GIESELA RÜHL

Professor of Law Faculty of Law, Friedrich Schiller University Jena Carl-Zeiss-Straße 3, 07743 Jena, Germany
Phone: +49 (0) 3641 - 942160, Fax: +49 (0) 3641 - 942162 Email: giesela.ruehl@uni-jena.de

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

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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-

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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.“
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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

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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.

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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
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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).

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2008). U LEN. PA. Contract Law. supra note 11. Rather it is because consumers know less about products and contracts than professionals. Consumer Protection Policy in the United States. & E CON.. 24 J. 141-45. 126-27 (Martin Ebers. at 410. L.14 Additionally. David Cayne & Michael Trebilcock. 23 U. 405-07 (1973). Richard Craswell & Steven Salop. T HE L IMITS OF F REEDOM OF C ONTRACT 58 (1993). R EV. M ICHAEL J. 1387 (1983). Consumer protection. B US. 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. Avery W. 723. T ORONTO L. it is sometimes argued that consumers need protection because they do not always act rationally. European Contract Law and Economic Welfare: A View from Law and Economics 17-18 (Universitat Pompeu Fabra. supra note 12. T HOMAS W EIN & H ANS-JÜRGEN E WERS. not because they are considered to be “weaker” and at risk of exploitation by large companies. at 35-46. Katz & Richard Craswell. 45 A M. J. Schäfer. supra note 8. supra note 12. Unternehmensrecht.15 1. The Efficient Regulation of Consumer Information. 410. André Janssen & Olaf Meyer eds. supra note 11. 69 V A. 630 (1979). Verbraucherrecht. 491. Benjamin Hermalin. at 560. Privatrecht . 396. R EV. LAW AND E CONOMICS 46-47 (5th ed. The Political Economy of Private Legislatures. 2007). E CONOMIC PRINCIPLES OF LAW 40-41 (2007). Wilde.warum sind sich UN-Kaufrecht und EUKaufrechts-Richtlinie so ähnlich?. 5 . Haupt. at 5-6. Howse & Trebilcock. Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests. 411. Asymmetric Information in Consumer Contract: The Challenge That Is Yet to be Met. 501-13 (1981). Carl Shapiro. J. C ENTO G.13 In so far as consumers are today deemed in need of protection from an economic perspective it is.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. 728. Howard Beales. Schwartz. in E UROPEAN PERSPECTIVES ON PRODUCER'S LIABILITY 125. L. 2007). supra note 5. InDret: Revista para el Análisis del Derecho. Market Considerations in the Formulation of Consumer Protection Policy. Hadfield. 139 Z EITSCHRIFT FÜR DIE GESAMTE STAATSWISSENSCHAFT [ZSTW ISS] 527. R OBERT D. at 1138. V ELJANOVSKI. 127 U. Shmuel Becher. 1. Ian Ramsay. See for a detailed account Gómez Pomar. L. Consumer Sales Law from an Economics Perspective. 52729 (1983). Alan Schwartz & Louise L. T REBILCOCK . 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. supra note 12. 2009). 34-39 (A. Wilde. at 140. therefore. C OOTER & T HOMAS S. M ARKTVERSAGEN UND W IRTSCHAFTSPOLITIK 279324 (2005). in 1 H ANDBOOK OF LAW AND E CONOMICS 3. 202 A RCHIV FÜR DIE CIVILISTISCHE PRAXIS [A CP] 40 (2002).Consumer Protection in Choice of Law have vis-à-vis consumers is limited through competition from other companies. M ICHAEL FRITSCH.. Roger van den Bergh & Louis Visscher. 733-35 (2008). Working Paper No. L. Fernando Gómez Pomar. in 1 T HE N EW PALGRAVE D ICTIONARY OF E CONOMICS AND THE L AW . Alan Schwartz & Louise L. Stefan Grundmann. Mitchell Polinsky & Steven Shavell eds.

Lowering the prices. professionals offering low-quality products may ask for the same – high – price as professionals offering high-quality products. however.17 Experience goods are characterized by the fact that consumers can only determine their quality after completion of the contract. POL. supra note 18. Consumers. at 126-27. supra note 16. PERLOFF.Consumer Protection in Choice of Law concluded. This.at 443-46.e. 311. information asymmetries of the kind just 17 18 van den Bergh & Visscher. 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. experience goods and credence goods Michael R. if the product in question is not a search or inspection good. In both cases a race to the bottom occurs that leads to a “market for lemons”. Darby & E. 67. 312-18 (1970). I NFORMATIONSASYMMETRIE IM V ERTRAGSRECHT 118-20 (2001). at 126. in turn. 475-76 (2006). 6 . If professionals offering high-quality products refrain from lowering the quality of the products they will be forced out of the market. will require lowering the quality of the products in order to operate cost-efficiently. 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. Karni. Examples include visits to doctors. N EUE I NSTITUTIONENÖKONOMIK 35261 (2003). supra note 17. George A. The Market for "Lemons": Quality Uncertainty and the Market Mechanism. Credence goods are distinct in that consumers cannot even asses their quality after completion of the transaction. 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. J. 78 J. 117. i. C ARLTON & JEFFREY M. however. E CON. Since this price will necessarily be lower than the price of a high-quality product. i. 84 Q UART. a market on which only low-quality products are traded. supra note 16. F URUBOTN . Akerlof. see also D ENNIS W. As a result. Against this background. cereals or restaurant visits. 68-72 (1973) and Phillip Nelson. at 40-41. R UDOLF R ICHTER & E IRIK G.e. what is the situation when it comes to consumer transactions in choice of law? Two points can readily be made: first. van den Bergh & Visscher. supra note 16. Information and Consumer Behavior. professionals offering high-quality products will be forced to lower their prices. L. V ELJANOVSKI. See for a detailed account C ARLTON & PERLOFF. at 121-23 (2001). E CON. Free Competition and the Optimal Amount of Fraud. 16 J. but an experience or credence good. Examples include diverse products such as body lotions. See for a detailed account search goods. H OLGER F LEISCHER . M ODERN INDUSTRIAL O RGANIZATION 443-46. 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. FLEISCHER. 488 (1970). & Econ.

