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Regulatory Competition in Contract Law

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DOI 10.1515/ercl-2013-0003
ERCL 2013; 9(1): 61–89
Articles
Giesela RГјhl
Regulatory Competition in Contract Law:
Empirical Evidence and Normative
Implications*
Abstract: Regulatory competition has been high on the agenda of lawyers and
economists for several years. Initially, the focal point of the debate was corporate
law. Only recently the attention has shifted to other areas of law, notably contract
law. However, in contrast to corporate law where there is little doubt that states
do compete for corporate charters both in the United States and in Europe, it is
hotly debated whether there is – or whether there can be – regulatory competition
in contract law. In the first part of the following article I argue that this question
must be answered in the affirmative: empirical evidence shows that there is
regulatory competition in contract law just like in other areas of law, notably
corporate law. Most importantly, empirical evidence shows that businesses and
consumers actually choose the applicable contract law based on the quality of the
law and that states actually respond to these choices by adjusting their contract
laws. With this finding, however, the discussion about regulatory competition in
contract law has not yet reached its end. To the contrary: the fact that states
actually do compete for application of their contract law raises a number of
normative questions. Should regulatory competition be promoted because it
induces a race to the top? Should it be banned because it induces a race to the
bottom? In the second part of the paper I argue that regulatory competition in
contract law will generally induce a race to the top. It should, therefore, generally
be promoted. However, I also argue that regulatory competition may induce a
race to the bottom in some cases, namely where a choice of law does not account
for the interests of all parties affected by the choice. In these cases, I conclude,
that regulatory competition should be regulated. More specifically, I argue that it
should be regulated on the level of private international law by limiting freedom
of choice.
* This article is a revised version of a paper presented at the Cambridge Centre of European Legal
Studies, the Oxford Comparative Law Discussion Group and the Amsterdam Centre for the Study
of European Contract Law. I thank all participants for their valuable comments. All remaining
errors are mine.
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62
Giesela RГјhl
Résumé: La concurrence normative a été placée haut dans l’agenda des juristes et
des Г©conomistes depuis plusieurs annГ©es. Initialement, le point nodal du dГ©bat
était le droit des sociétés. C’est seulement récemment que l’attention a été reportée sur d’autres domaines du droit, notamment le droit des contrats. Cependant,
par opposition au droit des sociГ©tГ©s oГ№ il y a peu de doute que les Г‰tats soient en
concurrence en matière d’établissement de statuts de sociétés, à la fois aux ÉtatsUnis et en Europe, il est passionnément débattu de savoir s’il y a ou s’il peut y
avoir une mise en concurrence normative en matiГЁre de droit des contrats. Dans
la première partie de l’article suivant, je soutiens qu’il faut répondre à cette
question par l’affirmative: des preuves empiriques montrent qu’il y a une compétition normative en droit des contrats comme dans les autres branches du droit et
notamment en droit des sociГ©tГ©. Plus important, des preuves empiriques montrent que des entrepreneurs et des consommateurs choisissent effectivement le
droit des contrats applicable en fonction de la qualitГ© du droit et que les Г‰tats
rГ©pondent effectivement Г ces choix en ajustant leurs droits des contrats. Avec
cette dГ©couverte, cependant, la discussion relative Г la compГ©tition normative en
droit des contrats n’est pas encore close. Au contraire, le fait que les États soient
effectivement en compétition pour l’application de leur droit des contrats soulève
un certain nombre de questions juridiques. Est-ce que la mise en concurrence
normative doit être promue parce qu’elle induit une course au mieux-disant?
Doit-elle être au contraire bannie parce qu’elle conduit à une course au moinsdisant? Dans la seconde partie de cet article, je soutiens que la mise en concurrence normative en droit des contrats va généralement entraîner une course au
mieux-disant. Elle devrait donc, en gГ©nГ©ral, ГЄtre promue. Cependant, je soutiens
aussi que la mise en concurrence normative peut conduire Г une course au
moins-disant dans quelques cas, notamment quand un choix de loi ne rend pas
compte de l’intérêt de toutes les parties affectées par ce choix. Dans ces cas, je
conclus que la mise en concurrence normative devrait être régulée. Plus spécifiquement, je soutiens qu’elle devrait être régulée au niveau du droit international
privГ© en limitant la libertГ© de choix.
Zusammenfassung: Der Wettbewerb der Rechtsordnungen beschäftigt Juristen
und Ökonomen seit vielen Jahren. Anfänglich ging es dabei im Wesentlichen um
das Gesellschaftsrecht. Erst in jГјngster Zeit sind andere Rechtsgebiete, insbesondere das Vertragsrecht in das Zentrum der Aufmerksamkeit gerГјckt. Im Gegensatz
zum Gesellschaftsrecht, wo sowohl in den USA als auch in Europa mittlerweile
anerkannt ist, dass Staaten um die Anwendung ihres Rechts konkurrieren, ist im
Vertragsrecht allerdings unklar, ob es einen Wettbewerb der Rechtsordnungen
gibt. Der erste Teil des nachfolgenden Beitrags legt dar, dass diese Frage im
Hinblick auf das Vertragsrecht ebenso zu bejahen ist wie im Hinblick auf andere
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Regulatory Competition in Contract Law
63
Rechtsgebiete, insbesondere das Gesellschaftsrecht. Verschiedene Studien zeigen
nämlich, dass Unternehmen und Verbraucher das anwendbare Recht wählen und
dass Staaten auf diese Wahl durch die Anpassung ihres Vertragsrechts reagieren.
Mit dieser Feststellung ist die Diskussion über den Wettbewerb der Rechtsordnungen im Vertragsrecht allerdings noch nicht beendet. Vielmehr stellen sich zahlreiche normative Fragen. Sollte der Wettbewerb der Rechtsordnungen gefördert
werden, weil er ein race to the top auslösen wird? Oder sollte er eingeschränkt
werden, weil er ein race to the bottom zur Folge haben kann? Der zweite Teil des
nachfolgenden Beitrags legt dar, dass im Hinblick auf das Vertragsrecht der
Wettbewerb der Rechtsordnungen grundsätzlich gefördert werden sollte, weil er
grundsätzlich positive Effekte haben wird. Nur soweit der Wettbwerb der Rechtsordnungen ausnahmsweise negative Effekte nach sich ziehen kann, weil die
Wahl des anwendbaren Rechts nicht die Interessen aller von der Rechtswahl
betroffenen Parteien widerspiegelt, sollte er eingeschränkt werden. Insbesondere
sollte auf der Ebene des Internationalen Privatrechts die Rechtswahlfreiheit begrenzt werden.
Giesela RГјhl: Professor of Civil Law, Civil Procedure, International Private Law,
International Civil Procedure, European Private Law and Comparative Law, Faculty of Law,
Friedrich-Schiller-University Jena, E-Mail: giesela.ruehl@uni-jena.de
Table of Content
A
B
C
D
Introduction
63
Empirical Evidence
64
I
The Demand Side
64
II
The Supply Side
73
Normative Implications
78
I
The Race to the Top-Scenario
80
II
The Race to the Bottom-Scenario
84
Conclusion
89
A Introduction
Regulatory competition has been high on the agenda of lawyers and economists
for several years. Initially, the focal point of the debate was corporate law. Only
recently has attention shifted to other areas of law, notably contract law. However, in contrast to corporate law, where there is little doubt that states do
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64
Giesela RГјhl
compete for corporate charters both in the United States and in Europe,1 it is hotly
debated whether there is – or whether there can be – regulatory competition in
contract law.2 In the following article, I will, therefore, analyse some empirical
evidence to find out whether the requirements for regulatory competition are
actually met in contract law (infra B). In addition, I will discuss some normative
implications that follow from the empirical evidence (infra C).
B Empirical Evidence
The discussion about regulatory competition is based on the economic theory of
jurisdictional competition. In its original form, this theory goes back to Charles
M. Tiebout.3 It assumes that law is a product that is supplied by states and asked
for by businesses and consumers.4 As a result, regulatory competition only comes
into existence if certain requirements – relating to the demand side on the one
hand and the supply side on the other – are met.
I The Demand Side
On the demand side, regulatory competition requires that businesses and consumers are in a position to choose the applicable law. In addition, it requires that
businesses and consumers are actually responsive to differences in legal rules.
1 See, for example, H. Eidenmüller, �Recht als Produkt’ (2009) 64 JuristenZeitung 641, 644–645;
H. Eidenmüller, �The Transnational Law Market, Regulatory Competition, and Transnational
Corporations’ (2011) 28 Indiana Journal of Global Legal Studies 707, 716–719; E. O’Hara and
L. Ribstein, The Law Market (Oxford: Oxford University Press, 2009) 107–131.
2 See, for example, S. Vogenauer, �Regulatory Competition through Choice of Law and Choice of
Forum: Theory and Evidence’ European Review of Private Law 21 (2013) 13 et seq; S. Vogenauer,
�Choice of Law and Choice of Forum in Europe’, in H. Eidenmüller (ed), Regulatory Competition in
Contract Law and Dispute Resolution (Munich: Sellier, forthcoming).
3 C. Tiebout, �A Pure Theory of Local Expenditure’ (1956) 64 Journal of Political Economy 416 et
seq. See for a detailed account W. Bratton and J. McCahery, �The New Economics of Jurisdictional
Competition: Devolutionary Federalism in a Second Best World’ (1997) 86 Georgtown Law Journal
201, 207–209; E.-M. Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (Tübingen: Mohr Siebeck, 2002) 45–46; J. Trachtman, �Regulatory Competition and Regulatory Jurisdiction’ (2000) 3 Journal of International Economic Law 331, 337–340.
4 See for detailed account EidenmГјller (2009), n 2 above, 641 et seq; EidenmГјller (2011), n 2
above, 707 et seq.
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Regulatory Competition in Contract Law
65
1 Freedom of Choice of Businesses and Consumers
Freedom of choice is probably the most fundamental requirement for regulatory
competition. It comes along in two different forms: direct and indirect.5 It is direct
if parties may choose the applicable law via a choice of law clause. It is indirect if
parties may influence facts that determine the applicable law. In corporate law,
for example, many states follow the incorporation theory and apply the law of the
state where the company was incorporated. As a result, parties may – indirectly –
choose the applicable corporate law by choosing the state of incorporation.
