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Professor of Law Faculty of Law, Friedrich Schiller University Jena Carl-Zeiss-Straße 3, 07743 Jena, Germany
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CONSUMER PROTECTION IN CHOICE OF LAW
forthcoming in CORNELL INTERNATIONAL LAW JOURNAL 44 (2011)
A. INTRODUCTION ............................................................................................................................................ 2 B. RATIONALE OF CONSUMER PROTECTION ..................................................................................................... 4 1. Information Asymmetries ..................................................................................................................... 5 a) The Self-Healing Powers of Markets .................................................................................................... 8 aa) Screening Mechanisms .......................................................................................................... 8 bb) Signaling Mechanisms ........................................................................................................... 9 cc) Empirical Evidence ............................................................................................................ 11 b) The Case for Regulatory Intervention .................................................................................................. 12 aa) Regulating Information ....................................................................................................... 13 (1) Duty of Information ....................................................................................................... 13 (2) Provision of Information .................................................................................................. 15 bb) Regulating Transactions ...................................................................................................... 16 2. Behavioral Anomalies ......................................................................................................................... 16 C. MODELS OF CONSUMER PROTECTION ........................................................................................................ 20 1. Party Choice of Law ........................................................................................................................... 21 a) Comparative Overview ..................................................................................................................... 22 aa) The First Model: Excluding Party Choice of Law ............................................................... 22 bb) The Second Model: Limiting Party Choice of Law .............................................................. 23 cc) The Third Model: Curtailing Party Choice of Law .............................................................. 25 b) Economic Analysis ......................................................................................................................... 28 aa) Avoiding a Market for Lemons ........................................................................................... 28 bb) Reducing the Costs of Regulation ....................................................................................... 30 (1) Legal Certainty ............................................................................................................. 31 (2) Party Preferences ............................................................................................................ 31 (3) Economic Efficiency........................................................................................................ 34 2. Applicable Law in the Absence of a Party Choice of Law ................................................................... 35 a) Comparative Overview ..................................................................................................................... 35 b) Economic Analysis ......................................................................................................................... 37 D. CONCLUSION .............................................................................................................................................. 38
Electronic copy available at: http://ssrn.com/abstract=1816641
Consumer Protection in Choice of Law
A. INTRODUCTION Consumer protection in choice of law is a fairly young concept. In fact, the idea that consumers might be as much in need of protection in choice of law as in other areas of law did not loom large before the second half of the 20th century.1 Only after the consumer protection movement gained pace in the 1960ies and 1970ies, academics, courts and legislators were quick to transfer the concept into choice of law. First legislative provisions were enacted in the 1970ies with § 41 of the Austrian Act on Private International Law2 as well as Article 5 of the European Convention on the Law Applicable to Contractual Obligations (Rome Convention).3 In the 1980ies Switzerland followed suit with the adoption of Article 120 of the new Swiss Act on Private International Law.4 Today, consumer protection in choice of law is an integral part of legal systems around the world. Thus, it comes as a surprise that up to now the pertaining rules and regulations have received very little attention from economic theory. Even though there is – by now – a substantial body of literature that deals with different aspects of conflict of laws from an economic perspective,5 the question of whether and how consumer should be protected in choice of law is
Early academic contributions include Ole Lando, Consumer contracts and party autonomy in the conflict of laws, 15 N ORDISK T IDSSKRIFT FOR INTERNATIONAL R ET [NITR] 208-219 (1972); Bernd von Hoffmann, Über den Schutz des Schwächeren bei internationalen Schuldverträgen, 38 R ABELS Z EITSCHRIFT FÜR AUSLÄNDISCHES UND INTERNATIONALES P RIVATRECHT [R ABELS Z] 396-420 (1974); Philipp Malaurie, La protection du consommateur en droit international privé, 24 T RAVAUX DE L’ASSOCIATION H ENRI C APITANT 389-97 (1973). Bundesgesetz über das Internationale Privatrecht [Federal Act of Private International Law], Jun. 15, 1978, Bundesgesetzblatt [BGBl.] No. 304/1978, available at http://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=10002426. [hereinafter Austrian Private International Law Act] EC Convention on the law applicable to contractual obligations, consolidated version in 1998 O.J. (C 27) 34 [hereinafter Rome Convention]. Bundesgesetz über das Internationale Privatrecht [Federal Act on Private International Law], Dec. 18, 1987, Amtliche Sammlung [AS] 1988, 1831, available at http://www.admin.ch/ch/d/sr/291/index.html. [hereinafter Swiss Private International Law Act] See, e.g., Francisco J. Garcimartín Alférez, Regulatory Competition: A Private International Law Approach, 8 E UROP. J. L. E CON 251 (1999); Francisco J. Garcimartín Alférez, La racionalidad económica del derecho internacional privado, in C URSOS DE DERECHO INTERNACIONAL Y RELACIONES INTERNACIONALES DE V ITORIA G ASTEIZ 2001 87 (Universidad del País Vasco ed., 2002); Andrew T. Guzman, Choice of Law: New Foundations, 90 G EO. L. J. 883 (2002); Peter Mankowski, Rechtswahlklauseln und Gerichtsstandsvereinbarungen im Lichte der Spieltheorie, in FESTSCHRIFT FÜR H ANS-B ERND SCHÄFER 368 (Thomas Eger & Georg von Wangenheim eds., 2008); Horatia Muir Watt, Choice of Law in Integrated and Interconnected Markets: A Matter of Politi-
Electronic copy available at: http://ssrn.com/abstract=1816641
Consumer Protection in Choice of Law
usually neglected. Insofar as the relevant authors deal with the question at all, they confine themselves to very brief statements relating to the reach of party autonomy. Michael J. Whincop and Mary Keyes, the authors of numerous articles and – so far – only monograph on the economics of conflict of laws, for example, merely have the following to say:6
„A greater problem is that parties can only make rational decisions with respect to choice of law clauses if they know the differences between the chosen law and the law that would otherwise apply. However, this problem doesn’t counsel precluding such choices, except perhaps in the context of lower value consumer contracts.“
As a result, the question of how consumer protection should work from an economic perspective in the context of choice of law largely remains unanswered. In the following article I endeavour to fill this gap. More specifically, I analyse how choice of law rules should be designed in order to protect consumers in an efficient way. To this end, I proceed in two steps: in the first step, I analyse the economic rationale for consumer protection in choice of law. In the second step, I analyse different models of consumer protection applied around the world. I conclude that the European model of curtailing party choice of law and applying the law of the consumer’s habitual residence in the absence of a choice is a good economic compromise. The same holds true for the American model that reaches similar results in practice. Both models
cal Economy, 9 C OLUM. J. E UR. L. 383 (2003); Horatia Muir Watt, Aspects économiques du droit international privé, 307 R ECUEIL DES C OURS [R EC. DES C OURS] 25 (2004); Erin A. O’Hara, The Jurisprudence and Politics of Forum-Selection Clauses, 3 C HI. J. INT’L L. 301 (2002); Erin A. O’Hara & Larry E. Ribstein, Conflict of Laws and Choice of Law, in 5 E NCYCLOPEDIA OF LAW AND E CONOMICS 631 (Boudewijn Bouckaert & Gerrit De Geest eds., 2000); Erin A. O’Hara & Larry E. Ribstein, From Politics to Efficiency in Choice of Law 67 U. C HI. L. R EV. 1151 (2000); Francesco Parisi & Erin A. O’Hara, Conflict of Laws, in 1 T HE N EW PALGRAVE D ICTIONARY OF E CONOMICS AND THE L AW 387 (Peter Newman ed., 1998); Francesco Parisi & Larry E. Ribstein, Choice of Law, in 1 T HE N EW PALGRAVE D ICTIONARY OF E CONOMICS AND THE LAW, supra, at 236; Michael J. Whincop, The Recognition Scene: Game Theoretic Issues in the Recognition of Foreign Judgments, 23 M ELB. U. L. R EV.416 (1999); Michael J. Whincop, Conflicts in the Cathedral: Towards a Theory of Property Rights in Private International Law, 50 U. T ORONTO L. J. 41 (2000); Michael J. Whincop & Mary Keyes, Towards an Economic Theory of Private International Law, 25 A USTRALIAN J. LEG. PHIL. 1 (2000); M ICHAEL J. W HINCOP & M ARY K EYES, POLICY AND PRAGMATISM IN THE C ONFLICT OF LAWS (2001). See also the contributions in JÜRGEN B ASEDOW & T OSHIYUKI K ONO, A N E CONOMIC A NALYSIS OF P RIVATE I NTERNATIONAL L AW (2006). In addition, there is a German monograph forthcoming G IESELA R ÜHL, STATUT UND E FFIZIENZ. Ö KONOMISCHE G RUNDLAGEN DES I NTERNATIONALEN P RIVATRECHTS (forthcoming 2011). Whincop & Keyes, supra note 5, at 31.
Consumer Protection in Choice of Law
trump all other ways of regulating choice of law in consumer contracts, most importantly the Swiss solution of excluding party choice of law in consumer contracts all together.
B. RATIONALE OF CONSUMER PROTECTION In the legal literature, consumer protection is generally explained – and justified – with the concept of the “weaker party”. Consumers are considered to be “weaker” than their contracting partners, the professionals, and assumed to be unable to protect their interests due to inferior bargaining power.8 In economic theory this reasoning is mirrored by the so-called “exploitation theory”.9 It dominated the economic discussion about consumer protection in the 1960ies and 1970ies.10 Focusing on the exercise of market power it argues that consumers are in need of protection for two reasons: first, consumers have few options but to purchase and contract on the terms set by increasingly large and powerful companies. Second, companies are able to exploit significant information and sophistication disparities in their favor.11 The “exploitation theory”, however, has not prevailed and is not regarded as explanation or justification for consumer protection by economists anymore.12 The reason for this is that it fails to take into account competition between companies and the fact that any bargaining power that companies
See generally Hugh Beale, Inequality of Bargaining Power, 6 O XFORD JOURNAL OF LEGAL STUDIES [O XFORD J. LEG. STUD.] 123-36 (1986) (U.K.); JOHN K. G ALBRAITH, T HE N EW INDUSTRIAL STATE 213-20 (1971); Friedrich Kessler, Contracts of Adhesion: Some Thoughts About Freedom of Contact, 43 C OLUM. L. R EV. 629, 632, 640-41 (1943); Spencer N. Thal, The Inequality of Bargaining Power Doctrine: The Problem of Defining Contractual Unfairness, 8 O XFORD J. LEG. STUD. 17-33 (1988). See also the detailed account in B ARBARA D AUNER-LIEB, V ERBRAUCHERSCHUTZ DURCH A USBILDUNG EINES SONDERPRIVATRECHTS FÜR V ERBRAUCHER , 109-45 (1983); J OSEF D REXL , D IE WIRTSCHAFTLICHE S ELBSTBESTIMMUNG DES V ERBRAUCHERS 29-43 (1998); Gillian K. Hadfield, Robert Howse & Michael Trebilcock, Informaton-Based Principles für Rethinking Consumer Protection Policy, 21 J. C ONSUM. POL. 131, 133-34 (1998). See George L. Priest, A Theory of the Consumer Product Warranty, 90 Y ALE L. J. 1297, 1299-302 (1981). See also Stefan Haupt, An Economic Analysis of Consumer Protection in Contract Law, 4 G ERMAN LAW JOURNAL [GLJ] 1137, 1137-38 (2003); Hans-Bernd Schäfer, Grenzen des Verbraucherschutzes und adverse Effekte des Europäischen Verbraucherrechts, in SYSTEMBILDUNG UND SYSTEMLÜCKEN IN K ERNGEBIETEN DES E UROPÄISCHEN P RIVATRECHTS 559, 559-60 (Stefan Grundmann ed., 2000). See G ALBRAITH, supra note 8, at 273-74. See also the detailed account in D REXL, supra note 8, at 125-26, 139-40. Fernando Gómez Pomar, Rational Choice and the Law: The Economic Approach to European Consumer Protection Law 7-8 (European University Institute, Max Weber Programme, Workshop No. 2, 2007 & 2008) (on file with the author); Haupt, supra note 10, at 1138; Schäfer, supra note 10, at 560; Alan Schwartz, Legal Implications of Imperfect Information in Consumer Markets, 151 JITE 31, 31-32 (1995).
