I and II’ 2011); Boeve, 75; Breeman, 327; van Dunné (‘Normatieve uitleg’); van Dunné (‘Normatieve uitleg algemeen’), 211; Hartman Kok, 162; Hendrikse, 133; Kraaipoel, 294; van Schaick, 272; Schelhaas (‘De uitleg’) 26; Schelhaas (‘Het Haviltex-criterium’) 35; Schelhaas/Valk; Spanjaard (‘Recht’); Spanjaard (‘Uitleg’); Tjittes (‘Uitleg’ RM Themis); Tjittes (‘Uitleg’); van Tongeren, 2754; Valk (‘Verder denken’), 1950; van Wechem/Wissink, 105; Wibier, 2749; Wissink (‘Vertrouwen’), 26; Wolters (‘Uitleg’), 14. 66 Most notably Tjittes (‘Uitleg’ RM Themis); Tjittes (‘Uitleg’) 417. See also Schelhaas (‘Pacta sunt servanda’), at 6. 67 cf. HR 5.4.2013: NJ 2013, 214 (Lundiform/Mexx) at 3.4.3 et seq. 68 cf. HR 19.1.2007: NJ 2007, 575 (Meyer Europe/PontMeyer) at 3.4.3 and 3.5.3; 29.6.2007: NJ 2007, 576 (Derksen/Homburg) at 4.1.3. 69 HR 19.1.2007: NJ 2007, 575 (Meyer Europe/PontMeyer) at 3.4.3. 70 cf. HR 29.6.2007: NJ 2007, 576 (Derksen/Homburg) at 4.1.1; in the negative HR 5.4.2013: NJ 2013, 214 (Lundiform/Mexx) at 3.4.2. See also Hendrikse, 135. 71 cf. HR 13.12.2019: RvdW 2020, 86 (Valerbosch/X) at 3.2.3; case note Burgers. 72 cf. Schelhaas (‘Pacta sunt servanda’), at 5.4; Sieburgh, mn. 371, in Asser, Algemeen overeenkomstenrecht. 73 See above mn. 28. 74 Its primary aim is to exclude extrinsic evidence on the basis of the parol evidence rule, in particular to exclude the various exceptions to that rule. Cf. on the parol evidence rule Peel, mn. 6‐014 et seq. 75 HR 5.4.2013: NJ 2013, 214 (Lundiform/Mexx) at 3.5.3. Cf. on the entire agreement clause from a Dutch perspective inter alia Drion (‘De innovatieve contractenmaker’), 17; Schelhaas (‘Pacta sunt servanda’), at 3.1; Tjittes (‘De betekenis’), 4; Tjittes (‘Uitleg’ RM Themis), 26 et seq.; Tjittes (‘Terug naar de tekst’), 422 et seq.

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amongst all others and therefore in need of interpretation.76 Even though an entire agreement clause can indeed call for a more objectified, textual interpretation of the contract,77 the circumstances of the case remain decisive and the clause itself does not prevent courts from relying on evidence beyond the contract when interpreting its terms.78 30 Accordingly, parties can insert interpretation clauses into the contract stipulating that its terms are to be interpreted textually. The meaning and effects of such clauses are obviously dependent on their wording and so is their precise qualification79. Whatever the case may be, entire agreement and interpretation clauses at least to some extent permit parties to limit the intensity with which courts scrutinise contractual terms.80 In addition, a strict textual interpretation of the contract will accordingly limit the scope of application particularly of the supplementary function of the principle of reasonableness and fairness.81 31

dd) Interpretation of international commercial contracts. As discussed above,82 the Dutch doctrine on interpretation of contracts aims to ascertain the meaning the parties to the given contract could have reasonably conferred upon a term. While legal opinions prevailing in the Netherlands are to be considered when determining the requirements of reasonableness and fairness (cf. Art. 3:12 BW), Dutch law has shown to be particularly receptive to international considerations.83 Notions of reasonableness shared in Dutch society in general and the Dutch legal community in particular are therefore not decisive in each and every instance. For example, the fact that both parties come from a foreign, perhaps even the same or at least a similar jurisdiction can influence the reasonable expectations regarding the interpretation of the terms of the contract.84 Thus, the facts that all shareholders to a multi-party merger agreement were from the United States combined with the fact that the contract was drafted in English and in a highly detailed manner in accordance with the ‘Anglo-American legal tradition’, provided a strong indication to adhere to a more textual interpretation in line with common law methods of construction.85 Moreover, a clause in a contract concluded on a foreign insurance marketplace, yet governed by Dutch law, was to be interpreted in accordance with the notions prevailing at the venue of conclusion of the contract.86 Finally, in a labour law case involving an employment contract between two Chinese parties located in the Netherlands, the Hoge Raad held that, in view of the fact that both parties were of Chinese origin, ‘common Chinese standards’ were to be taken into account.87

2. Standard terms 32

The personal and international scope of Dutch standard terms legislation will, as noted above,88 often have the effect that the relevant provisions are inapplicable to an international commercial contract.89 This chapter will nonetheless provide 76

cf. Tjittes (‘Terug naar de tekst’), 422. cf. HR 19.1.2007: NJ 2007, 575 (Meyer Europe/PontMeyer). Cf. also Schelhaas (‘Pacta sunt servanda’), at 5.2. 78 HR 5.4.2013: NJ 2013, 214 (Lundiform/Mexx) at 3.5.3. 79 cf. Tjittes (‘Uitleg’ RM Themis), 26. 80 cf. on the matter Drion (‘De innovatieve contractenmaker’); Wallart, 27. 81 cf. Wissink (‘Wegcontracteren’), 24. 82 See above mn. 23. 83 See from a private international law perspective Vlas, 84 et seq. 84 cf. also Bakker (‘Part II’), 504 et seq. 85 HR 9.4.2010: RvdW 2010, 511 (UPC/Land), at 3.3 and 5.3. 86 cf. HR 17.2.2006: NJ 2006, 378 (Royal & Sun Alliance/Universal Pictures) at 4.2. 87 HR 18.11.1983: NJ 1984, 345 (Shu/Lam) at 3.2; on that case also Vlas, 84 et seq., with references. 88 See above mn. 11. 89 See in detail below mn. 65 et seq. 77

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an overview of its substantive provisions which may be of interest to comparative lawyers and practitioners alike. a) Definition of standard terms. The substantive applicability of standard terms 33 legislation is subject to three conditions. Standard terms within the meaning of Art. 6:231 (a) BW are (i) one or more terms (ii) drafted with the aim of being incorporated into multiple contracts, (iii) which are not covered by the exception that the terms describe the core of the obligations, provided their wording is clear. The first criterion is to be interpreted extensively and covers any type of pre-formulated contractual stipulation,90 regardless of the denomination given to the document by the user.91 When it comes to the user’s intention to repeatedly employ the terms, Dutch law approaches the matter objectively from the perspective of the other party.92 Thus, the decisive question is whether the other party in view of the circumstances of the case was under the legitimate impression that the user intended to repeatedly use the standard term. Fairly low numbers of intended use suffice. While the legislative materials refer to an indicative number of five,93 scholarship has a tendency towards a much lower number of merely two intended uses.94 Stipulations on the core of the obligation are, finally, not considered to be standard terms, even if the other criteria are met (cf. also Art. 4 (2) Unfair Terms Directive). This exception aims to exclude standard price terms from judicial scrutiny, as Dutch law rejects iustum pretium-theory.95 It only targets the essentialia negotii in the absence of which a valid contract would not have been entered into due to a lack of determinability (bepaalbaarheid, cf. Art. 6:227 BW) of the obligations.96 Incomprehensible standard price calculation schemes could under certain circumstances no longer be considered ‘clear’ within the meaning of Art. 6:231(a) BW, thereby subjecting them to judicial scrutiny.97 The circumstance that standard clauses were the object of discussion or even 34 negotiations between the parties is not of the same importance under Dutch law as it is in some other legal orders, e.g. in German law (cf. § 305(1) BGB).98 Mere negotiations in general do not deprive a clause of its standardised character.99 This is particularly so when negotiations have not led to any modification of the clause. Yet even in the event that a clause has indeed been altered, its qualification as a standard term will ordinarily have to be reassessed.100 b) Offer and acceptance; battle of forms. Dutch law adheres to the ‘first shot-rule’ 35 when it comes to the incorporation of standard terms into the contract.101 A second reference to the applicability of a party’s standard terms remains without effect insofar as it does not explicitly renounce the first party’s standard terms (Art. 6:225(3) BW).102 The requirements regarding the content of such declarations as well as their effects are 90

cf. Hijma, 13 et seq. cf. HR 19.9.1997: NJ 1998, 6 (Assoud/De Nationale Sporttotalisator) at 3.3. 92 cf. Hijma, 14. 93 cf. van Zeben/du Pon, 1546 et seq. 94 cf. Hijma, 14 et seq., with references. 95 cf. HR 19.9.1997: NJ 1998, 6 (Assoud/De Nationale Sporttotalisator) at 3.4.2; van Zeben/du Pon, 1521; Hijma, 16 et seq.; Sieburgh, mn. 468, in Asser, Algemeen overeenkomstenrecht; on the historical background Zimmermann, 255 et seq. 96 cf. HR 19.9.1997: NJ 1998, 6 (Assoud/De Nationale Sporttotalisator) at 3.4.2; 21.3.2003: NJ 2004, 567 (Weevers Stous/Parkwoningen Hoge Weide) at 3.4.2. 97 cf. Hijma, 18; Sieburgh, mn. 467, in Asser, Algemeen overeenkomstenrecht. 98 See the contribution by Wais, in this volume. 99 cf. Sieburgh mn. 465, in Asser (ed.), Algemeen overeenkomstenrecht. 100 cf. Hijma, 18 et seq., with references. 101 cf. Hijma, 27 et seq. 102 According to HR 13.7.2001: NJ 2001, 497 (Hardstaal/Bovry), the first reference suffices, even if it is not a proper offer, but an invitatio ad offerendum. 91

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highly dependent on their precise wording and the circumstances of the case. The matter is controversial in case law and scholarly literature alike.103 c) Voidability. aa) Unreasonably onerous term. For the purposes of assessing whether a term is unreasonably onerous within the meaning of Art. 6:233(a) BW, account has to be taken of the circumstances enumerated in the norm, i.e. ‘the nature and the further content of the contract, the manner in which the terms and conditions came into existence, the mutually apparent interests of the parties, and the other circumstances of the case’. The standard is therefore very much open-textured. What can cause prejudice in one case, does not necessarily do so in another. Various considerations have been articulated in case law, yet a precise description of all potentially prejudicing terms falls outside the scope of this chapter.104 In short, it can be said that an important criterion lies in the rule of thumb that the greater a clause deviates from a comparable (if any) dispositive legal provision, the more likely it is to unreasonably prejudice the other party.105 In reverse, however, it cannot be said that a clause which accords with a legal default rule can never cause unreasonable prejudice.106 When it comes to the manner in which terms and conditions came into existence, the fact that a set of standard terms was drafted by a trade organisation in which both supply and demand sides of a market were represented may serve as an indication against being unreasonably onerous.107 37 For the purposes of establishing whether terms are unreasonably onerous, consumers are aided by a black and grey list (Art. 6:236 and 6:237 BW respectively).108 Even though the lists are not directly applicable outside B2C situations, Dutch law has to some extent inferred reflexive effects (reflexwerking) from them.109 The fact that a term is listed may serve as an indication that it is accordingly unreasonably onerous to a non-consumer within the meaning of the general standards of Art. 6:233(a) BW. Such a reflexive application is particularly called for when the capacity of the other party and the type of contract concluded do not materially differ from a consumer situation. This may, for example, be so in the case of small (non-profit) legal entities (foundations, associations, etc.) buying consumer goods or natural persons contracting in a professional capacity yet for goods not related to their profession.110 Conversely, the more these circumstances deviate from a B2C contract, the less apt a reflexive application is. In addition, Dutch scholars have argued that the contra proferentem-rule (Art. 6:238(2) BW), which only applies to the benefit of consumers (Art. 6:238(2) BW), can accordingly be applied beyond such situations.111 36

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bb) Opportunity to take cognisance. A standard term or rather the entire set of standard terms112 can additionally be voided if the user has not provided the other party 103 See in greater detail Hijma, 28 et seq.; Kruisinga, 37; Sieburgh, mn. 478, in Asser, Algemeen overeenkomstenrecht. 104 See in greater detail Hijma, 36 et seq., with references; Sieburgh, ibid., mn. 481 et seq. 105 cf. HR 23.2.2001: NJ 2001, 277 (Montoya/ABN Amro) at 3.8.2 for the reverse situation in which a standard term did not deviate from dispositive legal provisions. 106 cf. Sieburgh, mn. 484, in Asser, Algemeen overeenkomstenrecht. 107 cf. HR 3.2.2012: NJ 2012, 261 (Dix q.q./ING) at 4.4.5. Cf. on the matter in B2C contracts also Pavillon (‘De bindende kracht’), 367. 108 See on these lists Hijma, 39 et seq. 109 cf. ibid., 44 et seq.; Sieburgh, mn. 502, in Asser, Algemeen overeenkomstenrecht. 110 cf. Jongeneel/Wessels, 21 et seq., with references to case law from first and second instance courts. See in general Ancery/Pavillon, 647; Hijma, 45; Wessels, 725. 111 cf. Heering, 101; Hendrikse, 137 et seq.; Hijma, 32. 112 cf. HR 17.12.1999: NJ 2000, 140 (Breg/Asper) at 3.5. Cf. also van Zeben/du Pon, 1583 et seq.; Sieburgh, mn. 475, in Asser, Algemeen overeenkomstenrecht.

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a reasonable opportunity to take cognisance of the contents of the standard terms. The provision’s purpose is twofold. It aims not only to achieve informed consent in the precontractual phase but also to enable the other party to establish its contractual position after the conclusion of the contract.113 As noted above,114 it is not required that the other party is positively aware of the contents of a set of standard terms (Art. 6:232 BW). Rather, it suffices that the user has given the other party the opportunity to acquaint itself with the standard terms.115 As a general rule, the user can provide such an opportunity to take cognisance by handing over the terms to the other party before or on the occasion of the conclusion of the contract (Art. 6:234(1) BW). In this respect, various modes can practically suffice, though the most obvious manner for commercial contracts would be to attach general terms to a tender or an offer.116 When it comes to contracts concluded electronically, the user can also provide the other party with the standard terms in electronic form. In the case of contracts concluded by other means, however, the other party’s consent to the electronic availability of the standard terms is required (Art. 6:234(2), (3) BW).117 A proactive approach of the other party to make itself acquainted with the standard terms, for example by conducting an internet search, does not suffice.118 To the extent that handing over standard terms is subject to factual constraints, the user has accordingly given sufficient opportunity to take cognisance of the terms if he refers the other party to their deposit at his registered office, a chamber of commerce, or a court, and offers to send the terms to the other party immediately at its request and free of charge (Art. 6:234(1) BW).119 This exception particularly aims to find a workable solution for mass-contracts.120 From a practical point of view, Art. 6:233(b) BW contains fairly high hurdles for users.121 Consequently, the Hoge Raad has advocated a ‘reasonable and practicable application’ of the provision122 which ultimately revolves around the question whether the other party can be expected to be acquainted with the contents of the standard terms123. For example, case law accordingly confirmed the opportunity to take cognisance despite the fact that the standard terms were not actually handed over in the event that the parties to a contract are active in a sector in which all players routinely use the same set of terms.124 It has to be borne in mind that voidability for lack of opportunity to take cognisance only comes into play when standard terms have indeed become part of 113

cf. Hijma, 53 et seq. See mn. 9. 115 cf. Sieburgh, mn. 475, in Asser, Algemeen overeenkomstenrecht. 116 cf. Hijma, 56 et seq. Other modes include attaching standard terms to a catalogue, fine print on (the reverse side of) correspondence paper (cf. Hof ‘s-Hertogenbosch 14.4.2009: NJF 2009, 249), etc. 117 cf. Hijma, 63 et seq. 118 cf. HR 11.2.2011: NJ 2011, 571 (First Data/KPN Hotspots Schiphol) at 3.4.2. Cf. also Sieburgh, mn. 477, in Asser, Algemeen overeenkomstenrecht. 119 cf. in detail Hijma, 60 et seq. 120 cf. Hof Amsterdam 7.5.1998: NJ 2000, 559 (Assoud/De Nationale Sporttotalisator) on a sports wager contract; Ktr. Breda 3.1.2007: NJF 2007, 85 (X/KNVB) on a stadium ban on the basis of the standard terms of the Royal Dutch Football Association (KNVB) which were part of a contract relating to the purchase of season tickets of a football club. 121 cf. inter alia Hijma, 55 et seq., with references. 122 HR 1.10.1999: NJ 2000, 207 (Geurtzen/Kampstaal) at 3.4; 6.4.2001: NJ 2002, 385 (VNP/Havrij); 11.2.2011: NJ 2011, 571 (First Data/KPN Hotspots Schiphol). 123 cf. HR 1.10.1999: NJ 2000, 207 (Geurtzen/Kampstaal); 6.4.2001: NJ 2002, 385 (VNP/Havrij). 124 cf. HR 1.10.1999: NJ 2000, 207 (Geurtzen/Kampstaal). See on the non-exhaustiveness of Art. 6:234 BW also Hijma, 55 et seq. 114

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the contract.125 These two phases particularly have a procedural dimension, as it is generally for the user wishing to rely on a standard term to prove that it has been accepted by the other party (e.g. by presenting a signed order confirmation or a contract referring to the standard terms, Art. 6:231(c) BW). Thus, the circumstance that standard terms have been handed over and were not declined can lead to the conclusion that they have been accepted.126 This line of reasoning has, however, mistakenly led courts and scholars alike to the assumption that the user (positively) has to prove the fact that standard terms have been handed over in order to be able to rely on them. Much rather, the other party attempting to void a clause will subsequently, i.e. after incorporation into the contract as a consequence of acceptance, have to prove the lack of an ample opportunity to take cognisance of the terms.127 All in all, however, the distribution of the burden of proof is much contested.128 d) Exclusions. aa) Large commercial entities. Certain large commercial entities as defined in Art. 2:360 BW are categorically barred from invoking the grounds for voidability of a standard term (Art. 6:235(1)(a) BW). Practically, these include in particular the private limited company (besloten vennootschap), public limited company (naamloze vennootschap)129 as well as certain financial institutions, regardless of their legal form, insofar as these legal entities have (not: ought to have) published annual accounts or are liberated from doing so because they are part of a group in which the holding company publishes annual accounts (cf. in detail Art. 2:403(1) BW).130 In general, the aforementioned companies are under a legal obligation to publish annual accounts, unless an exemption on the grounds of minor entrepreneurial activities (Arts 2:396‐398 BW) applies. The decisive criterion is whether the entity has actually published and not whether it ought to have published its annual accounts. The factual as oppose to the normative criterion is rooted in considerations of practicability.131 Surprisingly, however, it may enable the other party to profit from its own violation of company law provisions for the purposes of standard terms legislation. 45 Notwithstanding the above, the other party will alternatively be barred from relying on the grounds of voidability when it has over 50 employees at the time of the conclusion of the contract. The number of employees can inter alia be established with the aid of the company register (handelsregister) (Art. 6:235(1)(b) BW).132 46 These provisions have rightly been subject to severe criticism. The norm’s underlying assumption that large commercial entities are not in need of the same protection as consumers and smaller companies – regardless of context, bargaining power, contract value, and so forth – appears to be unconvincing.133 Even more so, the provision’s point of reference is rather arbitrary, its wording somewhat unfortunate and its practicability, particularly in terms of the detectability of the other party’s size, often troublesome.134 44

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cf. HR 21.9.2007: NJ 2009, 50 (Ammerlaan/Enthoven) at 4.2. cf. HR 2.12.2011: NJ 2011, 574 (Linthorst/Echoput); van Wechem/Spanjaard, 480 et seq. 127 cf. HR 21.9.2007: NJ 2009, 50 (Ammerlaan/Enthoven) at 4.2.; 11.7.2008: NJ 2008, 416 (LommerseUitendaal/Atria Watermanagement) at 5.2.1. Cf. also Sieburgh, mn. 477, in Asser, Algemeen overeenkomstenrecht. 128 cf. on the matter with references to diverging case law Beenders, 46; van Wechem/Spanjaard, 480 et seq. 129 In addition, the application extends to the cooperative (coöperatie) and mutual society (onderlinge waarborgmaatschappij). 130 See for an example HR 27.4.2012: RvdW 2012, 685 (X/Deloitte); case note Spanjaard (‘De grenzen’). See in general Hijma, 82 et seq. 131 cf. Hijma, 82; Jongeneel/Wessels, 8. 132 cf. Jongeneel/Wessels, 19. 133 cf. Hijma, 83; Sieburgh, mn. 489, in Asser, Algemeen overeenkomstenrecht, both with references. 134 cf. Sieburgh, ibid. 126

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bb) Other party employing the same standard terms. When the other party itself 47 on multiple occasions uses the same or a very similar set of standard terms in its contractual relations with third parties, the former is precluded from invoking the voidability of clauses contained in the standard terms at hand. Such a situation can particularly arise when both parties routinely employ certain sector-specific standard terms drafted by e.g. a trade organisation.135 The provision is ultimately based on the notion that the other party would exhibit contradictory behaviour when attempting to void a clause which it would rely on vis‐à‐vis another party. The provision targets sets of standard terms in their totality.136 For example, it does not suffice that the user shows that the other party employs a single similar term as the one in the contested set of standard terms (e.g. in the case of different sets both containing a limitation of liability, perhaps even (coincidentally) to the same amount).137 e) Reasonableness and fairness and reflexive effects. Despite indications to the 48 contrary in the legislative materials,138 it is now well established that standard terms legislation does not take precedence over the contractual principle of reasonable and fairness, particularly in its restrictive form (Art. 6:248(2) BW)139. Therefore, the other party is not precluded from arguing that a standard term cannot be relied upon by the user because such a course of action would be unacceptable in view of the principle of reasonable and fairness.140 The need to rely on general principles can stem from the fact that the other party cannot directly rely on standard terms legislation, for example because the other party is a large entity141 or for reasons of internationality142. When it comes to the precise relationship between standard terms legislation on the 49 one hand and reasonableness and fairness on the other hand, there appears to be a lack of legal clarity in Dutch law. Some authors have argued that both standard terms legislation and the principle of reasonableness and fairness essentially entail the same test.143 However, this opinion is to be rejected, as it would have the effect of making the exclusions somewhat redundant. Instead, it can be inferred from the legislator’s choice to exclude the application of standard terms legislation to large companies and, to a great extent, in international cases that the permissibility limits are likely to be (significantly) more generous within the framework of Art. 6:248(2) BW.144

3. Penalty clauses a) General. Dutch law, as a general rule, recognises the validity of both liquidated 50 damage clauses as well as sanctioning penalty clauses.145 A penalty clause will often entail the payment of an agreed sum, although the debtor can accordingly be obliged to perform another type of obligation (Art. 6:91 BW), such as the transfer of a thing. Penalty clauses can generally be agreed upon without adhering to a particular form146 135

cf. van Zeben/du Pon, 1625. Cf. also Sieburgh, ibid., mn. 491. cf. HR 6.4.2001: NJ 2002, 385 (VNP/Havrij) at 3.4.2. 137 cf. Sieburgh, mn. 491, in Asser, Algemeen overeenkomstenrecht, with references. 138 cf. van Zeben/du Pon, 1580 et seq., 1586 et seq., 1595 et seq., 1620 et seq. 139 cf. HR 14.6.2002: NJ 2004, 112 (Bramer/Colpro) at 3.7. See also Hijma, 37 et seq.; Sieburgh, mn. 485, in Asser, Algemeen overeenkomstenrecht. 140 cf. Sieburgh, ibid., mn. 482. 141 cf. Hijma, 83; Jongeneel/Wessels, 21; Sieburgh, ibid., mn. 489. 142 cf. Hof ‘s-Hertogenbosch 1.2.2005: NJF 2005, 298. 143 cf. e.g. van der Wiel, 228. 144 cf. also Hijma, 84. 145 See on penalty clauses in general Schelhaas (‘Boeteclausules’). 146 Penalty clauses in employment contracts, amongst others, are an exception (Art. 7:650(2) BW, in writing) Cf. also Sieburgh, mn. 415, in Asser, De verbintenis in het algemeen. 136

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and can be attached to any type of main obligation.147 In view of the general laxity of Dutch law with regard to penalty clauses and their obvious benefits to creditors, it comes as no surprise that these are broadly employed in commercial contracts governed by Dutch law. b) Compensatory or sanctioning penalty clauses. The distinction between liquidated damages and sanctioning penalty clauses is of particular importance when determining whether the creditor can simultaneously desire performance of the main as well as of the penalty obligation.148 Whether a penalty clause is of the former or latter type, is to be assessed by determining its aim. It is therefore ultimately a matter of interpretation of the clause. 52 In the case of a compensatory penalty clause, the creditor cannot desire both the performance of the main as well as the performance of the penalty obligation (Art. 6:92 (1) BW),149 since such a penalty clause rather entails a fixation of damages in lieu of performance (vervangende schadevergoeding).150 Whether the penalty is exhaustive and replaces the amount compensable under the law of damages (Art. 6:92(2) BW) or whether the creditor is permitted to obtain additional damages is again a matter of interpretation of the clause.151 53 Insofar as a penalty clause sanctions late performance, however, the creditor can accumulate both claims, i.e. desire, and if so required, enforce performance of the main obligations as well as performance of the penalty obligation. Here, the aim of the penalty clause is much rather to either incentivise performance (ex ante) and to sanction late performance (ex post) or to compensate the creditor for losses as a result of delay by means of additional damages (aanvullende schadevergoeding).152 54 The existence of either type of penalty clause in a contract does not prevent the creditor from demanding performance of the main obligation by means of substantive or procedural mechanisms provided for by law (such as enforced performance) while refraining from claiming the penalty.153 In other words, in lack of indications to the contrary, the debtor cannot elect to perform either the main or the penalty obligation. 51

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c) Conditions for the assertion of the penalty obligation. Dutch law essentially perceives penalty clauses to be a form of privately drafted damage arrangements. Consequently, the conditions under which the creditor can desire performance of the penalty obligation are synchronised with those under which a creditor could ordinarily obtain damages. Therefore, a penalty obligation is due only after the creditor has put the debtor in a state of default (verzuim) which as a general rule requires a dunning notice (ingebrekestelling) with an additional time for performance under the same conditions as prescribed by the law on damages (Arts 6:93, 6:81‐83, 6:85, 6:87 BW).154 Moreover, performance of the penalty obligation can merely be obtained insofar as the debtor can be held liable (toerekening) for the failure to perform (tekortkoming) (Arts 6:92(3), 6:74(1), 6:75).155 147

cf. ibid., mn. 419. See on the application by analogy of the rules on penalty clauses to so-called improper penalty clauses (oneigenlijke boetebedingen) lacking accessory character HR 16.9.2011: NJ 2012, 56 (SUBAT/Kost). 149 Schelhaas (‘Boeteclausules’), 235. 150 cf. Sieburgh, mn. 421, in Asser, De verbintenis in het algemeen. 151 cf. Schelhaas (‘Boeteclausules’); Sieburgh, ibid., 423. 152 cf. Schelhaas, ibid. 153 cf. Sieburgh, mn. 420, in Asser, De verbintenis in het algemeen. 154 cf. Schelhaas (‘Boeteclausules’), 234; Sieburgh, ibid., mn. 424. 155 Ibid. 148

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d) Mitigation. The debtor can appeal to the court to mitigate a contractual penalty 56 ‘when it is evident that fairness demands so’ (Art. 6:94(1) BW).156 The norm entails a rather strict criterion that will not easily be fulfilled.157 For example, the fact that the creditor de facto incurs (significantly) less or even no damages and that the penalty may therefore be disproportionate will generally not suffice to activate the court’s mitigation competence.158 Penalties can only be mitigated insofar as adhering to them would lead to an ‘excessive and therefore unacceptable result’ (buitensporig en daarom onaanvaardbaar resultaat)159 or in the event of an ‘enormous discrepancy’ (enorme discrepantie) between damages and penalty (in that particular case: NLG 210 and 50.000 respectively)160.161 However, the Hoge Raad has held that, as a general rule, fairness may call for a 57 mitigation in the event of a so-called unitary penalty (eenheidsboete) which is attached to all obligations under the contract without further differentiation.162 In the case at hand, a penalty of 10 % of the contract price of NLG 900,000 and due for any breach of any obligation under the contract was incurred by the debtor of the monetary obligation for a late payment of a sum of approx. NLG 14,000 excl. VAT. The court found that the penalty clause in fact targets a broad range of highly diverging obligations. In such circumstances, courts can in principle use their mitigation power to differentiate between the severity of various types of breaches.163 In concreto, however, such a mitigation was ultimately declined by the Hoge Raad in a subsequent decision in the same case164.165 Insofar as the court does possess the power to mitigate, the penalty cannot be reduced 58 below the amount ordinarily payable under the rules on damages (Arts 6:94(1), 6:95 et seq. BW). e) Additional damages. Pursuant to Art. 6:94(2) BW, the creditor can accordingly 59 petition the court to permit him to obtain damages in addition to the penalty clause when fairness evidently demands so. The norm can only play a role when the interpretation of the clause leads to the conclusion that the clause fixes damages exhaustively, i.e. without the possibility of obtaining additional damages (cf. Art. 6:92 (2) BW).166 The provision can be traced back to the notion that in cases in which a penalty is set at a particularly low value, it is ultimately functionally equivalent to an exoneration clause.167 f) Party autonomy. The Dutch rules on penalty clauses (Arts 6:91‐94 BW) can be 60 derogated from by agreement, be it with a single exception, i.e. the power of the court to mitigate a penalty (Art. 6:94(3) BW). Therefore, Dutch law leaves contracting parties significant leeway to draft penalty clauses to their likings. 156 See on mitigation in Dutch law in general Wolters (‘De invloed’) with references to first and second instance case law; see also Dammingh; Martens; van der Minne; Wolters (‘De matiging’); Wolters (‘De boetebedingen’). 157 cf. HR 13.7.2012: NJ 2012, 459 (Van de Zuidwind/Faase) at 3.4.2; Schelhaas (‘Boeteclausules’), 236. 158 cf. HR 3.12.2004: NJ 2005, 238 (Electrabel/Ohra); Sieburgh, mn. 425, in Asser, De verbintenis in het algemeen. 159 HR 27.4.2007: NJ 2007, 262 (Intrahof/Bart Smit) at 5.3; confirmed in HR 13.7.2012: NJ 2012, 459 (Van de Zuidwind/Faase) at 3.4.2; 16.2.2018: NJ 2018, 100 (Protec/Easystaff Payroll Services) at 3.4.1. 160 HR 11.2.2000: NJ 2000, 277 (Kok/Schoor) at 3.5. 161 cf. also HR 27.4.1984: NJ 1984, 679 (NVB/Helder); 17.12.2004: NJ 2005, 271 (Ampatil/Weggelaar); Sieburgh, mn. 425 et seq, in Asser, De verbintenis in het algemeen. 162 HR 13.2.1998: NJ 1998, 725 (Hauer/Monda Recreatie) at 4.2 et seq. Cf. also Sieburgh, ibid. mn. 427. 163 cf. HR, ibid., at 4.4. 164 cf. HR 26.10.2011: NJ 2002, 595 (Hauer/Monda Recreatie II) at 3.4. 165 cf. Sieburgh, mn. 427, in Asser, De verbintenis in het algemeen. 166 cf. ibid., mn. 428. 167 cf. Schelhaas (‘Boeteclausules’), 236.

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4. Exoneration of liability 61

a) General. Limitations or exclusions of liability in general and for intent and gross negligence in particular are not generally impermissible in B2B contracts by virtue of codified norm.168 Against that background, standards developed in case law are guiding. Problems of (excessive) exclusion or limitation of liability is dealt with in the light of the restrictive function of the principle of reasonableness and fairness. It has to be pointed out that for the purposes of the admissibility of a contractual limitation of liability clause, Dutch law does not attach particular significance to the question whether the clause is part of a set of standard terms or has been negotiated individually. Commercial parties, unlike consumers vis‐à‐vis businesses (cf. Art. 6:237(f) BW), are not aided by a grey list presumption.

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b) Test and relevant factors. The Hoge Raad has repeatedly held that contractual stipulations excluding liability for intent and gross negligence cannot be relied upon by the debtor when invoking a contractual stipulation to that effect would be unacceptable (onaanvaardbaar) according to the standards of reasonableness and fairness (Art. 6:248 (2) BW).169 Whether this criterion is met, largely depends on the circumstances of the case. Various factors playing a role for the purposes of assessing whether the debtor can rely on a limitation clause can be derived from case law. These include the type of fault (e.g. intent or negligence)170, the value of the infringed legal right (personal injury171 as oppose to damages to objects, etc.), the existence of a liability insurance172, and, in the absence of such an insurance, the insurability of the risk for which the clause excludes or limits liability173. Other factors can be the capacity of the other party (SME or similar), the amount of limitation of liability, and the existence of a not unsubstantial counter-performance.174

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c) Exoneration for intent and gross negligence. In addition and of notable practical importance, the Hoge Raad has ruled that relying on an exoneration clause will, as a general rule, be unacceptable in the sense of Art. 6:248(2) BW when the clause limits liability for intent or gross negligence of (i) the debtor himself or of (ii) members of the executive management, i.e. those persons charged with the management of the debtor’s activities.175 While relying on a clause excluding liability for intent and gross negligence of the debtor and senior staff will therefore generally be impermissible, the debtor can, however, exonerate himself from liability for sub-contractors.176 168 As noted above (mn. 14), Dutch law does contain various rules on specific types of contracts. See on exoneration clauses in general Duyvensz. 169 cf. in general HR 19.5.1967: NJ 1967, 261 (Saladin/HBU); 20.2.1976: NJ 1976, 486 (Pseudovogelpest); 18.6.2004: NJ 2004, 585 (Kuunders/Swinkels). 170 cf. HR 8.3.1991: NJ 1991, 396 (De Kleijn/Van der Ende (Staalgrit)), in which the defendant knew before delivery that the goods were not in conformity with the contract and subsequently invoked a limitation of liability clause. 171 For example, courts tend to refuse to give effect to exonerations of horse stables for tortious liability for animals in the event of personal injury caused by horses. Cf. Hof Arnhem 17.6.2003: NJ 2005, 135; 17.2.2004: NJ 2004, 405. 172 cf. HR 18.6.2004: NJ 2004, 585 (Kuunders/Swinkels) at 3.6. 173 See on insurability HR 24.6.2016: RvdW 2016, 751; case note Ruygvoorn. 174 HR 12.5.2000: NJ 2000, 412 (Interpolis/Peeten) at 3.4. 175 cf. HR 12.12.1997: NJ 1998, 208 (Gemeente Stein/Driessen) at 3.6.1. Restated in HR 18.6.2004: NJ 2004, 585 (Kuunders/Swinkels) at 3.6. 176 See for an example from the maritime sector stating the general rule HR 31.12.1993: NJ 1995, 389 (Matatag/De Schelde), in which limitation of liability of a shipyard for a sub-contractor was not considered to violate the principle of reasonableness and fairness. Cf. also HR 15.1.1999: NJ 1999, 242 (Mastum Dakbedekkingen/Nationale Nederlanden) at 3.3.

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IV. International application 1. Reasonableness and fairness The application of Arts 6:2 and 6:248 BW, as a general rule, presupposes the 64 applicability of Dutch law to the merits of the case.177 However, there has been some scholarly debate on whether the substantive principle of reasonable and fairness can under certain circumstances modify the result of referral rules of private international law, either at the level of conflict of laws or at the level of substantive law.178 The Hoge Raad has indeed accepted such an approach for international marital property law in older judgments handed down prior to the enactment of the current rules of private international law,179 yet these decisions appear not to extend beyond that field of law180.181 Furthermore, it has not been clarified whether the principles developed in at least some of these cases have lost their validity in view of later conflict rules of international or European origin as well as of autonomous Dutch private international law as codified in Book 10 BW. The answer appears to be in the affirmative, as the principle of reasonable and fairness as a correction mechanism used to serve a function which is nowadays performed by various private international law provisions in both international and European instruments as well as in Dutch private international law, e.g. the manifestly closer connection- (Art. 10:8 BW) or fait accompli-exception (Art. 10:9 BW).182

2. Standard terms Art. 6:247 BW contains a scope rule on the international application of Dutch 65 standard terms legislation. In short, the provisions on standard terms merely apply to contracts between commercial parties established in the Netherlands as well as to contracts between a Dutch consumer and a commercial party (Art. 6:247(4) BW), regardless of the applicable law.183 The general aim of the scope rule is to protect consumers, while simultaneously preventing potential interferences of Dutch standard terms legislation with international commercial contracts.184 Art. 6:247(1) BW attempts to limit the circumvention of the rules on standard terms 66 by stipulating that these apply to contracts between two commercial parties, both of which are established in the Netherlands, regardless of the applicable law. Conversely, if both commercial parties are not established in the Netherlands, the provisions are not applicable (Art. 6:247(2) BW), again regardless of the applicable law. Consequently, Dutch standard terms legislation is inapplicable to contracts between a Dutch and a foreign commercial party,185 even if the contract is objectively or by virtue of a choice of law governed by Dutch law.186 177

cf. Vlas, 84. cf. Struycken, 23 et seq.; Vlas, 85 et seq., both with references. 179 cf. HR 11.12.1976: NJ 1977, 275 (Chelouche/Van Leer); 7.4.1989: NJ 1990, 347 (Sabah); 19.3.1993: NJ 1994, 187 (Zimbabwe); on those cases Vlas, 87 et seq.; Vonken, mn. 442, in Asser, Algemeen deel IPR. 180 cf. HR 8.5.1998: NJ 1999, 44 (Land Sachsen/C) at 3.4.2 on a painting by Jan van der Heyden lost during World War II. 181 cf. Struycken, 25. 182 cf. also Vlas, 89 et seq.; Vonken, mn. 441 et seq, in Asser, Algemeen deel IPR. 183 cf. Sieburgh, mn. 511, in Asser, Algemeen overeenkomstenrecht, with references. 184 cf. van Zeben/du Pon, 1807; Hijma, 5 et seq. 185 See for a practical example HR 11.5.2012: NJ 2012, 318 (Van Vliet Services/Dealkent). 186 Sieburgh, mn. 511, in Asser, Algemeen overeenkomstenrecht. 178

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This exclusion of application essentially favours Dutch commercial parties in their negotiations with foreign commercial parties on choice-of-law clauses. The latter can accept a choice of law in favour of Dutch law while employing its own standard terms without previously having to assess whether these are in accordance with Dutch law. In reverse, the provision permits Dutch commercial parties to employ their general terms vis‐à‐vis foreign parties that may be impermissible in a domestic situation.187 It is sometimes argued that in the event of parties opting for Dutch law without awareness of the non-applicability of standard terms legislation, its application can be unobjectionable.188 However, it may be difficult to establish such a mutual acceptance of the applicability of standard terms legislation when a choice-of-law clause does not contain an explicit reference to that effect, which practically it will indeed seldom do. 68 For the purposes of Art. 6:247 BW, a party is established in the Netherlands, if its main establishment, or, in the event of a branch performing the obligations under the contract, that branch, is located in the Netherlands (Art. 6:247(3) BW). 69 It has to be pointed out that the provision has repeatedly been criticised on various grounds, particularly for its lack of substance against the backdrop of EU private international law.189 However, this criticism is at least in part incorrect. For the purposes of consumer protection and private international law, Art. 6:247(4) BW has, in view of Art. 6(2) Rome I Regulation, indeed lost much of its function.190 However, the exclusion of applicability of standard terms legislation to international B2B contracts – whatever its merits in terms of legal policy may be191 – retains its significance. 67

3. Penalty clauses and exoneration clauses 70

The application of the Dutch rules on penalty clauses and the principles governing exoneration clauses will generally presuppose the applicability of Dutch law to the merits of the case pursuant to the Rome I Regulation (cf. also Art. 12(1)(c) and (b) Rome I Regulation, respectively). While it has neither been clarified in the literature nor in case law whether the lack of a possibility to mitigate a contractual penalty according to the applicable law or an excessive limitation of liability can lead to a violation of Dutch public policy, it appears that these matters at least for penalty clauses can only arise in exceptional cases in view of the limited intensity of judicial scrutiny and considerable latitude in Dutch substantive law.192 187

See for a somewhat different understanding of the norm, ibid. cf. van Zeben/du Pon, 1816; Sieburgh, ibid., 11. 189 cf. Hijma, 5, with references. 190 Sieburgh, 511, in Asser, Algemeen overeenkomstenrecht. 191 cf. Hijma, 5, with references. 192 cf. from the Dutch literature Kramer, mn. 964, in Asser, Internationaal vermogensrecht. 188

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J. Poland Bibliography: Du Cane, ‘Obecny stan prawa w kwestii tzw. opłat półkowych’ [Current situation under the law concerning shelf fees] (2013 (3)) Glosa 88–94; Dyś, ‘Nieuczciwa konkurencja: opłaty za przyjęcie towaru do sprzedaży’ [Unfair Competition: Fees for Accepting Goods for Sale] (2003) 14 Monitor Prawniczy 644–650; Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz [Civil Code. Commentary] (9th edn., C.H. Beck 2019); Gutowski, ‘Czynność prawna podjęta w celu przestępczym’ [Legal transaction performed for a criminal purpose – commentary on Supreme Court judgment II CK 174/05] (2007) 18 Monitor Prawniczy 1023–1026; Gutowski (ed.), Kodeks cywilny, t. II, Komentarz do Art. 353–626 [Civil Code, Vol. II, Commentary to Art. 353–626] (C.H. Beck 2019); Jastrzębski, ‘O umownych modyfikacjach podstawy odpowiedzialności odszkodowawczej dłużnika’ [Contractual modifications of the basis for debtor’s liability in damages] (2007) 3 Kwartalnik Prawa Prywatnego 801–837; Kępiński (ed.), System Prawa Prywatnego [Private Law System], v. 15 Prawo konkurencji [Competition Law] (C.H. Beck 2014); Lewandowski, ‘Sankcja nieważności wobec praktyk ograniczających konkrecję – cywilnoprawne aspekty prawa antymonopolowego’ [Penalty of Invalidity for Restrictive Practices – Civil Law Aspects of Antitrust Law] (2010 (7)) Przegląd Prawa Handlowego 20–26; Namysłowska/Piszcz, Ustawa o przeciwdziałaniu nieuczciwemu wykorzystywaniu przewagi kontraktowej w obrocie produktami rolnym i spożywczymi. Komentarz [The Act on counteracting unfair use of contractual advantage in trade in agricultural and food products. Commentary.] (C.H. Beck 2017); Nowińska/Szczepanowska-Kozłowska, Ustawa o zwalczaniu nieuczciwej konkurencji. Komentarz [Unfair Competition Act. Commentary] (Wolters Kluwer 2018); Pazdan (ed.), Prawo prywatne międzynarodowe. Komentarz [Private International Law. Commentary] (C.H. Beck 2018); Pietrzykowski (ed.), Kodeks cywilny. t. I, Komentarz do art. 1–449(10) [Civil Code, Vol. I, Commentary to Art. 1–449(10)] (9th edn., C.H. Beck 2018); Podrecka, Rozwiązanie umowy zobowiązującej i zobowiązująco-rozporządzającej za zgodą stron [Termination of obligation contracts and obligation-disposal contracts with the consent of the parties] (Branta 2003); Pyrzyńska, Rozwiązanie umowy przez strony [Termination of contract by the parties] (C.H. Beck 2000); Pyrzyńska, Zobowiązanie ciągłe jako konstrukcja prawna [Continuous obligation as a legal construct] (2017); Radwański/Olejniczak, Zobowiązania – część ogólna [Obligations – General Part] (C.H. Beck 2014); Romanowski, ‘Dopuszczalność wypowiedzenia umowy zawartej na czas oznaczony w świetle zasady swobody umów’ [Permissibility of terminating fixed-term contracts in the light of the freedom of contract principle)] (2002) 11 Przegląd Prawa Handlowego 47–56; Szanciło, ‘Charakter prawny opłat marketingowych jako utrudniających dostęp do rynku’ [Legal Nature of Marketing Fees as [Measures] Hindering Access to Market] (2013) 3 Monitor Prawniczy 117–126; Szwaja (ed.), Ustawa o zwalczaniu nieuczciwej konkurencji. Komentarz [Unfair Competition Act. Commentary] (5th edn., C.H. Beck 2019); Szydło, Nadużywanie pozycji dominującej w prawie konkurencji [Abuse of Dominant Position in Competition Law] (Wolters Kluwer 2010); Targosz, ‘Nieważność czynności prawnej jako wynik nadużycia pozycji dominującej’ [Invalidity of Legal Transaction Resulting from Abuse of Dominant Position] (2012) 2 Transformacje Prawa Prywatnego 77–99; Tracz, Sposoby jednostronnej rezygnacji z zobowiązań umownych [Methods of unilaterally cancelling contractual obligations] (Wolters Kluwer 2007); Trzaskowski, Skutki sprzeczności umów obligacjicyjnych z prawem [Consequences of Obligation Contracts being Contrary to the Law] (LexisNexis 2013); Wolski, ‘Wybrane zagadnienia na tle orzeczeń dotyczących opłat za przyjęcie towaru do sprzedaży’ [Selected matters in the context of rulings on fees for accepting goods for sale] (2013) 2 Internetowy Kwartalnik Antymonopolowy i Regulacyjny 27–44.

Contents mn. I. Overview ........................................................................................................... 1 II. Regulatory framework.................................................................................... 3 1. Civil Code..................................................................................................... 3 2. Competition and Consumers Protection Act ...................................... 6 3. Act on Combatting Unfair Competition............................................... 7 4. Act on Abuse of Contractual Advantage .............................................. 8 III. Requirements and legal consequences ....................................................... 10 1. Standard form contracts ........................................................................... 11 a) Incorporation ......................................................................................... 11

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Part 1. Country Reports b) Electronic format................................................................................... c) Binding effect ......................................................................................... 2. Content and purpose of the contract..................................................... a) Art. 3531 .................................................................................................. b) Art. 58 ...................................................................................................... aa) Scope ................................................................................................. bb) Invalidity .......................................................................................... 3. Other provisions ......................................................................................... 4. Legal consequences..................................................................................... IV. Jurisprudence regarding judicial review of B2B contracts..................... 1. Art. 3531 ........................................................................................................ 2. Art. 58............................................................................................................ a) Legal transactions contrary to statute .............................................. b) Circumvention of statute..................................................................... c) Legal transaction being contrary to the principles of community life....................................................................................... 3. Art. 473 ......................................................................................................... 4. Art. 746 § 3 .................................................................................................. 5. Art. 9.2 CCPA ............................................................................................. 6. Art. 15.1 No. 4 UCA .................................................................................. V. International application ............................................................................... VI. Conclusion........................................................................................................

12 13 14 15 18 19 20 23 27 29 30 35 35 40 41 47 51 52 56 59 63

I. Overview It is to be noted from the outset that there was no specific regulation in Polish civil law concerning the review of contract terms included in B2B contracts until the end of 2020. Accordingly, B2B contracts are typically governed by the general provisions of law which relate to legal transactions and define the limits of freedom of contract. There are also no provisions which would govern the review of standard contracts in the B2B context in the same as the law provides for review in relation to unfair terms in B2C contracts by implementing the provisions of the Unfair Terms Directive. 2 The problem of review of standard terms in B2B relations changed on 1 January 2021 when an Act1 which amended the Civil Code (Kodeks cywilny2)3 entered into force. According to the amended Art. 3855, the provisions on the review of standard contracts in B2C transactions apply mutatis mutandis to natural persons who enter into contracts directly related to their business activities (in which case they are not considered to be consumers),4 if it follows from the content of these contracts that they are not of a professional nature for such persons5. It is not clear from this wording who the other party to the contract is, but it should be assumed that it is another entrepreneur (this may also be another sole trader, i.e. a natural person). These new rules have been criticised6 1

1

Act of 31 July 2019, Journal of Laws (Dziennik Ustaw) of 2019, item 1495. Unless indicated otherwise, all cited provisions are those of the Polish Civil Code, as amended. 3 The Act of 23 April 1964, consolidated text: Journal of Laws of 2020, item 1740, as amended. 4 However, in the jurisprudence of the Supreme Court is presented a view according to that the interpretation rule of standard terms in B2C contracts “in dubio contra proferentem” has general character and it may apply in B2B relations (see the judgment of the Supreme Court of 28.5.2019, II CSK 454/18, (2019) 14 Monitor Prawniczy, 742). 5 According to this legal provision, a non-professional nature of a given contract can be established by comparing its content with the business objects shown in the CEIDG register (this is a Polish business register of sole traders). In practice, however, many entrepreneurs specify their business objects broadly in the register while they often do not carry out such activities. The reverse is also possible when an entrepreneur carries out activities that are not disclosed in the register. 6 Zagrobelny, in Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz, 801. 2

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because they introduce differentiation in the review of B2B contract giving preference to entrepreneurs who are natural persons regardless of the size of their business. An a priori assumption is made that the other party is a stronger entrepreneur which does not need to be the case necessarily. There may be interpretation concerns when assessing whether a given contract is of a professional nature or not, especially since Art. 3855 provides only one criterion for such a classification (some further criteria will therefore have to be developed in case law7).

II. Regulatory framework 1. Civil Code In Polish law, the limits of the parties’ freedom in defining their contractual 3 obligations are set out in Art. 3531. According to this provision, parties may stipulate obligations at their discretion, as long as their content and purpose are not contrary to the nature of the relationship, statute or the principles of community life (zasady współżycia społecznego, also referred to as principles of social coexistence). Terms of a contract stipulating that an obligation is to exceed statutory limits, or are contrary to the nature of the relationship or principles of community life, such terms will be invalid (Art. 58 § 1). Contract terms intended to circumvent statutory directives or prohibitions (‘prohibition of circumvention’), or which are contrary to the principles of community life (Art. 58 § 2) are also invalid.8 Furthermore, the Polish Civil Code contains numerous provisions prohibiting the 4 inclusion of certain contract terms. Examples include: Art. 119 (prohibition on shortening or extending the prescription periods); Art. 473 § 2 (prohibition of terms which would exclude liability for intentional damage caused to the creditor); Art. 482 § 1 (prohibition of interest on interest); Art. 359 § 21 (prohibition of excessive interest on principal); Art. 481 § 21 (prohibition of excessive interest for delay); Art. 5764 (prohibition to exclude or limit the right of the final seller to seek damages from previous sellers for a loss caused by a defect in goods)9; Art. 6492 § 1 (prohibition to exclude or limit the right of a construction work contractor to demand a payment guarantee from the investor); Art. 746 § 3 (prohibition of waiver of the right to terminate a mandate contract [umowa zlecenia] for good reason); Art. 7601 § 2 (in relation to the agency agreement, prohibition to provide otherwise for the obligations of the agent to follow the instructions of the principal and to communicate information to the principal); Art. 7613 § 1 2nd St., and § 3 2nd St., (in relation to the agency agreement, prohibition to include terms on payment of commission which are less favourable for the agent); Art. 7614 (in relation to the agency agreement, prohibition to include terms concerning the right to commission in case the agreement with the client is not performed which are less favourable to the agent); Art. 7641 § 1 2nd St. (prohibition to shorten the 7 The criteria showing a non-professional nature of a contract may include, for example, the size and subject matter of the parties’ performance, the legal nature of the contract or the repeatability of the transaction. 8 The relationship between Art. 58 and Art. 3531 is explained in such a way that Art. 3531 sets out the limits of freedom to shape the contractual obligation while Art. 58 provides for the sanction if this is infringed; see the resolution of the Supreme Court of 15.2.1996, III CZP 5/96: Orzecznictwo Sądu Najwyższego (OSN) 1996, No. 5, item 69. 9 This refers to the right of redress of the seller who satisfied the consumer if the good sold to him was defective (Art. 5761 which implements Art. 4 of Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees [1999] OJ L171/12).

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termination periods in agency agreements); Art. 7645 (prohibition to include in the agency agreement – until a notice is given to terminate it – terms on the agent’s compensatory claims in a manner that is less favourable than it would follow from Arts 7643 and 7644); Art. 846 § 5 (prohibition to exclude or limit the liability of a hotel operator, provided for in Art. 846 § 1, for damage caused by loss of or damage to items brought by persons who use the hotel services); Art. 867 § 1 4th St. (prohibition to include terms which exclude a partner from participation in profits in the civil law partnership agreement). 5 Finally, the Civil Code contains provisions on ineffectiveness of contract terms in the event of a specific conduct by a party after the contract has been concluded. One of the examples here is Art. 558 § 2 under which a contract term that excludes or limits the seller’s liability for defects of the good sold is ineffective if the seller concealed the defect deceitfully.10

2. Competition and Consumers Protection Act 6

Besides the Civil Code, there are also other statutory provisions which limit or exclude the freedom of B2B contracts. The following two provisions can be noted: Art. 6.1 No. 4 of the Competition and Consumers Protection Act11 (hereinafter ‘CCPA’) which prohibits, in relation to similar contracts with third parties, the use of onerous or non-uniform contract terms which create different conditions of competition for such persons if their purpose or effect is to eliminate, limit or harm competition; Art. 9.2 No. 4 CCPA which provides for an identical prohibition of the use of onerous or non-uniform contract terms in similar contracts with third parties if such terms result from abuse of a dominant position on the relevant market. Another form of abuse of a dominant position may be a situation where onerous terms are imposed by a business which derives unjustified benefits from them (Art. 9.2 No. 6 CCPA). If the conditions set out in these provisions are met, the contract terms resulting from the abuse of a monopolistic or dominant position will be invalid (Art. 6.2 and Art. 9.3 CCPA). The Supreme Court holds in its rulings that an ordinary court may, when examining validity of contract, independently determine whether there has been an abuse of a dominant position12, unless a final decision finding abuse of dominant position is issued earlier by the President of the Competition and Consumers Protection Office (in which case the common court is bound by this decision).13

3. Act on Combatting Unfair Competition 7

The prohibition to include certain terms in contracts will not always result directly from statutory provisions. An example that may be provided here are the provisions of the Act on Combatting Unfair Competition14 (hereinafter ‘UCA’) under 10 Provisions on statutory warranty for defects of goods sold are generally of a dispositive nature (Art. 558 § 1); consequently, it is permissible to exclude or limit seller’s liability under statutory warranty. 11 Ustawa o ochronie konkurencji i konsumentów Act of 16 February 2007, consolidated text: Journal of Laws of 2021, item 275. 12 See Supreme Court judgment of 22.2.1994, I CRN 238/93: OSN 1994, No. 10, item 198; Supreme Court resolution of 23.7.2008, III CZP 52/08: OSN 2009, Nos 7–8, item 107. For more information on the invalidity of contract terms in the CCPA see Szydło, 245; Lewandowski, 21 et seq.; Targosz, 87 et seq. 13 According to Szydło, at 256, the court is also bound by a decision to discontinue proceedings issued where no abuse of a monopolistic or dominant position is found. 14 Ustawa o zwalczaniu nieuczciwej konkurencji Act of 16 April 1993, consolidated text: Journal of Laws of 2020, item 1913.

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which it is an act of unfair competition to contractually reserve fees other than a trade margin for accepting goods for sale (Art. 15.1 No. 4 UCA). Terms of a contract which provide for such fees should be considered null and void15; consequently, the performance which has been provided should be reimbursed under the provisions on unjust enrichment (Art. 410 of the Civil Code in conjunction with Art. 18.1 No. 5 UCA). Another example is Art. 17g UCA, entered into force on 1 January 2020. This provision prohibits an unjustified extension of payment period which is – inter alia – not adequate to a schedule of delivery of goods or services or it does not take into account a character of goods or services which are the objects of a contract. Such agreed contractual term is treated as an unfair competition conduct and it also should be considered null and void.

4. Act on Abuse of Contractual Advantage Similar provisions to the UCA can be found in the ‘Act on abuse of contractual 8 advantage in trade in agricultural and food products’16 (hereinafter ‘Act on Abuse of Contractual Advantage’). The provisions of this Act prohibit abuse of the contractual advantage17 of the buyer over the supplier, or of the supplier over the buyer, which consists – inter alia – in granting the right to terminate or rescind the contract or the right to give a notice of termination, to one party only, or in unjustified extension of payment periods for agricultural or food products delivered (Art. 6 in conjunction with Art. 7.3 No. 2 and Art. 7.3 No. 4 of the Act on Abuse of Contractual Advantage). Other examples of abuse of contractual advantage include various types of charges for nonequivalent performance by a party having contractual advantage over the other (e.g., display and sales space fees, advertising fees, campaign or event fees, fees for communicating information about sales of products in particular retail outlets, fees for product disposal costs, fees for electronic issuance of commercial or financial documents), excessive discounts/rebates on purchases or promotions.18 If they result from abuse of contractual advantage of one of the parties (supplier or buyer),19 such contract terms 15 See comments hereinafter for the reasons for this sanction. The view that terms providing for fees other than the margin for accepting goods for sale may be invalid is expressed in the literature by Dyś, 645; Nowińska, in Kępiński (ed.), System Prawa Prywatnego, 371; Nowińska/Szczepanowska-Kozłowska, 349; Skoczny/Bernatt, in Szwaja (ed.), Ustawa o zwalczaniu nieuczciwej konkurencji. Komentarz, 602; Szanciło, 119, and, as far as court rulings are concerned, judgment of the Constitutional Tribunal of 16.10.2014, SK 20/12: Orzecznictwo Trybunału Konstytucyjnego 2014-A, No. 9, item 102, judgment of the Supreme Court of 26.1.2006, II CK 378/05: Wokanda 2006 No. 6, 8; judgment of the Supreme Court of 24.6.2014, I CSK 431/13: Legalis (database) No. 1160528; judgment of the Court of Appeal in Gdańsk of 10.5.2017, V ACa 241/16: Legalis No. 1674067. 16 Ustawa o przeciwdziałaniu nieuczciwemu wykorzystywaniu przewagi kontraktowej w obrocie produktami rolnymi i spożywczymi the Act of 15 December 2016, consolidated text: Journal of Laws of 2020, item 1213. 17 Contractual advantage is defined in Art. 7.1 of the Act on Abuse of Contractual Advantage as a situation in which there are no sufficient and actual possibilities for the supplier to sell agricultural or food products to other buyers and there is a significant disproportion in the economic potential in favour of the buyer, or a situation in which there are no sufficient and actual possibilities to buy agricultural or food products from other suppliers and there is a significant disproportion in the economic potential in favour of the supplier. 18 See the statement of reasons for the bill on counteracting the abuse of contractual advantage, Sejm (Parliament) Paper No. 790, 25.7.2016, 6. 19 The use of contractual advantage is unfair (abuse of advantage) if it is contrary to principles of morality and threatens to infringe significant interests of the other party or infringes such interests (Art. 7.2 of the Act on the Abuse of Contractual Advantage). Both conditions must be fulfilled cumulatively (see Piszcz, in Namysłowska/Piszcz (ed.), Ustawa o przeciwdziałaniu nieuczciwemu, 82).

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should be declared null and void20. If performance is provided on the basis of such an invalid contract term, it will be reimbursable as undue under the legal provisions on unjust enrichment (Art. 410). However, if a party does not receive the performance at the contractual amount, e.g. when excessive fees have been deducted or discounts applied which were reserved for the other party which has abused its contractual advantage, then such party can claim the unpaid part of the consideration which is due. 9 As it is emphasised by legal scholars, concurrence of Art. 15 UCA and Art. 7 of the Act on the Abuse of Contractual Advantage is possible21.

III. Requirements and legal consequences 10

The judicial review of B2B contracts in Polish law is based mainly on the aforementioned provisions of the Civil Code which determine the limits of freedom of all contracts, not only those concluded in the B2B context. The most important of these provisions are Art. 3531 and Art. 58. The first of these provisions sets out the limits to the freedom of determining the content of contractual relationship. These limits are determined by statutory provisions, the nature (characteristics) of the contractual relationship and principles of community life. The content and purpose of the contractual relationship may not exceed the limits so established.

1. Standard form contracts 11

a) Incorporation. The content of contractual relationship is determined not only contract terms which stipulate the rights and obligations agreed between the parties, but also by the terms of the standard contract, if the conditions for incorporating such standard contract are met. In order for a standard contract prepared by one of the parties to be binding on the other, the conditions specified in Art. 384 must be met. The standard contract should be delivered to the other party before a contract is concluded (Art. 384 § 1)22, unless it is customary in certain relationships to apply a standard contract (e.g. in relationships with banks, telecom operators, owners of paid car parks, etc.), as it is then sufficient that the other party could have easily learned about the content of the standard contract (Art. 384 § 2 1st St.). Therefore, in B2B relationships, the party which uses a standard contract should make it available in such a way that an average counterparty can see and become acquainted with it without any special effort, e.g. the standard contract can be displayed conspicuously on the premises where customers are served, at the entrance to a paid car park, etc.

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b) Electronic format. If the entrepreneur uses a standard contract in electronic format, it should be made available to the other party in such a way that it can be stored and reproduced in the ordinary course of business (Art. 384 § 4). These requirements will be fulfilled if the standard contract is sent to the counterparty by e-mail. 20 The Act on counteracting the abuse of contractual advantage introduces administrative sanctions, which does not preclude entrepreneurs from pursuing claims in civil proceedings (ibid. statement of reasons for the bill on counteracting the abuse of contractual advantage, Sejm (Parliament) Paper No. 790, 25.7.2016, 8). 21 See Nowińska/Szczepanowska-Kozłowska, 313; Piszcz, in Ustawa o przeciwdziałaniu nieuczciwemu, 42. The admissibility of the concurrence (zbieg) of legal provisions also results from Art. 4 of the Act on the Abuse of Contractual Advantage which provides that the protection granted under this Act does not exclude protection resulting from other acts, in particular from the provisions on combating unfair competition. 22 For example, a standard contract can be attached to an offer submitted to the other party.

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However, doubts are expressed as to whether it is sufficient to place the standard contract on the entrepreneur’s website in such a way (e.g. as a file) that the counterparty can download the standard contract on its computer using common software, as the entrepreneur could change the content of such standard contract after the contract has been concluded.23 c) Binding effect. Pursuant to Art. 3841, a standard form of contract issued during 13 the term of contract will be binding on the other party if the requirements specified in Art. 384 are met and the other party does not terminate (withdraw) the contract soon afterwards24. In judicial decisions, the conditions for a standard contract to be binding are more stringent than those that would result from Art. 384. This is because a party that issues a new standard contract or modifies the old one must deliver such new (modified) standard contract to the other party.25 Therefore, Art. 384 § 1 shall apply mutatis mutandis to the issuance of a new (modified) standard contract during the term of the contractual relationship. It is not enough that the other party could easily become acquainted with the standard contract (e.g. displaying the standard contract on the premises of the company where customers are served would not be sufficient for the new standard contract to be binding on a party with whom the contract was concluded earlier – this is because such party is not obliged to check whether the other party issues a standard contract after the conclusion of the contract). Therefore, Art. 384 § 2 shall not apply if the standard contract is issued after the conclusion of the contract between the parties. Furthermore, according to the view expressed in court rulings, a standard contract which is binding on the parties may not be changed unless it has been provided for in the contract made between the parties or there is a relevant clause included in the standard contract.26 Such a modification clause must be sufficiently specific and need to specify the circumstances in which standard contract can be changed (this cannot be a blank modification clause).27 The new (modified) standard contract is binding from the moment on which the time limit for the other party to give notice of termination (withdrawal) of the contract expires and no such notice has been so given, unless the contract provides otherwise or the parties agree otherwise28 after the notice of issuance of the new (modified) standard contract has been given.