In contract law, freedom of choice is widely recognized in its direct form. With
the exception of some Middle Eastern and Latin American countries,6 notably
Bolivia, Brazil, Columbia and Uruguay,7 most national and international private
international law regimes allow parties to choose the law applicable to their
contract via a choice of law-clause. In the member states of the European Union
direct freedom of choice is based on Article 3 of the Rome I Regulation.8 In other
European countries, freedom of choice is granted by national codifications such
as Article 116 (1) of the Swiss Act on Private International Law and Article 1201 of
the new Russian Civil Code.9 In the United States, freedom of choice has long been
enshrined in § 187 of the Restatement (Second) of Conflict of Laws and § 1–301 (a)
of the Uniform Commercial Code (UCC). In Mexico and Venezuela, freedom of
choice applies according to Article 7 of the Mexico Convention on the law applic-
5 See for this distinction L. de Lima Pinheiro, �Competition between Legal Systems in the
European Union and Private International Law’ (2008) Praxis des Internationalen Privat- und
Verfahrensrechts 206, 209; Kieninger, n 4 above, 12–15.
6 See for a recent account M. Albornoz, �Choice of Law in International Contracts in Latin
American Legal Systems’ (2010) 6 Journal of Private International Law 23, 43–48; J. Basedow,
�Theorie der Rechtswahl oder Parteiautonomie als Grundlage des Internationalen Privatrechts’
(2011) 75 Rabels Zeitschrift für ausländisches und internationales Privatrecht 32, 34–37.
7 However, in Brazil and Uruguay proposals to reform the law have been made in 2004 and 2009
respectively. They are expected to be adopted in the near future. See for a detailed account
Albornoz, n 7 above, 23, 45–46, 47–48; D. Opertti Badán and C. Fresnedo de Aguirre, �The Latest
Trends in Latin American Private International Law: the Uruguayan 2009 General Law on Private
International Law’ (2009) 11 Yearbook of Private International Law 305, 332–335.
8 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 OJEC L 177/6 [hereinafter Rome IRegulation]. Previously, freedom of choice was granted by the EC Convention on the law applicable to contractual obligations, consolidated version in 1998 OJEC C 27/34 [hereinafter Rome
Convention].
9 See for a detailed account S. Lebedev, A. Muranov, R. Khodykin and E. Kabatova, �New Russian
Legislation on Private International Law’ (2002) 4 Yearbook of Private International Law 117, 130–
132.
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66
Giesela RГјhl
able to contracts.10 In other Latin American countries, freedom of choice is
granted by national law. Article 2095 (1) of the Peruvian Civil Code, for example,
provides that contracts are governed by the law chosen by the parties.11 In
addition to private international law codifications in Europe and the Americas,
freedom of choice also dominates the private international law systems of most
Asian countries: it is embodied in Article 7 of the Japanese Act on the Application
of Laws adopted in 2006, in В§ 41 of the new Chinese Act of Private International
Law enacted in 2010, and in В§ 20 (1) of the new Taiwanese Act of Private International Law. It is also granted by В§ 25 of the South Korean Act on Private International Law adopted in 2002. Direct freedom of choice is, thus, well established
and not seriously called into question.12 It is therefore fair to say that businesses
and consumers are largely free to choose the law applicable to their contract.
This, in turn, means, that the first requirement for regulatory competition in
contract law is usually met.
2 Responsiveness of Businesses and Consumers
Freedom of choice on the level of private international law, however, is only a
necessary, but not a sufficient condition for regulatory competition. In addition to
businesses’ and consumers’ freedom to choose the applicable law, the theory
requires that businesses and consumers actually exercise their freedom of choice
and that they do so based on the quality of different legal rules.13 In view of contract
law many academics doubt that this is actually the case.14 They do so because the
10 See for a detailed account A. Gebele, Die Konvention von Mexiko (Berlin: Tenea, 2002) 113–
146; E. Hernández-Bretón, �Internationale Handelsverträge im Lichte der Interamerikanischen
Konvention von Mexiko über das auf internationale Verträge anwendbare Recht’ (1998) Praxis
des Internationalen Privat- und Verfahrensrechts 385, 387–388; F. Vischer, L. Huber and D. Oser,
Internationales Vertragsrecht (Bern: Stämpfli, 2000) 34–35.
11 See for more details M. Söhngen, Das internationale Privatrecht von Peru (Tübingen: Mohr
Siebeck, 2006) 77–78.
12 See, however, R. Bauerfeld, �Effectiveness of Choice-of-Law Clauses in Contract Conflicts of
Law: Party Autonomy or Objective Determination?’ (1982) 82 Columbia Law Review 1659, 1677–
1682, 1691 and W. Mincke, �Die Parteiautonomie: Rechtswahl oder Ortswahl?’ (1985) Praxis des
Internationalen Privat- und Verfahrensrechts 313, 316–317. Both authors do not accept freedom of
choice as independent connecting factor but follow the localisation theory of Henri Batiffol. As a
result, they regard a choice of law as one of many factors that help to assign a contract to a legal
order.
13 Kieninger, n 4 above, 286–311.
14 Kieninger, n 4 above, 275–332; E.-M. Kieninger, �Rechtsentwicklung im Wettbewerb der
Rechtsordnungen’, in C. Ott and H.-B. Schäfer (eds), Vereinheitlichung und Diversität des Zivil-
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Regulatory Competition in Contract Law
67
theory of regulatory competition is based on a number of assumptions that do not
seem to hold in reality. First, the theory assumes that businesses and consumers
are fully informed about different contract laws and that choosing the applicable
contract law via a choice of law-clause, thus, does not incur any costs.15 However,
not even lawyers know all the contract laws of the world. Therefore, businesses
and consumers must gather information about the pertaining rules and regulations
in order to make an informed choice.16 It goes without saying that this endeavour
incurs significant costs. And even though technical progress, most importantly the
internet, has reduced these costs,17 they will never be zero. As a result, it may
happen that businesses and consumers – due to information costs – do not exercise
their choice. Second, the theory of regulatory competition assumes that businesses
and consumers exercise their choice based on the quality of the law meaning that
they choose the law that best matches their preferences. However, many authors
argue that quality is not what drives parties’ choice because businesses and
consumers very often simply opt for their home law, no matter of whether this law
actually meets their needs.18 Or, they opt for a law because it is usually chosen by
rechts in transnationalen Wirtschaftsräumen (Tübingen: Mohr Siebeck, 2002) 72, 97–99; E.-M. Kieninger, �Europäische Vertragsrechtsvereinheitlichung aus rechtsökonomischer Sicht’, in T. Eger,
J. Bigus, C. Ott and G. von Wangenheim (eds), Internationalisierung des Rechts und seine ökonomische Analyse. Internationalization of the Law and its Economic Analysis. Festschrift für HansBernd Schäfer zum 65. Geburtstag (Wiesbaden: Gabler, 2008) 352, 363–364; Vogenauer, ERPL, n 3
above, 13 et seq; Vogenauer, in Eidenmüller (ed), n 3 above. See also J. Basedow, �Lex Mercatoria
and the Private International Law of Contracts in Economic Perspective’, in J. Basedow and
T. Kono (eds), An Economic Analysis of Private International Law (TГјbingen: Mohr Siebeck, 2006)
57, 67–68; S. Leible, �Kollisionsrecht und vertikaler Regulierungswettbewerb’ (2012) 76 Rabels
Zeitschrift für ausländisches und internationales Privatrecht 374, 383; G. Wagner, �The Economics
of Harmonization: The Case of Contract Law’ (2002) 39 Common Market Law Review 995, 1006–
1013.
15 See for a detailed account Bratton and McCahery, n 4 above, 201, 233–234.
16 Kieninger, n 4 above, 58, 60; C. Kirchner, �Zur Ökonomik des legislatorischen Wettbewerbs
im europäischen Gesellschaftsrecht’, in A. Fuchs, H.-P. Schwintowski and D. Zimmer (eds),
Wirtschafts- und Privatrecht im Spannungsfeld von Privatautonomie, Wettbewerb und Regulierung.
Festschrift für Ulrich Immenga zum 70. Geburtstag (Munich: C H Beck, 2004) 607, 614–615; Leible,
n 15 above, 383. See generally on information problems as restriction of regulatory competition
D. Kiwit and S. Voigt, �Grenzen des institutionellen Wettbewerbs’ (1998) 17 Jahrbuch für Neue
Politische Ökonomie 313, 326–327 and M. Streit, �Systemwettbewerb und europäische Integration’,
in F. Zimmermann (ed), Ordnungspolitische Aspekte der europäischen Integration (Baden-Baden:
Nomos, 1996) 11, 17.
17 Eidenmüller (2009), n 2 above, 642–643; Eidenmüller (2011), n 2 above, 711–712.
18 J. Basedow, Europäisches Vertragsrecht für europäische Märkte (Bonn: Zentrum für Europäisches Wirtschaftsrecht, 1996) 24; B. Lurger, Regulierung und Deregulierung im europäischen
Privatrecht (Frankfurt am Main: Peter Lang, 1997) 90; Leible, n 15 above, 383, 385; P. Mankowski,
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Giesela RГјhl
other businesses and consumers.19 Some authors even argue that the applicable
law does not matter at all since choice of law clauses are usually drafted – by
lawyers – at the very end of the negotiation process, when the parties have agreed
on everything else (champagne hour syndrome).20
The above mentioned academics, therefore, conclude that there is no regulatory competition in contract law and that the chances for regulatory competition
ever to come into existence are rather low. However, drawing this conclusion
means jumping to conclusions. This is because regulatory competition does not
require that all businesses and consumers exercise their choice based on the
quality of the law. Rather it is sufficient that a substantial number of businesses
and consumers respond to differences in legal rules on the basis of their quality.21
The decisive question therefore is not, whether all or a majority of businesses and
consumers choose a particular contract law because it meets their needs better
than other contract laws, but whether a substantial number of businesses and
consumers does so. I submit that there is conclusive empirical evidence that this
requirement is met.
a) Do Parties Actually Choose the Applicable Contract Law?