supra note 12. 1.warum sind sich UN-Kaufrecht und EUKaufrechts-Richtlinie so ähnlich?. Howse & Trebilcock. Market Considerations in the Formulation of Consumer Protection Policy. U LEN. Wilde. 501-13 (1981). 5 . Verbraucherrecht. Asymmetric Information in Consumer Contract: The Challenge That Is Yet to be Met. L. 202 A RCHIV FÜR DIE CIVILISTISCHE PRAXIS [A CP] 40 (2002).. 127 U. it is sometimes argued that consumers need protection because they do not always act rationally. Alan Schwartz & Louise L. Information Asymmetries Information asymmetries occur when one party to a transaction knows more about the quality of the product or services offered than the other. not because they are considered to be “weaker” and at risk of exploitation by large companies. E CONOMIC PRINCIPLES OF LAW 40-41 (2007). Consumer Sales Law from an Economics Perspective.13 In so far as consumers are today deemed in need of protection from an economic perspective it is. at 560. at 410. Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests. T ORONTO L. European Contract Law and Economic Welfare: A View from Law and Economics 17-18 (Universitat Pompeu Fabra. See for a detailed account Gómez Pomar. André Janssen & Olaf Meyer eds. Unternehmensrecht. 723. 34-39 (A. 141-45. M ICHAEL J. therefore. 2007). Contract Law. in 1 H ANDBOOK OF LAW AND E CONOMICS 3. T HOMAS W EIN & H ANS-JÜRGEN E WERS.Consumer Protection in Choice of Law have vis-à-vis consumers is limited through competition from other companies. supra note 5. J. Privatrecht . 45 A M. 2007). L. David Cayne & Michael Trebilcock. T REBILCOCK . Benjamin Hermalin. Stefan Grundmann. & E CON. 24 J. 139 Z EITSCHRIFT FÜR DIE GESAMTE STAATSWISSENSCHAFT [ZSTW ISS] 527. 52729 (1983). 405-07 (1973). Fernando Gómez Pomar. Mitchell Polinsky & Steven Shavell eds. Katz & Richard Craswell. at 5-6.. Schwartz. 23 U. Howard Beales.16 This is the case if consumers cannot ascertain the quality of the product or service by way of inspection before a contract is 13 14 15 16 Gómez Pomar. Richard Craswell & Steven Salop. Haupt. Working Paper No. 126-27 (Martin Ebers. L. in E UROPEAN PERSPECTIVES ON PRODUCER'S LIABILITY 125. 491.14 Additionally. LAW AND E CONOMICS 46-47 (5th ed. 410. supra note 8. 69 V A. V ELJANOVSKI. R EV. M ICHAEL FRITSCH. supra note 11. Rather it is because consumers know less about products and contracts than professionals. R OBERT D. 1387 (1983). Avery W. Consumer Protection Policy in the United States. PA. 396. R EV. M ARKTVERSAGEN UND W IRTSCHAFTSPOLITIK 279324 (2005). at 1138. J. at 140. B US. Roger van den Bergh & Louis Visscher. L. T HE L IMITS OF F REEDOM OF C ONTRACT 58 (1993). 630 (1979). 411. 728. supra note 12. 2009). C ENTO G. Shmuel Becher. They are usually regarded as reason for regulating transactions if the less informed party is not in a position to acquire the relevant information or if acquisition of relevant information is too costly. The Efficient Regulation of Consumer Information. Wilde. in 1 T HE N EW PALGRAVE D ICTIONARY OF E CONOMICS AND THE L AW . 2008). 733-35 (2008). at 35-46. Alan Schwartz & Louise L. The Political Economy of Private Legislatures. Hadfield. C OOTER & T HOMAS S. Carl Shapiro. supra note 11. Ian Ramsay. InDret: Revista para el Análisis del Derecho. supra note 12.15 1. Consumer protection. Schäfer.
F URUBOTN . Darby & E. van den Bergh & Visscher. J. E CON. Free Competition and the Optimal Amount of Fraud. 68-72 (1973) and Phillip Nelson. Examples include visits to doctors. Against this background. at 126-27. professionals offering low-quality products may ask for the same – high – price as professionals offering high-quality products. The Market for "Lemons": Quality Uncertainty and the Market Mechanism. supra note 16. 16 J. Consumers. 67. experience goods and credence goods Michael R. supra note 16. See for a detailed account search goods. N EUE I NSTITUTIONENÖKONOMIK 35261 (2003). As a result. cereals or restaurant visits. See for a detailed account C ARLTON & PERLOFF. Examples include diverse products such as body lotions. at 126. Since consumers will expect to receive a product of only average quality they will only be willing to pay a price that equals the price of an average-quality product. H OLGER F LEISCHER . This. in transactions involving experience and credence goods consumers cannot determine whether the deal offered is a good or a bad one before entering into the transaction. 117. will not be willing to pay the – high – price for a high-quality product if it is impossible to determine the quality before completion of the transaction. Akerlof. PERLOFF. what is the situation when it comes to consumer transactions in choice of law? Two points can readily be made: first. a market on which only low-quality products are traded. In both cases a race to the bottom occurs that leads to a “market for lemons”. will require lowering the quality of the products in order to operate cost-efficiently. 311. C ARLTON & JEFFREY M. 488 (1970).Consumer Protection in Choice of Law concluded. see also D ENNIS W. at 121-23 (2001). i. professionals offering high-quality products will be forced to lower their prices. 84 Q UART. E CON. Lowering the prices. If professionals offering high-quality products refrain from lowering the quality of the products they will be forced out of the market. 312-18 (1970). I NFORMATIONSASYMMETRIE IM V ERTRAGSRECHT 118-20 (2001). Information and Consumer Behavior. 6 .at 443-46. V ELJANOVSKI. M ODERN INDUSTRIAL O RGANIZATION 443-46. & Econ. supra note 17. supra note 16. George A.e. supra note 18.17 Experience goods are characterized by the fact that consumers can only determine their quality after completion of the contract. however. may lead to adverse selection – and in the worst case scenario – to a complete break-down of the market in question:18 if consumers cannot distinguish between good and bad deals. Karni. Since this price will necessarily be lower than the price of a high-quality product.e. information asymmetries of the kind just 17 18 van den Bergh & Visscher. however. POL. if the product in question is not a search or inspection good. FLEISCHER. 475-76 (2006). Credence goods are distinct in that consumers cannot even asses their quality after completion of the transaction. L. R UDOLF R ICHTER & E IRIK G. but an experience or credence good. i. at 40-41. 78 J. in turn.
i. do not have an incentive to invest into the gathering of such information. they may incur the same economic problems in choice of law as in other areas of law. 215-16 (2002). 700 711-40. 2002). See for a detailed account in regard to general contract terms Hans Bernd Schäfer.19 Professionals know the law that they wish to apply better than consumers. happen that only professionals survive who call for application of a law that discriminates against consumers. at 648. 64 JURISTENZEITUNG [JZ] 641. Eidenmüller. a consumer cannot always evaluate the law’s performance. therefore. They have a cost-justified incentive to invest in information about the applicable law since they engage in the same kind of transactions on a day-to-day basis. in contrast do not know the law that the professionals wish to apply and. See also in view of choice of forum clauses in consumer contracts Lee Goldman. which are typically low compared to the costs involved: expected benefits are low because consumer contracts are usually „small contracts“. 740-41 (1992). K REDITRECHT . in V EREINHEITLICHUNG UND D IVERSITÄT DES Z IVILRECHTS IN TRANSNATIONALEN W IRTSCHAFTSRÄUMEN 203. Therefore. 650 (2009). this downward development leads to a race to the bottom.e. In the worst case.A LLGEMEINES W IRTSCHAFTSRECHT .21 Usually. thus. Recht als Produkt.. consumers learn about the quality of law only after conclusion of the contract. in K ONSEQUENZEN WIRTSCHAFTSRECHTLICHER N ORMEN . the willingness to invest depends on the expected benefits. supra note 5. supra note 19. Parisi & Ribstein.20 This is because. namely when no problems occur. O’Hara & Ribstein. 607-11 (Michael Coester et al. Expected costs are high because law is difficult to ascertain to begin with and even more difficult to ascertain if it is a foreign law. 488. 2004). in PRIVATRECHT IN E UROPA – V IELFALT. 7 . supra note 5. Parisi & Ribstein. supra note 5. O’Hara & Ribstein. at 240. See also Wulf-Henning Roth.V ERBRAUCHERSCHUTZ . K OOPERATION 591.. See George Akerlof. Consumers.Consumer Protection in Choice of Law described may occur in view of the applicable law just as well as in view of the quality of a product. U. Second. Just like a patient cannot always evaluate a doctor’s performance. namely when problems occur. worse. Grundfragen im künftigen internationalen Verbrauchervertragsrecht der Gemeinschaft. professionals opting for a balanced law or for a law that is favourable to consumers. at 1186-87. supra note 5. at 649. have difficulties to ask for a higher price. FESTSCHRIFT FÜR C LAUS O TT ZUM 65. In the long run it may. 86 N W. 282-302 (Hans-Bernd Schäfer & Hans-Jürgen Lwowski eds. Theorie der AGB-Kontrolle. Vereinheitlichung des Europäischen Vertragsrechts. at 240. run the risk that a law will apply 19 20 21 22 Horst Eidenmüller. C LAUS O TT & H ANS-B ERND SCHÄFER. eds.22 Consumers. My Way and the Highway: The Law and Economics of Choice of Forum Clauses in Consumer Contracts. if information asymmetries are present. supra note 5. G EBURTSTAG 279. O Hara & Ribstein. R EV. at 650. the quality of the law remains totally unknown. supra note 18. K OLLISION. the choice of the law with the lowest level of protection. Sometimes. L.
Erin O’Hara and Larry E. 87-91 (Stefan Grundmann. aa) Screening Mechanisms Mechanisms belonging to the first category. One may add that consumers can also do they own re- 23 24 FLEISCHER. supra note 17. Perlman. Ribstein have. Larry E. J. 8 . 503. 409-11 (2003). at 124. in fact. The mechanisms that are favored by economic theory rely on the self-healing powers of markets. Parisi & Ribstein. had ample incentives to report about problems with choice of law clauses or the otherwise applicable law. Wolfgang Kerber & Stephen Weatherill eds. magazines and the internet.Consumer Protection in Choice of Law that is particularly beneficial to professionals and that provides for the lowest consumer protection standard. Ribstein. It is the consumer who takes the initiative to overcome the information asymmetry by trying to learn more about the product offered through own inquiries or through third parties. rely on the consumers’ ability and willingness to gather the relevant information. Information Problems and Market Failure. Two forms of market mechanisms can be distinguished: first. 2001).24 Consumers had cheap access to many sources of consumeroriented information about firms including third-party rating services. L.23 In view of the applicable law. they are different in the way the missing information is generated. some scholars. Thomas Wein. argued that screening mechanisms can prevent a market for lemons. 508-09 (1987) (arguing for free choice of law in product liability cases). R EV. However. They both avoid a market for lemons by providing the consumer with information. second. They are designed to prevent a race to the bottom without regulatory intervention and explain why many experience and credence goods are successfully traded on unregulated markets. These sources. 363. notably Francesco Parisi. in PARTY A UTONOMY AND THE R OLE OF I NFORMATION IN THE I NTERNAL M ARKET 80. screening and. See also Harvey S. Products Liability Reform in Congress: An Issue of Federalism. a) The Self-Healing Powers of Markets A market for lemons can be prevented by various mechanisms. supra note 5. From Efficiency to Politics in Contractual Choice of Law. signaling.. 37 G A. screening. at 239-40. 48 O HIO ST. L. in turn.
screening mechanisms do not seem well suited to mitigate the problem of information asymmetries in view of the applicable law across the board. such as lawyers. it is not very likely that these activities will yield much success: law is extremely complex and – in contrast to a lot of other characteristics of consumer goods – can hardly ever be comprehensively determined by looking into a book or by searching the internet. lawyers don’t give advice for free. be prohibitively high. 38 A RIZ. at 283. in PARTY A UTONOMY AND THE R OLE OF I NFORMATION IN THE I NTERNAL M ARKET .28 In 25 26 27 28 See for a detailed account on information intermediaries Stefan Grundmann & Wolfgang Kerber. screening mechanisms might work in some cases. See FLEISCHER. the costs necessary to do so are simply enormous. at 123-26. thus. R EV. at 264-310. 2002 BYU L. Stefan Grundmann. L. Europäisches Verbrauchervertragsrecht im Spiegel der ökonomischen Theorie. Information Intermediaries and Party Autonomy . in V EREINHEITLICHUNG UND D IVERSITÄT DES Z IVILRECHTS IN TRANSNATIONALEN W IRTSCHAFTSRÄUMEN . See also Michael I. for example. They could be reduced – and the chances of getting a correct picture of the applicable law increased – if the consumer simply turned to information intermediaries. Of course. supra note 23. And since consumer contracts are usually for small sums. If.27 bb) Signaling Mechanisms More promising appear mechanisms falling into the second category. from a global perspective these cases can be deemed to be the exception rather than the rule. 917. Der staatliche Umgang mit Informa- 9 . For a layperson such as a consumer the costs would. supra note 17. This holds even more true if the consumer is not interested in a particular legal question that might become pressing after a dispute has arisen. Krauss. R EV.25 However. supra note 22. 759. but needs to understand the impact of a choice of law clause or the otherwise applicable law before entering a contract.The Example of Securities and Insurance Market. However. a case touches upon legal systems that share a common language and a common legal origin. Markus Rehberg. 297. signaling. expected costs usually exceed expected benefits.Consumer Protection in Choice of Law search in law libraries or consult a lawyer.26 As a result. However. consumers might be able and willing to gather information about the applicable law. As any lawyer knows who has ever tried to get to know a foreign legal system. 811 and Gary T. Considering the Proper Federal Role in American Tort Law. They rely on the better informed party’s willingness to disclose the relevant information by sending signals that allow the less informed party to learn more about the unobservable quality of the product. Product Liability and Game Theory: One more Trip to the Choice-of-Law Well. Schwartz. 938-41 (1996) (both arguing that for reasons of asymmetric information a free choice of law in product liability cases will rather provoke a “race to the bottom” than a “race to the top”).
