On 11 October 2011, the European Commission (the Commission) published a proposal for a Regulation on an optional Common European Sales Law (CESL) (the proposed Regulation). This is the latest step in the Commission's efforts to harmonise contract law among EU member states. The CESL follows the Commission's Green Paper in July 2010 that set out various proposals for a legal instrument to harmonise contract law among member states (www.practicallaw.com/5-502-8713). Differences between member states' contract laws are perceived by the Commission as an obstacle to trade within the EU, particularly for consumers and small-to-medium sized enterprises (SMEs).

The CESL is entirely voluntary and is therefore less radical than some of the proposals in the Commission's Green Paper, such as a mandatory EU contract law or European Civil Code. Viviane Reding, the Vice-President of the European Commission, acknowledged in November 2011 in a speech at a conference on European contract law in Warsaw that the voluntary nature of the CESL has been proposed in response to the feedback from stakeholders, legal practitioners and member states as part of the Commission's consultation process.

The CESL's self-proclaimed objective is "to improve the establishment and the functioning of the internal market by facilitating the expansion of cross-border trade… and purchases". The Commission's intention is that the CESL will operate as a separate governing law, commonly referred to as the "28th regime" (that is, the contract law of a notional 28th member state).

The Commission has set an ambitious timetable for introduction of the CESL by the end of 2012, to coincide with the 20th anniversary of the EU's single market. When the concept of an optional Europe-wide contract law was put to the European Parliament in June 2011, an overwhelming majority (521 of the 736 members of the European Parliament (MEPs)) welcomed the idea. Accordingly, MEPs are likely to give a warm reception to the Commission's proposed Regulation on the CESL.

It is important for businesses transacting in the EU to understand the potential benefits and pitfalls of choosing the CESL to govern their contracts involving consumers or SMEs (see box "A contract law for Europe"). Given the Commission's timetable for introduction of the CESL, businesses are likely to have little time to grapple with the new law.

The proposed Regulation only applies to cross-border contracts for the sale of goods, digital content and related services involving consumers or SMEs, where the parties choose the CESL to govern their contract and at least one of the parties is established in a member state.

An SME is defined as a trader which employs fewer than 250 persons, and has an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million.

Certain transactions are expressly excluded from the scope of the CESL, including sales of:

The CESL provides member states with the option to expand the application of the CESL to include domestic transactions and transactions which do not involve SMEs. Accordingly, it is likely that the scope of the CESL will increase in the future.

The proposed Regulation gives parties some flexibility to choose which parts of the CESL they want to apply to their contracts. If a provision of the CESL is not expressed to be mandatory, the parties may agree to exclude or derogate from that provision. However, the extent to which the parties can change even the non‑mandatory provisions is often limited. For example, the proposed Regulation provides that many of the non-mandatory provisions cannot be excluded or derogated from to the detriment of a consumer.

The CESL is by no means uncontroversial. Various concerns have been voiced, including by the Law Society of England and Wales, which considers that the proposal could lead to uncertainty for businesses and consumers alike (see News brief "European contract law: proposal due in October", www.practicallaw.com/1-506-6226).

This uncertainty stems from the fact that there is little guidance on how the courts of member states will interpret the CESL, which is intended to be freestanding from national contract laws. The CESL expressly provides that it is to be interpreted autonomously and without reference to the national law that would otherwise govern the contract, or any other law.

The Law Commission and the Scottish Law Commission (the Law Commissions) have suggested that the CESL would be easier to understand if it had separate codes for business-to-business and business-to-consumer contracts, included notes and references and was accompanied by authoritative guidance.

In addition, there is concern about the consistency of interpretation of the CESL by the courts of different member states. To help alleviate this concern, the proposed Regulation provides for the establishment of a database of cases from member states' courts relating to the CESL.

Courts of member states can also refer matters to the European Court of Justice (ECJ), although there are concerns that if adoption of the CESL is widespread, this could put significant pressure on the ECJ's resources.

While welcoming the freedom of choice that the CESL offers businesses, the Law Commissions have expressed concern regarding whether the market is sufficiently large or significant for the CESL to develop the critical mass that it needs to succeed. Proponents of the CESL will need to convince traders to offer to apply the CESL to consumers and SMEs, and convince consumers and SMEs to accept such offers. Accordingly, in order for the CESL to become a popular choice of law, traders, consumers and SMEs will all need to be persuaded that this new "28th regime" is better than the existing 27 contract laws that they can already choose to govern their agreements.

The CESL has received mixed reactions from retailers and consumers. The British Retail Consortium has welcomed the Commission's proposals, with its director general, Stephen Robertson, saying: "If the law for selling across the EU is simpler, UK retailers should be able to expand into many more markets". On the other hand, consumer group Which? has described the CESL as a "pointless proposal" that could lead to consumers having less protection.