During the last couple of years a number of empirical studies have dealt with
choice of law clauses in international (or, in the United States, interstate) contracts.22 The methodology, the sample and the geographical focus of these studies
were different and so was the motivation behind them. However, they all show
that a substantial number of businesses and consumers actually choose the
�Rechtswahlklauseln und Gerichtsstandsvereinbarungen im Lichte der Spieltheorie’, in Eger,
Bigus, Ott and von Wangenheim (eds), n 15 above, 369, 370–371. See also the study of Kieninger,
n 4 above, 287–294. She shows that German handbooks always recommend the choice of German
law, whereas English and French handbooks always advocate the choice of English and French
law respectively.
19 See, for example, Mankowski, n 19 above, 379–380. In the economic literature, this effect is
referred to as �network effect’. See for a detailed analysis of network effects in the context of
regulatory competition A. Engert, �Networks and Lemons in the Market for Contract Law’, in
EidenmГјller (ed), n 3 above, available at http://ssrn.com/abstract=2091679.
20 See, for example, P. Herbel, �Der internationale Unternehmensjurist – ein vaterlandsloser
Geselle’, in I. Schwenzer (ed), Schuldrecht, Rechtsvergleichung und Rechtsvereinheitlichung an der
Schwelle zum 21. Jahrhundert (TГјbingen: Mohr Siebeck, 1999) 1, 8.
21 T. Straubhaar, �Empirische Indikatoren des Systemwettbewerbs – Moderne und historische
Befunde’ (1998) 17 Jahrbuch für Neue Politische Ökonomie 243, 252. See also Kieninger, n 4 above,
60.
22 See for a detailed discussion of these studies Vogenauer, ERPL, n 3 above, 35 et seq;
Vogenauer, in EidenmГјller (ed), n 3 above.
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Regulatory Competition in Contract Law
69
applicable law. The first study that deserves to be mentioned here was conducted
by Stefan Vogenauer and Stephen Weatherill in 2005.23 They asked 175 businesses
how they dealt with choice of law clauses when drafting international contracts.
They found out that the possibility to choose the applicable law was important to
83 percent24 and that 43 percent had at least occasionally chosen a foreign
contract law in the past.25 Slightly higher were the numbers that Stefan Voigt
collected in 2008. He studied choice of law clauses in contracts that were referred
to arbitration before the International Court of Arbitration (ICA) and discovered
that out of all cases filed with the ICA in 2003, parties opted for a national contract
law in 65.93 percent of the cases.26 Even higher numbers were yielded by a study
conducted by Stefan Vogenauer and Chris Hodges in 2008.27 They asked 100
European businesses how important the possibility of choosing the applicable
law was for them and how often they had chosen a foreign contract law in the
past. The answers revealed that the possibility of choosing the applicable law was
important or very important for 91 percent28 and that 85 percent had at least
23 S. Vogenauer and S. Weatherill, �The European Community’s Competence to Pursue the
Harmonisation of Contract Law – an Empirical Contribution to the Debate’, in S. Vogenauer and
S. Weatherill (eds), Harmonisation of European Contract Law: Implications for European Private
Laws, Business and Legal Practice (Oxford: Hart Publishing, 2006) 105 et seq.
24 Vogenauer and Weatherill, n 24 above, 120 (table 2). That choice of law is an important factor
when drafting international contracts also follows from a study recently conducted by David
T. Ackerman. He explored the approach lawyers of different countries, practice sectors and legal
traditions adopt in regard to international contract formation including, among others, choice of
law. He found converging attitudes towards the design of international contracts. Most importantly, he found that out of a set of five factors (choice of law, preventative measures, costbenefit-analysis, enforcement, cultural concerns), lawyers across countries considered choice of
law to be the most important factor when drafting international contracts. See D. Ackerman,
�International Business Contracts Survey’ (University of Central Florida, 2011), available at http://
ssrn.com/abstract=1946552, 8 (last visited 31 December 2012).
25 Vogenauer and Weatherill, n 24 above, 122 (table 4).
26 S. Voigt, �Are International Merchants Stupid? Their Choice of Law Sheds Doubt on the Legal
Origin Theory� (2008) 5 Journal of Empirical Legal Studies 1, 9, n 7. Note, that it is not quite clear
how Voigt arrives at these results given that the total number of cases filed with the ICA in 2003
was 580. Note also that in 16,07 percent of the cases parties opted for a non-state law such as the
lex mercatoria. For obvious reasons, however, these choice of law-clauses do not need to be
counted for the purpose of this article.
27 S. Vogenauer and C. Hodges, Civil Justice Systems in Europe: Implications for Choice of Law
and Choice of Forum – A Business Survey (University of Oxford, 2008) available at http://
denning.law.ox.ac.uk/iecl/ocjsurvey.shtml (last visited 31 December 2012).
28 Vogenauer and Hodges, n 28 above, 13 (question 15). See also the study by Ackerman, n 25
above).
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70
Giesela RГјhl
occasionally agreed on a choice of a foreign contract law in the past.29 Similar
numbers were revealed in an empirical study conducted by The English Law
Society in 2010 among English law firms.30 According to the answers provided, 91
law firms had drafted international contracts over the past twelve months.31 And
of these 91 law firms 88 percent had included a choice of law-clause.32 The highest
percent of choice of law-clauses was yielded by a study conducted by Theodore
Eisenberg and Geoffrey Miller published in 2009. They looked at 2882 commercial
contracts filed with the US-American Securities and Exchange Commission (SEC)
and found that 99.4 percent of the contracts contained a choice of law clause.33
All studies, thus, show that a substantial number of businesses and consumers actually agree on the applicable law when entering into international or
interstate contracts. Of course, this does not mean that all businesses and consumers enter into choice of law-clauses. And, of course, it cannot be excluded
that the studies suffer from self-selection bias. For example, it cannot be excluded
that they focus on contracts that are generally more likely than others to contain a
choice of law-clause. However, as mentioned earlier, it does not need very much
to stir regulatory competition. All that is necessary is that a substantial number of
businesses and consumers actually exercise their freedom of choice. And the
studies cited above strongly indicate that this substantial number actually exists.
The empirical evidence thus suggests that the costs associated with a choice of
the applicable contract law does not prevent a substantial number of parties from
choosing the applicable contract law in practice.
b) What Factors Drive Parties’ Choice of Law?
More intricate than the question of whether a substantial number of parties
exercise their freedom of choice is the question of whether a substantial number
of parties actually base their choice on the quality of the law. What are the
reasons for a choice of law? What are the key factors for the choice of a particular
contract law? Fortunately, several empirical studies, including some of the above
29 Vogenauer and Hodges, n 28 above, 13 (question 16).
30 The English Law Society, Firm’s Cross-Border Work (2010) available at http://international.
lawsociety.org.uk/files/Annex_LSEW_Cross-border%20Work%20Report_FINAL_12_2010.pdf
(last visited 31 December 2012).
31 The English Law Society, n 31 above, 6.
32 The English Law Society, n 31 above, 6 (chart 5).
33 T. Eisenberg and G. Miller, �The Flight to New York: An Empirical Study of Choice of Law and
Choice of Forum Clauses in Publicly-Held Companies’ Contracts’ (2009) 30 Cardozo Law Review
1475, 1487.
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Regulatory Competition in Contract Law
71
mentioned, have recently tried to shed light on this question. Due to the differences in methodology, sample and geographic focus the results of the studies
naturally vary. And so do the conclusions that the authors draw from them.
However, all the studies show that the quality of the chosen law does play an
important role in the selection of the applicable law. This holds true for the study
of Vogenauer and Weatherill conducted in 2005. They asked businesses what
characteristics of a contract law influenced their choice. 87 percent replied that
the extent to which the law enabled trade was a driving factor, 79 percent pointed
to predictability, 78 percent to fairness and 66 to flexibility of the contract law in
question.34 That quality is one of the factors that drives parties’ choice also follows
from the study conducted by Vogenauer and Hodges in 2008. They asked businesses which factors they took into account when choosing the governing contract law and allowed businesses to choose from a list of non-legal factors like
language, procedural factors like the availability of certain dispute resolution
schemes, and qualitative factors like fairness and predictability of outcomes as
well as the quality of the contract law as such. Most of the respondents pointed to
qualitative factors, notably the quality of the contract law as such.35 Similar
results yielded the study of the English Law Society conducted in 2010. Asked
what factors influenced a choice of law 56 percent of the law firms pointed to the
�attractiveness of legal principles’ and 57 percent to �the ease of use of the legal
system’.36 Finally, a study conducted by the Queen Mary International School of
Arbitration37 in 2010 found that the �appropriateness of the law for the type of
contract’ mattered for 60 percent of the businesses.38
All the studies thus show that the quality of the law influences businesses’
choices. However, it should be noted that they also show that the quality of the
law is not the only factor that affects the decision to choose the applicable law.
Next to the quality of the law it is notably the familiarity with the chosen law that
drives businesses’ choices.39 According to some studies it is even the most
important factor.40 However, it would be wrong to infer from this finding that �the
quality of contract rules … is just a marginal consideration in making choices of
34 Vogenauer and Weatherill, n 24 above, 121–122.
35 Vogenauer and Hodges, n 28 above, 17 (question 19).
36 The English Law Society, n 31 above, 8 (chart 10).
37 Queen Mary International School of Arbitration, 2010 International Arbitration Survey: Choices
in International Arbitration (2010) available at http://www.arbitrationonline.org/research/2010/
index.html (last visited 31 December 2012).
38 Queen Mary International School of Arbitration, n 38 above, 12 (chart 9).
39 The English Law Society, n 31 above, 8 (chart 10); Queen Mary International School of
Arbitration, n 38 above, 12 (chart 9). See also Vogenauer and Weatherill, n 24 above, 121 (table 3).