while it may be possible that signaling mechanisms prevent a market for lemons in some cases it is unlikely that they will do so across the board. in C ONFLICT OF LAWS IN A G LOBALIZED W ORLD 153.S. Ralf Michaels. 151 JITE 49. Choosing Law by Contract. not be excluded that the professionals have an incentive to provide consumers with information in order to gain an advantage vis-à-vis their competitors. Williamson.. Information asymmetries in the context of choice of law differ from information asymmetries in other contexts in a way that call the effectiveness of signaling mechanisms in question:30 first. thus. Larry E. thus. 82 T UL. Oliver E. they can only be offered by sellers of high-quality products without increasing the price. Ribstein. Second. the applicable law influences the professional’s reputation. supra note 23. only at the margin. 2147. Firms. a company engaging in cross-border sales is a lot less likely to lose or to develop a reputation than a company engaging in one country only. 2155. do not run a major risk when submitting the contract to the law of a state that shifts as many risks to the consumer as tion. Legal Implications of Imperfect Information in Consumer Markets. signals the consumer the – otherwise – not observable quality of a product. The risks that are distributed with the help of choice of law clauses materialize only in few cases. 18 J. the consumer’s satisfaction – and. Ribstein. consumer associations are less organized on an international level and thus less effective in exercising their monitoring function. 257-59 (1993). Christian Kirchner. R EV. supra note 17. 447-48. O'Hara & Larry E. Sellers of low-quality products. since they have to expect more claims on the warranty than sellers of high-quality products. therefore. 2007). in contrast. supra note 24. supra note 23. L. but on the immediate characteristics of the good. In view of the applicable law it can. 29 30 10 . See also Perlman. indeed. 180-81 (Eckart Gottschalk. in PARTY A UTONOMY AND THE R OLE OF INFORMATION IN THE INTERNAL M ARKET. 85-91. C ORP. supra note 5. 2007). Giesela Rühl. Wein. Party Autonomy in the Private International Law of Contracts. at 446-47. Giesela Rühl & Jan von Hein eds. see also C ARLTON & PERLOFF. 245. Erin A. in Ö KONOMISCHE A NALYSE DER EUROPÄISCHEN Z IVILRECHTSENTWICKLUNG 284. at 165. if at all.. at 409-11. the professional’s reputation – usually does not depend on the applicable law. L. 49-50 (1995). have to charge a higher contract price. 311-17 (Eger & Schäfer eds. supra note 24. at 508-09 regarding product liability. and Europe. Ribstein. Justifying Limits to Party Autonomy in the Internal Market.Consumer Protection in Choice of Law contract law signals in this sense are contractual warranties: since contractual warranties incur costs. Rules and Institutions in Developing a Law Market: Views from the U. Additionally. The applicable law. The potential customers are too dispersed to interact and to exchange information about the firm’s performance. is a credence good whose quality the consumer can neither determine before conclusion of a contract nor after its performance. 2156 (2008). Offering contractual warranties. at 240. Parisi & Ribstein. As a result.29 However. at 80. therefore. 172.
the German consumers. 1985 O. however. G ERALD M ÄSCH. para.J. R ECHTSWAHLFREIHEIT UND V ERBRAUCHERSCHUTZ 111-25 (1993). E UROPÄISCHES G EMEINSCHAFTSRECHT UND INTERNATIONALES PRIVATRECHT 387-419. The contracts provided for application of Spanish law because Spain at the time had not yet implemented the European Directive on Contracts Negotiated away from Business Premises32 which would have allowed the consumers to withdraw from the contract within seven business days.Consumer Protection in Choice of Law possible. C HRISTIANE R ÜHL. 873-972 (1994). Such empirical evidence would also be difficult to gather since most countries have long been protecting consumers against a market for lemons in choice of law. cc) Empirical Evidence Against this background. 326-27 (2002). were not able to withdraw from their contract upon their return to Germany.UND V ERFAHRENSRECHTS [IPR AX ] 1991. thus. Zur Analogie im Internationalen Schuldvertragsrecht. rather low.31 In these cases. Spanish companies had sold goods to German consumers while on holiday in Spain. Peter Mankowski. First. W ETTBEWERB DER PRIVATRECHTSORDNUNGEN IM E UROPÄISCHEN B INNENMARKT 320-22. The incentives to send signals to the consumers in view of the applicable law are. By the same token. E VAM ARIA K IENINGER. 205. For the same reason it is more difficult for firms to build up reputation that might induce the other party to pay a higher price for the same product but a better law. it seems that the self-healing powers of markets cannot prevent the negative effects of information asymmetries in view of the applicable law and that consumer contracts are indeed prone to developments that can lead to a race to the lowest consumer protection standard. there are the notorious so-called GrandCanary-cases. Even though delivery of the goods came through German companies that had been assigned all rights and obligations under the contracts at the time of their conclusion. It needs to be emphasized. (L 372) 31. 1991 PRAXIS DES I NTERNATIONALEN P RIVAT . Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises. 11 . consumers were deprived of the protection afford- 31 32 See for a detailed account of these cases E CKART B RÖDERMANN & H OLGER IVERSEN. thus. that there is – as of yet – no empirical evidence that a race to the bottom actually takes place in the context of choice of law. However. R ECHTSWAHLFREIHEIT UND R ECHTSWAHLKLAUSELN IN A LLGEMEINEN G ESCHÄFTSBEDINGUNGEN 16971 (1999). there is some anecdotal evidence that renders the above analysis plausible. 205-313.
33 Here. Wein. 873-972 (1994). R ÜHL. at 205-313. 248-249. Stefan Grundmann.35 As a matter of principle. supra note 23. thus. (L 280) 83. supra note 23. The contracts were made subject to the law of the Isle of Man thereby preventing application of the European Time-Sharing Directive. in PARTY A UTONOMY AND THE R OLE OF INFORMATION IN THE INTERNAL M ARKET. supra note 23.Consumer Protection in Choice of Law ed by European law in the so-called Time-Sharing-Cases. in PARTY A UTONOMY AND THE R OLE OF I NFORMATION IN THE I NTERNAL M ARKET . over the second. Hanno Merkt. at 513-14. Klaus J. limits freedom of contract and. in turn. supra note 31. 33 34 35 36 B RÖDERMANN & IVERSEN. 92-96. supra note 23. at 387-419. The parties’ power to structure their relationship according to their needs remains intact which. 1994 O. supra note 31.34 In both cases. at 230. incurs the risk of inducing inefficient contracts. Beales.36 This is because regulation of information aims at offsetting the information imbalance between the parties without touching upon the parties’ freedom to contract. para. Wolfgang Kerber & Sephen Weatherill. economic theory calls for a – cautious – regulatory intervention by the state aiming at the regulation of information or the regulation of transactions. 10-12. K IENINGER. companies intentionally called for application of a law that provided for a substantially lower – or no – consumer protection standard thus laying the foundation for a race to the bottom. economists prefer the first option. the regulation of information.J. at 80. at 3. German consumers on holiday in Spain were talked into the – very expensive – acquisition of time shares in apartments in Spain. at 111-25. supra note 14. Regulation of transactions. Mankowski. M ÄSCH. Party Autonomy and the Role of Information in the Internal Market – An Overview. in contrast. at 320-22. Disclosure Rules as a Primary Tool for Fostering Party Auatonomy. at 131-32. Craswell & Salop. b) The Case for Regulatory Intervention If a race to the bottom as a result of information asymmetries cannot be prevented with the help of market mechanisms. increases the probability of efficient contracts. Hopt. supra note 31. 326-27. at 246. Disclosure Rules as a Primary Tool for Fostering Party Auatonomy – Observations from a Functional and a comparative Legal Perspective. Directive 94/47/EC of the European Parliament and the Council of 26 October 1994 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a timeshare basis. in PARTY A UTONOMY AND THE R OLE OF INFORMATION IN THE INTERNAL M ARKET. 7. 12 . supra note 31. supra note 31. the regulation of transactions. 231-32.
notably Erin A. O’Hara & Ribstein. William J. supra note 5. 13 . supra note 14. unless the benefits associated with reading exceed the expected costs. Zwingendes Recht oder informierte Entscheidung. supra note 5. supra note 36. Grundmann.37 aa) Regulating Information Regulation of information may help in two ways to overcome information asymmetries: first. supra note 36. Ribstein as well as Michael J. supra note 5. in FESTSCHRIFT FÜR C LAUS-W ILHELM C ANARIS ZUM 70. O’Hara and Larry E. a duty of information may take different forms ranging from a mere duty to inform about the fact of a choice of law to a duty to inform about the details of the chosen law. This is why some law and economics scholars. 64 (2006). Constraining OptOuts: Shielding Local Law and Those it Protects from Adhesive Choice of Law Clauses.. Parisi & Ribstein. however. at 56. at 180-81. 40 Loy. Rühl.40 However. G EBURTSTAG 1191. supra note 5. at 648. supra note 30. (1) Duty of Information The establishment of a duty of information is the most obvious way to fight the problems associated with information asymmetries. 9. by establishment of a duty of information. at 7. 47 Stan. Ribstein. they ignore two important aspects of international consumer transactions: first. 1208 (Andreas Heldrich. Eisenberg. at 240. 2007). supra note 29. supra note 5. Whincop and Mary Keyes. at 257-59. Craswell & Salop. Critical on the question whether a duty of information is indeed a less intrusive measure Wolfgang Schön. Eidenmüller. Woodward. Kerber & Weatherill. The Limits of Cognition and the Limits of Contract.41 Most consumer transactions. O’Hara & Ribstein. at 650. second. W HINCOP & K EYES . Of course. consumers do not have an incentive to read information. Rev. 10-12. through provision of information by the state. at 31-32. Whincop & Keyes.Consumer Protection in Choice of Law This is why economists resort to direct regulation of transactions only if the regulation of information – for whatever reasons – does not yield the desired results. argue that consumers should be protected against a choice of law. see generally Melvin A. if at all. only involve small amounts. LA L. through establishment of a duty of information and. supra note 19. at 1186-87.38 It requires the professional to inform the consumer about a choice of law including the most important features of the chosen law. Rev. In the context of this article – and for the sake of the following arguments – the differences do not matter. at 251-52. Hopt. L. at 513-14. Jürgen Prölss & Ingo Koller eds. 37 38 39 40 41 Beales.39 Since it ensures that the consumer has all relevant information it may mitigate the information asymmetry and the risk of a market for lemons.
See for a detailed account Shmuel I. the capacity of consumers to read and process information is limited so that more information does not necessary lead to more knowledge and better decisions. Schön. C ONSUM . supra note 5. Speller & Carol A.46 For example. See for a more detailed account of behavioural anomalies in choice of law infra B. Speller & Carol A. supra note 30. see also Krauss. Florencia Marotta-Wurgler.ssrn. 11 J. thus. R EV. 09-40). M ARK. supra note 26.Consumer Protection in Choice of Law Therefore. 213 (1961). Brand Choice Behavior as a Function of Information Load. e. at 31 indicate – surely for this reason – that choice of law in consumer contracts should be limited or excluded. To the contrary. See. 63 (1974). 214-216 (1995). the expected benefit of reading is small and usually smaller than the costs. In addition. Kohn Berning. Jacob Jacoby. associated with reading. 1 J. at 938-41 (both arguing that for reasons of asymmetric information a free choice of law in product liability cases will rather provoke a race to the bottom than a race to the top). Behavioral Science and Consumer Standard Form Contracts. see generally on the on the costs and benefits of information procurement Georg J. 167-177 (2007). 2. 42 43 44 45 46 14 . Jacob Jacoby. at 180-82. Law & Economics Working Paper Series. 69 J. Economics and Organizations. Rational consumers. at 811. supra note 26.42 Since empirical studies show that only a negligible percentage of consumers read fine print. 68 LA L. time and effort. Empirical studies coming from the field of behavioural science prove that too much information can actually lower the quality of consumer decisions (information overload).44 Second.45 Apparently. Rühl. R ES .com/sol3/papers. POL. Trossen. supra note 26. Stigler. Donald E. Schwartz. more information can sometimes even lead to worse decisions because consumers do not even read the important information. By the same token it may happen that they overestimate their own capacities 211. even if consumers are willing to read the information provided by the professional this does not mean that they will actually make better decisions. i.g. at 938-41. available at http://papers. Whincop & Keyes. will abstain from reading any information that is provided by the professional. at 811 and Schwartz. E CON. supra note 26. Becher.. it may happen that consumers miscalculate the probability that a particular legal provision becomes relevant because they overestimate available information (availability heuristic) or because they ignore small risks (law of small numbers). R ES. at 1206-08 and in regard to product liability law Krauss. Working Paper No. behavioural anomalies may come into the equation. 117. Donald E. Brand Choice Behaviour as a Function of Information Load: Replication and Extension. 33 (1974). Kohn. Florencia Marotta-Wurgler. supra note 38.e.43 a duty of information will most probably not fight the information asymmetry but will instead make the conclusion of international consumer contracts more costly. Working Paper 2010 (on file with the author).cfm?abstract_id=1443256 (showing that buyers of software do not read the software licensing agreements when purchasing online). The Economics of Information. Does Disclosure Matter?. Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts (NYU Center for Law. Yannis Bakos & David R.