2. Content and purpose of the contract The content of the obligation, which results from the content of the contract and of 14 the standard contract, and its purpose must not be contrary to statute, the nature of the relationship or principles of community life. The purpose of an obligation is usually understood as the purpose of the contract, i.e. the situation the parties wish to achieve 23

See Zagrobelny, in Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz, 791. If a notice of termination of the contract cannot be given, it is considered impermissible to issue a (new) standard contract, see Pyrzyńska, in Gutowski (ed.), Kodeks cywilny, t. II, 236; Popiołek, in Pietrzykowski (ed.), Kodeks cywilny. t. I, 1288. The possibility of contract termination (withdrawal) is therefore to protect the other party against unexpected changes in the content of the contractual relationship after the conclusion of the contract. 25 See in particular Resolution of seven judges of the Supreme Court of 22.5.1991, III CZP 15/91: OSN 1992, No. 1, item 1. This view is accepted in the literature, see: Zagrobelny, in Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz, 792; Pyrzyńska, ibid., 243; Popiołek, ibid., 1287. 26 See Supreme Court resolution of 26.11.1991, III CZP 121/91: OSN 1992 No. 6, item 99, and see the literature, e.g. Pyrzyńska, ibid., 242; Zagrobelny, ibid.; Popiołek, ibid., 1287. 27 So in the Supreme Court resolution of seven judges of 6.3.1992, III CZP 141/91: OSN 1992, No. 6, item 90; this view is also accepted in the literature, cf. Pyrzyńska, ibid.; Zagrobelny, ibid.; Popiołek, ibid., 1288. 28 See the Supreme Court judgment of 18.12.2002, IV CKN 1616/00: OSN 2004, No. 4, item 54. 24

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by means of their contract. This is not about the content of the declarations of will, but about the effect to be achieved by the performance of the obligation.29 Such purpose should be known to both parties. a) Art. 3531. Pursuant to Art. 3531 the content and purpose of the obligation may not be contrary to the rules of law and to semi-imperative provisions30, not only those contained in statutes, but also in the secondary (delegated) legislation issued thereunder. These may include not only civil law but also public law31 (including criminal law32). 16 Furthermore, Art. 3531 stipulates that the content and purpose of the contractual obligation should not be contrary to the principles of community life. The principles of community life refer to values and judgements concerning appropriate, fair, loyal and honest conduct universally recognised in the whole society or in a given social group, and the role of these principles is to assess a specific situation in terms of compliance with moral criteria.33 This is a reference to the concept of contractual equity (słuszność kontraktowa), whereby the parties’ conduct is based on trust in the counterparty. Scholars underline the need to distinguish between different criteria of contractual equity depending on the specific nature of business dealings.34 This is because, in B2C relationships, account must be taken of the weaker position of consumers and the need to protect them. 17 Finally, the content and purpose of the obligation must not be contrary to the nature of the contractual relationship (relationship of obligation). As it is emphasised, these are certain basic characteristics of any contractual relationship which are defined by law, as well as characteristics relating to a specific category of contractual relationships (e.g. continuous obligations)35 without which such relationship would lose its economic sense or its internal axiological balance.36 An example of such a specific nature of contractual relationships entered into for a fixed term is that they are more lasting, which justifies the limitation of their termination possibilities (except in cases specified in statute or contract).37 In the opinion of some authors, such nature of contractual relationship coincides with the statutory criterion and, by itself, does not have any significance for determining the limits of freedom of contract.38 15

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See Supreme Court judgment of 25.2.2004, II CK 34/03: Legalis No. 313372. Provisions of semi-imperative nature are those that prohibit parties only from making changes in a certain manner specified in such provisions (usually from making changes in a manner that would be less favourable to one of the parties). 31 For more information on this topic, see Machnikowski, in Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz, 699. 32 See Supreme Court judgment of 28.10.2005, II CK 174/05: OSN 2006 No. 9, item 149, in which the Supreme Court declared a legal transaction performed for a criminal purpose null and void (the case was a fraud committed to the detriment of customers by a second-hand car dealer who accepted cars without any intention of performing the contract). 33 See the statement of grounds for the judgment of the Łódź Court of Appeal of 1.7.2016, I ACa 39/16: Legalis No. 1501859. 34 See Safjan, in Pietrzykowski (ed.), Kodeks cywilny. t. I, 1131. 35 See Zagrobelny/Machnikowski, in Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz, 701. 36 See Safjan, in Pietrzykowski (ed.), Kodeks cywilny. t. I, 1128. 37 See, in judicial decisions, the resolution of the Supreme Court of 27.10.1997, III CZP 49/97: OSNC 1998, No. 3, item 36, in which the Supreme Court held, in relation to a fixed-term lease, that it was ineffective to reserve a contractual right to terminate the lease at any time because such a term was contrary to the nature of a fixed-term contract; the Supreme Court expressed a similar opinion on a tenancy agreement in its resolution of 3.3.1997, III CZP 3/97: OSN 1997, Nos 6–7, item 71; on the other hand, in a resolution of seven Supreme Court Judges of 21.12.2007, III CZP 74/07: OSN 2008, No. 9, item 95, a reservation of the right to terminate a fixed-term lease (umowa dzierżawy) or hire/tenancy (umowa najmu) agreement was accepted as long as such right is reserved for cases specified in a given contract (the Supreme Court disagreed with the practice of reserving the right to terminate without specifying the grounds on which such a right can be exercised). 38 See Machnikowski, in Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz, 702. 30

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b) Art. 58. The second legal provision referred to, which is Art. 58, provides that a 18 legal transaction is invalid if it is contrary to statute or intended to circumvent statutory provisions, unless a specific legal provision stipulates that the invalid terms of the legal transaction are replaced by appropriate statutory provisions (Art. 58 § 1). A legal transaction that is contrary to the principles of community life shall also be null and void (Art. 58 § 2).39 If only a part of a legal transaction is affected by invalidity, then the remainder of the legal transaction shall continue to be valid, unless it follows from the circumstances that the parties would not perform the transaction without the invalid terms40 (Art. 58 § 3).41 In the latter case, the whole legal transaction becomes null and void. aa) Scope. Art. 58 applies to all legal transactions, regardless of their type; conse- 19 quently, it does not only refer to those legal transactions which create obligations. It also provides the basis for assessment of the terms contained in standard contracts used in B2B relationships (the legal provisions governing the review of standard contracts in the B2C context do not apply to the review of such B2B contracts).42 bb) Invalidity. Art. 58 refers only to invalidity of a legal transaction due to its 20 content or purpose43. A legal transaction may also be invalid for other reasons, such as lack of legal capacity of a party, failure to observe the required form, submission of a defective declaration of will or failure to properly represent a party44. If the parties have included a term in their contract which stipulates that, in the case of 21 invalidity of some of its terms, the remaining part of the contract shall continue in force (the so called severability clause), such a term makes it unnecessary to refer to Art. 58 § 3.45 It is therefore not necessary to examine whether, without the invalid term, the contract would have been concluded between the parties.46 39 The Supreme Court underlines in the judgement of 31.1.2019, V CSK 626/17, Legalis, that a reference to the principles of community life in both Art. 3531 and Art. 58 § 2 has universal character and limits a freedom of contract arising from those provisions to professional relationships as well. Any of those provisions does not distinguish any subjects whom it applies to. 40 According to the Supreme Court, invalidity of certain terms of a transaction results in the invalidity of the entire transaction if there is such a link between the invalid terms and the remaining part that, without the invalid terms, the identity of the legal transaction would be affected, see Supreme Court resolution of 14.3.2006, III CZP 7/06: OSN 2007, No. 1, item 7. 41 Art. 58 § 3 may be applied by analogy when invalidity of certain terms of a legal transaction results from legal provisions other than Art. 58 § 1 and § 2, see judgment of the Supreme Court of 12.5.2000, V CKN 1029/00: OSN 2001, No. 6, item 83. 42 See, however, Art. 805 § 4, which stipulates that Arts 3851–3853 (concerning the review of standard contracts in B2C transactions) should be applied as appropriate to standard contracts used in insurance contracts where the policyholder is a natural person, even if the insurance contract is directly related to the business or professional activity carried out by that person. In addition, Art. 3855 allows an application of provisions on the review of standard contracts in B2C transaction mutatis mutandis to natural persons who enter into contracts directly related to their business activities (see above mn. 2). 43 This provision may also be used in situations where a legal transaction does not contain a term required by law, e.g. does not specify the period in which the contractual right of rescission may be exercised as required by Art. 395 § 1 – such view is expressed by the Poznań Court of Appeal in the judgment of 22.10.2009, I ACa 697/09: Lex (database) No. 6282213. 44 See the statement of grounds for the Supreme Court resolution of 14.3.2006, III CZP 7/06: OSN 2007, No. 1, item 7. 45 See judgment of the Supreme Court of 8.10.2004, V CSK 670/03: OSN 2005, No. 9, item 162; however, for a different view see the judgment of the Supreme Court of 26.1.2006, V CSK 81/05: Orzecznictwo Sądów Polskich (OSP) (Rulings of Polish Courts) 2007, No. 2, item 17, with a critical commentary by Szlęzak (OSP 2007, Nos 7–8, item 88), in which the Supreme Court held that where a severability clause is included in a contract this does not preclude the applicability of Art. 58 § 3, as the functions of such a contract term and those of Art. 58 § 3 overlap only partly. 46 See judgment of the Poznań Court of Appeal of 22.10.2009, I ACa 697/09: Lex (database) No. 628213.

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A part of a legal transaction should be taken to mean a fragment of a declaration of will which expresses a decision of the parties to the legal transaction with regard to a distinguishable and legally relevant matter, e.g. regarding the method or date of payment of the price or remuneration.47 Taking the invalid term aside, the remaining terms of the legal transaction must have [at least] the minimum content of the legal transaction, i.e. they must provide for the matters without which the legal transaction could not be performed. Therefore, if the invalidity affects those terms which stipulate the main performance to be provided by the parties, the entire legal transaction will be invalid.48

3. Other provisions In addition to the two general provisions referred to above, the Civil Code also contains other provisions that prohibit the inclusion of certain terms in contracts.49 Among these provisions, Art. 473 § 2 plays the most important role: a term which excludes the debtor’s liability for damage caused intentionally to the creditor shall be null and void. This provision is an expression of a more general principle of full compensation for damage caused by intentional fault that is also reflected in other provisions of the Civil Code which override a limitation of liability in damages in situations where the debtor caused damage intentionally. For example, it follows from Art. 788 § 1 (relating to the contract of carriage) and Art. 801 § 1 (relating to forwarding contracts) that the limitation of liability of the carrier or forwarder (forwarding agent) for damage to the cargo50, as provided for in these articles, do not apply when the damage is caused by intentional fault or gross negligence. 24 An example that should also be given here is Art. 746 § 3, which provides that the right of termination for good reason cannot be excluded from the mandate contract (umowa zlecenia). This also applies to fixed-term contracts for services, although such contracts should, as has already been mentioned, offer higher stability. Since the provisions on the mandate contract shall be applied as appropriate to other contracts for supply of services not regulated in other provisions (Art. 750), a question which is posed is whether it as admissible to apply Art. 746 to such innominate contracts for supply of services.51 It is held in judicial decisions that Art. 746 can be applied to other contracts for supply of services.52 25 Good reasons for termination are understood to include reasons which relate to the person himself as well as those relating to the property of the party that terminates the contract. Such reasons could be e.g. bad health of a party, loss of trust in the other party or discontinuation of certain activities. Good reasons justifying termination also include a breach of obligation by one of the parties.53 23

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For more information on this topic, see Trzaskowski, 298 et seq. ibid., 300. 49 See above, mn. 5 et seq. 50 As a rule, the carrier and the forwarder (forwarding agent) are liable only for damage caused by loss of or damage to the goods up to the normal value of the cargo. This means that the carrier or forwarder is liable only for the loss and not for the lost profits (this is an exception to the principle of full compensation of damage as set forth in Art. 361). 51 See more on this subject in Pyrzyńska (‘Zobowiązanie ciągłe’), 405 et seq. 52 See judgment of the Poznań Court of Appeal of 12.6.2014, I ACa 225/14: Legalis No. 1062372. The case was about a logistics services contract made for a term of three years. The Court of Appeal in Poznań held that the contract was effectively terminated due to defective performance by the logistics operator. In another case concerning a consultancy contract courts found it admissible to terminate such contract for good reason, see Supreme Court judgment of 20.4.2004, V CK 433/03: OSN 2004 No. 12, item 205. 53 See Tracz, 189, and the aforementioned judgment of the Court of Appeal in Poznań. 48

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Finally, it is worth mentioning that the level of interest specified in the contract may 26 not exceed twice the statutory interest specified in Art. 359 § 254 (Art. 359 § 21), as well as the statutory limit on interest for delay in the provision of monetary consideration, which may not exceed twice the statutory interest for delay specified in Art. 481 § 255 (Art. 481 § 21)56. Before Art. 359 § 21 came into force,57 judicial decisions held that excessive interest which is not justified by inflation or profits earned in the course of business activities carried out diligently may be considered to be contrary to the principles of community life.58 As held by the Supreme Court, ‘such consequences of a contract regarding the remuneration reserved for the lender [which cannot be justified by any arguments] are contrary to the legal order and, for these reasons, must be regarded as contrary to the principles of community life’.59

4. Legal consequences In the event of conflict between contract terms and the statutory provisions referred 27 to above, the contract terms shall be null and void (Art. 58 § 1), unless the statute provides for another consequence. For example, the statutory provisions on maximum interest rates provide that where the stipulated rate of interest under the contract exceeds the statutory limit, the contractual interest is reduced to the level of the maximum statutory limit (Art. 359 § 22 and Art. 481 § 22). Such a sanction for breaching the provisions on the maximum interest may raise doubts as it does not discourage from imposing excessive interest. Where contract terms are contrary to the law or principles of community life, the 28 court should take this into account ex officio.60 The invalid term shall not, from the very beginning and by operation of law, have the legal effect (intended by the parties). A ruling that declares a contract or its individual terms null and void61 shall be declaratory in nature.

IV. Jurisprudence regarding judicial review of B2B contracts This part of the report will present examples of court rulings relating to the judicial 29 review of terms in B2B contracts. These judgments concern, inter alia, the interpretation of the aforementioned provisions which limit the freedom of B2B contract. 54 Under this provision, statutory interest is equal to the reference rate of the National Bank of Poland (which is currently 0.1 %) plus 3.5 percentage points (3.6 % p.a. in total). 55 Under this provision, statutory interest for delay is equal to the sum of the reference rate of the National Bank of Poland (which is currently 0.1 %) plus 5.5 percentage points (5.6 % p.a. in total). 56 According to the judgment of the Court of Appeal in Kraków of 2.12.2015, I ACa 1185/15: Legalis No. 1399098, the provisions on maximum interest do not apply to commission as a form of remuneration agreed in a loan agreement. However, this view may raise doubts. This is because the role of the contractual fee should be taken into account (i.e. whether it serves to remunerate for the provision of the funds to be used by borrower). A fee for providing a loan may serve to circumvent the provisions on maximum interest, and then such fee should be reduced to the level of the maximum interest limit. 57 This provision was introduced into the Civil Code by the Act of 7 July 2005, Journal of Laws of 2005, item 1316. 58 See judgment of the Supreme Court of 8.1.2003, II CKN 1097/00: OSN 2004 No. 4, item 55; judgment of the Court of Appeals in Łódź of 1.7.2016, I ACa 39/16: Legalis No. 1501859. 59 See Supreme Court judgment of 23.6.2005, II CK 742/04: Legalis No. 89836. 60 See Supreme Court resolution of 17.6.2005, III CZP 26/05: OSN 2006, No. 4, item 63. 61 Such a judgment may be given in an action for a declaration. Where a contract or its individual terms are declared null and void, this may also provide grounds for a decision in the event of an action for award.

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1. Art. 3531 Many court decisions have focused on whether contract terms were compatible with the nature of the obligation as one of the criteria determining the limits of freedom of contract (Art. 3531). In several judgments, courts found a contract term in which one party is obliged perform while the other party is released from the performance obligation to be contrary to the legal nature of reciprocal agreements62 and the principle of equivalent performance. For instance, in its judgment of 8 October 2004, the Supreme Court held that a franchise agreement concluded between the parties was a continuous relationship agreement which could be terminated by giving notice.63 Where a notice of termination is given, it will terminate the legal relationship ex nunc. A stipulation in the franchise agreement that, in the event of termination, only performance provided by one of the parties is reimbursable cannot be reconciled with the principle of equivalent performance in reciprocal agreements under Art. 487 § 2. This is because there could be a situation where one party would fully provide its (continuous) performance which would benefit the counterparty while such counterparty would fully recover the performance it provided. As a result, despite the conclusion of a reciprocal agreement, the situation of the parties would be comparable to that of a gift agreement (umowa darowizny). 31 In its judgment of 8 December 2005, the Supreme Court ruled that the essence of a lease agreement involves the handing over the leased asset by the lessor to the lessee in order to enable the lessee to use the asset.64 Therefore, the delivery of the leased asset by the lessor is intrinsically linked to the lessee’s right to possess, use and possibly derive benefits from the asset. Exemption of the lessor from the obligation to deliver the leased asset to the lessee on time would therefore be contrary to the nature of the lease agreement and the principles of community life (Arts 3531 and 58 § 2). The lack of an obligation to deliver the leased asset and, as a consequence, the exclusion of the lessor’s liability for breach thereof, would undermine – from the lessee’s point of view – the economic purpose of the lease agreement it concluded. For this reason, such exclusion of the lessor’s obligation to deliver the leased asset on time must be deemed null and void. 32 The Court of Appeal in Warsaw ruled on 25 March 2013 that a clause of the lease agreement which requires the lessee to return the asset before the expiry of the notice period while requiring the lessee at the same time to continue paying the rent until the end of the agreement violates the principle of equivalent performance of parties to reciprocal agreements.65 The essence of the lease agreement is the lessee’s right to use the leased asset until the end of the agreement; therefore, the foregoing contract term is invalid as it is contrary to Art. 659 § 1 and Art. 675 § 1 and to the nature of this legal relationship. 33 The courts also considered whether it was permissible to resolve a contract of a continuous nature or to give notice to terminate such a contract retroactively, which would be contrary to the nature of such an obligation. Polish civil law does not question the possibility of concluding a contract terminating a previously concluded contract,66 30

62 Pursuant to Art. 487 § 2, a contract is reciprocal if both parties agree in such a way that the performance of one of them is to be equivalent to the performance of the other. Legal scholars assume that this refers to a subjective belief of the parties that their performance is equivalent (subjective criteria is relevant), see Radwański/Olejniczak, 124; Zagrobelny, in Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz, 1102. 63 V CSK 670/03: OSN 2005, No. 9, item 162. 64 II CK 297/05: Lex No. 188549. 65 25.3.2013, VI ACa 605/12: Legalis No. 1049261. 66 See resolution of seven judges of the Supreme Court of 30.11.1994, III CZP 130/94: OSN 1995, No. 3, item 42.

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as well as the determination – within the limits of the freedom of contract set out in Art. 3531 – of the effects such a terminating agreement will have67 (therefore, the obligation relationship may, in principle, be terminated ex nunc or ex tunc, unless this is contrary to the nature of the obligation68). There is an established view in judicial decisions that termination of an agreement of a continuous nature (e.g. hire, tenancy, lease etc.) can only have ex nunc effect. This is why courts held terms of a contract that terminated a contract of a continuous nature with ex tunc effect to be null and void on the ground of being contrary to the nature of the obligation created by such contract69. Similarly, courts found a contract term allowing ex tunc (unilateral) termination of a continuous contract by giving notice to be contrary to the nature of such obligation.70 Finally, the courts considered the admissibility of providing, in a fixed-term contract, 34 the possibility of termination without stating the reason.71 In its resolution of 27 October 1997, the Supreme Court held that it was ineffective to reserve the right to terminate a fixed-term lease at any time as such clause is contrary to the nature of a fixed-term contract, which should be a continuous relationship.72 Therefore, such freedom to terminate is contrary to the nature of fixed-term contracts. Reserving the right to freely terminate a fixed-term contract would lead to an internal contradiction in such a contract which, on the one hand, would supposedly be of a more lasting nature while, on the other hand, it could be terminated at any time at the discretion of the parties. Similarly, the Supreme Court ruled against the admissibility of reserving the right to freely terminate a lease of premises concluded for a fixed period in its resolution of 3 March 1997.73 On the other hand, the resolution of seven judges of the Supreme Court of 21 December 2007 allowed a reservation of the right to terminate the lease or tenancy agreement concluded for a fixed term in cases specified in the agreement (however, the Supreme Court maintained its negative position regarding situations where parties reserve the right to terminate the agreement without specifying the reasons justifying the exercise of this right).74

2. Art. 58 a) Legal transactions contrary to statute. Pursuant to the foregoing Art. 58 § 1, a 35 legal transaction is invalid if it is contrary to statute or intended to circumvent statutory provisions, unless a specific legal provision stipulates that the invalid provisions of the legal transaction are replaced by appropriate statutory provisions. While there is no doubt that a legal transaction (its individual terms) which is contrary to the mandatory provisions of civil law (e.g. Art. 473 § 275) is invalid, the situation is different if a legal transaction is (its terms are) contrary to other laws, in particular to the provisions of public law (e.g. administrative law or criminal law). 67

For more information on terminating agreements, see Podrecka; Pyrzyńska (‘Rozwiązanie’). See Radwański/Olejniczak, 383. 69 See judgment of the Supreme Court of 15.11.2002, V CKN 1374/00: OSN 2004, No. 3, item 45; judgment of the Supreme Court of 15.2.2007, II CSK 484/06: Lex No. 274159; judgment of the Supreme Court of 17.3.2010, II CSK 454/09: OSN 2010, No. 10, item 142. 70 See the Supreme Court of 8.10.2004, V CSK 670/03: OSN 2005, No. 9, item 162. 71 The issue of whether it is permissible to reserve the right to terminate a fixed-term contract is also controversial in the literature, see Romanowski, 47 et seq. 72 III CZP 49/97: OSN 1998, No. 3, item 36. 73 III CZP 3/97: OSN 1997, Nos 6–7, item 71. 74 Resolution of the Supreme Court of 21.12.2007, III CZP 74/07: OSN 2008, No. 9, item 95. Views were expressed in the statement of grounds for this resolution both in favour of and against allowing the right of free termination to be reserved in fixed-term contracts. 75 See mn. 47. 68

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The Supreme Court has considered this problem several times in its rulings. In its judgment of 26 November 2002, the Supreme Court held that a guarantee provided by an insurance company to secure repayment of a loan to a bank is invalid as it is contrary to statute within the meaning of Art. 58 § 1 since the insurance company did not have the authorisation to carry out the activities of providing insurance guarantees and concluding loan repayment insurance agreements.76 The Supreme Court stressed that prohibitions to perform specific legal transactions may arise from provisions of public law (including, in particular, administrative law), the violation of which, as a rule, results in the consequences provided for in the provisions of this branch of law. However, if the purpose of a rule of law indicates that it is to prevent the formation of a civil-law relationship contrary to that rule, such a transaction must be declared invalid pursuant to Art. 58 § 1. As the Supreme Court argues, the legal system should be considered as a whole and coherent and activities prohibited by rules of public law cannot be allowed to be the subject of a valid obligation under civil law. In the opinion of the Supreme Court, this is the aim of the legal provisions that require an authorisation to carry out insurance activities. 37 In its judgment of 21 December 2010, the Supreme Court assessed the effectiveness of a rapeseed oil sales agreement concluded by a refinery with its supplier (a company which purchased rapeseed oil from agricultural producers).77 The rapeseed oil was to be used by the refinery to produce liquid fuel. The Supreme Court stated that these agreements were concluded contrary to the provisions of the ‘Biofuels Act’78 in force at that time. It followed from the provisions of the Biofuels Act that the legislator specified both the permissible type of contract that may be concluded between a biofuel component producer and a supplier of crude oil for processing, as well as the necessary elements forming the structure of such a contract. In the opinion of the Court, the legislator’s intention and goal was to require the entrepreneur to manufacture components, biofuel components and fuels himself, excluding intermediaries, and to impose on these entities the manner of arranging the obligation relationships which is specified in the Act. However, as per the description of the facts in this case, the refinery concluded a sales contract with an intermediary. Furthermore, agreements for the supply of biofuel components could be concluded for a period of at least five years, while the agreement examined by the courts was concluded for a shorter term. As the Supreme Court pointed out, the reasons behind such statutory regulation of contracts concluded by fuel producers with suppliers were both the interest of the state, which is to ensure security of fuel supplies (their continuity and quality), as well as the social interest understood as the interest of the public at large (agricultural producers and processors). The aim of the Act was to eliminate intermediaries and other entities that are not agricultural producers, manufacturers, first processors or producers within the meaning of the Act. As a result, the provisions of the Biofuels Act are mandatory provisions of law, and agreements which are contrary to those provisions are invalid under Art. 58 § 1. 38 The Supreme Court has also often assessed the admissibility of contracts concluded with persons who did not have the required real estate agents licence.79 In the judgment 36

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V CKN 1445/00: OSN 2004, No. 3, item 47. III CSK 47/10: Legalis No. 386451. 78 Ustawa o biokomponentach stosowanych w paliwach ciekłych i biopaliwach ciekłych The Act of 2 October 2003 on biofuel components used in liquid fuels and liquid biofuels (Journal of Laws of 2003, item 1934, as amended). This Act was replaced by the new Act on biofuel components and liquid biofuels (ustawa o biokomponentach i biopaliwach ciekłych) of 25 August 2006 (consolidated text: Journal of Laws of 2020, item 1233, as amended). 79 The legal provisions requiring a licence for this type of activity are no longer in force. 77

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of 19 January 201180 and in the judgment of 5 September 201281, the Supreme Court held that a real estate agency agreement concluded with a person who is not licensed as a real estate agent is invalid pursuant to Art. 58 § 1. The Supreme Court pointed out that, since the legislation prohibits and penalises persons who do not hold a proper professional licence to act as intermediaries (agents), it thus also restricts the freedom of contract by prohibiting the conclusion of agency agreements with persons who do not have a formal authorisation (licence) to act as agents on the real estate market. In the opinion of the Supreme Court, if a legal transaction is prohibited on pain of a penalty, it is null and void (Art. 58 § 1), unless the statute expressly provides for another sanction for it. A different view would lead to a duality of judgements that would undermine the coherence of the legal order and is unacceptable for systemic and axiological reasons. Finally, in its judgment of 28 October 2005, the Supreme Court held that a legal 39 transaction undertaken for a criminal purpose is invalid.82 This case concerned an entrepreneur who concluded commission agreements (umowy komisu) with counterparties without any intention to actually perform them (the entrepreneur disappeared shortly after he concluded agreements with several dozen customers). Such conduct satisfied the definition of fraud within the meaning of the Criminal Code (kodeks karny).83 In the opinion of the Supreme Court, civil law transactions cannot be used as means to achieve criminal objectives and therefore such a transaction should be considered invalid pursuant to Art. 58 § 1. This decision of the Supreme Court was met with criticism from legal scholars.84 It was emphasised that, apart from its consequences under criminal law, a criminal offence may, but does not necessarily have to, affect the validity or cause other defects of a legal transaction.85 In the case under consideration, neither the content nor the purpose of the commission agreement agreed by the parties were in conflict with rules of law. Such an agreement could only be declared invalid if both parties were aware that it is intended to be used to commit a crime; however, the legal basis for such an assessment would then be Art. 58 § 2 (legal transaction being contrary to the principles of community life) instead of Art. 58 § 1.86 b) Circumvention of statute. In light of Art. 58 § 1, a legal transaction is invalid not 40 only when it is contrary to statute but also when it aims to circumvent statutory provisions. On the basis of this provision, a clause of a lease agreement between two companies which stipulated that ‘the lessee can extend the lease twice for 30‐year terms on the conditions described in the agreement’ was held invalid.87 The courts decided in this case that this clause was intended to circumvent the prohibition on entering into leases for a fixed term of more than 30 years, since it was intended to create an obligation relationship for a period of 90 years that was not terminable. Pursuant to 80 V CSK 173/10: OSN 2011, No. 10, item 113. In this judgment, the Supreme Court referred to another judgment (Supreme Court resolution of 17.7. 2007, III CZP 69/07: OSN 2008, No. 9, item 99), in which it held that a property management contract concluded by a person without a professional licence of a manager is invalid. 81 IV CSK 81/12: Legalis No. 551899. 82 II CK 174/05: OSN 2006, No. 9, item 149. 83 There were criminal proceedings conducted against the owner of the commission sale business in which he was accused of fraud. 84 See Gutowski (‘Czynność prawna’), 1023 et seq. 85 See judgment of the Supreme Court of 23.2.2006, II CSK 101/05: Legalis No. 177873, in which the Supreme Court held that violation of prohibitions resulting from the rules of criminal law invalidates a legal transaction pursuant to Art. 58 § 1 only when the purpose of a specific rule of criminal law is to prevent the formation of a relationship under civil law in a manner which is contrary to such a rule. 86 See the statement of grounds for Supreme Court judgment of 25.2.2004, II CK 34/03: Legalis No. 313372. 87 See judgment of the Supreme Court of 20.3.2014, II CSK 290/13: OSN 2015, No. 4, item 43.

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Art. 695 § 1, after 30 years, a lease agreement concluded for a fixed term transforms into an agreement made for an indefinite duration. Therefore, the legislator defined, in Art. 695 § 1, the maximum term for which a fixed-term lease agreement may be concluded. It would be contrary to that legal provision to stipulate in such lease agreement that the lease can be extended after thirty years have passed in order to ensure that it can continue in force as a fixed-term contract. 41

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c) Legal transaction being contrary to the principles of community life. Pursuant to Art. 58 § 2, a legal transaction which is contrary to the principles of community life is also invalid. In judicial decisions, the principles of community life are sometimes considered to be quasi-legal rules. Under a different approach, it is not possible to create a fixed and invariable catalogue of principles of community life; therefore, all circumstances of each individual case need to be considered to determine whether principles of community life have been breached.88 Particular caution should be exercised when one is to consider a legal transaction invalid based on the principles of community life. As has been emphasised by the Supreme Court, making only nonspecific references to general clauses or to the values they protect may lead to an unacceptable situation in which the law is applied in an arbitrary manner resulting in the violation of the principle of legal certainty which is essential in a market economy89. Violation of the principles of community life is often combined with an infringement of the limits of freedom of contract.90 It is commonly believed that infringements of the principles of community life can also occur in B2B contracts. Court rulings provide examples of such contract terms that were declared null and void because they breached the principles of community life, as the following examples shall illustrate. It was held in the judgment of the Supreme Court of 26 October 2016 that an excessively high (grossly excessive) contract penalty provided for in a B2B contract may be contrary to the principles of community life.91 In its judgment of 20 May 2004, the Supreme Court held that a clause governing the parties’ cooperation in the conclusion of sales contracts which restricts the freedom of one of the parties to conduct a business infringes the principles of community life.92 According to this clause, in the event of late payment, ‘discounts [granted to the buyer] will be cancelled’. The Supreme Court held that, as a rule, it was permissible to afford one party to the contract (in this case the seller) the power to determine the final sale price; however, the clause under assessment was invalid (Art. 58 § 2) as it would allow the seller to make the buyer dependent on him and thus limit the buyer’s freedom to conduct business. This is because the seller could, for some time, tolerate the buyer’s failure to pay the price on time – as was the case – and this way maintain the business relationship with the buyer only for fear of charging the buyer with a large total amount of discounts which were ‘cancelled’. Uncertainty as to the price of the goods being purchased would also make it difficult for the buyer to determine the terms and conditions of sales agreements with his customers. The Court of Appeal in Gdańsk arrived at similar conclusions in its judgment of 14 May 201393 where it stated that it is contrary to the principles of community life to 88 With regard to these two views, see the statement of grounds for the judgment of the Supreme Court of 28.1.2016, I CSK 16/15: (2017) 1 Monitor Prawa Bankowego 35, and the rulings invoked there. 89 Judgment of the Supreme Court of 12.10.2017, IV CSK 660/16: (2017) 4 Monitor Prawa Handlowego 40. 90 See mn. 16. 91 III CSK 312/15: Lex No. 2186574. 92 II CK 354/03: OSN 2005, No. 5, item 91. 93 I ACa 174/13: Legalis No. 719614.

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stipulate, in a contract of carriage, a contract penalty for taking competitive actions after the termination of such contract without any compensation in exchange. In the opinion of the Court, reservation of the contract penalty would lead to gross harm to the carrier as it would limit the carrier’s freedom to conduct a business in a way that is not justified by the legal relationship between the carrier and the forwarder (forwarding agent) and is inadequate for the protection which the forwarder sought by including the penalty in the general terms and conditions of the transport order. Given the limited number of freight forwarders, carriers and customers interested in their services on the market, sometime after such a contract term has entered into force, the carrier would be obliged to wait for an order from a specific forwarder, as it would not, whether directly or indirectly, be able to fulfil an order of another person because of the risk of such contract penalty, whereas the forwarder would not be obliged by the terms of the contract to order transport services from that carrier. In this way, the forwarder would restrict the carrier’s freedom to conduct its business as regards the choice of customers to whom the carrier could provide transport services and this would significantly impair the carrier’s market position without any equivalent counter-performance from the forwarder. Many judgments also referred to the limits of the permissible disproportion between 46 performances by parties in reciprocal contracts. Generally, it is assumed in judicial decisions that a disproportion between the value of mutual performance of the parties specified in the agreement is not a sufficient reason to consider the agreement to be contrary to the principles of community life.94 Therefore, non-equivalence of performance or unequal distribution of the risk relating to the benefits to be obtained, which is an expression of the will of the parties, does not, generally, require the occurrence of circumstances that would justify it.95 However, arrangements that put one of the parties in an objectively unfavourable legal situation may be assessed negatively in moral terms; this may lead to the contract being regarded as contrary to the principles of community life where the contract is manifestly unfair due to intentional or merely negligent abuse of the other party’s stronger position.96 Therefore, the Supreme Court did not rule out the possibility that a currency option agreement concluded between a company and a bank may be considered incompatible with the principles of community life, since the company – which was not trading in financial instruments – might not have a real awareness of the content and effects of the currency option agreement proposed by the bank and of the resulting unequal distribution of risks between the parties.97

3. Art. 473 Pursuant to Art. 471, the debtor is obliged to redress damage caused to the creditor 47 as a result of non-performance or improper performance of the obligation, unless such non-performance or improper performance resulted from circumstances for which the debtor is not responsible. As a rule, the debtor is liable for failure to exercise due care in performing the obligation (Art. 472). However, the debtor’s liability in contract may be extended to circumstances for which he is not responsible under statutory 94 See the statement of grounds for the Supreme Court judgment of 8.1.2003, II CKN 1097/00: OSN 2004 No. 4, item 55, and the statement of grounds for the judgment of the Supreme Court of 18.3.2008, IV CSK 478/07: (2011) 5 Monitor Prawniczy 279. 95 As stated by the Supreme Court in the judgment of 19.9.2013, I CSK 651/12: OSN 2014 Nos 7–8, item 76. 96 As stated by the Supreme Court in the judgment of 25.5.2011, II CSK 528/10: Lex No. 794768. The view expressed in this ruling was confirmed by the aforementioned judgment of the Supreme Court of 19.9.2013. 97 See the Supreme Court judgment of 19.9.2013, I CSK 651/12: OSN 2014 Nos 7–8, item 76.

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provisions (Art. 473 § 1) or limited. This does not apply to the debtor’s liability for damage caused to the creditor intentionally as this cannot be excluded (Art. 473 § 2).98 The prohibition on excluding the debtor’s liability under Art. 473 § 2 also applies to the debtor’s liability for damage caused by third parties who assist him in the performance of his obligation.99 Accordingly, exclusion of the debtor’s liability (Art. 474) for damage caused intentionally by third parties in the performance of an obligation would be invalid. 48 Limits of the contractual extension of the debtor’s liability has been the subject of a number of court rulings, in particular with regard to the effectiveness of contract terms stipulating a contract penalty for non-performance or improper performance of an obligation.100 There is an established view in judicial decisions101 that an extension of the debtor’s liability to circumstances for which, according to statutory provisions, he is not liable should result clearly from the contract which is to specify the circumstances for which the debtor shall be liable. A general statement in a contract that the debtor is liable for damage ‘whatever the cause’ of the non-performance or improper performance of the obligation will, in principle, not suffice.102 Circumstances for which the creditor shall be liable cannot be specified in a given contract to be the circumstances for which the debtor shall be liable. Therefore, it is ineffective to agree a contract penalty that the creditor could demand in the event of non-performance or improper performance of an obligation caused by an act or omission by the creditor. This is because a contract penalty is a civil law sanction for non-performance or improper performance of an obligation by the debtor.103 49 However, it is noted in literature104 that it is not possible to specify in a contract a closed list of circumstances causing non-performance or improper performance of the obligation for which the debtor shall be liable.105 Material importance for the interpretation of contract terms which specify the basis of debtor’s liability for nonperformance or improper performance of the obligation must be attributed to the nature of obligation. It is therefore difficult to agree with an interpretation of the terms of a cash transport contract that would exclude the debtor’s liability for the loss of cash as a result of a robbery.106 98

For more information on this topic, see Jastrzębski, 801 et seq. See judgment of the Court of Appeal in Gdańsk, 25.10.1996, I ACr 822/96: Orzecznictwo Sądów Apelacyjnych 1997, No. 10, item 58. 100 Pursuant to Art. 483 § 1, it may be stipulated in a contract that damage resulting from nonperformance or improper performance of a non-monetary obligation shall be redressed by paying a certain amount of money. If a contract provides for payment of a penalty for non-performance or improper performance of a monetary obligation this is considered invalid as being contrary to the abovementioned provision (this view is expressed e.g. in the judgment of the Supreme Court of 26.9.2012, II CSK 84/12: Legalis No. 551881, and in the judgment of the Court of Appeal in Katowice of 23.7.2013, V ACa 233/13: Legalis No. 736480; a different view was taken by the Supreme Court in the judgment of 24.1.1994, I CO 39/93: Legalis No. 1456875). 101 See judgment of the Supreme Court of 27.9.2013, I CSK 748/12: OSNC 2014, No. 6, item 67; judgment of the Court of Appeal in Warsaw of 28.1.2016, I ACa 253/15: Legalis No. 1409026; judgment of the Supreme Court of 15.4.2016, I CSK 383/15: Legalis No. 1472291. 102 See judgment of the Court of Appeal in Łódź, 6.11.2017, I ACa 112/17: Legalis No. 1743628. 103 See the statement of grounds for the Supreme Court judgment of 27.9.2013, I CSK 748/12: OSNC 2014, No. 6, item 67. 104 See Jastrzębski, 837. 105 According to the Supreme Court in the statement of grounds for the judgment of 29.11.2002, IV CKN 1553/00: Legalis No. 59147. 106 As in the case in which the aforementioned Supreme Court judgment, was passed. The Supreme Court concluded that, since the employees of a cash in transit company are not responsible for the loss of cash, their employer shall not be liable for the loss, despite the fact that such company assumed full liability in the contract for the cash which was transported. This is because the Supreme Court ruled 99

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An interesting problem concerning the limitation of debtor’s liability was considered in 50 the judgment of the Supreme Court of 11 January 2008107. Pursuant to Art. 484 § 1 2nd St., if a contract provides for a contract penalty, the creditor may not seek compensation for damage exceeding the amount of the contract penalty (the ‘exclusive contract penalty’), unless the parties agree otherwise in the contract. In the case in question, the defendant joint stock company did not deliver bearer shares to the plaintiff, despite meeting the conditions for the sale of these shares as set forth in the agreement,108 and sold them – at a higher price – to a third party. The Supreme Court held that, despite the contract penalty for non-performance of the contract by the seller, the buyer may claim compensation for damage exceeding the amount of the penalty because the defendant company (seller) was aware that it was, by its actions (by selling shares to a third party), causing damage to the plaintiff and accepted that consequence; therefore, the damage occurred as a result of non-performance of the obligation through the intentional fault of the defendant company as the debtor. The Supreme Court stated that the assessment of effectiveness of penalty clauses should be reviewed in the light of those rules of law which limit the freedom of contract (Art. 3531 and Art. 58), and thus also in terms of the compatibility of such contract terms with Art. 473 § 2. The defendant joint stock company cannot release itself from the obligation to redress damage caused by intentional fault by stipulating a penalty.

4. Art. 746 § 3 Pursuant to Art. 746 § 1 1st St. and Art. 746 § 2, both the mandator (principal) and the 51 mandatary (agent) may, in general, terminate a mandate contract (umowa zlecenia) at any time. Since these are dispositive rules of law, the parties to such contract may limit the right of termination, but the right to terminate the contract for good reasons cannot be waived in advance (Art. 746 § 3). It has been an established approach in court rulings that the rules concerning the termination of mandate contracts are also applied to other contracts for the supply of services which are not governed by separate legal provisions (Art. 750).109 Art. 746 § 3 also applies to fixed-term contracts.110 This is a mandatory provision and a waiver of the right to terminate such contract for services for good reason would be invalid.111 However, it would, in the light of established case law, be acceptable to exclude the right to terminate for reasons other than good reason, as well as to limit the right of termination for good reasons by specifying the period of notice in the contract.112 In its judgment of 10 May 2002, the Supreme Court held that Art. 746 § 3 should also serve as guidance when interpreting terms of a contract for services which relate to the reasons for its termination.113 Therefore, it would be unreasonable to assume that, in a business management contract, the parties excluded the loss of trust in the manager against the extension of debtor’s liability for non-performance for reasons for which the debtor was not responsible. 107 V CSK 362/07: (OSP) 2012, Nos 7–8, item 76. 108 In the case of a sale of bearer shares, for the ownership of such shares to be effectively transferred it is necessary – apart from the agreement – to deliver such shares to the purchaser. 109 See for example the judgment of the Court of Appeal in Warsaw of 25.3.2013, VI ACa 605/12: Legalis No. 1049261. 110 As stated by the Supreme Court in the judgment of 9.10.2013, V CSK 472/12: Legalis No. 877777. 111 ibid. 112 As stated in the Supreme Court judgment of 11.9.2002, V CKN 1152/00: Legalis No. 59805; Supreme Court judgment of 23.10.2003, V CK 386/02: Legalis No. 62353; Supreme Court judgment of 20.4.2004, V CK 433/03: OSN 2004 No. 12, item 205; Supreme Court judgment of 15.10.2014, V CSK 684/13: OSN – Additional Collection (ZD) 2016, No. A, item 7. 113 IV CKN 1043/00, Legalis No. 278088.

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(mandatary) as a good reason for termination of the contract. In this ruling, the Supreme Court stressed that any acts or omissions of the manager (mandatary) – even if they are unrelated to the performance of obligations towards the principal (mandator) – may be deemed to be reasons justifying a loss of the necessary trust in the manager (mandatary) if the nature of such acts or omissions indicates that they may give rise to serious doubts as to whether the manager (mandatary) is a trustworthy person who guarantees proper performance of the contract for services. In another ruling, the Supreme Court held that an important reason for termination of a contract for supply of services (Art. 746 § 2 in conjunction with Art. 750) may be a reasonable assessment that the purpose of the contract will not be achieved for reasons attributable to the other party.114 In the case in which the ruling was made, it was not until the contract was concluded that the supplier (mandatary) was found to be lacking – contrary to earlier assurances – the qualifications and professional background necessary to provide the services which he agreed to supply under the contract.

5. Art. 9.2 CCPA As far as published rulings are concerned, the claim that a contract is invalid due to abuse of a dominant position115 has been heard by civil courts in particular in cases involving the supply of public utility services such as water, electricity or gas where the suppliers often have a de facto monopoly on a given local market. 53 In its judgment of 30 June 2016, the Wrocław-Fabryczna District Court analysed the conditions for connection to the water supply network specified by a company set up by the municipality.116 The Court held that the conditions set out in Art. 9.2 No. 6 CCPA, which prohibits abuse of a dominant position by imposing onerous terms and conditions on counterparties to derive unjustified benefits, were not fulfilled.117 The Court held that contract terms are imposed on the counterparty when a business with a dominant position uses its contractual advantage over the counterparty to force certain conduct on such counterparty because of the lack of alternatives on the market. What is relevant here is that the business with dominant position forces the other party into a difficult situation. In the case discussed here, the water supply company was neither able to ensure supplies of water having appropriate parameters as was needed for the fire protection system nor was it – for various reasons – able to build an appropriate water and sewage network, of which it informed its counterparty. On the other hand, it would be possible to connect the existing water supply network to a system which the counterparty (the plaintiff) would build from its own funds, with partial reimbursement of the costs of such construction. Furthermore, the Court noted that the counterparty could obtain access to water for fire-fighting purposes in another way (e.g. by building a deep well or a fire pool), and therefore was not forced into the situation. For this reason the Court held that the water company did not take advantage of the situation of the counterparty interested in connecting to the water supply network. 54 A further case involving the Court of Appeal in Katowice concerned connection to the district heating network.118 The defendant company asserted that it could not enter into a contract with another entity or have any influence on the connection conditions as the plaintiff was the only supplier of heat in the city. Therefore, the defendant 52

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company claimed that the plaintiff abused its dominant position by setting high penalties in the contract in the event of failure by the defendant company to comply with its obligations. Had it not entered into the agreement, the defendant company would not have been able to continue its investment project. The trial court found that the plaintiff was indeed the sole supplier of heat and therefore held a dominant position on the local market, but the Court also held that the defendant did not make any attempt to negotiate the terms of the contract which it considered unfavourable, including those which imposed penalties. Since the defendant did not take any steps to negotiate the provisions of the agreement that were unfavourable to it, it was difficult to assume that it was forced to enter into the agreement. Therefore, there was no abuse of a dominant position by the plaintiff within the meaning of Art. 9.2 No. 6 CCPA. The Court of Appeal in Katowice (as the higher court) shared the position of the trial court. It emphasised that the defendant company bears the burden of proving the conditions under Art. 9.2 No. 6 CCPA. However, the defendant company did not prove that the burden of the penalty stipulated in the contract was greater for the defendant than the burden generally accepted in this type of relationship. In addition, the defendant did not prove that the plaintiff obtained profits at the expense of the defendant which would differ from those generally accepted in such relationships. In a third case, the Supreme Court reviewed a decision by the President of the Office of 55 Competition and Consumer Protection in which a penalty was imposed on a water supply company for imposing onerous terms and conditions on its customers and deriving unjustified benefits from them. In the agreements offered to customers, the water supply company excluded its liability for interruptions in water supply and sewage collection caused by lack of water or interruptions in electricity supply to water and sewage systems. Hearing appeals against that decision, the circuit court (first instance) and the court of appeal (second instance) held that the contracts concluded by the water supply company with its customers prevent them automatically from seeking damages, regardless of the individual circumstances of the event giving rise to the damage, and, importantly, regardless of the water supply company’s conduct and the extent to which it contributed to the interruption of its services. In the opinion of the Courts, both the water level at the intake and interruptions in the power supply to water and sewage equipment may be caused by circumstances for which the water supply company is not responsible; however, this does not justify an arbitrary exclusion of its liability for all consequences of such circumstances, regardless of the actions taken by the water company after such circumstances were discovered. As a result of such contractual arrangements, the water company could obtain unjustified benefits as it was not obliged to provide compensation for damages suffered by its customers. However, the Supreme Court was of a different opinion and did not find any abuse of a dominant position by the water company within the meaning of Art. 9.2 No. 6 CCPA because the company could not benefit from excluding its liability in agreements with customers. The Supreme Court held that such exclusion of liability violates Art. 471 of the Civil Code and is therefore null and void pursuant to Art. 58 § 1 and Art. 58 § 3. The Supreme Court stressed that only a contract term that is valid can be considered as onerous and unjustifiably advantageous. If the term is invalid under laws other than the Competition and Consumers Protection Act, it cannot be concluded that an onerous condition is imposed which would bring unjustified benefits to the company which has a dominant position.

6. Art. 15.1 No. 4 UCA Under Art. 15.1 No. 4 UCA, charging fees other than a trade margin for accepting 56 goods for sale is considered an act of unfair competition as it hinders access to the Pisuliński

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market.119 This rule raises numerous doubts in practice and has been the subject of many court rulings.120 Courts pay particular attention to finding whether there are any fees charged for accepting goods for sale other than the margin. More simply, courts hold that the charging of fees from sellers (suppliers of the goods) which is not justified by the equivalent performance of the buyer (recipient of the goods)121 should be considered to be prohibited under Art. 15.1 No. 4 UCA. Given the character of this report, only a few recent judgments of the Supreme Court concerning this problem can be quoted. However, it should be noted that, in the light of the rulings so far, each situation where fees are charged for accepting goods for sale needs to be examined on a case-by-case basis. 57 In its judgment of 24 February 2016, the Supreme Court ruled that it can be considered an act of unfair competition within the meaning of Art. 15.1 No. 4 UCA if an extra fee is stipulated in a framework agreement (preceding the sales agreement) in the form of a bonus due to the buyer from the seller which is not a part of the price or margin and is not a payment for a specific non-cash performance from the buyer to the seller which would accompany the sales agreement, and such fee is actually a predetermined receivable from the seller based on the total annual sales between the parties.122 58 In its judgment of 15 June 2018, the Supreme Court confirmed that after-sales discounts are admissible.123 With reference to its earlier rulings, the Supreme Court concluded that if, instead of being linked in the contract to any measurable performance from the customer, an additional monetary performance of the supplier (rebate, discount, cash bonus, award) is connected with a certain level of turnover, sales or volume in a specified period of time, the terms of such performance (granting a discount, rebate, etc.) determines the price of the goods sold and, as a consequence, the margin of the supplier. In such a situation, there is no reason to treat the contract terms in which such obligations of the supplier are stipulated as the fees for accepting goods for sale within the meaning of Art. 15.1 No. 4 UCA. The freedom of pricing (Art. 536 § 1) is a significant manifestation of the freedom of contract (Art. 3531) and, in the opinion of the Supreme Court, there are insufficient grounds to assume that the legislator intended to create a mechanism to regulate prices in Art. 15.1 No. 4 UCA. At the same time, the Supreme Court stressed in that judgment that a discount/rebate must be regarded as a prohibited charge other than a commercial margin if the margin differs materially (unfavourable to the seller) from the margins charged by the seller in similar contracts for the same goods where such margins are at a reasonably uniform level, and if the parties fail to agree the conditions in which the buyer’s right to a reduction in price is exercised or to set the amount of the reduction in price, leaving that to the unilateral decision of the buyer.124 119 According to the judgment of the Supreme Court of 25.10.2012, I CSK 147/12: Lex No. 1231301, the seller does not have to prove that access to the market was impeded if the factual situation corresponds to the hypothesis [element of legal rule that defines its addressee and the circumstances] of the rule expressed in Art. 15.1 point 4 UCCA. 120 See the rulings referred to by Du Cane, 88 et seq. and by Wolski, 26 et seq. 121 This may refer to such consideration as promotion or advertising of the seller’s goods by the buyer. The Supreme Court held in its judgment of 12.6. 2008, III CSK 23/08: OSN ZD 2009, No. A, item 14, that the buyer’s conduct is dishonest if the marketing fees paid by the seller to the buyer are much higher than the costs of creating the seller’s own marketing campaign without concluding the sales contract. 122 I CSK 824/14: OSN 2017, No. 1, item 11. 123 I CSK 494/17: Legalis No. 1786890. 124 See also the Supreme Court judgment of 25.5.2018, I CSK 455/17: Legalis No. 1834484.

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V. International application The concept of overriding mandatory provisions has been known to Polish legal scholars in the area of private international law for many years, although it was not until the enactment of the Private International Law Act of 4 February 2011 (‘PPLA’)125 that this matter was resolved explicitly in legislation (Art. 8 PPLA126). However, international conventions and EU regulations (in particular Art. 9 Rome I) governing the application of overriding mandatory provisions take precedence over Art. 8 PPLA. Out of all the foregoing provisions concerning the review of B2B contracts, it is only in the case of Art. 359 § 21 (prohibition of excessive interest on principal) and Art. 481 § 21 (prohibition of excessive interest for delay) where the statute expressly states that the application of these provisions may not be excluded or limited by the choice of law of a state other than Poland.127 If foreign law is chosen as the governing law, provisions of Polish law limiting the amount of contractual interest shall apply to the determination of interest.128 It is claimed that these two provisions give statutory limitation of contractual interest the status of overriding mandatory provisions.129 These provisions should also be applied where, instead of interest for delay, the chosen foreign law allows for a penalty to be stipulated in a contract for delay in provision of a monetary consideration.130 However, the solution adopted in Art. 359 § 23 and Art. 481 § 23 may raise doubts if the governing law chosen by the parties has its own limitation of the maximum contractual interest and such limits may be lower than those in the Polish law.131 A problem may also arise if the chosen governing law provides for a different sanction in the event that the contract stipulates interest above the permissible level (e.g. invalidity of such a term or a reduction of the interest below the permissible maximum level). Therefore, it seems that the applicability of Art. 359 § 23 and Art. 481 § 23 could be limited by interpretation to those cases in which the law of another country chosen by the parties does not provide for any limits of maximum contractual interest. There have been no judicial decisions on this matter so far. It is assumed in legal writings that overriding mandatory provisions will also include provisions of antitrust law132 (which included Art. 6 and Art. 9 CCPA). Art. 473 § 2 125

Consolidated text in the Journal of Laws of 2015, item 1792. This provision was modelled on Art. 7 Rome Convention. For more information on this provision, see Zachariasiewicz, in Pazdan (ed.), Prawo prywatne międzynarodowe. Komentarz, 155 et seq. 127 See Art. 359 § 23 and Art. 481 § 23, respectively. 128 See Supreme Court judgment of 6.4.2017, III CSK 174/16: Legalis No. 1668459. 129 See Zachariasiewicz, in Pazdan (ed.), Prawo prywatne międzynarodowe. Komentarz, 710; Machnikowski, in Gniewek/Machnikowski (ed.), Kodeks cywilny. Komentarz, 729; in court rulings, see ibid., and the judgment of the Court of Appeal in Kraków of 17.5.2018, I ACa 1375/17: Legalis No. 1809579. 130 As stated by the Supreme Court in the judgment of 6.4.2017, III CSK 174/16: Legalis No. 1668459. The Supreme Court held in this ruling that ‘[t]he contractual penalty stipulated under Czech law failure to perform the obligation to provide monetary consideration on time undoubtedly corresponds functionally to contractual interest for delay in the provision of monetary performance. Legal rules which are to prevent parties from setting interest for late provisions of monetary performance above a certain level, and therefore also to limit the effectiveness of clauses which provide for such interest under the chosen foreign law, make sense only if they also apply to all clauses which have a comparable function. In foreign legal transactions, the equivalence of legal concepts from different legal systems should be determined by the function of each concept and not by its name.’ 131 This may apply, in particular, to obligations expressed in a currency other than Polish zloty, as the provisions referred to above indicate the same level of maximum contractual interest irrespective of the currency of the obligation. 132 See Zachariasiewicz, in Pazdan (ed.), Prawo prywatne międzynarodowe. Komentarz, 160. 126

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should be considered to be of a similar nature; this provision should be applied in the event that the governing law does not provide for the prohibition of exclusion or limitation of debtor’s liability for damage caused to the creditor by intentional fault.

VI. Conclusion The judicial review of B2B contracts in Polish law is based mainly on the general provisions of the Civil Code which determine the limits of the freedom of contract. They refer to the general clauses the interpretation of which raises many doubts. It is only from 1 January 2021 that the rules on the review of standard contracts in B2C transactions can be applied mutatis mutandis to contracts entered into by sole traders (natural persons) when the contract is of a non-professional nature for the trader. The way this is regulated seems insufficient and it would be appropriate, as in the legislation of other jurisdictions (e.g. German law), to introduce a review of standard contract terms in B2B transactions regardless of the form and size of the business. Such provisions could complement the existing rules for the review of B2B contracts in certain sectors (e.g. with respect to sales of agri-food products133). 64 It would also be appropriate to make the existing provisions clearer, including in particular Article 15.1 No. 4 UCA, the practical application of which raises many concerns and leads to uncertainties about the effectiveness of contracts which are concluded. 63

133 It is worth noting the Directive 2019/633 of the European Parliament and the Council (EU) of 17 April 2019 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain [2019] OJ L111/59, which lists prohibited market practices in Art. 3, including using of specific contract terms. Member States are required to implement the provisions of that Directive in their national legislation by 1 May 2021 (the national law to be adopted is to apply to contracts concluded from 1 November 2021).

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K. Portugal* Bibliography: Carneiro da Frada/Fontes da Costa, ‘Discussing the (ab)normality of financial crises as a relevant change of circumstances under portuguese law’ in: Başogğlu (ed.), The effects of financial crises on the binding force of contracts – Renegotiation, rescission or revision (Springer 2016) 221–241; Carvalho Fernandes, Teoria geral do Direito civl, II, Fontes, conteúdo e garantia da relação jurídica (Universidade Católica Portuguesa 2010); Domingues de Andrade, Teoria geral da relação jurídica, II, Facto jurídico, em especial negócio jurídico (Almedina 1992); Ferreira de Almeida, Contratos, V, Invalidade (Almedina 2017); Ferreira Sinde Monteiro, Responsabilidade por conselhos, recomendações ou informações (Almedina 1989); de Lima Pinheiro, Direito Internacional Privado – Volume II – Direito de Conflitos – Parte Especial (2nd edn., Almedina 2009); Markesinis et al., The German Law of Contract (2nd edn., Hart 2006); Morais Antunes, Prescrição e caducidade, Anotação aos artigos 296.º a 333.º do Código civil (O tempo e a sua repercussão nas relações jurídicas) (Coimbra Editora 2014); Moura Ramos, ‘La transposition des directives communautaires en matière de protection du consommateur et le droit international privé portugais’ in: Estudos de Direito Internacional Privado e de Direito Processual Civil Internacional – II (Coimbra Editora 2007) 223–240; da Mota Pinto et al., Teoria Geral do Direito Civil (Coimbra Editora 2005); Mota Pinto, ‘Contrato de swap de taxas de juro, jogo e aposta e alteração das circunstâncias que fundaram a decisão de contratar (continuação)’ (2014) 144 Revista de Legislação e Jurisprudência 14–56; de Oliveira Ascensão, ‘Cláusulas contratuais gerais, cláusulas abusivas e boa fé’ (2000) 60 Revista da Ordem dos Advogados 573–595; de Oliveira Martins, Contrato de seguro e conduta dos sujeitos ligados ao risco (Almedina 2018); Orvalho Castelo, ‘O contrato de swap de taxa de juro, Cinco anos na jurisprudência portuguesa’ [2016] Julgar Online 1–94; Pereira Dias, ‘Pactos de jurisdição: autonomia privada e internacionalidade – Ac.do STJ de 4.2.2016, Proc. 536/14.6TVLSB.L1.S1’ (2016) 55 Cadernos de Direito Privado 47; Pereira Dias, Pactos de jurisdição societários (Almedina 2018); Pinto Monteiro, ‘Contratos de adesão: o regime jurídico das cláusulas contratuais gerais instituído pelo Decreto-Lei n.º 446/85, de 25 de Outubro’ (1986) 3 Revista da Ordem dos Advogados 733–769; Pinto Monteiro, ‘The impact of the Directive on unfair contract terms in consumer contracts on Portuguese Law’ (1995) 3 European Review of Private Law 231–240; Pinto Monteiro, Erro e vinculação negocial (Almedina 2002); Pinto Monteiro, ‘O novo regime jurídico dos contratos de adesão/cláusulas contratuais gerais’ (2002) 62 Revista da Ordem dos Advogados 111–142; Pires de Lima et al., Código Civil Anotado, Volume I (Artigos 1.º a 761.º) (Coimbra Editora 1987); Prata, Contratos de Adesão e Cláusulas Contratuais Gerais (Almedina 2010); de Sá, Cláusulas contratuais gerais e Directiva sobre cláusulas abusivas (2nd edn., Almedina 2001); de Sousa Ribeiro, O problema do contrato, As cláusulas contratuais gerais e o princípio da liberdade contratual (Almedina 1999); de Sousa Ribeiro, ‘O regime dos contratos de adesão: algumas questões decorrentes da transposição da Directiva sobre as cláusulas abusivas’ in Comemorações dos 35 anos do Código Civil e dos 25 anos da reforma de 1977, Volume III, Direito das obrigações (Coimbra Editora 2007) 209–233.

Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... 1. Non-negotiated contract terms ............................................................... a) Law on Standard Contract Terms (LSCT)...................................... b) Supplementary provisions of the Civil Code .................................. 2. Unfair exploitation (‘Usury’) ................................................................... 3. Contract interpretation.............................................................................. 4. Change of circumstances .......................................................................... 5. Requirements of the contents of the contract: good morals ............

mn. 1 5 5 5 5 5 5 5 5

* Main abbreviations: Rap: Judge-Rapporteur; TRC: Tribunal da Relação de Coimbra (Court of Appeal, Coimbra); TRL: Tribunal da Relação de Lisboa (Court of Appeal, Lisbon); TRP, Tribunal da Relação de Porto (Court of Appeal, Porto); STJ: Supremo Tribunal de Justiça (Supreme Court). All case law quoted can be retrieved at the official website: www.dgsi.pt.

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Part 1. Country Reports III. Requirements and legal consequences ....................................................... 1. Judicial review of non-negotiated contract terms ............................... a) Contract terms encompassed ............................................................. b) Status of consumer v status of business........................................... c) Information and consent..................................................................... d) Particular rules of interpretation ....................................................... 2. Requirements ............................................................................................... a) Examples ................................................................................................. aa) Set-off................................................................................................ bb) Prescription ..................................................................................... cc) Cross-default ................................................................................... dd) Limitation of liability .................................................................... ee) Access to justice ............................................................................. b) Consequences......................................................................................... c) Usury (unfair exploitation) ................................................................. d) Good faith............................................................................................... e) Good morals........................................................................................... IV. International application ...............................................................................

6 6 6 9 15 20 24 30 30 32 36 37 41 45 48 53 66 68

I. Overview Private autonomy is arguably at the heart of Portuguese private law. By expressing the common intention of the parties, and affording it with legal effects, contracts are seen as the fuller embodiment of private autonomy. Nonetheless, contracts tend to be seen as more than an expression private autonomy: they form part of the legal system and may be subject to statutory norms and general legal principles. The courts, supported by scholarship, are therefore not reluctant to intervene where a contract is in conflict with those norms and principles, and, as shall be seen, judicial intervention is not solely reserved for B2C contracts. Even when relying on general principles or openended concepts, judicial scrutiny is not seen as an intuitive or discretionary exercise of power, since court decisions tend to expose their reasons in length, and to support them with previous case law and scholarship. 2 This context is key since judicial review of contracts tends to rely mainly on general standards and open-ended concepts. That is the case for the Law on Standard Contract Terms1 (hereinafter ‘LSCT’), applying to all non-negotiated terms, which is by far the source of judicial review of B2B contracts that plays the most relevant role in practice. Although its main focus is placed on policing the fairness of contracts, it starts by setting out particularly strict information duties – in particular, duties to communicate, explain and clarify the contents of the contract. The breach of such duties is in reality often brought before the courts. Where the scrutiny of fairness is concerned, the LSCT relies upon a central standard of good faith, which supresses the disproportionate imbalance of the rights and duties of the parties. This imbalance should be identified through reference to the purpose that the parties aimed to achieve with the contract and the reasonable expectations (trust) raised in the non-drafting party through the individual context of the contract. Default statutory norms are important in signalling (by comparison) situations of imbalance. The implications of the central standard of good faith are illustrated by four lists of prohibited terms, from which two rely heavily on open-ended terms (relative prohibitions/’grey list’ v list of absolute prohibitions/ ‘black lists’). Two lists (grey and black) containing the most serious breaches of good faith are also applicable to B2B contracts; the remaining two are in principle only 1

1

Decree-Law No. 446/85 of 25 October 1985.

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applicable in B2C contracts. Interpretative tools may correct a misalignment in the design of the contract by favouring the meaning reasonably accorded by the nondrafting party to the terms in the particular context of the contract. Further, irrespective of an immediate subsumption under one of the items of these lists, the central standard of good faith remains directly applicable, thus serving as a general clause that ensures the overall coherence of the system.2 The following also refers to the norms on usury, the principle of good faith and the 3 standard of good morals.3 Good faith plays a very central role as a source of rules of conduct. In the present context, it also functions as a guideline for construing the terms of the contract and is pivotal to the norms on change of circumstances, which were acutely under debate in the aftermath of the financial crisis. The following will provide an account of these issues, and a brief account of the norms on usury and of the standard of good morals, which courts seem to rarely use. Part II. will be mainly limited to the translation of the relevant provisions of the 4 LSCT and Civil Code (Código Civil); to avoid repetition, their implications will be clarified in Part III.