40 The English Law Society, n 31 above, 8 (chart 10).
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Giesela RГјhl
law’ and that �this alone rules out the possibility of regulatory competition in
contract law’.41 In order to provoke regulatory competition, the quality of the law
does not need to be the only or the most important factor for a choice of law. It
merely needs to be a sufficiently important one for a sufficiently large number of
businesses and consumers. In fact, regulatory competition would only be excluded, if all parties based their choice exclusively on the familiarity of the chosen
law. To draw a comparison: in Germany, most people buy German cars.42 A
majority of Germans thus reveal a preference for cars manufactured or produced
in their home country. The same holds true for purchasers domiciled in other
countries, notably France43 and Japan.44 However, nobody would seriously claim
that there is no international competition in the German, French or Japanese car
industry. The fact that most parties prefer a product because they are familiar
with it does not imply that there is no competition – as along as familiarity is not
the only factor that drives parties’ choice. And this is clearly not the case when it
comes to contract law. Take again the study of Vogenauer and Weatherill in 2005:
they found out that 21 percent of the businesses asked preferred not to contract
under their home law.45 Additionally, they found out that 44 percent had at least
occasionally chosen a foreign law because their home law had not been suitable
to achieve their aims.46 Both numbers indicate that the quality of the law plays a
role when businesses make a choice of law. And both numbers indicate that the
quality of the law is not, at least not only, a function of familiarity.
Empirical evidence thus suggests that a substantial number of businesses and
consumers actually respond to differences in legal rules and that they do so based
on the quality of the law. As a result, there are good reasons to believe that on the
demand side the requirements for regulatory competition are generally met.47
41 Vogenauer, ERPL, n 3 above, 59; Vogenauer, in EidenmГјller (ed), n 3 above.
42 In 2009, almost 80 percent of all cars that were newly licensed in Germany originated from
German companies. See Verband der Automobilindustrie, International Auto Statistics 2010
(2011) available at http//www.vda.de (last visited 31 December 2012).
43 In 2009, almost 65 percent of all cars that were newly licensed in France originated from
French companies. See Verband der Automobilindustrie, n 43 above.
44 In 2009, almost 96 percent of all cars that were newly licensed in Japan originated from
Japanese companies. See Verband der Automobilindustrie, n 43 above.
45 Vogenauer and Weatherill, n 24 above, 121 (table 3).
46 Vogenauer and Weatherill, n 24 above, 122 (table 4).
47 See also Eidenmüller (2009), n 2 above, 645–646; Eidenmüller (2011), n 2 above, 719–722;
H.-B. Schäfer and K. Lantermann, �Choice of Law from an Economic Perspective’, in Basedow and
Kono (eds), n 15 above, 87, 97; Wagner, n 15 above, 1012.
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Regulatory Competition in Contract Law
73
II The Supply Side
The demand side, however, is only one side of the equation. For regulatory
competition to come into existence, states must actually respond to businesses’
and consumers’ choice by adjusting their legal rules.48 And just as many academics believe that businesses and consumers do not actually respond to differences in legal rules, many scholars doubt that states actually respond to businesses’ and consumers’ choice of contract law.49 They do so for a number of
reasons: first, according to economic theory, states need an incentive to adjust
their contract laws to the perceived needs of businesses and consumers.50 However, it is not obvious where this incentive may come from in contract law.51 In
contrast to corporate law, where states can obtain revenue from filing fees and –
in the United States52 – from franchise tax, it is unclear how states may benefit
from the application of their contract laws. The only possible source of income
seems to be an increase in tax revenue resulting from more local lawyers working
on international contract cases.53 However, it is unclear whether these additional
48 K. Gatsios and P. Holmes, �Regulatory competition’, in P. Newman (ed), The New Palgrave
Dictionary of Economics and the Law, Volume 3 (London: Macmillan, 1998) 271, 274: �… for
regulatory competition to work we need both responsiveness of economic actors to differences in
regulation and responsiveness of regulators to any induced factor movements.’
49 Kieninger, n 4 above, 312–314; Leible, n 15 above, 385–386. See generally on the factors that
influence state actions from an economic perspective L. Gerken, �Institutional Competition: An
Orientative Framework’, in L. Gerken (ed), Competition among institutions (Basingstoke: Macmillan, 1995) 1, 10–11.
50 Bratton and McCahery, n 4 above, 235–239; Kieninger, n 4 above, 61–63, 88–90, 91–92. See
also the discussion by H. Muir Watt, �Aspects économiques du droit international privé. Réflexions sur l’impact de la globalisation économique sur les fondements des conflits de lois et de
juridictions’ (2004) 307 Recueil des Cours 25, 75–79.
51 Kieninger, n 4 above, 312–314. See also F. Parisi and L. Ribstein, �Choice of Law’, in P. Newman (ed), The New Palgrave Dictionary of Economics and the Law, Volume 1 (London: Macmillan,
1998) 236, 241; H.-B. Schäfer and C. Ott, �Vereinheitlichung des Europäischen Vertragsrechts’, in
Ott and Schäfer (eds), n 15 above, 203, 215, 216; D. Schmidtchen, �Vereinheitlichung des Vertragsrechts in Europa’, in T. Eger and H.-B. Schäfer (eds), Ökonomische Analyse der europäischen
Zivilrechtsentwicklung (Tübingen: Mohr Siebeck, 2007) 1, 36–37; M. Streit and A. Mangels, �Privatautonomes Recht und grenzüberschreitende Transaktionen’ (1996) 47 Jahrbuch für die Ordnung
von Wirtschaft und Gesellschaft 73, 81.
52 In Europe, only the real seat state can impose franchise taxes. See Council Directive 69/335/
EEC of 17 July 1969 concerning indirect taxes on the raising of capital [1969] OJEC L 249/25. As of
1 January 2009, this Directive will be replaced by the Council Directive 2008/7/EC of 12 February
2008 concerning indirect taxes on the raising of capital [2008] OJEC L 46/11.
53 EidenmГјller (2009), n 2 above, 643; EidenmГјller (2011), n 2 above, 713; Kieninger, n 4 above,
89; A. Ogus, �Competition between National Legal Systems: A Contribution of Economic Analysis
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Giesela RГјhl
gains – if they materialize at all – are sufficient to induce states to adjust their
contract laws.54 Second, even if states have a financial incentive to adjust their
contract laws, they might have difficulties to do so in practice. This is because
states are not in a position to take note of choice of law-clauses across the board
and to identify the causes for the choice of a particular contract law.55 The only
means to obtain the relevant information seem to be large-scale surveys. However, such surveys are difficult and, thus, costly to conduct. In addition, they do
not necessarily lead to useful results since businesses and consumers might have
different reasons to choose a particular law. States may have a hard time to adjust
their contract laws in a targeted fashion. Many academics, therefore, doubt that
the requirements relating to the supply side of regulatory competition are actually
met in practice. Recent developments, however, show that states indeed express
an interest in having their contract laws applied and that they are willing to adjust
their contract laws to the needs of businesses and consumers.
1 Have States an Interest in the Application of their Contract Laws?
States’ interest in having their contract laws applied becomes most obvious when
looking at three recent publications:56 the first publication was edited by The
English Law Society and supported by the English Ministry of Justice. It emphatically describes the alleged advantages of English law57 and specifically the
advantages of English contract law.58 The second publication relates to German
to Comparative Law’ (1999) 48 International and Comparative Law Quarterly 405, 408; A. Ogus,
�Economic Analysis and Comparative Law’, in Société de législation comparée (ed), Mélanges en
l’honneur de Denis Tallon (Paris: Société de législation comparée, 2000) 169, 172.
54 Kieninger, n 4 above, 89.
55 Gatsios and Holmes, n 49 above, 274; Kieninger, n 4 above, 61–63, 88, 90–91. See generally
on perception and information problems as limit of regulatory competition Kiwit and Voigt, n 17
above, 327–328.
56 See for a detailed discussion Vogenauer, ERPL, n 3 above, 30 et seq; Vogenauer, in EidenmГјller (ed), n 3 above.
57 The Law Society of England and Wales, England and Wales: The jurisdiction of choice (2008),
available at <http://www.lawsociety.org.uk/documents/downloads/jurisdiction_of_choice_ brochure.pdf> (last visited 31 December 2012).
58 See, for example, ibid 8: �In English Law, a contract is generally accepted to be valid unless it
is for an illegal purpose or is otherwise contrary to public policy. The key principle of �freedom of
contract’, where parties are bound by the terms of their agreement, is attractive to commercial
parties. English law allows the parties to agree the proportion of benefits which may accrue to
either party, allowing the parties much greater flexibility of arrangements than under many civil
codes.’
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Regulatory Competition in Contract Law
75
law. Authored by the so-called �Alliance for German Law’59 and supported by the
German Federal Ministry of Justice it praises the perceived advantages of German
law vis-Г -vis English and US-American law.60 Specifically, it praises the perceived
advantages of German contract law.61 The third brochure, finally, addresses the
superiority of Continental law in general.62 A French-German initiative supported
by both the German Federal Ministry of Justice and the French Ministry of Justice,
the brochure describes the perceived advantages of legal orders belonging to the
civil law tradition vis-Г -vis those that belong to the common law tradition. Just
like the other brochures it specifically focuses on contract law.63 All three publications show that states care about application of their contract laws. In addition,
59 The �Alliance for German Law’ was founded by the Bundesnotarkammer (Federal Chamber
of German Civil Law Notaries), the Bundesrechtsanwaltskammer (German Federal Bar), the
Deutsche Anwaltverein (German Bar Association), the Deutsche Notarverein (German Notaries’
Association) and the Deutsche Richterbund (German Judges Association).
60 Bundesnotarkammer, Bundesrechtsanwaltskammer, Deutscher Anwaltsverein, Deutscher
Notarverein and Deutscher Richterbund, Law – Made in Germany. Global. Effective. Cost-Efficient
(1st ed 2008, 2nd ed 2012) available at <http://www.bmj.de/SharedDocs/Kurzmeldungen/DE/
2012/20120509_Law_made_in_Germany.html> (last visited 31 December 2012).