(2) Provision of Information Provision of information by the state is another way of overcoming information asymmetries without directly regulating consumer contracts. Holger Spamann. C HRISTOPH K ERN. at 523-27. not only provide for information about different legal systems. albeit not in the field of consumer law. the method and the quality of these rankings have been widely criticized. 47 48 49 50 See on the reduction of information costs through the state in general Beales. at 643. htm. at 531-32.50 In fact.com/abstract=894301. Shareholder Protection: A Leximetric Approach. just like a duty of information. Alan Schwartz & Louise L. They also could provide a basis for easy comparison. 7 J. 15 .weforum. it seems that a duty of information will not help to overcome the information asymmetries present when consumers enter into international contracts. 181 (1982). 7 March 2006). Olin Center Discussion Paper No. As a result.Consumer Protection in Choice of Law (self-serving bias). STUD. See only Eidenmüller. information provided by the state would most probably not be taken into account by consumers before conclusion of a contract. On the Insignificance and/or Endogeneity of La Porta et al. supra note 14. 13 B ELL J. see for a detailed account Christoph Kern. supra note 14. E CON. Available at http://www. Priya P. this way of regulating information does not promise much success: just like information provided by professionals. 17 (2007). JUSTICE BETWEEN SIMPLIFICATION AND FORMALISM. The Doing-Business-Reports of the Worldbank are available at http:www. ranking legal systems to provide consumers with easy access to information about the quality of the chosen law does not (yet) seem to be an instrument to avoid a market for lemons. States could. Craswell & Salop. Die Doing-Business-Reports der Weltbank – Fragwürdige Quantifizierung rechtlicher Qualität?.47 However. Siems. Shapiro.doingbusiness. C ORP. A D ISCUSSION AND C RITIQUE OF THE W ORLD B ANK SPONSORED LEX M UNDI PROJECT ON E FFICIENCY OF C IVIL PROCEDURE (2007). supra note 19.org. Such rankings are already to be found in the Doing-Business-Reports of the World Bank48 or the Global Competitiveness Reports of the World Economic Forum49. Wilde. however. Competitive Equilibria in Markets for Heterogeneous Goods with Imperfect Information: A Theoretical Analysis with Policy Implications. there is wide agreement that it is not that easy to transfer a legal system’s quality into a number. Lele & Mathias M. 64 JZ 498 (2009).’s ‘Anti-Director Rights Index’ under Consistent Coding (Harvard Law School John M. As a result. for example by ranking legal systems according to their consumer protection standard. available at http://ssrn.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index. However.
R EV. 51 52 See for different versions of the rational choice model Russell B. the only remaining option for action is the direct regulation of consumer transactions. They occur when consumers do not behave in accordance with the standard economic rational choice model. Fourth. 88 C AL. According to this model individuals act to maximize their own welfare. Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics. at 21-23. supra note 16. i. 16 . so-called behavioural anomalies are sometimes called upon to justify consumer protection from an economic perspective.e. 2. I will discuss below how legal systems around the world approach this challenge and which of the models applied deserves praise from an economic perspective.51 It rests on a number of assumptions:52 first. Third. Behavioral Anomalies In addition to information asymmetries. individuals have or collect all necessary information before making a decision. Korobkin & Thomas S. individuals have robust and stable preferences that are independent of outside factors and that do not change over time. E CONOMIC A NALYSIS OF LAW 3-10. the direct regulation of choice of law clauses. individuals determine and compare the costs and benefits of different courses of action before making a decision. See for a detailed account C OOTER & U LEN. individuals have the necessary intellectual abilities to process and to assess this information. R ICHARD POSNER. L. Admittedly this means to curtail the parties’ freedom to structure their relationship by limiting their freedom to choose the applicable law. Second.Consumer Protection in Choice of Law bb) Regulating Transactions If neither the self-healing powers of markets nor the regulation of information may avoid the negative effects of information asymmetries in choice of law. 17 (2007). compared with a market for lemons this seems to be the lesser of two evils – at least if the parties’ right to choose the applicable law is limited only to the extent necessary. Ulen. However. 1051 (2000).
individuals’ preferences are neither robust nor stable. Working Paper Series. 12879 2007). Richard A. Instead they use heuristics or rules of thumb that simplify. Wanting. R EV. this line of reasoning has not yet been employed to justify consumer protection. in H ANDBOOK OF C ONTEMPORARY B EHAVIORAL E CONOMICS 671.Consumer Protection in Choice of Law For many years. R EV. in R ECHT UND V ERHALTEN 60. W HINCOP & K EYES. Sunstein & Thaler. Behavioral Law and Economics. but distort their decisions. 82-83.53 However. in A N E CONOMIC A NALYSIS OF PRIVATE INTERNATIONAL L AW . Becher. Jeffrey J. Joshua D. in R ECHT UND V ERHALTEN. Behavioral Theories of Judgment and Decision Making in Legal Scholarship: A Literature Review. Langevoort. C HI. In light of these findings. A Behavioral Approach to Law and Economics. 131 (2008). supra note 12. supra note 5 at 87. L. 2006). at 1477-78.. the rational choice model has dominated the law and economics movement. J. 207 (2006). Ulen. supra note 54. see for a critical account Gómez Pomar. It has also informed the first economic analyses in the field of choice of law. at 24-29. 11. L. 51 V AND.. 2 N. 87 (2006). individuals suffer from serious intellectual limitations that impair their ability to act rational in the above described sense. 90-98 (Christoph Engel. How Much Irrationality Does the Market Permit?. at 98. L. 26-31 (1998).. Behavioral Law and Economics: A Progress Report. L. L. & E CON. Sunstein. supra note 23. individuals do not determine the costs and benefits of different courses of action before making a decision. Thomas S. Epstein. and Paternalism. R EV. 73 U. 139-43 (1999). supra note 45. at 1503-06.. Paternalism and Consumer Contracts: An Empirical Perspective. Liking and Learning: Neuroscience and Paternalism. For example. 53 54 55 56 See O’Hara & Ribstein. STUD.U. Markus Englerth. Individual Differences. See generally Christoph Engel & Gerd Gigerenzer. Psychology and Economics. Edward L. Christine Jolls. Rachlinski. 37 J. R EV.g. See generally Englerth. 133 (2006). supra note 5. supra note 5. Behavioral Economics: Human Errors and Market Corrections. R EV. 17 . 1 A M. many economists argue that consumers need protection not only because they know less than professionals but also because they do not always act rationally. 73 U. Information in the Market Economy. Sunstein. See. 115. R EV. Thomas S. Hans-Bernd Schäfer & Katrin Lantermann. Rabin. 1499. Markus Englerth. VAN A AKEN . in PARTY A UTONOMY AND THE R OLE OF INFORMATION IN THE INTERNAL M ARKET. Wright. they are subject to change under outside influence and over time. Ulen. Cognitive Errors. supra note 54. 2007). at 131-35. C HI. C HI. And they do not collect all necessary information to do so. 1471. Law and Heuristics. "R ATIONAL C HOICE" IN DER R ECHTSWISSENSCHAFT 100-03 (2003). Camerer. Jolls. supra note 55. Das deliberative Element juristischer Verfahren als Instrument zur Überwindung nachteiliger Verhaltensanomalien. Thaler. e. Paternalism and Psychology.54 In addition. Behavioral Law and Economics. Anne van Aaken. Matthew Rabin. Donald C. LEG.55 Rather. Colin F. Cass R. According to several studies. LIT. A NNE VAN A AKEN. Langevoort. 73 U. Sunstein & Richard H. Choice of Law from an Economic Perspective. there is by now credible experimental evidence that individuals frequently act in ways that are incompatible with the assumptions of rational choice theory. 1477-78 (1998). supra. Glaeser.Y. Alan Schwartz. supra note 54. L. Behavioral Law and Economics. 111 (2006). LAW & LIB. R EV. 36 J. 470 (2007).56 In choice of law. 1503-06 (1998). 677-80 (Morris Altman ed. Christine Jolls. supra note 54. L. Behavioral Law and Economics. Jörn Lüdemann & Indra Spiecker genannt Döhmann eds. at 13-16. at 88-93. at 189. 73 U. 30-33 (National Bureau of Economic Research. E CON. C HI. 50 STAN. supra note 54. Cass R. 139. in H EURISTICS AND THE LAW 1 (2006). Working Paper No.
behavioral anomalies may occur in international just as well as in national settings. Eugenio J. Competition and the Quality of Standard Form Contracts: An Empirical Analysis of Software License Agreements. Paying with Plastic: Maybe Not so Crazy?. 93 A M. the empirical findings are not as solid as they appear at first blush. C HI. Neoclassical Theory Versus Prospect Theory: Evidence From the Marketplace. E CON. August 2007). late payment fees. In fact.57 Take credit card agreements as an example. R EV. Working Paper No. J. 50 J. and Information Suppression in Competitive Markets. 63 (2006). 41 (2003). The decisive question. 11 2006). Shrouded Attributes. Souphala Chomsisengphet. is. supra note 57. L. for example. List. Seduction by Plastic. & E CON. therefore. Agarwal. 72 E CONOMETRICA 615 (2004). Xavier Gabaix & David I. see for a detailed account Wright. supra note 56 and also the studies of Sumit Agarwal. and cash advance fees (optimistic bias). List. REV. E MP. For example.com/sol3/papers. 5 J. STUD. consumers who have to choose between two different contracts 57 58 59 See the overview in Wright. L. shows that most consumers are in fact able to predict their future spending behaviour properly and usually do not enter into credit card agreements that contradict their interests. consumers may systematically miscalculate the costs and benefits of a choice of law rule because they use heuristics or rules of thumb. Who Makes Credit Card Mistakes? (Federal Reserve Bank of Philadelphia.cfm?abstract_id=843826.59 In fact. L. John A. 118 Q UART.58 Real world data. whether behavioural anomalies can actually explain and justify consumer protection in choice of law? Doubts are in order for several reasons: first. 505 (2006).ssrn. Tom Brown & Lacey Plache. Benjamin Klein & Joshua D. 73 U. 18 . E CON. LEG. available at http://papers. Consumer Myopia. however.e. The Economics of Slotting Contracts. Or. Wright. 421 (2007). Choosing the Wrong Calling Plan? Ignorance and Learning. J. 447 (2008). 98 NW U. Oren Bar-Gill. agree to a choice of American law because the American legal system is – thanks to jury trials and punitive damages awards – more often in the news than other legal systems (availability heuristic). Chunlin Liu & Nicholas Souleles. Liu & Souleles. R EV. several studies show that the results found in psychological and behavioural experiments specifically set up to investigate behavioural anomalies cannot always be found in reality. They might. at 475-77. see for a detailed account Wright. they might underestimate certain risks and agree to a choice of law that does not sufficiently cover these risks (optimistic bias). According to many behavioural economists consumers are systematically lured into contracts that do not mirror their best interests because they are too optimistic in view of their own spending behaviour and the need to pay credit card fees. Do Consumers Choose the Right Credit Contracts? (Federal Reserve Bank of Chicago. 121 Q UART. 297 (2003). 1373 (2004). Recent Developments in Consumer Credit and Payments. supra note 56. Does the Market Experience Eliminate Market Anomalies?. supra note 56. i. Laibson. E CON. over limit fees. Miravete. 477-82 .Consumer Protection in Choice of Law However. John A. Chomsisengphet. Florencia Marotta-Wurgler. Anthony Saunders & Barry Scholnick. Nadia Massoud. Working Paper.
thus. John C. supra note 57. Peter Fishman & Dennis G Pope. e. decrease the differences between actual and rational actions. Sumit Agarwal. (University of California at Berkeley. most importantly consumers’ attitude towards choice of law clauses.g. empirical studies analysing consumer behaviour. at least not at the moment. E CON. Driscoll.Consumer Protection in Choice of Law – low interests rates with an annual fee or low interests rates with no annual fee – usually choose the contract that is beneficial for them in the long run. behavioral anomalies may not. 19 . supra note 60. Does the Market Experience Eliminate Market Anomalies?. List. Here. at least some consumers are able to correct initial mistakes and miscalculations concerning their spending behaviour over time and. Gabaix & Laibson. R ES. As a result.60 As a result. Take again credit card agreements as an example. are even completely lacking. 31 J. List.. 52 (2004). see also Roland Bénabou & Jean Tirole. C ONSUM. Neoclassical Theory Versus Prospect Theory: Evidence From the Marketplace. this might change if more empirical studies. which people use to overcome cognitive disabilities. 848 (2004) and Dilip Soman & Amar Cheema. supra note 57. It is more than likely that the discussion about consumer protection in choice of law will then gain momentum and move into new directions. Department of Economics. POL. Driscoll. supra note 57. Working Paper 2005). over limit fees or cash advance fees. serve as a justification for consumer protection in choice of law. Liu & Souleles. 112 J. Xavier Gabaix & David Laibson. When Goals are Counterproductive: The Effects of Violation of a Behavioral Goal on Subsequent Performance. Miravete. even if consumers do not act in accordance with the standard economic rational choice model this does not mean that they will continue to do so. Second. many studies show that consumers are able to learn and to change their behaviour when they realize that they have made a mistake. Chomsisengphet. are available. on average manage to reduce these fees by 75% in three years. Agarwal. 60 61 See. supra note 57.61 As a result. Agarwal. However. who describe further mechanisms. several studies show that consumers who have to pay late payment fees. In view of the initially asked question whether behavioural anomalies may explain and justify consumer protection in choice of law. especially studies covering choice of law situations. these findings imply that there is – as of yet – too little empirical evidence that consumers systematically and persistently depart from the rational choice model. In choice of law. Stimulus and Response: The Path from Naiveté to Sophistication in the Credit Card Market (Working Paper 2007). The Long-Run Effects of Penalizing Customers: Evidence from the Video-Rental Market. Willpower and Personal Rules.