K REDITRECHT . 7 . 64 JURISTENZEITUNG [JZ] 641. O’Hara & Ribstein. See George Akerlof. supra note 5. in K ONSEQUENZEN WIRTSCHAFTSRECHTLICHER N ORMEN . if information asymmetries are present.e. run the risk that a law will apply 19 20 21 22 Horst Eidenmüller. a consumer cannot always evaluate the law’s performance. have difficulties to ask for a higher price. C LAUS O TT & H ANS-B ERND SCHÄFER. G EBURTSTAG 279. Consumers. supra note 5. 2004). Parisi & Ribstein. at 1186-87. therefore. supra note 5. 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. at 648. the choice of the law with the lowest level of protection. Therefore. consumers learn about the quality of law only after conclusion of the contract. worse. 282-302 (Hans-Bernd Schäfer & Hans-Jürgen Lwowski eds. O Hara & Ribstein.21 Usually. In the long run it may. namely when problems occur. at 240. Grundfragen im künftigen internationalen Verbrauchervertragsrecht der Gemeinschaft.V ERBRAUCHERSCHUTZ . supra note 19. See also in view of choice of forum clauses in consumer contracts Lee Goldman. the quality of the law remains totally unknown. Eidenmüller. K OOPERATION 591. 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. 650 (2009). the willingness to invest depends on the expected benefits.20 This is because. they may incur the same economic problems in choice of law as in other areas of law.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. Vereinheitlichung des Europäischen Vertragsrechts. supra note 5. in PRIVATRECHT IN E UROPA – V IELFALT. happen that only professionals survive who call for application of a law that discriminates against consumers. K OLLISION. U. See for a detailed account in regard to general contract terms Hans Bernd Schäfer. in V EREINHEITLICHUNG UND D IVERSITÄT DES Z IVILRECHTS IN TRANSNATIONALEN W IRTSCHAFTSRÄUMEN 203. 2002). Just like a patient cannot always evaluate a doctor’s performance. Sometimes. 86 N W. professionals opting for a balanced law or for a law that is favourable to consumers. supra note 18.. 740-41 (1992). thus. L. 488. Theorie der AGB-Kontrolle. O’Hara & Ribstein. R EV. Recht als Produkt. Second. supra note 5. My Way and the Highway: The Law and Economics of Choice of Forum Clauses in Consumer Contracts. namely when no problems occur. Parisi & Ribstein. i.A LLGEMEINES W IRTSCHAFTSRECHT . at 650. eds. 607-11 (Michael Coester et al. 215-16 (2002). FESTSCHRIFT FÜR C LAUS O TT ZUM 65. do not have an incentive to invest into the gathering of such information.22 Consumers.19 Professionals know the law that they wish to apply better than consumers. at 649.. See also Wulf-Henning Roth. at 240. 700 711-40. which are typically low compared to the costs involved: expected benefits are low because consumer contracts are usually „small contracts“. In the worst case. this downward development leads to a race to the bottom. in contrast do not know the law that the professionals wish to apply and.

at 239-40. second. aa) Screening Mechanisms Mechanisms belonging to the first category. They both avoid a market for lemons by providing the consumer with information. had ample incentives to report about problems with choice of law clauses or the otherwise applicable law. rely on the consumers’ ability and willingness to gather the relevant information. 2001). screening. From Efficiency to Politics in Contractual Choice of Law. 87-91 (Stefan Grundmann. 508-09 (1987) (arguing for free choice of law in product liability cases). However. Larry E. L. notably Francesco Parisi. magazines and the internet. 363. some scholars. argued that screening mechanisms can prevent a market for lemons. Wolfgang Kerber & Stephen Weatherill eds. 8 . a) The Self-Healing Powers of Markets A market for lemons can be prevented by various mechanisms. Perlman. at 124. Ribstein have. screening and. in PARTY A UTONOMY AND THE R OLE OF I NFORMATION IN THE I NTERNAL M ARKET 80. in fact.24 Consumers had cheap access to many sources of consumeroriented information about firms including third-party rating services. Thomas Wein. 409-11 (2003). 37 G A. 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. they are different in the way the missing information is generated. 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. Two forms of market mechanisms can be distinguished: first.23 In view of the applicable law. Products Liability Reform in Congress: An Issue of Federalism. supra note 17. signaling. R EV. Erin O’Hara and Larry E. The mechanisms that are favored by economic theory rely on the self-healing powers of markets. Ribstein. J. in turn. See also Harvey S.. 48 O HIO ST. 503. Information Problems and Market Failure. L. Parisi & Ribstein. One may add that consumers can also do they own re- 23 24 FLEISCHER. supra note 5.Consumer Protection in Choice of Law that is particularly beneficial to professionals and that provides for the lowest consumer protection standard.

but needs to understand the impact of a choice of law clause or the otherwise applicable law before entering a contract. lawyers don’t give advice for free. 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”). be prohibitively high. thus.26 As a result. 2002 BYU L. Krauss. 759. 297. Europäisches Verbrauchervertragsrecht im Spiegel der ökonomischen Theorie. Information Intermediaries and Party Autonomy . Product Liability and Game Theory: One more Trip to the Choice-of-Law Well. See FLEISCHER. 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. Markus Rehberg. 917. 38 A RIZ.Consumer Protection in Choice of Law search in law libraries or consult a lawyer. However. in PARTY A UTONOMY AND THE R OLE OF I NFORMATION IN THE I NTERNAL M ARKET . the costs necessary to do so are simply enormous. And since consumer contracts are usually for small sums. 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. Stefan Grundmann. signaling. at 283.28 In 25 26 27 28 See for a detailed account on information intermediaries Stefan Grundmann & Wolfgang Kerber. expected costs usually exceed expected benefits. such as lawyers. As any lawyer knows who has ever tried to get to know a foreign legal system. Schwartz. However. screening mechanisms might work in some cases. For a layperson such as a consumer the costs would.27 bb) Signaling Mechanisms More promising appear mechanisms falling into the second category. Of course.The Example of Securities and Insurance Market. screening mechanisms do not seem well suited to mitigate the problem of information asymmetries in view of the applicable law across the board. 811 and Gary T. L. consumers might be able and willing to gather information about the applicable law. R EV. supra note 22. R EV. If. supra note 23. See also Michael I. in V EREINHEITLICHUNG UND D IVERSITÄT DES Z IVILRECHTS IN TRANSNATIONALEN W IRTSCHAFTSRÄUMEN . at 264-310. 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. a case touches upon legal systems that share a common language and a common legal origin. supra note 17. at 123-26. Der staatliche Umgang mit Informa- 9 . from a global perspective these cases can be deemed to be the exception rather than the rule.25 However. for example. 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. Considering the Proper Federal Role in American Tort Law.