61 See, for example, ibid 9: �The basic structures of contracts of sale are prescribed by law. In
contrast to English law, a contract under German law requires no detailed provisions and
definitions on issues such as right of retention, set-off or assignment, as these have already been
provided by the legislator. Unless the contract expressly stipulates otherwise, the statutory
provisions will apply. German contracts of sale are therefore considerably more concise than
comparable contracts under English law, saving both parties valuable time and substantial legal
fees … The German law on sales is contemporary, dependably fulfilling the needs of international
trade.’
62 Association des Juristes Français et Allemands, Bundesnotarkammer, Bundesrechtsanwaltskammer, Conseil National des Barreaux, Conseil Supérieur du Notariat, Deutscher Anwalt-verein,
Deutscher Notarverein, Deutscher Richterbund, Fondation pour le Droit Continental and UniversitГ© Paris PanthГ©on Assas Paris II (eds), Continental Law. Global. Predictable. Flexible. CostEffective (2011), available at <http://www.kontinentalesrecht.de/tl_files/kontinental-base/
Broschuere_DE.PDF> (last visited 31 December 2012).
63 See, for example, ibid 6: �Continental law countries are characterized by the existence of a
civil code that serves as the general framework for contract law. It not only contains general
provisions applicable to all contracts, but also specific rules for different types of contracts. These
rules provide what are deemed to be equitable solutions to problems that individuals and
businesses are likely to encounter in ordinary contracts. They also enable contracts to be written
clearly and succinctly, thereby making them less costly and afford a higher degree of legal
certainty. Contrary to common law countries, the parties do not have to create their own rules for
each contract; the contract only needs to stipulate clauses on issues on which the parties wish to
exclude or supplement the rules of the Code. In continental law countries the provisions of
contract law are not mandatory on the contracting parties, who are, in principle, free to modify
the statutory provisions, in whole or in part, in accordance with the principle of freedom of
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Giesela RГјhl
they shed light on the reasons why states want to have their contract laws
applied.64 First, they want to ease international activity of local businesses. And,
second, they want to attract foreign businesses. This, in turn, implies that states
hope to derive some financial benefit from the application of their contract laws –
either by increasing the productivity of local businesses or by having more local
lawyers working on the relevant cases.
2 Are States Willing to Adjust their Contract Laws?
The fact that states’ have an interest in having their contract laws applied, however,
does not permit yet the conclusion that there actually is regulatory competition in
contract law. In addition to having an interest in application of their contract laws,
states must actually be willing to adjust their contract laws to the needs of businesses and consumers. Some authors doubt that this is actually the case. They
argue that the publications mentioned earlier are nothing more than �market
rhetoric’ and that states prefer to promote their contract laws over actually changing them.65 For two reasons, however, this argument does not ring true.
First, law reform is a lot more costly than promotion. It is, therefore, rational
that states first resort to promotion in order to attract businesses before they
engage in law reform. However, there should be little doubt that states will also be
willing to change their contract laws if they actually have to, ie if promotion does
not actually attract businesses and consumers. The pressure – and the expected
benefits – simply have to be high enough. Second, and more importantly, it is not
true that states have not changed their contract laws during the last years. In fact,
a large number of states have partly or wholly revised their contract laws over the
last two decades. Take, for example, Germany. After more than 20 years of
preparatory work the federal legislator introduced a new law on contractual
contract. This allows the parties to individualize their contractual relationships or to devise new
rules for them.’
64 See, for example, Bundesnotarkammer et al, Law – Made in Germany, n 61, 5: �German law
ensures the optimum framework for your company, as legal certainty and pro-active structuring
provide a solid base for the avoidance of future disputes, thereby saving you considerable
expense… As an entrepreneur, you need highly qualified staff, efficient public administration, a
functioning education system and the requisite infrastructure, such as roads, railway stations
and airports. Most importantly, you need a functioning and predictable legal infrastructure.
Germany more than meets all of these requirements.’
65 See, for example, Vogenauer, ERPL, n 3 above, 74; Vogenauer, in EidenmГјller (ed), n 3
above.
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Regulatory Competition in Contract Law
77
obligations in 2002.66 By the same token, Estonia,67 Hungary,68 Lithuania,69 the
Netherlands,70 Poland,71 and Romania72 substantially revised their contract laws.73
In each case the revisions went beyond the obligation to adopt the acquis communautaire and to implement EU directives. And in each case one of the driving
forces was the desire to make the contract law in question �fit for Europe’.74
To be sure, it is true that some states, notably England and France, have –
so far – refrained from substantially reforming their contract laws or failed to do
66 Law on the Reform of the Law of Obligations of 26 November 2001. See for a detailed account
S. Grundmann, �Germany and the Schuldrechtsmodernisierung 2002’ (2005) 1 European Review of
Contract Law 129.
67 Law of Obligations Act of 28 September 2001. See for a detailed account I. Kull, �Reform of
Contract Law in Estonia: Influences of Harmonisation of European Private Law’ (2008) XIV
Juridica International 122 et seq.
68 Act on the Civil Code of the Republic of Hungary of 20 November 2009. See for a detailed
account L. Vékás, �About Contract Law in the New Hungarian Civil Code’ (2010) 6 European
Review of Contract Law 95 et seq.
69 Civil Code of Lithuania of 18 July 2000. See for a detailed account V. Mikelenas, �The Main
Features of the New Lithuanian Contract Law System Based on the Civil Code of 2001’ (2005) X
Juridica International 42 et seq.
70 See on the various, consecutive reform laws R.-G. de Groot, �Entwicklungen im niederländischen Zivilrecht seit 1992’ (1998) 6 Zeitschrift für Europäisches Privatrecht 543 et seq; T. Hartlief
and C. Bollen, �The Netherlands’ (2006) 2 European Review of Contract Law 406 et seq.
71 See for a detailed account J. Pisulinski, �Die Evolution des polnischen Vertragsrechts.
Aktuelle Lage und Zukunft’ (2010) 6 European Review of Contract Law 319 et seq; J. Rajski,
�European Initiatives and Reform of Civil Law in Poland’ (2008) XIV Juridica International 151 et
seq.
72 C. Alunaru, �Zum neuen Rumänischen Zivilgesetzbuch – Vertragsrechtlicher Teil’ (2010) 6
European Review of Contract Law 197 et seq.
73 Note that Slovenia adopted a new Code of Obligations in 2001. This Code, however, did
merely take over the old Yugoslav Act of Obligations and did not contain substantial changes.
See for a detailed account D. Možina, �Harmonisation of Private Law in Europe and the Development of Private Law in Slovenia’ (2008) XIV Juridica International 173 et seq. In Serbia and Spain
plans to reform the law of (contractual) obligations are under way. See for a recent account
M. Djurovic, �Serbian Contract Law: its developments and the New Serbian Civil Code’ (2011) 7
European Review of Contract Law 65 et seq; C. Jerez Delgado and M. J. Pérez Garcia, �The General
Codification Commission and the Modernisation of the Spanish Law of Obligations’ (2011) 19
Zeitschrift für Europäisches Privatrecht 601 et seq. Finally, the Australian government recently
undertook a public consultation to explore the scope for reforming Australian contract law. See
the information available at <http://www.ag.gov.au/Consultations/Pages/ReviewofAustraliancontractlaw.aspx> (last visited 31 December 2012).
74 This is, of course, not to say that this was the only or even the main reason for law reform in
the respective countries. However, it was a sufficiently important one.
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Giesela RГјhl
so.75 However, regulatory competition does not require that all competitors
actually engage in regulatory competition. Again, it is sufficient that a substantial number does so. Also, it is only natural that states that already have a strong
contract law on offer, such as England, or that have a large domestic market for
their contract law, such as France, have less incentives to change their contract
laws than states whose contract laws are perceived to be less strong or that have
only small domestic demand. Again, the pressure just has to be high enough.
Empirical evidence thus suggests that states actually compete for application
of their contract laws and that the theoretical problems discussed above do not
materialize in practice. Furthermore, empirical evidence suggests that some states
have come off as winners from this competition: according to the above mentioned
study by Eisenberg and Miller on US contract law, commercial contracts, notably
financing contracts are usually assigned to the law of New York.76 According to
the studies by Vogenauer, Weatherill and Hodges just as well as Voigt, the Queen
Mary International School of Arbitration and The English Law Society, business
contracts are more often submitted to English and Swiss law than to other laws.77
For other types of contracts there is at least anecdotal evidence that some contract
laws are more popular than others. Eva-Maria Kieninger, for example, notes that
charter contracts are predominantly governed by English law and the law of New
York.78 Additionally, Erin A. O’Hara and Larry E. Ribstein observe that consumer
credit contracts are mostly assigned to the laws of Delaware and South Dakota.79
In the remainder of this article I will, therefore, go on to discuss some normative
questions that follow from the empirical evidence.
C Normative Implications
The original theory of regulatory competition assumes that competition for legal
products will always enhance efficiency. More specifically, the theory assumes
that regulatory competition will support the evolution of legal rules that satisfy
75 England, however, adopted the Contracts (Rights of Third Parties) Act in 1999 that allows
parties to conclude contracts for the benefit of third parties. At common law the doctrine of
consideration had left such contracts unenforceable.
76 Eisenberg and Miller, n 34 above, 1475.
77 Vogenauer and Weatherill, n 24 above, 121, 123 (table 5); Vogenauer and Hodges, n 28 above,
14–15 (questions 17.1, 17.2, 17.3 and 17.4); Voigt, n 27 above, 13–14, 15 (table 2); Queen Mary
International School of Arbitration, n 38 above, 13 (chart 9); The English Law Society, n 31 above,
7 (chart 6 and 7).