II. Regulatory framework 1. Non-negotiated contract terms This issue is addressed by the 1985 Law on Standard Contract Terms. As its name 5 conveys, it originally referred only to standard contract terms. It was subject to minor amendments in 1995 to transpose the Unfair Terms Directive into Portuguese law. However, those changes were not deemed sufficient to comply with the Directive, and the Law was altered again in 1999, to ensure that it encompassed all terms that had not been individually negotiated.4 This section contains translations of selected provisions from the LSCT as well as some norms of the Civil code supplementing the LSCT. a) Law on Standard Contract Terms (LSCT)5 Chapter I (General Provisions) Article 1. LSCT (Scope) 1. The Law applies to standard contract terms, drafted without previous negotiation and which indeterminate proponents or addressees merely subscribe or accept. 2. The Law further applies to any term inserted in an individual contract, where the term has been drafted in advance and the other party has therefore not been able to influence its substance. 2

See mn. 24 et seq. In spite of Portuguese private law also relying on the standard of public order (‘ordem pública’) to control the contents of juridical acts, this standard tends not to be a relevant source of judicial review of B2B contracts. Public order refers to the core of imperative principles that underpin the legal system, playing a subsidiary role in the scrutiny of contracts. Outside the sphere of personality rights and protection of the natural person, the standard is therefore only applied in cases that reflect very severe violations of the law, and where the infringement of imperative norms is usually also implied (see Ferreira de Almeida, 197 et seq.). 4 Respectively, it was Decree-Law no. 220/95 of 31 August 1995, and Decree-Law no. 249/99 of 7 July 1999. 5 Translation by authors. 3

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Part 1. Country Reports 3. The person intending to avail himself/herself of a certain term bears the burden of proof as to whether it has been individually negotiated (n.º3). (…) Chapter II (Inclusion of Standard Terms in Individual Contracts) (…) Article 5. LSCT (Communication) 1. Standard contract terms must be communicated in full to the addressees who merely subscribe or accept them. 2. Communication must be made adequately and in due time in order to enable effective and complete knowledge of its terms to a reasonably diligent addressee, according to the importance of the contract and the extent and complexity of its terms. 3. The burden of proof as to the adequate and effective communication falls upon the user of the terms. Article 6. LSCT (Information) 1. The user of standard terms must inform the other party of the aspects of those terms that, according to the circumstances, demand clarification. 2. All reasonable clarifications requested by the other party shall also be provided. (…) Article 8. LSCT (Terms excluded from the contract) The following clauses shall be excluded from the contract: a) Those that have not been communicated as under Article 5.º; b) Those communicated with breach of the duty to inform, so as to render unlikely their effective knowledge; c) Those which, in their respective context, given their heading or outward appearance, would not be noticed by a reasonable contracting party, placed in the position of the actual party; d) Those that were included in a form after its signature by any of the parties. Article 9. LSCT (Maintenance of the contract) 1. In the cases envisaged in the previous article, the remainder of the contract remains in effect; in the parts affected by the exclusion, the contents of the contract are determined by the default statutory norms and, if necessary, according to the provisions on the filling in of gaps in the contract. 2. The contract is however void if upholding it, even taking into account the elements provided in no. 1, would cause an unsurmountable indeterminacy in essential aspects of the contract or an imbalance between the duties of the parties that severely contradicts good faith. Chapter III (Interpretation and Filling in of Gaps in Standard Terms) (…) Article 11. LSCT (Ambiguous terms) 1. Ambiguous standard terms are to be interpreted according to the meaning that a normal indeterminate contracting party, limited to the subscribing or accepting of those clauses, would give them, when placed in the position of the actual contracting party. 2. Where there is doubt about the meaning of a term, the interpretation most favourable to the party that did not draft them shall prevail.

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K. Portugal 3. This rule on interpretation shall not apply in the context of a judicial injunction aimed at forbidding the future use of certain clauses. Article 12. LSCT (Forbidden terms) Standard terms in breach of provisions of this Law are declared null. Article 13. LSCT (Maintenance of the contract) 1. The party subscribing or accepting the standard term can opt for the maintenance of the contract in case of nullity of any of the terms. 2. The parts affected by the nullity are replaced by the default statutory norms applicable and, if necessary, with recourse to the provisions on the filling in of gaps in the contract. Article 14. LSCT (Partial invalidity) The rules on partial invalidity shall however be applicable when the right granted by the previous article is not exercised or when its exercise leads to an imbalance between the duties of the parties that severely contradicts good faith. Chapter V (Forbidden Standard Terms) Section I (Common Provisions) Article 15. LSCT (General principle) Standard terms contrary to good faith are forbidden. Article 16. LSCT (Application) The application of the previous provision is to be made according to the fundamental values of law as reflected in the particular case, and considering in particular: a) the trust raised in the parties by the global meaning of the standard terms at stake, by the circumstances of its negotiation, by its contents and by any other relevant elements; b) the purpose that the parties aimed to achieve through the contract, as determined by the type of contract chosen. Section II (Contracts between Businesses or Equivalent Entities) Article 17. LSCT (Scope of the prohibitions) The prohibitions laid down in the previous section [Articles 15.º and 16.º] and in the present one [Articles 18.º and 19.º] are applicable to contracts between entrepreneurs, members of legal professions, and between one and the other, when each of the parties acts strictly within that status and within his/her specific activity. Article 18. LSCT By a) b) c)

(Terms absolutely forbidden) way of example, the following terms are absolutely forbidden: Those that directly or indirectly exclude or limit the liability for death, or for the damage caused to the physical or moral integrity or health of a person; Those that directly or indirectly exclude or limit the liability for non-pecuniary liability in tort, be it towards the other party or towards third parties. Those that exclude or limit the liability for other damage arising from an intentional or grossly negligent breach of duty by the drafter;

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Part 1. Country Reports d) Those that exclude or limit the liability for other damage arising from an intentional or grossly negligent breach of duty by a legal representative of the drafter or by a person that the drafter availed himself/herself of to perform his obligations; e) Those that directly or indirectly give the drafter the exclusive right to interpret any term of the contract; f) Those that exclude the right to withhold performance of reciprocal obligation or the right to termination in case of non-performance; g) Those that exclude the right of retention; h) Those that exclude the right to set-off, when granted by law; i) Those that in any way limit the right to obtain discharge from the obligation by depositing its object to the order of the creditor; j) Those that lay down perpetual obligations, or obligations, the duration of which depends solely on the intention of the drafter; k) Those that give the drafter the possibility of assigning the contract, or transferring his obligations under the contract, or to subcontract, without consent of the other party, except when the identity of the transferee or subcontracted person is specified in the contract. Article 19. LSCT (Terms relatively forbidden) By way of example, the following terms can be forbidden, according to the context of the standard contract: a) Those that benefit the drafter by setting out excessive deadlines for the accepting or rejecting of offers; b) Those that benefit the drafter by setting out excessive deadlines for performance without incurring in the consequences of delay; c) Those that set out penalty clauses that are disproportionate in regard of the damage; d) Those that create fictions of receipt, acceptance or other manifestations of intent, basing upon facts that are insufficient for those purposes; e) Those that subordinate without justification the guarantee for conformity of the goods or services delivered to the condition of non-recourse to third parties; f) Those that entitle one of the parties to terminate the contract without due notice and without adequate compensation of the other party, when he/she has made considerable investments or expenses in its regard; g) Those establishing a competent forum detrimental to one of the parties, where that is not justified by the interest of the counterparty; h) Those that enable the drafting party to modify the performance promised without compensating the counterparty for any loss of value; i) Those that limit without justification the right to demand performance from the other party. Section III (Contracts with Final Consumers) Article 20. LSCT (Scope of the prohibitions) The prohibitions set out in the previous sections [Articles 15.º to 19.º], as well as the ones set out in the previous section apply to transactions with consumers and, more generally, to all transactions not encompassed by Article 17.º Article 21. LSCT By a) b) c)

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(Terms absolutely forbidden) way of example, the following terms are absolutely forbidden: Those that limit or in any way modify commitments undertaken by the drafting party or his/her agents; Those that directly or indirectly give the drafting party the exclusive right to ascertain and determine whether the goods or services supplied are in conformity with the contract; Those that allow performance not to correspond to the indications or specifications made or samples shown in the context of negotiation;

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K. Portugal d) Those that exclude the duties of the counterparty in the event of non-performance or inadequate performance or establish predeterminate compensations for those events; e) Those that establish that the parties are in possession of certain information on legal or material issues regarding the contracts; f) Those that alter the rules on the distribution of risk; g) Those that modify the rules on the burden of proof or restrict the evidence admissible under law; h) Those that exclude or limit beforehand the right to take legal action in case of any dispute between the parties, or that determine rules on arbitration that don’t comply with the procedural guarantees set out by the law. Article 22. LSCT (Terms relatively forbidden) By way of example, the following terms can be forbidden, according to the context of the standard contract: a) Those that set out excessive periods of time for the duration of the contract or for its termination; b) Those that allow the drafting party to terminate a long term contract without due notice or to terminate the contract without a reasonable ground, as set out by law or by contract; c) Those that allow the drafting party to unilaterally alter the terms of the contract without a valid reason which is specified in the contract: d) Those that provide for the price of goods to be determined at the time of delivery without giving the counterparty the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded; e) Those that allow for successive increases in the price for goods or services that are to be delivered or rendered within short delays, or that allow for manifest increases in prices beyond this time limit, without prejudice of the rules on change of circumstances; f) Those that exclude immediate termination of the contract when increase in prices justify it; g) Those that without justification contract out of the rules on inadequate performance or on the delays to make use of the remedies granted in case of non-performance or inadequate performance; h) Those that automatically extend a contract of fixed duration where the counterparty does not indicate otherwise, when the deadline fixed for the counterparty to express this desire not to extend the contract is unreasonably early; i) Those that enable one of the parties to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so; j) Those that without justification exclude that repair services or other goods or services are provided by a third party; k) Those that require exaggerated anticipations of performance; l) Those that require the provision of guarantees that are excessively costly or refer to an amount that is excessively high in regard to the value that is to guarantee; m) Those that establish places, schedules or ways of performing that are unjustified or inconvenient; n) Those that subject the acts performed within the execution of the contract to formalities not required by law, or that condition the exercise of the parties’ rights to the adoption of unnecessary conducts6. Article 23. LSCT (Applicable Law) 1. Independently of the law chosen by the parties to govern the contract, the rules under this Section always apply when the contract presents a close connection with the Portuguese territory. 6 Art. 21.º is further integrated by numbers 2 and 3, which mutatis mutandis mirror the paragraphs under number 2 (‘Scope of subparagraphs (g), (j) and (1)’) Unfair Terms Directive.

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Part 1. Country Reports 2. If the contract presents a close connection with the territory of another Member State of the European Community, the corresponding provisions of this country apply, insofar as such law determines its application.

b) Supplementary provisions of the Civil Code. Article 292. Civil Code (Reduction) Partial invalidation does not entail the invalidity of the entire juridical act, unless it is proved that such act would not have been concluded without the vitiated part7. Article 298. Civil Code (Prescription, caducity, and non-use of a right) 1. The rights that are not exercised within the period of time provided for by the law are subject to prescription, unless they are inalienable rights or the law provides otherwise. 2. When, by effect of the law or the will of the parties, a right should be exercised within a certain period of time, the rules applicable shall be those of caducity, except when the law directly refers to prescription8. Article 300. Civil Code (Mandatory nature of the rules on prescription) Juridical acts intending to modify the periods of prescription set out by the law, or to hinder or soften the conditions for prescription are deemed null. Article 847. Civil Code Section on ‘Set-off’ (Requirements) 1. If two parties owe each other obligations, either party may set off that party’s right against the other party’s right, if and to the extent that, at the time of set-off: a) the performance of the first party is due and no defence can be invoked against it under substantive law; b) the obligations of the parties concern fungible goods of the same kind and of the same quality. 2. Where the rights don’t concern the same quantity of goods, they can be set-off as far as they are coextensive. 3. The fact that a right is unascertained as to its value does not prevent set-off. Article 853. Civil Code (Exclusion of set-off) Set-off cannot be effected: a) against a right arising from an intentional wrongful act; b) against a right to the extent that that right is not subject to judicial attachment, except when both rights are of the same nature; c) in regard of a right belonging to the State or other public entity, except when the law provides differently. 2. Set-off can also not be effected when it is detrimental to the rights of a third party that existed before the requirements for setting-of were fulfilled, or when the debtor has waived the right to set-off.

7 Like German law, Portuguese law generally refers to a category (‘negócio jurídico’) that encompasses both contracts and unilateral acts that have their effects determined by one declaration of intention (or several, but parallel). Its translation as ‘juridical act’ follows the terminology of the DCFR. 8 No. 3 of the same norm, that provides the rule for non-use of a right, has been left out of this transcription as it refers to property rights and other rights in rem and is therefore outside the scope of this text.

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2. Unfair exploitation (‘Usury’) Article 282. Civil Code (‘Usury’) 1. The contract is deemed relatively null when someone, through exploitation of the situation of necessity, inexperience, improvidence, dependency, of the mental state or lack of willpower, obtains from another party, for himself/herself or for a third party, an excessive or unjustified benefit. 2. The previous provision is without prejudice of Articles 559.º-A and 11469. Article 283. Civil Code (‘Adaptation of the contract’) 1. The party entitled to invoke the invalidity of the contract may instead request its adaptation according to equity. 2. If invalidation of the contract is requested, the other party may oppose to that request by declaring that he/she accepts the adaptation of the contract as set out in the previous number.

3. Contract interpretation Article 236. Civil Code (Normal meaning of the declaration) 1. A declaration of intent has the meaning that a reasonable person in the position of the addressee would attribute to the conduct of the person making that declaration, except if this person could not reasonably have anticipated such meaning. 2. When the addressee was aware of the actual intention of the person making the declaration, its meaning will be defined according to that intention. Article 239. Civil Code (Filling in of gaps in the contract) When no other provision can apply, the declaration of intent should be supplemented according to the intent that the parties would have had in case they had envisaged the aspect not provided for, or according to the rules of good faith, where they demand a different solution10.

4. Change of circumstances Article 437. Civil Code (Requirements), inserted in Subsection VII, ‘Termination and adaptation of the contract due to change of circumstances’ 1. When the circumstances on which the parties founded the decision to contract change beyond what is normal, the affected party has the right to termination of contract, or to its adaptation according to equity, provided that the maintenance of her obligations severely contradicts the principle of good faith and cannot be said to correspond to the risks that are inherent to that contract. 2. (…) Article 438. Civil Code (Delay of the affected party) The affected party is not entitled to termination or adaptation of the contract when he/she was in delay of performance at the time of the change of circumstances. 9

These provisions concern the statutory limits on interest rates. The Portuguese approach to the interpretation of contracts greatly follows the lines of German jurisprudence; therefore, it seems preferable to avoid the English terminology referring to ‘implied terms’ due to the different basis (Markesinis et al., 133 et seq.). 10

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5. Requirements of the contents of the contract: good morals Article 280. Civil Code (Requirements of the contents of the contract) 1. A juridical act, the contents of which are physically or legally impossible, contrary to the law or indeterminate is deemed null. 2. A juridical act that is in breach of public order or good morals is deemed null.

III. Requirements and legal consequences 1. Judicial review of non-negotiated contract terms a) Contract terms encompassed. The Law on Standard Contract Terms is the key instrument. Standard contract terms differ from mere non-negotiated terms in that they are not only unilaterally drafted in advance and imposed by one of the parties but they are also pre-formulated for general use in several contracts, frequently an indeterminate number.11 7 In spite of the changes in 1999, the LSCT mainly kept the reference to standard contract terms. Although its provisions are deemed to apply to all non-negotiated clauses there is doubt especially whether – as the Unfair Terms Directive only applies to B2C contracts – the later extension should also encompass B2B contracts. Legal scholarship has taken different positions in this regard,12 whereas the courts seem to find the legislation applicable to B2B contracts in any case. 8 Another preliminary aspect that should be underlined is that unlike the Unfair Terms Directive, Portuguese law does not exclude from the scrutiny of fairness the terms defining the main subject of the contract or the adequacy between price and remuneration and the services or goods supplied.13 Against this background, there is no special discussion challenging, for instance, the legitimacy of the courts to scrutinise the fairness of a loan contract term that stipulated the rounding up of the interest rate14, the fairness of insurance contract terms that define the insured risk15, or of a term providing for an additional price in case of assignment of the contract16. Therefore, transparency is seen in ‘formal respects’ – that is, it is placed within the system of duties to inform and has generally not developed into a material standard of protection of reasonable expectations under the purpose of the contract.17 6

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Pinto Monteiro (‘The impact’), 236; Pinto Monteiro (‘O novo regime’), No. 3. Favourable to that extension: de Sousa Riberio (‘O regime’), 219–220; Prata, 43, 82–84, 90 et seq.; against de Sá, 59 et seq. On case law, see for instance TRP, 27 September 2017, Proc. no. 1897/ 14.2T2AGD-A.P1 (Rap. Inês Moura). 13 de Oliveira Ascensão, 578–579. 14 STJ, 31 May 2011, Proc. no. 854/10.2TJPRT.S1 (Rap. Fonseca Ramos). It should be noted that the Court was confronted with a legal opinion sustaining that the norms on standard terms did not apply to a price clause such as the one at issue and discarded this reasoning. 15 There was, for instance, constant jurisprudence from the STJ considering that insurance contract terms defining the risk of disability as the risk of dependency from another person for the normal tasks of daily life were unfair since they removed the cover of any utility in the majority of cases, countering the reasonable expectations of the policyholder (STJ, 7 October 2010, Proc. no 1583/06.7TBPRD.L1.S1, (Rap. Serra Baptista); STJ, 18 September 2014, Proc. no. 2334/10.7TBGDM.P1.S1 (Rap. Granja da Fonseca); STJ, 27 September 2016, Proc. no. 240/11.7TBVRM.G1.S1 (Rap. José Raínho)). 16 The reasoning of the Court does not revolve around the idea of the limiting of fair possibilities of assignment, but it focuses exactly in an assessment of disproportion, considering the annuity that the party already had to pay under the contract and the fact that assignment did not imply relevant administrative costs to the drafting party (TRL, 8 June 2017, Proc. no. 5437/15.8T8LSB.L1 (Rap. Fernandes dos Santos)). 17 There is in fact some case law applying the transparency requirement in this latter sense with regard to clauses defining disability for the purposes of disability insurance (TRP, 27 February 2014, Proc. no 12

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b) Status of consumer v status of business. For the purposes of the LSCT, B2B contracts are defined as contracts between entrepreneurs, members of legal professions, and between one and the other, when each of the parties acts (i) strictly within that status and (ii) within his specific activity. In any other case, he is treated as a consumer. There is little certainty regarding the interpretation of this norm. Under a literal interpretation any professional party entering into a contract in a field outside its expertise would qualify as a consumer. This would have implications, for instance, in the provision of those services required in order for any business to operate, such as financial services, or services concerning the provision of electricity or access to distance communication, since they tend to rely heavily on standard terms and to fall outside the scope of the professional expertise of the recipient. Arguably, it could also imply, albeit in much less relevant terms, that the professional party could be treated as a consumer in situations in which other consumers present him a predetermined contract, such as a standardised lease contract concluded with a landlord. In fact, some authors seem to favour this approach,18 whereas there is case law departing from the assumption that the status as consumer does not apply if the contract is entered into in a commercial context19. The qualification has consequences as contracts with consumers are subject to a stricter control than contracts between professionals. In particular, pursuant to Art. 20 LSCT a consumer can invoke the prohibitions on particular contract terms set out in the lists applying to consumers and to professionals. Furthermore, the international scope of application of these lists varies, given that consumers benefit from mandatory protection under Art. 23 LSCT, which in turn is not applicable to businesses.20 However, the consequences of the distinction are somehow softened because, on the one hand, the distinction between a B2C and B2B contract does not apply when the terms are evaluated under the general principle of good faith since all particular circumstances of the case are taken into account. This approach also allows for an assessment of the knowledge and effort expected from that particular party, where the size of the business involved can play a role. On the other hand, a potentially relevant body of cases (regarding financial intermediation contracts) is handled in general terms by Art. 321.º n.º 3) Securities Code (Código dos Valores Mobiliários21) according to which ‘[t]he framework for standard contractual clauses is applicable to financial intermediation contracts and, for this purpose, retail investors are comparable to consumers.’. Non-professional investors, as 2334/10.7TBGDM.P1 (Rap. Araújo Barros)). The reasoning is however mostly grounded in what is perceived as a clearer functioning of the system (it would not be reasonable to admit that the clause even formed part of the contract, when it could be excluded beforehand due to lack of transparency, under Art. 8.º) and, besides being questionable against the backdrop of the Portuguese norms, it does not enlarge the possibilities of scrutiny that would result from Arts 15.º et seq. 18 Prata, 94, 343–345, 476–477; Carvalho Fernandes, 118–119: regarding cases where someone is acting as an entrepreneur/member of a legal profession and the contract concerns his specific activity (the author gives the example of a business supplying medical equipment to a practitioner or to a hospital). This understanding seems in fact reasonable, at least concerning actual standard contract terms, since even a professional contracting party will face an informational imbalance towards the user of the terms – although it must be said that the definition of the precise borders of the field of expertise would be open to doubt in each particular case. 19 See for instance STJ, 4 May 2017, Proc. no. 1961/13.5TVLSB.L1.S1 STJ (Rap. Lopes do Rego): the provisions on the black list for terms in B2C contracts do not apply to a swap contract entered into by a construction company, since it pertained to the exercise of its economic activity. 20 See below, mn. 68 et seq. 21 An English translation of the Securities Code is available from the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários; CMVM) www.cmvm.pt/en/Legislacao/National_legislation/Securities%20Code/Pages/2011009.aspx (last accessed 16 January 2020).

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defined under Art. 4(10), (11) and Annex II of the MiFID II Directive22, refer to the vast majority of businesses, since professional investors generally only include banking and investment institutions, as well as very large corporations.23 Consequently, the standard terms used in financial intermediation contracts with non-professional investors shall be subject to the enhanced scrutiny ascribed to contracts with consumers. c) Information and consent. The LSCT polices the quality of consent, and does so by imposing duties of communication (Art. 5.º), information (Art. 6.º, n.º 1) and clarification (Art. 6.º, n.º 2) upon the party drafting the clauses. The drafting party must bring the whole content of the contract to the effective knowledge of the other party, communicating it integrally and in due time (Art. 5.º, n.º 1 and 2), and clarify the points of the contract that reasonably need explanation (Art. 6.º, n.º 1), or that the other party questions him about (Art. 6.º, n.º 2). 16 The duty to inform is more comprehensive than a mere duty to communicate and translates into a duty to clarify the provisions of the contract. According to the courts, it does not require an explanation of the content of each separate clause, but an explanation on the functioning of the contract as a whole, underscoring for instance the special risks it entails, or selecting the aspects that need to be elucidated.24 17 As opposed to the duty to clarify (Art. 6.º, n.º 2 LSCT), the duty to inform rests upon the initiative of the drafting party, who should provide the necessary explanation without request. However, in any case, the extent of the duty to inform is determined by the extent to which the other party is himself responsible to provide for his own information. The extent of this self-responsibility is determined according to his experience and knowledge, as well as by the framing of his relationship with the drafting party, since a longstanding business relationship can legitimately allow him to trust that the drafting party will select and provide all the relevant items of information.25 Therefore, for instance, when an insurance policyholder comes from a region where snowstorms are frequent and therefore expects the coverage for damage caused by ‘storms’ to include ‘snowstorms’, if the clause defining ‘storms’ does not include that that source of risk, this fact should be clarified by the insurer, as drafting party.26 18 When the other party is a legal entity, the courts assess the experience and knowledge of its representatives that specifically took part in the conclusion of the contract.27 15

22 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments [2014] OJ L173/349. 23 Namely the ones that rise above two of the following three criteria, according to the last individual annual accounts: own capital of 2 million euro; total assets of 20 million euro; net turnover of 40 million euro. 24 Respectively, STJ, 4 May 2017, Proc. no. 1961/13.5TVLSB.L1.S1 (Rap. Lopes do Rego) and STJ, 16 June 2015, Proc. no. 1880/10.7TVLSB.L1.S1 (Rap. Paulo Sá). 25 TRL, 13 May 2013, Proc. no. 309.11.8TVLSB.L1-7 (Rap. Maria do Rosário Morgado), sustaining the self-responsibility of the creditor of information whose representative was an engineer with experience in contacting with banks, and had held a meeting with the Bank’s representatives to receive clarification on the swap contract he entered into. Similarly, STJ 16 June 2015, Proc. no. 1880/10.7TVLSB.L1.S1 (Rap. Paulo Sá), concluding that the duty to inform had been complied with, in regard of the nature of the party (a company, with considerable turnover and recurrent resource to bank financing), the experience and qualification of its representative (an engineer, with vast experience in business in the real estate sector), the nature of the previous relationship between the parties, and the efforts of the Bank to convey the necessary information. On the role of trust in the setting aside of self-responsibility, in case of longstanding relationships with banks, STJ, 25 October 2018, Proc. no. 2581/16.8T8LRA.C2.S1 (Rap. Bernardo Domingos). 26 STJ, 16 April 2002, Proc. no. 02A3560 (Rap. Ponce de Leão). 27 TRL, 13 May 2013, Proc. no. 309.11.8TVLSB.L1-7 (Rap. Maria do Rosário Morgado); STJ, 4 May 2017, Proc. no. 1961/13.5TVLSB.L1.S1 STJ (Rap. Lopes do Rego): although the contracting party was a company, its representative and director (who only had attended elementary school) had no knowledge

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The clauses affected by noncompliance with these duties do not form part of the 19 contract (Art. 8.º, a) and b) LSCT). The same applies to the clauses that the other party did not have an actual possibility to become aware of, namely because they were included in the contract after its signature by any of the parties, or because, in the context, given their outward appearance or heading, they would not be noticed by a reasonable contracting party (Art. 8.º, c) and d) LSCT). d) Particular rules of interpretation. Rules of interpretation differ when it comes to injunctive action aimed at prohibiting the further use of a specific term and when the establishment of the meaning of a term arises in the context of an action regarding a particular contract. In the former context the interpretation is abstract and focuses on preventing risks for contracting parties. Accordingly, use of the term will be prohibited should any interpretation result in a risk of unfairness. In contrast, in relation to an action regarding the parties to a particular contract, the term is construed in the context of their particular relationship, according to the meaning that the party not drafting the term reasonably accorded to it. This is the combined result of Arts 10.º and 11.º LSCT.28 That implies that the term at stake is interpreted in the context of the whole contract, attending to the actual purpose that its parties – conceived as reasonable and fair-minded persons – aimed to achieve. For example, if insurance contract covers the right of disability of the manager of a SME and defines the risk as ‘disability for the undertaking of the “management”’, this latter concept is not to be understood as reporting to managerial functions in general and abstract terms, but as reporting to the socio-economic reality underlying a micro-enterprise in the construction sector, as the one at stake, that might imply a continuous presence and contact with clients from the manager.29 Furthermore, the knowledge and experience of the nondrafting party are to be considered, as well as the particular circumstances of the conclusion and execution of the contract. This general criterion intertwines with the rule laid down for when there is doubt as to the meaning of a term, determining that the term is given the meaning most favourable to the non-drafting party (contra proferentem rule, stated in Art. 11.º LSCT). If even this interpretation leads to the conclusion that the clause is disproportionately imbalanced, then it is declared null (Art. 12.° LSCT). Both criteria concur in the result of preserving challenged terms, since they push towards an interpretation that aligns them with the expectations of the other party and thus gives them a fairer meaning.30

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2. Requirements The principle of good faith serves as the main criterion to assess unfairness. This 24 general principle operates through several specifications. First of all, scholarship, ensued by the courts, considers that its main effect is to forbid terms that lead to a substantially or experience to be able to understand by himself the functioning and the risks of a sophisticated financial contract such as the swap contract at stake. 28 In scholarship, de Sá, 27–29. 29 STJ, 24 January 2017, Proc. no. 1237/14.0TBSTR.E1.S1 (Rap. Júlio Gomes). 30 This result is especially visible in a decision concerning a civil liability insurance for damage caused by pets outside the field of B2B contracts (STJ, 3 May 2016, 613/08.2TBSSB.E1.S1 (Rap. Pinto de Almeida)). The policy excluded coverage when the norms setting out duties for pet owners had not been complied with. The disputed term was considered too vague and with potential to devoid cover of any utility; however, instead of declaring its nullity, the STJ corrected it through interpretation, stating that the exclusion could only be of effect when the pet owner had breached his duties at least with gross negligence.

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unbalanced distribution of the risks or rights/duties under the contract, that would favour disproportionately the drafter of the terms, therefore bringing the general criterion in line with the standard of the Unfair Terms Directive (Art. 3(1))31. That assessment is to be made in the light of the criteria laid down in Art. 16.º LSCT, with features that have no parallel in the Directive. Art. 16.º LSCT refers in its subsection a) to the particular trust – i.e., the reasonable expectations – raised in the counterparty by the process leading to the conclusion of the contract, its terms and all other relevant elements. These non-specified elements are those generally relevant in the interpretation of contracts. Beyond those referred to in Art. 16.º, a), they will also encompass for instance the circumstances of execution of the contract. Art. 16.º, b) LSCT refers to the purpose of the contract, as determined by the type of contract chosen. Here the law refers to the sets of statutory norms that identify and regulate a transaction aimed at a specific purpose (such as sale of goods, lease of property, insurance) and also to the sets of clauses that recurrently appear in commercial practice, also identifying and regulating certain kinds of transactions. In fact, when the drafting party refers to a typified transaction there will be a reasonable expectation that the terms will allow the particular contract to reach the typical purpose of that transaction. However, the term is not only gauged in light of the general and abstract purpose of that type of contract; this purpose is also specified in view of the reasonable needs that the non-drafting party aimed to satisfy with the contract, and that the drafting party should reasonably be aware of. For example, the term of an insurance contract for civil liability connected with the use of a drill that excluded cover for damage caused by vibration was deemed null because it would devoid the cover from one of its main utilities.32 Default norms serve as another relevant standard to ascertain whether the contract created an unfair balance between the parties. The LSCT somehow points to them by referring to the type of contract chosen, since the type is outlined by a set of rules, from which a good number consists of default rules. However, scholarship refers more broadly to default rules in general, even when they are not part of the rules on a certain contract.33 Where non-negotiated contracts are concerned, contracting out of the applicable default rules is subject to a presumption of unfairness. Rebutting this presumption requires ascertaining whether the disadvantages resulting from contracting out of the rules are set off by other advantages that the contract offers to the nondrafting party. Lastly, it is to be noted that the general standard of good faith fulfils two different functions within the system of judicial review of contracts. On the one hand, it sets out the central standard of the system, and is pivotal in the construction of the open-ended concepts embedded in the grey lists (e.g. ‘reasonable’). On the other hand, it sets out the subsidiary criterion for assessment of unfairness: although the term may fall within a category of forbidden clauses, it may nonetheless be nullified due to breaching the standard of good faith (Art.15.° LSCT). a) Examples. aa) Set-off. Terms excluding or limiting a statutory right to set-off (as set out by Art. 847. of the CC, quoted above) are deemed absolutely forbidden, even in B2B contracts (Art. 18.º, h) LSCT). It should be remembered that the right to set-off as granted by the general provisions is generally deemed to be waivable. 31

de Sousa Ribeiro (‘O problema’), 570 et seq.; de Sá, 33 et seq. STJ, 24 January 2018, Proc. no. 534/15.2T8VCT.G1.S1 (Rap. Graça Amaral). 33 de Sá, 35; de Sousa Ribeiro (‘O problema’), 552 et seq. 32

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As the general norms on set-off are not especially restrictive, the right is consequently 31 preserved in a considerable number of cases. bb) Prescription. The norms on prescription are deemed mandatory by the Civil Code (Art. 300.°). A clearer understanding of this question demands nevertheless a short explanation of the concepts and rules involved. Legislation refers both to prescription and to caducity, as two forms of extinction of subjective rights (except property rights and other rights in rem) where they are not exercised within a certain time limit. There is not an accurate substantive criterion to differentiate between the two concepts, but merely a formal criterion: caducity is the rule, unless the law directly refers to prescription. However, the scope of the rules of prescription is still very large, since rights to performance are subject to prescription.34 Under Art. 300.º CC the parties are not free to contract out of the rules on prescription. This endows the creditor with very relevant protection, since the period for prescription is subject to suspension and interruption under a number of different circumstances (Arts 318.º et seq.) and, under the general rules that would tend to apply in B2B contracts, it is considerably long: a 20-year general period of prescription, whereas the rights to a certain periodic performance (such as rights to interest, annuities, lease payments) prescribe after 5 years (Arts 309.º and 310.º, respectively). In contrast, the rules on caducity (which would apply for instance to the right to invalidate or terminate the contract) may be set aside (Art. 330.º).35 However, in the context of non-negotiated terms, the provisions differing from the default rules would be presumed unfair.36

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cc) Cross-default. The courts have taken a restrictive stance towards a term establish- 36 ing a cross-default rule, whereby the drafting party – a bank – may put the borrower in default if the borrower defaults on another obligation. For example, terms used by a bank in this regard were object of an injunction forbidding their future use; and the terms used in a loan agreement between a bank and an SME were deemed unfair and thus nullified.37 The decision relied in both cases on the fact that those terms imply setting aside the general norms on time and conditions of performance and default. In spite of their non-mandatory character, these norms identify the standard of reasonable protection that the creditor should be granted; the extended protection that the terms on cross-default would grant him represented in consequence a disproportionate advantage for the creditor. dd) Limitation of liability. In contrast to the above, terms excluding or limiting 37 liability and/or warranty require a more nuanced answer. It is absolutely forbidden in B2B contracts to set aside the liability of the drafter or of 38 its representatives or agents in a core of situations where liability for non-pecuniary loss is at stake, or where there is qualified fault for breach of duty in contract (Art. 18.º, a) to d) LSCT). It should be noted that under the general provisions of the Civil Code, the liability for breach of duty by a person that the debtor avails himself of in order to perform his obligations can be excluded by agreement between the parties, except if the 34 This conclusion is backed by norms that set out special periods of prescription and underlies the general application of the ordinary period of prescription to rights to performance (see the case law quoted in Morais Antunes, 110–115. For a general approach, see da Mota Pinto et al., 373–377, and Morais Antunes, 21 et seq. 35 See also below, mn. 40. 36 STJ, 24 January 2018, Proc. no. 534/15.2T8VCT.G1.S1 (Rap. Graça Amaral). 37 Respectively, TRL, 12 July 2012, Proc. no. 846/09.4YXLSB.L1-7 (Rap. Maria do Rosário Morgado); and TRP, 27 September 2017, Proc. no. 1897/14.2T2AGD-A.P1 (Rap. Inês Moura).

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breach of duty is contrary to public order (Art. 800.º, n.º 2 CC). In contrast, the contract cannot exclude liability for gross negligence or intent in any case in which the term has not been negotiated. 39 With regard to terms limiting warranty, or liability for non-performance in cases in which there is no qualified fault, some prohibitions applicable in B2B contracts are instrumental to assure that the drafting party complies entirely with his obligations (Art. 19.º, e), h), i) LSCT). The sharpest restrictions to those terms are though laid down in the lists that provide for B2C contracts, which absolutely forbid terms that exclude the duties set out for the event of non-performance or inadequate performance or establish predetermined compensation for those events (Art. 20.º, d) LSCT), besides relatively forbidding terms which, without justification, contract out of the rules on inadequate performance or on the delays to make use of the remedies granted in case of nonperformance or inadequate performance (Art. 21.º, g) LSCT), and containing other prohibitions that are instrumental in ensuring the quality of performance (Art. 20.º, a) to c), e), f) LSCT). 40 Should one follow the perspective that views businesses acting outside their field of expertise as consumers, under Art. 17.º LSCT, then these limits set out in Arts 20.º and 21.º LSCT could be directly enforceable in contracts between enterprises. Yet even if that perspective is not endorsed, those latter limits should not be considered entirely irrelevant for B2B contracts, since they also have the function of signalling those terms that, albeit when presented to professional parties, may be particularly prone to contradict good faith. This conclusion can nevertheless only be reached in view of all the relevant circumstances of the case, under Arts 15.º and 16.º LSCT.38 ee) Access to justice. Terms can limit access to courts in B2B either by denying the judicial remedies that the party would be entitled to, or by setting special rules with regard to the intervention of judicial bodies. Cases of the first kind were partially handled above,39 and would also be affected by Art. 21, h) LSCT, which, in B2C contracts, absolutely forbids terms that exclude or limit beforehand the right to take legal action in case of any dispute between the parties. 42 Cases of the latter kind would in B2B contracts be affected by Art. 19.º g) LSCT, which forbids terms on forum selection, when it can be substantiated that those are severely detrimental to the non-drafting party and that is not justified by the interest of the counterparty. The application of this rule has been the subject of a series of decisions regarding the choice of a foreign forum, more specifically the relationship with the unified rules of jurisdiction under the Brussels I bis Regulation.40 43 Moreover, standard terms in respect to access to courts may be affected by the last segment of Art. 21, h), which, in B2C contracts, absolutely forbids terms that determine rules on arbitration that do not comply with the procedural guarantees set out in law. 44 In regard of the extension of the prohibitions laid down for B2C contracts to B2B contracts.41 41

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b) Consequences. Typically, a contract will be maintained where a term is excluded due to a breach of an information duty; however the non-drafting party may elect to maintain the contract if a term is nullified due to unfairness (see Art. 9.º v, 38 de Sá, 38, somehow points in this direction, saying that the lists regarding B2C contracts only in principle do not apply to B2B contracts, since the actual criterion on that matter will be given by the principle of good faith (which may determine otherwise). 39 See above, mn. 37 et seq. 40 See mn. 70; see for instance STJ, 4 February 2016, Proc. no. 536/14.6TVLSB.L1.S1 (Rap. Lopes do Rego); for an analysis of the decision, see Pereira Dias (2016), 33 et seq. 41 See mn. 37 et seq.

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Art. 13.º LSCT). The resulting gap is then filled in by recourse to default norms; the general provision under Art. 239.º CC is applicable where there are no such default norms. These latter norms would determine that the contract should be supplemented according to the hypothetical intent that the parties would have formulated for that point, had they acted in full fairness. In practice, this procedure tends to lead to the simple exclusion of the vitiated clause, since it is deemed that a fair-minded drafting party would not have included it. However, if the court considers that either the application of the default norms or the 46 exclusion of the vitiated clause would lead to a severe imbalance between the duties of the parties, then the norm on reduction of the contract (Art. 292.º CC) will apply. It should be remembered that this norm allows the interested party to set its regime aside by proving that he would not have contracted without the vitiated part. Consequently, it entitles the drafting party to establish that it would never have entered into the contract if it did not contain the term that was declared null and obtain complete invalidation of the contract. In many instances the drafting party might prefer to be fully released from the contract as opposed to keeping it without that term. Moreover, the fear of losing a contract with conditions that may no longer be available for the other party at the market (e.g., an insurance contract, when the risk at stake has meanwhile increased and cover is no longer available, or at least at that price) may serve to deter him from invoking the unfairness of a term in the first place. In some cases, instead of simply excluding the challenged clause, the court there- 47 fore uses the powers conferred upon it by Art. 13.º LSCT and by Art. 239.º CC in order to construe a clause that replaces the nullified one with a clause that would presumably be accepted by those two parties, when acting reasonably and fairmindedly. This process does not equate with correcting or reducing the unfair clause in order to make it compliant with the fairness test; the starting point is that of the nullity of the challenged clause, which is then replaced by the one construed by the court. Although the procedure does imply a considerable degree of judicial intervention upon the contract and is therefore not free from controversy, it should be said that it does not stand out in the general approach of Portuguese courts to contracts, completing and correcting their terms with resource to general standards (mainly, good faith).42 c) Usury (unfair exploitation). Usury is a ground for invalidation in itself. In 48 contrast to other legal systems, usury under Portuguese law does not fall under good morals; it is subject only to the requirements set out in Art. 282.º CC, which amount to a lack of actual self-determination (due to a range of different grounds) of one of the parties, who is exploited in order to make him dispose of rights or assume duties in a disproportionate way vis-à-vis what he receives in return. The person exploiting that condition may be the counterparty or a third party. All the same, it should be added that the courts occasionally appear to prefer framing 49 certain cases of disproportionate extraction of benefits from a vulnerable party within 42 This procedure has been considered admissible in scholarship, for instance by Pinto Monteiro (‘Contratos de adesão’), 59–760 and by de Oliveira Martins, 775–777. In case law, the STJ seemed to bring the two procedures together with regard to a term of a compulsory civil liability insurance contract, laying down an exclusion of compensation below a minimum percentage of disability that was in contravention of the law (STJ, 8 November 2016, Proc. no. 815/11.4TBCBR.C1.S1, Rap. Helder Roque). The Court considered that in this case the effect of the invalidation of the term would have to be its replacement by a term that would conform to the applicable rules. This could be done either through a partial invalidation of the term that put it in accordance with the purpose of the norm (teleological reduction of the contract) or through the elimination of the term at stake and its replacement by a supplementary term construed by the Court under Art. 239.º CC.

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the standard of good morals.43 As the requirements set out for usury are not especially strict – the law does not require an ‘intent to exploit’, or a ‘striking disproportion’ – it is not obvious to conceive a case involving rights or duties of a pecuniary nature that would not fall under usury yet would still contradict good morals. The reference to the standard may nevertheless be useful in enabling the identification of the most severe cases of usury, where the rules of Arts 288.º and 282.º CC should possibly be set aside. 50 As a consequence of usury, the affected party may request the court to readjust the contract according to equity or to invalidate it. The invalidity operating here is a mere ‘anulabilidade’, that was referred to above as ‘relative’, to distinguish it from the most severe kind of invalidity, ‘nulidade’ (i.e. ‘voidable’ and ‘void’, to use functionally equivalent English terminology). Both kinds of invalidity produce the elimination of the effects of the contract; however, ‘relative invalidity’ can only be invoked (i) by the affected party and (ii) within the time limit of one year starting from the moment when the ground for invalidity ceased to exist (Art. 287.º CC). In this case, it would amount to one year starting from the ceasing of the condition of special vulnerability towards the particular contract that allowed for exploitation. By effect of the general rules on invalidity, the affected party can also choose to confirm the imbalanced contract (Art. 288.º CC), although in the most severe cases of unfair exploitation this faculty could arguably be blocked by the external limit of good morals. 51 Art. 282.º gives the other party the right to oppose invalidation, by requesting judicial adaptation of the contract. However, it seems questionable that this right should be affirmed when this was exactly the person inflicting the unfair exploitation on the affected party and the latter does not want to maintain the contract. 52 This said, it should be added that case law portrays a very limited use of this norm, more so in relation to B2B contracts. Although this norm has been invoked in the context of the cases concerning swap contracts,44 it does not seem to have been subject to appeal and thus not subject to discussion by the higher courts.45 d) Good faith. The principle of good faith is the main policy tool for special relationships (i.e. relationships between specified persons, especially arising from contracts or other legal acts). It plays a very central role as a source for rules of conduct; however, it also affects the contents of a contract. 54 Good faith functions, first of all, as a rule for construing the meaning of the contract. Although Art. 236.° CC (interpretation of the contract) does not make express reference to good faith, it is summoned to identify the reasonable meaning that the addressee of a declaration of intent would attribute to it. In this guise, good faith can have a corrective role, protecting the reasonable expectations that the addressee could place in a certain interpretation of the contract, even when not meant as such by the author of that statement.46 53

43 TRP, 20 December 2012, Proc. no. 959/09.2TTVNG.P2 (Rap. Fernanda Soares) in which an employer wanted to terminate the contract with his employee, which would have demanded the first party to comply with a specific procedure and pay compensation. The employee agreed to enter into an agreement with the employer, under which compensation would be paid in instalments, and submitted to the condition of the former employer disposing of sufficient liquidity at the end of each month. On good morals, see mn. 66 et seq. 44 See mn. 61. 45 Orvalho Castelo, 91, available at http://julgar.pt (last accessed: 22 January 2019). 46 See, for instance STJ 15 January 2015, Proc. no. 883/08.6TVPRT.P1.S1 (Rap. Fernanda Isabel Pereira), where the clause of the lease of a commercial establishment that made the lessee responsible for compliance with a contract that the lessor had with its providers was construed under good faith to imply that the lessee would only be responsible for the payments regarding the period after commencement of the lease.

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In addition, good faith polices the conditions for validity of a contract – though only in respect of the LSCT – and also the conditions for its maintenance, through the norms on change of circumstances. The norms on change of circumstances are of subsidiary application, only intervening when the question has not been addressed by specific provisions of the contract (e.g., hardship clauses) and does not fall under the general provisions on impossibility of performance.47 Moreover, Portuguese courts have traditionally been very cautious in enforcing such terms in cases where the change referred to background circumstances, not relating specifically to the particular contract.48 Quite recently, in the aftermath of the financial crisis, there has been however a relevant body of case law regarding B2B contracts (more specifically, interest rate swap contracts49) that put these provisions under the spotlight, contributing to the clarification of their requirements. The remedies granted by the provision on change of circumstances depend on the following requirements: (i) a change of the circumstances on which the parties founded the decision of contracting; this change should be (ii) abnormal meaning that it is not included in the set of risks inherent to the contract; and, (iii) in consequence, maintaining the obligations undertaken would seriously affect the principles of good faith. It is to be noted that these requirements are not discrete units and are instead thought of by scholarship and case law as mutually influential, forming a ‘moveable system around the axis of what, pursuant to law, are the “principles of good faith”’50. There is also an obvious connection between the determination of the circle of the risks that are inherent to the contract and the changes of circumstances that are to be deemed abnormal, or the cases in which maintaining the obligations of the affected party would be a breach of good faith. The conceptual basis of the reference to the circumstances on which the parties founded the decision of contracting is the doctrine of the basis of the transaction (‘Geschäftsgrundlage’), in the form it acquired under the works of Lehmann and Larenz. It gained currency in Portugal under the formulation of Manuel de Andrade, who identified such circumstances as those recognised or recognisable to the other party at the time of the conclusion of the contract and should be deemed manifestly fundamental in such terms that, had it been proposed to the other party that the contract was conditional upon their occurrence, he would have accepted it or at least should have accepted if acting in good faith. The principle of good faith corrects this formulation, including the cases where conditioning would not be accepted, but the strict main47

Mota Pinto, 41–42; Carneiro da Frada/Fontes da Costa, 229. The ones referred to by German scholarship as ‘significant changes of circumstances’ (schwerwiegende Störung der Geschäftsgrundlage); see below, mn. 59. 49 Those interest rate swap contracts had been entered into by a Bank and several of its commercial borrowers in the years when Euribor was experiencing successive increases. Whereas in those years the balance was favourable to the borrowers, who thus managed to hedge the interest rate risk arising from their loan contracts, when Euribor started declining, they found themselves under the obligation to make successive payments to the Bank and thus resorted to the courts, contesting the validity or the subsistence of the swap contracts. The main ground for challenging the latter was change of circumstances: according to the affected parties, the financial crisis and the ensuing interest rate policy constituted an abnormal change of circumstances that went beyond the risks inherent to the contract and caused the maintenance of the contract to severely counter the principle of good faith. As to the challenging of the validity of the contract, see mn. 15 et seq.), on the duty to inform upon conclusion of the contract. 50 Carneiro da Frada/Fontes da Costa, 232 and 227–228. Thus, what will be said might be systemised differently by different authors. In case law, decision of the STJ, 22 June 2017, Proc. no. 540/11.6TVLSB. L2.S1 (Rap. Tomé Gomes). 48

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tenance of the contract would cause a gross disproportion between the obligations of the parties, thereby unbalancing the agreement. This formulation still enjoys considerable favour from scholarship and from the courts.51 60 The reference to circumstances that were recognised or recognisable to the other party encompasses first of all the circumstances that did not form part of the content of the contract, but that the parties alluded to: foremost, the contract’s ‘representations’, which are not traditional to the Portuguese drafting technique, but became very frequent in B2B contracts due to Common law influences.52 It encompasses the circumstances tacitly recognised as fundamental, too; furthermore it encompasses contextual circumstances that the counterparty should, according to fair and diligent behaviour, have recognised as fundamental. General background circumstances underlying that context of contracting may also be brought under this last group. 61 Those circumstances become relevant when they suffer an abnormal change, which should be understood as one not comprised in the distribution of risks inherent to the contract.53 These two requirements are increasingly brought together to emphasise that the interpretation of the contract, in regard of its provisions, of the applicable norms and of its completion through the principles of good faith, should provide the foundation for reasoning. Thus, it will suffice that the contract relied on certain fundamental circumstances to remain relatively constant, even if the change thereof is not objectively considered abnormal.54 62 For background circumstances of general impact, the Portuguese courts have traditionally been very cautious in providing relief under this norm. Case law has conspicuously rejected that several phenomena ensuing the Portuguese revolution of 1974 would constitute an ‘abnormal change of circumstances’ – such as the mandatory closing of the stock market (e.g. with regard to loan contracts to finance investment in stocks), decolonisation (e.g. with regard to lifetime annuity contracts), or the nationalisation of companies (whose shares had been sold before the Revolution, being that their payment was deferred).55 As concerns the recent financial crisis, the courts have systematically rejected that any resulting personal economic hardship could determine the application of these norms.56 However, for the risk affecting interest rate swap contracts, the decisions of the higher courts have fluctuated between (i) the original acceptance that the financial crisis embodied a major change of circumstances, and the steep decrease of interest rates that followed it was not encompassed by the risks pertaining to an interest rate swap, and (ii) a more restrictive approach, considering that some of the corollaries of economic crises – 51 Domingues de Andrade, 406 et seq.; Mota Pinto, 33–34 and 49, also regarding what is subsequently said in the text. 52 Carneiro da Frada/Fontes da Costa, 228, referring to it, along the lines of German terminology, as the subjective basis of contract. 53 Swaps, as any other derivative contract, imply a high degree of uncertainty regarding whether and how much each of the parties will actually have to perform. Contracts with these characteristics – termed ‘aleatory contracts’ – were traditionally deemed excluded from the incidence of the norms on change of circumstances or on usury (Pires de Lima et al., 413). The scholarship and case law that still defend this exclusion seem to be a minority in the present, where most authorities consider that the risks undertaken by each of the parties of these agreements are not all-encompassing, and some changes in the underlying circumstances may not be included in the allocation of risks inherent to the contract. The issue is whether the parties intended exactly to allocate between them the consequences of a certain risk, by accepting that one of them would have to perform disproportionately in case it occurred; if the change falls within these risks, then it will be comprised within the risks inherent to the contract (Mota Pinto, 42–47). 54 Mota Pinto, 34. 55 ibid. 47–48. 56 See the case law quoted on Carneiro da Frada/Fontes da Costa, 222–223.

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changes in interest rates, unemployment, inflation – are predictable events that should not be deemed abnormal.57 In this regard, scholarship has underlined that, when it comes to the change in 63 background circumstances, predictability should indeed play a role; however, the question is not whether an event was unpredictable in abstract terms, but whether it can be inferred from the circumstances that the parties of the particular contract relied on its non-occurrence, or at least if a regular contracting party within their typical sphere of knowledge would attribute only a minimum probability of actual occurrence.58 Lately, the trend in case law seems to be converging in this focus on the particular circumstances of the contract, be it in different directions. In a first case, the Court considered that the investor, being a company that would have its own legal and financial counsel, and entering into the swap agreement in 2008, should have predicted the risk of a forthcoming decrease in interest rates.59 More recently, the Court identified the requirement of abnormality with reference to the particular purpose of the contract: when the same parties, also lender and borrower, had before entered into a series of successive swap contracts in order to hedge their mutual risks in the loan contract, and not to obtain speculative gains, the latter contract should also be represented as aiming to hedge those risks, and therefore the decrease in interest rate should be deemed abnormal in its regard.60 In any case, this change should be subsequent to the conclusion of the contract. If 64 non-coincidence between certain fundamental circumstances and the representations of one or both of the parties already existed at the moment of conclusion, the rules on mistake regarding the basis of the contract will apply. The traditional perspective is that in this case, as in any other case of mistake, the contract can be invalidated. However, some scholarship and case law consider that the consequences will then be termination or modification, in line with the norms on change of circumstances.61 Lastly, the maintenance of the contract is deemed to be contrary to good faith when it 65 causes severe damage to the affected party, causing a serious imbalance in the rights and obligations of the parties.62 e) Good morals. In spite of the questionable resonance of this criterion, that would 66 seem to allude to conservative moral standards, its scope has evolved in accordance with the evolving conceptions of private law and it has become an operative tool in a number 57 Embodying the first trend, decision of the STJ of 10 October 2013, Process no. 1387/11.5TBBCL.G1. S1 (Rap. Granja da Fonseca); embodying the second trend, STJ 26 January 2016, Proc. no. 876/ 12.9TVLSB.L1.S1(Rap. Gabriel Catarino). For a panoramic view, see Orvalho Castelo. 58 For the first (and stricter) understanding, Mota Pinto, 51; for the latter Carneiro da Frada/Fontes da Costa, 230. In case law, for instance the decision of the STJ, 10 January 2013, Proc. no. 187/10.4TVLSB. L2.S1 (Rap. Orlando Afonso), stating that the economic distress invoked by the claimant had not been directly linked to the economic crisis and moreover that the loan agreement had been modified in 2008 in order to increase the amounts provided, at a time when the financial crisis was amply present. 59 STJ, 26 January 2016, Proc. no. 876/12.9TVLSB.L1.S1(Rap. Gabriel Catarino). 60 STJ, 22 June 2017, Proc. no. 540/11.6TVLSB.L2.S1 (Rap. Tomé Gomes). 61 Critical of the perspective adopted by some case law in the past in the sense of applying legal rules on mistake to cases of circumstances or representations occurred later than the conclusion of the contract (a kind of error in futurum), see only Pinto Monteiro (‘Erro e vinculação negocial’). 62 As to the requirement of a severe, gross or manifest loss, see for instance the decision of the STJ decision, 10 October 2013, Process no. 1387/11.5TBBCL.G1.S1 (Rap. Granja da Fonseca); or the decision of the STJ, 22 June 2017, Proc. no. 540/11.6TVLSB.L2.S1 (Rap. Tomé Gomes). Considering past experience, it can be noted that neither of the following variations were considered per se relevant enough for these purposes: the decrease of 34 % in the price of cork, the increase of 300 % to 400 % in the market price of housing, in regard of a promissory agreement to sell, the decrease of 30 % in demand of the public for the use of a garage (due to major construction works in the city), in regard of a contract for the supply of fuel (Mota Pinto, 48).

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of different areas. Good morals refer nowadays to the ethical principles that are accepted in general by the honest and fair dealing people living in a certain context of space and time.63 It brings therefore this minimal and historical common ethical ground inside the framing of law, which is also open to these values. In this broad conception, it plays a central role as a source for judicial review of contracts in the field of personality rights (where good morals are a limit to consent). 67 However, good morals bear a stricter sense that is particularly relevant for B2B contracts, regarding ethical standards of particular professional groups, as long as they do not contradict the general ethical standards. The standard can have an autonomous role scrutinising contracts that are directly detrimental to third parties, when they contradict those ethical standards, as in the cases of inducement to breach of contract with a third party.64 Although scholarship endorses this approach, a body of relevant case law has not yet emerged.

IV. International application The question of determining the law applicable to B2B contracts arises when such contracts present international elements. The applicable rules in the EU have largely been unified over the course of the past decades: first through the Rome Convention of 1980, applicable in Portugal since 1994, and then Rome I Regulation, applicable to contracts concluded from 17 December 2009. Conflict-of-laws rules on contractual obligations are now essentially to be found in this latter instrument, which thus substitutes the corresponding rules still included in the Civil Code (mainly Arts 41 and 42). 69 Addressing the particularities B2B contracts may present in this regard, two aspects are worth mentioning: the issue, addressed by recent case law, of the rules applicable to a choice of forum included in standard terms of B2B contracts; and the mandatory nature of some specific rules on judicial review of contracts with standard terms. 70 First, as noted above,65 Art. 19.º g) LSCT contains a prohibition of ‘establishing a competent forum detrimental to one of the parties, where that is not justified by the interest of the counterparty’. The interpretation of this rule recently came to the foreground in the context of a number of cases where commercial contracts, namely distribution contracts and swap agreements, had included choice-of-forum clauses in favour of national courts of other EU Member States, the validity of which was challenged under the criterium set out by Art. 19.º g) LSCT. An interesting problem of articulation between legal sources had to be clarified by Portuguese courts, who have satisfactorily uncluttered the relationship between Brussels I Regulation, on the one hand, and Art. 19.º g) LSCT, on the other hand: Art. 23 Brussels I, similarly to Art. 25 Brussels I bis, does not provide legal basis for a challenge on the grounds of the said ‘detriment to one of the parties’ of the chosen forum. And the Regulations shall apply generally and directly, as European legislative acts of the kind (Art. 288 TFEU), 68

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da Mota Pinto et al., 558–559, recently followed by Ferreira de Almeida, 201 et seq. Ferreira Sinde Monteiro, 550 et seq. In case law, STJ, 1 February 2000, Proc. no. 99A1061 (Rap. Aragão Seia) (only the summary is available online), stating that the ethical standards underlying good morals forbid the conclusion of a contract directly, intentionally and deliberately aimed at causing damage to a third party. In other instances, the standard is summoned to reinforce the application of other standards or norms, such as public order (STJ, 27 January 2004, Proc. no. 03A3043 (Rap. Nuno Cameira) in regard of a contracts with public authorities that served as an instrument for fraud) or usury (see above, mn. 48 et seq.). 65 See above, mn. 42. 64

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regardless of divergent national rules. However, according to Art. 67 of both Regulations, they ‘shall not prejudice the application of provisions governing jurisdiction and the recognition and enforcement of judgments in specific matters which are contained in instruments of the Union or in national legislation harmonised pursuant to such instruments’. This raised the question of whether Art. 19.º g) LSCT, being included in a national law ‘harmonised pursuant to’ an instrument of the Union (namely the Unfair Terms Directive), should supersede the Regulation. The jurisprudential answer has correctly taken into consideration that, while indeed serving implementation of the Directive, the LSCT goes beyond that scope and equally applies to B2B contracts – an area falling outside such European harmonisation: hence the inapplicability of Art. 67 Brussels I, and so the untouched resort to the provisions of the Regulations (both 2001 and the 2012, namely Arts 23 and 25, respectively) concerning the validity of choice-of-forum clauses in B2B contracts66. Second, as to the mandatory nature of some specific rules on judicial review of 71 contracts with standard terms, Art. 23 LSCT may have to be taken into consideration: according to this provision, freedom of choice of law is not necessarily excluded – the first words of this provision make clear that there may have been a ‘law chosen by the parties to govern the contract’. However, such freedom is significantly limited with regard to all contractual aspects dealt with by this legislation: whenever there is a strong link or close connection with Portuguese territory, the rules under Art. 23 LSCT shall apply. The provision has been amended and presents its current form after the legislator intervened in 1999, seeking to harmonise this provision with the Unfair Terms Directive (Art. 6(2)).67 Reference to this provision is relevant for mainly two reasons: on the one hand, whenever Portuguese law provides that businesses shall receive the same protection conferred to consumers in the context of standard terms, as it is the case in the financial intermediation contracts, a close connection with Portuguese territory triggers the mandatory application of those Portuguese rules.68 On the other hand, the uncertainty regarding interpretation of the rule that draws the line between consumers and businesses69 may, in practice, give additional relevance to this provision. 66 See, among others: STJ, 19 November 2015, Proc. no. 2864/12.6TBVCD.P1.S1 (Rap. Lopes do Rego), STJ, 16 February 2016, Proc. no. 135/12.7TCFUN.L1.S1 (Rap. Gabriel Catarino), STJ, 26 January 2016, Proc. no. 540/14TVLSB.S1 (Rap. Garcia Calejo), STJ ,17 March 2016, Proc. no. 588/13.6TVPRT.P1.S1 (Rap. Ana Paula Boularot), STJ, 21 April 2016, Proc no. 538/14.2TVLSB.L1.S1 (Rap. António Silva Gonçalves); see also Orvalho Castelo, 68 et seq., Pereira Dias (2018), 225 et seq., and Pereira Dias (2016), 71 et seq. 67 See Moura Ramos, 233 et seq.; Lima Pinheiro, 437 et seq. 68 Reference shall also be made, in the financial intermediation context, to Art. 3 of the Securities Code, which covers with overriding mandatory nature the rules of this Code when activities or juridical acts present a ‘relevant connection with the Portuguese territory’. 69 See above, mn. 9 et seq.

de Oliveira Martins/Dias

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L. Romania Bibliography: Angheni, ‘Aspecte definitorii privind clauza penală potrivit dispoziţiilor noului Cod civil’ in: In honorem Corneliu Bîrsan (Hamangiu 2013) 340–352; Baias et al. (eds), Noul Cod civil. Comentariu pe articole (2nd edn., C.H. Beck 2014); von Bar/Clive (eds), Draft Common Frame of Reference (DCFR) – Full Edition (Sellier 2009); Bianca, Diritto civile, III, Il contratto (Giuffrè 2000); Boroi/Anghelescu, Curs de drept civil. Partea generală (2nd edn. Hamangiu 2012); Brătilă, ‘Căteva consideraţii referitoare la clauza penală şi reductibilitatea acesteia sub cuantumul obligaţiei principale conform prevederilor Art. 1541 alin. (2) Cod civil’ (2016) 3 Revista Română de Jurisprudenţa 176–181; Calliess, Rome Regulations Commentary (2nd edn., Kluwer 2015); Chénedé, ‘Raymond Saleilles, Le contrat d’adhésion, 2e partie’ (2012) 3 Revue des Contrats 1017; Chirică, Tratat de drept civil. Contracte speciale, V. I, Vânzarea şi schimbul (C.H. Beck 2008); Chirică, Tratat de drept civil. Contracte speciale, V. 1, Vânzarea şi schimbul (2nd edn. revised, Hamangiu 2017); Ciobanu/Nicolae (ed.), Noul Cod de procedură civilă comentat şi adnotat – Vol. I (2nd edn., UJ 2016); Claes, The National Courts’ Mandate in the European Constitution (Hart 2006); Deak, Tratat de drept civil. Contracte speciale (UJ 2001); Duagi, ‘Practicile şi clauzele contractuale abuzive între profesionişti’ (2014) 2 Revista Română de Drept al Afacerilor 83–93; Ferrari (ed.), Rome I Regulation (Sellier 2015); Floare, Buna şi reaua-credinţă în negocierea şi executarea contractelor de drept comun (UJ 2015); Hellwege, ‘Standard Contract Terms’ in: Basedow et al. (eds), The Max Planck Encyclopedia of European Private Law – Vol. II (OUP 2012); Hesselink, ‘The Concept of Good Faith’ in: Hartkamp et al. (ed.), Towards a European Civil Code (4th edn., Kluwer 2010) 619–649; Ilie, ‘Consideraţii asupra posibilităţii aplicării adaptării contractului în cazul dolului’ in: In honorem Corneliu Bîrsan, (Hamangiu 2013) 243–255; Jansen/Zimmermann (ed.), Commentaries on European Contract Law (OUP 2018); Kessler, ‘Contracts of Adhesion – Some Thoughts about Freedom of Contract’ (1943) 5 Columbia Law Journal 629–642; Kocsis, ‘Clauza penală – modalitate de reparare a unui prejudiciu sau pedeapsă privată ?’ in: Studii şi cercetări din domeniul Stiinţelor Socio-Umane – Vol. 12 (Argonaut 2004) 342–367; Lando (ed.), Principes du droit européen du contrat (version française par Rouhette et al., Société de Législation Comparée 2003); Larenz, Lehrbuchs des Schuldrechts, Band I: Allgemeiner Teil (4th edn., C.H. Beck 1960); Magnus/Mankowski, Brussels I Regulation (2nd edn., Sellier 2012); Man/Varo, ‘Consideraţii cu privire la ‘ireductibilitatea clauzei penale’ (2004) 6 Pandectele Române 251–271; McKendrick, Contract Law. Text, Cases and Materials (8th edn., OUP 2018); Münchener Kommentar zum BGB, Band 2, Schuldrecht Allgemeiner Teil (7th edn., C.H. Beck 2016); Nicolae, Codex Iuris Civilis, T. 1, Noul Cod civil. Ediţie critică (UJ 2012); Nicolae, ‘Curtea Constitutionala si impreviziunea. O alta lectura tot constitutionala a Deciziei nr. 623/2016’ in: Popa (ed.), In Honorem Dan Chirică (Hamangiu 2018) 523–614; Nicolae, Drept civil. Teoria generală, Vol. II, Teoria drepturilor subiective civile (Solomon 2018); Neamţ, ‘Momentul calitativ al încheierii contractului. Elementele esenţiale ale contractului’ (2016) 4 Revista Română de Drept Privat 123–144; Neumayer ‘Contracting Subject to Standard Terms and Conditions’ in: von Mehren (ed.), International Encyclopedia of Comparative Law – Vol VII/2: Contracts in General (Mohr-Siebeck/ Martinus Nijhoff 2008) Ch. 12; Noul Cod civil – Comentarii, doctrina, jurisprudenta Vol. II, Art. 953–1649 (Hamangiu 2012); Oglindă, ‘Clauze neuzuale în reglementarea Noului Cod civil român – provocare pentru doctrină şi jurisprudenţă’ (2015) 3 Pandectele Române 30–42; Pătulea, ‘Revizuirea judiciară a sumelor stabilite prin clauzele penale’ (2012) 3 Revista Română de Dreptul Afacerilor 13–16; Plender/Wilderspin, The European Private International Law of Obligations (4th edn., Sweet & Maxwell 2014); Pop, Tratat de drept civil. Obligaţiile – Vol. II Contractul (UJ 2009); Pop et al., Curs de drept civil. Obligaţiile (UJ 2015); Popa, ‘Reprimarea clauzelor abuzive’ (2004) 2 Pandectele Române 194–219; Popa, ‘Remediile abuzului de drept contractual’ (2014) 6 Revista Română de Drept Privat 174–198; Popa, ‘Tirania clauzelor neuzuale’ (2016) 1 Revista Română de Drept Privat 135–154; Popa, ‘„Viciile” garanţiei ediliciene contra viciilor ascunse’ in: Popa (ed.), In Honorem Dan Chirică (Hamangiu 2018) 734–776; Popa, ‘„Opozabilitatea” drepturilor şi libertătilor fundamentale şi efectul lor asupra dreptului privat’ in: In Honorem Valeriu Stoica. Drepturi, libertăţi şi puteri la începutul mileniuui al III-lea (UJ 2018) 41–66; Popa/Tabirta, ‘Consideraţii privind reglementarea noului Cod civil asupra clauzelor neuzuale’ (2013) 3 Revista Română de Dreptul Afacerilor 81–93; Rauscher (ed.), Europäisches Zivilprozess- und Kollisionsrecht. Kommentar Brüssel Ia-VO (4th edn., Sellier 2016); Rescigno (ed.), Codice civile, T. I (Art. 1–1677) (IXa edn., Giuffrè 2014); Scurtu, ‘Notă’ (2011) 9 Pandectele Române 243–246; Spellenberg, ‘Der Konsens in Art. 23 EUGVVO – Der kassierte Kater’ (2010) 5 IPRax 464–471; Stătescu/Bîrsan, Drept civil. Teoria generală a obligaţiilor (8th edn., C.H. Beck 2002); Tabirta/Lisievici, ‘Discuţii privind viciul de consimţământ al violenţei în raporturile dintre profesionişti. Incadrarea violenţei economice’ (2013) 9 Revista

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L. Romania Română de Dreptul Afacerilor 63–79; Vasilescu, Drept civil. Obligaţii (Hamangiu 2017); Vogenauer/ Kleinheisterkamp (ed.), Commentary on the UNIDROIT Principles of International Commercial Contracts (OUP 2009); Zamşa, Teoria impreviziunii. Studiu de doctrină şi jurisprudenţă (Hamangiu 2006); Zidaru, Competenţa instanţelor judecătoreşti – în dreptul procesual civil român şi german (UJ 2015); Zidaru, Competenţa în materie civilă potrivit Regulamentului Bruxelles I bis (nr. 1215/2012) (Hamangiu 2017); Zimmermann, The Law of Obligations. Roman Foundations of the Civilian Tradition (Clarendon 1996); Zimmermann, ‘Interest for Delay in Payment of Money’ in: Gullifer/Vogenauer (ed.), English and European Perspectives on Contract and Commercial Law. Essays in Honour of Hugh Beale (Hart 2014) 319–349.