Gukjesabeop [Act on Private International Law]. 21.66 Article 120 of the Swiss Private International Law Act. for example. Milletlerarasi Özel Hukuk ve Usul Hukuku Hakkinda Kanun [Act on Private International Law and Civil Procedure]. 149-FS of Nov. Section 3 (4) Oregon Contracts Conflict Act equals Oegon Revised Statutes § 81.69 The second regulatory technique. Resmi Gazete [RG] No. they modify the rules about free party choice of law and the rules that determine the applicable law in the absence of a choice of law. Regulation (EC) No.68 It is also applied in the United States as far as consumer protection is granted by § 1-301 (e) of the Uniform Commercial Code in the revised version of 2001.Consumer Protection in Choice of Law C. [hereinafter Japanese Private International Law Act]. 28 of Jun. § 51:1418 of the Louisiana Revised Statutes and Section 3 (4) (a) of the Oregon Act Relating to Conflict of Laws Applicable to Contracts. Third Part]. Act Relating to Conflict of Laws Applicable to Contracts. 27. The pertaining rules share the virtue of departing from the general rules on choice of law.105 (4)(2009). 7. 2007 [hereinafter Turkish Private International Law Act]. 26728 of Dec.J. Law No. 2001 [hereinafter Korean Private International Law Act]. Rossijskaja Gaseta [RG] of Nov. Law No. The first regulatory technique is to be found. 2001 [hereinafter Russian Civil Code]. 5718 of Nov. For everything else. 26. consumer protection in choice of law is an integral part of most modern legal systems. 6465 of Apr.62 Article 6 of the Rome I-Regulation. in contrast.64 § 27 of the Korean Private International Law Act. others rely on general clauses or rather vague concepts. MODELS OF CONSUMER PROTECTION As indicated earlier. Sobranie zakonodatel’stva Rossijskoj Federaccii [Civil Code of the Russian Federation.65 Article 1212 of the Russian Civil Code. Hô no Tekiyô ni kansuru Tsûsoku-hô [General Act on the Application of Laws]. Federal Law No. 2006. Differences appear both in view of the content of the pertaining rules and the regulatory technique applied: whereas some national laws and international regulations provide for specific choice of law rules for transactions involving consumers. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). in Article 5 of the Rome Convention. House Bill No. 12. 2008 O. 28. there is little agreement. 2001. More specifically. 2414 of 2001 [hereinafter Oregon Contracts Conflict Act]. § 109 (a) sentence 2 of the Uniform Computer Information Transaction Act.67 and Article 26 of the Turkish Private International Law Act. 2007.63 Article 11 of the Japanese Private International Law Act. prevails under the Inter-American Convention on the Law Applicable to Contractual Obligations 62 63 64 65 66 67 68 69 Supra note 3. Supra note 4. (L 177) 6. 20 . Law No.
oas. H AY. D IE K ONVENTION VON M EXIKO 111-12 (2002). consumers may be protected with the help of the very flexible provisions that determine the law applicable in the absence of a choice of law. 305. PATRICK J. See for a detailed account PETER H AY. namely insofar as consumers are protected under the fundamental public policy doctrine expressly enshrined in § 187 (2) Restatement (Second) of Conflict of Laws72 but also read into § 1-301 of the Uniform Commercial Code. international contracts are governed by the law chosen by the parties. Choice of Law in International Distribution Contracts: Obstacle or Opportunity?. 1994. INTERNATIONAL 339 (2nd ed. However. The Latest Trends in Latin American Private International Law: the Uruguayan 2009 General Law on Private International Law. Konvergenz im Internationalen Vertragsrecht? Zu jüngeren Entwicklungen im europäischen und US-amerikanischen Kollisionsrecht. at 167-71. C OMPARATIVE. SYMEONIDES. at 271. and is often termed a “universal approach”. 17. 181-82 (2006). in Brazil and Uruguay proposals to reform the law and to recognize party autonomy have been made in 2004 and 2009 respectively and are expected to be adopted in the near future.Consumer Protection in Choice of Law (Mexico Convention). 1. C ONFLICT OF LAWS: A MERICAN.Y. 1998 IPR AX 378. see also Weintraub. supra note 30. 1998 IPR AX 385. Eugenio Hernández-Bretón. Mar. VON M EHREN. Choice of Law in the American Courts in 1992: Observations and Reflections. Bolivia. Patrick J. INT’L L. J.75 the principle of party autonomy claims widespread application. C ONFLICT OF LAWS 1098-1129 (5th ed. SYMEON C. Brazil. Giesela Rühl. However. Party Choice of Law Around the world.html. 187 R EC. 23. supra note 72. PRIV. supra note 74. 135 (1994). 332-335 (2009). 42 A M. available at http://www. INT’L L. PERDUE & A RTHUR T. SYMONIDES. 21 . 271 (1984). 2003). 7 (1998). it does not provide for specific choice of law rules for consumer contracts. Borchers. 391. B ORCHERS & SYMEON C. Eberhard Röhm & Robert Koch.74 In fact. See for a detailed recent account María Mercedes Albornoz. Jürgen Samtleben. as well as with the help of overriding mandatory provisions. Colombia and Uruguay. See A LEXANDER G EBELE. I NTERNATIONALES P RIVATRECHT UND E UROPARECHT [Z F RV] 175. 6 J. 2010). Choice of Law in International Contracts in Latin American Legal Systems. 47 Z EITSCHRIFT FÜR R ECHTSVERGLEICHUNG .70 Even though it was closely modelled on the Rome Convention. 384. 43-48 (2010). Rühl. Russell J. Functional Developments in Choice of Law for Contracts. Didier Opertti Badán & Cecilia Fresnedo de Aguirre. Internationale Handelsverträge im Lichte der Interamerikanischen Konvention von Mexiko über das auf internationale Verträge anwendbare Recht.71 The second regulatory technique is also applied in the United States. C OMP. PRIV. DES C OURS 239. R EV. 125.org/juridico/English/treaties/b-56. with the exception of some South American countries. W ENDY C. Weintraub.73 1. L. at 1155-56. INT'L L. 11 N.76 When it comes to 70 71 72 73 74 75 76 Convención interamericana sobre Derecho aplicable a los contratos internacionales [Inter-American Convention on the Law Applicable to Contractual Obligations]. Versuch über die Konvention von Mexiko über das auf internationale Schuldverträge anwendbare Recht. 11 Y B. B ORCHERS & SYMONIDES.
both states will honour a choice of foreign law if the consumer is not a resident of Louisiana and Oregon or if the transaction does not have the specified connection to these states. Symeonides. It is very simple and straightforward because it outright excludes party autonomy in consumer contracts: according to Article 120 (2) of the Swiss Act on Private International Law there is no choice of law in consumer contracts. 77 78 See Symeon C. a) Comparative Overview When looking into national legal systems and international treaties. Codifying Choice of Law for Contracts: The Oregon Experience. aa) The First Model: Excluding Party Choice of Law The first model is to be found in Switzerland.78 As a result. most legal systems restrict the parties’ freedom to choose the applicable law in one way or another. in contrast to Switzerland. However. 22 . 69 R ABELSZ 726. For details see Section 3 (4) Oregon Contracts Conflict Act and § 51:1418 Louisiana Revised Statutes. Similar provisions are to be found in the Oregon and Louisiana codifications on choice law: according to § 51:1418 (C) of the Louisiana Revised Statutes and Section 3 (4) (a) of the Oregon Contracts Conflict Act77 a choice of a foreign law – including the law of another state – will not be enforced if the consumer is a resident in one of these two states and if the transaction was concluded or initiated there. three basic models of consumer protection can be distinguished: the first model excludes party choice of law in consumer transactions all together. In the following I will first provide a comparative overview of the models applied to protect consumers and then offer an economic analysis. however. 730 (2003). Louisiana and Oregon will refuse enforcement of a choice of law clause in consumer transactions providing for a foreign law if the transaction has a connection to their territory.Consumer Protection in Choice of Law consumer transactions. And the third model curtails the effects of a party choice of law. The second model limits the parties’ choice to certain laws.
PRIV. 2009 IPR AX 218. Rolf Wagner. R ICHARD PLENDER & M ICHAEL W ILDERSPIN . Rolf Wagner. Stefan Perner. Choice of Law in Insurance Contracts under the Rome I Regulation. 286-288. 2009). Louise Merret. PRIV. 2008 T RANSPORTRECHT [T RANSPORTR] 339. Christian Heinze. Das Internationale Versicherungsvertragsrecht nach Inkrafttreten der Rom I-Verordnung. 2008 T RANSPORTR 221-224. Il contratto internazionale di trasporto di persone. 2009). the law of the place of departure or the law of the place of destination. El nuevo Derecho internacional privado de los seguros en el Reglamento Roma I. T HE E UROPEAN P RIVATE I NTERNATIONAL L AW OF O BLIGATIONS 205-22 (3rd ed. in LA NUOVA DISCIPLINA COMUNITARIA DELLA LEGGE APPLICABILE AI CONTRATTI (R OMA I) 247 (Nerina Boschiero ed. See for a detailed account of Article 7 of the Rome I-Regulation Martin Fricke. Rom I und Rom II aus der Sicht des Transportsrechts. 23 . Das Internationale Privatrecht der Versicherungsverträge nach Inkrafttreten der Rom-I-Verordnung. Neue kollisionsrechtliche Vorschriften für Beförderungsverträge in der Rom I-VO. In view of insurance contracts covering risks limited to events occurring in one state other than the 79 80 See for a detailed account of Article 5 of the Rome I-Regulation Gianluca Contaldi.79 By the same token. 49 (2009)./R. L. 8 A NNUARIO E SPAÑOL DE D ERECHO INTERNACTIONAL PRIVADO [AEDIPR] 425 (2008). the law of the carrier’s habitual residence or central place of administration. 2009). 261 (2009).80 In view of life assurance. In contrast to the first model it does not outright exclude choice of law in consumer transactions but limits party autonomy to certain laws. Dirk Looschelders & Kirstin Smarowos.. 2009 V ERSICHERUNGSRECHT [V ERSR] 443. 2009 E UROPEAN JOURNAL OF C ONSUMER L AW /R EVUE EUROPÉENNE DE D ROIT DE LA CONSOMMATION [E UR . 2009). La lege applicabile ai contratti di trasporte nel regolamento Roma I. INT’L L. PLENDER & W ILDERSPIN. in R OME I R EGULATION 99 (Franco Ferrari & Stefan Leible & eds. Sara Tonolo. I contratti di assicurazione tra mercato interno e diritto internaionale private. The Rome I Regulation and Contracts of Carriage. in LA NUOVA DISCIPLINA COMUNITARIA DELLA LEGGE APPLICABILE AI CONTRATTI (R OMA I) 349 (Nerina Boschiero ed. 2009 T RANSPORTR 281.] 729. Entwicklungen im Internationalen Privat. Rosa Miquel Sala. J. 2010 V ERSR 1. Insurance Contracts. R IVISTA DI DIRITTO INTERNAZIONALE PRIVATO E PROCESSUALE [R IV . Paola Piroddi. Article 7 additionally allows the choice of the law of the state of which the policy holder is a national. 5 J. According to Article 5 (2) sentence 3 of the Rome I-Regulation parties to a contract of carriage may only choose the law of the passenger’s habitual residence.C.und Prozessrecht für Transportverträge in Abkommen und speziellen EG-Verordnungen. INT’L L. in R OME I R EGULATION 109 (Franco Ferrari & Stefan Leible eds.E. 10 Yb. Caroline Van Schoubroeck. 2009 N EDERLANDS INTERNATIONAAL P RIVAATRECHT [NIPR] 445.. at 270-96. Peter Mankowski.Consumer Protection in Choice of Law bb) The Second Model: Limiting Party Choice of Law The second model of consumer protection is to be found in the European Union. Urs Peter Gruber. Das Internationale Versicherungsvertragsrecht nach Rom I. supra note 79. C ONSUM . 2009). Article 7 (3) sentence 1 of the Rome I-Regulation essentially limits parties’ choice in insurance contracts to the law of the state where the risk is situated at the time of conclusion of the contract and to the law of the country where the policyholder has his habitual residence.D. Arnt Peter Nielsen. DIPP] 309 (2009). Die EGVerordnungen Brüssel I. 755-64. The new European conflicts-of-law rules from an insurance perspective. Insurance Contracts in Rome I: Another Recent Failure of the European Legislature. Helmut Heiss. Insurance contracts under the Rome I Regulation.