78 Kieninger, n 4 above, 306.
79 O’Hara and Ribstein, n 2 above, 145–148.
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Regulatory Competition in Contract Law
79
preferences of businesses and consumers.80 And it assumes that it will induce the
evolution of new and arguably better rules.81 This development, however, is not a
matter of course. Just like markets for goods and services, markets for laws can
fail and lead to laws that turn out to be beneficial only for some members of
society and not for society at large.82 In corporate law, for example, it has long
been discussed whether regulatory competition has induced a race to the top or a
race to the bottom.83 In the race to the bottom-scenario, states compete for
corporate charters by skewing their substantive corporate laws one-sidedly to80 See for a detailed account W. Kerber, �Zum Problem einer Wettbewerbsordnung für den
Systemwettbewerb’ (1998) 167 Jahrbuch für Neue Politische Ökonomie 199, 201; W. Kerber, Interjurisdictional Competition within the European Union’ (2000) 23 Fordham International Law
Journal 217, 223, 224–226; Kiwit and Voigt, n 17 above, 320–323; Ogus (1999), n 54 above, 406–
409; R. van den Bergh, �Subsidiarity as an Economic Demarcation Principle and the Emergence of
European Private Law’ (1998) 5 Maastricht Journal of European and Comparative Law 129, 132–
134. See also F. Garcimartín Alférez, �La racionalidad económica del derecho internacional
privado’, in Universidad del País Vasco (ed), Cursos de derecho internacional y relaciones internacionales de Vitoria Gasteiz 2001 (Bilbao: Universidad del País Vasco, 2002) 87, 108–111 and
Kieninger, n 4 above, 34–38.
81 See, for example, Eidenmüller (2009), n 2 above, 648–649; Eidenmüller (2011), n 2 above,
730–732; Gatsios and Holmes, n 49 above, 271, 273; Kerber (1998), n 81 above, 202; Kerber (2000),
n 81 above, 224–226; W. Kerber and V. Vanberg, �Competition among Institutions: Evolution
within Constraints’, in Gerken (ed), n 50 above, 35, 40–48; O’Hara and Ribstein, n 2 above, 32–33;
M. Streit and W. Mussler, �Wettbewerb der Systeme und das Binnenmarktprogramm der Europäischen Union’, in L. Gerken (ed), Europa zwischen Ordnungswettbewerb und Harmonisierung
(Berlin: Springer, 1995) 75, 78; V. Vanberg, �Wettbewerb in Markt und Politik’, in Zimmermann
(ed), n 17 above, 85, 85–86, 92–93; V. Vanberg and W. Kerber, �Institutional Competition Among
Jurisdictions: An Evolutionary Approach’ (1994) 5 Constitutional Political Economy 193, 201–206;
M. Vihanto, �Competition Between Local Governments as a Discovery Procedure’ (1992) 148
Journal of Institutional and Theoretical Economics 411, 415–420; M. Wohlgemuth, �Economic and
Political Competition in Neoclassical and Evolutionary Perspective’ (1995) 6 Constitutional Political Economy 71 et seq.
82 See for a detailed account T. Bewley, �A Critique of Tiebout’s Theory of Local Public Expenditure’ (1981) 49 Econometrica 713 et seq; Bratton and McCahery, n 4 above, 217–219; Garcimartín
Alférez, n 81 above, 112–117; F. Garcimartín Alférez, �Harmonization, State of origin or State of
destination: An outline of the EU Legislator’s dilemma from an economic standpoint’, in M. Audit,
H. Muir Watt and E. Pataut (eds), Conflits de lois et rГ©gulation Г©conomique (Paris: Librairie
générale de droit et de jurisprudence, LGDJ, 2008) 253, 257–259; Gatsios and Holmes, n 49 above,
273–274; Kerber (2000), n 81 above, 226 et seq; Kieninger, n 4 above, 67–72; Muir Watt, n 51 above,
66–75; Ogus (2000), n 54 above, 177–178; P. Swire, �The Race to Laxity and the Race to Undesirability: Explaining Failures in Competition Among Jurisdictions in Environmental Law’ (1996) 14
Yale Law and Policy Review 67, 94–106, 107–109; van den Bergh, n 81 above, 136–139.
83 See for a detailed recent account of the – complex – discussion, including references to
additional theories and positions, A. Sachdeva, �Regulatory competition in European company
law’ (2010) 3 European Journal of Law and Economics 137 et seq.
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wards managers, ie those parties who make – or at least strongly influence – the
decision of where to incorporate.84 In the race to the top-scenario, in contrast,
states focus on managers’ incentives to make the corporation’s shares attractive
and compete for corporate charters by making their substantive corporate laws
more beneficial for both managers and shareholders.85 The interesting question,
therefore, is what will happen in contract law? Will regulatory competition induce
a race to the top or a race to the bottom?
I The Race to the Top-Scenario
Unfortunately, there is, as of yet no clear-cut answer to this question.86 Just as in
other areas of law,87 notably corporate law,88 there is no empirical evidence
84 See, for example, L. Bebchuk, �Federalism, and the Corporation: The Desirable Limits on State
Competition in Corporate Law’ (1992) 105 Harvard Law Review 1437, 1440; L. Bebchuk and
A. Ferrell, �A New Approach to Takeover Law and Regulatory Competition’ (2001) 87 Virginia Law
Review 111, 130; L. Bebchuk and A. Ferrell, �Federalism and Corporate Law: The Race to Protect
Managers from Takeovers’ (1999) 99 Columbia Law Review 1168 et seq; G. Subramanian, �The
Influence of Antitakeover States on Incorporation Choice: Evidence on the �Race’ Debate and
Antitakeover Overreaching’ (2002) 150 University of Pennsylvania Law Review 1795, 1801.
85 See, for example, P. Dodd and R. Leftwich, �The Market for Corporate Charters: “Unhealthy
Competition” Versus Federal Regulation’ (1980) 53 Journal of Business Law 259 et seq; F. Easterbrook, �Managers’ Discrection and Investors’ Welfare: Theories and Evidence’ (1984) 9 Delaware Journal of Corporate Law 540, 542; R. Romano, The Genius of American Corporate Law
(Washington: AEI Press, 1993) 16 et seq; R. Romano, �Competition for Corporate Charters and the
Lesson of Takeover Statutes’ (1993) 61 Fordham Law Review 843, 847.
86 EidenmГјller (2009), n 2 above, 649; EidenmГјller (2011), n 2 above, 733 et seq.
87 Bratton and McCahery, n 4 above, 201, 239 et seq; Gatsios and Holmes, n 49 above, 274 (in
view of regulatory competition in environmental law); A. Peters, �Wettbewerb von Rechtsordnungen’ (2010) 69 Veröffentlichungen der Vereinigung der Deutschen Staatsrechtslehrer 7, 32–34 (in
view of regulatory competition in labour law and tax law).
88 Eidenmüller (2009), n 2 above, 649; Eidenmüller (2011), n 2 above, 733–734. Note, however,
that there are empirical studies that show that the stock market price of a publicly held corporation increase following incorporation in Delaware (see, for example, M. Bradley and C. Schipani,
�The Relevance of the Duty of Care Standard in Corporate Governance’ [1989] 75 Iowa Law Review 1
et seq; Dodd and Leftwich, n 86 above, 259 et seq; R. Heron and W. Lewellen, �An Empirical
Analysis of the Reincorporation Decision’ [1998] 33 Journal of Financial Quantitative Analysis 549
et seq; R. Hyman, �The Delaware Controversy – The Legal Debate’ [1979] 4 Journal of Corporate
Law 368 et seq; J. Netter and A. Poulsen, �State Corporation Laws and Shareholders: The Recent
Experience’ [1989] 18 Financial Management 29 et seq). By the same token, there are studies that
show that a corporation’s value as measured by what is referred to as �Tobin’s Q’ increases upon
incorporation in Delaware (see, for example, R. Daines, �Does Delaware law improve firm value?’
(2001) 62 Journal of Financial Economics 525 et seq). However, for various reasons these (event)
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Regulatory Competition in Contract Law
81
available that would point into one or the other direction.89 However, there are
good reasons to believe that regulatory competition in contract law will rather
induce a race to the top than a race to the bottom. This is because a choice of the
applicable contract law – at least as a matter of principle – only affects the
immediate parties to the contract, ie the parties who actually agree on the choice
of law.90 Under the condition that these parties’ choice is voluntary and informed,
states do not have an incentive to skew their contract laws one-sidedly towards
one party. Rather they have an incentive to account for the interests of all parties
involved. It follows that regulatory competition – at least as a matter of principle –
is more likely to induce a race to the top than a race to the bottom.91 It should,
therefore, – at least as a matter of principle – be promoted. This can – and
should – be done on two different levels.
1 Promotion on the Level of Private International Law
On the level of private international law regulatory competition should be
promoted in essentially two ways. To begin with the very foundation for regulatory competition – freedom of choice – should be guaranteed, ie parties should
studies do not allow for the conclusion that regulatory competition in corporate law in the United
States has induced a race to the top. See for a detailed discussion S. Bhagat and R. Romano,
�Event Studies and the Law: Part II: Empirical Studies of Corporate Law’ (2002) 4 American Law
and Economics Review 380, 382 et seq; G. Subramanian, �The Disappearing Delaware Effect’
(2004) 20 Journal of Law, Economics & Organizations 31 et seq.
89 Note, that empirical evidence would also be very hard to gather in contract law: contracts are
not publicly rated. They are not even publicly available. The only way to determine the effects of
regulatory competition, therefore, would be to analyse the effects of a reform of contract law: if
more parties decide to choose a certain contract law after it has been changed than before it may
be assumed that the reform and, thus, regulatory competition, has had positive effects. This is
because an increased number of choice of law-clauses indicates that the contract law satisfies the
preferences of more parties than before the reform. Unfortunately, there is as of yet no empirical
evidence as to whether recent reforms in contract law have actually triggered any such development.
90 Exceptions will be discussed infra at C II.
91 Note that this conclusion is also based on the assumption that parties who actually choose
the applicable contract law have the same or comparative preferences as parties who refrain from
making a choice or who are not allowed to do so. Most importantly, it is based on the assumption
that parties to an international contract have the same or comparable preferences as parties to a
domestic contract. Of course, whether this assumption actually holds in practice remains to be
tested empirically.
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be granted the freedom to choose the applicable law.92 Of course, as has been
seen earlier, most states have already implemented this recommendation.93
However, as the law stands at the moment individual states can still undermine
the market for contract laws by unilaterally doing away with freedom of choice.