Contents mn. I. Some interim explanations ........................................................................... 1 II. Overview ........................................................................................................... 4 III. Regulatory framework.................................................................................... 7 1. Public order and good morals ................................................................. 8 2. Good faith .................................................................................................... 9 3. Abuse of rights ............................................................................................ 12 4. Standard terms ............................................................................................ 13 5. Formation of contract................................................................................ 17 6. Contract interpretation.............................................................................. 28 7. Change of circumstances .......................................................................... 29 8. Other provisions ......................................................................................... 31 IV. Requirements and legal consequences ....................................................... 33 1. Judicial review of standard terms ........................................................... 33 a) Definition of standard terms .............................................................. 33 b) Particular consent requirements relating to standard terms: the unusual terms .................................................................................. 37 c) Particular rules of interpretation ....................................................... 46 d) Judicial review for the external control of standard terms.......... 50 2. Other means of control and judicial review......................................... 54 a) ‘Grossly Excessive Penalty’.................................................................. 54 b) Unfair contract terms relating to interest for late payment........ 61 c) Exclusion of some liability terms ...................................................... 68 d) Good faith doctrine .............................................................................. 74 e) ‘Cauza’, ‘ordre public’ and ‘good morals’......................................... 82 f) Deceit, ‘unfair exploitation’ and violence ........................................ 86 g) Terms related to prescription............................................................. 89 V. International application ............................................................................... 90 1. Choice of law agreements (Art. 1203 CC v Art. 3 Rome I).............. 91 2. Choice of court agreements (Art. 1203 CC and Art. 1067 NCPC v. Art. 25 Brussels I bis) ................................................................................ 94 3. Choice of court agreements and protection of the weaker party.... 100 VI. Brief concluding remarks .............................................................................. 102

I. Some interim explanations For accuracy and fidelity reasons, this account of the Romanian case law and doctrine 1 on B2B contracts has to be preceded by a disclaimer regarding the novelty of the legislation related to the matter. On 1 October 2011, a new Civil Code (Noul cod civil)1 entered into force and thereby replaced the former Napoleonic Civil Code of 1864. The 1 Unless indicated otherwise, all provisions are those of the new Romanian Civil Code. As a complete English translation of the Code does not exist at present, the available French translation may provide some assistance: Nouveau Code civil Roumain (Dalloz 2013).

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new Civil Code engendered an impressive amount of doctrine within a very short time, compared to the former Civil Code. Accordingly, this has given rise to a mass of case law. Nonetheless, a part of both doctrine and case law is still controversial, mostly due to varying interpretations given by the Romanian Supreme Court (Înalta Curte de Casaţie şi Justiţie) to some of the confusing legal questions. However scant, the existing doctrine and case law are sufficient to offer an overview on the uncontroversial matters. Due to a certain delay in publication of some noteworthy case law, we have extensively used electronic recordings of trusted e-administrators for judicial decisions and for the history of the legislative process. 2 Regarding the view of the new regulation of B2B contracts and generally on standard contract terms, the trend of Romanian private law towards the common core European rules is to be underlined. This shift may be explained through the choice among its sources on the area of interest. Mainly, as will be indicated, this is due to the use by the Romanian legislator of model rules, some European and some non-European, though strongly related to each other (in order of influence for the topic of interest: Italian Codice civile, PECL, DCFR, Civil Code of Québec, PICC (2004), German BGB, Swiss Code of Obligations, Swiss Civil Code, ACQP, ‘Avant-projet Catala’2). 3 Romanian case law contains a large number of decisions concerning B2C contracts. These will be not considered here unless they provide valuable insights into the assessment of B2B contracts, as long as some features are common for defining standard terms and/or terms not individually negotiated under both type of contracts. Furthermore, although we shall strive to avoid controversial national doctrine, it will be necessary to draw on scholarly opinions where case law has not become sufficiently established and where case law demonstrates firm receptiveness to scholarly opinions over the past 10 years.

II. Overview Where the traditional view under Romanian case law and doctrine is concerned, it is necessary to point out at the outset that the new statutory regime of standard terms did not oust the European dual view on standard terms and not negotiated terms3 as both concepts are used. Moreover, each notion is seen as a category of terms composing adhesion contracts4. Legal provisions refer to all of these categories, though sometimes (as will be shown) with different legal effects depending on the individual category. 5 The new Civil Code contains provisions which admit judicial review of originally unbalanced contracts (e.g. unfair exploitation regulated obiter in Art. 1221 where the condition of a weaker position of the aggrieved party is to be proven) or for contracts that since became unbalanced (e.g. the judicial adjustment for hardship under Art. 1271). These provisions apply irrespective of the nature of the contract terms, i.e. standard or individually negotiated, though the judicial review is less demanding if the term is standard (as defined under Arts 1175 and 1202). As shall be seen, in some instances the formal 4

2 ‘Avant-projet de réforme du droit des obligations et du droit de la prescription’ (2005), available online under http://www.justice.gouv.fr/art_pix/RAPPORTCATALASEPTEMBRE2005.pdf (accessed 7 January 2020). 3 See Hellwege, 1589. However, the prevailing reasoning before the entry into force of the new Civil Code regarding B2B contracts was to favour a larger concept of not negotiated terms over standard terms. (‘Only a contract term which was not negotiated by the parties could be unfair and not a term which, even if it creates a significant imbalance between the rights and obligations of the parties, represents the will of the contracting parties’ – ICCJ (Înalta Curte de Casaţie şi Justiţie; Supreme Court), Commercial Division, Dec. No. 3790/16.12.2008: (2009) 4 Revista Română de Jurisprudenţa 159–160). 4 See Kessler, 631; concept directly borrowed from the French legal doctrine (see Stătescu/Bîrsan, 42; Pop, 126 et. seq.).

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approach applies whereby terms may be reviewed or are considered unenforceable only if they are standard, e.g. Art. 1203 for unusual clauses/surprising terms. Such method implies a certain substantial approach where an imbalance of bargaining power is presumed for the very existence of the formal approach. Further, in addition to the formal approach, a substantial control of the contract terms takes place through the theory of unfair terms and/or ‘open’ concepts such as good-faith or the cauza of the contract. Good-faith is a regulatory principle underpinning the whole system of civil law 6 (Arts 14 and 15) and which serves as a means to control contracts (Arts 1170 and 1183). Although good faith applies regardless of the nature of the contract terms, it is, however, submitted that it should not be overrated and used as a ‘super-tool’ to ‘rearrange’ the contract, but rather for the interpretation of a party’s behaviour under the contract and for unclear contractual terms. Following the same path, the concept of cauza (i.e. the aim or purpose of a contract) may sometimes be used to review the contract (Arts 1235–1239). Unlike the former regulation of cauza, which offered multiple arguments for judicial intervention, the provisions of the new Civil Code are very restrictive in extent. The notion of ‘good morals’ and its possible use for review under Art. 11 and Art. 1225 is not commonly used with regard to B2B contracts,5 or at least, no relevant case law exists at present. Instead, ‘public order’ coupled with the cauza offers some arguments for reviewing B2B contracts.

III. Regulatory framework The following provisions from the Civil Code serve to provide a minimum basis for 7 the comments provided in the following sections. The selected provisions are of general application and allow for review of the contract. As there is no official English translation, the following translations are merely for illustrative purposes only

1. Public order and good morals Article 11. Romanian Civil Code (‘Respecting public order and good morals’) It cannot be derogated from the laws of public order or from good morals by agreement or by unilateral declaration of intent.

This text corresponds in essence to Art. 5 Civil Code 1864.

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2. Good faith Article 14. Romanian Civil Code (‘Good faith’) Every natural or moral person has to exercise her rights and fulfil her obligations in good faith, in accordance with the public order and the good morals.

Also, according to Art. 1170 (again titled ‘Good faith’, but designed to govern 9 contract law): Article 1170. Romanian Civil Code (‘Good faith’) Parties have to act in good faith during the negotiation, conclusion and performance of the contract. This obligation cannot be set aside or limited. 5 Although case law did advocate such an approach under the former Civil Code, it is very unlikely that it will be used under the new Civil Code.

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These provisions (the latter being inspired by Art. 1:201 PECL and Art. 1.7 PICC) are complemented by Article 1183. Romanian Civil Code (‘Good faith during negotiations’) (1) The parties are free to initiate, undertake and put an end to negotiations and cannot be held responsible for their unfruitful result. (2) However, the party who engages in negotiations has to act according to the requirements of good faith. The parties cannot agree to limit or set aside this obligation. (3) The conduct of the party who engages in negotiations without the intention to conclude the contract is, amongst others, contrary to the requirements of good faith. (4) The party who initiates, continues or breaks up negotiations contrary to good faith is held responsible for the prejudice caused to the other party. This prejudice can consist in the costs of the negotiations, those caused by the loss of concurrent offers or by other similar circumstances.’

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Art. 2:301 PECL, as well as Art. 2.1.15 PICC are clear sources of inspiration for this provision.

3. Abuse of rights Article 15. Romanian Civil Code (‘Abuse of rights’) No right can be exercised with the intent of injuring another or in an excessive and unreasonable manner, contrary to good faith.

12

This new definition is inspired by Art. 7 Civil Code of Québec. Moreover, with Art. 15 the legislator put an end to a controversy regarding the conditions of the abuse of rights: inspired by the ‘socialist’ ideology and on the basis of Arts 1 and 3 of the Decree No. 31/1954, the abuse of a right was formerly defined as a misuse of a right for goals other than the social and economic ones taken into consideration by the legislator when recognising that right. After 1989, however, it was rightfully objected that the holder of a right is entitled to exercise his right according to his own interest and that it is for the legislator, not the individual, to be concerned with the harmonisation between the individual and the general interest. Therefore, the abuse of a right was redefined as an excessive manner of exercising this right, aimed mainly to harm another and less to procure a legitimate advantage to the holder of the right.

4. Standard terms Article 1175. Romanian Civil Code (‘Adhesion contract’) The contract is regarded as one of adhesion when its essential terms are imposed or are drafted by one party or as a result of its instructions, the other party being allowed only to accept them as they are.

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A distinct set of rules is provided for standard terms. Article 1202. Romanian Civil Code (‘Standard terms’) (1) Notwithstanding Art. 1203, the present section applies accordingly when standard terms are employed at the conclusion of the contract. (2) Standard terms are stipulated by a party in advance to be used in a general and repeated manner and are included in the contract without being negotiated with the other party. (3) Negotiated terms prevail over standard ones.

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L. Romania (4) If the parties do not reach an agreement concerning the different standard terms each one of them employs, the contract will be concluded according to negotiated terms and to the essentially common standard terms. However, each party can notify the other, either at the conclusion of the contract or immediately hereinafter, that she does not regard herself to be bound by such a contract.’

Art. 1202 was inspired, albeit indirectly, by § 305b BGB via Art. 2:209(3) PECL. Art. 1203 is a sample of formal approach for reviewing standard terms.

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Article 1203. Romanian Civil Code (‘Unusual terms’) Standard terms which, in favour of the proposer, are meant to limit the liability, to provide the right to unilaterally terminate the contract or to unilaterally suspend the performance of the obligations, or which are providing for the loss of the adhering party’s benefit of the granted period for performance, the limitation of the right to rise exceptions, the restriction of the freedom of contracting with third parties, for the implied renewal of the contract, the choice of the applicable law, the arbitration term, choice of courts terms derogating from the common rules on jurisdiction of the courts cannot be opposed to the other party if the latter has not accepted them expressly and in writing.

As we will explain below,6 the source of this norm is Art. 1341(2) Italian Codice civile.7

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5. Formation of contract Art. 1182, important for introducing the concept of ‘sufficient agreement’ in Roma- 17 nian law, represents a preliminary rule for the regulation of formation of contract: Article 1182. Romanian Civil Code (‘Sufficient agreement’) (1) A contract is concluded by negotiation between the parties or by simple assent to an offer. (2) A sufficient agreement exists if parties agreed to the elements which are essential for the contract, even if some secondary terms were left open and/or a third party is empowered to determine them. (3) Under para. (2), if the parties do not reach an agreement regarding the secondary terms or the empowered third party does not decide upon them, the court can be requested by either party to complete the contract according to the circumstances, to the nature of the contract and to the parties’ intention.

This provision (despite that Art. 2 Swiss Code of Obligations is the original source) 18 was inspired by Art. 2.1.14 PICC and Art. 2:103 PECL. Art. 1197 is of major importance for determining the very existence of a contract, as 19 it is inferred that this text synthesises the ‘mirror rule’. Article 1197. Romanian Civil Code (‘Modified acceptance’) (1) The answer of the offeree is not an acceptance if: (a) states additional or different terms which alter the terms of the offer; (b) it is not expressed in the form explicitly required by the offeree; (c) reaches the offeree after the offer lapses. (2) The answer according to para. (1) can be considered as a counteroffer, according to the relevant circumstances.

The source for this norm is to be found in Art. 2:208 PECL and 2.1.11 PICC. Art. 1214 is thought to offer some strong legal arguments for judicial review: 6 7

20 21

See mn. 37. For details see the contribution by Patti, in this volume, in particular mn. 14 et seq.

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Part 1. Country Reports Article 1214. Romanian Civil Code (‘Deceit’) (1) The consent is vitiated through deceit if the party concluded the contract relying on an error caused by the other party, through fraudulent representation or fraudulent nondisclosure of any information which it should have disclosed. (2) The party whose consent was vitiated can demand annulment of the contract, even if its error was not essential. (3) The contract can be annulled even if the deceit was caused by a representative of the other party. (4) The deceit cannot be presumed.

This norm is overtly inspired by Art. 960 of the Civil Code 1864, as well as by Art. 4:107 PECL and Art. 3.2.5 PICC. The deceit is thought to offer a certain protection even in B2B contracts whenever an imbalance in information exists, i.e. when one party is a specialist while the other is not active in the commercial field concerned, yet both are professionals. Accordingly, whenever this obligation refers to relevant information, deceit may be used as an instrument to obtain avoidance of the contract and normally not of its individual terms. 23 Art. 1216 is (for the time being only in theory) an instrument to regulate harsh imbalances in B2B contracts: 22

Article 1216. Romanian Civil Code (‘Violence (threat)’) (1) The annulment of the contract can be demanded by the party who concluded the contract under a justified fear unlawfully induced by the other party or by a third person. (2) There is violence if the threatened person could believe under the circumstances that, without her consent to the contract, her life, person, dignity or goods would be exposed to an imminent and serious threat. (3) Violence can determine the annulment even if it is directed against a person close to the party, such as her spouse, parents or children. (4) The existence of violence will be assessed taking into consideration the age, social standing, health and character of the victim of the violence, as well as any other circumstance which could influence her state at the moment when the contract was concluded. Article 1217. Romanian Civil Code (‘Threat with exercising a right’) The fear determined by the threat of exercising a right in order to obtain unjust advantages constitutes violence.

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Art. 1217 was inspired by a similar provision existing in the Project of the Civil Code (1940) and which never entered into force, as well as by § 123(1) BGB and Art. 3.2.6 PICC. Neighbouring the notion of ‘threat’ is Art. 1218, which is similar to Art. 1404 Civil Code of Québec: Article 1218. Romanian Civil Code (‘State of necessity’) The contract concluded by a party under a state of necessity can be annulled only if the other party took advantage of this situation.

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In the same line of reasoning, Art. 1221 offers some additional possibilities of reviewing contracts, even if B2B: Article 1221. Romanian Civil Code (‘Lesion or gross disparity’) (1) There is lesion if one party takes advantage of the state of necessity, the lack of experience or knowledge of the other party, by stipulating a much bigger benefit for herself than the value of her own obligation, at the date of the contract.

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L. Romania (2) The existence of lesion is assessed according to the nature and goal of the contract. (3) There can be lesion also when a minor assumes an excessive obligation with regard to his patrimonial situation, to the benefit he obtains or to all relevant circumstances.’

The ‘sanctions’ for gross disparity are regulated by Art. 1222:

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Article 1222. Romanian Civil Code (‘Sanctions’) (1) The party whose consent was vitiated through lesion can demand either the annulment of the contract or the reduction of her own obligation with the damages due. (2) Notwithstanding Art. 1221 par. (3), the action for annulment can be brought only if the lesion is bigger than half of the obligation assumed or executed by the party who suffered prejudice. This disproportion has to still exist at the date of the action for annulment. (3) The court can however maintain the contract if the other party offers equitably a reduction of her right or an aggrievance of her obligation. Art. 1213 regarding the ‘adaptation’ of contract applies accordingly.

The various sources of these norms include Art. 4:109 PECL, § 138(2) BGB and 27 Art. 3.2.7 PICC, as well as Art. 1448 and 1550 Italian Codice civile.

6. Contract interpretation Among the rules of interpretation of contract terms, chiefly important are those of 28 Art. 1269 comprising and coupling in dubio pro reo and contra proferentem interpretations: Article 1269. Romanian Civil Code (‘Subsidiary interpretation rules’) (1) If after the aforementioned interpretation rules the contract remains unclear, it will be interpreted in favour of the debtor. (2) The terms included in the contract of adhesion shall be interpreted against their proposer.

7. Change of circumstances The long-debated ‘hardship’ topic ended in the adoption of some very known rules. 29 Accordingly, Art. 1271 (‘Unexpected change of circumstances’) provides: Article 1271. Romanian Civil Code (‘Unexpected change of circumstances’) (1) A party is bound to fulfil its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance she receives has diminished. (2) If, however, performance of the contract becomes excessively onerous because of an exceptional change of circumstances which would render the performance of the initial obligation manifestly unjust, the court may: (a) terminate the contract at a date and on terms to be determined by the court; or (b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances. (3) Para. 2 applies only if: (a) the change of circumstances took place after conclusion of the contract; (b) the change of circumstances and the amplitude thereof was not and could have been not reasonably foreseen by the debtor at the conclusion of the contract; (c) the debtor did not assume the risk of this change of circumstances and such an assumption cannot be reasonably implied; (d) the debtor tried reasonably and in good faith to negotiate a reasonable and equitable adaptation of the contract.’

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The text is inspired by Art. 6:111 PECL, but relevant differences underline the reluctance shown by the Romanian legislator to this means to breach of the principle pacta sunt servanda. Art. 107 of the Application Law of the Civil Code (Law No. 71/2011) states also that Art. 1271 applies only to contracts concluded under the new Civil Code, and not to prior agreements. Prior to the new Civil Code, the change of circumstances had no specific regulation and the institution as such, although mentioned in a few post-war and post-1989 decisions (rendered in times of hyperinflation), was rather contested than recognised in doctrine and jurisprudence8.

8. Other provisions For all the other aspects, some of the legal provisions shall be presented in the dedicated section as a more extensive presentation is needed. For instance, under the old Civil Code 1864, where the penalty clause regime was regulated following the French statutory model, no legal provision existed with regard to the alleviation of a possible unfair penalty clause, except for the case of performance in part (see Art. 1070 Civil Code 1864). Nevertheless, a certain judicial and scholarly trend9 acknowledged the reduction of a penalty if considered an unfair contract term. Under the new Civil Code, the penalty may be reduced provided that it is ‘obviously excessive’ (i.e. ‘obviously unreasonable’) ‘compared to the damage that may have been foreseen by the parties upon the conclusion of the contract’ (Art. 1541(1)(b))10. The provision is mandatory, as any stipulation to the contrary is rendered ‘unenforceable’ (Art. 1541(3), ‘is considered unwritten’). The provision is part of the specific section on compensation for damages (Arts 1531 to 1548). 32 Some notable provisions may be identified in specific legislation. For example, Chapter V (Arts 12–15) of the Law No. 72/2013 on late payment in business contracts or between business and public authorities11 shields the creditor in a way narrowly shaped by the Late Payment Directive. As already known from the Directive, the statutory model provides a range of rules to oust the unfair contract terms relating to interest for late payment, a legal standard now traditional in Europe12. 31

8

See e.g., Nicolae (‘Curtea Constitutionala si impreviziunea’), 523 et seq. See Supreme Court, Commercial Division, Dec. No. 98/17.1.2006: (2006) 5 Revista Română de Dreptul Afacerilor 135 (pointing out that an excessive penalty for delay in performance is void; the grossly unfair nature is triggered, among other circumstances, by applying the interest penalty rate to the whole value of the contract instead of the unperformed obligation); inter alia, Court of Appeals Bucharest, Civil IVth Division, Dec. No. 166/25.3.2010: (2010) 5 Revista Română de Dreptul Afacerilor 114; Arbitral Court Bucharest, ICC Romania, Dec. No. 89/1998 and No. 158/1999 (arbitral award holding that ‘the immutability of a penalty term shouldn’t be understood as forbidding the reduction of an unfair penalty’), both commented in Man/Varo, 251 et seq.; Arbitral Court Bucharest, ICC Romania, Dec. No. 83/ 31.10.2000 (an interest of 365 % per year is grossly unfair and excessive): (2003) 4 Dreptul 180; Court of Arbitration Bucharest, ICC Romania, Dec. No. 76/30.3.2010 and No. 127/4.5.2001, both commented by Scurtu; added for doctrine, Popa (‘Reprimarea clauzelor abuzive’), 194 et seq. 10 This statutory provision is inspired by Art. 1384 of the Italian Codice civile (Riduzione della penale) where the wording is manifestamente eccessivo and corresponds to Art. 9:509(2) PECL. 11 Transposing Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions [2011] OJ L 48/1 (‘Late Payment Directive). 12 See Zimmermann, in Jansen/Zimmermann (eds), Commentaries on European Contract Law, 1528 et seq. 9

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IV. Requirements and legal consequences 1. Judicial review of standard terms a) Definition of standard terms. Art. 1175 uses the concept of ‘contract of adhe- 33 sion’, which before the enactment of the Civil Code, existed only in doctrine and in specific legislation (mainly in consumer law). The contract of ‘adhesion’ exists ‘when its essential terms are imposed or are drafted by one party for this purpose or as a result of its instructions, the other party being allowed only to accept them as they are.’13 Usually, but not necessarily, the ‘adhesion’ contract is a sum of standardised terms or forms14. Art. 1202(2) lays down the principal rules to be observed in standardised forms, providing their definition: ‘standard terms are stipulated by a party in advance to be used in a general and repeated manner and are included in the contract without being negotiated with the other party.’ The features of standard terms are, in short15: (i) The standard terms are one-sided stipulations (‘unilateral proposal’). Typically, 34 standardisation of contract means the process of unilateral composition, makeup and configuration of contract terms by the proferens in order to be used generally and repeatedly in contracts proposed to its customers16. It is not enough that the proposed contract/term comes from one of the parties, but the proposal should be comprised within a standardised proposal designed to serve an indefinite set of contracts with the same content (usually made through models and forms used by professionals). Hence, it was stressed out that, in order to be in the presence of contractual standardisation, this operation should relate to an indefinite series of contractual relationships in which the proferens wants to be involved, both from the substantial point of view (i.e. same content directed to a plurality of subjects) and formally (i.e. the use of the same legal content through models and formulas usable in series). For example, a contract proposed by one of the parties for a particular transaction and sent to the other party for the purpose of its study cannot be qualified as a standardised contract because it is not part of a trading scheme for serial transactions. Moreover, the mere quality of professional assigned to the proferens is not sufficient to transform a proposal in a standard form. Conversely, the contract/term proposed by proferens to adhaerens using the same content as for any customer before, is clearly a standard form if the latter has accepted it as such. (ii) The standard terms are drafted in advance (‘unilateral drafting’). As mentioned, the 35 pre-existence of a standard model is part of a ‘general market plan’ of contracting with customers. The drafting has to be done by the proferens itself, or at least to be captured and transformed in order to be proposed from a set of rules drafted by a third party (e.g. the requirements of standard terms are met if a group of terms is 13 See, before the Civil Code, Pop, 128 et seq., mn. 44. The Raymond Saleilles concept of contrat d’adhésion (De la déclaration de volonté. Contribution à l’étude de l’acte juridique dans le Code civil allemande (Pichon 1901); for a modern view see Chénedé, 1017 et seq.) and generally, the French concept of this contract category had such an impact in Romanian doctrine and case law that its preservation within the new regulation of standard terms was not a surprise. 14 As noted long before, see Kessler, 631. 15 See, Vasilescu, 292 et seq.; Popa, in Pop et al. (ed.), Curs de drept civil, 46 et seq.; Moise, in Baias et al (eds), Noul Cod civil, 1229; inter alia for case law, Rădulescu, in Noul Cod civil – Comentarii, 409 et seq. 16 This element of the legal definition is similar to that usually identified in comparative law (see for the idea of ‘formal and material one-sidedness’, Neumayer, mn. 12–8).

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extracted from a set of pre-drafted professional contracts). If both parties have chosen a set of pre-drafted rules from an open set of rules (the inclusion per relationem of standard terms), then the effects usually assigned to the standard forms are not applicable17, or at least some of these effects (e.g., the ‘unusual terms’ theory issued from Art. 1203 is excluded; equally, contra proferentem interpretation is thought improper for this situation). 36 (iii) The standard terms are not negotiated with the adhaerens (automatic inclusion). It is commonly acknowledged that ‘negotiation’ in the context of Art. 1202 has a similar meaning to that existing under consumer law18. Thus, a contractual term shall be deemed not to have been negotiated directly with the adhaerens if this term was established without granting him the real possibility to influence its substance. Therefore, if there is evidence that a term was discussed by the parties and finally endorsed by the party to which it was opposed in the form which has been proposed, it cannot be regarded as falling within Art. 1202, even if the clause remained unchanged. However, it has to be clear from the circumstances that the negotiation implied the possibility of changing the term in question (e.g. in some case law it was found that this may be inferred from the mere existence of contracts concluded with some other customers with a different content). 37

b) Particular consent requirements relating to standard terms: the unusual terms. The source of the Romanian regulation for particular consent to certain standard terms is Art. 1341(2) Italian Codice civile19, with minor deviations (consisting of the addition of an unusual term – regarding the choice of the applicable law). The original purpose of this statutory regime was to avoid applying pacta sunt servanda to terms that could not be clearly established as having been agreed upon by the opposing party. Still, the Italian model was not the only one to follow. There were at least four other relatively convergent solutions that could have been considered as drafting models,20 compared to which the choice of the Romanian legislator seems bizarre. More curious is that Art. 1341(1) Italian Codice civile (regarding the acquaintance of the adhaerens with the general contract conditions offered by the proferens in order to consider them as part of 17

See Popa (‘Tirania clauzelor neuzuale’), 142. See Art. 4(2) of the Law No. 193/2000 on unfair terms in contracts concluded with consumers, transposing Art. 3(2) Unfair Terms Directive (first indent: ‘A term shall always be regarded as not individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract.’). 19 For which, see, Dell’Utri, in Rescigno (ed.), Codice civile, T. I, 2698 et seq.; Bianca, 351; for the Romanian view, see Popa, in Curs de drept civil, 92; Oglindă; Popa/Tabirta; Popa (‘Tirania clauzelor neuzuale’), 140 et seq. 20 The drafting history of Art. 1203 is curious. At least four ‘more usual models’ were within reach, yet the Romanian legislator chose an already partially outdated design (as noted long before – see Neumayer, mn. 45). The most at hand example (and model-type for the other three) was represented by §§ 305c‐ 306 BGB (Überraschende und mehrdeutige Klauseln) – § 2 and especially § 3 of the (now since repealed) AGBG, which provide that standard terms that are so unusual in the given contractual context do not produce the effect that the adhaerens could not expect to meet (§ 305c(1)), without nominating the terms targeted (Basedow, in Münchener Kommentar zum BGB, 1193 et seq.). The PICC 2004 contain a similar provision in Art. 2.1.20 on Surprising terms (see Naudé, in Commentary on the UNIDROIT PICC, 330 et seq.). The text provides the same rule: terms that the other party could not expect in the context of the given contract, its content, the language used and its presentation, are not part of the content of the contract. Art. 2:104(1) PECL (see Lando, 110 et seq.) and Art. II.‐9:103(3) DCFR (see von Bar/Clive, 588 et seq.) both provide – using similar wording – that a standard term cannot be opposed to the other party if it was unaware of its existence or if the proferens has not taken reasonable steps to call the other party’s attention to the clause. Under English law, the more relaxed rule applied by the courts could not serve as a model: exorbitant terms must be specifically notified to the other party unless the contract is signed (the ‘red hand rule’, for which see McKendrick, 323 et seq.). 18

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the contract) was not adopted, resulting in a general applicability of the external consensus theory (Arts 1186–1200) for standard terms (i.e. the mirror image rule), save for different statutory provisions (as statutory rules for conflicting standard terms or for unusual standard terms). Art. 1203 is an instrument of the commutative justice designed, along with other legal tools, to correct an unbalanced contract. Mainly, offer and acceptance, as a basis for the conclusion of the contract, are seen as ‘a guarantee of mutual reconciliation of the parties’ opposite interests and the fairness of the contract between the parties’21. Alteration of this way of contract formation, through standard terms, requires corrective means. The mechanism of unusual terms removes some of the terms which underlie the suspicion of a lack of consent (i.e. the failure to fulfil the so-called external consensus regarding the specific term). Art. 1203 contains various conditions, elements and the effects of the mechanism of ‘unusual terms’ from which it is inferred that: (i) It only applies to the standard terms proposed by the proferens to the adhaerens. Only standard terms meeting the requirements of Art. 1202 may be subjected to this type of judicial review.22 If standard (i.e. non-negotiated) and negotiated terms coexist, beyond the observation imposed by Art. 1202(2) 2 (which provides the prevalence of negotiated terms over the standard terms), Art. 1203 shall apply only if an ‘unusual term’ is found amongst the proposed standard terms. In addition, standard terms with a pre-formulated statutory content are exempted from the application of this mechanism.23 The unusual standard term must come from the proferens, according to Art. 1202(2). Apart from this hypothesis, we are not within the scope of Art. 1203. Thus, if by mutual consent the parties refer per relationem to models and forms used or prepared by a third party, the provisions of Art. 1203 are not applicable despite the inclusion of non-negotiated terms in the third party’s forms. (ii) It only applies with regard to the clauses listed in Art. 1203. Exclusion of a term from the contract is conditional upon the inclusion of the subject-term in the statutory list. The list is strictly limited to ten types of contract terms.24 No other terms, regardless of their sound unfairness, might be excluded using this legal mechanism. The purported unusual terms are divided into two categories: standard terms benefiting the proferens25 and standard terms disfavouring the adhaerens. The first category comprises terms which limit liability, provide the right to terminate the contract unilaterally26 or to unilaterally suspend the performance of the obligations. The second category includes terms concerning the loss of the adhaerens’ benefit of the granted period for performance, the limitation of the right to oppose exceptions, the restriction of the freedom of contracting with third parties, the implied renewal of the contract, the choice of the applicable law, the 21

See Neumayer, mn. 12–20. For this, see mn. 13. 23 See Popa/Tabirta, 86; Lower Court Bacău, Civil Division, Dec. No. 3841/23.5.2018 (regarding the clause providing for the jurisdictional competence of an arbitral commission). 24 For criticism, Popa (‘Tirania clauzelor neuzuale’), 147; see also e.g. Tribunal Ilfov, Civil Division, Dec. No. 3170/10.7.2018 (a penalty clause is not included in the statutory list and thus not subject to control under Art. 1203; the court has pointed out that no statutory provision requires a specific consent for the inclusion in a contract of a penalty term). Lower Court Buftea, Dec. No. 4322/23.7.2018 (the punitive interest, arguably unfair in its substance, is not governed by Art. 1203). 25 See Tribunal Iaşi, Civil Division I, Dec. No. 1583/24.5.2018 (holding obiter that only a termination clause favouring the proferens qualifies as unusual); Lower Court Drobeta Turnu-Severin, Dec. No. 2342/ 24.4.2018. 26 See Tribunal Iaşi, Civil Division I, Dec. No. 1904/20.6.2018 (term allowing the GSM service provider to end the contract unilaterally); Tribunal Iaşi, Civil Division I, Dec. No. 1925/21.6.2018. 22

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arbitration term27, choice of courts terms derogating from the common rules on jurisdiction of the courts28. 42 (iii) Express and written acceptance by the adhaerens is required to avoid the exclusion or the unenforceability of such terms. According to Art. 1203, the term contained in the statutory list shall only have effect ‘if expressly agreed in writing by the other party.’ Whether or not this condition is of form or substance remains unclear.29 However, in order to consider this requirement fulfilled, the proferens has to draw the adhaerens’ attention to the unusual term and to record specifically his express assent in writing. Hence, a separate signature is required30 either in close proximity to the term itself31 (e.g. beside the term) or at the end of the contract following a recap-consent mentioning the disputed terms32. The approach of the relating case law is formal. The principle is that at least two signatures are required – one for the general acceptance of the contract and another, specialised one, in relation to unusual terms. In short: (i) Correct signature of unusual terms is mandatory; (ii) proper assent may be conveyed via signature under/beside the term in the contract; (iii) a summary of unusual clauses may be considered proper if this summary is limited to the terms purported as unusual; (iv) the specific assent to an unusual term cannot be taken into account if the signed summary is not sufficiently accurate [e.g. the summary of several terms including both usual and unusual terms is not specific enough]; (v) the acceptance of the unusual term may follow via a separate document at the same time as or after the conclusion of the contract. 43 (iv) The mechanism of unusual terms applies also to any unfair terms. Art. 1203 establishes an external control (i.e. formal control) of the content of the contract, while the unfair terms theory establishes an internal control thereof.33 The mechanism set in Art. 1203 is considered as pre-empting the control of internal fairness. Thus, if a term is presently fair and yet fails to pass the unusual terms test, then the unfairness test is useless. Conversely, the mechanism of unfair terms also applies to clauses that have successfully passed the unusual terms test34. For example, the simple signing of an arbitration term renders Art. 1203 inapplicable but does not mean that such a clause may not be unfair on a different basis. 44 (v) The identification of an unusual term results in unenforceability of such term, as Art. 1203 provides that these clauses ‘do not produce effects’. Again, the nature of the sanction for these terms remains unclear (i.e. whether this is avoidance or considering the term unwritten),35 but the effect is undisputed: the adhaerens is not bound by the unusual term that was not regularly agreed/subscribed to. 27 See, Lower Court Cornetu, Dec. No. 2382/5.6.2018 (holding out obiter for the unusual nature of an arbitration clause). 28 See, Lower Court Buzău, Dec. No. 3704/27.6.2018 (choice of court favouring the buyer). 29 See, Popa (‘Tirania clauzelor neuzuale’) 163. 30 See, Lower Court Buzău, Dec. No. 3704/27.6.2018 (subscription of the whole contract does not satisfy the requirements of specific consent). In the same direction, see Zidaru, in Ciobanu/Nicolae (eds), Noul Cod de procedură civilă comentat, 493–495. 31 This condition is not fulfilled if the choice of court term is inserted in an invoice accepted by the recipient (see Lower Court Bistriţa, Civil Division, Dec. No. 1613/8.6.2018 and Decision No. 1577/ 6.6.2018). 32 For formulas of formal assent, see Popa (‘Tirania clauzelor neuzuale’), 168. 33 Very much like the German approach (see Basedow, in Münchener Kommentar zum BGB, 1194 et seq.). 34 Occasionally, this solution is not correctly illustrated (see, Lower Court Cornetu, Dec. No. 3865/ 17.10.2018 (equating an unfair term with an unusual one); similar, see, Lower Court Bacău, Civil Division, Dec. No. 3840/24.5.2018). 35 Popa (‘Tirania clauzelor neuzuale’) 182; Oglindă, 40.

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It is also worth noting that according to an intended ‘Art. 1204’ of the Civil Code- 45 Project, the drafters of the new Civil Code wanted to replicate the internal control stipulated by Art. 4:110 PECL36. It is relevant that, according to the reasons stated for this proposal, the drafters of the bill were aware that the formal control of the way standard terms were agreed upon does not by itself offer enough protection for the weaker party and that a material control of standard terms was also regarded as necessary (even in B2B contracts, B2C contracts being covered by specific consumer laws). This provision would have been quite revolutionary for Romanian civil law. Unfortunately, during Parliamentary debates this text was one of the very few draft provisions which were eliminated, which of course proves the reluctance of the legislator towards such control mechanisms of B2B contracts containing standard forms. c) Particular rules of interpretation. It is commonly acknowledged that at least 46 three rules of interpretation are applicable to standard terms. These rules doubt, de facto, the honesty of the professional proferens. Therefore, these rules are usually used against the proposer, whereby the contra proferentem rule is the most prominent. Despite its poor wording, Art. 1269 of most significance because it states specifically that standard terms are to be interpreted against the proferens. (i) The first rule is set out in Art. 1202(3) and is meant to solve the possible conflict 47 between a standard term and a negotiated term.37 The rule states that a negotiated term prevails over a standard term. This is seen as a substantive rule more than a rule of interpretation38 as long as it is designed to serve the determination of the content of the contract and not to explain its unclear terms. As the formulation is strict (‘Negotiated terms prevail over standard terms’), this rule does not serve to solve a possible conflict between any non-negotiated and a negotiated term, but only a conflict that opposes standard against negotiated terms39. (ii) The second rule is the contra proferentem interpretation.40 Art. 1269(2) sets out a 48 clear canon of interpretation. The statutory text provides that ‘The terms included in the contract of adhesion shall be interpreted against their proposer.’ Some typical features are extracted from the wording of the provision: • the rule is equally applicable to B2C and B2B contracts. The underlying legal model appears to be Art. 4.6 PICC 2004 (though the Romanian text only refers to adhesion contracts while the model serves for any stipulation)41 or moreover, § 305c (2) BGB42 (which provides this rule only for general conditions, i.e. standard terms); • contra proferentem equally applies to standard terms and not negotiated terms, as the statutory wording uses the phrase ‘contracts of adhesion’, encompassing both standard and non-negotiated terms43, thus overrunning the two competing concepts; 36 According to which: (1) A party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be rendered under the contract, all the other terms of the contract and the circumstances at the time the contract was concluded. (2) This Article does not apply to: (a) a term which defines the main subject matter of the contract, provided the term is in plain and intelligible language; or to (b) the adequacy in value of one party’s obligations compared to the value of the obligations of the other party. 37 For more detail see mn. 50 et seq. 38 See Popa, in Curs de drept civil, 91 et seq.; Moise, in Baias et al (eds), Noul Cod civil, 1259. 39 As noticed, the two concepts are competing – see Hellwege, 1589. 40 See Vogenauer, in Jansen/Zimmermann (eds), Commentaries on European Contract Law, 772. 41 For which, see Vogenauer, in Commentary on the UNIDROIT PICC, 527 et seq. 42 For which, see Basedow, in Münchener Kommentar zum BGB, 1202 et seq. 43 See Popa, in Curs de drept civil, 91, mn. 72; Moise, in Baias et al (eds), Noul Cod civil, 1259.

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• contra proferentem is considered to function following a reasonable standard of interpretation44, i.e. the term shall be understood as the reasonable person of the same type as the adhaerens would have understood it under the same circumstances (objective test of understanding). In this regard, any other circumstance should be ignored, even the very specific understanding of the party involved in the transaction at issue, though case law has not yet confirmed this; • the rationale of contra proferentem is anchored in the set of tools intended to protect the weaker party, i.e. the party who was only the recipient of a term proposed by the other party placed in a better position.45 The second use of the rationale of contra proferentem – as rule set to help correct input errors46 – is considered as part of the first rationale. • the contra proferentem rule is applied in particular under sales law. Art. 1671 prescribes the interpretation of sale contract terms against the seller, save for adhesion contracts or consumer contracts. If the proferens is the seller (as is regularly the case) in an adhesion-sale contract, contra proferentem applies. If the proferens is the buyer in an adhesion-sale, the general contra proferentem shall apply against him. If the contract is not one of adhesion (or a consumer contract), yet B2B, the unclear term will be interpreted in favour of the buyer. 49 (iii) The third rule is in dubio pro reo interpretation: if, despite following the common statutory rules for interpretation, the contract remains unclear, the interpretation shall be made in favour of the debtor (Art. 1269(1)). This rule of interpretation, even if subsequent to the general principles of interpretation (anchored in Arts 1266–1268), is of uniform application and not conceived specifically for standard or non-negotiated contract terms. This rule is traditionally coupled with contra proferentem following the old French tradition initiated by Pothier and Domat in this respect. d) Judicial review for the external control of standard terms. The external control is seen in Romanian doctrine as the possibility of judicial evaluation of the so-called ‘external consensus’, which is the meeting between offer and acceptance. In case of litigation, the function of judicial review is to state whether a contract was concluded and, if the answer is affirmative, to determine its content. Three statutory provisions are of key importance for judicial review of B2B contracts: Art. 1182 relating to the sufficient agreement, Art. 1202(3) and (4) regarding the incorporation of conflicting standard terms and Art. 1203 on unusual terms. 51 (i) Sufficient agreement. As the acceptance must mirror the offer for the contract to be concluded (Art. 1197 and Art. 1182(1)),47 the intricate process of offer–acceptance may create difficulties when determining the moment of contract formation as well as the content of the contract. Here, the concept of sufficient agreement is important. Art. 1182(2) provides that a sufficient agreement exists if parties agreed to the essentialia negotii, even if some secondary terms were left open and/or to be 50

44

See Popa, ibid. 107. See Nicolae (‘Drept civil. Teoria generală’), 478; Vasilescu, 325. 46 See Vogenauer, in Jansen/Zimmermann (eds), Commentaries on European Contract Law, 773. 47 Departures from the elements of the offer (as modifications or additions) contained in the purported acceptance create a counter-offer (Art. 1197(1)(a)). Hence, the traditional mirror image rule applies (see e.g. C.S.J. – Curtea Supremă de Justiţie; Supreme Court of Justice, Commercial Division, Dec. No. 2846/ 18.4.2002: (2003) 3 Revista Română de Dreptul Afacerilor 128: ‘Therefore, the conditional or limited acceptance of a contract term is considered, according to the provisions of Art. 39 of the Commercial Code, to be a refusal of the first tender, constituting a new offer made to the offeror, the contract being considered concluded only when the new assent came to the attention of the proposer within the time limit determined by the offeree; thus, the Court of Appeals mistakenly held that the applicant owed penalties of 1 % per day of delay, a term proposed by the defendant yet not accepted by the plaintiff’). 45

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determined by a third party.48 As the concept is widely used in the European ius commune49 and in the most essential respects the features of this concept and its functions are the same50 we will refrain from a detailed discussion. In case of a dispute regarding the conclusion and/or content of the, the court is required to ‘supplement’ the contract, which is to say that the judge is only allowed to choose the proper norm from the ius dispositivum to be applied. (ii) Conflict between negotiated and standard terms. As the contract may be a sum of 52 standard and negotiated terms, Art. 1202(3) provides that ‘negotiated terms prevail over standard terms.’ This text and its interpretation are similar to § 305b BGB.51 Whereas a contract is concluded and the parties rely on different terms, one negotiated and the other one not, and one conflicts the other, then the negotiated term pre-empts the applicability of the opposing standard form. Thus, judicial review in this case should mean exclusion of the opposing standard term from the contract. (iii) The ‘battle of forms’ is equally considered in Art. 1202(4). Following the typical 53 criteria laid down in Arts 1187–1197, i.e. the traditional scheme of offer and acceptance, one ought to consider that no contract is concluded. However, Art. 1202(4) exhibits a statutory mechanism in order to consider sometimes the contract concluded. This mechanism is drafted using Art. 2:209 PECL as a model and appears to follow the Restgültigkeitstheorie of the German BGH. The Romanian legislator has chosen the knock out rule for this typical situation instead of the common last shot rule which remains in force for the normal conclusion of contract.52 Accordingly, where both parties rely on their own standard terms that they want to include in the contract, and no agreement is reached, the contract may nonetheless be concluded based on the agreed terms and on ‘the standard common terms in their substance’. Notwithstanding this rule, if one of the parties objects prior to the conclusion of the contract or immediately after (the ‘moment of the conclusion of the contract’ stands for ‘purported moment’) informing the other party that it ‘does not intend to be bound by such an agreement’, then no contract exists (Art. 1202(4)). The legal doctrine nevertheless insists on the notion that no contract is concluded also if the agreement created by the addition of agreed terms and common standard terms does not result in a sufficient agreement according to Art. 1182(2)53. Related to this point, it is worth noting that the Civil Code lays down a very relaxed view on the minimum requirements of a contract (i.e. essentialia negotii). Thereby the contract should be considered concluded even if, for example, no price is set. The price may be determined hereinafter, following the criteria of Art. 123354 dedicated to determining the price in B2B contracts.55 Once the contract concluded, provided that none of the parties has objected, the nomagreed part is established following the sufficient agreement concept using the ius dispositivum. 48

The wording is borrowed from Art. 2(1) and (2) Swiss Code of Obligations. See Art. 2:103 PECL, Art. II.‐4:103 DCFR, and for comments Christandl, in Jansen/Zimmermann (eds), Commentaries on European Contract Law, 268 et seq. 50 See Moise, in Baias et al (eds), Noul Cod civil, 1236 et seq.; Popa, in Curs de drept civil, 90, 66; see also Neamţ, 123 et seq. 51 Permeating the Civil Code through Art. 2:209(3) PECL. See Popa, ibid., 91. 52 For the meaning we use here see Christandl, in Jansen/Zimmermann (eds), Commentaries on European Contract Law, 340. 53 See Popa, in Curs de drept civil, 91. 54 See Zamşa, in Baias et al (eds), Noul Cod civil, 1293 et seq. 55 This provision is complemented by Arts 1661–1664 allowing eventually the price to be determined whenever the parties left the price undetermined. 49

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a) ‘Grossly Excessive Penalty’. A penalty clause (‘penal clause’) may be subjected to judicial review. In Romanian contractual practice penalty clauses are used on a large scale both in B2B and B2C contracts. A penalty clause is seen as an anticipatory evaluation of compensation for non-performance (Art. 1538(1)) and a means to force the debtor to perform his obligations. A temptation of sharp penalisation of the failing debtors is conceivable and normally accepted. However, in order to avoid the misuse of this instrument, Art. 1541 provides for a possible judicial review of such contract term under only two circumstances: if only the main obligation was performed in part (Art. 1541(1)(a)) or, ‘if the penalty grossly exceeds the value of the damage that may have been foreseen by the parties by the conclusion of the contract.’ (Art. 1541(1)(b)). Here we shall consider only the latter circumstance, namely an excessive penalty. (i) The reviewing of a penalty clause is exceptional.56 Normally, such a clause is accepted as it stands (i.e. with a penalty value exceeding the normal value of damages for which it was stipulated). The main rule is that that the penalty is immutable57, inferred from Art. 154(1), an application of pacta sunt servanda as general principle of contract effects (Art. 1270). (ii) A penalty clause, if excessive, may be reviewed regardless of the nature of the contract term, both standard and negotiated terms being targeted. However, a standard term is usually easier to subject to judicial review, especially when it lacks transparency. (iii) ‘Grossly excessive’58 is meant to be equated with ‘grossly unfair’ and it is seen under the Romanian case law as cause of review only when the penalty so blatantly deviates from the standard evaluation of damages that no further specific inquiry is needed to determine the grossly excessive nature of such term59 (being implied that normally a penalty exceeds the common value of damage and that pacta sunt servanda should usually prevail). It has sometimes been noticed that the ‘mirrored’ penalty clauses are a strong indicator against assessing the excessive nature.60 The rules on reviewing comprised in Art. 1541 are seen as means to decrease or reduce an excessive penalty and cannot be used to increase an unfair poor penalty clause.61 (iv) The excessive nature of such a clause may lead to the reduction in penalty value and not exclude application of the entire contract term; however alleviated, the remaining penalty must remain superior to the main obligation undertaken (as prescribed by Art. 1541(2))62. 56 See Court of Appeals Bucharest, Dec. No. 868/9.5.2017 (rejecting a claim for excessiveness based on Art. 1541); in the same way, see Lower Court Braşov, Dec. No. 679/2.2.2016 (finding, highly doubtful, that ‘business economic relations, are not to be questioned excessively onerous obligations that produce an imbalance’); or, Tribunal Bucharest, Dec. No. 414/23.12.2012 (pointing out that pacta sunt servanda applies and in the case at hand there is no room for assessing the unfairness of a penalty clause). 57 See Vasilescu, 558; Popa, in Curs de drept civil, 250; Angheni, 340 et seq. 58 The concept resembles the concept adopted by Art. 9:509 PECL. 59 See Court of Appeals Bucharest, Dec. No. 868/9.5.2017 (a reciprocal penalty clause of 0.2 % per day was seen as not excessive). 60 ibid. 61 Contrary to the provisions of the former Art. 1152 French Code civil (now Art. 1231–5) allowing reduction or increase of a penalty (see Pătulea). 62 The text however remains unclear as the liquidated damages term for delay in payment stipulated usually as per time units is commonly smaller than the obligation itself and yet it may be unfair (or excessive). An opinion has pointed out that only the liquidated damages term stipulated for compensation of non-performance loss may be reduced while that for delay in performance is not concerned (see Bratilă).

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(v) All the statutory provisions relating to the possibility of judicial review of an 59 excessive penalty are mandatory. According to Art. 1541(3), any stipulation circumventing the regulated judicial evaluation of excessiveness is rendered ‘unwritten’ (i.e. unenforceable). (vi) The onus of proving an excessive penalty is upon the debtor, following the 60 common rule of actori incumbit probatio. Some scholars support the view that damage ought to be ascertained in order to obtain the penalty clause applied.63 Yet, the major part of the doctrine considers, following Art. 1538(4) that damage need not be proven: ‘The creditor may claim the penalty not being asked to prove any damage for non-performance’64. b) Unfair contract terms relating to interest for late payment. The Late Payment Directive was transposed into Romanian law by Law No. 72/2013 on late payment in business contracts or between business and public authorities.65 Some possible unfair terms relating to late performance for monetary obligations are provided in Arts 12–15.66 The features of the Romanian legal view are contained mainly in Art. 12 (according to which, ‘The practice or the contractual term establishing manifestly unfairly, in relation to the creditor, the payment period, interest rate for late payment or the compensation for recovery costs is considered unfair.’) Although the national definition departs slightly from the European text, the underlying rationale is identical.67 (i) The statutory rules are equally applicable to both standard and negotiated contract terms – assuming that the Romanian legislator is using the same underlying principle as the Directive, Art. 12 does not exclude negotiated terms from its scope thereby resulting in a general applicability of the unfairness test.68 (ii) The statutory rules have an unequivocal character. From Arts 12–15 it is clearly inferred that the legal rules are intended to protect only the creditor of a monetary duty.69 The result, as pointed out in the legal doctrine,70 is that terms more favourable to the creditor are subject to ordinary fairness control and they are not covered by these specific statutory provisions. (iii) The legal control of gross unfairness is linked to the common provisions on interest for obligations to pay a sum of money. Deviations to the detriment of the creditor regarding provisions on interest for late payment are suggested and no strict legal criterium is given. As no legal test is provided, save for some circumstances to look at when assessing unfairness (Art. 1371), the common test of fairness is of assistance: how far the contract term departs from the ius dispositivum which is 63

See Kocsis, 42; in addition for the current regulation, Vasilescu, 558. See, e.g., Ungureanu, in Baias et al (eds), Noul Cod civil, 1629; Popa, in Curs de drept civil, 249. 65 Transposing the Late Payment Directive. See Duagi. 66 Their drafting closely follows Art. 7 Late Payment Directive. 67 The European policy in the matter of interest for delay in payment of money (for which see Zimmermann (‘Interest for Delay’)). 68 See Tribunal Bucharest, VI Civil Division, Dec. No. 3026/5.9.2017, pointing out that a negotiated term may be equally scrutinised for the unfairness test. 69 Some courts misused the legal provision (see e.g. Lower Court Constanţa, Dec. No. 4383/13.4.2017, and Tribunal Constanţa, Dec. No. 1229/6.10.2016, both wrongly using Art. 12 to declare void a penalty term detrimental to the debtor). For an accurate application see Court of Appeals Oradea, Civil 2nd Division, Dec. No. 131/5.5.2015 and Lower Court, 6th Sector, Bucharest, Dec. No. 927/6.2.2017 both emphasising the unilateral application of the statutory provisions on unfair terms contained in Arts 12–15). 70 See Zimmermann, in Jansen/Zimmermann (eds), Commentaries on European Contract Law, 1530. 71 See for the model-rule of these legal provisions, Art. 7(1) Late Payment Directive (some minor adjustments were operated on the occasion of transposition). 64

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presumed more equitable and/or balanced between parties.72 The core rules for ius dispositivum are represented by the common provisions on interest. Art. 4 on ‘penalty interest’ provides that ‘If the parties did not set the interest rate for the late payment, the penalty interest shall be applied as calculated according to Art. 3 of the Government Ordinance No. 13/2011 on the legal interest payable and penalising for monetary obligations, as well as for the regulation of financial-fiscal measures in the banking field, as approved by Law No. 43/2012. The legal interest rate reference rate in force on the first calendar day of the semester applies throughout the semester.’ In respect of the mentioned legal common regulation on interest, the basis for the comparative test is the dispositive regulation of the minimum statutory interest rate as provided for B2B contracts by Art. 373 of the Government Ordinance No. 13/2011 on the legal interest (applicable if not otherwise agreed) distinguishing between statutory interest rate and penalty rate interest.74 It is worth mentioning that the penalty interest for late payment in B2B contract is the National Central Bank reference interest plus 8 percentage points. 66 (iv) For some terms the unfairness is presumed. According to Art. 14, terms are qualified as unfair, without any further verification (including circumstances provided in Art. 13 or any other circumstances specific to the case)75, if they: ‘a) exclude the possibility of applying penalty interest or set penalties lower than the statutory penalty interest; b) set a default obligation to notify the debtor76 in order for the interest rate to operate; c) provide for a longer period from which the debt produces interest other than that provided in Art. 3(3)77 or, as the case may be, to Art. 6 and Art. 7(1)78; d) fix, in the contracts between professionals and contracting authorities, a payment term higher than that provided in Art. 7(1); e) exclude the possibility of compensation for recovery costs; f) set a time limit for the issuance/receipt of the invoice.’ 67 (v) The unfair terms are ineffective. According to Art. 15(1), a grossly unfair term is void, with no further explanations. However, is inferred from the underlying policy that this affects the subjected term only to the extent it detriments the creditor, that is, to the extent of the unfairness. On the other hand, Art. 15(2) mentions the debtor liability for using unfair practices and terms. The liability is regulated in Arts 1530–1548 starting from the principle of full compensation. 72 See Popa, in Curs de drept civil, 96; being obvious that the criteria regulated for assessing unfairness in B2C contracts (Law No. 193/2000) is not accepted (see Court of Appeals Oradea, Civil 2nd Division, Dec. No. 131/5.5.2015). 73 Art. 3 of the Ordinance: (1) The statutory interest rate shall be set at the level of the reference interest rate of the National Bank of Romania, which is the monetary policy rate established by the Decision of the Board of Directors of the National Bank of Romania.; (2) The penalty interest rate shall be set at the level of the reference interest rate plus 4 percentage points.; (2‐1) In the relations between professionals and between them and contracting authorities, the penalty interest rate is set at the level of the reference interest plus 8 percentage points.(…). For the scholarly approach, see Popa, in Curs de drept civil, 245, mn. 159. 74 The Ordinance sets out a set of rules for default situation (if no agreement exists) and limiting rules as part of an underlying policy regarding interest regulation. 75 Unfortunately, under the Romanian transposition, the distinction between terms presumed unfair (Art. 7(3) Late Payment Directive) and terms always unfair (Art. 7(3) Late Payment Directive) is unclear or missing, with the result of an exceeding transposition. 76 The ‘reminder’ of the Late Payment Directive (see e.g. Art. 6(2)). However, for any obligation to pay a sum of money, Art. 1535(1) is applicable (‘If a sum of money is not paid at maturity, the creditor is entitled to compensation for loss, from the maturity to the moment of payment, in the amount agreed by the parties, or in the absence provided by the law, without having to prove any damage. In this case, the debtor is not entitled to prove that the loss suffered by the creditor as a result of late payment is lower.’). 77 The text is a verbatim copy of Art. 3(3) Late Payment Directive. 78 The equivalents of Art. 4 Late Payment Directive.

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c) Exclusion of some liability terms. The control of fairness in B2B contracts is related to the terms excluding, limiting or aggravating one party’s liability against the other. The aggrieved party may seek protection on a general basis pleading an infringement of the principles laid down in Art. 1355 or calling for specific protection offered by special provisions for several contracts (especially in sale or lease contracts). The statutory text related to the underlying principles on liability clauses is Art. 1355. Inspired in part by Art. 1474 Civil Code of Québec, Art. 1355(1) provides that any term excluding or limiting the liability for material injury caused to another through an intentional or gross fault is ineffective. The legal clause is purported to have a general application to torts and contracts. This principle is strengthened by a harsh rule under Art. 1355(4): ‘The declaration of acceptance of the risk of damage does not in itself constitute the renunciation of the victim to the right to claim compensation.’ Briefly, a term, apparently legally consented to and inserted in the contract, still does not produce any effect if it aims at excluding or limiting liability for intentional or grossly negligent acts. The case law confirms this view since the times of the old Civil Code 1874.79 It is admitted that ‘gross fault’ means gross recklessness, gross carelessness or gross negligence.80 In turn, terms aimed to limit or even exclude liability for simple carelessness or simple negligence are effective (Art. 1355(2)), again this rule being a statutory endorsement of the pre-existing case law.81 Ultimately, the exclusion or limitation of liability for personal injuries is seen as suspect and may be effective ‘except under the law’, which is seen as ‘only if permitted by the law’. Frequently, the notion of ‘intentional or gross fault’ is coupled with that of bad-faith as the antonym of good-faith (i.e. is considered that bad-faith covers both attitudes toward the ability to produce damages from a certain act or behaviour). Terms extending or aggravating liability are not covered by Art. 1355. However, the aggravation may be subjected to a different form of control of fairness (i.e. unusual terms rules, grossly unfair penalty, etc.). This view is accepted by the doctrine and endorsed by case law.82 The ius dispositivum of specific contracts contains some provisions aimed to protect the weaker party. The most well known are present in sale, lease, and transport contract regulations. Here we shall focus on so called ‘conventional warranty’ against hidden defects and third party claims (i.e. the conventional modifications terms relating to liability for latent defects and third party claims and rights). In sales regulation, Art. 1708(2) provides that an exclusion or limiting liability term for latent defects known or which ought to be known by the seller by the time of contracting is void. This traditional rule existing in almost all known continental 79 See Court of Appeals Bucharest, Vth Commercial Division, Dec. No. 135/8.3.2007: (2009) 7 Revista Română de Dreptul Afacerilor (is void the condition that, in the absence of any objection to the statement of account communicated, the bank may no longer be held responsible for the services performed is unlawful because it leaves the bank the possibility to assure itself de plano exoneration of contractual liability); also, International Arbitral Court ICC Bucharest, Dec. No. 2/10.1.2008, annotated by Popa, (2010) 2 RRDP 210 et seq. (the buyer of shares discovers after the acquisition that the passive of the bought company is larger than the one he was considering at the time of the contract; the exclusion of liability term is held ineffective). 80 On the types of fault see Boilă, in Baias et al (eds), Noul Cod civil, 1417; Pop, in Pop et al., Curs de drept civil, 351 et seq. 81 See e.g., CSJ (Supreme Court of Justice), Commercial Division, Dec. No. 7727/9.12.2001: (2003) 4 PR 122 (the term of the sale contract providing that the loss or damage of the perishable goods sold, which is not attributable to the carrier, is borne equally by seller and buyer, operates if no gross fault is attributable to the seller). 82 See above, mn. 37 et seq.; 55 et seq.

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regulations already featured in old Civil Code 1874.83 However, the new statutory wording (‘ought to have known’) is thought to reinforce the protection against a professional seller which is factually presumed as capable to have known the defects in goods sold.84 The present status of the real extent of this text is unclear as long as before the new provisions it was considered that a professional seller is a venditor sciens, save for the situations in which the buyer too is a professional and they act in the same commercial field (when the de facto assumption against the seller was somehow ‘neutralised’ by the buyer’s quality85). Today, under the new wording of Art. 1708(2), the only reasonable conclusion is that in all sale contracts where the seller is a professional (comprising both B2B and B2C sales)86, the term excluding or limiting seller’s liability for latent defects is ineffective. Regarding the extension of liability for defects (latent or not), this is largely permitted in B2B contracts (and in general) as there is no statutory prohibition and because a whole section is dedicated to the warranty for the functioning of the goods sold (Arts 1716–1718), which is seen as an extension of the common warranty.87 73 Relating to the liability for third party claims terms, the exclusion or limiting liability terms are seen with a certain reluctance. Under Arts 1698–1699 the principle is that these terms are admitted. However, these terms are considered ‘unwritten’ (in any case ineffective under Art. 1699) if: (i) the third party claims are the effect of a certain act of the seller; (ii) the seller knew about the very existence of the third party claim by the time of the sale and concealed it to the buyer. At the same time, the exclusion/limiting term has a limited effect. Provided that such a term exists, its effect is only that compensation for loss is barred, instead the reimbursement of the price has to be made, except for the term through which the buyer clearly assumed the determined risk resulting from third party claims (under Art. 1698(2))88. This applies for all sales, regardless of the qualities of the parties, and thus extends to B2B contracts, yet a far stricter view is assumed under the statutory provisions protecting consumers. 74

d) Good faith doctrine. The concept of good faith has impacted on the legal doctrine prior to the entry into force of the new Civil Code, though the judicial recognition of its usefulness rather arose in the context of real estate rather than contract law.89 The repeated references to ‘good faith’ in the new Civil Code (in particular Art. 14 stating the good-faith as a general principle of civil law; Art. 1170 and 1183 relating to good 83 See Deak, 91 (under the former Art. 1354 (1864)); Chirică (‘Tratat de drept civil’ 2008), 435; Popa (‘Viciile’), 748 et seq. 84 Following the traditional approach which is said to have been ‘launched’ by Molinaeus (Charles Dumoulin) and ‘incriminates’ the venditor sciens (see, Zimmermann (‘The Law of Obligations’) 334 et seq.); under the Civil Code 1864, see Deak, 91; Chirică, ibid., 431 (pointing out the very existence of an absolute presumption of the knowledge against the professional seller); in general, see Popa (‘Viciile’), 746. 85 See Chirică, ibid., 436. 86 See Chirică (‘Tratat de drept civil’ 2017), 429 and 436 et seq. (although, keeping a part of the old reasoning under No. 1075, which is arguable). The case law mirroring this view is for the time being poor (see, however, Tribunal Brăila, Civil II Division, Dec. No. 33/29.1.2015 – where the court has failed to evaluate an exemption of liability term taking into account the seller’s professional quality). 87 Chirică, ibid., 439 et seq. 88 This ‘taking of risk’ has to be undoubtedly assumed by the buyer, clearly indicating the risk and the acceptance of its effects and exonerating expressly the seller of any liability. This term result in a transformation of sale contract in an aleatory contract. See Chirică, ibid., 397 et seq.; for the previous view, under the Civil Code1864, see Deak, 83 et seq. The old view is identical under all the elements of the so-called conventional warranty against third party claims as shaped by the new regulation. 89 See, inter alia, Constitutional Court (Curtea Constituţională), Dec. No. 21/27.1.2004: M.O. No. 315/ 2004; see also 629/6.7.2010: M.O. No. 460/2010 (as a prerequisite to the error communis facit ius doctrine).