thus. 2007). thus. the consumer’s satisfaction – and. the professional’s reputation – usually does not depend on the applicable law. Firms. Giesela Rühl & Jan von Hein eds. L.. since they have to expect more claims on the warranty than sellers of high-quality products. 2155. O'Hara & Larry E. supra note 24. supra note 23. 311-17 (Eger & Schäfer eds. 245. In view of the applicable law it can. 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. at 240. L. 447-48. the applicable law influences the professional’s reputation. R EV.29 However. Larry E. in Ö KONOMISCHE A NALYSE DER EUROPÄISCHEN Z IVILRECHTSENTWICKLUNG 284. and Europe. at 508-09 regarding product liability. 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. 29 30 10 . The applicable law. therefore. 85-91. only at the margin. Choosing Law by Contract. 2147. 2007). at 165. supra note 17. Offering contractual warranties. 257-59 (1993). See also Perlman. 18 J. Ribstein. The risks that are distributed with the help of choice of law clauses materialize only in few cases. signals the consumer the – otherwise – not observable quality of a product. As a result. C ORP. Oliver E. supra note 24. The potential customers are too dispersed to interact and to exchange information about the firm’s performance. 82 T UL. 2156 (2008).Consumer Protection in Choice of Law contract law signals in this sense are contractual warranties: since contractual warranties incur costs. indeed. 151 JITE 49. 172. Wein. in C ONFLICT OF LAWS IN A G LOBALIZED W ORLD 153. Justifying Limits to Party Autonomy in the Internal Market. Giesela Rühl. is a credence good whose quality the consumer can neither determine before conclusion of a contract nor after its performance. see also C ARLTON & PERLOFF. they can only be offered by sellers of high-quality products without increasing the price. at 409-11. Christian Kirchner. in PARTY A UTONOMY AND THE R OLE OF INFORMATION IN THE INTERNAL M ARKET. therefore. Second. Legal Implications of Imperfect Information in Consumer Markets. in contrast. supra note 23. Ralf Michaels. at 80. 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. Parisi & Ribstein. Ribstein. Erin A. Rules and Institutions in Developing a Law Market: Views from the U.S. supra note 5. have to charge a higher contract price. Williamson. Sellers of low-quality products. but on the immediate characteristics of the good. 49-50 (1995). 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. at 446-47. consumer associations are less organized on an international level and thus less effective in exercising their monitoring function. Ribstein. Additionally.. if at all. Party Autonomy in the Private International Law of Contracts. 180-81 (Eckart Gottschalk. 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.

G ERALD M ÄSCH. R ECHTSWAHLFREIHEIT UND V ERBRAUCHERSCHUTZ 111-25 (1993). 205-313. Spanish companies had sold goods to German consumers while on holiday in Spain. thus.J. 873-972 (1994). consumers were deprived of the protection afford- 31 32 See for a detailed account of these cases E CKART B RÖDERMANN & H OLGER IVERSEN. the German consumers. Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises. para. 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.Consumer Protection in Choice of Law possible. W ETTBEWERB DER PRIVATRECHTSORDNUNGEN IM E UROPÄISCHEN B INNENMARKT 320-22. were not able to withdraw from their contract upon their return to Germany. 1985 O. It needs to be emphasized. 11 . there is some anecdotal evidence that renders the above analysis plausible. 326-27 (2002). rather low. 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. 205. Zur Analogie im Internationalen Schuldvertragsrecht. cc) Empirical Evidence Against this background. E VAM ARIA K IENINGER. there are the notorious so-called GrandCanary-cases. 1991 PRAXIS DES I NTERNATIONALEN P RIVAT . 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. E UROPÄISCHES G EMEINSCHAFTSRECHT UND INTERNATIONALES PRIVATRECHT 387-419. 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. 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. By the same token. The incentives to send signals to the consumers in view of the applicable law are. First. C HRISTIANE R ÜHL. 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.31 In these cases. Peter Mankowski.UND V ERFAHRENSRECHTS [IPR AX ] 1991. R ECHTSWAHLFREIHEIT UND R ECHTSWAHLKLAUSELN IN A LLGEMEINEN G ESCHÄFTSBEDINGUNGEN 16971 (1999). thus. (L 372) 31. However.

Wolfgang Kerber & Sephen Weatherill. (L 280) 83. the regulation of transactions. in contrast.Consumer Protection in Choice of Law ed by European law in the so-called Time-Sharing-Cases. Stefan Grundmann. supra note 14. in PARTY A UTONOMY AND THE R OLE OF INFORMATION IN THE INTERNAL M ARKET. at 3. Regulation of transactions. at 513-14. supra note 31. at 387-419. at 320-22. The contracts were made subject to the law of the Isle of Man thereby preventing application of the European Time-Sharing Directive. Disclosure Rules as a Primary Tool for Fostering Party Auatonomy – Observations from a Functional and a comparative Legal Perspective. Disclosure Rules as a Primary Tool for Fostering Party Auatonomy. in PARTY A UTONOMY AND THE R OLE OF INFORMATION IN THE INTERNAL M ARKET. supra note 23. over the second. increases the probability of efficient contracts. supra note 23. 248-249. supra note 23. 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. economic theory calls for a – cautious – regulatory intervention by the state aiming at the regulation of information or the regulation of transactions. 326-27. supra note 31. Beales. supra note 31. Klaus J. German consumers on holiday in Spain were talked into the – very expensive – acquisition of time shares in apartments in Spain. 873-972 (1994). incurs the risk of inducing inefficient contracts. para. 1994 O. limits freedom of contract and.34 In both cases. at 205-313. 92-96. Hanno Merkt. 231-32. Hopt. at 131-32. Party Autonomy and the Role of Information in the Internal Market – An Overview.J.36 This is because regulation of information aims at offsetting the information imbalance between the parties without touching upon the parties’ freedom to contract. 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. 10-12. K IENINGER. at 230. supra note 31. supra note 31. 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. The parties’ power to structure their relationship according to their needs remains intact which. in PARTY A UTONOMY AND THE R OLE OF I NFORMATION IN THE I NTERNAL M ARKET . 7. at 111-25.35 As a matter of principle. at 246. thus. 12 .33 Here. Wein. Craswell & Salop. Mankowski. economists prefer the first option. M ÄSCH. the regulation of information. at 80. R ÜHL. supra note 23. in turn. 33 34 35 36 B RÖDERMANN & IVERSEN.