The right to choose the applicable law should, therefore, not only be rooted in
national law, but additionally in international law.94 Again, some states have
already implemented this recommendation:95 in the European Union, Article 3
of the Rome I-Regulation grants free party choice of law. And in at least two
Latin American countries Article 7 of the Mexico Convention allows parties to
choose the applicable law. For the rest of the world, work is in progress: the
Hague Conference on Private International Law is currently working on uniform
rules dealing with choice of law-clauses in commercial contracts.96 Should these
rules ever be adopted and enacted by a sufficiently large number of states, this
would secure the foundation for regulatory competition in contract law around
the world.
In addition to ensuring freedom of choice, regulatory competition should also
be promoted by extending the scope of freedom of choice.97 At present, many
national legal orders and international legal instruments restrict freedom of
choice more than necessary: according to Article 3 of the Rome I-Regulation, for
example, the parties may only choose the law of a state, but not a non-state body
of law.98 And according to § 187 (2) (a) Restatement (Second) and § 1‑301 (a) UCC a
choice of law-clause will be respected only if the parties or the contract have a
relationship to the chosen law.99 All these restrictions unnecessarily limit regula-
92 Eidenmüller (2009), n 2 above, 651; Eidenmüller (2011), n 2 above, 741–742.
93 See supra B I 1.
94 Eidenmüller (2009), n 2 above, 651; Eidenmüller (2011), n 2 above, 741–742.
95 See supra B I 1.
96 See for a detailed account of this project the information available at <http: //www.hcch.net/
index_en.php?act=text.display&tid=49> (last visited 31 December 2012). See also The Permanent
Bureau of the Hague Conference on Private International Law, �Choice of Law in International
Commercial Contracts: Hague Principles?’ (2010) 15 Uniform Law Review 883 et seq.
97 G. Rühl, �The Choice of Law Framework for Efficient Regulatory Competition in Contract Law’,
in EidenmГјller (ed), n 3 above.
98 See for a detailed legal and economic account of this restriction G. Rühl, �Party Autonomy in
the Private International Law of contracts: Transatlantic Convergence and Economic Efficiency’,
in E. Gottschalk, R. Michaels, G. RГјhl and J. von Hein (eds), Conflict of Laws in a Globalized World
(Cambridge: Cambridge University Press, 2007) 153, 164 et seq and 178 et seq; G. RГјhl, Statut und
Effizienz (TГјbingen: Mohr Siebeck, 2011) 485 et seq; RГјhl, n 98 above.
99 See for a detailed legal and economic account of this restriction RГјhl (2007), n 99 above, 160
et seq and 178 et seq; RГјhl (2011), n 99 above, 493 et seq; RГјhl, n 98 above.
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Regulatory Competition in Contract Law
83
tory competition by reducing the number of available contract laws.100 It follows,
that they should be removed.
2 Promotion on the Level of Substantive Law
On the level of substantive law, regulatory competition should be promoted by
increasing the number of available contract laws.101 More specifically, international and supranational legislators should offer additional contract law regimes
open for choice by the parties.102 In the European Union, this course of action has
already proved to be successful in many areas of law, notably corporate and
intellectual property law.103 In addition, the United Nations Convention on the
International Sale of Goods (CISG), the Principles of European Contract Law (PECL)
and the UNIDROIT-Principles for International Commercial Contract (UNIDROITPICL) have influenced national and international legislation in the field of contract
law and, hence, stimulated regulatory competition.104 Against this background, it
is generally to be welcomed that the European legislator is currently working on a
Common European Sales law that may be chosen by the parties instead of the
contract law of the Member States.105 If adopted, the instrument will increase the
pressure on national contract laws and promote regulatory competition.106 This
100 Note, however, that there are restrictions that are necessary to prevent a race to the bottom
and that should, therefore, not be removed. See for a detailed discussion infra at C II.
101 Eidenmüller (2009), n 2 above, 652; Eidenmüller (2011), n 2 above, 743–745.
102 This recommendation is, of course, based on the assumption that the benefits of optional
instruments exceed the costs associated with (drafting) them. Whether this is actually the case,
remains unclear. See for a detailed account EidenmГјller (2009), n 2 above, 652; EidenmГјller
(2011), n 2 above, 744.
103 See for an overview of existing optional instruments J. Basedow, �Fakultatives Unionsprivatrecht oder: Grundlagen des 28. Modells’, in D. Joost, H. Oetker and M. Paschke (eds), Festschrift
für Franz Jürgen Säcker (Munich: C H Beck, 2011) 29, 31–32; Leible, n 15 above, 397–389. See for a
general description of problems relating to optional instruments H. Fleischer, �Optionales europäisches Privatrecht (“28. Modell”)’ (2012) 76 Rabels Zeitschrift für ausländisches und internationales Privatrecht 234 et seq.
104 This holds true even though all these instruments – as non-state laws – cannot be directly
chosen by the parties under current private international law regimes.
105 Proposal of 11 October 2011 of the European Parliament and the Council on a Common
European Sales Law, COM (2011) 635 final.
106 See for a discussion of the – potential – positive effects of such an instrument on regulatory
competition H. Eidenmüller, �What Can Be Wrong with an Option? An Optional Common
European Sales Law as a Regulatory Tool’ (2012) available at http://ssrn.com/abstract=2102827;
S. Grundmann, �Kosten und Nutzen eines optionalen Europäischen Kaufrechts’ (2012) 212 Archiv
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competition, of course, will differ from the competition focused on thus far.107 It
will not be horizontal, but vertical. It will not take place between national contract
laws, but between national contract laws on the one hand and international or
supranational contract laws on the other. And, of course, for vertical regulatory
competition to have positive effects certain conditions need to be met.108 Most
importantly, the optional instrument in question must be efficiently designed to
avoid the result that network effects lead to inefficiently low market standards.109
However, if these conditions are met,110 optional instruments may be driving forces
on the market for law.
II The Race to the Bottom-Scenario
That regulatory competition is more likely to induce a race to the top does not
mean that occurrence of a race to the bottom is excluded altogether. In fact, there
are cases that are more likely to trigger a race to the bottom than a race to the
top.111 In the context of this article two deserve to be mentioned: first, choice of
für die civilistische Praxis 503, 517, 518–520; S. Grundmann and W. Kerber, �European System of
Contract Laws – a Map for Combining the Advantages of Centralised and Decentralised Rulemaking’, in S. Grundmann and J. Stuyck (eds), An Academic Green Paper on European Contract
Law (The Hague: Kluwer Law International, 2002) 295, 305–306 and passim; F. Gomez and
J. Ganuza, �An Economic Analysis of Harmonization Regimes: Full Harmonization, Minimum
Harmonization or Optional Instrument?’ (2011) 7 European Review of Contract Law 275, 290–291;
Max Planck Institute for Comparative and International Private Law, �Policy Options for Progress
Towards a European Contract Law. Comments on the issues raised in the Green Paper from the
Commission of 1 July 2010, COM (2010) 348 final’ (2011) 75 Rabels Zeitschrift für ausländisches und
internationales Privatrecht 371, 398.
107 See for a detailed account Grundmann, n 107 above, 515–528; Leible, n 15 above, 387–392.
108 See for a detailed account EidenmГјller, n 107 above; Engert, n 20 above; S. Grundmann,
�CESL, Legal Nationalism or a Plea for Appropriate Governance?’ (2012) 8 European Review of
Contract Law 241, 242–243; Grundmann, n 107 above, 522–528.
109 Engert, n 20 above. See also Eidenmüller, n 107 above; Grundmann, n 107 above, 527–528.
110 Note that in view of the proposed Common European Sales Law it is argued that it is not yet
efficiently designed and that it will, therefore, be a �defective reference text’ leading to negative
effects. See H. Eidenmüller, N. Jansen, E.-M. Kieninger, G. Wagner and R. Zimmermann, �Der
Vorschlag für eine Verordnung über ein Gemeinsames Europäisches Kaufrecht: Defizite der
neuesten Textstufe des Europäischen Vertragsrechts’ (2012) 67 JuristenZeitung 269, 273–285, 285–
287 (article also available in English: H. EidenmГјller, N. Jansen, E.-M. Kieninger, G. Wagner and
R. Zimmermann, �The Proposal for a Regulation for a Common European Sales Law: Deficits of
the Most Recent Textual Layer of European Contract Law’ (2012) 16 Edinburgh Law Review 301 et
seq); Eidenmüller, n 107 above; Grundmann, n 107 above, 528–534.
111 See for a general discussion of this problem Engert, n 20 above.
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Regulatory Competition in Contract Law
85
law clauses that are not negotiated by parties with equal bargaining power and,
second, choice of law clauses that affect third parties. In the first case the choice
of law clause is drafted by one sophisticated party that imposes its choice on the
other party. Examples include choice of law clauses in consumer contracts or,
more generally, choice of law clauses in general conditions of contracts. In the
second case the choice of law clause affects third parties who do not have a say
during the drafting process. Examples include contracts for the benefit of third
parties. In both cases, legislators have to enact laws that cater to the preferences
of only those parties that actually choose the applicable law if they want to have
their contract laws applied. Lack of equal bargaining power and lack of participation in the drafting process may, thus, lead to one-sided laws that may eventually
induce a race to the bottom.112 To prevent this from happening, regulatory competition needs to be regulated.113 Again, this may be done on two different levels.
1 Regulation on the Level of Substantive Law
The most obvious way of regulating regulatory competition is harmonisation on
the level of substantive law.114 It requires states to adjust their substantive laws to
comply with minimum standards set by the international community or, in
Europe, the European Union. Under the condition that these minimum standards
account for the preferences of society at large, harmonisation may effectively
prevent states from enacting one-sided laws apt to induce a race to the bottom.115
The problem, however, with regulating regulatory competition on the level of
112 Eidenmüller (2009), n 2 above, 648–651; Eidenmüller (2011), n 2 above, 736–737; Kieninger,
n 4 above, 68–72, 382; Muir Watt, n 51 above, 25, 68–71; Ogus (2000), n 54 above, 177–178; O’Hara
and Ribstein, n 2 above, 25–26, 33–34.