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faith as a general principle of negotiation and performance of all contracts) are evidence of the Romanian legislator’s preoccupations with its benefit. However, the use of this ‘super-tool’ did not prove to be strong enough to establish significant case-law based thereon, though it may be too early to discern! Nevertheless, good-faith coupled with prohibition on the abuse of rights incited doctrine and case law. Both good faith and prohibition of the abuse of rights are seen in Romanian doctrine as open concepts or open norms90, capable of creating new rules where the Civil Code is silent.91 Both are conceived to ‘civilise’ the law of obligations whenever its rules are used against its designed scope. More specifically, good-faith is seen as a tool for filling gaps and abuse, as a means to correct the exercise of conferred rights. Thus, the corrective function of good-faith (along with the prohibition on the abuse of rights) is considered prevailing. Up to this moment, this function of the concept did not result overtly in any correction of a legal provision even if this use is admitted, especially on the ground of constitutional values and their primacy over civil positive rules through the instrument of good-faith.92 However, the large use of remedies against an abuse of rights, i.e. the paralysis of a legal rights when used unfairly, and compensation are an expression of this corrective function. The corrective function stands abreast the regulating function of good faith as a means to supervise the performance of contract (e.g. the obligation to co-operate). Good faith is, on the other hand, seen as a legal instrument used to identify specific obligations or duties where the law or the contract are silent (supplementary function). For instance, before the new Civil Code, under the influence of the French doctrine, it was assumed that the obligations to inform and give assistance result from an overarching obligation of good faith. Under the new regulation, this view persists for obligations and duties so far not yet expressly regulated as the obligation to co-operate, the duty of care, the duty not to behave inconsistently (non venire contra factum proprium), etc. This function is generally based on Art. 1272(1) and (2) allowing the legal interpreter of a contract to detect implied obligations considered as ‘common or usual implied terms’. The abuse of rights, regulated following (almost identically) Art. 7 Civil Code of Québec is commonly used to remedy either unbalanced contracts or unbalanced performances under a contract. The very definition of abuse is intrinsically bound to good faith, as the legal provision considers all forms of abuse as ‘contrary to good faith’. For B2B contracts, remedies for abuse of contract rights joined with the doctrine of good-faith are clearly ascertained. Some examples can be found in the statutory rules and case law as well and within the doctrine: (i) The sanction for abuse of pre-contractual rights results in avoidance (e.g. partial or total avoidance for deceit as a result of concealing valuable information), or in a remedy under contract in the situation known as overlapping remedies (e.g. concealing information relating to the defects of the goods sold may result in remedies for breaching the legal warranty for latent defects). (ii) The remedy for an abuse of contract rights is thought to be the paralysis of the right abusively exercised. Case law offers some guidelines. In the case of an exercise of a right to unilaterally end the contract (i.e. withdrawal) exercised after its holder allowed the other party to reasonably believe that he will insist on performance, thereby causing him major expenditures to prepare the performance;93 the exercise 90 91

Following its German reference (see, e.g., Larenz, 72 et seq.); see, Popa (‘Remediile abuzului’). Following a certain European doctrine (especially Hesselink), the idea was adopted by Floare, 342 et

seq. 92 93

See Popa (‘Opozabilitatea’), 63 et seq. See ICCJ, Civil Division, Dec. No. 3117/13.11.2014.

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with great delay of a right to terminate the contract under the contract term allowing the creditor to consider the contract unperformed, delay inducing the reasonable belief that this right is waived;94 80 (iii) Art. 1534 comprises both the mora creditoris rule and the prohibition of venire contra factum proprium. Under Art. 1534(1), linked to Art. 151795, a reduction in compensation of damages for non-performance is provided whenever the obligee contributed to the non-performance he alleged. A reduction to zero is also conceivable when the creditor blocked the other party’s possibility to perform. Finally, where the creditor assumed the effects of a certain risk causing the nonperformance, the compensation of any type is also precluded. Under Art. 1534(2), the creditor’s right to compensation is precluded for all damages the creditor could have avoid with a minimum thoroughness or diligence.96 These rules are seen as an expression of the general obligation to co-operate for which the new regulation provides a number of applications.97 81 (iv) The unexpected change of circumstances is, at least historically, seen as a development of the good faith doctrine.98 Nowadays, the Civil Code includes in Art. 1271 the judicial review of a contract for unexpected change of circumstance. The text is almost a complete copy of Art. 6:111 PECL and Art. III.‐1:110 DCFR. The comments mirror the underlying European viewpoints.99 e) ‘Cauza’, ‘ordre public’ and ‘good morals’. Freedom of contract is the governing principle for B2B contracts. Accordingly, the parties may choose the contracts and the contract content which best serve their interests. And yet, freedom of contract stands as a principle within the limits of mandatory rules, public order and good morals (Art. 1169). Choosing a contract and/or its terms is normally an intentional act, therefore it is considered that, in circumscribing the limits of contractual freedom, the scrutiny of the subjective urge (motives) to conclude a contract is an instrument of control of contracts. 83 The Romanian legislator has chosen to preserve cauza among the validity conditions of the contract, unlike the major part of the modern reforms (including the French 2016 reform of the law of obligations) but following Art. 1410 Civil Code of Québec. However, its functions, as a result of a long debate on whether to maintain the notion of cauza, were severely constricted. As noted,100 the new concept of cauza established by Art. 1235 is strictly confined to ‘contract cauza’101 or causa remota of a contract (i.e. the 82

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See arbitral award of C.A.C.I./C.C.I.R., Dec. No. 240/29.11.2011: (2014) 3 BNP 44. Art. 1517: ‘A party cannot rely on the non-performance of the other party’s obligations to the extent that the non-performance is caused by the first party’s act or omission.’ This text is taken from Art. 80 CISG (almost identical wording) and/or Art. 7.1.2 PICC (inspired by the CISG). The provision is inserted in the introductory section of the chapter regarding remedies for non-performance, so it stands as a general principle governing the remedies. 96 See Court of Appeals Bucharest, VIth Civil Division, Dec. No. 166/25.3.2010: (2010) 5 Revista Română de Dreptul Afacerilor (the passiveness of the creditor against the debtor resulting in an increase of penalties under the contract is ‘sanctioned’ with a reduction in compensation as a result of an abuse of contract rights). 97 See, e.g., Arts 1510–1515 (the effects of the notice given to the oblige to accept an offer of performance), Art. 1719 and Arts 1725–1726 (the effects of non-performing by the buyer of his obligations to take over the goods sold). 98 See Pop, 532 et seq. (and the legal and scholar references here quoted); Zamşa, 152 et seq. (accurately based on the good faith doctrine). 99 For which, see e.g. Rüfner, in Jansen/Zimmermann (eds), Commentaries on European Contract Law, 899 et seq. 100 See Nicolae (‘Codex Iuris Civilis’), 327; Vasilescu, 384 et seq. 101 Unlike the old regulation of ‘cauza of obligation’ (Arts 966–968 Civil Code 1874) which gave rise to a whole current advocating the avoidance of a contract/term for lack of ‘cauza’ of one of the parties. This 95

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main reason/their purpose which ‘caused’ the parties to enter a contract). Thereby, it was argued that the lack of one party’s cauza results in the avoidance of contract only if the other party knew or could not have been unaware of such absence.102 The use of cauza in B2B contracts in order to expel unfair terms was drastically reduced.103 The concept of ‘public order and good morals’, endorsed by an important doctrine,104 84 was usually coupled with the ‘illicit (unlawful) cauza’. A contract founded on an unlawful cauza is void (Art. 1238(2) and Art. 1247). Moreover, when the contract was the instrument for circumventing the mandatory law, then its cauza is unlawful and results in the absolute avoidance of the whole contract. Nevertheless, the avoidance is precluded if the ‘illicit cauza’ was one-sided (i.e., instigated by one party only) and it was not the common purpose of the parties or at least the other party was aware of it (Art. 1238(2)). Although limited, the connection between public order and cauza proves itself useful 85 in order to speed up the enforcement of the ‘European ordre public’ as an element of the national public order as understood by Art. 11. So far, it was clearly stressed that the mandatory European rules are part of the ‘Romanian ordre public’105. As long as EU mandatory rules include in turn including the interpretations given by the CJEU, its views upon ‘adhesion’ contracts are of help even in B2B contracts even if most of its reasoning is dedicated to B2C contracts and are used intensely by Romanian courts. Moreover, under Simmenthal106, the Romanian courts are called to directly apply the European mandatory legal instruments including when necessary, the review of the Romanian law in order to give effect to European law. f) Deceit, ‘unfair exploitation’ and violence. Some of the rules on validity of 86 consent, regarding especially deceit, unfair exploitation (as part of ‘lesion’) and ‘economic’ violence may be challenged in order to prevent or to expel unfair terms from B2B contracts.107 Deceit (Art. 1214) is thought to offer certain protection even in B2B contracts 87 whenever an imbalance in information exists, i.e. when one party is a specialist in the respective commercial field while the other is not, yet both are professionals. Accordingly, linked to the duty to inform, whenever this obligation refers to relevant information, deceit may be used as an instrument to obtain avoidance of the contract and normally not of its individual terms.108 However, Art. 1257 provides, in case the contract is not avoided, also for a reduction of the aggrieved party’s obligations with the value of compensation for the delict of deceit.109 According to the legal provisions, current and its arguments, fruitful for the exclusion of unfair terms from B2B contracts, are not to be used under the new regulation. 102 See especially, Nicolae (‘Codex Iuris Civilis’), 327; Nicolae (‘Drept civil. Teoria generală’) 431. 103 See Tribunal Giurgiu, Civil Division, Dec. 27/21.4.2017; also, Tribunal Ialomita, Civil Division, Dec. No. 827/11.6.2018. 104 See, under the old regulation, Pop, 368 et seq. (and the doctrine quoted here). 105 See, e.g. Constitutional Court, Dec. No. 967/20.11.2012: M.O. No. 853/2012 (though the extent of direct applicability is controversial between constitutionalists); Pop, 372. 106 Expression borrowed in Romanian law from ECJ, C-106/77 Simmenthal ECLI:EU:C:1978:49. For the expression, see Claes, 69 et seq. 107 Even misrepresentation; before the entry into force of the new Civil Code, see Popa (‘Remediile abuzului’), 217 et seq.; Pop, 336. 108 See Pop, 269 et seq.; Vasilescu, 356 et seq.; Nicolae (‘Drept civil. Teoria generală’), 387 et seq.; Ilie. However, the opinion was also expressed that a contract concluded under deceit may be subjected to adaptation according to Art. 1213 (i.e. which is the performance of the contract as it has been understood by the victim of the mistake; see, for this opinion, Boroi/Anghelescu, 154). 109 For remedies for deceit, see Zamşa, in Baias et al (eds), Noul Cod civil, 1317; Ilie, 252; Nicolae, ibid., 393; Vasilescu, 361 et seq.

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deceit results in avoidance only if the misrepresentation triggered by the absence of information is so serious for the aggrieved party that he would not have concluded the contract if he was aware of the information that has been concealed. 88 Some dispositions from the Civil Code’s regulation of violence (threat) (Arts 1216–1217), state of necessity (Art. 1218) and the ‘lesion’/gross disparity (Art. 1221)110 are seen in combination as representing the equivalent of Art. II.‐ 7:207 DCFR on unfair exploitation or of Art. 4:109 PECL111 on excessive benefit or unfair advantage112. Between professionals, some scholarly approaches have considered that the ‘economic’ violence (i.e. ‘economic duress’) may give rise to avoidance, damages and/or the reduction in obligation of the aggrieved party only if one party has exploited the other party’s situation of economic distress and has committed an abuse. This view is favoured if the economic situation of the aggrieved party is coupled with economic dependency or subjection to the other party (for whom, definitions from competition law are used – i.e. for dominant position, for unfair practices113). Even if competition law is correctly illustrated by case law, for the time being no relevant decisions are known relating to the issue presented here. 89

g) Terms related to prescription. According to Art. 2515 conventional arrangements on prescription are admitted within definite limits. Parties are therefore allowed to modify the length of prescription (albeit within certain restraints – between a minimum of one year and a maximum of ten), the beginning, the suspension or cessation of prescription through an express114 agreement (Art. 2515 (3) and (4))115. Thus, normally, clauses related to prescription are also permitted in B2B contracts. However, for a major part of these claims under contract – for all claims derived from adhesion contracts and from insurance contracts, any convention on prescription thereof is strictly prohibited (according to Art. 2515(5)116). Accordingly, any infringement of this rule results in absolute voidness of such term (Art. 2515(6)). Therefore, not even the strict respect paid to rule on negotiations of contract may avoid the applicability of general rules on standard terms (i.e. rules on specific consent for standard terms117) is not strong enough to reinforce such terms which remain strictly prohibited. Conversely, a negotiated term related to prescription inserted in a B2B contract is valid, save for insurance contracts where the term remains prohibited. As Art. 2515(5) refers to ‘claims’ issued from adhesion contracts/ insurance contracts we have to assume that a negotiated term regarding prescription for a claim issued from a non-negotiated term is also not valid otherwise the legal prohibition would be circumvented. 110

See Nicolae, ibid., 399 et seq.; Zamşa, ibid.1279 et seq. Especially under the Civil Code 1874, see Pop, 276 et seq.; under the new Civil Code, see Chirică, 313; Tabirta/Lisievici. 112 See for comparison, Lohsse, in Jansen/Zimmermann (eds), Commentaries on European Contract Law, 701 et seq. 113 See, for instance, Art. 5(1)(e) Competition Law No. 21/1996, prohibiting implied contract terms through which is made ‘(…) the conclusion of contracts subject to the acceptance by the partners of additional services which, by their nature or according to commercial usage, are not related to the subject of such contracts.’ Similarly, Art. 6(1) of the same Law prohibits ‘[t]he unfair practice of using by one or more companies of a dominant position held on the Romanian market or a substantial part of it.’ 114 The meaning of ‘express’ is that the terms should be clearly formulated and not as a legal extension of condition on form (see Nicolae (‘Drept civil. Teoria generală’), 765, mn. 346). 115 See ibid., 765 et seq. 116 ‘(5) The provisions of Paragraphs 3 and 4 shall not apply to rights for claims which the parties may not dispose, nor to claims deriving from adhesion contracts or insurance and consumer protection legislation.’ 117 See above, mn. 38 et seq. 111

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V. International application Due to the many issues regarding the international application we shall only analyse 90 in this context the choice of law and choice of courts agreements, with a few mentions regarding the choice of courts agreements consented to by the weaker party.

1. Choice of law agreements (Art. 1203 CC v Art. 3 Rome I) According to Art. 3(1) Rome I, a contract shall be governed by the law chosen by the 91 parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract. It is widely admitted that according to this rule, the formal validity of the choice of law agreement has to be severed from the formal validity of the main contract. Thus, even if the latter is subject to some formal requirements according to the applicable law, these requirements do not apply to the choice of law agreement, which does not have to be concluded in writing118 (oral agreements are accordingly valid, though providing evidence thereof may be difficult). It is also settled that the choice of law can be implicit, resulting, for instance, from an exclusive choice of court agreement119. All this raises the question of the relationship between Arts 2 et seq. Rome I, on one 92 hand, and Art. 1203 regarding unusual terms, on the other. Art. 1203 aims to ensure the consent of the parties regarding the unusual terms, which expressly includes choice of law agreements are explicitly listed.120 The application of Art. 1203 regarding to choice-of-law agreements subject to the 93 Rome I Regulation is however not possible, at least not in B2B contracts. First, as stated above, according to Art. 3 Rome I the choice of law clause need not be in writing, but can be even oral and also result implicitly from other clauses of the main contract. Thus, Art. 3 Rome I itself is incompatible with Art. 1203, and the Regulation enjoys priority over conflicting national rules of law.121 One could definitely not regard Art. 1203 as a ‘mandatory overriding provision’ in the sense of Art. 9 Rome I, since this notion is an exceptional one, regarding only the vital public interest of the respective legal system, and it is accordingly to be construed narrowly.122 In addition to this, if one were to consider the application of Art. 10 Rome I (according to Art. 3 (5) Rome I),123 this rule points to the putative law (i.e. the law which would govern the contract if the agreement were valid), and not to the objective law, applicable if there were no agreement at all. In consumer contracts, one could regard the subsidiary application of Art. 10(2) Rome I and thus of the law of the country where the consumer has his habitual residence; a similar approach could be taken, exceptionally, even in B2B contracts where the difference of economic power, knowledge and legal skills is so extensive and obvious that it seems fair to subject the greatly weaker business to consent protection rules provided by the national law of its habitual residence (for instance, Art. 1203, if the residence or seat of the business is in Romania), for analogous reasons to those regarding consumers. 118

See, for instance Ragno, Rome I Regulation, Art. 3(17) et. seq., 83 et seq. See also, Recital 12 Rome I. 120 See above, mn. 42. 121 For this approach, see Calliess, in Calliess, Rome Regulations, Art. 3 mn. 29–30. 122 Recital 37 of the Regulation. 123 For this alternative approach, see for instance Plender/Wilderspin, 171–172. 119

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2. Choice of court agreements (Art. 1203 CC and Art. 1067 NCPC v. Art. 25 Brussels I bis) Insofar the Brussels I bis Regulation is applicable ratione materiae,124 Art. 25 regarding choice of court agreements supersedes parallel national rules regarding the same issue. Art. 1067(1) NCPC (Codul de procedură civilă; New Civil Procedure Code125) states that if the parties are entitled to dispose of the disputed rights according to Romanian law and the competence of Romanian courts has been validly chosen, the competence of those courts shall be exclusive. According to Art. 1067(2) NCPC, the Romanian court becomes competent if the defendant enters an appearance without challenging the courts’ jurisdiction. However, Art. 1067(3) NCPC limits the ambit of both norms, stating that the (chosen) Romanian court can still reject the claim (on the grounds of lacking competence) if the litigation presents no relevant connection to Romania. It has been said that this rule is a rather surprising – and highly questionable – application of the forum non conveniens, a rule specific to common law jurisdictions126. Forum non conveniens127 has the great disadvantage to affect the foreseeability of the court competence rules, since the competent court could nevertheless declare itself incompetent on grounds of ex postconsiderations regarding the sufficient or insufficient connection of the trial with the forum. 95 It is quite clear that Art. 1067(3) NCPC is altogether incompatible with Art. 25 Brussels I bis, which enables even third states parties with no connection to the European Union to choose a court from a Member State, without any conditions regarding the connection of the parties or the litigation to the respective Member State128 or, even narrower, to the chosen court. Thus, should the Regulation be applicable ratione materiae, any choice of court agreement in favour of a Romanian court will be governed by Art. 25 alone, Art. 1067 NCPC and the other relevant provisions of the NCPC being set aside.129 96 Another relevant issue is, again, the question of the relation between Art. 25 Brussels I bis, on one hand, and Art. 1203 regarding unusual terms, on the other. As stated,130 Art. 1203 regards choice of court agreements as unusual terms and requires 94

124 See, essentially, Art. 1 of the Regulation and the abundant doctrine and jurisprudence thereto, e.g., Rogerson, in Magnus/Mankowski, Brussels I Regulation, 54 et. seq.; Zidaru (‘Competenţa în materie civilă’), 23–74. 125 Law. No. 134/2010, in force since 15 February 2013. 126 See Zidaru (‘Competenţa instanţelor judecătoreşti’), 227. 127 On this notion, see, for instance, Zidaru (‘Competenţa în materie civilă’), 96–99; Mankowski, in Rauscher, Europäisches Zivilprozessrecht, 221–222. 128 See also ECJ, C-56/79 Zelger ECLI:EU:C:1980:15, para. 4; Magnus, in Magnus/Mankowski, Brussels I Regulation, 461; Zidaru (‘Competenţa în materie civilă’), 422, where it is stated that Art. 1067(3) NCPC is always superseded by Art. 25 of the Regulation and that the former should be eliminated from the NCPC in order to prevent confusions such as the (erroneous) complementary application of Art. 1067(3) 3 NCPC even when Art. 25 Brussels I bis is applicable; unfortunately, from Romanian court decisions it is apparent that not all judges are conscious of the incidence of European law and tend to refer to the corresponding national rules, which is of course wrong, even in the many instances where the content of the national rules is harmonised to the corresponding rules of the Brussels I bis Regulation. For an example where the national court has applied Art. 23 Brussels I Regulation, although the parties have both relied on the NCPC, see Tribunal Timiş, 2nd Civil Division, Dec. No. 329/2014. On the contrary, in a case where the defendant’s domicile was in the Netherlands and the inexistence of a valid prorogation in favour of the Romanian courts was (correctly) held, the court nevertheless erroneously referred to Art. 1067 NCPC, instead of Art. 25 Brussels I bis Regulation – Tribunal Suceava, 2nd Civil Division, Dec. No. 38/2017. 129 See, for instance, regarding the exclusion of national competence rules insofar the Brussels I bis Regulation applies, Mankowski, in Rauscher, Europäisches Zivilprozessrecht, 226. 130 See mn. 40.

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explicit and written acceptance of the particular choice of court agreement; a general consent to the contract containing standard terms is therefore not enough for the choice of court agreement to produce effects. As we mentioned before,131 Art. 1203 is meant to ensure the effective consent of the 97 adhaerens to the standard term concerning the choice of court. As it was stated in a constant ECJ decision and in the relevant doctrine, the form requirements laid down by Art. 25 Brussels I bis are meant to ensure the effective consent of the parties regarding the choice of court agreement. As such, these requirements are the sole applicable and other concurrent national rules are set aside. This was stated explicitly by the ECJ in Elefanten Schuh, where national rules regarding the written form of employment contracts were held to be inapplicable.132 Therefore, concurrent national rules such as Art. 1203 or Art. 126 NCPC (requiring 98 the written form for choice of courts agreements) are inapplicable, even if they claim to ensure a better party protection regarding the effective consent to the choice of court agreement.133 The same was held by the French Court of Cassation, stating that Art. 42 of the new French Code of Civil Procedure (containing similar requirements to Art. 1203) is not applicable when Art. 23 of the former Brussels I Regulation applies and that the choice of courts agreement cannot be set aside on the ground that it is unlikely that the party – teacher, not lawyer or businesswoman – understood the effects of a choice of courts agreement.134 It was also stated by relevant parts of the doctrine that Art. 25 regulates finally and 99 conclusively questions regarding international choice of courts agreements and that national control of such agreements according to the standards applicable to unfair contract terms is in principle inadmissible even if a jurisdiction agreement was contained in standard contract terms.135 However, Art. 25(1) Brussels I bis submits now the issues of substantial validity to the law of the Member State of the chosen court. One could therefore say that substantive issues not covered by the conclusive rules of Art. 25 Brussels I regarding the form of the agreement (form requirements meant to ensure effective consent) such as state of necessity (Art. 1218) could be examined under the rules of the aforementioned national law.136

3. Choice of court agreements and protection of the weaker party The aforementioned rule of party autonomy regarding choice of court agreement is 100 restricted in the areas of insurance, consumer, and employment contracts. According to Arts 15, 19, 23 Brussels I bis Regulation,137 in these cases, a derogation from the protective rules can be agreed upon either after the dispute has arisen – and the weaker party becomes aware of the risk of actual litigation, being much more attentive when agreeing to a choice of court – either before, but in the latter case only if the agreement is favourable to the weaker party, by opening other possibilities to bring action, in addition to (and not instead of) the competent courts according to the protective rules of the Regulation. In addition to this, Art. 15(3) and Art. 19(3) allow a choice of court 131

See mn. 42. ECJ, C-150/80 Elefanten Schuh ECLI:EU:C:1981:148. 133 See Zidaru (‘Competenţa în materie civilă’) 400–401. 134 Cass. fr., civ. 1-ere, decision from 23 January 2018, apud. Spellenberg, 464. 135 See Magnus, in Magnus/Mankowski, Brussels I Regulation, 448. 136 For this approach see, e.g. Zidaru (‘Competenţa în materie civilă’), 425, warning however that this should not lead to a hidden control of an objective link of the litigation to the chosen forum, under a socalled abuse of rights-control (Zidaru, ibid. 423). 137 For detail, see the contribution by Pfeiffer, in this volume. 132

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agreement which is entered into by the consumer and the other party to the contract (or between a policyholder and an insurer), both of whom are at the time of conclusion of the contract domiciled or habitually resident in the same Member State, and which confers jurisdiction on the courts of that Member State, provided that such an agreement is not contrary to the law of that Member State. These provisions are not effective regarding the Romanian law, which does not allow a choice of court agreement in insurance and consumer litigation before the dispute has arisen (Arts 115(2) and 126 (2) NCPC138), but this case is already covered by the aforementioned rules of the Regulation. 101 In cases where protective competence rules apply, the prorogation through entering an appearance applies only if the court draws attention to the weaker party which is sued in an incompetent court (this means another court than the courts of the Member State where the weaker party has its domicile) of her right to challenge the court competence and to the consequences of entering an appearance without challenge (Art. 26(2) Brussels I bis).

VI. Brief concluding remarks The regulatory competition proved its benefits through the new Romanian Civil Code. However, with criticism being still vivid upon its regulating methods and the resulting provisions, it is difficult to draw a comprehensive conclusion, though some brief summarising remarks may still be made. First, the new Civil Code is surely of more use then the previous had become in its late life. Referring to standard contract terms, the new provisions are far more adequate to the needs of day-to-day life. The samples from the statutory regime offered here serve, to a great extent, as a link toward the common European understanding of some legal institutions. Thus, the new provisions, with all their shortcomings and drawbacks still contribute to a certain minimal uniformity of the judicial review of B2B contract terms. 103 On the other hand, as we have noticed, some decent protection rules for B2B unbalanced contracts now exist as part of the Civil Code and of some connected laws starting from the rules on inclusion of standard terms in contracts, of special consent required for the inclusion of specific imbalanced terms, for typical situations of conflicting terms, rules of interpretation and even rules provided for an internal content of unfair terms in B2B contracts. The results presented here, severely restricted for the doctrine, have focused on case law which is in its phase of stabilisation. 102

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M. Spain* Bibliography: Agüero Ortiz, '¿Cambio de doctrina del Tribunal Supremo respecto a la aplicación de la ley de usura a los intereses moratorios?’ Center for Consumer Studies, www.uclm.es/centro/cesco; Alba Ferre, ‘El reconocimiento del principio de confianza legítima como nuevo principio del Derecho contractual europeo’ in: Llamas Pombo (coord.), Congreso Internacional de Derecho Civil Octavo Centenario de la Universidad de Salamanca (Ars ivris 2018) 57–71; Albiez Dormann, ‘Los parámetros de control de las cláusulas suelo en préstamos bancarios con empresarios en la jurisprudencia reciente’ (2017) 7 Revista Doctrinal Aranzadi Civil-Mercantil 67–96; Cámara Lapuente, ‘Control de cláusulas predispuestas en contratos entre empresarios’ Almacén de Derecho (27 June 2016); Miranda Serrano, ‘Cláusulas limitativas y sorprendentes en contratos de seguro: protección de las expectativas y el consentimiento de los asegurados’ (2017) 761 Revista Crítica de Derecho Inmobiliario 1151–1196; Pertíñez Vílchez, ‘Buena fe ex art. 1.258 cc y nulidad de las cláusulas suelo sorpresivas en contratos de préstamo con adherentes empresarios’ (2016) 4 InDret 1–21.

Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... 1. General rules................................................................................................ 2. The most current case law ....................................................................... 3. Relevant specific provisions in B2B contracts ..................................... III. Requirements and legal consequences ....................................................... 1. Control of standard terms ........................................................................ a) General terms......................................................................................... b) Particular rules of interpretation ....................................................... c) Incorporation control........................................................................... d) Content control: possibilities.............................................................. 2. The law of repression of usury................................................................ a) Application ............................................................................................. b) Requirements ......................................................................................... c) Consequences......................................................................................... IV. International application ...............................................................................

mn. 1 12 12 18 20 29 31 31 34 35 46 66 66 67 70 72

I. Overview In Spanish law, the importance of the basic principle of autonomy of the will in 1 contract law does not prevent the Civil Code (Código Civil) from establishing traditionally mandatory rules for judges to be able to review the content of a contract when there is an intolerable imbalance between the rights and obligations of the parties. However, according to the liberal philosophy at the time the law was drafted, these rules refer to very specific assumptions and are very limited. The principle of autonomy of the will is based on the equality between parties that is 2 presumed in a private contract. The actual non-existence of that equality was already addressed by our legislators at the beginning of the last century. For this reason, standards were created to correct the initial imbalance and ensure that the contract is freely agreed to by the parties. * This essay is part of the Research Project DER2017-86017-R, ‘Obstáculos a la movilidad de personas en los nuevos escenarios de la UE’, awarded by the Ministerio de Economía, Industria y Competitividad, under the terms of article 37 of Ley 14/2011, of 1 June (BOE nº 131, 2-VI-2011).

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So when one contracting party is stronger than the other, the legislator provided mandatory rules preventing the first party from obliging the second party to accept terms that would not be expected to be accepted in a more balanced position. In Spanish law there have been many regulations created for this purpose since the Law of 23 July 1908, on the repression of usury1. The widespread practice of mass contracting and the use of standard terms has made it much more necessary to rebalance the position of the parties. The courts had to deal with this problem even before there were specific statutory regulations for controlling the general terms of contracts. There is no doubt that it is in the consumer field where most changes to traditional contractual rules have been made in order to alleviate the informational and economic disadvantages consumers and users face when dealing with traders. Especially strong controls have been established in the field of contracting in terms of balancing the rights and obligations of the parties. Within this, declaring unfair terms null is especially important. Unfair terms are clauses which, contrary to the requirement for acting in good faith, cause significant imbalance in the parties’ rights and obligations arising from the contract, to the detriment of the consumer (Art. 82 Law 1/2007, General Law for the Protection of Consumers and Users2). This control, especially in bank contracts, has led to many harmful clauses being removed from contracts so that consumers have had their economic burdens reduced, and even had recognition of their rights to recover money already paid to financial entities. However, contracting by means of general terms, which is really the origin of the possibility of a contract being more expensive for one party than the other, is not only used in B2C contracts but also in contracts between professionals. This means that at least one of the two assumptions that in many cases justify the different treatment of the consumer (adhesion contracts and real inequality between the parties) also occurs when both contracting parties are businesses and the contract terms are not negotiated. The latter can occur in such a way that it seems as though the protection should be the same according to criteria of fairness. We will see that this does not happen under Spanish laws because the control of unfair terms only applies in contracts with consumers and more and more people are demanding the system be revised in that sense. In Spain, a consumer is any natural person acting for purposes outside his or her trade, business, craft or profession and also any non-profit legal person or entity without legal personality acting in a field unrelated to a trade or profession (Art. 3 General Law for the Protection of Consumers and Users). The definition of a natural person consumer currently matches the definition of a consumer in the EU consumer directives. It is different to the concept set out in Law 26/ 1984 (no longer in force), which states that the consumer is the final recipient of goods or services. Accordingly, somebody acquiring goods or services for their production process is not a consumer, whereas a trader, or a professional, can act as a consumer depending the circumstances. The ECJ judgment in Costea3 states that a lawyer who concludes, with a natural or legal person acting for purposes relating to his trade, business or profession, a contract which particularly as it does not relate to the activity of his firm, is not linked to the exercise of the lawyer’s profession, is, visà-vis that person, in the weaker position referred to in paragraph 18…4 1

Ley de 23 de julio de 1908, de la Usura. Real Decreto Legislativo 1/2007, de 16 de noviembre, por el que se aprueba el texto refundido de la Ley General para la Defensa de los Consumidores y Usuarios y otras leyes complementarias. 3 CJEU, C-110/14 Costea ECLI:EU:C:2015:538. 4 ibid., para. 26. 2

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Paragraph 18 refers to an unequal position. It also states that Article 2 (b) of Council Directive 93/13/ECC of 5 April 1993 on unfair terms in consumer contracts must be interpreted as meaning that a natural person who practices as a lawyer and concludes a credit agreement with a bank, in which the purpose of the credit is not specified may be regarded as a ‘consumer’ within the meaning of that provision, where that agreement is not linked to that lawyer’s profession.5 The legal changes of the definition of a consumer in Spanish laws have not put to rest all questions. For example there is the so-called ‘mixed consumer’, the person acquiring goods or services partly for private use and partly for their profession (‘dual purpose’). In its judgment on 5 April 2017 the Supreme Court (Tribunal Supremo) concludes that it is necessary to identify what the relevant purpose is, following the European rules.6 However, recital 17 of the Consumer Rights Directive7 states that in the case of dual purpose contracts, where the contract is concluded for purposes partly within and partly outside the person’s trade and the trade purpose is so limited as to not be predominant in the overall context of the contract, that person should also be considered a consumer. The legal person of a consumer is also problematic. For instance, it is difficult to decide whether a trust in a financial entity that buys things for their offices is acting outside of its professional activity, or an association that buys merchandising. In B2C contracts there is no problem for the application of the consumer protection rules even though no inequality existed in a specific case; just as it is not disputed that traders and professionals are not protected by consumer regulations. Only the dissenting opinion in the Supreme Court judgment of 3 June 2016 does not agree with the need for different treatment for a natural person making a contract and a trader when there is a similar imbalance.8

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II. Regulatory framework 1. General rules Art. 1255 Civil Code places law (imperative law), morals and public order as limits on 12 the autonomy of the will. These are very imprecise limits and only very occasionally allow the content of a contract to be reviewed or declared ineffective. For its part, Art. 1256 states that the validity and performance of contracts cannot be left to the discretion of one of the contracting parties. Good faith as a rule of action in the contractual field is included in Art. 1258 Civil 13 Code: Contracts are perfected by mere consent, and since then bind the parties, not just to the performance of the matters expressly agreed therein, but also to all consequences which, according to their nature, are in accordance with good faith, custom and the law.

Art. 57 Commercial Code (Código de Comercio) states The contracts of commerce will be executed and fulfilled in good faith, according to the terms in which they were made, without distorting with arbitrary interpretations the 5

ibid., para. 30. N. 224/2917. 7 Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights [2011] OJ L304/64. 8 N. 367/2016. 6

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As a general rule of law, we find in Art. 7.1 Civil Code: ‘Rights may be exercised in accordance with the requirements of good faith’. We will see that the use of these provisions is currently being proposed to review the content of B2B contracts. Art. 1288 Civil Code has been a very effective rule for judges to control general terms, even before the statutory approval of specific rules. The provision states that the interpretation of obscure terms in the contract must not favour the party that caused the obscurity. Examples in B2B contracts include rulings of the Supreme Court from 7 April 19929; 27 September 199610 and 31 October 199611 in insurance contracts, and the ruling of 4 October 199412 in a loan contract. As for specific provisions that render certain obligations enforceable on a general level in the contracts, we can include the nullity of waiving liability arising from wilful misconduct (Art 1102 Civil Code). For obligations with a penal clause, the penalty may be modified by the judge when the main obligation has been partially or irregularly fulfilled by the debtor (Art. 1154). For its part and as a specific application of the principle of good faith, the last paragraph of Art. 1475 Civil Code – in the rules of sale – states that the contracting parties may increase, decrease or waive liability for dispossession but Art. 1476 establishes that any agreement that exempts the seller from liability if they acted in bad faith is void. As for the liability for the warranty for hidden defects or flaws of the thing sold, the seller shall not be liable if it has been stipulated but only if unaware of hidden defects or flaws of the thing sold (Art. 1485). On the other hand, if the sale is commercial – of things to resell – if there is agreement, the seller will not be liable for dispossession or hidden defects of the thing sold (Art. 345 Commercial Code). In addition, in some especially paradigmatic cases the application of general civil law regulations has been useful for protecting adherent non-consumers. This was the case, for example, with the selling of particularly complex, high-risk financial products that were, for some years, offered by banks to their customers without sufficient information. Many of those contracts were annulled by the courts on the legal basis of the error as a defect in the consent. In many cases the customers were businesses.13 The Supreme Court, in this sense, considered the fact that the client was a business did not mean that they were experts in these complex financial products.14 We have no doubt that the perspective of consumer protection has had much to do with this. The problem is that even when the error is proven – which is not easy according to our case law – an adequate remedy will only be obtained when the weaker party is interested in the total nullification of the contract. This would not happen in general in loan contracts because they would have to return to the lender all that remains of the amount lent, which could be a significant amount of money. The most important legislation for the control of standard terms in B2B contracts is the Law on General Terms in Contracts15 (hereinafter ‘General Terms Law’), which established a dual control for the standard or general terms of contracts: incorporation 9

Rec. 379/1990. Rec. 2731/1992. 11 N. 886/1996. 12 N. 865/1994. 13 Supreme Court Judgments of 20 January 2013, N. 840/2013; 9 December 2015, N. 674/2015; 3–4 February 2016, N. 24–26/2016; 8 April 2016, N. 235/2016; 30 September 2016, N. 579/2016; 5 and 7 October 2016, N. 607/2016. 14 See for example, the Supreme Court judgment of 9 May 2017 (N. 279/2017). 15 Ley 7/1998, de 13 de abril, sobre condiciones generales de la contratación. 10

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control and content control. Incorporation control is the same for B2B contracts and B2C contracts. The general terms are binding when the adherent is able to know of their existence and their content before concluding the contract. In addition, the general terms will only be part of the contract if they are drafted in a manner conforming to the criteria of clarity, accuracy and simplicity. For content control of general terms the legislation establishes that general terms that infringe the provisions of that legislation or any other rule ordering or prohibiting certain conduct, to the detriment of a party to the contract, shall automatically be void, save in so far as they make separate provision for cases of breach (Art. 8).

2. The most current case law Control of unfair terms only applies in B2C contracts vis-à-vis consumers: businesses 18 and adherent professionals are left out. But it seems unfair that in an unbalanced situation between the parties – which justifies the rules of consumer protection – and in a relationship with non-negotiated terms, that these terms are valid as the adherent party could not really understand their legal and financial consequences. In those cases there is a lack of the transparency that the Supreme Court demands in the control of unfair terms. It may be a small business owner, a professional or craftsman, with little financial knowledge and it might even be the only contract of that kind, such as a trader buying a site for their business. The business is in the same position as consumer in that case. This is probably why the Supreme Court has attempted to find a route to reach a 19 declaration of nullity of non-negotiated terms in a contract between traders. However, it has referred to general civil and commercial legislation, the general limits of Art. 1255 Civil Code and the conditions imposed by the mandatory standards expressly mentioned in Art. 8 General Terms Law. The application of these rules is not proving effective.

3. Relevant specific provisions in B2B contracts There are sectoral rules that apply in B2B contracts because any contracting party is 20 protected. The aforementioned Law of 23 July 1908, on repression of usury, applies to both civil and commercial loan contracts, and also to similar contracts whatever the form of the contract and the guarantee of compliance16. The judgment of 12 December 2014 says that Within the specific application of the Usury Law, it should be noted that its normative configuration, with a clear projection in the general controls or limits to the negotiating autonomy of article 1255 of the Civil Code, especially regarding the consideration of immorality of usurious or leonine lending, presupposes a serious injury to the interests subject to protection that, unlike the protection provided by the regulations of consumption and general conditions, is projected as much on the level of the patrimonial content of the loan contract, on the basis of the notion of unjustified economic injury or damage, as in the causal level of the structural validity of the contract entered into.17

Despite this, the truth is that its application to contracts between businesses is not comparable to its application to B2C contracts. Insurance legislation,18 which is considered a pioneer in the protection that is 21 currently provided to consumers, protects any insured party. Its third article establishes 16 On the contrary, the law does not apply to lease-back contracts whose autonomous cause is considered different from a loan (STS 2 February and 8 June 2006, No. 10 and 601/2006). 17 N. 715/2014. 18 Ley 50/1980, de Contrato de Seguro (Insurance Contract Law 50/1980).

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that the general terms, which in no case may be harmful to the insured, must be included by the insurer in the insurance proposal if there is one, and necessarily in the contract policy or in a complementary document, that the interested party will sign and will also be given a copy of. The general and particular terms will be written clearly and precisely. The terms limiting the rights of the insured will be highlighted in a special way and must be specifically accepted in writing. In addition to a formal control that affects all the general and particular terms that have to be ‘written clearly and precisely’ and a special or reinforced control that affects the limiting terms of the rights of the insured, there is a third control for avoiding harmful or unfair terms. The precept says specifically that the general terms cannot be ‘harmful’. In case law and in legal theory it is understood that injurious terms are those that affect the essential elements of the contract and that by their surprising or unexpected nature denaturalise the content of the contract in accordance with the legitimate expectations of the adherent party taking into account the nature thereof in accordance with its regulation and with its uses. Hence the judgment of the Supreme Court from 22 April 2016 that harmful clauses are those that ‘…significantly and disproportionately reduce the right of the insured, emptying it of content, so that it is practically impossible to access the coverage of the loss. In short, they prevent the effectiveness of the policy’19. For that reason, specifically because they have not really been consented to or the consent has to be considered flawed, those clauses must be considered void.20 Banking legislation, specifically the transparency order (Order EHA/2899/2011), which affects anyone who enters into a relationship with a financial institution, contains rules to guarantee an appropriate level of protection for customers of credit institutions, through the implementation of transparency measures in the provision of banking and financial services (Art. 1). It establishes, among other measures, the pre-contractual and contractual information that must necessarily be provided free of charge to the customer of the banking services with specific provisions for deposits, credits and mortgage loans. In addition the regulation of the Securities Market after the transposition of the MiFID Directive21 includes obligations for information in the contracting of investment products and services. The Bank must provide complete, sufficient and understandable information on the scope of the possible consequences of the agreement22 which, if the customer is a retailer, translates into an obligation to act whose proof corresponds to the bank. Failure to comply with all of these obligations may be important when determining whether the content of the contract is binding or not. Legal doctrine23 also gives us other examples of rebalancing the equality of the parties in purely commercial contracts. Law 15/2009 of 11 November 2009 on the contract of land transport of goods24 voids agreements that exclude the rules of revision of the price of road transport based on the price of diesel oil when it has clearly abusive content to the detriment of the carrier. The term will have no effect if it is contained in general 19

N. 273/2016. See Miranda Serrano, 1151–1196. 21 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments [2014] OJ L173/349. 22 Judgment of the Supreme Court of 23 September 2016, N. 562. 23 Cámara Lapuente, available online under https://almacendederecho.org/control-clausulas-predispuestas-contratos-empresarios/ (25 October 2019). 24 Ley 15/2009, de 11 de noviembre, del contrato de transporte terrestre de mercancías. 20

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terms (Art. 38.4). For its part, Art. 9 of Law 3/2004 of 29 December 2004 to establish measures to combat late payment in commercial transactions,25 declares void contractual terms or practices related to the date or payment deadlines, interest on delays or compensation for collection costs when they are manifestly abusive to the detriment of the creditor taking into account all the circumstances of the case. Law 5/2019, regulating real estate credit agreements26 has, among others, recently 27 been approved. The law transposes the Mortgage Credit Directive27. It applies to credit agreements which are secured either by a mortgage or by another comparable security on residential immovable property when the borrower or guarantor is a natural person even if they are not a consumer. The rules are mandatory. The law obliges business conduct when providing credit so the creditor, credit 28 intermediary or appointed representative must act honestly, fairly, transparently and professionally and must provide information free of charge to the customer. They are also obliged to assess the consumer’s creditworthiness. Finally, the law establishes sanctions for28 breach of obligations.29 The law also regulates issues such as foreign currency loans, variable rate credit, early repayment, acceleration clauses30 and default interest.31

III. Requirements and legal consequences The Unfair Terms Directive was transposed into Spanish legislation by Law 7/1998 of 29 13 April 1998 on General Terms in Contracts (hereinafter ‘General Terms Law’). The law also modified Art. 10 General Law for the Protection of Consumers and Users of 19 July 1984 (26/1984) and introduced a new Art. 10 bis to define unfair terms and to declare them null. The General Law for the Protection of Consumers and Users has been replaced by a 2007 text (1/2007) and Art. 10 became Art. 81. It can be seen, therefore, that the general protection of the equality of the 30 contracting parties is linked to the specific protection of consumers. At first glance it may appear surprising that a consumer directive, of unfair terms, has been incorporated into Spanish law by means of a law applicable to all contracts, and not only contracts with consumers: in the statement of reasons the law says that the protection of the equality of the parties is a necessary basis of the justice of contractual content and it constitutes one of the mandates of the policy in the field of economic activity. Therefore, the law aims to not only protect the legitimate interests of consumers but also of anybody who making a contract with a person using general terms in their contractual activity. 25 Ley 3/2004, de 29 de diciembre, por la que se establecen medidas de lucha contra la morosidad en las operaciones comerciales. 26 Ley 5/2019, de 15 de marzo, reguladora de los contratos de crédito inmobiliario. 27 Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property [2014] OJ L60/34. 28 The borrower will have the right to convert the loan to an alternative currency according to the provisions of the law (Art. 20). But if he is not a consumer he could conclude an agreement with the lender to limit the exchange rate risk related to he loan contract. In addition, the lender must periodically report to the borrower the evolution of the debt and his right to convert the loan to an alternative currency. 29 The interest rate cannot be modified to the detriment of the borrower during the term of the contract, unless otherwise agreed. Furthermore, a lower limit of the interest rate cannot be established (floor clause) (Art. 21). 30 It will occur automatically in case of non-payment established in the rule. 31 It will be the remunerative interest increased by three percentage points.

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1. Control of standard terms a) General terms. According to Art. 1 General Terms Law, general terms are clauses imposed by one of the parties incorporated into a plurality of contracts. Their material authorship, external appearance, extension and any other circumstances are irrelevant. 32 The fact that certain elements of a clause or that one or more isolated clauses have been negotiated individually does not exclude the application of the General Terms Law to the rest of the contract if the general evaluation leads to the conclusion that there is an adhesion contract. 33 The proof that one or several terms have been negotiated falls to the party who drafted the terms. 31

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b) Particular rules of interpretation. When there is a contradiction between the general terms and the particular terms stipulated in a contract, the particular terms will prevail over the general terms, unless the general terms are more beneficial to the adhering party. Questions in the interpretation of obscure general terms will be resolved in favour of the adherent party.

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c) Incorporation control. The General Terms Law established two controls for standard or general terms of contracts: incorporation control and content control. Both controls affect contracts between sellers or suppliers (traders in general32) and contracts between a seller or supplier and a consumer. Incorporation control is the same for B2B contracts and B2C contracts, the general terms will be binding when the adherent party is able to know of their existence and content before concluding the contract. In addition, the drafting of general terms shall comply with the criteria of clarity, accuracy and simplicity. Otherwise the clauses will not be part of the contract. As for more specific rules, in written contracts general terms will become part of the contract when the adherent party accepts their inclusion and the contract is signed by all contracting parties. In accordance with Art. 5 General Terms Law, acceptance of the general terms of a contract cannot be said to have occurred when the offeror has not expressly informed the adherent party about their existence and has not provided a copy. The adherent party can demand that a notary – for contracts concluded before a notary – not transcribe the general terms in the contract but instead incorporate them as an annex. In this case, the notary will verify that the adherent party has full knowledge of their content and accepts them. It must be said that, despite this rule, notaries often do not report the real economic consequences of the clauses. When a contract is not formalised in writing and the offeror receives a receipt confirming the counter-performance received, it will be sufficient to announce the general terms in a visible place within the place where the business is carried out. Likewise, it will be sufficient to insert the terms in the documentation that accompanies the contract or, in any other way, guarantee the adherent party the effective possibility of knowing their existence and content at the time the contract is agreed. In any case, the wording of the general terms must conform to the criteria of transparency, clarity, specificity and simplicity. As a result of the aforementioned and in accordance with Art. 7, general terms that the adherent party has not had a real opportunity to understand completely at the time

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32 A trader means any natural person or any legal person who is acting for purposes relating to his trade, business, craft or profession, cf. Art. 2 No. 2 EU Consumer Rights Directive.

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the contract is concluded, or terms that have not been signed where necessary, or terms that are illegible, ambiguous, obscure and incomprehensible will not be incorporated into the contract. Obscure terms will be valid when they have been expressly accepted in writing by the adherent party and comply with the specific regulations about transparency in relevant regulations (for example, banking regulations). The part of the contract affected by non-incorporation will be included in accordance 43 with the provisions of Art. 1258 Civil Code and provisions on interpretation contained therein. In order to find judicial application of control of incorporation in B2B contracts, we 44 must resort to the provincial courts, in which few cases appear. We can note the judgment of the Provincial Court of Álava of 10 July 201733. The contract was a mortgage loan guaranteed to a butcher’s shop that included a so-called floor clause (‘Clausula Suelo’34), but what was really considered was the lack of transparency such as a lack of information about the operation and the economic consequences of the application of a clause which was in principle, known and understandable (Arts. 5, 7 and 8 were applied). This possibility will be addressed below.35 But it is necessary to say that the judgement of the Provincial Court was annulled by the Supreme Court in its judgement of 12 July 2020.36 On the contrary, the judgment of 12 April 201737 in the Provincial Court of La Rioja noted that the control of incorporation into B2B contracts is limited to analysing whether the wording of the general clauses meets the criteria of transparency, clarity, specificity and simplicity provided by Art. 5.5 of Law 7/1998 and if the requirements established in Art. 7 of that same Law are met. In addition, the resolution of the Provincial Court of Madrid on 7 November 2017 relating to an insurance contract signed by a company decreed the non-inclusion of a clause prejudicial to the insured because it was ‘illegible and incomprehensible’ (it was included in a rudimentary photocopy).38 Finally, also the judgment of the Provincial Court of Girona of 19 July 201939 declared the nullity of the floor clause included in a mortgage loan between a financial entity and a limited company. The clause was incorporated unexpectedly at the time of signing the contract that had previously been negotiated. The ruling says that although the public document with the floor clause was read by the notary, the contract extension was why it went unnoticed. The Supreme Court in its judgement of 11 March 2020 states that its case law does 45 not limit the incorporation control to the grammatical comprehension and declared void a floor clause incorporated into a commercial loan requested to acquire a taxi license. However, the main reason was that the borrower could not really know the clause 8 (Articles 5 and 7 of the General Conditions Law were applied and the court also declared that the Order EHA 2899/2011 had not been respected). d) Content control: possibilities. As stated above,40 restrictions on the content of the 46 general terms in B2B contracts are limited, in Art. 8 General Terms Law, to the provisions of the Law itself or other mandatory or prohibitive rules. Law 1/2007 says that any contractual term which has not been individually nego- 47 tiated shall comply with the requirements of good faith and fair balance of rights 33

N. 335/2017. The interest rate may not fall below a contractually established limit. 35 See mn. 49 et seq. 36 N. 296/2020. 37 N. 62/2017. 38 N. 381/2017. 39 N. 517/2019. 40 See mn. 35 et seq. 34

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and obligations between the parties and, in any case, unfair terms are excluded. Art. 82 says that unfair terms are clauses that, contrary to the requirement for good faith, cause a significant imbalance in the parties’ rights and obligations arising from the contract, to the detriment of the consumer. Art. 83 provides that unfair contractual terms shall automatically be void and deemed not to have formed part of the contract. For those purposes, having heard the parties, the court shall rule that the unfair terms included in the contract are invalid, though the contract shall continue to bind the parties to the remaining terms if the contract can continue without the unfair terms. However, this rule does not apply to B2B contracts. For its part, the preamble to the General Terms Law says that ‘this does not mean that in the general terms between professionals there can be no abuse of a dominant position. But such a concept will be subject to the general rules of contractual nullity’, although it is not regulated in the subsequent provisions. The content of contracts can therefore be controlled, but in such ambiguous terms that the rule has not had any practical effect. Spanish legal scholarship that has seen the most work on this matter shows how Supreme Court case law has not tended to protect businesses in this area.41 For the control of unfair terms in B2C contracts, Supreme Court case law has added transparency control to the initial incorporation and content controls established by the General Terms Law. Terms that have not been individually negotiated shall be void when they are not transparent despite having fulfilled the formal requirements of incorporation (intelligible clauses). A term is not transparent when the consumer is not able to discover all of the term’s legal and financial consequences. According to an interpretation of Art. 4 Unfair Terms Directive, this control is possible even when the term affects the main subject of the contract.42 This doctrine was first introduced by the judgment of the Supreme Court on 9 May 201343 and was later repeated in the judgment of 24 March 201544, both of which referred to floor clauses in mortgage lending contracts. In its judgment of 9 May 2013 the Supreme Court held that in the contract in dispute the term establishing a minimum rate below which the variable rate of interest could not fall was void. This term was grammatically intelligible to consumers but the requirement of substantive transparency was not satisfied. For the Supreme Court, banking institutions had not provided the necessary information to borrowers about the practical consequences of the terms. Among other shortcomings, forecasts about possible eventualities depending on changes in interest rates were not provided. One can say that since the judgment of 3 June 201645, control of general terms in consumer contracts has three posibilities. The first, incorporation control, in Arts 5 and 7 General Terms Law and also in Art. 80 Law 1/2007. If this test is not passed, the term will not be in the contract. Secondly, it is necessary to pass the content test, which in B2C contracts means the invalidity of unfair terms. According to EU case law, this test can and should be carried out by judges ex-officio and the assessment of the unfair nature of the terms shall not relate to the definition of the contract’s main subject matter, in so far as these terms are in plain intelligible language (Art. 4.2 Unfair Contract Terms Directive). The third control, transparency control, looks at whether 41

See Cámara Lapuente. Really Art. 4 says that the ‘assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other, in so far as these terms are in plain intelligible language’. 43 N. 241/2013. 44 N. 139/2015. 45 N. 380/2016. 42

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the terms related to the main subject of the contract have been accepted by the consumer. This means that the consumer needs to know the legal and financial consequences of the contract. Since the ruling of May 2013, the question has been raised of whether in B2B contracts the adherent party can also be protected when the legal and economic consequences of the transaction are not clear, and initially the answer is no. The Supreme Court clearly states that an entity that acts in the for-profit business sector is not protected by consumer legislation on transparency and unfair terms.46 In the June 2016 case the plaintiff had entered into a mortgage loan agreement to finance the acquisition of a location for a pharmacy. In the judgment of 30 January 2017, the plaintiff, who requested an abusive clause be rendered void, was a small, limited company providing car parking. The plaintiff alleged that there was abuse of a dominant position by the financial institution and that Arts 1256 and 1258 Civil Code must be applied. In the first instance, the Court (Huelva Commercial court) dismissed the petition considering, among other things, that the claimant was not a consumer. However, the Provincial Court agreed with the plaintiff because they said that the lender did not comply with the obligations of transparency and litigation clauses are contrary to contractual good faith in violation of Art. 1258, which causes an economic imbalance between the rights and obligations of the parties. However, the argument is debatable from the minute it starts by considering the plaintiff a consumer. The Supreme Court decision is a consequence of the position of the majority of the Court members that consider that the transparency control as unfair terms control47. Thus, it can only work for consumer contracts. The Supreme Court has not only clearly excluded in general the application of control of abusive clauses to B2B contracts but has also expressly said that the approximation between transparency and unfair terms does not allow transparency control for B2B contracts. Neither the regional nor national legislators have taken the step of offering a special mode of protection to nonconsumers, beyond referral to general civil and commercial legislation in respect to good faith and fair balance between benefits to avoid situations of contractual abuse.48 And that is not the courts’ responsibility, the configuration of a ‘tertium genus’ that it is not legislatively established, given that it is not a legal loophole that must be replaced by analogy, but a legislative option that, in terms of hiring terms, differentiates only between consumer and non-consumer parties. The fact that the legal system leads effectively to that difference in treatment is what has led some authors to describe it, in relation to the floor clauses, as ‘imperfect, unfair and unsatisfactory’49. Regardless of the above, there are other ways to protect the adherent who is not a consumer in the absence of transparency. First, we have the separate opinion in the judgment of 3 June 201650. Although it does not question the final decision – the disputed 46

Judgment of 3 June 2016 (N. 367/2016) and of 30 January 2017 (N. 57/2007) Cámara Lapuente criticises this identification. On the one hand, he considers that German doctrine and case law are followed without the legal anchoring provided by the legal system of that country. On the other hand, that the thesis is not clear from the Directive and nor has it been supported by the case law of the Court of Justice. 48 Specifically, Art. 1258 Civil Code stated ‘Contracts are perfect by mere consent, and since then bind the parties, not just of the matters expressly agreed therein, but also to all consequences which, according to then nature, are in accordance with good faith, custom and the law’ and Art. 57 Commercial Code that ‘The contracts of commerce will be executed and will fulfil in good faith, according to the terms in which they were made, without distorting with arbitrary interpretations the straight, proper and usual sense of the spoken or written words, nor to restrict the effects that naturally derive from the way with that the contracting parties have explained their will and contracted their obligations’. 49 See Albiez Dormann, 67–96. 50 N. 367/2016. 47

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term had been negotiated – it does not agree with the idea of not extending transparency control to B2B contracts with general terms, especially to SMEs. In that opinion, which the judge repeats in a later dissenting opinion51, the law does not expressly prohibit an extensive interpretation in that sense. He considers the transparency requirement to currently be a guideline for general action to achieve justice which affects all the legal norms of coexistence. It constitutes a legal principle that includes economic public order and it must exercise an information function on the matter it affects. Therefore in contracts, especially with general terms, in which transparency is required by the applicable regulations on clarity, simplicity and specificity of the pre-written terms – Art. 4(2) Unfair Terms Directive and Art. 80.1 Law 1/2007 – the offeror has a prior and special contractual duty of transparency. This obligation does not exclude or replace the duty of formal or documentary transparency but rather controls the compliance ‘of this special duty of real understanding in the course of the commercial offer and of its corresponding serial regulation’. So according to the judge, if the consequences of the function of a term are not understandable, then it must be void on the basis of the principle of transparency. He concludes by defending the extension of the regulatory concept of transparency to contracts between commercial parties or professionals, ‘its technical specification as a control of legality’, although he leaves the door open for it to be articulated as transparency control or as incorporation control. In my opinion the result of this thesis is positive if there is a real inequality between the parties to an adhesion contract even if one of them is not a consumer. But the extension of transparency control through the courts seems excessive if it means resorting to principles in order to overcome the lack of a norm when there is no legal loophole gap that justifies recourse to the ‘iuris’ analogy. It seems more feasible to include transparency in the control of incorporation. We have already said that the General Terms Law is also applicable to B2B contracts and that it establishes a formal incorporation control. It is a law which relates to a different form of contracts to traditional negotiated contracts. Without denying the principle of the autonomy of the will, it is evident that not all of the content of the contract that is agreed is really desired or even known by the adherent, without prejudice to the fact that there must be a real possibility of knowing it. If it were not so, that principle would be totally distorted. With this law, an option to control transparency in the contracts we are studying would be to combine transparency with incorporation control. This has been suggested by legal scholars and, as we have seen, by the Judgment of the Provincial Court of Álava of 10 July 2017. However it is not currently the line of the Supreme Court. Let us remember that this last judgement was annulled by the Supreme Court in its judgment of 12 June 2020. What the Supreme Court does seem to consider is that there must be an examination of whether, contrary to good faith, there is an imbalance between the positions of the parties. In fact, the judgments of 3 June 2016 and 30 January 2017 seem to draw attention to that possibility. Both judgments show that if a consumer does not intervene, the terms cannot be abusive. However, the Supreme Court also shows that it is necessary to reject the situation that would result from trying to take advantage of the predisposition, imposition and lack of negotiation of terms that harm the adherent party if the known content, according to the nature and functionality of the contract, is modified covertly. Specifically in relation to floor clauses, the judgment of 3 June 2016 raises the possibility that there may be terms that must be excluded from the contract by 51

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contradicting the agreement of a variable interest rate with a limitation so unusual that ‘the adherent party could not have reasonably foreseen’. The judgment alludes, in this sense, to existing case law in relation to insurance contracts. And so, to estimate the concurrence of those circumstances which the adherent party will have to prove, it will be necessary to see the level of information provided …, and the diligence used by the adhering borrower to understand the economic and legal consequences of the loan and the possible future effects of the general condition discussed on the cost of the loan. Required diligence to the adherent businessperson that will depend, to a great extent, on their subjective circumstances, such as legal-mercantile personality, business volume, corporate structure, experience, financial knowledge, advice, etc.). This supposes a change of criterion with respect to that established by the Court itself 62 in the judgment of 30 April 2015 in which it denied the possibility of appealing to the Civil Code and specifically to Art. 1258 to declare a clause contrary to good faith void. The judgment says that Article 1258 contains rules of contract integration, specifically that relating to good faith, so that in the fulfilment and execution of the contract can be determined what has been called the natural content of the contract. But based on this precept it cannot be claimed that it can declare the nullity of certain general terms that should be removed from the contractual regulations. The principle of transparency, as a general principle of public order, can be linked to 63 the (broader) principle of legitimate expectations present in European contract law. But both can in turn be linked to the principle of contractual good faith set out in the Civil Codes. And this is what legal scholars have pointed out, showing that the case law of the Supreme Court highlights the important role played by the principle of good faith.52 Up to now the control of content in B2B contracts based on the criteria in 64 Art. 8 General Terms Law has had limited, almost zero, practical effect. This is recognised in the judgment of 30 January 2017 and the Court has said on occasion that ‘the requirement of clarity, specificity, simplicity and direct comprehensibility of Article 7 b) of the General Law for the protection of consumers does not reach the level of requirement that we apply to the control of transparency in the case of contracts with consumers’53. The provincial courts have produced resolutions that speak of the possibility but have always concluded the validity of the contended terms because the court decided that the imbalance the borrower alleged (usually the cases are to do with loan contracts) did not exist.54 Until now, the precautions expressed by some authors do not seem necessary when they fear that in this way a control similar to that of transparency in contracts with consumers may be achieved.55 In addition, it does not seem appropriate to generalise, as the author does, that the case of the adherent consumer, the important thing is the activity of the other party and the information provided while in the case of adherent businesses what is important is their diligence (certainly, the author adds the information provided). It will depend on the case. We are more in agreement with Pertíñez that the diligence required of the adherent business in 52 Judgment of Supreme Court 1 September 2014 (N. 3860/2014) following the judgments of 11 December 2012 (N. 2525/2012) and 14 January 2014 (537/2013). See Alba Ferre, 61. 53 Judgment of 15 December 2015 (N. 688/2015). 54 Judgment of Albacete 13 March 2015 (AC/2015/608); 29 November 2013 (AC/2013/2295); La Rioja 12 April 2017 (635/2017) or Valencia 5 February 2018 (JUR/2018/72334). 55 See Pertíñez Vílchez, available under www.indret.com.

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the understanding of the content of the contract will depend on their circumstances, including ‘their volume of business, corporate structure, experience, financial knowledge, advice, etc.’. This was also said by the Supreme Court.56 We also agree that the closer personal circumstances of the business to those of a consumer, the more information they will require to be able to provide informed consent (the author gives the example of a freelancer without financial experience who applies for a mortgage loan to start up a business). 65 Just before closing this analysis, it comes to our knowledge that the Provincial Court of Valencia of 6 October 2020 (N. 1126/2020) annulled a floor clause in a loan arranged between a bank and a pharmaceutical company, applying the article 8 of the General Conditions Law (also 5). The Court considered the clause surprising (could not reasonably be foreseen) and contrary to good faith because before signing the contract at the notary's office, the incorporation of this clause had not been communicated to the parties.