supra note 30. thus. the parties may also choose the law of that state. requires a connection to the chosen law in a much broader fashion than European law where it is limited to contracts of carriage and insurance contracts. the American substantial or reasonable relationship doctrine may indeed be understood as a means of consumer protection turning it into a special Note that Articles 5 and 7 of the Rome I-Regulation are not limited to consumer contracts. R EV. supra note 72. Dennis Solomon. Party autonomy in Rome I and II: an outsider’s perspective. H AY. most importantly consumers. Note. 195-196. however. just like Articles 5 and 7 of the Rome I-Regulation § 187 (2) of the Restatement (Second) and § 1-301 (1) of the Uniform Commercial Code are not limited to consumers. in turn. The 2001 version was. To be sure. L.82 However. at 1152. Rühl. By the same token. The Private International Law of Contracts in Europe: Advances and Retreats.84 This understanding is confirmed by a look to the case law relating to § 187 (2) of the Restatement (Second) and § 1-301 (1) of the Uniform Commercial Code: whereas courts regularly enforce choice of law clauses in commercial contracts even if the connection to the chosen law is rather weak.81 In other countries. however. Attempts undertaken in 2001 to abandon the reasonable relationship requirement for business-to-business contracts were unsuccessful because most states chose to keep the original version. As a result. Symeon C. § 1-301 (1) of the Uniform Commercial Code asks for a reasonable relationship. 82 T UL. § 187 (2) of the Restatement (Second) of Conflict of Laws provides that a party choice of law will only be enforced if the parties or the transaction bear a substantial relationship to the chosen law. supra note 72. Symeonides. raises the question of whether – in addition to consumers – other persons need protection against a party choice of law across the board.85 As a result. that Article 121 (3) of the Swiss Act on Private International Law applies the second model in view of employment contracts. This. 1709 (2008). they are more reluctant to do so. at 168-71. supra note 72. just like in Europe.Consumer Protection in Choice of Law state where the risk is situated. See for a detailed account of the legislative history of the provision H AY. therefore. B ORCHERS & SYMEONIDES. limitations such as the ones to be found in Articles 5 and 7 of the Rome I-Regulation are unknown. Rather. Rühl. when consumers are involved. is beyond the scope of this article. However. B ORCHERS & SYMEONIDES . they cover – and protect – all types of policyholders and passengers because they are perceived as weaker parties. 2010 NIPR 191.83 American law. the relationship requirement is informed by the wish to avoid evasion of mandatory laws designed to protect weaker parties. 1109-15. Articles 5 and 7 of the Rome I-Regulation protect passengers and policyholders by limiting party autonomy to laws that have a connection to either the parties or the transaction. 181-82. withdrawn in 2008 and replaced with the current version that basically restores § 1-105 of the original Uniform Commercial Code. 81 82 83 84 85 24 . This question. The current version of § 1-301 of the Uniform Commercial Code was adopted in 2008 and essentially corresponds to § 1-105 of the original Uniform Commercial Code.
Instead. Aurelio López-Tarruella Martinez.. Ulrich Magnus. Jonathan Hill. 2004).C. INT. navire stable aux instruments efficaces de navigation? 136 J. LAWRENCE C OLLINS. Art. paras. International consumer contracts in the new Rome I Regulation: how much does the regulation change?. D ICEY. 2008 INTERNATIONALES H ANDELSRECHT [IHR] 133. 2004). Aurelio López-Tarruella Martínez. 2 D ROIT INTERNATIONAL PRIVÉ 337-38 (2007). 140-41.. in S TAUDINGERS K OMMENTAR ZUM BGB. supra note 79. Russia. M ARIE-LAURE N IBOYET & G ÉRAUD D E G EOUFFRE DE LA PRADELLE.86 Article 6 (1) of the Rome I-Regulation.. 29 EGBGB.E. D R./R. Dieter Martiny. Consumer Contracts and Insurance Contracts in E NFORCEMENT OF INTERNATIONAL C ONTRACTS IN THE E UROPEAN U NION IN A FUTURE R OME IR EGULATION 269. it curtails the effect of a party choice of law. 655-656. LEANDER D. Peter Mankowski. C ONSUM.. para. According to Article 5 (2) of the Rome Convention. 29 EGBGB. 2009 NIPR 437. 33-008 and 1640. It applies in the European Union. 832 (4th ed. para..E. J.. 13-17 (Heinz-Peter Mansel. Thomas Pfeiffer.Consumer Protection in Choice of Law form of the second model of consumer protection to be found Articles 5 and 7 of the Rome IRegulation. in 1 FESTSCHRIFT FÜR E RIK JAYME 3. para. in R OME I R EGULATION 129 (Franco Ferrari & Stefan Leible eds. 2009).87 86 87 See for a detailed account of Article 5 of the Rome Convention B ERNARD A UDIT. LOACKER. Consumer Contracts under Article 6 of the Rome I Regulation. Jürgen Basedow.. Franz Jürgen Säcker & Roland Rixecker eds. 2006). 2009). Contratti con i consumatori e regolamento Roma I. 3. Marta Pertegás & Gert Straetmans eds. at 227-54. in LA NUOVA DISCIPLINA COMUNITARIA DELLA 25 . M ORRIS AND C OLLINS ON THE C ONFLICT OF LAWS 1638./R. Le règlement (CE no 593/2008 du 17 juin 2008 sur la loi applicable aux obligations contracutelles (“Rome I”). cc) The Third Model: Curtailing Party Choice of Law The third model of consumer protection does neither exclude a party choice of law all together nor does it limit the parties’ choice to certain laws. International jurisdiction and conflict of law rules for consumer claims: a survey of European legislation. 1993 R ECHT DER INTERNATIONALEN W IRTSCHAFT [RIW] 453. in Japan. D ROIT INTERNATIONAL PRIVÉ 671. 2002). L. Art.D.. 2004). See for a detailed account of Article 6 of the Rome I-Regulation Jan De Meyer. Article 6 of the Rome I Regulation: Much ado about nothing. Peter Mankowski. Francesco Seatzu. Dieter Martiny. 13th ed. 823 (Christoph Reithmann & Dieter Martiny eds. 6th ed. C ONSUM. The Law Applicable to Consumer Contracts under the Rome I Regulation. D ER V ERBRAUCHERVERTRAG IM INTERNATIONALEN PRIVATRECHT 97 (2006). paras. Strukturfragen des Internationalen Verbrauchervertragsrecht. 62-63 (2009). 2006). Korea. 631. 2006). Die Rom IVerordnung – Änderungen im europäischen IPR für Schuldverträge. 4th ed. J. Christian Kohler & Rainer Hausmann eds. 96 (Christian Armbrüster et al. Le règlement "Rome I" sur la loi applicable aux obligations contractuelles. Turkey and the United States. Jürgen Basedow. D ROIT INTERNATIONAL PRIVÉ 25 (2007).. D OMINIQUE B UREAU & H ORATIA M UIR W ATT.C.D. in M ÜNCHENER K OMMENTAR ZUM BGB. Contratos internacionales celebrados por los consumidores: las aportaciones del nuevo artículo 6 Reglamento Roma I. 136 JOURNAL DU D ROIT INTERNATIONAL [J. in LE NOUVEAU RÈGLEMENT EUROPÉEN “R OME I“ RELATIF À LA LOI APPLICABLE AUX OBLIGATIONS CONTRACTUELLES 121. INT. Francesca Ragno. D R. Hughes Kenfack. De quelques changements . L. Herbert Kronke. P LENDER & W ILDERSPIN . 2009 E UR. 345. para.] 41. 30-33 (2009). 277-82 (Johan Meeusen. 2009 E UR. 140-41 (Eleanor Cashin Ritaine & Andrea Bonomi eds. 459. Internationales Verbrauchervertragsrecht. in INTERNATIONALES V ERTRAGSRECHT 682. 54 (Kurt Rebmann. Peter Mankowski. 33-014 (14th ed. Stéphanie Francq. eds.. 8 AEDIPR 511 (2008).
Note that the preferential law approach does not apply to all consumer contracts but only to those that meet certain requirements. Einführung in das neue Internationale Privatrecht der Republik Korea. in JAPANESE AND E UROPEAN PRIVATE INTERNATIONAL LAW IN C OMPARATIVE PERSPECTIVE 77. According to Article 6 (1) of the Rome I-Regulation. Party Autonomy and Its Restrictions by Mandatory Rules in Japanes Private International Law. in E INFÜHRUNG IN DAS KOREANISCHE R ECHT 115 (Korea Legislation Institute ed. and the contract falls within the scope of such activities. R EV. in JAPANESE AND E UROPEAN PRIVATE INTERNATIONAL LAW IN C OMPARATIVE PERSPECTIVE. 2007 IPR AX 552... 2 J. Consumer contracts in European private international law: the sphere of operation of the consumer contract rules in the Brussels I and Rome I Regulations. See for a detailed account of the new Korean law Knut B. 311. 1730-34. supra note 84. If. Unfortunately. INT'L L. a detailed discussion of the requirements that need to be met for the preferential law approach to apply is beyond the scope of this paper. See for a detailed account Yuko Nishitani. 554-55. Hironori Wanami. for example. 320-25 (2006). Internationales Privatrecht. or by any means. 906-08 (2007). supra. the contract is governed by a law mix consisting of the chosen law and the mandatory provisions of the law at the consumer’s habitual residence.89 Article 1212 (1) of the Russian Civil Code and Article 26 (1) of the Turkish Private International Law Act. thus. application of the consumer protection regime requires that the professional pursues his commercial or professional activities in the country where the consumer has his habitual residence. Harald Baum & Yuko Nishitani eds. Koji Takahashi.. at 61. Die Reform des internationalen Privatrechts in Japan. Pissler. However. 2009). See for a detailed account Paul Cachia. Aspects de la réforme du droit international privé au Japon. 2008). 152-54 (2006). 476 (2009). Yasuhiro Okuda. Yuko Nishitani. thus. In other countries. LEGGE APPLICABILE AI CONTRATTI 26 . INT'L L. Knut B. Background and Outline of the Modernization of Japanese Private International Law. The third model is also to be found in the United States insofar as consumer protection is provided with the help of the fundamental public policy doctrine enshrined in § 187 (2) of the Restatement (Second) and read into § 1-301 (1) of the Uniform Commercial Code. 70 R ABELSZ 279 (2006). provide for the minimum standard of consumer protection. directs such activities to that country or to several countries including that country. however.88 § 27 (1) of the new Korean Private International Law Act.Consumer Protection in Choice of Law Article 11 (1) of the new Japanese Private International Law Act. 94-100 (Jürgen Basedow. require an issue-by-issue comparison between the chosen law and the mandatory law of the consumer’s habitual residence.90 The provisions. at 1717-19. Reform of Japan's Private International Law: Act on the General Rules of the Application of Laws. similar provisions are in place. Yasuhiro Okuda. PRIV. 8 Y B. 899. Solomon. D R. the choice may not deprive the consumer of the protection afforded to him by the mandatory provisions of the law of his habitual residence (preferential law approach). The mandatory provisions of the consumer’s habitual residence. 134 J. 2010). A Major Reform of Japanese Private International Law. PRIV. 34 E UR. If the chosen law provides for more protection. INT. Under this 88 89 90 (R OMA I) 299 (Nerina Boschiero ed. 92-94. 145. Pissler. the parties may choose the applicable law even if one of the parties is a consumer. it governs the contract. 67-68. L. the chosen law provides for less protection.
27 . Korea. Party Autonomy and Its Restrictions by Mandatory Rules in Japanes Private International Law. who must find and determine the ap- 91 92 93 According to §§ 191. 196 of the Restatement (Second) the law at the consumer’s habitual residence is the law that applies in the absence of a choice of law. Okuda. in contrast. Japanese. remain in view of the way the protection is activated: according to Article 6 (1) Rome IRegulation and § 27 (1) of the Korean Act on Private International Law courts must determine. 181-82. the consumers must plead and proof the content of the mandatory provisions of their habitual residence. Differences.93 It is therefore. the choice of law is completely set aside with the result that the consumer’s law governs the transaction completely. Japan. Takahashi. Die Reform des internationalen Privatrechts in Japan. supra note 88.Consumer Protection in Choice of Law doctrine consumers are protected against a choice of law that violates a fundamental public policy of the law at the consumer’s habitual residence. 19 D UKE INT'L & C OMP. in contrast. supra note 88. Japan. at 168-71. 535. Consumer Protection Choice of Law: European Lessons for the United States. consumers in Europe. According to Article 11 (1) of the new Japanese Private International Law Act. at 321-22. L. Under the American fundamental public policy doctrine. Aspects de la réforme du droit international privé au Japon. Rühl.92 American courts engage in the same kind of comparison between the chosen law and the law of the consumer’s habitual residence as courts in Europe. Korean. at 907. Korea. Russia and Turkey. The only difference between the American version of the third model on the one hand and the European. at 153-54. 554-55. supra note 88. supra note 88. Russia. Nishitani. supra note 30. Reform of Japan's Private International Law. 536-546 (2009). Healy. 94-96. Rühl. Okuda. Russian and Turkish version on the other hand is that according to the latter a law mix applies if the chosen law provides for less protection than the law at the consumer’s habitual residence. J. compare and – as the case may be – apply the mandatory provisions of the consumer’s habitual residence ex officio. supra note 72. even though more skeptical account of the fundamental public policy doctrine and its application to class action waivers and credit card agreements James J. the consumer.91 And since American courts usually find a violation of a fundamental public policy if a choice of law clause provides for application of a foreign law that would deprive the consumer of the protection afforded to him by the law of his habitual residence. however. See also for a recent. Turkey and the United States are protected against a choice of law with the help of the preferential law approach. supra note 88. All in all. Nishitani.