113 See generally without regard to contract law Bratton and McCahery, n 4 above, 211–212;
S. Deakin, �Legal Diversity and Regulatory Competition: Which Model for Europe?’ (2006) 12
European Law Journal 440, 443; Gatsios and Holmes, n 49 above, 273, 275; T. Giegerich, �Wettbewerb von Rechtsordnungen’ (2010) 69 Veröffentlichungen der Vereinigung der Deutschen Staatsrechtslehrer 57, 81; Kerber (1998), n 81 above, 203–205; W. Kerber, �Rechtseinheitlichkeit und
Rechtsvielfalt aus ökonomischer Sicht’, in S. Grundmann (ed), Systembildung und Systemlücken
in Kerngebieten des Europäischen Privatrechts (Tübingen: Mohr Siebeck, 2000) 67, 83; Kerber and
Vanberg, n 82 above, 51–53; Kiwit and Voigt, n 17 above, 334; Peters, n 88 above, 38–52. Note,
however, that this conclusion is not imperative. In fact, a large number of authors, notably public
choice theorists, question the merits of regulation as a means to remedy market imperfections.
114 See, for example, Peters, n 88 above, 50–51.
115 Eidenmüller (2009), n 2 above, 651; Eidenmüller (2011), n 2 above, 742–743; Garcimartín
Alférez, n 81 above, 112–117; Peters, n 88 above, 50–51; van den Bergh, n 81 above, 143–146.
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Giesela RГјhl
substantive law is that it does not reach very far. In view of the directives of the
European Union, for example, the effects of harmonisation are limited to the
contract laws of the member states. It follows that a race to the bottom cannot be
avoided if the contract law of a non-member state applies, for example, by way of
a choice of law which, of course, does not necessarily account for the interests of
weaker and third parties.116 To make sure that regulatory competition does not
lead to a race to the bottom where the interests of weaker and third parties are at
stake, regulatory competition, thus, needs to be regulated on a different level.
And this is the level of private international law.
2 Regulation on the Level of Private International Law
Regulatory competition may be regulated on the level of private international
law because private international law regulates the details of freedom of choice.
Under the condition that it manages to ensure that a choice of law mirrors the
preferences of all parties involved, it may prevent states from enacting laws
that cater to the preferences of some people at the expense of others. And,
indeed, most national and international private international law regimes do
not allow the parties to make an entirely free choice if one of the parties is
perceived to be weaker than the other or if the choice affects the rights of third
parties.117 According to Article 6 (2) of the Rome I-Regulation, for example, a
choice of law may not deprive consumers of the protection afforded to them by
the mandatory provisions of the law of their habitual residence. And according
to Article 3 (2) Sentence 3 of the Rome I-Regulation a choice of law entered into
after the conclusion of the contract must not adversely affect the rights of third
parties. Both provisions ensure that a choice of law will have to account for the
interests of weaker parties, ie consumers, and third parties not directly involved
in the choice. Legislators, thus, may not ignore these interests when enacting
rules of substantive contract law. As a result, private international law may
guarantee the proper functioning of regulatory competition – just like competition law guarantees the proper functioning of competition on markets for goods
116 In addition, harmonization incurs substantial economics costs. See for a detailed discussion
G. Rühl, �Effizienzprobleme bei grenzüberschreitenden Rechtsstreitigkeiten’, in R. Bork, T. Eger
and H.-B. Schäfer (eds), Ökonomische Analyse des Verfahrensrechts (Tübingen: Mohr Siebeck,
2009) 335, 345–350; G. Rühl, �The Problem of International Transactions: Conflict of Laws
Revisited’ (2010) 6 Journal of Private International Law 59, 81–84; Rühl (2011), n 99 above, 60–67.
117 See for a detailed legal and economic account of these restrictions RГјhl (2011), n 99 above
443 et seq, 545 et seq; RГјhl, n 98 above.
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Regulatory Competition in Contract Law
87
and services.118 However, the effectiveness of private international law to avoid
a race to the bottom varies depending on whether regulatory competition is
horizontal or vertical and depending on whether the choice of law-rules are of
national or supranational origin.
a) Horizontal and Vertical Regulatory Competition
Private international law is the most effective in avoiding a race to the bottom if
regulatory competition is horizontal. This is because horizontal regulatory competition takes place between national contract laws and is brought about by a
choice of law on the level of private international law. In contrast, private international law’s ability to avoid a race to the bottom is less obvious if regulatory
competition is vertical.119 This is because vertical regulatory competition takes
place between national contract laws and international or supranational contract
laws and is brought about by a choice of an optional instrument. The choice of an
optional instrument, however, may be subject to the rules of private international
law – or the choice may be subject to the rules of the optional instrument itself.
Take, for example, the Common European Sales Law. According to Article 3 of the
Proposal the envisioned Common European Sales Law may be chosen by the
parties. However, according to Article 8 of the Proposal this choice will be subject
to the rules of the Common European Sales Law – and not to the rules of private
international law.120 The rules of private international law, notably the Rome IRegulation, will, therefore, not be able to regulate the resulting – vertical –
regulatory competition between the Common European Sales Law and the contract laws of the Member States.
118 Eidenmüller (2009), n 2 above, 651; Eidenmüller (2011), n 2 above, 742–743; F. Garcimartín
Alférez, �Regulatory Competition: A Private International Law Approach’ (1999) 8 European
Journal of Law and Economics 251, 263–265; Garcimartín Alférez, n 81 above, 112–117, 120;
Garcimartín Alférez, n 83 above, 253, 257–259; Leible, n 15 above, 393–396; H. Muir Watt,
�Concurrence d’ordres juridiques et conflits de lois de droit privé’, in B. Ancel (ed), Le droit
international privé: esprit et méthodes (Paris: Dalloz, 2005) 615, 630–632; Rühl (2011), n 99 above,
247. See also P. Mankowski, �Europäisches Internationales Privat- und Prozessrecht im Lichte der
ökonomischen Analyse’, in Ott and Schäfer (ed), n 15 above, 118, 130–131; Trachtman, n 4 above,
332–333, 334.
119 Leible, n 15 above, 393, 399.
120 See for a detailed discussion of this approach including its merits and demerits G. RГјhl, The
Common European Sales Law: 28th Regime, 2nd Regime or 1st Regime? (2012) 19 Maastricht Journal
of European and Comparative Law 148, 150–156.
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b) National and Supranational Private International Law
In addition, the effectiveness of private international law to avoid a race to the
bottom varies depending on who actually enacts the pertaining choice of lawrules:121 private international law is less able to avoid a race to the bottom if it is of
national origin, ie if choice of law-rules are enacted by national legislators. This is
because states – just as individuals – pursue their own interests. And these
interests are not necessarily directed towards efficient regulatory competition.
Just like competitors in markets for goods and services, states might rather have
an interest in preventing or at least impeding regulatory competition.122 Private
international law, therefore, may do a better job in avoiding a race to the bottom
if it is not enacted by states, ie the competitors themselves, but by international or
supranational institutions seeking to balance the state interests involved.123
Against this background it is to be welcomed that the European legislator has
recently adopted the Rome I Regulation which provides for uniform choice of law
rules for contracts.124 Of course, this does not mean that private international law
cannot contribute to efficient regulatory competition if it is enacted by individual
states. Under the condition that private international law is disciplined, for
example, by constitutional principles, it may help to avoid a race to the bottom
even if it is of national origin.125 However, the chances that it will actually do so
are significantly lower.
121 Kieninger, n 4 above, 57. See also EidenmГјller (2009), n 2 above, 652; EidenmГјller (2011),
n 2 above, 745; O’Hara and Ribstein, n 2 above, 12–13.
122 Garcimartín Alférez, n 119 above, 256; Schäfer and Lantermann, n 48 above, 87 et seq.
123 Kieninger, n 4 above, 57. See also EidenmГјller (2009), n 2 above, 652; EidenmГјller (2011),
n 2 above, 745; O’Hara and Ribstein, n 2 above, 12–13.
124 See also Garcimartín Alférez, n 119 above, 256: �The benefits derived from parties’ autonomy
(choice-of-law rule) and the possibility of internalizing some externalities through conflict-oflaws rules can only be ensured if the rules are uniform for all the states connected with a
transaction. If each state could unilaterally establish its own conflict-of-laws rule, there would be
a risk of opportunistic behavior. Without such uniformity, one state on its own would have no
incentive to recognize the foreign law chosen by the parties, nor would it have any incentive to
adopt the rule which internalizes the costs arising from its own law.’ See also Garcimartín Alférez,
n 81 above, 120–123; Kiwit and Voigt, n 17 above, 330, 334.
125 See H. Muir Watt, �L’expérience américaine’, in A. Fuchs, H. Muir Watt and E. Pataut (eds),
Les conflits de lois et le système juridique communautaire (Paris: Dalloz, 2004) 145, 157–158. See
also O’Hara and Ribstein, n 2 above, 12–13.
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Regulatory Competition in Contract Law
89
D Conclusion
Regulatory competition in contract law has recently attracted a lot of attention.
Thus far the discussion has largely focused on the question whether there is – or
whether there can be – regulatory competition in contract law. In the first part of
the preceding article I have argued that this question must be answered in the
affirmative: empirical evidence shows that there is regulatory competition in
contract law – just like in other areas of law, notably corporate law. Most importantly, empirical evidence shows that businesses and consumers actually choose
the applicable contract law based on the quality of the law and that states actually
respond to these choices by adjusting their contract laws. With this finding,
however, the discussion about regulatory competition in contract law has not yet
reached its end. To the contrary: the fact that states actually do compete for
application of their contract law raises a number of – normative – questions.
Should regulatory competition be promoted because it induces a race to the top?
Should it be banned because it induces a race to the bottom? In the second part of
the paper I have argued that regulatory competition in contract law will generally
induce a race to the top. It should, therefore, generally be promoted. However, I
have also argued that regulatory competition may induce a race to the bottom in
some cases, notably where a choice of law does not account for the interests of all
parties affected by the choice. In these cases, I have concluded, regulatory competition should be regulated on the level of private international law. It should be
noted, however, that both the hypothesis that regulatory competition in contract
law will – as a matter of principle – induce a race to the top as well as the
hypothesis that it will – in some cases – induce a race to the bottom still needs to
be tested empirically. As a result, the debate, including the search for empirical
evidence, may – and must – go on.
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