they ignore two important aspects of international consumer transactions: first. only involve small amounts. L. consumers do not have an incentive to read information. G EBURTSTAG 1191. Grundmann. Rühl. if at all. 2007). 10-12. W HINCOP & K EYES . supra note 19. however. at 257-59. supra note 36.. Whincop & Keyes. 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. 37 38 39 40 41 Beales. Kerber & Weatherill.41 Most consumer transactions. supra note 29. Zwingendes Recht oder informierte Entscheidung. at 56. Eidenmüller. Ribstein. 40 Loy. supra note 5. Ribstein as well as Michael J.37 aa) Regulating Information Regulation of information may help in two ways to overcome information asymmetries: first. at 251-52. This is why some law and economics scholars. Rev. Whincop and Mary Keyes. Craswell & Salop. Woodward. argue that consumers should be protected against a choice of law. at 31-32. Hopt. In the context of this article – and for the sake of the following arguments – the differences do not matter. 1208 (Andreas Heldrich. 47 Stan. (1) Duty of Information The establishment of a duty of information is the most obvious way to fight the problems associated with information asymmetries. supra note 30. by establishment of a duty of information. unless the benefits associated with reading exceed the expected costs. William J. O’Hara and Larry E. at 7.38 It requires the professional to inform the consumer about a choice of law including the most important features of the chosen law.40 However. Rev. Critical on the question whether a duty of information is indeed a less intrusive measure Wolfgang Schön. at 650. O’Hara & Ribstein. supra note 14. at 513-14. at 648. O’Hara & Ribstein. at 240. 64 (2006). Eisenberg. at 1186-87. supra note 5.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. The Limits of Cognition and the Limits of Contract. supra note 36.39 Since it ensures that the consumer has all relevant information it may mitigate the information asymmetry and the risk of a market for lemons. second. Parisi & Ribstein. through provision of information by the state. in FESTSCHRIFT FÜR C LAUS-W ILHELM C ANARIS ZUM 70. Constraining OptOuts: Shielding Local Law and Those it Protects from Adhesive Choice of Law Clauses. supra note 5. Jürgen Prölss & Ingo Koller eds. at 180-81. supra note 5. see generally Melvin A. LA L. supra note 5. 9. 13 . through establishment of a duty of information and. notably Erin A. Of course.

44 Second. Jacob Jacoby. 117. will abstain from reading any information that is provided by the professional. In addition. M ARK.45 Apparently. at 811 and Schwartz. Working Paper 2010 (on file with the author).com/sol3/papers. Law & Economics Working Paper Series.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. 09-40). Trossen.Consumer Protection in Choice of Law Therefore. Kohn Berning. supra note 38. Whincop & Keyes. Rational consumers. thus. Speller & Carol A. supra note 30. Rühl. Yannis Bakos & David R. E CON. Brand Choice Behavior as a Function of Information Load. Schön. Behavioral Science and Consumer Standard Form Contracts. To the contrary. more information can sometimes even lead to worse decisions because consumers do not even read the important information. The Economics of Information. Florencia Marotta-Wurgler. Donald E. 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).e.g. Florencia Marotta-Wurgler. e. i. 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). Empirical studies coming from the field of behavioural science prove that too much information can actually lower the quality of consumer decisions (information overload). See. 214-216 (1995). at 938-41. Stigler. Jacob Jacoby. at 1206-08 and in regard to product liability law Krauss. See for a more detailed account of behavioural anomalies in choice of law infra B. at 31 indicate – surely for this reason – that choice of law in consumer contracts should be limited or excluded. Becher.cfm?abstract_id=1443256 (showing that buyers of software do not read the software licensing agreements when purchasing online). time and effort. supra note 26. 33 (1974).46 For example. supra note 26. R ES . Speller & Carol A. R ES. Economics and Organizations. 11 J. C ONSUM . see also Krauss. Does Disclosure Matter?. POL. R EV. supra note 26. behavioural anomalies may come into the equation. Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts (NYU Center for Law. at 180-82. 42 43 44 45 46 14 . 68 LA L. see generally on the on the costs and benefits of information procurement Georg J. 213 (1961). Brand Choice Behaviour as a Function of Information Load: Replication and Extension. 167-177 (2007). 69 J.. Schwartz.42 Since empirical studies show that only a negligible percentage of consumers read fine print. the expected benefit of reading is small and usually smaller than the costs. even if consumers are willing to read the information provided by the professional this does not mean that they will actually make better decisions. Kohn. Working Paper No. Donald E. supra note 5. 1 J. See for a detailed account Shmuel I. available at http://papers. supra note 26. at 811. 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.ssrn. 2. By the same token it may happen that they overestimate their own capacities 211. 63 (1974). associated with reading.

however. Lele & Mathias M.org. 13 B ELL J. available at http://ssrn. However. States could. Olin Center Discussion Paper No. Alan Schwartz & Louise L. C ORP. Craswell & Salop. supra note 14.Consumer Protection in Choice of Law (self-serving bias). Die Doing-Business-Reports der Weltbank – Fragwürdige Quantifizierung rechtlicher Qualität?. Available at http://www. Holger Spamann. Competitive Equilibria in Markets for Heterogeneous Goods with Imperfect Information: A Theoretical Analysis with Policy Implications. at 523-27. at 531-32. Shareholder Protection: A Leximetric Approach. just like a duty of information. this way of regulating information does not promise much success: just like information provided by professionals. 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. Priya P. 7 J. C HRISTOPH K ERN. there is wide agreement that it is not that easy to transfer a legal system’s quality into a number. albeit not in the field of consumer law.doingbusiness. E CON. (2) Provision of Information Provision of information by the state is another way of overcoming information asymmetries without directly regulating consumer contracts. See only Eidenmüller. at 643. for example by ranking legal systems according to their consumer protection standard. They also could provide a basis for easy comparison. 7 March 2006). Wilde.’s ‘Anti-Director Rights Index’ under Consistent Coding (Harvard Law School John M. htm. 47 48 49 50 See on the reduction of information costs through the state in general Beales. 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. The Doing-Business-Reports of the Worldbank are available at http:www.47 However. 15 . As a result. information provided by the state would most probably not be taken into account by consumers before conclusion of a contract.com/abstract=894301.weforum. On the Insignificance and/or Endogeneity of La Porta et al.50 In fact. not only provide for information about different legal systems. 181 (1982). 17 (2007). it seems that a duty of information will not help to overcome the information asymmetries present when consumers enter into international contracts. supra note 19. As a result. 64 JZ 498 (2009). Shapiro. supra note 14. Siems. STUD. the method and the quality of these rankings have been widely criticized. 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).org/en/initiatives/gcp/Global%20Competitiveness%20Report/index. JUSTICE BETWEEN SIMPLIFICATION AND FORMALISM. see for a detailed account Christoph Kern.

16 . individuals have robust and stable preferences that are independent of outside factors and that do not change over time. supra note 16. Ulen. 2. 17 (2007). so-called behavioural anomalies are sometimes called upon to justify consumer protection from an economic perspective.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. individuals have or collect all necessary information before making a decision. 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. individuals determine and compare the costs and benefits of different courses of action before making a decision. Korobkin & Thomas S.e. According to this model individuals act to maximize their own welfare. at 21-23. E CONOMIC A NALYSIS OF LAW 3-10. 1051 (2000). 88 C AL. R ICHARD POSNER. They occur when consumers do not behave in accordance with the standard economic rational choice model. Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics. L. See for a detailed account C OOTER & U LEN. Third. the only remaining option for action is the direct regulation of consumer transactions. i.51 It rests on a number of assumptions:52 first. 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. individuals have the necessary intellectual abilities to process and to assess this information. Behavioral Anomalies In addition to information asymmetries. Fourth. R EV. the direct regulation of choice of law clauses. Second. However. Admittedly this means to curtail the parties’ freedom to structure their relationship by limiting their freedom to choose the applicable law. 51 52 See for different versions of the rational choice model Russell B.