2. The law of repression of usury 66

a) Application. Art. 1 of the Law of 23 July 1908 establishes that any loan contract that stipulates an interest rate noticeably higher than the normal money lending rate and manifestly disproportionate to the circumstances of the case is null. This is also the case when there are reasons to think that the contract has been accepted by the borrower because of a situation of distress, inexperience or having limited mental faculties. This open wording has allowed this Law to continue to be useful nowadays, since it allows the test of ‘interest rate noticeably higher than normal and manifestly disproportionate to the circumstances of the case…’ to be different amounts depending on the time and the situation.

b) Requirements. Although case law has always suggested that it is only applicable to remunerative interest and not to interest for delay given the different purpose of the latter57, recently the Supreme Court ruled that it affects both.58 The authors doubt, however, that one can speak of a case law change.59 68 When it comes to determining the interest rate limit that would be declared usurious, the judgment of 25 November 201560 says that the rate that must be taken into account is not the nominal rate but the annual equivalent rate (AER), which calculates the payments that the borrower must make to the lender, in accordance with legally predetermined standards. On the other hand, according to the same ruling, the interest rate it must be compared with is not the legal rate but the ‘normal money lending rate taking into account the circumstances of the case, resorting to the statistics published by the Bank of Spain on the basis of the monthly information provided by credit institutions’. 69 As for the manifest disproportionality to the circumstances of the case, it should be the credit institution that justifies the concurrence of exceptional circumstances that explain or justify the stipulation of much higher interest rates than the normal money lending rate in the transaction. The ruling says that 67

Generally, the exceptional circumstances that can justify an abnormally high interest rate are related to the risk of the operation. When the borrower is going to 56

Judgment of 18 January 2017 (N. 30/2017). See Judgment of the Supreme Court 2 October 2001, with doctrine subsequently reiterated in many others. 58 STS 2 December 2014. 59 See Agüero Ortiz, available under, www.uclm.es/centro/cesco. 60 N. 628/2015. 57

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use the money lent in an especially lucrative but high-risk operation, it is justified that whoever finances it also participates in the high expected benefits by setting a noticeably higher interest rate than normal. c) Consequences. If a transaction is determined to be usurious, the Supreme Court 70 has indicated that it would subjectively be considered illegal or immoral and in consequence, the borrower would not have to pay interest. In this way, if the amount delivered by the borrower were greater than the nominal 71 amount of the loan, the obligation to pay the amount received illegally would arise for the lender, in case it is claimed. If the loan is insured with a mortgage, the mortgage will also be void.

IV. International application The influence of consumer law in B2B contracts in Spain is conditioned by the uniform rules of private international law in the EU. Spanish courts rigidly apply the Rome I Regulation and the case law of the CJEU. In this way, commercial contracts other than contracts with consumers and passengers are subject to the general rules, without specific consideration of the size of one of the parties, particularly if such a party is a small or medium undertaking in comparison with the other. In fact, these general rules are applied even in cases of contracts with consumers when the professional does not pursue nor direct activities to the country where the consumer has habitual residence. These general rules of the Rome I Regulation are basically the freedom of choice under which the parties may choose any law to govern the contract. Whether a commercial party is weaker than the other party is not, in fact, a key issue in order to recognise the choice of law by the parties. For instance, the judgment of the Audiencia Provincial La Rioja of 13 October 201461 clearly admits the choice of Italian law and all the general terms of a contract although the general terms were in English and French. That the defendant argued misunderstanding of these languages was irrelevant. Maybe in some cases the absence of proof in foreign law is how Spanish courts apply some Spanish rules that could be considered more protective of a weak professional party. One case of interest is the Supreme Court judgment of 23 March 201562. In that ruling, contracts of distribution were governed by Swiss law, but the Supreme Court did not hesitate to apply Spanish rules in order to protect the distributor as the weaker party compared to the supplier, when the Swiss law has not been proven. Apart from cases of absence of proof under foreign law, it is true that some specific remarks could be made through the overriding mandatory rules or loi de police. Certainly Spain has some rules considered crucial for safeguarding its public interest and economic organisation. Thus, these provisions are applicable to any situation falling within their scope, irrespective of the law governing the contract. Maybe the main overriding mandatory rule in this sense is the General Terms Law. This legislation is obviously applicable when Spanish law is the law governing the contract. Such would be the case when choosing Spanish law, because the law governing the contract applies to the consent of the parties. It would also be the case of contracts governed by Spanish law under Art. 4 Rome I Regulation, in absence of a choice of law. 61 62

N. 252/2014. N. 140/2015.

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But apart from these cases, the General Terms law is applicable when the adherent party, who is the weaker party, has manifested consent in Spain, where the party has their habitual residence. In those cases, the legislation is applicable although the law governing the contract under Rome I Regulation is a foreign law. Notice that two requirements shall be met: habitual residence in Spain but also the manifestation of the consent in Spain. For instance, if the contract is concluded in Spain, but the adherent party does not have habitual residence in Spain, the General Terms Law is not applicable as loi de police. Similarly, if the adherent party has habitual residence in Spain but the contract is concluded abroad, this legislation is not applicable as loi de police. Both connecting factors, place of consent and habitual residence, are not easy to identify. Place of consent is difficult to determine when the parties are not present at the same time in the same place. Habitual residence is not easy to identify concerning legal persons. Unfortunately, the Act is silent in this respect. Nevertheless, the application of the General Terms Law as loi de police shall respect the international agreements signed by Spain. The judgment of the Tribunal Superior de Justicia of Cataluña of 25 March 201363 is a good example because it recognises an arbitration agreement which is valid under the New York Convention of 1958. The General Terms Law and the fact that the adherent party’s habitual residence was in Spain, where the consent was manifested (this issue was also unclear), were irrelevant. Apart from this general legislation about contracting general terms, we can find some specific rules in particular cases which basically relate to the choice of courts in the contract. Again EU rules contained in the Brussels I bis Regulation are rigidly applied in Spain. The free choice of courts is provided for by EU rules without limits other than the limits on consumers, workers and insurance. Nevertheless, some Spanish acts provide limits to the prorogation of jurisdiction in B2B contracts. For instance, Law 12/1992 about agency contracts64 determines that the court of the domicile of the agent has jurisdiction and any agreement of the parties in any other sense has no effect (additional disposition 2). This provision is based on the fact the agent is the weaker party, and it is the weaker party even though the agent is a professional. The question is whether this prohibition of agreement is applicable in international cases. Scholars have pointed out that this provision is not applicable to international cases. Firstly, the EU rules of the Brussels I bis Regulation have primacy in their application. Secondly, this Spanish provision is not based on the Commercial Agents Directive65. Thirdly, the provision actually does not expressly refer to international jurisdiction. In consequence, case law has reduced the application of this provision to local cases. 63

N. 46/2013. Ley 12/1992, de 27 de mayo, sobre Contrato de Agencia. 65 Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the member states relating to self-employed commercial agents [1986] OJ L382/17. 64

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N. Sweden Bibliography: Andersen/Runesson, ‘An Overview of Nordic Contract Law’ in: Håstad (ed.), The Nordic Contracts Act. Essays in Celebration of its One Hundredth Anniversary (Djoef Publishing 2015) 15–41; Bärlund, ‘Protections of the Weaker Party in B2B Relations’ in: Håstad (ed.), The Nordic Contracts Act. Essays in Celebration of its One Hundredth Anniversary (Djoef Publishing 2015) 83–106; Bernitz, Standardavtalsrätt (9th edn., Norstedts Juridik 2018); Bogdan, Svensk internatonell privat- och processrätt (7th edn., Norstedts juridik 2008); Dotevall, Avtal (Studentlitteratur AB 2017); Grönfors/Dotevall, Avtalslagen. En kommentar (5th edn., Wolters Kluwer 2016); Hauge, ‘Unfair Contract Terms in Nordic Contract Law’ in: Håstad (ed.), The Nordic Contracts Act. Essays in Celebration of its One Hundredth Anniversary (Djoef Publishing 2015) 157–178; Kötz/Zweigert, An Introduction to Comparative Law (3rd edn., OUP 1998).

Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... 1. Introduction................................................................................................. 2. Swedish Contracts Act............................................................................... a) Formation of contracts ........................................................................ b) Main concepts in the Swedish Contracts Act................................. c) The offer principle ................................................................................ d) Invalidity of promises .......................................................................... e) The doctrine of erroneous assumptions in Swedish law ............. f) The general clause in Art. 36 Contracts Act................................... g) Is Nordic contract law competitive as a choice of law? ............... III. Requirements and legal consequences ....................................................... 1. Formation and content of contracts ...................................................... 2. Standard contracts and terms.................................................................. 3. Inclusion of onerous or surprising standard contract terms............ 4. Interpretation of contract ......................................................................... 5. The fairness test in Swedish law ............................................................. 6. Protecting the weaker party in B2B contracts ..................................... a) Overview ................................................................................................. b) Examples ................................................................................................. c) Summary ................................................................................................. IV. International application ............................................................................... V. Summary...........................................................................................................

mn. 1 12 12 14 14 19 23 27 37 40 48 50 50 53 61 67 72 78 78 82 88 89 93

I. Overview The Scandinavian countries Denmark, Norway and Sweden are united by closely- 1 related languages and have for periods throughout history been politically connected in different combinations. The culture and trade of the Nordic countries have many similarities. At the end of the 19th century Denmark, Norway and Sweden agreed to a program to 2 modernise contract and sales law as core areas of the commercial law. Each country established its own legislative committee. The national committees worked together but presented separate proposals. However, the proposals to the reformed contract code were almost identical. Dotevall

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The first legislation which came out of this cooperation was the Sale of Goods Act, promulgated in 1905–1907. Sweden and Norway enacted a new Sale of Goods Act around 1990 which was influenced by CISG.1 The old Sale of Goods Act is still in force in Denmark. Other projects in the cooperation between Denmark, Norway and Sweden at the beginning of the 20th century were statues on commission and commercial agency, hirepurchase, formation and invalidity of contracts, insurance contracts, and instrument of debts. The cooperation between the Nordic countries was then extended to company law, family law, and other areas. However, nowadays the cooperation between the Nordic countries in legislative matters is at a low level as an effect of the cooperation within the EU. The Contracts Act, which is still in force, is the oldest statue with a Nordic background. It was promulgated in Sweden in 19152, in Denmark in 1917 and in Norway in 1918.3 There has been only one material amendment made during the years. Section 36 of the Act was introduced in 1980 which gives the court discretion to modify contractual terms that would otherwise be unfair to apply. Furthermore, Denmark and Norway have implemented the Unfair Terms Directive in their versions of the Contracts Act, whereas Sweden implemented the Directive in a separate statue. Consequently, the Swedish Contracts Act has been in force for more than one hundred years with just one substantial material change. It is often questioned if the Nordic legal system belongs to the common law family or the civil law family. The lack of a civil code in Denmark, Norway and Sweden and the strong focus on what is expressed through legal doctrine and court practice reflect some common law features in the Nordic Legal system. But this is just on the surface. The legal concepts in the Nordic legal system have with no doubts their roots in the civil law tradition. Nordic law has been quite independent from the common law and has no or very few characteristics thereof. The typical methods of finding law are different in Swedish law compared to common law. One could say that the Nordic laws of contract are connected to the civil law and the continental legal systems but have some specific features. The influence of Roman law is not as strong in Nordic law as, for example, in German law. The Nordic countries do not have a comprehensive civil code as the German Bürgerliches Gesetzbuch (BGB) or the French Code civil. As a consequence, Nordic lawyers do not, for obvious reasons, in contractual disputes focus on statutes as the primary legal source or indeed apply a systematic interpretation. Nordic law instead has an argumentative structure characterised by reasoning by analogy and teleological interpretation. Where substance is concerned, it will be adequate to refer the Nordic system to the civil law tradition. However, the Nordic legal system is not allocated clearly to the civil law system and for that reason be considered as a legal family of its own.4 It is clear that German law has been influential on the legal development in Nordic law. Most of the legal concepts which are used in the Nordic legal reasoning can be traced to the German BGB, for example ‘Willenserklärung’ (the declaration of will or intention) or ‘Unmöglichkeit’ (impossibility). Both concepts deal essentially with the same issues in Nordic law even if they do not have exactly the same meaning as in German law. The concepts are not used in Swedish law as the base for a logical 1

For Sweden, Köplag (1990:931). Lag (1915:218) om avtal och andra rättshandlingar på förmögenhetsrättens område. 3 For Finland see the contribution by Karhu, in this volume, mn. 1 et seq. 4 See Kötz/Zweigert, 277 et seq. 2

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deduction; they are instead often used as a framework for the balancing of different interests in legal disputes. Nordic lawyers are trained to think pragmatically when they consider the outcome of 10 a legal decision. The pragmatic attitude also influences the use of concepts. A Nordic lawyer would as a consequence of this tradition focus on the characteristics of the underlying intent and if this is clear enough to create an expectation in the mind of the recipient.5 The pragmatic attitude can explain that Swedish law has not been very enthusiastic to 11 support the initiative from the EU Commission to launch a European civil code.6 Lawyers trained to find a legal solution without any comprehensive code of that kind may find such an instrument difficult to accept. A code like that could fit in the Nordic legal tradition if drafted in broad terms and with the character of soft law. Such norms can be recognised as equivalent with the legal doctrine.

II. Regulatory framework 1. Introduction The Swedish Contracts Act has remained unchanged since it was enacted more than 12 a century ago, though with the exception from the fairness clause which was introduced in Art. 36 Contracts Act in 1976.7 A substantial part of the legislation in contract law since the Contracts Act was promulgated has concerned the implementation of EU directives, e.g. Consumer Credit Directive8, the Consumer Sales Directive9 and Consumer Rights Directive10. The bulk of this legislation has a purpose to protect consumers. The most important source in contract law is a binding contract. The contract 13 according to the Swedish Contract law can be written or oral and also expressed or implied. In other words, the contract is legal basis for the parties in Nordic contract law as in most other jurisdictions.

2. Swedish Contracts Act a) Formation of contracts. The rules of contract formation follow Sections 1–9 in the 14 Contracts Act. The main rule is that a contract is formed by the exchange of a corresponding offer and acceptance. This legislative model is based on the fact that the contract is formed in a situation where the parties are not present (inter absentes). The Contracts Act will also be applicable where the parties are present and exchange offer and acceptance simultaneously (inter presents). This follows from Art. 3(2) which prescribes that an offer made orally without any time limit shall be accepted immediately. 5

See Andersen/Runesson, 15 et seq. COM (2001) 398 final. 7 Lag (1976:185) om ändring i lagen (1915:218) om avtal och andra rättshandlingar på förmögenhetsrättens område. 8 Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit [1987] OJ L42/48 since repealed by Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers [2008] OJ L133/66. 9 Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees [1999] OJ L171/12. 10 Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights [2011] OJ L304/64. 6

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If a person makes an offer to sell a bicycle to another person for a certain price and this person immediately accepts the offer, a binding contract is concluded. If the promise includes a period for acceptance, Art. 2(1) Contracts Act provides that acceptance must then be made before the period expires. 16 Contracts can also be formed when an offer or acceptance is expressed by a conclusive behaviour. This is not expressed in Chapter 1 of the Contracts Act. 17 If the offeree fails to meet the deadline for acceptance, Art. 4(1) Contracts Act provides that this late acceptance shall be regarded as a counter-offer. Under Art. 4 (2) Contracts Act this does not apply if the offeree believed that the acceptance has been received in due time and the offeror must realise this. If that is the case, and the offeror does not want to accept the late reply, he must inform the offeree without delay. If the offeror fails to do this, a contract has been concluded. The provision in Art. 4, together with Art. 6, clearly induces a duty of loyalty for the contracting parties. 18 If an offeror regrets his offer before the offeree has accepted it, the offer can only be revoked no later than at the moment the offeree obtains information about the offer. This is provided in Art. 7 Contracts Act and is an expression of one of the basic principles in Swedish contract law that the offer is binding for the offeror when the recipient becomes aware of the offer. 15

b) Main concepts in the Swedish Contracts Act. The declaration of intent is a main principle in Swedish contract law. This notion is found throughout the Contracts Act and in paraphrases such as offer, acceptance and revocation. The principle explains why contracts are binding and why customs and dealings can create a binding contract and legal obligations. 20 A promise is a declaration of intent which imposes a binding obligation upon its sender. A valid promise establishes a legal obligation in accordance with its content. A consequence of a binding promise is that the recipient’s legitimate reliance on the promise is protected. 21 The legal consequence of a promise often depends of legal rules which are not expressed in the promise. For example, if someone is selling goods, he or she will rely of the applicable Sales Act. In business contracts in the realm of their own industry, the parties will usually rely on the customs of that business. 22 Certain kinds of promises and agreements are subject to conditions which typically will convoy a promise without special adoption – naturalia negotii. The rules of the Sales Act can be regarded as statutory naturalia negotii or default rules in agreements for the purchase of the goods if nothing else is agreed or assumed. 19

c) The offer principle. Arts 1–3 Contracts Act express the so-called ‘offer principle’. This means that the offeror cannot revoke an offer. It does not matter if the offer has not been accepted. However, the offer can be revoked after it has expired. Until then it is in the offeree’s hands to accept it and conclude a binding contract. 24 The ‘contract principle’, which means that the offeror is not bound until there is a contract, gives the offeror an advantage. However, the ‘offer principle’ favours the offeree. The offeree can form a binding contract through acceptance. And the offeror cannot revoke the offer until the offer period has expired. During this period, it is up to the offeree to decide whether to accept the offer. It is possible for the offeror to set a very short acceptance period or reserve a right in the offer to revoke it at any time. 25 Contracts of sales of goods between a Swedish party and a party whose place of business is outside the Nordic countries11 are governed – unless stated otherwise in the 23

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contract – by the CISG.12 Art. 16(1) CISG stipulates that an offer may be revoked until a binding contract is concluded if the revocation reaches the offeree before the offeree has dispatched an acceptance. According to Art. 16(2) CISG: […] an offer cannot be revoked: (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. Art. 16 CISG is flexible and gives courts a considerable discretion to adjudge if an 26 offer is revocable against the background of the specific content of the offer. d) Invalidity of promises. Under Swedish contract law, a promise is invalid if it contravenes mandatory law. In this aspect Swedish law is not different from other jurisdictions. Traditionally, the common purpose of the rules on invalidity in Swedish contract law is to ensure that the contract is an expression of the contracting parties will. The invalidity rules are based on the ambition to protect the interest of the freedom of contract principle, whereby the parties should act in with free will, and not in reliance on incorrect information given by the other party. Another purpose is to ensure that a binding contract does not give rise to clear unreasonable effects. Not surprisingly, a contract will be null and void if one of the contracting parties lacks legal capacity. A forged offer is not binding for obvious reasons. An agent who lacks authority does not bind the principal. However, it is possible for the principal to approve afterwards. Chapter 3 of the Contracts Act comprises several provisions on invalidity because of lack of will and flaws in the contractual process. The rules in Chapter 3 express the principle that a promise from a person lacking will is not binding. Two kinds of invalidity exist in Swedish contract law. The qualified invalidity rules are applicable even if the other party acts in good faith. This is similar to the German concept of nichtig (void). Art. 28 Contracts Act is one example, namely that promises made due to threats placing the promisor in imminent danger are invalid. A qualified ground for invalidity also occurs, according to Art. 32(2) Contracts Act, when an error is caused by the transmission of a message. Unqualified invalidity grounds are caused by other kinds of morally unacceptable oppression which do not, according to Art. 29, expose the promisor to imminent danger. These grounds are not applicable against a person who acts in good faith. These rules are similar to the German concept anfechtbar (voidable). An invalidity ground developed in case law is related to the absence of will, which can be described as mistake or lack of motive – error in motivis. Art. 30 Contracts Act prescribes that if a promise has been made through the use of fraudulent or deceitful behaviour or, according to Art. 31, or by usury are unqualified invalidity grounds. A general clause is found in Art. 33 based on morality aspects. A promise may not be invoked if it is grossly unfair in relation to the circumstances at the time of the promise. Art. 33 is rarely used in practice since the general clause in Art. 36 entered into force in 1976. Art. 36 expresses a general fairness standard. Art. 32(1) applies in situations where there is a mistake in expression of a party’s will. A promisor expresses, written or orally, by mistake A but intends to say B. According to Art. 2(1) the promisor is not bound to A if the recipient knew or ought to have known that the promisor meant B. In the adverse situation, i.e. when the receiver was not acting in good faith with regard to the mistake, the promisor is bound by A. 12

Lag (1987:822) om internationella köp (International Sales of Goods Act).

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Cases similar to error in motivis arise when the offeror expresses A and is convinced that he or she means B. Art. 32(1) is applicable in this situation through analogy. In some cases, such mistake can lead to invalidity of the promise as a consequence of the doctrine of erroneous assumptions. 36 It can be concluded that Art. 32 Contracts Act is a manifestation of the fundamental reliance principle in Nordic contract law. 35

e) The doctrine of erroneous assumptions in Swedish law. The doctrine of erroneous assumptions is a doctrinal consequence of the will theory which is the foundation for Nordic contract law. The German Voraussetzungslehre has strongly influenced Nordic law in this aspect, but it has been developed in Swedish case law in a more pragmatic way. The doctrine of erroneous assumptions bears some similarity to the common law doctrine of frustration. 38 In a leading Swedish case from the Supreme Court (Högsta domstolen),13 both parties in a sales contract assumed that the buyer was going to be financially reconstructed. But the reconstruction failed and the buyer went into bankruptcy. The buyer had, according to the Court, acted in a way which strengthened the seller’s impression that the planned reconstruction should be successful. The sales contract was held to be invalid on the ground of erroneous assumptions. The consequence was a right for the seller to separate the goods delivered even if the seller had not made a valid reservation of title. 39 It must be mentioned that in recent years the doctrine of erroneous assumptions has diminished in importance. The main reason is the introduction of the fairness standard in Art. 36 Contracts Act in the 1970s. The same can be said not only about Art. 33 but also the invalidity rules in Art. 37 (clauses on forfeiture of a pledge are void) and Art. 38 (unreasonable non-compete clauses in a contract are void). 37

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f) The general clause in Art. 36 Contracts Act Article 36. Contracts Act ‘A contract term may be adjusted or held unenforceable if the term is unreasonable with respect to the contract’s contents, circumstances at the formation of the contract, subsequent events or other circumstances. If the term is of such significance that it shall otherwise be enforceable in accordance with its original terms, the contract may also be adjusted in other respects or held unenforceable in its entirety. With respect to the application of the first paragraph, special consideration shall be given to the need for protection of consumers and others who assume an inferior position in the contract relationship. The first and second paragraphs shall be given similar application to terms in other legal relationships than that of contract.’

The introduction of the general clause in Art. 36 Contracts Act has resulted in a paradigm shift in Swedish contract law. The general clause does not so far have the same broad scope in Swedish case law as the German counterpart in § 242 BGB. However, the Swedish general clause applies in standard contracts and standard terms in B2B contracts. Swedish law does not contain specific provisions which relates specifically to B2B contractual relationships concerning standard terms. 41 According to the general clause a contract can be modified or invalid, partly or in whole, if it is unreasonable to one of the contracting parties. When Art. 36 is applied relevant facts are the circumstances which exist when the contract was concluded, the terms of the contract and subsequent circumstances. 13

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At the time of its implementation in all the Nordic countries, Art. 36 Contracts Act served the main purpose of protecting consumers. However, there is no doubt in Swedish law that the fairness standard in Art. 36 can be applied in B2B contracts.14 The introduction of a general clause with a broad application triggered an intensive legislative debate. It was seen among the critics as an unacceptable limitation of freedom of contract or an exaggerated protection of the weaker party with a paternalistic feature. Nowadays the general clause is an important part of contract law and is applied in many cases, including in B2B contracts. The practical function of the general clause in Art. 36 is primarily the modification of contracts. This means that a contract term may be adjusted or set aside if it is unreasonable when considered in relation to the contract in its whole. Other relevant aspects to be deliberated are the circumstances in which the contract was concluded, subsequent circumstances or other conditions in the contractual context. If the contract term at issue is of essential importance to the remaining contract, other contract terms may be adjusted or the whole contract will be invalid. If a contract term deviates from a non-mandatory statutory provision it is likely that the court will adjust the contract. This could be the result even if the statutory provision is not directly applicable. According to Art. 36 Contracts Act contracts could be adjusted due to the conditions when the contract was concluded. This principle is based on the assumption that a contract during those circumstances are not concluded under free will. A contract may therefore be adjusted if a party has used unfair methods, e.g. surprise tactic or putting pressure on the counterparty, when the contract was negotiated. Concerning the importance of subsequent circumstances for the adjustment of a contract the good faith standard in Art. 36 Contracts Act overlaps with the doctrine of onerous assumptions. However, whereas Art. 36 gives the court a possibility to adjust the contract term or make it invalid, application of the doctrine of onerous assumptions will render the contract invalid.15 In one high-profile Supreme Court judgment a contract was rendered invalid and gave a party a right to separate property from an insolvent estate, which would not have been possible if the contract terms had been adjusted and the contract was valid.16

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g) Is Nordic contract law competitive as a choice of law? A pertinent question is if 48 the Swedish Contracts Act can be of interest to choose as applicable law in an international contract which involves parties from jurisdictions outside the Nordic countries. The Swedish contract law has some features from common law as well as from civil 49 law systems. Swedish contract law makes it possible in a significant way to use common sense arguments which will facilitate the possibility to reach predictable pragmatic solutions.17

III. Requirements and legal consequences 1. Formation and content of contracts In Swedish law, as in other jurisdictions, the judicial control over contracts has 50 traditionally focused on the nature of the circumstances surrounding the formation of 14

See Grönfors/Dotevall, 255 et seq. See Dotevall, 236. 16 NJA 1985 p. 178. 17 See Andersen/Runesson, 15. 15

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contracts. Accordingly, the Swedish Contracts Act has provisions regulating traditional causes for invalidity of contracts, such as duress, fraud, unfair exploitation and mistake (Arts 28–32). In other words, such provisions do not enquire into the substance of the contract, but rather the process of contract formation. 51 Art. 33 Contracts Act gives a possibility to render contracts contrary to good faith and honesty invalid.18 The main purpose of this provision to supply the traditional grounds of invalidity.19 According to Art. 33 it is not possible to review the content of the contract; the focus is on the fairness of the process of contract formation. The importance of Art. 33 in practice has decreased during the last decades. 52 Art. 36 Contracts Act expresses the idea that the traditional focus on the process of contract formation does not always lead to a fair result. The general fairness model recognises that the traditional contract mechanisms can lead to unfair results in all kind of relationships and with regard to all contract terms. This emphasises that the tools which is available to enforce a contract should not be used when the contract is unfair.20 The meaning in Swedish law is that the fairness principle is not limited to consumer contracts or standard contracts but will encompass the whole of contract law.

2. Standard contracts and terms 53

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Swedish legislation has so far lacked any definition of a standard contract; however, the notion is normally used to describe contracts which, in whole or in part, are concluded according to previously drafted standard terms intended to similarly apply in a large number of specific contractual situations of a given type, in which at least one of the parties finds himself.21 In practice, it can be difficult to draw a clear line between standard contracts and standard terms, on the one hand, and individually negotiated contracts or contract terms, on the other. Moreover, the use of modern computer technology has not seldom entailed that both types have a similar appearance. The Unfair Terms Directive, whose main provisions have been incorporated into Swedish law, provides, however, a definition of a ‘not individually negotiated’ term (Art. 3(2) 1st St.). As is apparent from the third sentence of Art. 3(2) Unfair Terms Directive, a standard term is a contract term which has not been individually negotiated: ‘Where any seller or supplier claims that a standard term has been individually negotiated’. The definition under the Unfair Terms Directive is close to that which had previously been deemed to apply in Sweden. It should be noted that the same contract can very often contain both standard terms and individually negotiated terms, the latter of which can, for example, govern the price or purchased quantity. The definition may now be viewed as fundamental to what should be characterised as a standard contract. As mentioned, a standard contract is a contract that contains a number of predetermined contract terms which one or more of the parties want to apply to a specific type of contract. Standard contracts may arise on the initiative of an individual enterprise or one or more industry organisations. The terms and conditions in a standard contract are rarely negotiable. In other words, you must accept the standard terms and conditions for an agreement to be reached. This applies to contracts with banks, for example. This provision is similar to § 138(2) BGB. See Hauge, 157; Grönfors/Dotevall, 243. 20 In the translation of Art. 36 the word ‘unconscionable’ is used. The two notions are used in this context as synonyms. 21 See Bernitz, 15. 18 19

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Standard contracts are often unilateral. Sellers often have ready-made standard 58 contracts for their goods and services. Their standard terms and conditions often contain provisions covering fault liability, warranties, delays, etc. The legal quality of these standard contracts can vary. Swedish trade associations have developed quite a number of widely used and well- 59 known standard terms negotiated by representatives of both parties. They are often called ‘agreed documents’ (standardavtal). Some of the terms often correspond to an international standard. Further mention should be made to the Swedish Terms of Contract between Trades- 60 men Act22 enacted in 1984. The purpose of this legislation is to protect a business against unfair contract terms from another business in a dominant position. In such a situation a commercial court23 can prohibit a business undertaking from using the same or similar term again. The Act does not give a possibility for the courts to adjust contracts or terms in business relationships.

3. Inclusion of onerous or surprising standard contract terms The reasonableness of a contract term may be indirectly reviewed by the special requirements for incorporation of standard contract terms considered to be onerous, unexpected or surprising. These requirements have been developed though case law and are not statute law. The principle applies not only to B2C but also to B2B contracts. In order to be included in an individual contract, an onerous, unexpected or surprising term must be brought to the knowledge of the other party at the time of entering into the contract. This is not necessary if the if the counterparty already knew of the term or the standard contract or reasonably ought to have known it.24 As a main rule, it suffices to make a reference to standard terms to make them part of the contract. A requirement is that the standard terms are available to the other party upon request. Business usage may mean that some frequently used standard terms may in some cases be part of the contract without any explicit reference. If the parties have referred to the standard terms in earlier contracts, they can be considered to be incorporated in a new contract because of the custom the parties have established between themselves. In business dealings, the parties would normally have reason to expect the existence of standard terms and they will even be considered to be incorporated without any reference. This is the case for instance when insurance companies entering into contracts via telephone or email. However, if the terms are surprising or onerous, they must be presented to the other party.25 The application of the rule of incorporation of standard contracts and terms appears to be flexible in Swedish law. The bargaining position of the parties, negotiations, trade customs, and previous dealings between the parties are of importance. A main rule could be expressed in the following way: the more onerous a contract term, the greater the requirements for approval. The requirements of incorporation are in general not as rigorous in B2B contracts as in B2C contracts. The rule of incorporation can be described as a general clause for standard contracts and is more flexible than, for example, the German rule in § 305a‐c BGB, which has similar purpose.26 22

Lag (1984:292) om avtalsvillkor mellan näringsidkare. Patent and market court. 24 See Bernitz, 56. 25 ibid. 26 See Hauge, 157. On German law, see the contribution by Wais, in this volume. 23

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4. Interpretation of contract 67

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Principles of contract interpretation provide another tool for judicial review of contracts. The ambiguity rule, in dubio contra stipulatorem (or proferentem), has been applied as a general principle in Swedish law and also in other European jurisdictions.27 The ambiguity rule as a principle for contractual interpretation is very familiar and has had special significance when interpreting unilaterally drafted standard contracts. The starting point in the interpretation of a contract to determine if there is a common intention when the contract was concluded is not possible to use when a standard contract is used.28 If it can be proved that a written contract does not show the parties common intention, the written text is set aside. In a case concerning a B2B contract, the Swedish Supreme Court concluded that in dubio contra stipulatorem has a subsidiary function when a standard contract is interpreted.29 The literal interpretation of a written contract, and especially a standard contract, is very important as the first step. In cases in which the interpretation of a standard term in a B2B contract, the Supreme Court concludes that the structure of the contract must be considered in such a literal interpretation.30 Other aspects such as the purpose of the contract term, fairness and trade customs will also be of importance. Where standard contracts in B2B relationships are concerned, the Supreme Court has stated that the default mandatory rules should apply if the standard contract was used, which in the case at hand was the Sale of Goods Act.31 As regard contract terms between businessmen, the state of the law remains unchanged. In such cases the ambiguity rule can be applied as previously, i.e., usually with some caution. The fact that the contra stipulatorem rule has now been so clearly established in the area of consumer contracts may, very likely, result in increased application of the rule when interpreting standard contracts in relation to small businesses, where there is typically an imbalance between the parties. The Supreme Court case law of recent decades shows that although the contra stipulatorem rule has been applied in Sweden as a general principle of interpretation it has, from an international perspective, a relatively limited use in Swedish contract law. This rule has mainly functioned as an alternative method of interpretation. More often the courts, in interpreting standard contracts, apply a teleological interpretation which seeks to find an appropriate rule based on an overall assessment in the light of the statutory rules which would otherwise apply if a standard contract was not used.32

5. The fairness test in Swedish law The fairness test can be seen as a question of balancing the principle of freedom of contract and predictability against the principle that every contract must be fair to the contracting parties. 73 The classical concept of contractual freedom is based on an assumption of equality in bargaining power. Protecting the weaker party can be seen therefore as a tool to contribute to substantive freedom of contract. However, this assessment must be made against the background of the principle of pacta sunt servanda. In business life it is 72

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See Bernitz, 88. ibid.; Dotevall, 191. 29 NJA 2001 p. 750. 30 NJA 2013 p. 471. 31 NJA 2015 p. 862. 32 See Dotevall, 189. 28

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essential to remain bound by the contract which is the other side of the principal of freedom of contract. The Swedish Supreme Court has underlined the principle of freedom of contract.33 The Court stated that a fundamental basis of contract law is the principal pacta sunt servanda. It was emphasised that not at least in the area of credit, the principle is important, since there is a risk that serious lenders will adopt a very restrictive approach that would be to the detriment of a business seeking credit. The test if a contract is fair is, according to Art. 36 Contracts Act, based on a general assessment of the contract as a whole. Another important aspect is that the contract should be unfair in casu. A contract term could be fair in one contractual relationship but considered to be unfair in another. This assessment of the unreasonableness in casu is illustrated in a decision from the Swedish Supreme Court concerning an insurance contract.34 Under the terms of the policy, insurance coverage was excluded under certain conditions. The policyholder in the particular case was a fur retailer whose store had been burgled. Investigations into a burglary at his premises revealed that the key to the premises had been copied by an employee at the security company who was assigned to guard the premises. The terms of the insurance policy, however, excluded the coverage for burglary under these conditions. Although the term in the insurance policy was not considered unreasonable per se, the Supreme Court stated that the fur retailer had acted very carefully to prevent burglaries and the assignment of the security company was induced by the insurer. The Supreme Court found that these circumstances made the insurance policy unreasonable in this specific case. In Swedish law the content of the contract is the starting point in the assessment. The question is if the contract is balanced. It is argued that an imbalance in the party’s obligations according to the contract is an important factor in the test of fairness.35 Exemption clauses are an example of terms which typically have an inherent imbalance. Another example of a term which is always void is exclusion of liability for gross negligence.36

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6. Protecting the weaker party in B2B contracts a) Overview. The discussion about the protection of the weaker party has usually 78 been dealt with in the context of consumer protection legislation. The protection of the weaker party in relations between businessmen has been a subject of discussion in the Nordic countries, though to a lesser degree of intensity. The most important area of protecting the weaker party has been in EU law and the 79 extensive legislation on consumer protection. Some regulation of B2B relations in contract law has been made at EU level, for instance the Commercial Agency and the Late Payment Directives.37 So far, the attitude in Swedish law has been that in B2B contractual relations the 80 imbalance between the parties must be significant before rights and duties according to a contract must be apparent before the contact could be adjusted. The most important 33

NJA 1999 p. 408. NJA 1989 p. 346. 35 See Dotevall, 238. 36 See Hauge, 157. 37 Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the member states relating to self-employed commercial agents [1986] OJ L382/17 and Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions [2011] OJ L48/1. 34

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legal basis for a claim that an unfair contract or contract term shall be adjusted or set aside is Art. 36 Contracts Act. This provision provides tools for the court to assess if the contract term is unfair. 81 A contract or contract term might be characterised as unfair for various reasons. As a guideline if a contract is unfair to a party optional law is of interest.38 If a mandatory rule is circumvented it is likely that the contract is unfair. Default rules and trade customs are also relevant in this assessment.39 As already mentioned, a contract can be seen as unreasonable and adjusted if there is a significant imbalance in the parties’ rights and obligations arising under the contract. This imbalanced may relate to change of circumstances during the duration of the contract.40 b) Examples. The Swedish Supreme Court has dealt on several occasions with the inferior position as a condition for unfairness according to Art. 36 in contractual relations between businesses.41 As a first example, the Court adjusted a standard arbitration clause in favour of the weaker party (a foreign company) where the clause was deemed to be unfair in the context of a specific contract.42 In this particular case the arbitration clause was hidden amongst the terms of a standard contract and afforded the Swedish party to the contract the exclusive right to determine if the dispute should be settled according to Swedish law in a Swedish court or elsewhere. The Swedish Supreme Court held this clause void for unfairness. 83 The Supreme Court has also held that if the weaker party, in this case a commercial agent, has a position similar to an employee in relation to the principal, the imbalance that occurs is relevant in the assessment of the fairness of a contract.43 The arbitration clause was set aside by the court. In this case the commercial agent was financially weak and an arbitration procedure would have been very costly for him. 84 As a further example, the Supreme Court concluded that arbitration clauses in B2B contracts are acceptable if the parties are at eye-level.44 However, it is a significant aspect of a franchise agreement that the franchisee is inferior to the franchisor. According to the Court, the franchisee who does not wish to conclude a contract with the same conditions and terms as other franchisees is faced with the alternative of abstaining from concluding such an agreement. Typically, the franchise is in a weaker economic position than the franchisor; entering into a franchise agreement often results in extensive financial commitments for the franchisee. In this respect, an arbitration clause in a franchise agreement can be seen as a procedural impediment where the franchisee does not have the financial resources available for arbitration. Although one could argue that there is a need for the franchisee to be protected in the same manner as a consumer with regard to the negative financial consequences of an arbitration clause, the Supreme Court concluded that the franchisee in this case was not comparable with a consumer and the contract was not adjusted. 85 The imbalance in bargaining strength, which could be structural, may be considered also in B2B contracts. In this kind of contract, it is necessary to have higher expectations of the contracting parties than if a consumer is involved. An imbalance between the parties is of relevance but there are not any examples in Swedish case law that this has been the only ground for adjusting a B2B contract. For instance, in a case concerning a 82

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letter of credit issued by a bank in a purchase of clothes, the Supreme Court found that the contract terms applied by the bank were unfair because the bank was in a superior position and the terms in the contract differed from the conditions used by other banks in similar contracts.45 The Supreme Court has also found that if a standard contract term (a non-liability 86 clause) is common in a specific branch of industry and not unreasonable in itself, a contract cannot be adjusted even if there is a great imbalance in the contracting parties’ financial strength.46 In B2B contracts with no significant difference in bargaining power, the level for 87 unreasonableness will normally be high, in particular if the contracting party had taken a calculated risk. It is a similar situation if a standard contract term is part of an agreed document and the contract is drafted between parties according to a process which aims to ensure a balanced contract considering the rights and duties of the parties.47 c) Summary. It seems clear that the attitude in Swedish law to a general legal 88 principle of protecting the weaker party has been quite reluctant beyond the application of the few legal provisions that also protect small businesses. The explanation could be the opposition against general principles in contract law. The strong tradition of legal realism in Swedish law is still an obstacle for elaborate general doctrines.48 In Swedish and Nordic legal doctrine there is therefore little evidence that the protection of the weaker party in B2B relationships would be of greater importance outside the realm of Art. 36 Contracts Act.

IV. International application According to Swedish law, a conflict of law exists whenever the court has to settle a dispute that involve a foreign element. Foreign elements in a contract dispute emerge when a party is a foreign national or is a habitual resident abroad or the contract is concluded abroad or should be performed abroad by one of the parties. Art. 3 Rome I sets out the basic rule that the contract shall be governed by the law chosen by the parties.49 As can be seen from Art. 3(3) Rome I, the Regulation permits the choice of law of any country, even where relevant facts are connected to a country other than the country whose law has been chosen. If the parties fail to choose an applicable law, Art. 4 Rome I prescribes fixed rules for specific contracts. For example, a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence, a contract for the provision of services, except distribution and franchising, shall be governed by the law of the country where the service provider has his habitual residence and a franchise and distribution contract shall be governed by the law of the country where the franchisee or the distributor has his habitual residence. Chapter 3 of the Contracts Act comprises several provisions on invalidity because lack of will and flaws in process to reach a binding contract. The rules in this chapter express the principle a promise from a person despite lacking will is not binding the promisor. Chapter 3 also contains the fairness principle in Art. 36. If the parties chose 45

NJA 1983 p. 332. NJA 1970 p. 483. 47 See Grönfors/Dotevall, 243. 48 See Bärlund, 83. 49 For more detail see the contribution by Pfeiffer, in this volume. 46

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foreign law, or foreign law is applicable without an agreement, the Swedish courts would not apply the provisions of invalidity or Art. 36 Contracts Act.50

V. Summary 93

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The judicial review of standard terms in B2B contracts is based on the general clause in Art. 36 Contracts Act and on the principle of good faith. The general clause in Art. 36 has a broad scope in Swedish contract law, though its practical function is primarily the adjustment of contracts. Swedish legislation has so far lacked any definition of a standard contract. In Swedish law a standard contract normally defines as contracts which, in whole or in part, are concluded according to previously drafted standardised terms intended to similarly apply in a large number of concrete contractual situations of a given type, in which at least one of the parties finds himself. To be included individual contract, an onerous, unexpected or surprising term must be brought to the knowledge of the other party of the time entering the contract. This is not necessary if the if the counterpart already know the term or the standard contract or reasonably ought to know it. Another tool for the judicial review of the contract is the principles of interpreting the contract. The ambiguity rule, in dubio contra stipulatorem, has been applied as a general principle in Swedish law and in other European jurisdictions. This rule plays a role when the contract is interpreted that it is not unfair to one of the contracting parties. The test if a contract is unreasonable is, according to Art. 36 Contracts Act, based on a general assessment of the contract as a whole. Another important aspect is that the contract should be unreasonable in casu. A contract term could be fair in one contractual relation but considered to be unreasonable in another. The starting point in the assessment a contract is reasonable is if the contract is balanced. With regard to contract between businesses the threshold of unfairness is considered to be high. An imbalance between the parties is of relevance but there are not any examples in Swedish case law that this has been the only ground for adjusting a B2B contract between businessmen. Chapter 3 in the Contracts Act comprises several provisions on invalidity because lack of will and flaws in process to reach a binding contract. The rules in this chapter express the principle a promise from a person despite lacking will is not binding the promisor. Chapter 3 also contains the fairness principle in Art. 36. If the parties chose foreign law, or foreign law is applicable without an agreement, the Swedish courts would not apply the provisions of invalidity or Art. 36. 50

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See Bogdan, 266 et seq.

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O. Switzerland* Bibliography: Atamer/Pichonnaz, Control of Price Related Terms in Standard Form Contracts, General Report, in: Y. M. Atamer/P. Pichonnaz (ed.), Control of Price Related Terms in Standard Form Contracts (Ius Comparatum – Global Studies in Comparative Law, vol. 38), (Springer Nature 2019) 3–63; Bucher (ed.), Commentaire romand, Droit international privé (Helbing Lichtenhahn 2011); Caroni, ‘Der “demokratische” code unique von 1881, Eine Studie zur ideologischen Beziehung von Sonderrecht und Demokratie’ in: Caroni (ed.), Das Obligationenrecht 1883–1983, Berner Ringvorlesung zum Jubiläum des schweizerischen Obligationenrechts (Haupt 1984) 19–68; Gauch/Schluep/Emmenegger (ed.), Schweizerisches Obligationenrecht, Allgemeiner Teil, Vol. 1 (10th edn., Schulthess 2020); Fasel (ed.), Handels- und Obligationenrechtliche Materialien (Haupt 2000); Hilty/Arpagaus (ed.), Basler Kommentar Bundesgesetz gegen den unlauteren Wettbewerb (UWG) (Helbing Lichtenhahn 2013); Honsell/Vogt/Schnyder/Berti (eds), Basler Kommentar, Internationales Privatrecht (3rd edn., Helbing Lichtenhahn 2013); Huguenin, Obligationenrecht, Allgemeiner und Besonderer Teil (3rd edn., Schulthess 2019); Koller, ‘Einmal mehr: das Bundesgericht und seine verdeckte AGB-Inhaltskontrolle’ (2008) 8 Aktuelle Juristische Praxis / Pratique Juridique Actuelle 943–953; Kramer, Battle of the Forms”: eine rechtsvergleichende Skizze mit Blick auf das schweizerische Recht in: Gauchs Welt (Helbing Lichtenhahn 2004) 493–506. Kramer, ‘Konzeptionsfragen zur Vertragsinhaltskontrolle’ (2018) 137 Zeitschrift für schweizerisches Recht / Revue de droit suisse 295–325; Kramer/Probst/Perrig, Schweizerisches Recht der Allgemeinen Geschäftsbedingungen (Stämpfli 2016); Martenet/Pichonnaz (ed.), Commentaire romand, Loi contre la concurrence déloyale (Helbing Lichtenhahn 2017); Morin, ‘L’ impact de l’ Art. 8 LCD sur le contrat de leasing’ (2019) 138 Zeitschrift für schweizerisches Recht / Revue de droit suisse 159–179; Perrig, Die AGB-Zugänglichkeitsregel, Das Kriterium der Zugänglichkeit als Regelerfordernis bei der Einbeziehung von Allgemeinen Geschäftsbedingungen (AGB) (Helbing Lichtenhahn 2011); Pichonnaz, ‘Le centenaire du code des obligations, Un code toujours plus hors du code’ (2011) 130 Zeitschrift für schweizerisches Recht / Revue de droit suisse 117–226; Probst, Control of Price Related Terms in Standard Form Contracts in Switzerland – The Control of Standard Contracts Terms: The Swiss Approach, in: Y. M. Atamer/P. Pichonnaz (ed.), Control of Price Related Terms in Standard Form Contracts (Ius Comparatum – Global Studies in Comparative Law, vol. 38), (Springer Nature 2019) 653–670; Schlechtriem/Schwenzer/Schroeter (ed.), Kommentar zum UN-Kaufrecht (CISG) (7th edn., C. H. Beck 2019); Schwenzer/Fountoulakis, Obligationenrecht Allgemeiner Teil (8th edn., Stämpfli 2020); Stöckli, ‘Der neue UWG 8 – Aufbruch oder perte d’ une chance’ in: Weber (ed.), HAVE Tagungsband Personen-Schaden-Forum 2012 (Schulthess 2012) 199–205; Tercier/Pichonnaz, Le droit des obligations (7th edn., Schulthess 2019); Thevenoz/Werro (ed.), Commentaire romand, Code des obligations I (2nd edn., Helbing Lichtenhahn 2012); Tolou, La forfaitisation du dommage (Schulthess 2017); Tolou, ‘Les clauses de liquidation forfaitaire du dommage en pratique’ in: Pichonnaz/Werro (ed.), La pratique contractuelle 6 (Schulthess 2018) 173–199.

Contents mn. I. Introduction ..................................................................................................... 1 II. Regulatory framework.................................................................................... 4 1. Civil Code..................................................................................................... 4 2. Code of Obligations ................................................................................... 4 3. Unfair Competition Act............................................................................ 4 III. Requirements and legal consequences ....................................................... 5 1. Surprising terms.......................................................................................... 5 a) Overview ................................................................................................. 5 b) Definition of surprising terms............................................................ 8 c) Scope of application ............................................................................. 10 * My English text was revised by Prof. Dr Andrew Steven, Edinburgh Law School, University of Edinburgh, and Scottish Law Commissioner, to whom I am deeply indebted. I am very grateful to my assistant, Bastien Khalfi, for his help.

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Part 1. Country Reports d) Criteria for application ........................................................................ aa) Standard contract terms ............................................................... bb) Global incorporation ..................................................................... i) Incorporation ........................................................................... ii) Global......................................................................................... cc) An interpretation contra proferentem ....................................... dd) Subjectively and objectively surprising terms.......................... e) Legal consequences ............................................................................... 2. Unlawful, immoral or impossible terms ............................................... a) Unlawful.................................................................................................. b) Immoral................................................................................................... c) Impossible ............................................................................................... d) Legal consequence................................................................................. 3. Excessive penalty clauses .......................................................................... 4. Unfair advantage......................................................................................... a) Clear discrepancy .................................................................................. b) Exploitation ............................................................................................ c) Legal consequences ............................................................................... 5. Exclusion of liability clauses .................................................................... 6. Modification of the limitation period .................................................... 7. Judicial review of unfair terms ................................................................ IV. International application ............................................................................... V. Conclusion........................................................................................................

12 13 24 25 35 40 42 47 51 53 58 63 64 66 72 73 74 75 77 89 93 96 111

I. Introduction Swiss law has not implemented a regime of unfair terms in Standard Contract Terms (SCT) for contracts between businesses (B2B). Unlike other European domestic systems, it does not provide for any regulations or special provisions governing the use of SCT; the main rules derive from case law and from general provisions applicable to contracts in general. On 1 July 2012, a new version of Art. 8 of the Unfair Competition Act1 (UCA) entered into force; however, it only governs unfair terms in SCT incorporated into contracts concluded between professionals and consumers. 2 Applying the principle of good faith (Art. 2(1) Swiss Civil Code2 [CC]), the courts have developed the doctrine of surprising terms, whereby terms that are considered as ‘surprising’ are deemed not to be part of the contractual terms incorporated into the contract. Until the new Art. 8 UCA, this doctrine applied similarly to contracts concluded between businesses (B2B), between a business and a consumer (B2C) or between private persons (P2P). The doctrine only applies in the case of global incorporation of SCT, i.e. when the counter-party or customer does not read or negotiate the various SCT. Case law has established that a term is considered to be surprising when the term substantially changes the nature of the contract or deviates significantly from the legal framework which is characteristic of that type of contract (imbalance test3) and the attention of the counter-party has not been drawn specifically to the term (surprising test4). Terms considered to be surprising are excluded from the 1

1 Official Collection (AS/RO) 2011 4909 for the text adopted on 17 June 2011, available under: https:// www.admin.ch/opc/fr/official-compilation/2011/4909.pdf; Federal Papers (BBl/FF) 2009 5539 for the Report by the Federal Council to the Parliament; available under: www.admin.ch/opc/fr/federal-gazette/ 2009/5539.pdf. 2 Code civil suisse / Schweizerische Zivilgesetzbuch / Codice civile svizzero / Cudesch civil svizzer. 3 See mn. 8. 4 See mn. 8 et seq.

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global incorporation of SCT. They are not part of the contract and therefore not enforceable against the counter-party. Apart from the regime of surprising terms developed by case law, a series of general 3 provisions in the Code of Obligations5 (CO) provide for mandatory rules limiting the validity of clauses included in contracts; there is no distinction whether the contracts are between professionals, with consumers or between private persons. These mandatory provisions limit contractual freedom for B2B contracts. In addition to these general provisions, Swiss law also contains provisions for specific 4 contracts that limit the contractual freedom of the parties in connection with SCT, whether the parties are professionals, consumers or are not. These include lease contracts (Art. 256(2)(a) CO), the exclusion of liability in sales contracts (Art. 199 CO), and private insurance contracts (Art. 35 Federal Insurance Contract Act6).

II. Regulatory framework 1. Civil Code7 Article 2. Swiss Civil Code Acting in good faith (1) Every person must act in good faith in the exercise of his or her rights and in the performance of his or her obligations. (2) The manifest abuse of a right is not protected by law.

2. Code of Obligations8 Article 19. Code of Obligations Definition of terms (1) The terms of a contract may be freely determined within the limits of the law. (2) Clauses that deviate from those prescribed by law are admissible only where the law does not prescribe mandatory forms of wording or where deviation from the legally prescribed terms would contravene public policy, morality or rights of personal privacy. Article 20. Code of Obligations Nullity (1) A contract is void if its terms are impossible, unlawful or immoral. (2) However, where the defect pertains only to certain terms of a contract, those terms alone are void unless there is cause to assume that the contract would not have been concluded without them. Article 21. Code of Obligations Unfair advantage (1) Where there is a clear discrepancy between performance and consideration under a contract concluded as a result of one party’s exploitation of the other’s straitened circumstances, inexperience or thoughtlessness, the person suffering damage may declare within one year that he will not honour the contract and demand restitution of any performance already made. (2) The one-year period commences on conclusion of the contract. 5

Droit des obligations / Obligationenrecht / Diritto delle obbligazioni / Dretg d’obligaziuns. Federal Insurance Contract Act of 2 April 1908, Systematic Collection 221.229.1, available under: https://www.admin.ch/opc/fr/classified-compilation/19080008/index.html. 7 English unofficial translation by the federal administration: https://www.admin.ch/opc/de/classifiedcompilation/19070042/index.html. 8 English unofficial translation by the federal administration: https://www.admin.ch/opc/de/classifiedcompilation/19110009/index.html. 6

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Part 1. Country Reports Article 100. Code of Obligations Exclusion of liability (1) Any agreement purporting to exclude liability for unlawful intent or gross negligence in advance is void. (2) At the discretion of the court, an advance exclusion of liability for minor negligence may be deemed void provided the party excluding liability was in the other party’s service at the time the waiver was made or the liability arises in connection with commercial activities conducted under official licence. (3) The specific provisions governing insurance policies are unaffected. Article 129. Code of Obligations Mandatory prescriptive periods The prescriptive periods laid down under this Title may not be altered by contract. Article 141. Code of Obligations Waiver of the prescription defence (1) The debtor may waive the right to object on the grounds of prescription, in each case for a maximum of ten years from the start of the prescriptive period. (1bis) The waiver must be made in writing. Only the user of general terms and conditions of business may waive the defence of prescription in such terms and conditions. (2) A waiver granted by a joint and several debtor does not bind the other joint and several debtors. (3) The same applies to co-obligors of an indivisible debt and to the surety in the event of waiver by the principal debtor. (4) A waiver granted by a debtor shall bind the debtor’s insurers and vice-versa, provided a direct claim exists against the insurer. Article 163. Code of Obligations Amount, nullity and reduction of the penalty (1) The parties are free to determine the amount of the contractual penalty. (2) The penalty may not be claimed where its purpose is to reinforce an unlawful or immoral undertaking or, unless otherwise agreed, where performance has been prevented by circumstances beyond the debtor’s control. (3) At its discretion, the court may reduce penalties that it considers excessive.

3. Unfair Competition Act9 Article 8. Unfair Competition Act Use of unfair terms Shall be deemed to have committed an act of unfair competition any person who, in particular, uses general terms and conditions which, contrary to the principle of good faith, provide for a substantial and unjustified imbalance between the contractual rights and obligations to the detriment of the consumer.

III. Requirements and legal consequences 1. Surprising terms 5

a) Overview. In accordance with the principle of good faith in contract law, derived from Art. 2(1) CC, a supplier of SCT may incorporate these terms into a contract by means of a ‘global incorporation’. This is the case when the counter-party agrees, generally in writing in the contract, that some specific SCT are deemed to be an integral part of the contract, and those SCT are reasonably available for consultation 9

Translation by author.

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(‘reasonable availability test’).10 There is no need under Swiss law to make any statement according to which the counter-party would have read, or even understood, these terms. Global incorporation means that the counter-party is not deemed to have read the SCT.11 Thus, in the case of global incorporation, the counter-party usually does not read the 6 SCT or does so only briefly, without negotiating or taking the time to understand the legal implications of such provisions. As a consequence, the courts have developed the doctrine of surprising terms, based on the principle of good faith (Art. 2(1) CC), which considers that only terms that are broadly expected to be incorporated in the contract are deemed to be accepted by the counter-party.12 Traditionally, the regime of the surprising terms is thus considered part of the control 7 of integrity of consent as the doctrine limits the effects of a general consent given by the counter-party.13 However, as will be seen below, in practice the courts use the surprising clause regime to control indirectly the content of the SCT. This is sometimes referred to as a ‘hidden control’ of the content of SCT.14 b) Definition of surprising terms. Under the doctrine of surprising terms, clauses or 8 terms that are both ‘surprising’ and ‘imbalanced’ are not covered by the general consent to the SCT, and therefore do not form part of the contract. Terms are ‘surprising’, when they are so atypical that the counter-party could not or should not reasonably have expected them at the time that the contract was concluded.15 The terms should not only be objectively surprising, but also subjectively, i.e. the counter-party should not have expected to find them in the SCT. Terms are ‘imbalanced’ when they substantially modify the nature of the contract or deviate notably form the legal framework of a named contract (sales, lease, mandate).16 The Swiss Federal Tribunal has held that a term in SCT shall be regarded as a 9 surprising term when, in the case of a global incorporation, the attention of the recipient has not been drawn specifically to it (‘element of surprise’) and it substantially changes the nature of the contract or significantly deviates from the legal framework characteristic of the contract in question (‘element of imbalance’).17 c) Scope of application. The use of SCT for contracts concluded between profes- 10 sionals (B2B) or between private persons (P2P) is mainly subject to the scrutiny provided for by the doctrine of surprising terms. In December 2018, the Federal 10 Decision of the Federal Tribunal (DFT), 139/2013 III 345, reason 4.3; Federal Tribunal (FT), decision of 2 June 2015 4A_47/2015, reason 5.4.1; Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 53; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 52; Kramer/Probst/Perrig, mn. 90, 133 et seq. 11 DFT, 108/1982 II 416, reason 1b; Pichonnaz, ibid.; Kramer/Probst/Perrig, mn. 88. 12 Pichonnaz, ibid., mn. 94; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 53; Kramer/ Probst/Perrig, mn. 173. 13 DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 1, reason 2.1; FT, decision of 14 September 2004, 4C.202/2004, reason 4; Pichonnaz, ibid.; Kramer/Probst/Perrig, mn. 173. 14 Koller, 943 et seq.; Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 94; Kramer, 302. 15 DFT, 138/2012 III 411, reason 3.1; Pichonnaz, ibid., mn. 95; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 54; Kramer/Probst/Perrig, mn. 178. 16 DFT, 138/2012 III 411, reason 3.1; FT, decision of 3 June 2015 4A_119/2015, reason 2.2; FT, decision of 29 April 2015 4A_48/2015, reason 2.1. 17 See FT, decision of 3 June 2015 4A_119/2015, reason 2.2; FT, decision of 29 April 2015 4A_48/2015, reason 2.1; DFT, 140/2014 III 404, reason 5.1; FT, decision of 9 March 2012 4A_538/2011, reason 2.3; DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 225, reason 1.3; DFT, 135/2009 III 1, reason 2.1; DFT, 122/1996 V 142, reason 4c; DFT, 119/1993 II 443, reason 1a; DFT, 109/1983 II 213, reason 2a; DFT, 108/1982 II 416, reason 1b; DFT, 98/1972 Ia 314, reason 5a; DFT, 49/1923 II 167, reason 6.

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Tribunal clarified its previous case law by stressing that not only the weaker party to the contract may invoke the regime of surprising terms, but even the experienced party can benefit from this doctrine.18 This derives from the understanding that the surprising terms doctrine is based on the principle of good faith and on consent theory19. 11 According to some authors,20 the regime of unfair clauses in Art. 8 UCA could be applied to a contract between a professional and a legal person acting as a consumer, i.e. outside of its business and trade, but for personal and non-commercial purposes (e.g. an association of singers obtaining a loan to renovate their rehearsal building). However, the Federal Tribunal has not yet settled this issue. 12

d) Criteria for application. To apply the doctrine of surprising terms, the provision (i) shall be a ‘standard contract term’, (ii) which has been incorporated in a ‘global’ way into the contract and (iii) has created an imbalance which is subjectively and objectively surprising.

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aa) Standard contract terms. Unlike other national laws (e.g. § 305 I BGB), Swiss law does not contain a statutory definition of ‘standard contract terms’. SCT are generally defined as ‘preformulated (standardised) contractual clauses that generally describe all or part of the content of any contracts’21. The definition largely corresponds to the definition in international sets of rules. Thus, Art. 2.1.19(2) of the Principles of International Commercial Contracts (PICC) defines SCT as ‘provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the counter-party’. The Principles of European Contract Law (Art. 2:209(3) PECL) include a comparable definition considering that SCT are: ‘[…] terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which have not been individually negotiated between the parties’. To qualify as general conditions under Swiss law, contractual clauses must therefore have three characteristics: – Advance formulation. SCT are formulated in advance by a drafter. The party using these SCT has usually drafted them, but it may also have used SCT prepared by third parties, such as professional associations. The supplier of SCT, which is often the drafter, then makes these SCT available to the counter-party or customer. – Intention to use multiple times. SCT are standardised because they are intended to be used in multiple contracts. This is also why they are generally drafted as a separate document and annexed to the main contractual document. However, the fact that these SCT have not yet been used, or that they have been used only in a very limited number of contracts, or even just once, does not change their nature.22 What matters more is the intention to use them for many contracts as a standardisation mechanism of contracts.23 This excludes ‘tailor-made’ provisions.

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18 FT, decision of 10 December 2018 4A_499/2018, reason c. 3.3.2; also DFT, 138/2012 III 411, reason 3.5; however DFT, 109/1983 II 452, reason 5a, was unclear in that respect. 19 FT, decision of 10 December 2018 4A_499/2018, reason c. 3.3.2. 20 Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 129; undecided, Stöckli, 202 et seq.; contra: Kramer/Probst/Perrig, mn. 504; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 82; Morin, 160. 21 FT, decision of 28 November 2012 4P.135/2002, reason 3.1; Pichonnaz, ibid., mn. 4; Thouvenin, ibid., mn. 1 et seq., 78; Kramer/Probst/Perrig, mn. 73. 22 Pichonnaz, ibid., mn. 9; Kramer/Probst/Perrig, mn. 80. 23 Pichonnaz, ibid., mn. 4.