that excludes party autonomy. The same holds true for the third model. do well in this context. the preferential law approach.95 The answer depends on the ability of the models to effectively avoid a market for lemons caused by asymmetric information and their ability to reduce the costs of regulation. the avoidance of a market for lemons. lies at the heart of consumer protection in choice of law. this article only deals with the economic aspects largely focusing on efficiency. The danger of a race to the bottom is effectively banned.Consumer Protection in Choice of Law plicable law.94 b) Economic Analysis The large number of different models designed to protect consumers in choice of law – including their different versions – raises the question which of these models deserves praise from an economic perspective. thus. SYMEON C. A model that does not manage to ban the risks flowing from information asymmetries does not fight the economic problem of consumer protection in choice of law and. does not allow the parties to choose the applicable law. The same holds true for the United States where parties generally have to plead and proof foreign law. However. The above described models. 28 . aa) Avoiding a Market for Lemons The first factor. SYMEONIDES. consumer protection may also be based on non-economic grounds. As a result of the need to compare the chosen law with the mandatory provisions of the law of the consumer’s habitual residence the second model guarantees that a choice of law can make consumers only better off 94 95 See H AY. cannot stand from an economic perspective. A MERICAN PRIVATE I NTERNATIONAL L AW 89-91 (2008). in its different versions: it makes sure that consumers will not lose the protection afforded to them by the law of their habitual residence. Of course. however. at least for the most part: the first model. consumers do not need to fear that professionals will choose the law with the lowest consumer protection standard. at 602-04. supra note 72. As a result. B ORCHERS & SYMONIDES.
supra note 87.Revolution im Internationalen Verbrauchervertragsrecht. How can the laws be identified that provide for a sufficient level of consumer protection? It does not seem feasible to explore all legal systems of the world and to draw up a list of those that provide for enough consumer protection. supra note 5.Consumer Protection in Choice of Law but never worse off. Mankowski. A race to the bottom that might eventually result in a market for lemons may not occur. however. however. under Article 5 (2) Rome I-Regulation the parties may submit a contract of carriage to the law at the carrier’s habitual residence or place of central administration. The criterion of relationship. at 141-42. To begin with. The same 96 97 Of course. poses problems when it comes to its implementation in practice. Art. O’Hara & Ribstein. thus. supra note 87. 29 . this holds only true under the assumption that the standards of conflict of laws are enforced in practice. may not effectively prevent a race to the bottom. 159-60 (2006). 106 Z EITSCHRIFT FÜR VERGLEICHENDE R ECHTSWISSENSCHAFT [ZV GLRW ISS] 120. This is probably why Articles 5 and 7 of the Rome I-Regulation as well as § 187 (2) of the Restatement (Second) of Conflict of Laws follow a different path to determine the eligible laws: they require a relationship between the chosen law on the one hand and the parties or the transaction on the other. the professional can rely on the consumer’s lack of knowledge and choose the law that benefits him the most. at 1187. 5 des Vorschlags für eine Rom I-Verordnung . The second model. See Peter Mankowski. The time and resources necessary to complete such a list and to keep it up to date would very likely exceed the associated benefits. at 140-41. Mankowski. Under the condition that the eligible laws provide for a minimum standard of consumer protection and under the condition that laws with no or little consumer protection may not be chosen.97 At least. For example. a market for lemons might also be prevented under the second model that limits parties’ choice to certain laws. If not. a relationship between the chosen law and the parties or the transaction does not have anything to do with consumer protection. the professional may be able to influence the relevant connecting factors and.96 Finally. Consumer Contracts under Article 6 of the Rome I Regulation. they may effectively provide for application of a law with little or no consumer protection. And since carriers may influence both their habitual residence and their place of central administration. a race to the bottom cannot occur. In addition. the eligible laws. it will not have the disastrous effects that may eventually result in a complete breakdown of the market. Die Rom I-Verordnung. The parties or the transaction may have a relation to a certain law and the law can still lack a sufficient degree of consumer protection.
the second model can only convincingly fight a market for lemons if the parties’ choice were limited to laws of states that are members of a federation or union with a common constitution or quasi-constitutional framework that guarantees a minimum standard of consumer protection. The following discussion. which are governed by a common constitution. 30 . states. it must provide for legal certainty and meet parties’ preferences as far as possible. therefore. effectively choose a law with a low consumer protection standard. bb) Reducing the Costs of Regulation The first factor. neither the first nor third model of consumer protection described above manage to succeed in both dimensions. i. will focus on the first and third model of consumer protection. the parties might be permitted to choose only the laws of U. It is merely the first economic test that a model has to pass.98 And in Europe. In addition to effectively banning the risks of information asymmetry. the second model could be implemented.e. In the United States.S. but not on a global level. As a result. does not suffice to make a final judgment about the economic efficiency of different models of consumer protection. Here. parties’ choice could be limited to the laws of member states of the European Union. states. and common cultural norms. As I will show.“. the ability to effectively avoid a market for lemons. this version of the second model would solve the problem of consumer transactions only on a regional. by limiting parties’ choice to the laws of the U. However. no matter whether the relationship criterion is implemented by precisely enumerating the laws the parties may choose or by using general terms it does not effectively prevent a race to the bottom. thus. for example. supra note 6. For example.S. the second model does not amount to an economically viable solution to the problem of information asymmetry present in international consumer transactions. an efficient model of consumer protection must keep the costs of regulation as low as possible.Consumer Protection in Choice of Law holds true for the American substantial relationship doctrine embodied in § 182 (2) of the Restatement (Second). 98 See O’Hara & Ribstein. at 1187: „But lawmakers concerned about rogue jurisdictions should restrict the available choices rather than ban all choice. a common legal system. As a result. Against this background. professionals may easily create contacts to the chosen law and.
The third model. Instead. It goes without saying that this way of dealing with international consumer contracts is a lot more complicated than excluding party autonomy all together.] 245. In the European. cannot claim to do well in view of legal certainty: it requires parties and courts to compare the chosen law and the mandatory provisions of the law at the consumer’s habitual residence and to apply either the chosen law or the law of the consumer’s habitual residence. It makes it very hard for the parties. at 656. 3 J. PRIV. 113. 127-28 (2007).Consumer Protection in Choice of Law (1) Legal Certainty The first model that excludes party autonomy all together excels in view of legal certainty:99 it provides for a clear-cut rule because parties know that they are not allowed to choose the applicable law. In contrast to the third model. 31 . 1995 JAHRBUCH JUNGER Z IVILRECHTSWISSENSCHAFTLER [JB. This is because the exclusion of party autonomy reduces parties’ choices and brings about 99 JONATHAN H ILL. By the same token it incurs substantially higher transaction and litigation costs. It also makes it very hard for courts to determine the applicable law. provides for legal certainty and reduces both transaction and litigation costs. Korean. As a result. 259. in contrast. thus. at 151-52. Russian and Turkish version it may also require courts to combine both laws depending on the issue at stake leading to application of an artificial law mix. Peter Mankowski. INT'L L. ZW ISS. Rechtswahlfreiheit und kollisionsrechtlicher Verbraucherschutz. Sophia Zheng Tang. 2006 IPR AX 101. parties and courts may focus on the rules that determine the applicable law in the absence of a choice of law. supra note 87. See also in view of the proposal for a Rome I Regulation De Meyer. The first model. to predict which law will eventually apply to their contract. (2) Party Preferences In view of party preferences the first model does not come off as well as in view of legal certainty. Parties' Choice of Law in E-Consumer Contracts. 106. The same holds true for the actual application of the law. the third model provides for significantly less legal certainty than the first model. Der Vorschlag für die Rom I-Verordnung. Japanese. parties and courts do not have to engage in a complex comparison of the chosen law and the mandatory provisions of the law of the consumer’s habitual residence. especially for consumers. J. Stefan Leible. supra note 96. Mankowski. C ROSS-B ORDER C ONSUMER C ONTRACTS 329 (2008).
To begin with. 339-46 (F. Since the professionals must adjust their contracts to a foreign law. R EV. at 413-414. See Bruce H. 228 (1976). Contract and Jurisdictional Freedom.103 The result may be negative cross-border external effects that increase prices and limit the range of available products and services to the disadvantage of local consumers.100 In view of professionals this finding does not come as a surprise. supra note 14. while regulation protects consumers from unknowingly purchasing a product which they 100 101 102 103 See generally Shapiro. at 413.. in T HE FALL AND R ISE OF FREEDOM OF C ONTRACT 325. H. Borchers. Bebchuk. However. STUD. Koichi Hamada. consumers may not agree to a choice of the professionals’ law in order to reduce the costs of the transaction and. See Ramsay. 1 J. 82 T UL. Kobayashi & Larry E. R EV. 32 . supra note 14. thus. 66 A M. E CON. see generally Lucian A. Ramsay. As Carl Shapiro puts it: „… product regulation amounts to trading off two effects: regulation decreases the variety of products … harming those who wish to buy the banned varieties. the exclusion of party autonomy also incurs costs for consumers. 8 H OFSTRA L.101 In the worst case scenario. Wealth Distribution and the Ownership of Rights. (2008) 1645. The very idea of consumer protection in choice of law is to reduce professionals’ choices in order to avoid a market for lemons. L. Ribstein. LEG.102 Costs for consumers may also occur because exclusion of party autonomy excludes competition of legal systems and the potential benefits associated with it. 1658-59. For example. supra note 14. Liability Rules and Income Distribution in Product Liability. Buckley ed. at 8-13. The Pursuit of a Bigger Pie: Can Everyone Expect a Bigger Slice?. States become monopolists in view of consumer law and might have an incentive. whether and to what extent the above described costs occur depends on consumers’ preferences. Categorical Exceptions to Party Autonomy in Private International Law. 671 (1980). Harold Demsetz. to protect local consumers at the expense of international professionals.Consumer Protection in Choice of Law costs for both professionals and consumers. 223 (1972). R EV. 1999). at 538-39. supra note 12. see also Patrick J. See Gómez Pomar. consumers are effectively deprived of the potential benefits of a choice of law. the contract price. chances are high that consumers will have to pay a higher price for goods and services. consumers are effectively banned from buying a product or from accepting a service because professionals refuse to sell their products or to offer their services on certain national markets. However.
Of course.Consumer Protection in Choice of Law would not choose were they informed. It also increases the price for the service offered by trained surgeons. the first model of consumer protection indeed seems to impair the parties’ preferences. it establishes minimum quality standards108 comparable to so called partly mandatory provisions of substantive laws that may only be modified to the benefit of the consumer. at 1186-87. for example. at 538-39. supra note 14. is that consumer preferences are very hard to determine.109 In contrast to the first model. The heterogeneity of consumers’ tastes (and incomes) must be balanced against their lack of information. supra note 14. in light of the risks flowing from information asymmetries it can be assumed that many consumers do not mind if they do not have a choice. As a result. in SYSTEMBILDUNG UND SYSTEMLÜCKEN IN K ERNGEBIETEN DES E UROPÄISCHEN 33 . Unsystematische Überregulierung und kontraintentionale Effekte im Europäischen Verbraucherschutzrecht. chances are high that at least some consumers would prefer to have a choice.106 It certainly reduces consumers’ choice to allow only trained surgeons to practice. Example taken from Shapiro. See also O’Hara & Ribstein. at 539 . However.“104 The first model. in contrast. the third model reduces 104 105 106 107 108 109 Shapiro. POL. at 257-58. supra note 5. Leland. As a result. It does not exclude party autonomy all together but allows a choice of law in so far as it makes consumers better off. and Licensing: A Theory of Minimum Quality Standards. the service of a surgeon without professional training. The situation would then be comparable to products and services that nobody wants. The same would hold for the exclusion of party autonomy if consumers were in fact not interested in a choice of law. E CON. since nobody wants to undergo surgery unless the surgeon is competent. at 538-39 . Shapiro.107 The third model of consumer protection. Quack. supra note 29. does a better job in view of the parties’ preferences. However. 1328 (1979). 87 J. See also Michael Martinek. In other words: banning products and services which nobody wants may only improve welfare. The problem. Lemons. thus.105 Take. In contrast to the service of untrained surgeons it is hard to tell whether consumers – or at least a sufficiently large number of consumers – are happy if they have no choice as to the applicable law. does not impair consumers’ preferences if consumers are in fact not interested in choosing the applicable law. allowing only trained surgeons to practice does not incur any costs. See for a detailed account Hayne E. however. supra note 14. Ribstein.
usually allows modifications and deviations in so far as its provisions are not mandatory. This is mainly because the perceived advantages of the first model are not as significant as it appears at first blush. therefore. are replaced by other rules. is which of the two models is the better economic compromise? I submit that it is the preferential law approach and. supra note 10. INTERNATIONALES V ERSICHERUNGSVERTRAGSRECHT 505-06 (1985). the law of the consumer’s habitual residence. its application may turn out to be as complicated as application of the preferential law approach. a).110 This law. See infra C. In fact. it reduces only the freedom of choice of those consumers who would be willing to accept a lower standard of consumer protection against a lower price while not touching upon the freedom of choice of consumers who are willing to pay more for more consumer protection. application of the first model may just as well as the third model lead to application of a law mix consisting of the mandatory provisions of the law of the consumer’s habitual residence and other provisions the parties wish to apply. On the other hand. 2. i. at 511. submits consumer contracts to the law applicable in the absence of a choice of law. The limitation of its effects incurs costs because it is complex and difficult to apply. thus.e. In fact. thus. for example the rules of a foreign law. the second model. 530-32. (3) Economic Efficiency For the overall efficiency of the first and the third model of consumer protection the above consideration hold some important implications. the first model does not provide for as much legal certainty as one might think. neither the exclusion of party autonomy nor the limitation of its effects is a perfect solution to the problem of information asymmetries in international consumer contracts. however. To begin with.e. may agree that the non-mandatory provisions of the law of the consumer’s habitual residence. W ULF-H ENNING R OTH. As a result. i. the default rules. This is because the first model excludes party autonomy and. It follows that the third model impairs parties’ preferences significantly less than the first model.Consumer Protection in Choice of Law consumers’ choice only in so far as a choice would make them worse off. this also 110 PRIVATRECHTS. The decisive question. thus. The parties. The exclusion of party autonomy incurs significant costs because it ignores some consumers’ preferences. More specifically. 34 .