L. Rabin. Paternalism and Consumer Contracts: An Empirical Perspective. at 1477-78. 87 (2006). Information in the Market Economy. 131 (2008). Matthew Rabin. 115. Individual Differences. at 131-35. Liking and Learning: Neuroscience and Paternalism. 90-98 (Christoph Engel. Anne van Aaken. Joshua D. Behavioral Law and Economics. See generally Christoph Engel & Gerd Gigerenzer. Donald C. A NNE VAN A AKEN. 2 N. 1471. supra note 45. Sunstein.53 However. individuals suffer from serious intellectual limitations that impair their ability to act rational in the above described sense. the rational choice model has dominated the law and economics movement. supra note 54. Sunstein & Thaler.. R EV. Thomas S. C HI. R EV. 1477-78 (1998). Epstein. 37 J. supra note 5. According to several studies. 470 (2007). at 1503-06. 1499. Becher. at 88-93. 2006). in A N E CONOMIC A NALYSIS OF PRIVATE INTERNATIONAL L AW . Behavioral Law and Economics. but distort their decisions. & E CON. Paternalism and Psychology. at 98. R EV. Behavioral Law and Economics. Behavioral Theories of Judgment and Decision Making in Legal Scholarship: A Literature Review. Sunstein & Richard H. C HI. And they do not collect all necessary information to do so. R EV. individuals do not determine the costs and benefits of different courses of action before making a decision. 1503-06 (1998). R EV. 1 A M. Markus Englerth. L. L. LAW & LIB. Colin F. Behavioral Law and Economics: A Progress Report. R EV. 73 U. Working Paper Series. LEG. 30-33 (National Bureau of Economic Research. at 189. Thaler. C HI. Psychology and Economics. 139-43 (1999). supra note 5 at 87.Y. Wanting. It has also informed the first economic analyses in the field of choice of law. Choice of Law from an Economic Perspective. at 13-16. Richard A. L. In light of these findings. Camerer. Instead they use heuristics or rules of thumb that simplify. supra note 54. 17 . R EV. supra note 12.54 In addition. 677-80 (Morris Altman ed. Rachlinski. 73 U. 11. See generally Englerth. Edward L. Cognitive Errors. How Much Irrationality Does the Market Permit?. Sunstein. L. supra note 5. at 24-29. supra note 55. 51 V AND. 12879 2007). Markus Englerth. 50 STAN. 36 J. Ulen. Cass R. Christine Jolls. 139.g. individuals’ preferences are neither robust nor stable. there is by now credible experimental evidence that individuals frequently act in ways that are incompatible with the assumptions of rational choice theory. A Behavioral Approach to Law and Economics. Glaeser. 73 U. 73 U. LIT. "R ATIONAL C HOICE" IN DER R ECHTSWISSENSCHAFT 100-03 (2003).. E CON. 26-31 (1998). in H EURISTICS AND THE LAW 1 (2006). in H ANDBOOK OF C ONTEMPORARY B EHAVIORAL E CONOMICS 671. many economists argue that consumers need protection not only because they know less than professionals but also because they do not always act rationally. supra note 54.. 111 (2006). in R ECHT UND V ERHALTEN. Langevoort.56 In choice of law. in PARTY A UTONOMY AND THE R OLE OF INFORMATION IN THE INTERNAL M ARKET. Thomas S. 207 (2006). supra note 54. STUD.. W HINCOP & K EYES.U. Jeffrey J. For example. Alan Schwartz. See. this line of reasoning has not yet been employed to justify consumer protection. J. Behavioral Economics: Human Errors and Market Corrections. supra note 54. Law and Heuristics. supra note 23. Wright. Working Paper No. Das deliberative Element juristischer Verfahren als Instrument zur Überwindung nachteiliger Verhaltensanomalien. C HI. supra.Consumer Protection in Choice of Law For many years. Jörn Lüdemann & Indra Spiecker genannt Döhmann eds. 53 54 55 56 See O’Hara & Ribstein. Behavioral Law and Economics. see for a critical account Gómez Pomar. Cass R. L. in R ECHT UND V ERHALTEN 60. Jolls. 2007). VAN A AKEN . and Paternalism. Langevoort. L. Ulen. Hans-Bernd Schäfer & Katrin Lantermann. 82-83. they are subject to change under outside influence and over time. Christine Jolls.55 Rather. e. 133 (2006).

e. 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. for example. L. 421 (2007). Neoclassical Theory Versus Prospect Theory: Evidence From the Marketplace. L.ssrn. late payment fees. 505 (2006). REV. supra note 56. 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. J. Working Paper. 98 NW U. consumers may systematically miscalculate the costs and benefits of a choice of law rule because they use heuristics or rules of thumb. see for a detailed account Wright. August 2007). Or. E CON. 63 (2006). supra note 56. C HI. Anthony Saunders & Barry Scholnick. Seduction by Plastic. and Information Suppression in Competitive Markets. and cash advance fees (optimistic bias). The decisive question. 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). Agarwal. Working Paper No. Chomsisengphet. however. supra note 57. Nadia Massoud. behavioral anomalies may occur in international just as well as in national settings. The Economics of Slotting Contracts.58 Real world data. & E CON. 121 Q UART. whether behavioural anomalies can actually explain and justify consumer protection in choice of law? Doubts are in order for several reasons: first.59 In fact. over limit fees. Souphala Chomsisengphet. L. R EV. Wright. 477-82 . the empirical findings are not as solid as they appear at first blush. they might underestimate certain risks and agree to a choice of law that does not sufficiently cover these risks (optimistic bias). LEG. John A. Liu & Souleles. Laibson. 41 (2003). Do Consumers Choose the Right Credit Contracts? (Federal Reserve Bank of Chicago. 73 U. 297 (2003). Shrouded Attributes. E CON. 18 . In fact. see for a detailed account Wright. Does the Market Experience Eliminate Market Anomalies?. i. R EV. at 475-77.Consumer Protection in Choice of Law However. Recent Developments in Consumer Credit and Payments. For example. Competition and the Quality of Standard Form Contracts: An Empirical Analysis of Software License Agreements. E CON. Chunlin Liu & Nicholas Souleles. John A. E MP. List. Paying with Plastic: Maybe Not so Crazy?. Tom Brown & Lacey Plache. 50 J. Oren Bar-Gill. 447 (2008). supra note 56 and also the studies of Sumit Agarwal. consumers who have to choose between two different contracts 57 58 59 See the overview in Wright. 72 E CONOMETRICA 615 (2004). Who Makes Credit Card Mistakes? (Federal Reserve Bank of Philadelphia. 5 J. Florencia Marotta-Wurgler. therefore. Miravete. 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. 11 2006). Consumer Myopia. 1373 (2004). Eugenio J.com/sol3/papers. They might.cfm?abstract_id=843826. List.57 Take credit card agreements as an example. STUD. 93 A M. available at http://papers. 118 Q UART. is. Xavier Gabaix & David I. Benjamin Klein & Joshua D. Choosing the Wrong Calling Plan? Ignorance and Learning. J.