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Drawing a distinction between SCT and ‘tailor-made’ provisions is not always simple.24 The main feature of SCT lies in their general and abstract drafting characteristics and often in the use of standard formulations for complex contracts. – Absence of individual negotiation. SCT keep their nature of being ‘standard’ contract terms when they have not been individually negotiated. Individual negotiation takes place when there is an effective opportunity for the customer to influence the content of the terms. Thus, there is no individual negotiation when a request to discuss one term or the other was rejected, or when a provision has been highlighted (e.g. by setting them in bold) by the supplier of the SCT or by the counter-party.25 Similarly, when the counterparty has requested additional information on a specific term (highlighted or not) and following clarification the term is not modified, the term may not necessarily be regarded as individually negotiated. Individual negotiation requires that the parties have not only discussed its content but also, in principle, have modified a term, in particular by additions, corrections or adaptations; or, in absence of modification, the discussion on the substance has ended with the counter-party’s consent to the wording.26 The way in which the SCT are drafted, i.e. often in a separate document that appears to be unchangeable, and the fact that the customer is often told that the SCT cannot be changed, justify the notion that the threshold to accept that specific SCT have been individually negotiated must be reasonably high. The expectations will certainly differ according to the value of the transaction and whether or not the counter-party is a business itself. In B2C contracts, the costs of searching for better terms or negotiating such terms are often too high; therefore, for those contracts, negotiation can seldom be presumed as the contract value is mostly low. In B2B contracts, however, this possibility might be higher. Even when the counter-party/customer has had a real opportunity to modify a provision, but has not done so, it is in my opinion necessary to exercise considerable restraint in denying the character of SCT to such provision. The ‘negotiation’ period will often be brief, without real time for the counter-party to become aware of all the consequences of various clauses, whereas in most cases the supplier of SCT will have had more time for consideration before submitting them.27 The mere fact that one clause of a whole set of SCT is negotiated does not prevent the remaining provisions from qualifying as SCT. However, the court will assess this question in the light of the entire contract.28 Finally, SCT which are formally incorporated into the basic contract document maintain their nature as SCT, provided that their standardised nature and their potential repeated use are still identifiable.29 bb) Global incorporation. To be binding, SCT need to be incorporated into the contract. However, for the regime of surprising terms to apply, SCT must have been ‘globally incorporated’ into the contract.30 i) Incorporation. Incorporation of SCT is the result of a declaration of will by which the customer agrees, at the time of conclusion of the contract, that specific SCT will form an integral part of the contract.31 24

ibid., mn. 10; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 3. Pichonnaz, ibid., mn. 8; Thouvenin, ibid.; Kramer/Probst/Perrig, mn. 84. 26 Pichonnaz, ibid.; Thouvenin, ibid.; Kramer/Probst/Perrig, ibid. 27 Pichonnaz, ibid. 28 FT, decision of 28 November 2002 4P.135/2002, reason 3.1; Kramer/Probst/Perrig, mn. 85; Pichonnaz, ibid. 29 Kramer/Probst/Perrig, mn. 76. 30 DFT, 123/1997 III 25, reason 2c/bb; DFT, 118/1992 II 295, reason 2 a. 31 DFT, 123/1997 III 25, reason 2c/bb; DFT, 118/1992 II 295, reason 2b; FT, decision of 1 April 2004 4C.347/2003, reason 3.1. 25

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This acknowledgment may be done without any specific form, according to the general principle of freedom of form (Art. 11 CO); it could also be the result of a tacit acknowledgment, especially when the parties are professionals, who are regularly in contact.32 However, incorporation is mostly achieved by way of an incorporation clause, which refers to the specific SCT. It must also be done in a specific form, when the contract itself is subject to specific form requirements. For the incorporation to be effective, the supplier must comply with three precontractual duties: – A duty to refer to the SCT before conclusion of the contract.33 The incorporation of SCT is subject to the specific consent of the recipient. The supplier must inform the counter-party that it intends to include SCT in the contractual relationship. It must make a sufficiently explicit reference to the existence and content of the SCT which it intends to include into the contract. Reference to the SCT may be made in different ways, but the less the counter-party expects such SCT, the more explicit the supplier should be in its reference to them. Reference to the SCT must be made at the latest at the time of conclusion of the contract. In contracts concluded by electronic means, it should be before the counterparty clicks on the order button. It is not sufficient for the supplier to report the existence of SCT in the receipt, invoice, delivery note or automatically generated order confirmations.34 In these cases, however, only the counter-party can invoke the fact that the SCT have not been incorporated into the contract. The supplier is not allowed to do so, since this would constitute an abuse of rights (venire contra factum proprium) under Art. 2(2) CC. In order for SCT produced after the conclusion of the contract to become an integral part of the contract, a subsequent agreement of the parties is required. The reference of the supplier to its SCT after conclusion of the contract constitutes an offer to modify the contract, which must be accepted by the counter-party. Such modification may only have retroactive effect if that is the intention of the parties according to interpretation of their declaration of consent. In some states of the USA, the mere fact of using a webpage after being notified of the existence of SCT is interpreted as an assent.35 Sometimes even a system of ‘pay now, terms later’ (PNTL) is accepted as a valid incorporation of SCT, where the terms arrive later with the purchased items.36 There is no case law on this in Switzerland and the tendency is to resolve those issues through interpretation of the will of the parties. – Reasonable availability test. For general conditions to be validly incorporated into the contract, the counter-party must have a reasonable opportunity to become aware of their content, at the latest at the time of conclusion of the contract.37 A blanket reference to branch conditions applicable in a specific field of activities is thus not sufficient, even for contracts concluded between professionals. It is, however, not 32 FT, decision of 2 June 2015 4A_47/2015, reason 5.1; FT, decision of 15 December 2003 4C.282/2003, reason 3.1. 33 DFT, 139/2013 III 345, reason 4.3; Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 52; Kramer/Probst/Perrig, mn. 90, 133 seq.; in detail, Perrig, 29 et seq. 34 Pichonnaz, ibid. 35 This is typical for the US court practice, see among others Nguyen v. Barnes & Noble, Inc., 763 F.3d 1171 (9th Cir. 2014); Specht v. Netscape Communications Corp., 306 F.3d 17 (2nd Cir. 2002). 36 See among others Hill v. Gateway 2000, 105 F.3d 1147 (7th Cir 1997); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); Specht v. Netscape Communications Corporation, 306 F.3d 17 (2nd Cir. 2002). 37 DFT, 139/2013 III 345, reason 4.3; DFT, 100/1974 II 200, reason 5d; DFT, 77/1951 II 154, reason 4; Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 53; Kramer/Probst/ Perrig, mn. 137; in detail, Perrig, 29 et seq.

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necessary for the counter-party to have read the SCT or that they are delivered to him personally. It is sufficient that the text has been made available by the supplier and been reasonably accessible to the counter-party before or at the time of conclusion of the contract.38 The way in which the availability is made is irrelevant as long as the general 32 conditions are accessible to the recipient without difficulties (i.e. immediately and freely accessible).39 The text of the SCT can thus be attached to the contract, sent to the counter-party, presented, delivered, communicated verbally to it or made clearly visible by any other form. In commercial premises, for example, SCT could be displayed in a place accessible to the counter-party when it concludes the contract. In the particular case of contracts concluded by electronic means, the counter- 33 party must be able to download, save and print the SCT.40 For this purpose, a clearly visible (e.g. different colour or underlined) direct hyperlink to the SCT on the order page of the website is sufficient. In B2B contracts, authors consider that a reference to the SCT in the basic navigation bar or main menu is sufficient, even if it is not particularly highlighted, since a professional party can be expected to pay increased attention in internet transactions.41 However, as the anonymity of the internet makes it is difficult (if not impossible) for the supplier to determine whether or not the counter-party is a professional, it should give priority to a simple and clear access to the SCT (direct hyperlink). Finally, whether or not the recipient is a professional, it must be able to take note of the SCT before clicking on the order button. – A duty to use lawful general conditions. Finally, the use of general conditions must 34 not be prohibited. In particular, account must be taken of the special rules of certain contracts, which exclude the use of SCT to the detriment of the weaker party (for example, see Art. 256(2)(a) CO for lease contracts42). ii) Global. The parties can incorporate SCT into the contract by means of an 35 individual or a global incorporation.43 Individual incorporation occurs when the counter-party takes note of the content of 36 the essential provisions of the SCT by reading them, discussing and possibly understanding them. Individual incorporation, which consists solely of taking note of the SCT, should not be confused with individual negotiation,44 which disqualifies SCT, validly incorporated, as SCT protected by the regime of surprising terms. Global incorporation occurs when the counter-party accepts the SCT ‘as a whole’, i.e. 37 without reviewing, discussing and understanding them. However, as mentioned,45 SCT must be reasonably available and accessible to the counter-party at the latest at the conclusion of the contract, to be validly incorporated into the contract. There is a presumption of global incorporation.46 38

FT, decision of 2 June 2015 4A_47/2015, reason 5.4.1; DFT, 139/2013 III 345, reason 4.3. Kramer/Probst/Perrig, mn. 137; Tercier/Pichonnaz, mn. 935. 40 DFT, 139/2013 III 345, reason 4.4 (issue remained open); Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 53; Kramer/Probst/Perrig, mn. 137. 41 Pichonnaz, ibid. 42 See mn. 54. 43 Pichonnaz, ibid mn. 61 et seq.; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 53; Kramer/ Probst/Perrig, mn. 87 et seq. 44 See mn. 19. 45 See mn. 31 et seq. 46 Pichonnaz, ibid., mn. 63; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 52; Kramer/ Probst/Perrig, mn. 87. 39

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According to the Federal Tribunal, the regime of surprising terms only applies when SCT have been incorporated ‘as a whole’, i.e. globally, into the contract47. Thus, the supplier can avoid the regime of surprising terms if it can prove that the counter-party has taken note of the content of the SCT by way of individual incorporation into the contract. 39 The ability to review and possibly understand SCT should not, in my opinion, preclude the counter-party from any protection when there was no real opportunity to negotiate these terms in the first place. There is indeed no reason to distinguish between the counter-party reading the SCT and the one who does not do so, when the principle is that of ‘take-it or leave-it’48. Otherwise, this would result in encouraging the counter-party not to read the SCT to ensure a better protection. This cannot be the aim of such regime. 38

cc) An interpretation contra proferentem. Before examining whether SCT may be surprising terms, it is necessary to interpret any contractual clause to settle its meaning; this is also true for SCT. Like most legal systems, Swiss law has adopted the interpretation contra proferentem,49 which goes back to the Roman law rule of interpretation valid for unilateral oral contracts (stipulatio)50. It aims at improving the quality and transparency of SCT. According to this rule, in case of doubt over the meaning of SCT, it is necessary to choose the most favourable interpretation for the counter-party, and decide against the supplier (in dubio contra stipulatorem). The rule sets an incentive to suppliers of SCT to avoid equivocal terms as much as possible. It has been expressly stated in Art. 33 Federal Insurance Contract Act51. 41 It is only once SCT have been validly incorporated into a contract, and their meaning determined by means of interpretation based on the contra proferentem rule, that the court has to examine specifically the doctrine of surprising terms. 40

dd) Subjectively and objectively surprising terms. To qualify as surprising, a contractual term or clause must be unexpected. The surprising nature of a term generally results from its content (or purpose). This applies in particular to terms of which the content is extraordinary (‘atypical’) in the context of the proposed contract,52 producing a significant imbalance to the detriment of the counter-party. However, the element of surprise may also arise from formal rather than mere substantive aspects. For example, an element of surprise may result from the place reserved for a term in the contract (in particular when it is ‘hidden’), the complicated or misleading formulation of such clause or terms53 or the difference between the terms incorporated into the contract and the terms presented during negotiations of the contract as such or the supplier’s publicity.54 The surprising nature of a term can also result from the conjunction of several of these elements. 43 First, the surprising nature of a term has to be assessed subjectively.55 The court shall determine whether, having regard to the circumstances, the counter-party could or should have expected such term. In its assessment, the court has to consider in 42

47 FT, decision of 3 June 2015 4A_119/2015, reason 2.2; DFT, 138/2012 III 411, reason 3.1; DFT, 135/ 2010 III 225, reason 1.3; DFT, 135/2010 III 1, reason 2.1. 48 Kramer/Probst/Perrig, mn. 87, consider that reading but not understanding is still global incorporation. 49 Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 83 et seq.; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 55 et seq.; Kramer/Probst/Perrig, mn. 253. 50 D. 45,1,38, 18 (Ulpianus libro 49 ad Sabinum): ‘In stipulationibus cum quaeritur, quid actum sit, verba contra stipulatorem interpretanda sunt.’ 51 Federal Insurance Contract Act of 2 April 1908, Systematic Collection 221.229.1, available on page: https://www.admin.ch/opc/fr/classified-compilation/19080008/index.html. 52 DFT, 126/2000 III 278, reason 4 b. 53 FT, decision of 1 October 2004 5C.134/2004, reason 4.2; Kramer/Probst/Perrig, mn. 181. 54 DFT, 138/2012 III 411, reason 3.1. 55 Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 96; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 54; Kramer/Probst/Perrig, mn. 178.

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particular the specific knowledge and experience (or inexperience) of the counter-party in the respective field,56 but also its training or education,57 at the time of conclusion of the contract58. The same term may thus be surprising for one person and usual for another. For example, a specific term of SCT used in a given commercial field can be surprising when supplied to a person or an entity which is not familiar with such a field, but could be considered as usual (and not surprising) when addressed to an expert in that field.59 Subsequently, the surprising nature of a term has to be assessed objectively.60 The 44 term must therefore substantially change the nature of the contract in question or deviate significantly from the legal framework characteristic of this type of contract.61 In general, the more a clause deviates from default provisions, the more likely the courts are to deem it surprising.62 Further, the more a clause weakens the legal status of the counter-party, the more likely it will be regarded as having a surprising character.63 The objective assessment is therefore also triggered by the importance of the imbalance which it creates to the detriment of the counter-party. Examples of terms that the Federal Tribunal has held to constitute surprising terms 45 include: – Terms which exclude insurance liability only for minor negligence of temporary employees, but not for gross negligence,64 even if usual in the field of activity; – Terms giving full power of agency, including acceptance of the final bill, to an architect, acting for an inexperienced owner building a house;65 – Terms which provide for an exemption of liability for full vehicle insurance in case of minor breach of driving regulations, since it objectively deviates fundamentally from a usual motor insurance contract;66 – Terms that exclude coverage for a collectively insured person in the case of unemployment, if such person later concludes an individual insurance contract;67 – Terms that enable a bank to pay a customer an amount from a savings account without asking for the identity of such a customer;68 – Terms that allow an insurance company to reduce the period of indemnity after occurrence of an insured risk, by unilaterally terminating the insurance contract;69 – Terms that allow unilateral changes of SCT without giving a right to terminate to the counter-party;70 56 FT, decision of 19 April 2016 4A_601/2015, reason 2.2.3; FT, decision of 16 June 2009 4A_84/2009, reason 2.1. 57 FT, decision of 14 October 2013 4A_247/2013, reason 2.4. 58 FT, decision of 19 April 2016 4A_601/2015, reason 2.2.3; DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 1, reason 2.1. 59 DFT, 140/2014 III 404, reason 5.1; DFT, 138/2012 III 411, reason 3.1. 60 Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 97; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 54; Kramer/Probst/Perrig, mn. 179 et seq. 61 DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 225, reason 1.3; DFT, 135 III/2009 1, reason 2.1. 62 See DFT, 138/2012 III 411, reason 3.1; FT 135/2009 III 225, reason 1.3; DFT, 119/1993 II 443, reason 1a; FT, decision of 3 June 2015 4A_119/2015, reason 2.2. 63 DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 225, reason 1.3; DFT, 135 III/2009 1, reason 2.1; DFT, 109/1983 II 452, reason 4 in fine. 64 FT, decision of 9 May 2008 4A_187/2007, reason 5.4. 65 DFT, 109/1983 II 452, reason 5 c. 66 DFT, 119/1993 II 443, reason 1 b. 67 FT, decision of 7 May 2002 5C.74/2002, reason 2c; confirmed in FT, decision of 7 April 2009 4A_39/ 2009, reason 3.5. 68 DFT, 116/1990 II 459, reason 2 a. 69 DFT, 135/2009 III 225, reason 1 a. 70 DFT, 135/2009 III 1, reason 2.6‐3.5.

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– Terms that provide for an automatic renewal of the contract for a significantly long period;71 – Terms that divide by two the amount allowed by a health insurance in case of psychological illness compared to ‘ordinary’ illness.72 46 Examples of terms for which the Federal Tribunal has refused to apply the doctrine of surprising terms include: – Terms which provide that the customer has to bear the risk of loss or theft of Eurocheques;73 – Terms which exclude coverage of hospital insurance for illnesses and accidents relating to the abuse of medicines or suicide attempts;74 – Terms which provide that a bank has the right to delete the credit already ascribed to the account after presentation of a cheque, when the counter-value does not reach the bank;75 – Terms which provide that the customer of a bank waives the right to set-off the claim for warranty for defects against the purchase price towards the seller, a bank;76 – Terms which provide that a claim against an insurer is unenforceable (time-barred) if it is not made within a certain period of time;77 – Terms which provide that a gym-contract which is limited to one year is automatically renewed for another year in absence of a notice of termination sent three months prior to the end of the contract period;78 – Terms which provide that compensation is limited to the effective price of the car, insured under comprehensive insurance (‘full casco’), despite a high value and therefore loss by the customer;79 – Terms which allow insurance coverage to terminate at the end of the period of insurance, when the motorhome remained abroad for a longer period;80 – Terms under which the user of a parking space has to pay the full amount from 7 a.m. if the parking ticket has been lost;81 – Terms that limit the number of days of coverage for a stay in a psychiatric clinic to 180 days out of 1,080;82 the fact that the customer was aware of the insurance field of activity played an important role (no subjective surprising terms). e) Legal consequences. Where the regime of the surprising terms applies, the ‘surprising’ term is excluded from the global incorporation of the SCT.83 In other words, it is not covered by the general consent given by the counter-party to these SCT and is therefore not part of the contract. The clause is thus ineffective and is not enforceable against the counter-party.84 48 As the counter-party does not read SCT in the case of global incorporation, settled case law holds that, in accordance with the principle of good faith, the supplier of SCT 47

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FT, decision of 13 May 2005 5P.115/2005, reason 1.2. DFT, 138/2012 III 411, reason 3.5. 73 DFT, 122/1996 III 373, reason 3 a. 74 FT, decision of 1 October 2004 5C.134/2004, reason 4.2. 75 FT, decision of 4 May 2006 4C.427/2005, reason 2.2, 2.3. 76 DFT, 109/1983 II 213, reason 2. 77 FT, decision of 18 August 2008 4A_200/2008, reason 2.3. 78 FT, decision of 15 July 4A_475/2013, reason 5.3.2, unpublished reason of DFT, 140/2014 III 404. 79 FT, decision of 3 June 2015 4A_119/2015, reason 2.5. 80 FT, decision of 29 April 2015 4A_48/2015, reason 2.3. 81 Geneva Court of Justice: (1992) Semaine Judiciaire 170, reason 3. 82 FT, decision of 10 December 2018 4A_499/2018, reason 3.4‐3.5. 83 DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 1, reason 2.1; FT, decision of 7 May 2019 4A_540/2018, reason 1.5; FT, decision of 10 December 2018 4A_499/2018, reason 3.3. 84 DFT, 133/2007 III 607, reason 2.2; FT, decision of 20 April 2009 4A_54/2009, reason 1. 72

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has to assume that the counter-party’s consent to the SCT covers only those clauses that are typical (i.e. similar to default provisions), or customary (i.e. standard for the type of contract in question); surprising terms are therefore excluded.85 However, if the attention of the counter-party has been specifically drawn to some 49 surprising terms, for example by having those terms in bold and express reference made to them, the counter-party is precluded from invoking the regime of surprising terms.86 Thus, if the supplier wants to enforce terms which might be considered as surprising, it has to prove that the counter-party has specifically consented to the incorporation of those terms by demonstrating that it has specifically made the counter-party aware of the surprising terms, at the latest at the time of conclusion of the contract.87 This requires in particular that the supplier has visually highlighted the surprising clauses, in particular by bold type or larger letters, or that it has drawn the counter-party’s attention to these terms in a sufficiently clear manner and in a separate way, either orally, or more often in a written document.88 As mentioned above,89 in my view, the highlighting of surprising clauses and even 50 their reading by the recipient should not exclude an application of the regime of the surprising terms when a negotiation of such terms is de facto excluded. There is no reason to distinguish a counter-party who reads the general conditions and one who does not, when the principle is that of ‘take-it or leave-it’.

2. Unlawful, immoral or impossible terms Pursuant to Art. 20(1) CO, a contract with impossible, unlawful or immoral terms is 51 void. This provision applies also to SCT. Freedom of contract only applies within the limits set by the law, which means limits set by statutory law, customary law, judgemade law and other general principles that may apply. Art. 20(1) CO sets out the effects of a contract that is in whole or in part unlawful, 52 immoral or impossible. The contract is null and void, which means that its nullity may be raised by anyone, at any time, without being affected by the period of limitation.90 If unlawfulness affects only part of the contract or part of SCT, Art. 20(2) CO provides for partial nullity, as presented below.91 a) Unlawful. A clause which is part of a SCT is unlawful and void if it contravenes a 53 mandatory statutory provision. This may result from the content of the clause itself, such as a clause exempting from liability in the case of personal injury or the violation of personal integrity, protected by Art. 27 CC.92 It may also derive from the mere conclusion of a contract itself, but then it is not restricted to SCT. An example would be a party inducing another to breach a contract in order to conclude one with itself. This would be a violation of Art. 4(d) and (d) UCA, as an act of unfair competition, it would be unlawful or at least immoral.93 The unlawfulness may also result indirectly from the aim of the contract, which might be to lead indirectly to an unlawful result.94 85

DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 1, reason 2.1. Zurich Commercial Court: (1996) Blätter für Zürchersiche Rechtsprechung 144. 87 DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 225, reason 1.5. 88 Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 54; Kramer/Probst/Perrig, mn. 182. 89 See mn. 19 et seq 90 For example, DFT, 129 III 209, reason 2.2; Gauch/Schluep/Emmenegger, mn. 681; Tercier/Pichonnaz, mn. 533. 91 See mn. 65. 92 Tercier/Pichonnaz, mn. 947; Koller, mn. 13.97. 93 Morin/Oppliger, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 4 UCA mn. 7 et seq. 94 Tercier/Pichonnaz, mn. 784. 86

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The mandatory character of a statutory provision may derive expressly from that provision. Important examples include: – Art. 100(1) and 101(3) CO declare void (i) the exclusion of liability in the case of fraud or gross negligence95 and (ii) exclusion of liability in the case of minor negligence, when the liability arises in connection with commercial activities conducted under official licence96. – Art. 199 CO declares void any agreement to exclude or limit the warranty rights if the seller has fraudulently concealed the failure to comply with the warranty from the buyer. Such exclusion or limitation of warranty is often part of SCT. – Art. 256(2) CO provides that clauses deviating from the standard duties of a landlord which would adversely affect the tenant are void if they are set out (i) in previously formulated general terms and conditions or (ii) in leases for residential or commercial premises. – Art. 273c CO declares that a tenant may waive the rights conferred on him by the provisions on ‘Protection against Termination of Leases of Residential and Commercial Premises’ only where this is expressly envisaged; all agreements to the contrary are void. – Art. 418u in fine CO states that an agent or its heirs will have an inalienable claim for adequate compensation in the case of termination of a commercial agency contract. SCT may therefore not exclude such a right to compensation. 55 The mandatory character of a provision may also derive impliedly from the spirit and the protective purpose of a given provision. This is obviously subject to interpretation,97 but refers to provisions on the requirements of formalities, which usually trigger nullity, unless they are considered as merely formalities for the sake of keeping registries in good order. 56 An important example is Art. 404 CO, which the Federal Tribunal interprets as being mandatory; it allows the termination of a contract of mandate/agency or any similar contract for services at any time, and limits the right for compensation to termination given at an inopportune time and then only for reliance damages (‘negative interest’).98 57 Violation of personality rights (Art. 27 CC) also leads to a contract being void. Where a party is bound by a restriction for a long period of time, it may be immoral.99 An example may be a SCT setting a financial penalty clause, based on the FIFA disciplinary code, by which a football player was threatened with an unlimited prohibition on playing if he did not comply with the financial penalty.100 54

b) Immoral. Art. 41(2) CO provides that a person who wilfully causes loss or damage to another in an immoral manner is obliged to pay damages. Similarly, in terms of Art. 20(1) CO, a contract or a clause that is initially immoral is null and void.101 59 A contract is contrary to morality or immoral in relation to one of its clauses or in its entirety if, without breaching a mandatory provision, it contravenes established morality, i.e. by the general feeling of propriety or by the principles and value judgements implied by the legal order as a whole.102 58

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See mn. 78 et seq. See mn. 84. 97 Koller, mn. 13.99. 98 On the principle, see FT, decision of 11 June 2018 4A_129/2017, reason 3.2; DFT, 115/1989 II 464, reason 2a; on the ambit of reliance damages, FT, decision of 11 June 2018 4A_129/2017, reason 3.2; FT, decision of 13 February 2014 4A_284/2013, reason 3.6.1. 99 DFT, 114/1988 II 159, reason 2a; DFT, 143/2017 III, reason 5.6.2 [30-year shareholders’ agreement]. 100 DFT, 138/2012 III 322, reason 4.3.3. 101 Koller, mn. 13.99, 13.128; Tercier/Pichonnaz, mn. 805. 102 DFT, 132 III 455, reason 4.1; decision of the FT 4A_3/2014, reason 3.1; decision of the FT 4A_37/ 2008, reason 3.1; Koller, mn. 13.174 seq. 96

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Immorality of a particular contractual provision or of the contract as a whole may 60 take two forms: – Immorality arising from the subject matter of the undertaking. A clause which 61 breaches personality rights, such as a contract allowing physical harm without consequences used to be considered as immoral;103 today, it would probably instead be unlawful. The agreement to waive an opposition to a request to build or to renounce to an appeal in consideration of a sum of money might be considered as immoral, if the opposition or the appeal had no chance of success.104 – Immorality because of a breach of commercial loyalty. This is the case for instances 62 of bribery, if not directly void as unlawful.105 c) Impossible. When a clause leads objectively to an impossible result it is deemed 63 not to have been written. For ancillary clauses, this might lead simply to the provision being ignored. d) Legal consequence. Art. 20(1) CO sets out the effects of a contract that is unlawful, 64 immoral or impossible in whole or in part. The contract is null and void.106 The nullity can be raised by anyone, at any time, without being affected by the period of limitation.107 This so-called ‘absolute’ nullity (or voidness) of these terms exists from the time of conclusion of the contract. As mentioned above,108 there may be cases in which the breach affects only part of a 65 contract or part of a contractual clause (or part of SCT). Art. 20(2) CO provides then for partial nullity;109 meaning that the lawful, immoral or impossible clauses are removed and the contract stands without these, if the parties would have envisaged concluding the contract with the remaining provisions (hypothetical intent of the parties). If this results in a gap, it will be filled by the usual principles, especially default rules (‘geltungserhaltende Reduktion’)110. However, with regard to SCT, the Federal Tribunal has refused to adapt the contract; it only applies the regime of nullity to the unlawful clause, without filling in the gap with default rules.111

3. Excessive penalty clauses According to Swiss law, penalty clauses are valid. Art. 160(1) CO provides: ‘where a 66 penalty is agreed for non-performance or defective performance of a contract, unless otherwise agreed, the creditor may only compel performance or claim the penalty’. The penalty may be claimed even in the absence of any loss or damage, in terms of Art. 161(1) CO. Nonetheless, Art. 163(3) affords the court the discretion to reduce penalties it considers excessive. SCT may contain penalty clauses. This is the case, for example, when SCT expressly 67 provide that in the case of late performance or termination, a fixed amount or a 103

DFT, 44/1918 II 77, reason 2. DFT, 138/2012 III 29 (appeal); FT, decision of 8 February 2012 4A_657/2011, SJ 2012 I 433, reason 3; FT, decision of 12 June 2008 4A_37/2008, reason 3 (opposition). 105 DFT, 129/2003 III 320. 106 Koller, mn. 13.128 et seq.; Tercier/Pichonnaz, mn. 817 et seq. 107 DFT, 129/2003 III 209. 108 See mn. 52. 109 DFT, 143/2017 III 600; DFT, 131/2005 III 636, JdT 2006 I 539; application by analogy in arbitration matters, see DFT, 130/2004 III 66; Koller, mn. 13.146 seq.; Schwenzer/Fountoulakis, mn. 32.39 seq.; Tercier/Pichonnaz, mn. 823. 110 DFT, 138/2012 III 29, reason 2; DFT, 131/2005 III 467; Koller, mn. 13.137; Schwenzer/Fountoulakis, mn. 32.43 seq.; Tercier/Pichonnaz, ibid. 111 FT, decision of 18 December 2008 4A_404/2008, reason 5.6.3.2.1; Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 172. 104

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percentage of the remuneration has to be paid or, if already paid, can be kept by one party, irrespective of any loss. Art. 163(3) CO is similarly applicable, in terms of Art. 162(1) CO, when SCT provide that the whole or part of any down payments can be kept by the creditor in the event that the contract is terminated.112 With regard to Art. 163(3) CO, the court has some discretion in reducing the penalty amount. The Federal Tribunal has refused to fix percentages or fixed amounts; it considers that the assessment has to be made with regard to all the circumstances, especially whether there is a material discrepancy between the agreed amount and the interest of the creditor to obtain full performance, given the moment when the termination or breach of contract occurred.113 The courts have also to take into account the nature and duration of the contract, the seriousness of the fault and breach of the contract, the economic situation of the parties and the potential dependency relationship.114 There is, however, a tendency to cap penalty clauses at 10 % of the total amount, which might increase to 20 % in specific circumstances.115 Being a mandatory provision of ordre public in private international law, the courts have to apply Art. 163(3) CO on their own motion, even if not requested by one party to do so.116 For the court to reduce an excessive penalty clause, the debtor nevertheless has to invoke and give evidence of the factual circumstances which may justify a reduction, such as the approximate amount of the actual loss suffered or the lack of interest in full performance of the creditor.117 A reduction of an excessive penalty clause is possible even if the amount has already been paid. However, restitution of the excessive part is only possible if the payment took place for another reason. For instance, if a down payment is then kept as a penalty because of termination, the excessive part can be claimed back.118 Art. 63(1) CO, which prevents restitution of a payment made voluntarily and without mistake, does not apply, since the down payment was due when paid. It is only after termination that the amount was requalified as penalty clause pursuant to SCT, and became excessive.

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Art. 21(1) CO concerns unfair advantage and sets out the objective requirement of a clear discrepancy between the performance and counter-performance and the subjective requirement of exploitation of the other’s straitened circumstances, inexperience or thoughtlessness may not be solely because of SCT. However, some SCT may trigger such a result for the whole contract.

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a) Clear discrepancy. There should be a substantial discrepancy between the contractual performance required from both parties. Case law has not decided how much is too much. However, given the principle of freedom of contract, the tendency of the courts is to be quite restrictive in accepting the excuse of unfair advantage.

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b) Exploitation. The substantial discrepancy must be the result of the exploitation of the counter-party’s financial embarrassment, inexperience or frivolousness. Financial embarrassment or constraint has been recognised in the case of a football club that 112

For such a case, see DFT, 133/2007 III 43. FT, decision of 14 December 2016 4A_268/2016, reason 5.1 (unpublished in DFT, 143/2017 III 1); FT, decision of 29 July 2008 4A_237/2008, reason 4.3, DFT, 133/2007 III 201. 114 DFT, 133/2007 III 43, reason 3.3.2. 115 ibid., reason 5.5; Mooser, in Code des obligations I, Art. 163 CO mn. 9. 116 DFT, 133/2007 III 201, reason 5.2; FT, decision of 29 January 2018 4A_508/2017, reason 4.4. 117 DFT, 143/2017 III 1, reason 4.1; FT, decision of 6 February 2016 4A_468/2016, reason 6.1. 118 DFT, 133/2007 III 43, reason 3.5.1; DFT, 133/2007 III 201, reason 3. 113

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could no longer afford the rent of the playing field after being forced to accept a substantial increase. The club had no other choice than to accept the overly high rent, since otherwise it had to play the whole season in the neighbouring village.119 This type of financial constraint does not really apply only to SCT, but most of the time to the conclusion of a contract as such. It is therefore not really SCT-specific. Similarly, inexperience or frivolousness is already covered to some extent by the doctrine of surprising terms and has not yet been applied specifically to SCT. c) Legal consequences. The party who has suffered as a result of the unfair advantage 75 has one year from conclusion of the contract to ‘not ratify’ the contract, i.e. to accept that it is void, and demand restitution of any performance already made. Due to this time-limit, this device also may not be very effective to challenge SCT. The Federal Tribunal decided in 1996 that, despite the text of Art. 21(1) CO, the 76 party which has suffered loss from an unfair advantage may ask for mere reduction of performance, and not necessarily for full voidness.120 It is however foreseeable that the Federal Tribunal would not apply that decision to SCT, since it considers that SCT should not be adapted if one term is surprising.121

5. Exclusion of liability clauses Limitation or exclusion of liability clauses are governed by general and specific provisions. Art. 100(1) CO forbids clauses excluding liability for gross negligence or fraud. This might be a typical situation for SCT. A contractual party will not be allowed to rely on the limitation or exclusion clause if the damages claim results from gross negligence or fraud. Gross negligence has been defined as the violation of elementary rules of behaviour; whereas fraud covers not only intentional acts, but any abstention or silence when there is a duty to inform or to give advice.122 Art. 100(2) CO moreover gives discretion to the court to declare null and void clauses excluding liability in advance even in the case of minor negligence or absence of fault, provided the creditor was an employee of the debtor or the liability arose in connection with commercial activities conducted under official license (e.g. bank, insurance). Minor negligence is not defined. It results for anything that is not qualified as gross negligence.. However, the line between gross and minor negligence might be difficult to draw; this is one of the reasons why the court has discretion in assessing whether such an exemption clause is or is not valid in the specific situation. It will, however, fairly systematically consider whether the clause is null and void. The second requirement is a more objective one. It covers two issues: – The party suffering loss is an employee of the other party. Typically, an employer cannot waive its liability for minor negligence towards the employee, even in SCT. – The debtor conducts commercial activities under official license. This covers mainly issues in the fields of banking or insurance contracts, but the limits are not settled.123 SCT are very numerous in this field of activity. SCT excluding liability for minor negligence shall not be enforceable against the creditor with a damages claim.124 119

DFT, 123/1997 III 292, reason 5. ibid., reason 2. 121 See mn. 65. 122 FT, decision of 4 July 2018 4A_245/2018, reason 2.1.1. 123 Koller, mn. 60.34; Gauch/Schluep/Emmenegger, mn. 3901. 124 DFT, 132/2006 III 449; DFT, 112/1986 II 450, reason 3 a. 120

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For example, in a case dated 29 May 2018125, the Federal Tribunal stated that a regulation under which the bank bears the risk of an undetected lack of legitimisation or forgery may be amended. Often SCT contain a so-called ‘risk transfer clause’, which has the effect of transferring to the client the risk that the bank in principle bears when performing a money transfer or other service at the request of an unauthorised person.126 The validity of such a clause has to be examined by analogical application of Art. 100 and Art. 101(3) CO (for auxiliaries), but the Federal Tribunal did not conclude in this case whether such a clause is valid or not. In any event, the court stressed that the bank cannot exclude its liability for gross negligence.127 Art. 100 CO might be at issue with liquidated damages clauses. When the parties agree on a fixed amount of compensation in the case of breach of a contractual duty (for instance in a SCT), the amount will no longer vary in the cases of gross negligence, or of minor negligence. This means that neither the debtor nor the creditor can prove that the actual damage is different from the amount set out in the clause. There is thus a fiction as regards the amount of damage downwards combined with an upwards exclusion of liability, whose validity is limited by Art. 100(1) and (2) CO and Art. 101 (3) CO.128 The same is true with a maximum amount, but with no minimum set.129 An exclusion of liability in the case of breach of contract by a sub-contractor or an employee is valid, even if provided for by SCT (Art. 101(2) CO). The only limitation is provided by Art. 101(3) CO, which states that if the creditor is an employee of the debtor or when the liability arises in connection with commercial activities conducted under official licence, any exclusion of liability by agreement may apply at most for minor negligence. Therefore, the right to limit its liability for the act of an auxiliary is broader than what exists under Art. 100 CO. This has been criticized by many authors,130 but the Federal Tribunal has not expanded the limitation beyond what is set out in Art. 101(3) CO. In other words, businesses may limit their liability for acts by auxiliaries even if the latter have been grossly negligent. Finally, Art. 199 CO provides that ‘any agreement to exclude or limit the warranty obligation is void if the seller has fraudulently concealed the failure to comply with the warranty from the buyer’. Such an exemption of warranty for defective goods is therefore valid even if provided for in SCT. The only limit is linked to fraudulent concealment of the defect by the seller. Such fraudulent concealment consists in particular of concealing a fact such as the absence of an expected quality of the thing sold, knowledge of which would have led the buyer not to conclude the contract, or to conclude it on terms different from those agreed.131 The seller must have effective knowledge of the defect; ignorance due to even gross negligence is not sufficient.132 Knowledge need not necessarily be full or cover all details; 125

FT, decision of 29 May 2018 4A_81/2018. ibid., reason 3. 127 ibid., as well as DFT, 132/2006 III 449, reason 2; DFT, 112/1986 II 450, reason 3a; FT, decision of 15 June 2017 4A_379/2016, reason 3.3 and 3.3.1; FT, decision of 5 December 2016 4A_386/2016, reason 2.2.3 and 2.2.4; FT, decision of 23 February 2009 4A_398/2009, reason 5.1.2; FT, decision of 20 April 2009 4A_54/2009, reason 1. 128 On this, see Tolou (‘La forfaitisation’), mn. 45, 1265 seq.; Tolou (‘Les clauses’), 177; Tercier/ Pichonnaz, mn. 1345. 129 Tolou (‘La forfaitisation’), mn. 57, 1265 et seq.; Tolou (‘Les clauses’), 179; Tercier/Pichonnaz, mn. 1347. 130 Among others, Huguenin, mn. 1020. 131 DFT, 132/2006 II 161, reason 4.1; on the whole question: FT, decision of 12 April 2011 4A_70/2011, reason 4.1. 132 FT, decision of 20 August 2009 4A_226/2009, reason 3.2.3. 126

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the exclusion will not be effective where the seller was sufficiently aware about the cause of the defect for the principle of good faith to require him to inform the buyer.133 The concealment must be intentional (dolus eventualis is also sufficient); no distinction is drawn regarding the nature of the fraud. The seller must consciously fail to communicate a defect to the buyer knowing that it is an important element for the latter.134 If those requirements are met, the exemption of warranty is invalid; in all other cases, 88 it is valid, even if provided for in SCT.

6. Modification of the limitation period The previous version of Art. 129 CO declared null and void any modification of the period of limitation provided for in Arts 127–142 CO. Since SCT often adapt the period of limitation for specific claims, this provision was the subject of many concerns and discussions, including its relationship with Art. 141 CO which prohibits advance waiver of the limitation period. In an important decision of 2006, the Federal Tribunal clarified the ambit of both provisions.135 It decided that it is possible to change the period of limitation of any statutory provision, including those of Title 3 (i.e. Arts 127–142 CO), either directly by setting a new period of limitation by agreement (Art. 129 CO) or indirectly by waiving the limitation period (Art. 141 CO). The only restriction is that such a modification cannot be agreed at the time of conclusion of the contract.136 This is an important restriction with regard to SCT. Any waiver or modification of the period of limitation fixed by SCT is invalid, since by definition it occurs at the time of conclusion of the contract. However, if subsequent SCT modify the limitation period, while the contract remains in force, such a modification or waiver is valid. A new set of provisions dealing with the limitation period entered into force on 1 January 2020. Art. 129 CO has not been changed, but Art. 141 CO has been modified. The waiver to invoke the period of limitation has to be in writing and, in terms of Art. 141(1bis) CO, only the supplier of SCT may waive its right to invoke the period of limitation, not the counter-party. This means that a mutual waiver of a period of limitation for a certain period in SCT is not possible. Moreover, since Art. 129 CO has not been modified, it can be asked whether the previous case law still remains valid, i.e. whether it is possible to modify the period of limitation after conclusion of the contract, for instance by submitting a new set of SCT. This is far from clear and future cases will have to settle this issue.

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7. Judicial review of unfair terms As Art. 8 UCA is applicable only to B2C contracts, this provision should not in 93 principle be mentioned here. However, the notion of the ‘consumer’ is not yet settled by case law. A majority of authors consider that the notion of consumer refers only to a natural person, who uses the goods or services for private consumption, and not for his or her trade, business or profession.137 However, some authors consider rightly that a legal entity could also qualify as 94 consumer, but only when it uses the goods and services for private consumption, and 133

DFT, 66/1940 II 132, reason 6. FT, decision of 7 September 2010 4A_301/2010, reason 3.2: (2011) I Semaine Judiciaire 17. 135 DFT, 132/2006 III 226. 136 ibid., reason 3.3.7. 137 For example, Kramer/Probst/Perrig, mn. 504; Thouvenin, in Basler Kommentar UWG, Art. 8 UCA mn. 82; Morin, 160. 134

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not for its trade, business or profession. This would therefore mainly be associations or private foundations concluding contracts for hobby activities or leisure.138 95 In other words, Art. 8 UCA will in any case not be applicable to businesses acting in their course of business and trade, i.e. in B2B contracts. That is why a detailed analysis of this provision is not necessary here. Despite numerous publications on Art. 8 UCA, its requirements, scope of application and inter-temporal application, the Federal Tribunal has not yet been asked to decide upon its application. The only decision concerns the inapplicability of Art. 8 UCA in a particular case, in which the automatic renewal clause of a gym-contract had already produced its effect before the new Art. 8 UCA entered into force.139

IV. International application 96 97

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In contractual matters, Switzerland has ratified some conventions on applicable law. The Hague Convention of 15 June 1955, on the Law Applicable to International Sales of Goods, entered into force for Switzerland on 27 October 1972.140 The number of ratifying States is limited. As of 2019, only eight States have ratified the Convention, namely Denmark, Finland, France, Italy, Niger, Norway, Sweden, and Switzerland.141 Under Art. 2 Hague Convention, the applicable law is the one chosen by the parties. In default of such a choice of law clause, Art. 3 Hague Convention provides for the domestic law of the country in which the vendor has its habitual residence at the time when it receives the order, or in which the establishment is situated to apply. If the order has been received in the country in which the buyer has its habitual residence or establishment, it will be that country. If Swiss law is applicable as result of this Convention, the various issues presented above will apply to SCT. Switzerland has also ratified the CISG, which entered into force in Switzerland on 1 March 1991.142 In terms of Art. 4(a) CISG, the Convention does not govern the validity of the contract or of any of its provisions or of any usage. The incorporation of SCT is governed by the CISG provisions on offer and acceptance.143 Issues about the validity of SCT and especially the application of mandatory rules or the doctrine of surprising terms is however outside of the scope of application of the CISG.144 Private international law rules will have to determine therefore which law will govern the validity of the content of SCT or whether there is a case of surprising terms. Swiss standards in this respect are much more lenient than other countries, as shown above. Art. 116 and 117 of the Swiss Private International Law Act (PILA) deal with the applicable law for contracts. Pursuant to Art. 116 PILA, the parties may validly choose the applicable law for their contract. Their choice shall be explicit or derive from the various provisions of the 138 Pichonnaz, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 8 UCA mn. 129; undecided, Stöckli, 202 seq. 139 DFT, 140/2014 III 404. 140 https://www.admin.ch/opc/fr/classified-compilation/19550095/index.html#fn1. 141 https://www.hcch.net/en/instruments/conventions/full-text/?cid=31. 142 https://www.admin.ch/opc/fr/classified-compilation/19800082/index.html. 143 Ferrari, in Kommentar zum UN-Kaufrecht, Art. 4 CISG mn. 21; the issue of battle of the forms is implicitly dealt with by Art. 19 CISG; see Schroeter, in Kommentar zum UN-Kaufrecht, Art. 19 CISG mn. 64 et seq. 144 Ferrari, ibid., mn. 20, with many references.

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contract and the surrounding circumstances (Art. 116(2) PILA). It may be modified at any time; if chosen after conclusion of the contract, the applicable law retroactively applies as of the day of conclusion of the contract (Art. 116(3) PILA). Art. 117 PILA provides that, in the absence of a choice of law clause, the contract is governed by the law of the State with which it has the closest link (Art. 117(1) PILA). These links are deemed to be closest to the State in which the party which has to provide for the characteristic performance of the contract has its habitual residence or establishment (Art. 117(2) PILA). Application of Swiss mandatory provisions is dealt with by Art. 18 PILA. Swiss mandatory provisions which are ‘applicable because of their aim’ have to be applied, whatever law is applicable to the contract. According to case law, this means that mandatory provisions that protect essential interests of social, political or economic order should as such be considered ‘loi d’application immédiate’. In 2007, the Federal Tribunal decided that the right to obtain reduction of excessive penalty clauses under Art. 163(3) is of public order and mandatory.145 This would mean that it is applicable under Art. 18 PILA to any contract whatever law applies to that contract. This is certainly true as well for provisions on exclusion of liability (Art. 100, Art. 101 and Art. 199 CO) and for Art. 21 CO on unfair advantage. With regard to surprising terms, the answer is uncertain. A 2009 decision of the Federal Tribunal has dealt in detail with the issue of ‘loi d’application immédiate’ when the Swiss Federal State files a lawsuit based on its own right of action, under Art. 10(2) (c) UCA. Since such a right of action by the State, when available, is grounded on public interest, the underlying provisions that the State invokes are ‘loi d’application immédiate’.146 The new Art. 10(5) UCA provides expressly that when the State is filing a lawsuit pursuant to Art. 10 UCA, the UCA is a ‘loi d’application immédiate’ under Art. 18 PILA. Authors have therefore concluded that this would also be the case when the right of action belongs to private persons only.147 This would include Art. 8 UCA on unfair terms. Despite this decision, it remains uncertain whether the doctrine of surprising terms would qualify as a ‘loi d’application immédiate’. First, the regime of surprising terms aims at a ‘hidden’ control of the content of SCT, which is less invasive than Art. 8 UCA. If the latter is a ‘‘loi d’application immédiate’, it might be the same for the other. Second, the regime of surprising terms is grounded on the principle of trust.148 However, the Federal Tribunal has rejected the use of the principle of ‘lifting the veils’ (‘Durchgriff’), similarly grounded on the principle of trust, as a ‘loi d’application immédiate’, and applied the lex societatis.149 Finally, the regime of surprising terms is considered by the Federal Tribunal as part of the doctrine of consent, which as such does not qualify as a ‘loi d’application immédiate’. Given this, and the fact that the Federal Tribunal remains not very active in striking down surprising terms, it is probably safe to presume that the Federal Tribunal would not consider the regime of surprising terms as a ‘loi d’application immédiate’ under Art. 18 PILA. It would be difficult to conclude that this doctrine protects essential 145

DFT, 133/2007 III 201, reason 5.2. DFT, 136/2010 III 23, reason 6.6.2.3. 147 Fornage, in Martenet/Pichonnaz (ed.), Commentaire romand, Art. 11 UCA mn. 28; Rüetschi, in Basler Kommentar UWG, Art. 10 UCA mn. 40 seq.; Mächler-Erne/Wolf-Mettier, in Basler Kommentar Internationales Privatrecht, Art. 18 PILA mn. 16b; Bucher, in Droit international prive, Art. 18 PILA mn. 10. 148 DFT, 138/2012 III 411, reason 3.1; DFT, 135/2009 III 1, reason 2.1 149 FT, decision of 3 November 2011 4A_274/2011, reason 7.2.1; Mächler-Erne/Wolf-Mettier, in Basler Kommentar Internationales Privatrecht, Art. 18 PILA mn. 17 e. 146

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interests of social, political or economic order. Therefore, the doctrine of surprising terms will presumably not qualify as a ‘loi d’application immédiate’ under Art. 18 PILA.

V. Conclusion When codifying private law at the end of the 19th century, the Swiss legislator tried to avoid adopting particular rules for specific groups of people.150 This largely explains the absence of both a Commercial Code and a Consumer Code in Switzerland. This is also the reason why mandatory rules or the doctrine of surprising terms similarly apply to SCT incorporated in B2B, B2C and even P2P contracts. 112 As a true product of the then prevailing liberalism, the Swiss Code of Obligations of 1911 is fairly reluctant to limit parties’ freedom of contract. This ensures too that Swiss contract law remains flexible and fit for both international commercial contracts and purely national agreements. Control of content for SCT is therefore relatively restrictive for B2B contracts. It is mainly through the control of consent to SCT, and by means of a small number of mandatory provisions, that the legislator has given the courts powers to intervene in relation to SCT in B2B contracts. 113 Under the influence of EU consumer law and, in general, EU private law, Swiss law has begun to provide for specific provisions protecting consumers in B2C contracts. The rise of a so-called ‘social’ private law has also justified some intervention by the courts to rebalance the interests of consumers and businesses. This trend, however, has not yet significantly influenced the case law on the doctrine of surprising terms or the way in which the courts have enforced mandatory provisions. Whether this will remain so in the future is hard to predict. However, freedom of contract remains a central feature of B2B contracts. Moreover, despite the increasing pressure of EU law to push Swiss consumer law towards a more consumer protective contract law, the Swiss Government and Parliament remain very cautious, to say the least, in expanding consumer protection in Switzerland. It is therefore probably safe to say that B2B contracts, and specifically the regime of SCT in B2B contracts, will not evolve much in the coming years. 111

150 Pichonnaz, 117 et seq., specifically 127; Caroni, 38; Message du Conseil fédéral concernant le projet d’une loi fédérale sur les obligations et le droit commercial, of 27 November 1879, FF (Federal Papers) 1880 I 174 (Report of the government to the parliament on the draft federal statute on law of obligations and law of commerce) (reprinted in Fasel, 1213).

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P. Taiwan Bibliography: C-W Chen (陳忠五), ‘ding xing hua qi yue tiao kuan de gui fan yi ju yu guan zhi fang fa’ (定型化契約條款的規範依據與管制方法) (2012) 197 Taiwan Law Journal 9–20; C-W Chen (陳忠五), ‘min shi lei shi wu dao du’ (民事類實務導讀) (2018) 348 Taiwan Law Journal 159–171; T-C Chen (陳自 強), qi yue fa jiang yi (契約法講義) I (3rd edn., 2014); T-C Chen (陳自強), qi yue fa jiang yi (契約法講 義) III (2015); T-F Chen (陳聰富), min fa zong ze(民法總則) (2nd edn., 2016); T-F Chen (陳聰富), ‘2017 nian min shi fa nian du hui gu’ (2017年民事法年度回顧) (2018) National Taiwan University Law Journal Vol. 47 Spec. 1755–1792; W-Y Chen (陳瑋佑), ‘lun zai huo zheng quan bei mian zhi guan xia tiao kuan’ (論載貨證券背面之管轄條款) (2018) 337 Taiwan Law Journal 1–28; W-Y Chen (陳瑋佑), ‘guo ji shang shi zhong cai xie yi yu fang su kang bian shen li cheng xu shang zhi you xiao xing shen cha’ (國際商事仲裁協議於妨訴抗辯審理程序上之有效性審查) (2018) 357 Taiwan Law Journal 143–162; W-Y Chen (陳瑋佑), ‘fa yuan dui yu guo ji shang shi zhong cai zhi xie li yu jian du’ (法院對於國際商事 仲裁之協力與監督) (2018) 108 Taipei University Law Review 253–331; Hsieh (謝哲勝), ‘ding xing hua qi yue de gui zhi’ (定型化契約的規制) (2017) 68/2 Law Monthly 32–42; Hsieh (謝哲勝), ‘qing shi bian geng yuan ze pai chu shi yong tiao kuan de xiao li’ (情事變更原則排除適用條款的效力) (2017) 68/8 Law Monthly 1–14; Hsu (許耀明), in: guo ji si fa cai pan xuan xi (國際私法裁判選析) (2nd edn., 2018) 170–178; Jan (詹森林), in: min shi fa li yu pan jue yan jiu (民事法理與判決研究) IV (2006) 143–224; Jau (姚志明), qi yue fa zong lun (契約法總論) (2nd edn., 2014); Jseng (曾品傑), ‘fu he qi yue yu ding xing hua qi yue zhi ji ben wen ti’ (附合契約與定型化契約之基本問題) (2006) 25 Tunghai University Law Review 39–74; Jeng (曾品傑), ‘lian dai bao zheng ren wei bei bao zheng ren dui di san ren zhi bao zheng zhai wu fu ze’ (連帶保證人為被保證人對第三人之保證債務負責) (2011) 9 Court Case Times 18–25; Lin (林更盛), ‘qian que qi ta de di yue ke neng: min fa di 247 tiao zhi 1 de bu cheng wen de gou cheng yao jian’ (欠缺其他的締約可能民法第247條之1的不成文的構成要件) (2012) 18 Court Case Times 85–89; Liu (劉鐵錚) / Chen (陳榮傳), guo ji si fa lun (國際私法論) (6th edn., 2018); Shen (沈冠伶), in: su song quan bao zhang yu cai pan wai fen zheng chu li (訴訟權保障與裁判外紛爭處理) (2nd edn., 2012); Sun (孫森焱), min fa zhai bian zong lun (民法債編總論) (2nd rev. edn., 2014); T-S Wang (王泰 升), tai wan fa lu shi gai lun (台灣法律史概論) (3rd edn., 2012); T-C Wang (王澤鑑), zhai fa yuan li (債 法原理) (3rd edn., 2012); T-C Wang (王澤鑑), min fa zong ze (民法總則) (Rev. edn., 2014); W-Y Wang (王文宇), ‘fa xue jing ji xue yu shang ye jiao yi’ (法學、經濟學與商業交易) (2018) 277 Taiwan Law Review 64–90; Wu (吳光平), in: guo ji si fa cai pan xuan xi (國際私法裁判選析) (2nd edn., 2018) 179–188; H-H Yang (楊宏暉), ‘jia meng qi yue nei rong kong zhi zhi li lun yu shi wu’ (加盟契約內容控 制之理論與實務) (2016) 147 Chengchi Law Review 1–81; S-W Yang (楊淑文), ‘zhu zhai quan fan wei kuo zhan tiao kuan zhi wu xiao yu yi chang’ (主債權範圍擴展條款之無效與異常) (2005) 122 Taiwan Law Review 226–239; S-W Yang (楊淑文), ‘ding xing hua qi yue zhi guan zhi yu qi yue zi you’ (定型化契 約之管制與契約自由) (2013) 132 Chengchi Law Review 163–213.

Contents I. Overview ........................................................................................................... II. Regulatory framework.................................................................................... III. Requirements and legal consequences ....................................................... 1. Mandatory regulations (Art. 71) ............................................................. 2. Judicial review of standard terms (Art. 247‐1 TCC).......................... a) Preliminary remark............................................................................... b) Definition of standard terms .............................................................. c) Incorporation and interpretation of standard terms .................... d) Control over substantive content of standard terms .................... aa) Settled case law in favour of validity of standard terms....... bb) Criticism in the literature and reaction in the judiciary....... 3. Judicial review of non-standard terms .................................................. a) Public policy or good morals (Art. 72 TCC) .................................. b) Good faith (Art. 148 II TCC).............................................................

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Part 1. Country Reports IV. International application ............................................................................... 30 1. Judicial review of main contractual terms ............................................ 31 2. Judicial review of dispute resolution clauses........................................ 34

I. Overview Taiwanese law takes freedom of contract as an essential basis for private autonomy and affords it constitutional protection1. On the other hand, in order to guarantee justice of contract, there should be some kind of mechanism for controlling the formation and validity of contracts.2 This is reflected in the Taiwanese Civil Code (hereafter ‘CC’) which transplanted the German, Swiss as well as Japanese law in a mixed way around 1930 and has been largely reformed in 1999 with regard to the law of obligations.3 More specifically with regard to freedom as to content of contract, the Taiwanese Civil Code contains provisions which aim at either maintaining the equilibrium between performance and counter-performance or ensuring a fair allocation of risks. By virtue of those provisions, contractual arrangements will generally be void if they violate mandatory regulations (Art. 71 TCC) or are contrary to public policy or good morals (Art. 72 TCC). One party could claim for adaptation of his contractual rights or obligations in case of usury (Art. 74 TCC) or hardship (Art. 227‐2 TCC). The reduction of contractual penalty by the courts is possible (Art. 252 TCC). Furthermore, based on the (fundamental) principle of good faith, the courts have a general power to amend or complement the contractual relationship (Art. 148 II TCC). Finally, the courts could strike out contract terms which they perceive to be ‘obviously unfair’, provided that the contractual clauses qualify as ‘standard terms’ (Art. 247‐1 TCC). 2 All of the aforementioned provisions provide the basis for judicial review of the substantive content of B2B contracts, which stand in focus of this national report. This is also true for private transactions between businesses and government, namely B2G contracts.4 However, in respect of standard form contracts, it should firstly be noted that, according to the prevailing opinion in the literature, the more detailed rules under the Taiwanese Consumer Protection Act (hereafter ‘TCPA’) are at least, through the indeterminate legal concept of ‘obvious unfairness’ employed in Art. 247-1 TCC, indirectly applicable to B2B contracts.5 Secondly, the Taiwanese judiciary tends to apply Art. 247‐1 TCC not only where non-negotiated contract terms of pure substantive nature (private contract) come into question but also (correspondingly) to those containing procedural elements (procedural contract), especially forum selection and arbitration clauses.6 3 Given the different relevance of those provisions in practice and the purpose of this book, it seems legitimate not to discuss all of them. We will thus lay emphasis on the application of Art. 247‐1 TCC concerning domestic B2B contracts,7 without losing sight of possible judicial control pursuant to Arts 71, 72 and 148 II TCC.8 To this extent, it will be shown that the Taiwanese Supreme Court takes a strongly liberal position on the 1

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Judicial Yuan, Interpretation No. 576 (2004). T-C Wang, 81–83; T-C Chen (2014), 123–124. 3 T-S Wang, 284–286. 4 See Supreme Court, civil judgment of No. 104-Tai-Shun-Tzu-416 (2015); Supreme Court, civil judgment of No. 88-Tai-Shun-Tzu-1868 (1999). 5 See below, mn. 10. 6 See below, mn. 34 et seq. 7 See below, mn. 9 et seq. 8 See below, mn. 6 et seq., 25 et seq. 2

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scope of freedom of contract. This tendency of self-restraint in invalidating individual contract terms is more or less reflected in the few Supreme Court decisions concerned with international B2B contracts.9

II. Regulatory framework As outlined above,10 the courts should firstly reject to enforce contract terms being 4 contrary to mandatory regulations. Art. 71 TCC11, unlike its German ancestor, § 134 BGB, mentions two kinds of mandatory regulations, namely the imperative and prohibitive provisions12. However, the qualification as one kind or the other is of less importance, since it only matters in practice whether the violated provision has mandatory nature, and if so, whether this provision renders the legal transaction void as a consequence13. Secondly, contract terms not in accordance with public policy or good morals produce no legal effect. By juxtaposing public policy with good morals, Art. 72 TCC14 has been considered more complete than its German counterpart, § 138(1) BGB.15 Having said that, it is indeed neither necessary nor helpful to differentiate strictly between these two notions,16 as demonstrated in the court rulings17. The question of how to clarify their meanings in individual cases remains crucial. Thirdly, if the courts find contract terms to be against the principle of good faith, they could deny their enforceability, as some Supreme Court decisions implied.18 In this sense, Art. 148 II TCC19, introduced into Taiwanese Civil Code in 1982 with reference to Art. 2(2) Swiss Civil Code and Art. 1(2) of the Japanese Civil Code, can certainly be considered as a legal basis for invalidating contract terms. However, this provision has been only playing a minor role in practice.20 The reason for this should be that, for one thing, the judiciary tended to examine the contractual arrangements under Art. 72 TCC, then again most of the disputed clauses are ‘standard terms’ so as to be scrutinised by virtue of Art. 247‐1 TCC. As long as the principle of good faith comes into question, the same problem as that of Art. 72 TCC arises due to its normative openness. Where contract terms qualifying as ‘standard terms’ are not void according to Arts 71 5 or 72 TCC, Art. 247‐1 TCC21 permits the courts to strike out those terms which 9

See below, mn. 30 et seq. See above, mn. 1. 11 Official translation: A juridical act which violates an imperative or prohibitive provision of the act is void except voidance is not implied in the provision. An English translation of the Taiwanese Civil Code is available under https://law.moj.gov.tw/ENG/LawClass/LawAll.aspx?pcode=B0000001 (accessed 20 January 2020). 12 T-C Chen (2014), 190. 13 T-C Wang (2014), 313. 14 Official translation: ‘A juridical act which is against public policy or morals is void.’ 15 T-C Wang (2014), 327. 16 T-C Chen (2014), 193. 17 e.g. Supreme Court, civil judgment of No. 83-Tai-Shun-Tzu-1530 (1994). 18 See below, mn. 28 et seq. 19 Official translation: (I) A right cannot be exercised for the main purpose of violating public interests or damaging the others. (II) A right shall be exercised and a duty shall be performed in accordance with the means of good faith. 20 cf. T-F Chen, 434–435, 441–442. 21 Official translation: If a contract has been constituted according to the provisions which were prepared by one of the parties for contracts of the same kind, the agreements which include the following agreements and are obviously unfair under that circumstance are void. (1) To release or to reduce the responsibility of the party who prepared the entries of the contract. 10

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(i) exclude or limit the liability (‘responsibility’) of the proferens, (ii) increase the liability of the adhering party, (iii) restrict the rights of the adhering party or, more generally, (iv) appear to be gravely disadvantageous to the adhering party, provided that the clauses in question are ‘obviously unfair’ in the circumstances. This provision has been enacted in the context of the reform of the law of obligations in 1999, following the legislation of the TCPA in 1994, in which there are much more detailed regulations concerning the incorporation, interpretation and content review of ‘standard terms’ of B2C contracts (Arts 12 et seq. TCPA). The draftsman of Art. 247‐1 TCC deemed the establishment of this regulation necessary as the party dealing on the other party’s ‘standard terms’ is normally in the economically weaker position and has hardly any bargaining power; in the view of the legislator, the ‘obviously unfair’ clauses in a socalled contrat d’adhésion should be void in order to avoid the abuse of freedom of contract and maintain transactional fairness.22 As to the criteria for assessment of the ‘obvious unfairness’, the Legislative Explanation notes that regard is to be had to the nature of the contract as well as the default rules.23 The consideration of protecting the weaker party, which led to Art. 247‐1 TCC, has been adopted by the Supreme Court to restrain the control over the substantive content of contracts.

III. Requirements and legal consequences 1. Mandatory regulations (Art. 71) The Taiwanese Civil Code contains a series of mandatory regulations which void legal transactions if such regulations are violated. They are, for instance, the prohibitions regarding the extension or reduction of limitation period (Art. 147 TCC), the exclusion of liability for intention or gross negligence (Art. 222 TCC) or deceitful exclusion of liability in a sales contract (Art. 366 TCC). 7 At this point, it is worth noting that since 1999, due to the practical need for protecting the surety, Art. 739‐1 TCC bans basically all contractual arrangements which restrict the rights of the surety prescribed in the law of suretyship. Therefore, the creditor cannot effectively make the surety consent in advance to further stand surety in the event that the creditor grants the (principal) debtor an extension of the originally fixed period of time of performance, because Art. 755 TCC provides the surety with the right to disapprove of that extension.24 However, the Supreme Court denies constantly the application of Art. 755 TCC to the ‘credit line suretyship’, which is often present in context of long-term transactions and means that the surety is liable not only for specific existing obligations but for non-specific future ones up to a maximum amount,25 in holding that the surety would not have to carry unexpected risks as far as the credit line has not been exceeded26. Thus, the clause restricting the right of the surety provided by Art. 755 TCC in a credit line suretyship contract is not invalid pursuant to Art. 739‐1 TCC in conjunction with Art. 71 TCC. 6

(2) To increase the responsibility of the other party. (3) To make the other party waive his right or to restrict the exercise of his right. (4) Other matters gravely disadvantageous to the other party. 22 Legislative Yuan gazette No. 88/13 (1999) 303–304. 23 ibid., 305. 24 Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-1368 (2003). 25 See Supreme Court, judicial precedent of No. 77-Tai-Shun-Tzu-943 (1988). 26 Supreme Court, civil judgment of No. 96-Tai-Shun-Tzu-232 (2007); Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-1472 (2003); Supreme Court, civil judgment of No. 91-Tai-Shun-Tzu-1912 (2002).

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In fact, an overview of the Supreme Court decisions as regards the application of 8 Art. 71 TCC shows that the Supreme Court tends to respect freedom of contract as much as possible. It seems to be reluctant to recognise the mandatory nature of the given provision or to expand its scope of application and, where a mandatory regulation has been obviously violated, the Supreme Court tends refrain from voiding the contract. The following three examples should suffice to justify this observation: first, it is possible to embed a clause in a lease contract increasing the liability of the lessee for (slight) negligence in case of fire, albeit Art. 434 CC stipulates that the lessee is only responsible for fire damage caused with gross negligence.27 Secondly, the amount of rent or rent security deposit for a commercial lease concerning real estate is not subject to the maximum set by the Land Act, since freedom of contract should prevail in commercial relationships.28 Thirdly, despite the prohibitions of commercial use of land in certain districts according to the Urban Planning Law, the violation of these provisions under public law should not deter the relevant private transactions from becoming effective.29 The case law outlined above follows the line of opinion in the literature on the interpretation of Art. 71 TCC with respect to B2B contracts.30

2. Judicial review of standard terms (Art. 247‐1 TCC) a) Preliminary remark. Prior to the reform of the law of obligations in 1999, the 9 judiciary perceived public policy (Art. 72 TCC) as the adequate vehicle for conducting the examination of ‘standard terms’.31 As is generally known, the Supreme Court held that the Bank as cheque drawee cannot exclude his responsibility towards the cheque drawer for erroneous payment caused with (slight) negligence by way of standard form contract, having recourse to public policy.32 While it is undoubtedly acceptable to strike out such an onerous contractual arrangement, the reasoning with public policy instead of the principle of good faith (Art. 148 II TCC) appears to be questionable.33 However, the draftsman of Art. 247‐1 TCC, which then governs the judicial review of ‘standard terms’, has refrained from mentioning the principle of good faith and contented itself with the legal construct of ‘obvious unfairness’. Nevertheless, it is hard to deny that the latter concept, which constitutes also the key requirement of usury (Art. 74 TCC),34 essentially corresponds to the former one35. That said, neither the concept of ‘obvious unfairness’ nor the principle of good faith 10 is sufficiently concrete for the judicial control. This raises the issue of whether the more detailed rules of the TCPA should not be taken into account. The prevailing opinion in 27 Supreme Court, civil judgment of No. 102-Tai-Shun-Tzu-2002 (2013); Supreme Court, civil judgment of No. 89-Tai-Shun-Tzu-1416 (2000); this applies, according to Supreme Court, civil judgment of No. 91-Tai-Shun-Tzu-2638 (2002), regardless of whether the clause in question qualifies as ‘standard terms’. 28 Supreme Court, civil judgment of No. 95-Tai-Shun-Tzu-1907 (2006); Supreme Court, civil judgment of No. 94-Tai-Jian-Shun-Tzu-8 (2005); Supreme Court, civil judgment of No. 92-Tai-Jian-Shun-Tzu-20 (2003). 29 Supreme Court, civil judgment of No. 103-Tai-Shun-Tzu-976 (2014); see also Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu-2155 (2017). 30 See W-Y Wang, 73–74, 76. 31 e.g. Supreme Court, civil judgment of No. 78-Tai-Shun-Tzu-2118 (1989); Supreme Court, civil judgment of No. 80-Tai-Shun-Tzu-792 (1991). 32 Supreme Court, Resolution No. 10 of civil divisions on 73.9.11 (1974); it should be noted that this legal opinion has been abandoned by Supreme Court, Resolution No. 5 of civil divisions on 90.5.1 (2001) due to the enactment of Art. 247-1 TCC. 33 T-C Chen (2014), 98–99; S-W Yang (2013), 178–179; H-H Yang, 30. 34 cf. Sun, 694–695. 35 C-W Chen (2012), 14.