Applicable Law in the Absence of a Party Choice of Law a) Comparative Overview With regard to the law that applies in the absence of a choice of law there is more agreement around the world. supra note 86. Martiny. However. supra note 86. supra note 86. This follows. at 338-39.e.111 It follows that the first and the second model incur about the same transaction and litigations cost in practice whereas the third model involves lower regulatory costs because it curtails parties’ choice to a lesser extent. para. Ulrich Magnus. at 670-71.Consumer Protection in Choice of Law means that the first model does not limit party autonomy as much as it appears at first sight. Martiny. at 685-86. Consumer Contracts and Insurance Contracts. to the extent necessary. from Article 5 (2) of the Rome Convention. the above considerations show that it is impossible to grant free party choice of law. at 282. supra note 109. 832. 33-024. Basedow. C OLLINS. at paras. at 168-76. paras.114 Article 6 (1) of the Rome I-Regulation in view of 111 112 113 114 The only exception to this rule are the above mentioned partly mandatory rules. However. Against this background. supra note 19. LOACKER. supra note 86. at 100-03. 62. at 497. for example. 35 . B UREAU & M UIR W ATT. Basedow. supra note 86. supra note 86. See also Eidenmüller. the third model can be classified as an economically viable compromise that is to be preferred over the first model.113 2. N IBOYET & D E G EOUFFRE DE LA PRADELLE. supra note 86. supra note 86. They grant a minimum standard of protection and allow contractual deviations for the benefit of the consumer. application of the preferential law approach is complicated and causes costs in practice. para. at paras. 112-15. supra note 86. protect consumers and avoid complex rules at the same time.112 Of course. If and to the extent that the law at the consumer’s habitual residence provides for such substantive rules the first and the third model incur the same economic costs and benefits. See also R OTH. 828. supra note 1. at 17. at 1645. supra note 86. at 651. Internationales Verbrauchervertragsrecht. in contrast to the third model it does not allow parties to deviate from the mandatory provisions of the law of the consumer’s habitual residence if this makes the consumer better off. K ROEGER. In most national legal systems and international regulations consumer contracts are governed by the law of the consumer’s habitual residence. i. at 25. See for a detailed account A UDIT.
at 654-655. supra note 89. at 116-18. supra note 80.118 Article 26 (2) of the Turkish Private International Law Act and § 109 (b) sentence 2 of the Uniform Computer Information Transaction Act.119 In view of insurance contracts Article 7 (2) sentence 3 of the Rome I-Regulation provides that the law of the country applies where the risk is situated. at 449. at 288-90. supra note 80. Takahashi. In view of contracts of carriage Article 5 (2) of the Rome I-Regulation calls for application of the law of the consumer’s habitual residence provided that either the place of departure or the place of destination is in this country. supra note 87. See for a detailed account Contaldi. Looschelders & Smarowos. Wagner. supra note 80. Nielsen. at 908. at 220. supra note 80. PLENDER & W ILDERSPIN. at 448. supra note 80. See for a detailed accout Pissler.116 § 27 (2) of the Korean Private International Law Act. Okuda. supra note 80. at 322. Reform of Japan's Private International Law supra note 88. See for a detailed account Fricke. supra note 84. at 218-219. supra note 87. supra note 80. Consumer Contracts under Article 6 of the Rome I Regulation. at 142-43. supra note 87. at 223. at 307-313. Wagner. at 7. Party Autonomy and Its Restrictions by Mandatory Rules in Japanese Private International Law.120 However. Solomon. Francq.117 Article 1212 (2) of the Russian Civil Code. supra note 80. supra note 88. López-Tarruella Martinez. Nishitani. at 348. PLENDER & W ILDERSPIN. See Article 7 (6) of the Rome I-Regulation which refers to Article 2 (d) of the Second Council Directive 88/357/EEC of 22 June 1988. supra note 87. at 62-63. Gruber. Mankowski. Kenfack. at 30-33. supra note 80. at 2-4. Mankowski. supra note 88. at 555. supra note 80. Seatzu. at 447. supra note 80. supra note 80. supra note 88. Merret. supra note 80.121 The law of the consumer’s habitual residence is also the applicable law under the Restatement (Second) of Conflict of Laws even though there is no express provision providing for this 115 116 117 118 119 120 121 See for a detailed account Meyer. supra note 80. International consumer contracts in the new Rome I Regulation. Heiss. Gruber. supra note 79. at 439.115 Article 11 (2) of the Japanese Private International Law Act. E INFÜHRUNG IN DAS INTERNATIONALE PRIVATRECHT 255 (1998). at 154. supra note 79. at 276-77. note 31. supra note 80. Die Reform des internationalen Privatrechts in Japan. at 362. Pissler. at 288-89. at 450. supra note 80. See for a detailed account IVO SCHWANDNER. PLENDER & W ILDERSPIN. at 376-78. at 276-77. Article 120 (1) of the Swiss Private International Law Act. supra note 79. Rom I und Rom II aus der Sicht des Transportsrechts. LUCIUS H UBER & D AVID O SER. at 61. supra note 87. supra note 79. supra note 87. at 288. supra note 79. at 439. note 64. supra note 80. Piroddi. Internationales Privatrecht. at 308-09. in the case of mass risk insurance contracts this is usually the place of the consumer’s habitual residence. Looschelders & Smarowos. at 107-08. INTERNATIONALES V ERTRAGSRECHT (2d ed.Consumer Protection in Choice of Law consumer contracts in general. Miquel Sala. supra note 79. supra note 88. at 116-18. Neue kollisionsrechtliche Vorschriften für Beförderungsverträge in der Rom I-VO. at 134. 1730-34. See for a detailed account Nishitani. Miquel Sala. supra note 89. Heinze. 2000). at 97. Piroddi. Merret. Heinze. at 284-86. supra note 79. Die EG-Verordnungen Brüssel I. Perner. Einführung in das neue Internationale Privatrecht der Republik Korea. See for a detailed account Fricke. at 216-17. supra note 80. supra note 79. at 278. Aspects de la réforme du droit international privé au Japon. at 60-61. FRANK V ISCHER. Okuda. Perner. at 321-23. at 1717-19. Heiss. 36 . Tonolo. supra note 79.
supra note 30. at 613.124 With regard to professionals. no need for an express provision dealing with consumer contracts. the consumer’s habitual residence reduces the costs associated with the determination of the applicable law. for example. the reduction in determination costs may be attributed to the fact that the consumer’s habitual residence is easier to identify than other connecting factors. according to §§ 189 to 197 of the Restatement (Second) contracts are generally subject to the law of the party who receives the goods and services. e. supra note 20. in contrast. in contrast to other connecting factors.Consumer Protection in Choice of Law result. the nationality 122 123 124 See Rühl. See Solomon. the professional’s habitual residence would determine the applicable law. The risk of a market for lemons. moving the seat of the company or through founding a subsidiary or regional office. at 181-82. professionals could determine the law – similar to a choice of law – through.123 Since this is usually the consumer. it may come as a surprise that there is the risk of a market for lemons to begin with if there is no choice of law. most of the connecting factors which determine the applicable law can easily be manipulated. supra note 72. b) Economic Analysis The worldwide accepted application of the law at the consumer’s habitual residence is also to be welcomed from an economic perspective: first. However. can only be effectively prevented if the applicable law is determined through a connecting factor such as the consumer’s habitual residence that cannot be influenced by the professional. it effectively prevents a market for lemons caused by asymmetric information. Rühl. thus. With regard to consumers this finding flows from the fact that they know the law of their habitual residence the best. there is. If.g. Of course. supra note 30. 37 . the Restatement (Second) usually calls for application of the law of the consumer’s habitual residence.122 However. at 1717. thus. Rühl. supra note 84. In contrast to most other legal systems. Second. which also cannot be influenced by the professional. Furthermore it can be assumed that consumers have the best access to information about the law of their habitual residence. As a result. at 167-71. the professional may influence the applicable law even without a choice of law clause. see also Roth.
courts usually do not need to engage in the cost-intensive inquiry of foreign law. 38 . As a result. in turn.127 In addition. In most cases these contracts are governed by general contract terms provided by the professional. supra note 86. are the cheapest cost avoider. at 607-11. application of the law of the consumer’s habitual residence avoids a split of jurisdiction and applicable law. Consumer Contracts under Article 6 of the Rome I Regulation. This is because the pertaining rules and regulation on jurisdiction in consumer contracts – in the European Union Article 15 of the Brussels I-Regulation126 – usually assign disputes relating to consumer contracts to the court of the consumer’s habitual residence. services contracts and other types of contracts on a day-to-day basis. consumers enter into international and interstate sales contracts. Thanks to globalization and increased regional integration. repeatedly enter into the same kind of transaction on the same foreign market they are able to spread the costs associated with the determination of the consumer’s habitual residence over multiple contracts. very often without being aware of it. supra note 20. at 142. 125 126 127 See also Mankowski. Professionals. 125 Third. avoiding a split of jurisdiction and applicable law increases the chance that consumers will actually enforce their rights. Roth. (L 12) 1. at 278. Council Regulation 8EC) No. the overall costs associated with the consumer’s habitual residence are still lower than the costs associated with any other factor: since professionals are repeated players and. thanks to email and the internet. However. Of course. Consumer Contracts and Insurance Contracts. thus.J. 2001 O. the consumer’s habitual residence raises the professionals’ costs compared to a connecting factor located in the professionals’ sphere. Internationales Verbrauchervertragsrecht.Consumer Protection in Choice of Law of the consumer. D. which the professional also could not manipulate. Basedow. reduces the chance that professionals will outsmart the consumer. CONCLUSION Cross-border consumer transactions are among the most frequent transactions conducted around the world. This. at 14. supra note 86. therefore. supra note 87. Since consumer cases usually involve small claims this reduces litigation costs. but may apply their own law. See also Basedow. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
this may lead to a race to the bottom and a market for lemons. enter into a large number of similar contracts on the same market. Korean. Russia. In the absence of a party choice of law. in contrast. in Japan. Korea. thus. Turkey and the United States promises the greatest benefits in terms of efficiency. provides for a minimum standard of consumer protection which effectively prevents a market for lemons. both mechanisms are unlikely to avoid the problems flowing from information asymmetries in consumer contracts because they rely on consumers ability and willingness to gather information about the applicable law. several mechanisms can be applied: to begin with. From an economic perspective these clauses pose serious problems. However. Since consumers are not able to distinguish between professionals who choose consumerfriendly laws and those who don’t. it is because consumers know less about the applicable law and have no incentive to invest into the gathering of the relevant information. However. It does not exclude a free party choice of law but merely limits the parties’ freedom to choose the applicable law with the help of the preferential law approach. According to this approach a choice of law may not deprive consumers of the mandatory provisions of the law of their habitual residence. The preferential law approach. Rather. the European model – and likewise the American. Japanese. Professionals. Therefore. the law can rely on the self-healing powers of markets. they have an incentive to gather information about the applicable law in order to choose the law that provides the most benefits for them and the least benefits for consumers. this is not because consumers are strategically “inferior” or “weaker” than professionals. From the various models that are applied around the world the general European model that is also to be found. A duty to inform imposed on professionals is unlikely to yield more success.Consumer Protection in Choice of Law And in many cases these terms provide for a choice of law clause. To avoid such a development. most importantly screening and signaling mechanisms. Since it limits free party choice of law only to the extent necessary it is to be preferred over both the complete exclusion of choice of law to be found in Switzerland and the limitation of the parties’ choice to certain laws to be found in the European Union in view of insurance contracts and contracts of carriage. As a result. albeit with differences in detail. the only way to prevent a race to the bottom and a market for lemons is to directly regulate consumer transactions by modifying the general provisions determining the applicable law. Russian and Turkish model – calls for application of the law of the consum- 39 .
the Japanese. the respective rules and regulations enhance efficiency – even though they were not drafted with economic theory in mind. consumers are. thus. Since the habitual residence is outside the professional’s influence this approach effectively prevents a market for lemons and reduces the cost of determining the applicable law.Consumer Protection in Choice of Law ers’ habitual residence. As a result. the Russian and Turkish model. well protected against the risks flowing from information asymmetries. 40 . the Korean. the American. Under the European.
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