decrease the differences between actual and rational actions. C ONSUM. empirical studies analysing consumer behaviour. Chomsisengphet.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. especially studies covering choice of law situations. Miravete. supra note 57. this might change if more empirical studies. who describe further mechanisms. e. 848 (2004) and Dilip Soman & Amar Cheema.g. Does the Market Experience Eliminate Market Anomalies?.61 As a result. Agarwal. on average manage to reduce these fees by 75% in three years. supra note 57. serve as a justification for consumer protection in choice of law. supra note 60. several studies show that consumers who have to pay late payment fees. Liu & Souleles. 31 J. R ES. Gabaix & Laibson. The Long-Run Effects of Penalizing Customers: Evidence from the Video-Rental Market. thus. Sumit Agarwal. 112 J. over limit fees or cash advance fees. 60 61 See. many studies show that consumers are able to learn and to change their behaviour when they realize that they have made a mistake. Driscoll. which people use to overcome cognitive disabilities. As a result. John C. Here. In choice of law. Working Paper 2005). Peter Fishman & Dennis G Pope. Xavier Gabaix & David Laibson. List. Willpower and Personal Rules. It is more than likely that the discussion about consumer protection in choice of law will then gain momentum and move into new directions. Second. most importantly consumers’ attitude towards choice of law clauses. 52 (2004). supra note 57. Agarwal. are even completely lacking. List. Driscoll. Department of Economics. E CON. supra note 57. 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. 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 view of the initially asked question whether behavioural anomalies may explain and justify consumer protection in choice of law. However. at least some consumers are able to correct initial mistakes and miscalculations concerning their spending behaviour over time and. POL.. are available. (University of California at Berkeley. behavioral anomalies may not. at least not at the moment. When Goals are Counterproductive: The Effects of Violation of a Behavioral Goal on Subsequent Performance. see also Roland Bénabou & Jean Tirole. Neoclassical Theory Versus Prospect Theory: Evidence From the Marketplace. Stimulus and Response: The Path from Naiveté to Sophistication in the Credit Card Market (Working Paper 2007). Take again credit card agreements as an example. 19 .60 As a result.

2008 O. for example. 2006.69 The second regulatory technique. Hô no Tekiyô ni kansuru Tsûsoku-hô [General Act on the Application of Laws]. Milletlerarasi Özel Hukuk ve Usul Hukuku Hakkinda Kanun [Act on Private International Law and Civil Procedure]. 149-FS of Nov. 2001 [hereinafter Korean Private International Law Act]. House Bill 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. in Article 5 of the Rome Convention.66 Article 120 of the Swiss Private International Law Act. 27.62 Article 6 of the Rome I-Regulation. Third Part]. 2001. 2007. Rossijskaja Gaseta [RG] of Nov. MODELS OF CONSUMER PROTECTION As indicated earlier. 7.64 § 27 of the Korean Private International Law Act. 26728 of Dec. there is little agreement. Regulation (EC) No.105 (4)(2009). 6465 of Apr.J. Law No. § 51:1418 of the Louisiana Revised Statutes and Section 3 (4) (a) of the Oregon Act Relating to Conflict of Laws Applicable to Contracts. 5718 of Nov. (L 177) 6. 12.65 Article 1212 of the Russian Civil Code. Gukjesabeop [Act on Private International Law]. § 109 (a) sentence 2 of the Uniform Computer Information Transaction Act. Sobranie zakonodatel’stva Rossijskoj Federaccii [Civil Code of the Russian Federation. prevails under the Inter-American Convention on the Law Applicable to Contractual Obligations 62 63 64 65 66 67 68 69 Supra note 3. [hereinafter Japanese Private International Law Act]. Law No. Supra note 4. 20 . 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. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). Law No. 21. Federal Law No. 28 of Jun. Act Relating to Conflict of Laws Applicable to Contracts. Resmi Gazete [RG] No. consumer protection in choice of law is an integral part of most modern legal systems. For everything else. others rely on general clauses or rather vague concepts.63 Article 11 of the Japanese Private International Law Act. 2007 [hereinafter Turkish Private International Law Act].67 and Article 26 of the Turkish Private International Law Act. More specifically. The first regulatory technique is to be found. 2414 of 2001 [hereinafter Oregon Contracts Conflict Act]. 28. 2001 [hereinafter Russian Civil Code].Consumer Protection in Choice of Law C. Section 3 (4) Oregon Contracts Conflict Act equals Oegon Revised Statutes § 81. in contrast. 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. The pertaining rules share the virtue of departing from the general rules on choice of law. 26.

