Ius Commune Conference

26 November 2009

The Role of the General Principle of the Prohibition of Abuse of Rights in a codified European Contract Law

Annekatrien LenaertsPh. D. Fellow of the Research Foundation – Flanders

Structure

I. The principle of the prohibition of abuse of rights in the case law of the ECJ§ 1. Evolution of the approach of the ECJ§ 2. A general principle of Community law?

II. Application of the principle of the prohibition of abuse of rights in a codified European contract law§ 1. References in the codification projects§ 2. Relation to the principle of good faith§ 3. Applicability of the principle of prohibition of

abuse of rights developed by the ECJ§ 4. Conclusion: need for a more explicit reference in

the codification projects?

I. The principle of the prohibition of abuse of rights in the case law of the ECJ

§ 1. Evolution of the approach of the ECJ (1)

A. Broad conception of the abuse of rights• Early doctrine of abuse: circumvention cases, where a

Community right of free movement is exercised to avoid the application of more stringent national rules (Van Binsbergen, 1974; broadcasting cases, 1992-1994; Daily Mail, 1988)

• Circumvention arises where the activity of a person providing services is “entirely or principally directed towards the territory” of a Member State, while this person is established in another Member State (Van Binsbergen, 1974, para. 13)

• Large room for Member States to take anti-abuse measures to prevent circumvention (no particular conditions)

§ 1. Evolution of the approach of the ECJ (2)

B. Emergence of limits to the broad conception of abuse of rights (1)

• National courts may apply national anti-abuse provisions to rights granted by Community law under two conditions (Kefalas, 1998, para. 22; Diamantis, 2000, para. 34):– The full effect and uniform application of Community law in the

Member States may not be prejudiced;– The scope of the Community law provision may not be altered

and its objectives may not be compromised.

Not much room for Member States: ECJ reviews itself all grounds for the existence of an abuse

§ 1. Evolution of the approach of the ECJ (3)

B. Emergence of limits to the broad conception of abuse of rights (2)

• Room for Member States to take anti-abuse measures to prevent circumvention is limited by the objectives of the provisions of the EC Treaty (Centros, 2000):

the conduct of the person exercising the Community right of free movement (in casu freedom of establishment) to circumvent the application of stricter national rules must be assessed “in the light of the objectives pursued by those provisions” (para. 25).

§ 1. Evolution of the approach of the ECJ (4)

C. Establishment of an “abuse test”

• Extension of the doctrine of abuse: every abusive or fraudulent exercise of rights granted by Community law (not only circumvention of national rules)

• Creation of a Community concept of abuse of rights through an “abuse test”, with two positive conditions of application (Emsland-Stärke, 2000, para. 52-53):

– Combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved (“objective test”);

– The intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it (“subjective test”).

§ 1. Evolution of the approach of the ECJ (5)

D. Sophistication of the “abuse test”

• Application of the “abuse test” to other areas of Community law: VAT (Halifax, 2006); direct taxation (Cadbury Schweppes, 2006: non harmonised area of EC law – condition of “wholly artificial arrangement”)

• Refinement of the “subjective test”: the intention to obtain an advantage from Community rules may be “apparent from a number of objective factors” (“objective intentions”) (Halifax, 2006, para. 75)

§ 2. A general principle of Community law? (1)

A. Recognition of a principle prohibiting the abuse of rights in the Member States

• Most important source: “general principles common to the laws of the Member States” (Article 288 (2) EC Treaty)– Common to most of the Member States; or– “Most progressive” solution

• The principle of the prohibition of abuse of rights is applied in most of the Member States and can be qualified as the “most progressive” solution.

• Common concept of abuse of rights: exercise of a right in an unreasonable manner, with consequent harm to another, whether there was an intention to harm or mere carelessness

§ 2. A general principle of Community law? (2)

B. Towards a recognition of a general principle of Community law prohibiting the abuse of rights by the ECJ

• Implicit reference to a general principle of Community law in Halifax, 2006: “that principle of prohibiting abusive practices” (para. 70).

• Explicit reference to a general principle of Community law in Kofoed, 2007: “thus, Article 11 (1) (a) of Directive 90/434 reflects the general Community law principle that abuse of rights is prohibited. (...) The application of Community legislation cannot be extended to cover abusive practices, that is to say, transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law” (para. 38 – own emphasis).

II. Application of the principle of the prohibition of abuse of rights in a codified European contract law

§ 1. References in the codification projects (1)

A. Principles of European Contract Law (PECL)

• Model rules of contract law established through a comparative analysis of the laws of the Member States

• Article 1:201 PECL: general rule on “good faith and fair dealing”: “(1) Each party must act in accordance with good faith and fair dealing. (2) the parties may not exclude or limit this duty.”