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the literature assumes that, on the one hand, the provisions regarding the incorporation and interpretation of ‘standard terms’, inter alia the ineffectiveness of surprising terms (Art. 14 TCPA36) and the contra proferentem rule (Art. 11 II TCPA37), should apply analogously to fill the gaps in the TCC.38 On the other hand, the standard of review prescribed in Art. 12 TCPA39, especially the last two subparagraphs of its second paragraph, which share a high degree of similarity to § 307(2) BGB should have influence on the application of Art. 247‐1 TCC.40 By contrast, the Supreme Court has long refused to (correspondingly) apply the TCPA to commercial transactions with respect to the review of ‘standard terms’ on the ground of its limited scope of application.41 It is said that, without referring to the strict rules aimed at consumer protection, Art. 247‐1 TCC leaves a necessary margin of judgement to the courts as regards the diversity of business activities and thus the approach taken by the judiciary is to be given preference.42 11 In the following, we shall see how the courts exercise their controlling power with the rudimentary rule of the Taiwanese Civil Code. 12

b) Definition of standard terms. ‘Standard terms’ are legally defined as those contract clauses which are ‘prepared by one party for contracts of the same kind’. The contract concluded under such terms is mostly called a ‘standard form contract’, while the expression ‘contract of adhesion’ was chosen by the draftsman of Art. 247‐1 TCC and might have prevented confusion with the ‘standard form contract’ prescribed in the TCPA.43 Although the legal definition causes some uncertainties (e.g. the exact meaning of ‘contract of the same kind’44; whether the terms should be prepared for contracting with numerous others45, etc.), there are only few Supreme Court rulings on the issue of whether contract terms qualify as ‘standard terms’. This may be explained by the fact that, under settled case law of the Supreme Court,46 clauses qualifying as ‘standard terms’ will, with very few exceptions, in any case pass the content examination pursuant to Art. 247‐1 TCC. It seems thus unnecessary to make efforts to deal with the question of qualification. 36 Official translation: For terms and conditions not specified in standard contracts and not foreseeable by the consumers under normal circumstances shall not constitute as part of the contract. 37 Official translation: (I) The terms and conditions adopted in the standard contracts shall be conformed to the principles of equality and reciprocity. (II) Where there is any ambiguity in the wording of the standard terms and conditions, interpretations shall be made in favor of consumer. 38 T-C Chen (2014), 45(preface), 95–96; Sun, 697; Jan, 161, 171–172; S-W Yang (2005), 235–238. 39 Official translation: (I) Any standard terms and conditions in violation of the good faith requirements are unconscionable to consumers, shall be rendered null and void. (II) The use of standard contracts are presumed unconscionable where the terms and conditions provided fall within any of the following: (1) Where the terms and conditions of the contracts are in violation of the principle of equality and reciprocity. (2) Where the terms and conditions of the contracts which are excluded by the suppletory rules are obviously contradicted to legislative intent. (3) Where the purposes of the contracts cannot be achieved due to the major rights or obligations of the contracts are restricted by such terms and conditions. 40 Jan, 167, 169; S-W Yang (2005), 233; S-W Yang (2013), 200–201; C-W Chen (2012), 13; Sun, 703; Jau, 124. 41 Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-39 (2003); Supreme Court, civil judgment of No. 91-Tai-Shun-Tzu-740 (2002); Supreme Court, civil judgment of No. 90-Tai-Shun-Tzu-641 (2001). 42 Jseng (2006), 71–72. 43 ibid., 50. 44 T-C Chen (2014), 112. 45 Sun, 696–697. 46 See below, mn. 17 et seq.

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Against this background, special notice should be given to a recent case regarding 13 the validity of a contract term exempting the customer from the partial payment of remuneration in a construction contract. While the appeal court assumed the contract in question immediately as a standard form contract, the Supreme Court held that only those contract terms which are prepared ‘for general use’ and used ‘without negotiation’ can qualify as ‘standard terms’ and accordingly raised doubt about the qualification accredited by the appeal court.47 However, the precondition ‘without negotiation’ is hardly understandable in light of previous case law of the Supreme Court, according to which the ‘negotiation’ or even the ‘possibility to negotiate’ suffices to enforce a disputed standard form contract;48 if the existence of ‘possibility to negotiate’ should be decisive for the validity of a contractual arrangement, it would be nonsense to require contract terms to be used ‘without negotiation’ so as to fall into the scope of application of Art. 247‐1 TCC. This Supreme Court decision could therefore only have relevance if the Supreme Court decided to depart from its long-standing legal opinion regarding the intensity of content control. Yet, as we shall see, this remains highly questionable. c) Incorporation and interpretation of standard terms. Unlike the TCPA, the 14 Taiwanese Civil Code contains no specific provisions governing the incorporation and interpretation of ‘standard terms’. This denotes by no means that the judiciary ignores the particularity out of contracting under ‘standard terms’ and simply applies the general rules of contract law. In fact, with regard to the issue of incorporation, albeit the mistake of not differentiating between procedural and substantial control is evident,49 the Supreme Court indeed reviews the procedural formation of contracts as it constantly says that the lack of ‘knowledge about contract terms’ can lead to the invalidity of the terms in question50. However, this is not to say that the Supreme Court, as far as can be seen, has ever struck out any ‘standard term’ on that ground. Instead, in a recent case where the buyer challenged the enforceability of a contract term concerning the earnest money in a real estate purchase contract made between two enterprises for commercial purpose, the Supreme Court could have made use of the said precondition to reach its conclusion favourable to the buyer in casu, but, deliberately or not, it did not express any doubt about the applicability of the TCPA, which had been approved without reasoning by the appeal court, and ruled on the basis of Art. 11‐1 TCPA51, which accords the consumer a reasonable period of time to review contract terms52; this provision belongs to the procedural part of control over ‘standard terms’ in the TCPA.53 It is a completely open question whether the Supreme Court will confirm this approach or even extend it to other types of transactions. 47

Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu-1166 (2017). See below, mn. 17 et seq. 49 Jan, 170–171. 50 See T-C Chen (2014), 46–48 (preface). 51 Official translation: (I) Traders shall provide a reasonable period, not longer than 30 days, for consumers to review all contract clauses, before entering into a standard contract. (II) The terms and conditions adopted by traders in standard contracts made consumer waive the right prescribe in the previous paragraph shall be invalid. (III) Where standard terms and conditions in violation for provisions prescribed in the first paragraph shall not constitute part of the contract, but consumers may still propose that the terms and conditions make up as part of the standard contract. (IV) The central competent authority may select particular industries and proclaim the appropriate contract reviewing period with reference to the importance of the standard terms and conditions, the coverage and complexity of the matters related in a standard contract. 52 Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu-2097 (2017). 53 T-C Chen (2014), 43 (preface); C-W Chen (2012), 16. 48

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With regard to the issue of interpretation, the starting-point should be the same as for non-standard terms, i.e. the real intention of the parties must be sought beyond the words used in the standard form contract (Art. 98 TCC), as the Supreme Court ascertained before Art. 247‐1 came into force.54 Following this line, the Supreme Court perceived, in accordance with the appeal court, the general exclusion clause to be only concerning the liability for (slight) negligence of the proferens, not that for intention or gross negligence (Art. 222 TCC).55 However, in a case which raised the question of whether the experimental order of military items should be construed as a gratuitous contract, the Supreme Court made reference to the contra proferentem rule prescribed in Art. 11 II TCPA as well as Art. 54 II of the Insurance Act and suggested the interpretation of relevant terms in favour of the adhering party who produced and transferred the military items.56 Even though one may see the contra proferentem rule as confirmed by the judiciary, the extent to which this rule could apply would remain rather limited, since, in the view of the Supreme Court, it should be in most cases possible for the party contracting on the other’s ‘standard terms’ to negotiate and there would thus be less need for protection.57

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d) Control over substantive content of standard terms. In comparison to the issues of qualification, incorporation and interpretation, there are several Supreme Court decisions dealing with the issue of content review of ‘standard terms’. The focus lies substantially on whether contract terms are ‘obviously unfair’ in sense of Art. 247‐1 TCC. Based on the case law under which the relevant provisions of the TCPA could only apply to B2C contracts,58 the judiciary has taken the Legislative Explanation of Art. 247‐1 TCC seriously into consideration59 and hence developed a basic rule for judicial review of B2B contracts: where the equality of bargaining power between both contracting parties exists, the courts should not intervene in their contractual relationship. The rule itself and its application to concrete cases, which has turned out to be formalistic,60 has been heavily criticised by the doctrine and caused some reluctance in the judiciary itself.61

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aa) Settled case law in favour of validity of standard terms. At first sight, the stated basic rule is not unreasonable.62 This is especially true as the Supreme Court points out that in determining the (in)equality of bargaining power regard is to be had to all circumstances surrounding the transaction, such as the process of contracting, the potential benefit brought by the contract and the expertise or experience in the type of dealing.63 In practice, however, the evaluation of the circumstances is regularly replaced with the simple examination of whether the adhering party is able to negotiate, because the Supreme Court constantly holds that ‘standard terms’ which can possibly go through negotiation do not constitute any type of clauses listed in Art. 247‐1 TCC and therefore fall outside of its ambit.64 While any modification of ‘standard terms’ indicates 54

Supreme Court, civil judgment of No. 78-Tai-Shun-Tzu-2557 (1989). Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-39 (2003). 56 Supreme Court, civil judgment of No. 98-Tai-Shun-Tzu-2075 (2009). 57 See below, mn. 17. 58 See above, mn. 10. 59 See above, mn. 5. 60 See below, mn. 17 et seq. 61 See below, mn. 22 et seq. 62 Jseng (2006), 63–64; T-C Chen (2014), 205–206 noted on the other hand that even if the adhering party possesses sufficiently the bargaining power, he will nevertheless choose not to negotiate for the reason of cost-efficiency, and it’s this fact that raises the necessity of judicial review of ‘standard terms’. 63 Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-963 (2003); Supreme Court, civil judgment of No. 101-Tai-Shun-Tzu-1113 (2012). 64 As to Art. 247-1 I TCC: Supreme Court, civil judgment of No. 96-Tai-Shun-Tzu-168 (2007); as to Art. 247-1 II TCC: Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-1395 (2003); Supreme Court, 55

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without doubt the existence of ‘possibility to negotiate’, according to the Supreme Court, the challenge of effectiveness of contract terms in question already fails if the adhering party cannot successfully demonstrate that no other contracting parties were available at the time of concluding the contract; in other words, the ‘possibility to negotiate’ could even be deduced from the presence of ‘possibility not to contract’.65 As a result, the courts may give full effect to contract terms just on the ground that the adhering party could have chosen not to enter into the standard form contract. The consequence of this settled case law is apparently that it is practically impossible 18 to strike out any onerous ‘standard term’, since only in such an exceptional situation as market monopoly one could say that there is no way for the adhering party to refuse to contract with the proferens.66 This applies regardless of whether the disputed contract is concluded between a large business and a SME. The following case report will confirm our observation: The ‘standard terms’ in (public) construction contracts, which limit the liability of the 19 customer or restrict the rights of the (building) contractor, are one of the most frequent subjects of judicial review pursuant to Art. 247‐1 TCC. For the reason that the contractor is not the economically weaker party and the ‘possibility not to contract’ exists, the Supreme Court, in continuing its previous course67, perceived those clauses to be valid which (i) allocate the costs and risks out of the postponement of construction period to the contractor;68 (ii) impose upon the contractor to specify the damages for which the customer may be liable before the total payment of remuneration as a condition of further claim for compensation;69 (iii) make the contractor waive the ipso iure acquired mortgage on the basis of Art. 513 TCC (old version)70; (iv) subject the postponement of construction period to the consent of the customer;71 and (v) exclude any increase of the estimated amount of remuneration72. However, with regard to the kinds of ‘standard terms’ under (ii) and (iv), one may concede that they deviate so significantly from the underlying principles of the law of obligations that the requirement of ‘obvious unfairness’ could be deemed as satisfied.73 The ‘standard terms’ in security contracts, notably the credit line suretyship contract 20 and the credit line mortgage contract, also commonly give rise to judicial control under Art. 247‐1 TCC. The Supreme Court has confirmed the validity of two kinds of ‘standard terms’ despite the fact that these contract terms are clearly disadvantageous to the surety or the mortgagor. First, a clause stipulating that the surety is liable, inter alia, for duty of surety, which the principal debtor owes to the (bank) creditor, should civil judgment of No. 93-Tai-Shun-Tzu-1856 (2004); Supreme Court, civil judgment of No. 94-Tai-ShunTzu-2340 (2005); Supreme Court, civil judgment of No. 96-Tai-Shun-Tzu-684 (2007); Supreme Court, civil judgment of No. 98-Tai-Shun-Tzu-1793 (2009); Supreme Court, civil judgment of No. 98-Tai-ShunTzu-2075 (2009); as to Art. 247-1 III TCC: Supreme Court, civil judgment of No. 105-Tai-Shun-Tzu-2197 (2016); as to Art. 247-1 IV TCC: Supreme Court, civil judgment of No. 103-Tai-Shun-Tzu-1503 (2014). 65 Supreme Court, civil judgment of No. 90-Tai-Shun-Tzu-2011 (2001); Supreme Court, civil judgment of No. 91-Tai-Shun-Tzu-2220 (2002); Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-39 (2003); Supreme Court, civil judgment of No. 100-Tai-Shun-Tzu-1635 (2011). 66 Jan, 179–180; C-W Chen (2012), 19. 67 See Supreme Court, civil judgment of No. 90-Tai-Shun-Tzu-1184 (2001). 68 Supreme Court, civil judgment of No. 96-Tai-Shun-Tzu-168 (2007); see also Supreme Court, civil judgment of No. 99-Tai-Shun-Tzu-333 (2010). 69 Supreme Court, civil judgment of No. 101-Tai-Shun-Tzu-1341 (2012); see also Supreme Court, civil judgment of No. 96-Tai-Shun-Tzu-684 (2007). 70 Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-2744 (2003). 71 Supreme Court, civil judgment of No. 101-Tai-Shun-Tzu-1113 (2012). 72 Supreme Court, civil judgment of No. 105-Tai-Shun-Tzu-2197 (2016); see also Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-1395 (2003). 73 Jan, 196; S-W Yang (2013), 190.

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be enforceable74; this conclusion is linked to the allegation of the Supreme Court that the surety is by nature not economically weak and must not give the suretyship.75 The same applies for a clause according to which duty of surety of the personal debtor towards the mortgagee is included in the extent of claims secured by the mortgage.76 Secondly, considering that the surety is entitled by Art. 754 TCC to terminate the suretyship at any time, the clause requiring the surety to stand suretyship for an indefinite period of time is not void,77 provided that a maximum amount of duty of surety has been set out in the contract78. However, in respect of the former kind of ‘standard term’, it is argued that under this so-called ‘double security arrangement’ the surety or mortgagor would indeed carry excessive risks so as to run counter to original purpose of a suretyship or mortgage contract;79 against the view of the Supreme Court, the surety is in any case that party in the weaker position.80 Yet one may in turn say that it is less problematic where commercial loans as claims to be secured come in to question.81 21 The issue of effectiveness of ‘standard terms’ in other types of contracts has been brought before the courts, too. These contract terms are mostly ‘judge-proof’. In relation to a lease contract, the Supreme Court gave full effect to a clause excluding the responsibility of the lessor of an oil storage tank for loss or deterioration of oil caused with (slight) negligence,82 albeit one may notice that it is the main contractual obligation of the lessor that is mitigated here by the contract term83. Besides, the lessee of a building should be bound by the clause under which the possibility of tacit extension of the lease for indefinite period of time (Art. 451 TCC) is precluded, since he, as a large association, should be able to negotiate with the lessor.84 In addition, with regard to a transport contract, the positive decision of the appeal court on the validity of a package limitation clause to the disadvantage of the shipper, who should have enough bargaining power, has been upheld by the Supreme Court.85 Moreover, concerning a service contract, as the Supreme Court concluded, the IDC (Internet Data Centre) provider could demand the payment of contractual penalty from the client on the basis of a clause which prescribes such claim for cases of premature termination of the management service by the client.86 Last but not least, in respect of a franchise contract, although the commercial autonomy of the franchisee is limited significantly by the rights of the franchisor to guide and supervise under this contractual relationship,87 the Supreme Court did not see any need to depart from its settled case law and expressed, in accordance with the appeal court, no doubt about the validity of the clause which 74

Supreme Court, civil judgment of No. 98-Tai-Shun-Tzu-1652 (2009). Supreme Court, civil judgment of No. 93-Tai-Shun-Tzu-710 (2004); Supreme Court, civil judgment of No. 101-Tai-Shun-Tzu-377 (2012). 76 Supreme Court, civil judgment of No. 100-Tai-Shun-Tzu-1327 (2011); Supreme Court, civil judgment of No. 98-Tai-Shun-Tzu-1793 (2009); Supreme Court, civil judgment of No. 91-Tai-Shun-Tzu-2336 (2002). 77 Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-2110 (2003); Supreme Court, civil judgment of No. 101-Tai-Shun-Tzu-276 (2012). 78 See Supreme Court, civil judgment of No. 107-Tai-Shun-Tzu-875 (2018). 79 Jan, 203–204; see also S-W Yang (2005), 234–235. 80 S-W Yang (2013), 187. 81 Jseng (2011), 23–24. 82 Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-39 (2003). 83 See Jan, 191–192. 84 Supreme Court, civil judgment of No. 103-Tai-Shun-Tzu-1503 (2014). 85 Supreme Court, civil order of No. 95-Tai-Shun-Tzu-2326 (2006). 86 Supreme Court, civil judgment of No. 100-Tai-Shun-Tzu-1635 (2011). 87 H-H Yang, 29. 75

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permits the franchisor to terminate the franchise when the franchisee fails to comply with the condition governing the opening hours.88 bb) Criticism in the literature and reaction in the judiciary. According to the settled 22 case law of the Supreme Court, as just illustrated, ‘standard terms’ between (commercial) parties of equal bargaining strength are not ‘obviously unfair’ and thus not void by virtue of Art. 247‐1 TCC; whether this is the case depends on the presence of ‘possibility to negotiate’ with regard to the adhering party; the ‘possibility to negotiate’ already exists where there is a ‘possibility not to contract’. This fairly formalistic approach for conducting content control, which leads almost always to the validity of ‘standard terms’, has met with severe criticism in the literature. Particularly those who advocate an analogous application of Art. 12 TCPA to B2B contracts see,89 as regards the result of the case law, a great danger that freedom of contract would be abused or even the law of the jungle would prevail90 and argue, as regards its reasoning, that the Supreme Court mistook the procedural for substantial control if not overinterpreted the Legislative Explanation.91 After all, it is noted that the requirement of fairness of ‘standard terms’ is not to be satisfied simply on the basis of the ‘possibility to negotiate’ but on material consideration of the interests involved in the standard form contract.92 Under this doctrine, the substantive fairness of contract terms should be placed under the spotlight and assessed with reference to the nature of the contract as well as the default rules;93 whether the adhering party is economically weak or not, appears to be of little concern. The criticism is not without consequence for the judiciary. In a case where the 23 effectiveness of a clause in a construction contract, under which the customer is not obliged to pay the remuneration until the public authority issues the permission to use the building (i.e. much later than the statutory due date of remuneration), has been challenged by the contractor, the Supreme Court, referring exclusively to the passage of the Legislative Explanation of Art. 247‐1 TCC as regards the notion of ‘obvious unfairness’,94 raised concerns that the contractor would fall into serious financial difficulty because of the postponed payment of remuneration and then upheld the objection of the contractor.95 While this remark of the Supreme Court was only obiter dictum, the following Supreme Court ruling deserves more attention: in a case where the licensee of a public parking management contract sought to invalidate a clause which, in the event of falling short of the amount of parking spaces supposed to be provided by the licensor, generally exempts the licensor from compensating the licensee for damages and excludes a royalty reduction, the Supreme Court took a view that is clearly in conflict with the settled case law; it has been pointed out in the decision that, irrespective of whether the adhering party is a (commercial) legal entity or whether ‘possibility to negotiate’ exists, ‘standard terms’ should produce no effect if they excessively deviate from principles of law or default rules which embody justice of contract presumed by the legislator.96 Without any misunderstanding, this approach adopted by the Supreme Court flows from the stated doctrine.97 88

Supreme Court, civil judgment of No. 107-Tai-Shun-Tzu-1247 (2018). See above, mn. 10. 90 Jan, 223; S-W Yang (2005), 230–231, 239; S-W Yang (2013), 194 thought that given the fact that the adhering party is normally deprived of freedom to determine the content of contract terms, standard form contracts are by nature inconsistent with the principle of good faith. 91 C-W Chen (2012), 18–19. 92 See T-C Chen (2014), 51(preface); Jan, 180–181; Hsieh, (2017/2) 40. 93 Jan, 165–169; S-W Yang (2013), 200–201; see also Sun, 704. 94 See above, mn. 5. 95 Supreme Court, civil order of No. 101-Tai-Shun-Tzu-1616 (2012). 96 Supreme Court, civil judgment of No. 104-Tai-Shun-Tzu-472 (2015). 97 Hsieh (2017/2), 41. 89

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Although this point of law is followed implicitly by another Civil Panel of the Supreme Court dealing with the same case98, it is still far from certain that the settled case law would lose its importance given the recent development of the judiciary reported above. 24 In this context, it’s worth noting that there are also opinions in the literature which are in line with the basic rule mentioned at the outset. Considering that in commercial contracts the contracting parties as ‘sophistical economic actors’ are generally able to evaluate and evade possible risks of transactions and thus the certainty of their contractual arrangements must be ensured, there should normally be no room for judicial intervention.99 Against this background, it is acknowledged that the standard of review of B2B contract terms should be determined in the first place by the strength of the relative bargaining positions of the parties, i.e. the more powerful the adhering party is, the more respect should be given to his freedom of contract.100 One may then concede that there would be no significant difference between the approach taken by this doctrine, under which the determination of standard of review should precede the control over substance of contracts, and the basic rule developed by the judiciary, if the Supreme Court abandoned its formalistic attitude and instead required a thorough consideration of factors related to the ‘possibility to negotiate’ of the adhering party. To this extent, it is rather the formalistic application of the basic rule than the rule itself that appears to be problematic. Whether the Supreme Court will adjust its way of conducting content review, remains again unclear.

3. Judicial review of non-standard terms 25

Theoretically, ‘non-standard terms’, which are not subject to judicial review pursuant to Art. 247‐1 TCC, are generally to be controlled by the courts under Arts 72 and 148 II TCC. In practice, however, there is an evident reluctance to strike out contractual clauses on those legal bases. The Supreme Court has notably made clear that, except where the law provides specific relief (e.g. Art. 227‐2 TCC for hardship, Art. 252 TCC for excessive contractual penalty), the parties are bound by their agreement even though it appears to be unfair.101 The freedom of contract and the corresponding principle of pacta sunt servanda are thus of major importance for the judiciary. This pro private autonomy view of the Supreme Court is further reflected in the case law, according to which a clause allocating the burden of proof in a manner different to the provisions of substantive law, is to be given full effect and should have impact on the finding of courts, provided that ‘public interest’ is not involved.102 The following discussion is confined to constellations where the application of Arts 72 or 148 II TCC to individual terms come into question.

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a) Public policy or good morals (Art. 72 TCC). An early example can be found to show the restrained use of Art. 72 TCC as regards the effectiveness of contract terms. In a case where the validity of a (amendment) clause reducing considerably the purchase 98

Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu-220 (2017). cf. W-Y Wang, 67–68; T-C Chen (2015), 348–349. 100 Jseng (2006), 69–70; Lin, 89; see also S-W Yang (2013), 186. 101 Supreme Court, civil judgment of No. 104-Tai-Shun-Tzu-2192 (2015). 102 Supreme Court, civil judgment of No. 104-Tai-Shun-Tzu-551 (2015); Supreme Court, civil judgment of No. 102-Tai-Shun-Tzu-1039 (2013); it should be noted that in these two Supreme Court decisions the principle of party autonomy (i.e. the principle of party control of litigation and that of party control if facts as well as the means of proof) has been also invoked to establish the legality of such allocation of burden of proof contract, since the Supreme Court perceived it to be of double nature of both procedural and substantive law. The allocation of burden of proof contract is, however, just one variation of the so-called ‘evidence contract’, which has been long since recognised by the Supreme Court on the basis of procedural law alone, see Supreme Court, civil judgment of No. 88-Tai-Shun-Tzu-1122 (1999); Supreme Court, civil judgment of No. 96-Tai-Shun-Tzu-2907 (2007). 99

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price of a broken-up vessel had been challenged by the seller, the appeal court perceived the price reduction to be contrary to public policy and good morals for the reason that the buyer had taken undue advantage of the seller’s distress; by contrast, the Supreme Court overruled this judgment in holding that the validity of a legal transaction would not be affected merely because its underlying considerations or motivations appear to be not in line with public policy or good morals.103 Similar results can be seen in cases which raise the issue of whether a non-compete 27 clause contravene public policy or good morals. Without any reference to the Labour Standards Act, which regulates work relationship between worker and employer and contains since 2015 a specific provision (Art. 9-1) governing the legal effect of noncompete clause,104 the Supreme Court held early on that a clause forbidding the employee from practising certain types of professions for a period of two years after termination of the contract has nothing to do with public policy and should bind the employee who agreed to it.105 In subsequent periods, the Supreme Court required such clause to be ‘reasonable’ in consideration of conflicting interests of contracting parties, in particular the occupational freedom of the employee and the trade secrets of the employer, so as to produce its full effect.106 b) Good faith (Art. 148 II TCC). As mentioned,107 the principle of good faith 28 serves rarely as a mechanism for judicial review of contract terms. However, there are two types of clauses which deserve attention in this context: contractual penalty clause and hardship clause, both of which are commonly present in construction contracts. In relation to the former type of clause, it has been constantly held by the Supreme Court that the arrangement of a contractual penalty, which the contracting parties conclude on the basis of freedom of contract, should be respected and enforced by the courts, except to the extent that the amount of the penalty appears to be so great that a judicial reduction by virtue of Art. 252 TCC108 comes inevitably into consideration;109 in the event of a claim for excessive penalty payment, justice of contract embodied in the said provision should take precedence over the principle of pacta sunt servanda and permits the courts to intervene.110 In the view of the Supreme Court, the principle of good faith plays a role in the assessment of whether the contractual penalty is excessively high and thus ‘obviously unfair’111. If this is the 103

Supreme Court, civil judgment of No. 79-Tai-Shun-Tzu-1712 (1990). For difference between work contract under the Labour Standards Act and service contract (e.g. employment, agency, etc.) under the TCC, see Judicial Yuan, Interpretation No. 740 (2016). 105 Supreme Court, civil judgment of No. 75-Tai-Shun-Tzu-2446 (1986); see also Supreme Court, civil judgment of No. 87-Tai-Shun-Tzu-43 (1998) as regards non-compete clause in (actor/actress) talent agency contract. 106 Supreme Court, civil judgment of No. 94-Tai-Shun-Tzu-1688 (2005); Supreme Court, civil judgment of No. 99-Tai-Shun-Tzu-599 (2010); Supreme Court, civil judgment of No. 103-Tai-Shun-Tzu-1984 (2014); Supreme Court, civil judgment of No. 103-Tai-Shun-Tzu-793 (2014) perceived the disputed noncompete clause to be void for the reason that the extent of the prohibition is excessive. 107 See above, mn. 4. 108 Official translation: If the agreed penalty is disproportionately high, the court may reduce it to a reasonable amount. 109 Supreme Court, civil judgment of No. 92-Tai-Shun-Tzu-2747 (2003); Supreme Court, civil judgment of No. 93-Tai-Shun-Tzu-909 (2004); Supreme Court, civil judgment of No. 94-Tai-Shun-Tzu-2230 (2005). 110 Supreme Court, civil judgment of No. 102-Tai-Shun-Tzu-1606 (2013); Supreme Court, civil judgment of No. 103-Tai-Shun-Tzu-2194 (2014); Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu1367 (2017). 111 Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu-2453 (2017); Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu-1389 (2017); Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu220 (2017); it has been ascertained in these decisions that in examining the fairness of contractual penalty regard should be had to the possible compensation for damages on non-performance. 104

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case, it is contrary to Art. 148 II TCC to demand a full payment of the penalty.112 On balance, one may say that the courts control the effectiveness of contractual penalty clause indirectly through the principle of good faith. 29 In light of a hardship clause, which means, in a broader sense, those contractual arrangements providing specific ways for adaptation (e.g. indexation of the remuneration if the material costs change to a certain degree) or excluding adjustment of performance (e.g. fixation of the remuneration notwithstanding increase of material costs), the question of the applicability of Art. 227‐2 TCC113 arises. In other words, it is to determine whether the disadvantaged party is, despite the hardship clause in the contact, entitled to relief under the principle of clausula rebus sic stantibus.114 This was seemingly disapproved by the Supreme Court,115 which has been a subject of criticism in the literature116. Now, the Supreme Court makes clear that while, based on the principle of pacta sunt servanda, the disadvantaged party should be bound to the hardship clause aimed at allocation of risks in advance, it would be unfair to deny the application of the principle of clausula rebus sic stantibus when unexpected circumstances supervene and risks associated herewith were not assumed by the parties; given that the principle of good faith has the function of regulating contracts, the binding effect of the said term should be eliminated and the disadvantaged party could claim for adaptation pursuant to Art. 227‐2 TCC117. Apart from the possible reasoning with the mandatory nature of Art. 227‐2 TCC that could lead to the same conclusion,118 Art. 148 II TCC is apparently invoked by the judiciary to limit the enforceability of hardship clause119.

IV. International application 30

As far as can be seen, there are only few Supreme Court decisions concerning judicial review of individual terms in international contracts. A reason for this should be that legal disputes between local and foreign businesses are usually brought before foreign courts or submitted to arbitration due to forum selection or arbitration clauses incorporated in main contracts. This can also explain the fact that an important part of those few court rulings relates to the effectiveness of the said dispute resolution clauses, which the local party tried to avoid by defending the jurisdiction or competence of the Taiwanese courts. In general, we shall see that the Supreme Court takes a similar position on control over international transactions as on that over domestic ones. 112 See Supreme Court, civil order of No. 91-Tai-Jian-Kang-Tzu-9 (2002); Supreme Court, civil judgment of No. 95-Tai-Shun-Tzu-1095 (2006). 113 Official translation: (I) If there is change of circumstances which is not predictable then after the constitution of the contract, and if the performance of the original obligation arising therefrom will become obviously unfair, the party may apply to the court for increasing or reducing his payment, or altering the original obligation. (II) The provision in the preceding paragraph shall apply mutatis mutandis to the obligation not arising from the contract. 114 C-W Chen (2018), 161. 115 Supreme Court, civil judgment of No. 99-Tai-Shun-Tzu-1742 (2010); Supreme Court, civil judgment of No. 100-Tai-Shun-Tzu-1347 (2011); Supreme Court, civil judgment of No. 100-Tai-Shun-Tzu-1714 (2011). 116 Hsieh (2017/8), 9; see also C-W Chen (2018), 162. 117 Supreme Court, civil judgment of No. 102-Tai-Shun-Tzu-929 (2013); Supreme Court, civil judgment of No. 104-Tai-Shun-Tzu-132 (2015); Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu1866 (2017). 118 cf. T-C Chen (2014), 190–191. 119 See T-F Chen (2018), 1774.

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1. Judicial review of main contractual terms Where the contracting parties chose foreign law as the lex contractus, the provisions of 31 the Taiwanese Civil Code regarding content review (Arts 71, 72, 148 II and 247‐1 TCC) do not apply. This has been explicitly confirmed by the Supreme Court in a series of cases arising out of patent license agreements between the Taiwanese licensees and the Dutch licensor. The licensees had notably challenged the effectiveness of two clauses which stipulate respectively the amount of royalty and the rate of default interest, on the grounds that, on one hand, the royalty clause violates the mandatory regulation of Art. 9 of the Fair Trade Act (hereafter ‘FTA’) and is in addition as a ‘standard term’ ‘obviously unfair’ according to Art. 247‐1 TCC, on the other hand, the default interest clause runs counter to Taiwanese public policy or good morals by exceeding the maximum rate prescribed in Art. 205 TCC. The Supreme Court has dismissed these objections in holding that, as regards the royalty clause, only the Dutch law, which is effectively chosen by the parties under Art. 20 I of the Act Governing the Choice of Law in Civil Matters Involving Foreign Elements (hereafter ‘ACL’), could be invoked to determine its validity,120 and that, as regards the default interest clause, the excess of legal interest rate is not sufficient condition for inapplicability of the relevant law on the basis of ordre public (Art. 8 ACL), which should be interpreted in a strict manner121. The restrictive application of Art. 8 ACL ascertained by the Supreme Court has been 32 appreciated in the literature.122 Likewise, the refusal to apply Art. 9 FTA in conjunction with Art. 71 TCC has been believed to be correct due to the lack of overriding mandatory rule in the ACL and of legislative intent of the FTA to be applied universally (i.e. regardless of whether international or domestic transactions are involved).123 Besides, there should be little room, if any, for the Taiwanese courts to review ‘standard terms’ by virtue of Art. 247‐1 TCC either immediately or indirectly, when foreign law governs the contractual relationship, since the legal institute of overriding mandatory rule has not been adopted by the draftsman of the ACL124 and it is broadly acknowledged that Art. 247‐1 TCC has little to do with public policy.125 In this respect, the point of law which the Supreme Court took in the said decisions, is not unjustified.126 In cases where Taiwanese law is the governing law of the contract with foreign 33 elements, one may reasonably surmise that the Supreme Court will apply the same liberal approach as developed in the domestic context to conduct control over substance of contracts, because contract law is not regulated differently for international transactions in this jurisdiction.

2. Judicial review of dispute resolution clauses In contrast to the judicial review of main contractual terms, which depends in the first 34 place on what law is to govern the international contract, the Supreme Court ignores, be 120 Supreme Court, civil judgment of No. 101-Tai-Shun-Tzu-1997 (2012); Supreme Court, civil judgment of No. 98-Tai-Shun-Tzu-1933 (2009). 121 Supreme Court, civil judgment of No. 103-Tai-Shun-Tzu-1957 (2014); for seemingly contradictory decision, see Supreme Court, civil judgment of No. 95-Tai-Shun-Tzu-20 (2006). 122 Hsu, 176–178 with reference to former Supreme Court decisions. 123 Wu, 183–185, 187. 124 See Liu/ Chen, 569–570. 125 See above, mn. 9. 126 It should be noted that instead of the overriding mandatory rule, the legislator of the ACL has enacted the rule of evasion of law (Art. 7 ACL). Art. 247-1 TCC could thus be applicable if the parties fraudulently chose a foreign law to evade the judicial review of the Taiwanese courts according to that provision.

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this deliberately or not, the issue of conflict of laws with regard to the judicial review of dispute resolution clauses, including those on choice of law, forum selection, and arbitration. It is notably the notion of ‘obvious unfairness’ that the Supreme Court uses to assess the effectiveness of such clauses, in particular those qualifying as ‘standard terms’. This can be seen in a recent Supreme Court decision affirming that the choice of law clause stated on the back of a bill of lading, under which the United States Carriage of Goods by Sea Act 1936 shall govern the relevant legal relationships, is not ‘obviously unfair’ and thus valid.127 However, the Supreme Court did not indicate any legal basis of the ‘obvious unfairness’ test, unlike the appeal court which explicitly subjected the said clause to substantial control according to Art. 247‐1 TCC. 35 Furthermore, in a case where a German seller, against whom the Taiwanese buyer brought an action for damages in Taiwan, raised the objection to international jurisdiction on the ground of the forum selection clause in a textile machine purchase contract, which unilaterally allows the seller to file a lawsuit at any other court having statutory jurisdiction than the exclusively designated German court, the Supreme Court has declined, in accordance with the appeal court, international jurisdiction, because the buyer could have chosen not to enter into the standard form contract, i.e. there was a ‘possibility not to contract’, and the said contract term should thus not be considered ‘obviously unfair’.128 Although the Supreme Court did not invoke Art. 247‐1 TCC here, the parallel between its reasoning and the illustrated settled case law is not to be dismissed.129 36 In this context, it is worth noting that, in other decisions which also relate to the effectiveness of forum selection clause in B2B contracts, the Supreme Court has generally required international jurisdiction agreements to comply with Art. 28 II of the Taiwanese Code of Civil Procedure (hereafter ‘CCP’).130 However, the ambit of Art. 28 II CCP131, which regulates the effectiveness of choice of venue agreement qualifying as ‘standard terms’, is confined to B2C relationship by its unambiguous wording. It is thereby unclear whether the Supreme Court merely confirms, fallowing the doctrine of ‘double functionality’132, the applicability of Art. 28 II CCP to international jurisdiction agreements or additionally envisages an analogous application of this provision to B2B transactions. But for the purpose of this book, the question can be left open, as one may properly assume that the Supreme Court will construe the concept of ‘obvious unfairness’ under Art. 28 II CCP in the same way as that under Art. 247‐ 1 TCC, given the fact that, as noted in its Legislative Explanation,133 Art. 28 II CCP, just like Art. 247‐1 TCC, has also been enacted to protect the weaker party. 127 Supreme Court, civil judgment of No. 105-Tai-Shun-Tzu-105 (2016); see also Supreme Court, civil judgment of No. 106-Tai-Shun-Tzu-418 (2017). 128 Supreme Court, civil order of No. 103-Tai-Kang-Tzu-571 (2014). 129 See above, mn. 17 et seq. 130 Supreme Court, civil order of No. 106-Tai-Kang-Tzu-445 (2017); Supreme Court, civil order of No. 102-Tai-Kang-Tzu-1061 (2013). 131 Official translation: (I) A court, upon determining a lack of jurisdiction over the action in whole or in part, will transfer the action to a court with jurisdiction either by ruling on the plaintiff’s motion or on its own initiative. (II) Before proceeding orally on the merits, a party may move the court to transfer the action to another court with jurisdiction when the court in which the action is pending obtains jurisdiction in accordance with the provision of Article 24 and such agreement is part of a standard contract prepared by the opposing party which is either a juridical person or a merchant, and the contract is manifestly unfair under the circumstances, provided however, that this provision will not apply where both parties are either judicial persons or merchants. (III) A ruling denying the motion for transfer is not reviewable. 132 cf. W-Y Chen (2018/337), 7–9. 133 Legislative Yuan gazette No. 92/8 (2003) 1123–1124.

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While an arbitration clause also has to pass the ‘obvious unfairness’ test so as to 37 produce its full effect, special attention should be given to two Supreme Court decisions, both referring to Art. 247‐1 TCC. In one case where the Taiwanese supplier of chips for solar cells raised the objection pursuant to Art. 4 of the Arbitration Law of ROC (hereafter ‘AL’) that the court proceeding commenced by the Taiwanese purchaser shall be suspended due to the agreement to arbitrate in Singapore, the Supreme Court has upheld, in accordance with the appeal court, this objection for the reason that there was a ‘possibility to negotiate’ for the purchaser and thus the requirements of Art. 247‐ 1 TCC were not met.134 In the other case which raised the issue of the effectiveness of an agreement to arbitrate in the US State of Utah between the American MLM (Multi-level marketing) company with a branch office in Taiwan and the Taiwanese participant, the Supreme Court has approved the ruling of the appeal court which invalidated the arbitration clause on the basis of Art. 247‐1 TCC, as the participant would otherwise have been forced to commence an arbitration process in a distant country.135 Theoretically, even if the arbitration agreement should be considered merely as a 38 procedural contract,136 the direct application of Art. 247‐1 TCC to international arbitration agreements could be hardly justified by the principle of forum regit processum, since the AL contains, at least implicitly in its Art. 50(2)137, conflict rules concerning the material validity of arbitration agreement;138 Art. 247‐1 TCC applies only where Taiwanese law is the governing law. This may be a reason for the fact that the Supreme Court recently refrained from mentioning that provision and simply resorted to the notion of ‘obvious unfairness’ in two consecutive cases, which respectively raise the issue of whether the contract term included in a charter-party between a Chinese shipper and a Panamanian carrier to submit their dispute to arbitration in Hong Kong with English laws should be valid139 and the question of whether the incorporation clause referring to the same charter-party on the bill of lading issued by the Panamanian carrier could bind the Taiwanese holder of the bill of lading140. Although this approach can possibly find its legal basis in Art. 49 I (1) AL141, which 39 permits the Taiwanese courts to invalidate the arbitration agreement infringing the national (procedural or substantive) public policy, it is arguable if the Supreme Court sets the correct standard for such review in saying that the arbitration agreements concluded in the last mentioned cases were not ‘obviously unfair’ and thus enforceable, because the designated seat of arbitration, namely Hong Kong, was not ‘inconvenient’ for the parties to resolve their maritime disputes.142 Nevertheless, there is no denying that the Supreme Court tends here to define the criteria for assessment of the ‘obvious unfairness’ in a less formalistic way. 134

Supreme Court, civil order of No. 100-Tai-Kang-Tzu-820 (2011). Supreme Court, civil judgment of No. 99-Tai-Shun-Tzu-1175 (2010). 136 See Shen, 216–218. 137 This subparagraph corresponds to the second part of Art. 36(1)(a)(i) UNCITRAL Model Law on International Commercial Arbitration 1985 and thus to the second part of Art. V(1)(a) New York Convention. 138 W-Y Chen (2018/108), 316–318. 139 Supreme Court, civil order of No. 106-Tai-Kang-Tzu-1353 (2017). 140 Supreme Court, civil order of No. 106-Tai-Kang-Tzu-1354 (2017). 141 This subparagraph corresponds to Art. 36(1)(b)(ii) UNCITRAL Model Law on International Commercial Arbitration 1985 and therefore to Art. V(2)(b) New York Convention. 142 W-Y Chen (2018/357), 159–160. 135

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PART 2 CONFLICT OF LAWS Q. Choice of Law and Choice of Court: The Rome I and Brussels I bis Regulations Bibliography: v. Bar/Clive (ed.), Draft Common Frame of Reference (DCFR) (Full Edition) (Sellier 2009); Baumert, Abschlusskontrolle bei Rechtswahlvereinbarungen, (1997) 10 Recht der internationalen Wirtschaft 805–811; Dörner, Case note, (2017) 4 Lindenmaier-Möhring Kommentierte BGH-Rechtsprechung 388798; Giuliano/Lagarde, Report on the Convention on the law applicable to contractual obligations, [1980] OJ C 282/1–50; Jenard, Report on the Convention on jurisdiction and the enforcement of judgments in civil and commercial matters, [1979] OJ C 59/1–65; Kropholler/von Hein, Europäisches Zivilprozessrecht (10th edn., dfv 2018); Mankowski, Case note, (1994) 5 Recht der internationalen Wirtschaft 421–423; Münchener Kommentar zum BGB – Vol. 12 (7th edn., C.H. Beck 2018); Nomos Kommentar BGB – Vol. 6 (3rd edn., Nomos 2019); Palandt: Bürgerliches Gesetzbuch (79th edn., C.H. Beck 2020); Pfeiffer, Die Fortentwicklung des Europäischen Prozessrechts durch die neue EuGVO, (2014) 127 Zeitschrift für Zivilprozess 409–431; Pfeiffer, Die Haager Prinzipien des internationalen Vertragsrechts – Ausgewählte Aspekte aus der Sicht der Rom I-VO, in: Mankowski/Wurmnest (ed.), Festschrift für Ulrich Magnus (Sellier 2014) 501–513; Pfeiffer, Rechtswahlvereinbarung und Transparenzkontrolle, in: Wandt/Reiff/Looschelders/ Bayer (ed.), Versicherungsrecht, Haftungs- und Schadensrecht, Festschrift für Egon Lorenz (Verlag Versicherungswirtschaft 2014) 843–861; Pfeiffer, Urteilsanmerkung, (2017) 3 Zeitschrift für internationales Wirtschaftsrecht 133; Roth, Rechtswahlklauseln in Verbraucherverträgen – eine schwierige Sache?, (2013) 6 Praxis des Internationalen Privat- und Verfahrensrechts 515–524; Rühl, Rechtswahlklauseln und Rechtswahlfreiheit in Allgemeinen Geschäftsbedingungen (Nomos 1999); von Staudingers Kommentar zum Bürgerlichen Gesetzbuch: Staudinger BGB – EGBGB/IPR Einführungsgesetz zum Bürgerlichen Gesetzbuche/ IPR: Einleitung zur Rom I-VO; Art 1–10 Rom I-VO (Internationales Vertragsrecht 1) (de Gruyter 2016).

Contents mn. I. Overview ........................................................................................................... 1 II. Regulatory framework.................................................................................... 1 III. Requirements and legal consequences ....................................................... 2 1. Choice-of-law clauses ................................................................................ 2 2. Application of chosen law ........................................................................ 4 a) Applicability of national rules on judicial review of standard terms ........................................................................................................ 4 b) Conflicting choice-of-law clauses: battle of forms......................... 6 3. Choice-of-forum clauses ........................................................................... 11 a) Form......................................................................................................... 12 b) Consent.................................................................................................... 21

I. Overview This chapter deals with judicial review of standard clauses under European Private 1 International and Procedural Law, i.e. under the Rome I1 and Brussels I bis2 Regula1 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6. 2 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) [2012] OJ L351/1.

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tions. Standard terms play a role in private international law as far as choice-of-law and choice-of-forum (jurisdiction) clauses are concerned. In principle European (as opposed to national) provisions govern the contractual choice of the applicable law. The relevant rules in relation to contractual choice-of-law clauses are to be found in the Rome I Regulation. This instrument provides for a twofold regime. Firstly, Art. 3(1) Rome I states certain autonomous European standards as to the necessary clarity of the choice made. Secondly, Art. 3(5) in combination with Art. 10 Rome I refer to the law chosen by the parties for matters of existence and validity of the contractual consent. In contrast, choice-of-forum clauses fall within Art. 25 Brussels I bis. This provision states requirements relating to the formalities of such clauses, but also indirectly aims at ensuring the parties have sufficiently consented to the clause.3 The substantive validity of such clauses is governed by the law of the chosen forum.

II. Regulatory framework Article 3. Rome I Freedom of choice (1) A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract. (2) The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties. (3) Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. (4) Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties’ choice of applicable law other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement. (5) The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 10, 11 and 13. Article 10. Rome I Consent and material validity (1) The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Regulation if the contract or term were valid. (2) Nevertheless, a party, in order to establish that he did not consent, may rely upon the law of the country in which he has his habitual residence if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in paragraph 1. Article 25. Brussels I bis (1) If the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction, unless the agreement is null and void as to its substantive validity under 3

Jenard, 37.

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Q. Choice of Law and Choice of Court: The Rome I and Brussels I bis Regulations the law of that Member State. Such jurisdiction shall be exclusive unless the parties have agreed otherwise. The agreement conferring jurisdiction shall be either: (a) in writing or evidenced in writing; (b) in a form which accords with practices which the parties have established between themselves; or (c) in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned. (2) Any communication by electronic means which provides a durable record of the agreement shall be equivalent to ‘writing’. (3) The court or courts of a Member State on which a trust instrument has conferred jurisdiction shall have exclusive jurisdiction in any proceedings brought against a settlor, trustee or beneficiary, if relations between those persons or their rights or obligations under the trust are involved. (4) Agreements or provisions of a trust instrument conferring jurisdiction shall have no legal force if they are contrary to Articles 15, 19 or 23, or if the courts whose jurisdiction they purport to exclude have exclusive jurisdiction by virtue of Article 24. (5) An agreement conferring jurisdiction which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. The validity of the agreement conferring jurisdiction cannot be contested solely on the ground that the contract is not valid.

III. Requirements and legal consequences 1. Choice-of-law clauses Art. 3(1) Rome I states that a choice of law must be made expressly or sufficiently 2 clear from the parties’ agreement. In order to understand this rule properly, one should note the distinction between two different cases: express choice of law and other cases (without express choice). Against this backdrop, the requirement that the choice of law has to be sufficiently clear from the contract applies to cases without express choice because, for the purposes of Art. 3(1) Rome I, an express choice is per se considered to be sufficiently clear. In cases without express choice, the main function of the clarity requirement is to ensure that a mere hypothetical intent does not suffice as a basis of a contractual choice of law. That was expressly stated in relation to Art. 3(1) Rome Convention,4, 5 the identical predecessor of Art. 3(1) Rome I, and has not changed since. According to the above, a choice-of-law clause included in standard terms and stating 3 that a contract is governed by the laws of a specific jurisdiction constitutes an express choice. Accordingly, Art. 3(1) Rome I cannot function as a basis for an autonomous European transparency requirement for choice-of-law clauses in B2B contracts. The transparency requirements stated in relation to choice-of-law clauses by the ECJ under Arts 3 and 5 Unfair Terms Directive6 do not apply to B2B contracts due to the Directive’s application in B2C contracts only.

2. Application of chosen law a) Applicability of national rules on judicial review of standard terms. Pursuant to 4 Arts 3(5) and 10(1) Rome I, the conclusion and validity of a contractual choice of law is 4 Convention on the Law Applicable to Contractual Obligations opened for signature in Rome on 19 June 1980 (80/934/EEC) [1980] OJ L266/1. 5 Giuliano/Lagarde, see Art. 3 note 3 at 17, with Art. 4 note 1 at 19. 6 ECJ, C-191/15 Verein für Konsumenteninformation ECLI:EU:C:2016:612.

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governed by the chosen law. Under the wording of this rule, this would include any standard of review in relation to standard terms provided for by the chosen law. However, some authors submit that review standards relating to standard terms in national law do not apply.7 First, it is argued that applying a national review standard relating to standard terms would be contrary to the principle of Party autonomy. Second, consumer contracts form the most relevant group of cases for judicial review of standard term contracts, yet in such instances Art. 6(2) Rome I provides a specific mechanism for choice-of-law clauses and thus leaves no room for applying national law in this respect. Third, it is argued that rules on standard terms cannot apply since they are substantive in nature and do not regulate choice of law. 5 However, these arguments against applying national review standards are contrary to the express reference to the chosen law in Arts 3(5) and 10(1) Rome I. Moreover, a nonapplication of national review standards implies a distinction between general rules of traditional contract law relating to consent, mistake etc. (which, from this viewpoint, are referred to in Arts 3(5) and 10(1) Rome I) and other rules providing for a certain review standard (which are deemed to be of a lower value and therefore not referred to by the aforementioned provisions). Such a view on private law seems, however, outdated and, from a comparative viewpoint, absent a sufficient basis.8 A judicial review of standard contract terms, as far as allowed by national law, is part of the national general private law. Pursuant to Art. 3(5) in conjunction with Art. 10(1) Rome I, national rules on the review of standard terms may apply.9 b) Conflicting choice-of-law clauses: battle of forms. A special aspect of the wellknown problem of conflicting standard terms also arises in conflicts law, i.e. conflicting choice-of-law clauses. Ultimately, the issue is rooted in substantive law because there is no internationally-accepted rule as to how contract law should respond to conflicting standard terms. Generally, most legal systems agree that interpretation of the contract and the parties’ conduct serve to determine the prevailing standard terms. However, in cases of doubt, it is particularly controversial whether the ‘first shot’-theory, the ‘last shot’-theory or the ‘knock-out’-theory should apply, i.e. whether the applicable standard terms are those referred to in the first relevant communication or those referred to in the last relevant communication or only those common to both parties’ terms.10 The Rome I Regulation does not expressly regulate this issue, which is one reason why the problem has still not been finally resolved. One could refer to the rationale of the applicability of the chosen law (Arts 3(5) and 10(1) Rome I), which is that a choice of law (even if invalid) will, at least, serve as a semblance of a valid choice and therefore be the most likely basis for the parties’ conduct. Yet, if there are two different choices, this effect cannot occur. Consequently, this view denies a valid choice of law in case of conflicting clauses.11 7 Another option is to consider both conflicting clauses to be a potentially sufficient basis for a semblance of a valid choice. This view accepts it as a valid choice if the application of one of the two laws chosen results in a valid choice of law whereas the other does not.12 If, however, both laws referred to in the conflicting terms deem the choice to be valid, this solution does not work: neither of the choice-of-law clauses is 6

7 Baumert, 809; Mankowski, 422; Spellenberg, in: Münchener Kommentar, Art. 10 EGBGB, mn. 186 et seq.; Leible, in Nomos Kommentar, Art. 3 Rom I, mn. 75; Roth, 521; Rühl, 198–199. 8 For an analysis cf. Pfeiffer (‘Rechtswahlvereinbarung und Transparenzkontrolle’), 853 et seq. 9 See e.g. BGH, 26 October 1993, BGHZ 123, 380–393. 10 Comparative survey in v. Bar/Clive, Art. II.-4:209, notes 4–15. 11 Thorn, in Palandt, Art. 3 Rom I, mn. 9. 12 For instance, Magnus, in Staudinger BGB, Art. 3 Rom I, mn. 174.

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applied and the statutory choice-of-law regime steps in.13 Therefore, this view does not deserve support. Recently, the discussion on this issue was supplemented by the solution laid down in 8 Art. 6(1)(b) of the Hague Principles on Choice of Law in International Commercial Contracts:14 If the parties have used standard terms designating two different laws and under both of these laws the same standard terms prevail, the law designated in the prevailing terms applies; if under these laws different standard terms prevail, or if under one or both of these laws no standard terms prevail, there is no choice of law.

In other words, if both chosen regimes provide for the same substantive solution, that 9 is both laws agree which standard terms prevail under the circumstances given, one could speak of a false conflict. As such, one could argue that conflicts law should not result in a solution which is contrary to all laws related to a case. This solution, however, brings about the practical disadvantage that it requires a substantive analysis of both laws chosen. More importantly, the idea that parties will, most likely, have relied on the law chosen is not convincing in case of two conflicting choices. Therefore, the rationale for referring to the chosen law regardless of the validity of the choice does not apply. As a consequence, the solution provided for in Art. 6(1)(b) Hague Principles on Choice of Law, cannot be adopted by a mere interpretation of Arts 3(5) and 10(1) Rome I. Overall, the rationale for referring to the chosen law, i.e. the semblance of a valid 10 choice, does not apply in battle of forms situations. Consequently, in cases of conflicting choice-of-law clauses, no valid choice exists, unless the circumstances indicate that the parties have consented to the terms of one side.15

3. Choice-of-forum clauses Choice-of-forum clauses fall within the scope of Art. 25 Brussels I bis. Alongside the 11 requirements relating to the formalities of such clauses, it also seeks – albeit indirectly – to ensure sufficient consent to the clause.16 In particular, the choice of law must not be made without being noticed. As a consequence, Art. 25 Brussels I bis provides for requirements relating to clarity. The parties’ intentions must be expressed clearly so that their mutual consent is sufficiently certain.17 By the same token, the provision aims at ensuring that the other party does not state its consent without noticing the clause.18 In this respect, the ECJ consistently stated that a ‘narrow’ interpretation of the relevant requirements under Art. 25 Brussels I bis applies.19 This narrow interpretation, however, does not exclude that a choice-of-forum agreement is based on a standard clause if the requirements of this provision are met. In particular, in case of an ongoing business relationship, it may be that, depending on the specific circumstances, all contracts within this relationship may be governed by the standard terms of a party, including a choice-of-forum clause.20 If the choice-of-forum clause is validly included in a contract providing for third-party rights, the third party may invoke that clause without having 13

ibid. Hague Principles on Choice of Law in International Commercial Contracts of 19 March 2015, available under https://www.hcch.net/de/instruments/conventions/full-text/?cid=135#text. 15 Pfeiffer (‘Die Haager Prinzipien des internationalen Vertragsrechts’), 508. 16 Jenard, 37. 17 ECJ, C-24/76, Colzani ECLI:EU:C:1976:177, para. 7. 18 ECJ, C-106/95, MSG ECLI:EU:C:70, para. 17. 19 ECJ, C-221/84, Berghoefer ECLI:EU:C:1985:337, para. 11. 20 ECJ, C-25/76, Segoura ECLI:EU:C:1976:178, para. 11; C-71/83, Russ ECLI:EU:C:1984:217, para. 18 – concerning clauses included in a bill of lading. 14

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personally met the formal requirements of Art. 25 Brussel I bis.21 If, however, the third party may not invoke the agreement under the applicable contract law, that third party must consent in accordance with the formal requirements of Art. 25 Brussels I bis if it wishes to invoke the clause.22 12

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a) Form. Art. 25 Brussels I bis provides for a comprehensive and complete set of formal requirements which excludes the application of any supplementary national laws. They apply to the conclusion of the choice-of-forum agreement. In order to satisfy the ‘in writing’ requirement under Art. 25 Brussels I bis, an agreement needs the parties’ signature. It is, however, not necessary that both parties sign the same document.23 It also suffices if a choice-of-forum clause was included in a framework contract or a prior contract, provided that, under the applicable contract law, the parties – even orally – made valid reference to that contract or extended its application to the present contract.24 According to German case law, the requirements of Art. 25 Brussels I bis can purportedly be met if only one party signs the clause, provided the circumstances demonstrate the consent of both parties to the agreement.25 Where standard terms are used, the parties have agreed in writing if the signed contract refers to the standard terms including the choice-of-forum clause (not necessarily expressly to the choice-of-forum clause itself).26 The reference has to be sufficiently clear so that a party applying usual standards of care may follow-up on its effects.27 A reference merely made on an invoice is not sufficient.28 Where a bill of lading meets the requirements of Art. 25 Brussels I bis, a choice-of-forum clause is valid for and against all persons bound by the bill.29 The same applies to clauses included in an issue prospectus, i.e. the contract between the issuer and its initial counterpart must refer to the prospectus in accordance with the requirements stated above. Other persons need to validly acquire the initial counterparty’s contractual position.30 Under Art. 25(2) Brussels I bis, electronic transmission of consent has the same effects as statement of consent in writing. ‘Click wrapping’, i.e. the conclusion of a contract on the website of the provider of a clause where the other party confirms its consent with the terms by clicking on a consent icon or button, suffices, provided the standard terms are accessible via a link on that website and could be downloaded and saved or printed. It is not necessary that the terms including its choice-of-forum clause pop up automatically.31 Art. 25 Brussels I bis also permits ‘half-written’ choice-of-forum agreements. This option applies to oral agreements with a written confirmation by one party. It therefore plays no significant role in relation to standard terms. However, it should be noted that consent is still necessary, meaning the written confirmation cannot replace the necessary oral agreement.32 If there is no prior oral consent, a ‘confirmation’ referring to the 21

ECJ, C-201/82, Gerling Konzern ECLI:EU:C:1983:217. ECJ, C-387/98, Coreck ECLI:EU:C:2000:606, para. 26. 23 BGH, 22.2.2001 – IX ZR 19/00: NJW 2001, 1731–1732. 24 ECJ, C-313/85, Iveco Fiat ECLI:EU:C:1984:423. 25 BGH, 25.1.2017 – VIII ZR 257/15: RIW 2017, 229–232; critical Pfeiffer (‘Urteilsanmerkung’), 133; Dörner. 26 ECJ, C-24/76, Colzani ECLI:EU:C:1976:177. 27 ECJ, C-222/15, Hőszig ECLI:EU:C:2016:525, para. 40. 28 ECJ, C-64/17, Saey Home & Garden ECLI:EU:C:2018:123, paras 28 et seq. 29 ECJ, C-387/98, Coreck ECLI:EU:C:2000:606, para. 26. 30 ECJ, C-366/13, Profit Investment Sim ECLI:EU:C:2016:282. 31 ECJ, C-322/14, El Majdoub ECLI:EU:C:2015:334. 32 ECJ, C-25/76, Segoura ECLI:EU:C:1976:178. 22

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Q. Choice of Law and Choice of Court: The Rome I and Brussels I bis Regulations

confirming party’s standard terms requires confirmation by the other party. Mere silence or a lack of objection do not suffice.33 A party’s standard terms may also be included in a contract according to a trade usage. Such usage would have to be established in the area of international trade in which the parties are active; it must be known to the parties or supposed to be known to them. The existence of a usage, therefore, is not a matter of a certain national law34; rather, it is a matter of fact. A trade usage exists if professionals, in relation to certain kinds of contracts, generally follow a certain standard. It may be assumed that parties are aware of such a trade usage if they had a prior business relationship with each other or with other parties in the same industry or if, in relation to certain kinds of contract, parties, when concluding a specific kind of contract, usually or regularly behave in a particular manner.35 If that is the case, public knowledge of the usage is not necessary; sporadic doubts are irrelevant.36 The usage does not need to be locally connected to the parties as long as it is accepted ‘generally’, i.e. internationally, in a certain field of transactions. Proof for the usage does not have to cover all Member States; the nationality of the parties is not critical either. The existence of the trade usage may be indicated by its acceptance in those Member States which are most relevant in the sector concerned.37 If including the clause is in accordance with a trade usage, the parties’ consent is presumed.38 In that case, a mere confirmation letter issued by one party may suffice.39 A further option is that the parties comply with the formal rules they usually follow amongst each other (‘party usages’), e.g. a choice-of-forum clause is always included into contracts between the parties. This, however, requires a consistent practice, according to which there is an agreement that the choice-of-forum clause is always included in their contracts. The consistency must exist for a longer period of time and regardless of the form used for the conclusion of the contract.40

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b) Consent. Taken literally, Art. 25 Brussels I bis only governs the form of choice-of- 21 forum clauses. Yet, according to its rationale, the provision also indirectly states minimum requirements relating to the consent of the parties. To that extent, the rule provides for an European autonomous concept of agreements41, which, in particular, requires a real consent of the parties.42 Such real consent is absent if a producer invokes the clause agreed on with the direct buyer of a good against further traders in the chain of supply, even if they are entitled to an ‘action directe’ against the producer under the applicable national law.43 If these European minimum requirements are met, it is a matter of the applicable national law44 whether or not the parties validly agreed on the clause. 33

ibid. ECJ, C-106/95, MSG ECLI:EU:C:70, para. 23. 35 ibid.; see also ECJ, C-159/97, Castelletti ECLI:EU:C:1999:142 (consolidated practice); affirmative as regards bills of lading BGH, 15.2.2007 – I ZR 40/04: NJW 2007, 2036. 36 ECJ, C-159/97, Castelletti ECLI:EU:C:1999:142. 37 ibid., ECJ, C-366/13, Profit Investment Sim ECLI:EU:C:2016:282, para. 45. 38 ECJ, C-159/97, Castelletti ECLI:EU:C:1999:142. 39 ECJ, C-106/95, MSG ECLI:EU:C:70. 40 BGH, 25.3.2015 – VIII ZR 125/14: NJW 2015, 2584–2590, para. 58. 41 ECJ, C-543/10, Refcomp ECLI:EU:C:2013:62, para. 21. 42 ibid. para. 21. 43 ibid. 44 i.e. the law of the chosen forum meaning the law determined according to the conflicts rules of the chosen forum, see Recital 30 Brussels I bis and Pfeiffer (‘Die Fortentwicklung des Europäischen Prozessrechts’), 417. 34

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Part 2. Conflict Of Laws

The aforementioned principles not only apply in general but also with regard to standard terms, provided the agreement meets the requirements of Art. 25 Brussels I bis and the standard terms have been included in the contract according to the applicable national contract law. It is controversial whether a judicial review of standard terms under national law applies, and it is submitted in legal writing that a judicial review of standard terms under national law does not apply.45 23 However, according to the state of modern standard terms law, that position can hardly be based on the consideration that Art. 25 Brussels I bis only refers to national general private law, whereas rules on standard terms provide for a sectorial regulation only. A more persuasive argument might be that Art. 25 Brussels I bis intends to allow choice-of-forum clauses so that national standard terms law may not prohibit such clauses. The latter is correct insofar as, under the principle of effectiveness, national law must not deprive EU Regulations of their practical effectiveness. Any national standard term review to that effect would therefore be contrary to Art. 25 Brussels I bis. As a consequence, a national review of standard terms must not have the effect that usual standard choice-of-forum clauses are invalid. In particular, the usual clause providing for a forum at the seat or the provider of the clause has to be accepted. If, e.g., domestic German law is applicable to a party’s standard choice-of-law clause, this means that § 307 BGB applies but does not result in the invalidity of a clause providing for the jurisdiction of the forum at the seat of its provider.46 22

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Kropholler/von Hein, Art. 23 Brussels I, mn. 20. On § 307 BGB see Wais, in this volume, mn. 4.

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