W ENDY C.74 In fact. However. INT’L L. 305. Russell J. PATRICK J. B ORCHERS & SYMONIDES. 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.oas. Rühl. I NTERNATIONALES P RIVATRECHT UND E UROPARECHT [Z F RV] 175. C OMP. supra note 74. D IE K ONVENTION VON M EXIKO 111-12 (2002). Borchers. INTERNATIONAL 339 (2nd ed. However. VON M EHREN.Consumer Protection in Choice of Law (Mexico Convention). Functional Developments in Choice of Law for Contracts.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]. 1998 IPR AX 378. 391. 1998 IPR AX 385. C ONFLICT OF LAWS 1098-1129 (5th ed. PERDUE & A RTHUR T. Choice of Law in International Contracts in Latin American Legal Systems. supra note 30. Jürgen Samtleben. 17.75 the principle of party autonomy claims widespread application. 6 J. INT'L L. Party Choice of Law Around the world. C ONFLICT OF LAWS: A MERICAN. See for a detailed account PETER H AY. The Latest Trends in Latin American Private International Law: the Uruguayan 2009 General Law on Private International Law. 1. 332-335 (2009). Mar. See for a detailed recent account María Mercedes Albornoz. available at http://www. 47 Z EITSCHRIFT FÜR R ECHTSVERGLEICHUNG . supra note 72. J. SYMEON C. 11 N. at 271. Konvergenz im Internationalen Vertragsrecht? Zu jüngeren Entwicklungen im europäischen und US-amerikanischen Kollisionsrecht.71 The second regulatory technique is also applied in the United States. Patrick J. 2010). Brazil. B ORCHERS & SYMEON C.Y. DES C OURS 239. Giesela Rühl. Choice of Law in International Distribution Contracts: Obstacle or Opportunity?. 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. 2003). PRIV. 23. Choice of Law in the American Courts in 1992: Observations and Reflections. with the exception of some South American countries. PRIV. 43-48 (2010). SYMONIDES. at 167-71. and is often termed a “universal approach”. see also Weintraub. See A LEXANDER G EBELE. at 1155-56. INT’L L. 125. L. 181-82 (2006). Bolivia. 42 A M. H AY. 384. 21 . 187 R EC. 271 (1984). it does not provide for specific choice of law rules for consumer contracts. 135 (1994). as well as with the help of overriding mandatory provisions. international contracts are governed by the law chosen by the parties. Eugenio Hernández-Bretón. 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. 1994. Weintraub. Internationale Handelsverträge im Lichte der Interamerikanischen Konvention von Mexiko über das auf internationale Verträge anwendbare Recht. C OMPARATIVE.70 Even though it was closely modelled on the Rome Convention.org/juridico/English/treaties/b-56. R EV. Didier Opertti Badán & Cecilia Fresnedo de Aguirre. 7 (1998).html. Colombia and Uruguay. Versuch über die Konvention von Mexiko über das auf internationale Schuldverträge anwendbare Recht. 11 Y B. Eberhard Röhm & Robert Koch.73 1. SYMEONIDES.

78 As a result. 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. 730 (2003). 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.Consumer Protection in Choice of Law consumer transactions. 22 . Codifying Choice of Law for Contracts: The Oregon Experience. in contrast to Switzerland. a) Comparative Overview When looking into national legal systems and international treaties. The second model limits the parties’ choice to certain laws. Symeonides. And the third model curtails the effects of a party choice of law. aa) The First Model: Excluding Party Choice of Law The first model is to be found in Switzerland. 69 R ABELSZ 726. 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. 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. three basic models of consumer protection can be distinguished: the first model excludes party choice of law in consumer transactions all together. 77 78 See Symeon C. For details see Section 3 (4) Oregon Contracts Conflict Act and § 51:1418 Louisiana Revised Statutes. In the following I will first provide a comparative overview of the models applied to protect consumers and then offer an economic analysis. however. most legal systems restrict the parties’ freedom to choose the applicable law in one way or another. However.

Das Internationale Versicherungsvertragsrecht nach Inkrafttreten der Rom I-Verordnung. 2010 V ERSR 1. La lege applicabile ai contratti di trasporte nel regolamento Roma I. PLENDER & W ILDERSPIN. in LA NUOVA DISCIPLINA COMUNITARIA DELLA LEGGE APPLICABILE AI CONTRATTI (R OMA I) 247 (Nerina Boschiero ed.. 2008 T RANSPORTR 221-224. 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. PRIV. The new European conflicts-of-law rules from an insurance perspective. Rosa Miquel Sala. INT’L L. Dirk Looschelders & Kirstin Smarowos. C ONSUM . Il contratto internazionale di trasporto di persone. R ICHARD PLENDER & M ICHAEL W ILDERSPIN . INT’L L. in R OME I R EGULATION 99 (Franco Ferrari & Stefan Leible & eds. The Rome I Regulation and Contracts of Carriage.und Prozessrecht für Transportverträge in Abkommen und speziellen EG-Verordnungen. L. Rom I und Rom II aus der Sicht des Transportsrechts. 10 Yb. 261 (2009).] 729. 23 . 755-64. Arnt Peter Nielsen.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. 8 A NNUARIO E SPAÑOL DE D ERECHO INTERNACTIONAL PRIVADO [AEDIPR] 425 (2008). in LA NUOVA DISCIPLINA COMUNITARIA DELLA LEGGE APPLICABILE AI CONTRATTI (R OMA I) 349 (Nerina Boschiero ed. PRIV. Entwicklungen im Internationalen Privat. 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.79 By the same token. at 270-96. 2009). Christian Heinze. 2009). 2009 V ERSICHERUNGSRECHT [V ERSR] 443. Sara Tonolo. Paola Piroddi. Choice of Law in Insurance Contracts under the Rome I Regulation. 2008 T RANSPORTRECHT [T RANSPORTR] 339. Louise Merret. 2009). 2009 E UROPEAN JOURNAL OF C ONSUMER L AW /R EVUE EUROPÉENNE DE D ROIT DE LA CONSOMMATION [E UR . 2009 N EDERLANDS INTERNATIONAAL P RIVAATRECHT [NIPR] 445./R. 49 (2009). the law of the place of departure or the law of the place of destination. 286-288. Urs Peter Gruber.C. J. Das Internationale Versicherungsvertragsrecht nach Rom I. See for a detailed account of Article 7 of the Rome I-Regulation Martin Fricke. in R OME I R EGULATION 109 (Franco Ferrari & Stefan Leible eds. 2009). Neue kollisionsrechtliche Vorschriften für Beförderungsverträge in der Rom I-VO. the law of the carrier’s habitual residence or central place of administration. El nuevo Derecho internacional privado de los seguros en el Reglamento Roma I.D.E. 2009 IPR AX 218. 2009). R IVISTA DI DIRITTO INTERNAZIONALE PRIVATO E PROCESSUALE [R IV . Helmut Heiss.80 In view of life assurance. Rolf Wagner. Rolf Wagner. T HE E UROPEAN P RIVATE I NTERNATIONAL L AW OF O BLIGATIONS 205-22 (3rd ed. Insurance contracts under the Rome I Regulation. I contratti di assicurazione tra mercato interno e diritto internaionale private. Die EGVerordnungen Brüssel I. Article 7 additionally allows the choice of the law of the state of which the policy holder is a national. Peter Mankowski. Insurance Contracts. 5 J. DIPP] 309 (2009). 2009 T RANSPORTR 281. Stefan Perner. Caroline Van Schoubroeck. supra note 79. Das Internationale Privatrecht der Versicherungsverträge nach Inkrafttreten der Rom-I-Verordnung. Insurance Contracts in Rome I: Another Recent Failure of the European Legislature.. In contrast to the first model it does not outright exclude choice of law in consumer transactions but limits party autonomy to certain laws. 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.