• No express reference to the prohibition of abuse of rights

§ 1. References in the codification projects (2)

B. Principles of the Existing EC Contract Law (Acquis Principles – ACQP)

• Rules formulating the existing Community law in the field of private law in the form of a Restatement

• Article 2:101 ACQP: duty of good faith in precontractual dealings – Commentary: “an abusive exercise of a right may also fall under Art. 2:101 ACQP.”

• Article 7:102 ACQP: duty of good faith imposed on a creditor in the exercise of its rights to performance and remedies for non-performance – Commentary: this rule is expressly qualified as “a general rule preventing the abus de droit.”

§ 1. References in the codification projects (3)

C. Draft Common Frame of Reference (DCFR)• “Common terminology and rules” set up by Study Group

(revision of PECL) and Acquis Group, constituting a “toolbox” for the improvement of existing or the adoption of future legislation, or an “optional instrument” existing alongside the laws of the Member States

• Article I-1:102 (3) DCFR: in the interpretation and development of the DCFR rules “regard should be had to the need to promote good faith and fair dealing.”

• Article III-1:103 DCFR: general rule on good faith: “(1) a person has a duty to act in accordance with good faith and fair dealing in performing an obligation, in exercising a right to performance, in pursuing or defending a remedy for non-performance, or in exercising a right to terminate an obligation or contractual relationship (...).”

§ 1. References in the codification projects (4)

D. Guiding Principles of European Contract Law (GPECL)• Terminology, Guiding Principles and Revised Principles set up by a

specific group parallel to the working group for a DCFR (Association Henri Capitant; Société de Législation Comparée); comparative approach

• Article 0-301 GPECL: general duty of good faith and fair dealing: “each party is bound to act in conformity with the requirements of good faith and fair dealing, from the negotiation of the contract until all of its provisions have been given effect.”

• Article 0-302 GPECL: duty of good faith in the performance of an obligation: “every contract must be performed in good faith. The parties may avail themselves of the contractual rights and terms only in accordance with the objective that justified their inclusion in the contract.”

• General conclusion: no express provision establishing the principle of prohibition of abuse of rights

§ 2. Relation to the principle of good faith (1)

A. Prohibition of the abuse of rights as an application of the limitative function of good faith

• Prohibition of abuse of rights is a specific application of the principle of good faith in its limitative function (explicitly recognised in the commentary on Article 7:102 ACQP):– “Objective sense” of good faith: duty to follow a standard of

behaviour given by honesty, social morality and good practices;

– Good faith must also be observed in the exercise of rights (generally formulated in the codification projects as a general obligation of good faith);

– If the exercise of a right is abusive, that right will be limited to a normal use on the basis of good faith.

§ 2. Relation to the principle of good faith (2)

B. Room for the recognition of the limitative function of good faith in the Member States and on a Community level

• Member States: a limitative function is generally recognised (besides an interpretative and supplementing function); In core legal systems the prohibition of abuse of rights is based on this limitative function of good faith (e.g. Art. 1134 (3) Code Civil; § 242 BGB; Art. 6 (2) NBW).

• Community level: ECJ recognises that good faith may limit the exercise of rights – e.g. the recovery of unlawfully granted aid from EC or national resources may be prevented if the beneficiary of that aid had legitimate expectations that the aid was lawful. The principle of good faith will then limit the right to recover the wrongfully granted aid (Land Rheinland Pfalz v Alcan Deutschland GmbH, 1997; Republik Österreich v Martin Huber, 2002).

§ 3. Applicability of the general principle of prohibition of abuse of rights developed by the ECJ

• Independently of the principle of good faith, the rules developed by the ECJ on the general principle of prohibition of abuse of rights are also applicable to:

– Private law matters: situations in which the relation between private parties is at issue (e.g. Kefalas, 1998, Diamantis, 2000: a group of shareholders is opposed to a company and the remaining shareholders for a capital increase in breach of Article 25 (1) Second Company Law Directive);

– Contract law: express reference to the ECJ case law on the prohibition of abuse of rights in the Commentary on Article 2:101 ACQP (duty of good faith in precontractual dealings)Consequence: rules developed in this case law should be applied in an analoguous manner to matters of European contract law.

§ 4. Conclusion: need for a more explicit reference in the codification projects?

• The application of the prohibition of abuse of rights as a specific case of good faith in its limitative function (no express provision) is justifiable: – limitative function is common concept in Member States – room for application on a Community level

• However, the incorporation of a provision expressly prohibiting the abuse of rights (existing independently of the principle of good faith), based on ECJ case law, would be preferable: – Importance of principle prohibiting abuse of rights in ECJ case law– Recognition as a general priciple of Community law– Applicable to private law matters, including contract law– Crucial role of general principles of law in the process of harmonisation

of private law