2010 NIPR 191. B ORCHERS & SYMEONIDES . 1109-15.82 However. is beyond the scope of this article. the parties may also choose the law of that state. See for a detailed account of the legislative history of the provision H AY. thus.81 In other countries. § 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. B ORCHERS & SYMEONIDES. they cover – and protect – all types of policyholders and passengers because they are perceived as weaker parties. however.83 American law. raises the question of whether – in addition to consumers – other persons need protection against a party choice of law across the board. in turn. when consumers are involved. supra note 30. § 1-301 (1) of the Uniform Commercial Code asks for a reasonable relationship. R EV. The Private International Law of Contracts in Europe: Advances and Retreats. To be sure. This. As a result. 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. Party autonomy in Rome I and II: an outsider’s perspective. By the same token. Symeonides. 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. supra note 72.85 As a result. L. 181-82. H AY. therefore. supra note 72. However. Rühl. Note. 81 82 83 84 85 24 . Dennis Solomon. 195-196. supra note 72. just like in Europe. limitations such as the ones to be found in Articles 5 and 7 of the Rome I-Regulation are unknown. 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. This question. at 168-71. 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. 82 T UL. that Article 121 (3) of the Swiss Act on Private International Law applies the second model in view of employment contracts. The 2001 version was. most importantly consumers. 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.Consumer Protection in Choice of Law state where the risk is situated. the relationship requirement is informed by the wish to avoid evasion of mandatory laws designed to protect weaker parties. Rather. Rühl. 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. withdrawn in 2008 and replaced with the current version that basically restores § 1-105 of the original Uniform Commercial Code. however. at 1152. Symeon C. 1709 (2008).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. they are more reluctant to do so.

1993 R ECHT DER INTERNATIONALEN W IRTSCHAFT [RIW] 453./R. paras.. Internationales Verbrauchervertragsrecht. De quelques changements . Hughes Kenfack.. Peter Mankowski. 832 (4th ed. Marta Pertegás & Gert Straetmans eds. 631. Stéphanie Francq. LOACKER. According to Article 5 (2) of the Rome Convention. Dieter Martiny.C. 2004). D R. para.86 Article 6 (1) of the Rome I-Regulation. paras. 277-82 (Johan Meeusen. in R OME I R EGULATION 129 (Franco Ferrari & Stefan Leible eds. Russia. Le règlement (CE no 593/2008 du 17 juin 2008 sur la loi applicable aux obligations contracutelles (“Rome I”). The Law Applicable to Consumer Contracts under the Rome I Regulation. P LENDER & W ILDERSPIN . 2004).. 2009 NIPR 437.. para. See for a detailed account of Article 6 of the Rome I-Regulation Jan De Meyer. 140-41 (Eleanor Cashin Ritaine & Andrea Bonomi eds. 33-014 (14th ed. Article 6 of the Rome I Regulation: Much ado about nothing. Strukturfragen des Internationalen Verbrauchervertragsrecht. Christian Kohler & Rainer Hausmann eds. eds. J. International jurisdiction and conflict of law rules for consumer claims: a survey of European legislation. 2009 E UR. INT. in S TAUDINGERS K OMMENTAR ZUM BGB. 136 JOURNAL DU D ROIT INTERNATIONAL [J. in LE NOUVEAU RÈGLEMENT EUROPÉEN “R OME I“ RELATIF À LA LOI APPLICABLE AUX OBLIGATIONS CONTRACTUELLES 121. It applies in the European Union. in INTERNATIONALES V ERTRAGSRECHT 682. 30-33 (2009). J. Die Rom IVerordnung – Änderungen im europäischen IPR für Schuldverträge. 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. Jürgen Basedow. Turkey and the United States. 2008 INTERNATIONALES H ANDELSRECHT [IHR] 133. 96 (Christian Armbrüster et al. D OMINIQUE B UREAU & H ORATIA M UIR W ATT. para. Peter Mankowski. C ONSUM. Aurelio López-Tarruella Martinez. Contratos internacionales celebrados por los consumidores: las aportaciones del nuevo artículo 6 Reglamento Roma I. International consumer contracts in the new Rome I Regulation: how much does the regulation change?. it curtails the effect of a party choice of law. Le règlement "Rome I" sur la loi applicable aux obligations contractuelles. 140-41. 6th ed. L. L. 4th ed. at 227-54. Jonathan Hill. Aurelio López-Tarruella Martínez. 54 (Kurt Rebmann. Ulrich Magnus. 13-17 (Heinz-Peter Mansel. 62-63 (2009).D. Korea. in M ÜNCHENER K OMMENTAR ZUM BGB. 29 EGBGB. LEANDER D. 3. D ROIT INTERNATIONAL PRIVÉ 671. 29 EGBGB. D ICEY. 655-656. para. 2006). Jürgen Basedow. 2009 E UR. in 1 FESTSCHRIFT FÜR E RIK JAYME 3. D R. 2002). Dieter Martiny. 459. 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. INT. 33-008 and 1640.. 2009). C ONSUM. 8 AEDIPR 511 (2008). 2004)... D ER V ERBRAUCHERVERTRAG IM INTERNATIONALEN PRIVATRECHT 97 (2006). 2006).D. navire stable aux instruments efficaces de navigation? 136 J. Instead. Contratti con i consumatori e regolamento Roma I. 345.C.] 41. 2006).. Peter Mankowski. Franz Jürgen Säcker & Roland Rixecker eds. LAWRENCE C OLLINS. D ROIT INTERNATIONAL PRIVÉ 25 (2007). 13th ed. 823 (Christoph Reithmann & Dieter Martiny eds. in LA NUOVA DISCIPLINA COMUNITARIA DELLA 25 .E./R. Thomas Pfeiffer. Herbert Kronke.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. M ARIE-LAURE N IBOYET & G ÉRAUD D E G EOUFFRE DE LA PRADELLE. Consumer Contracts under Article 6 of the Rome I Regulation. Art.E. 2009).87 86 87 See for a detailed account of Article 5 of the Rome Convention B ERNARD A UDIT. M ORRIS AND C OLLINS ON THE C ONFLICT OF LAWS 1638. Art. 2 D ROIT INTERNATIONAL PRIVÉ 337-38 (2007).. supra note 79. Francesca Ragno.. in Japan. Francesco Seatzu.

in JAPANESE AND E UROPEAN PRIVATE INTERNATIONAL LAW IN C OMPARATIVE PERSPECTIVE 77.. INT'L L. L. Reform of Japan's Private International Law: Act on the General Rules of the Application of Laws..Consumer Protection in Choice of Law Article 11 (1) of the new Japanese Private International Law Act. 1730-34. 899. in JAPANESE AND E UROPEAN PRIVATE INTERNATIONAL LAW IN C OMPARATIVE PERSPECTIVE. the chosen law provides for less protection. If the chosen law provides for more protection.89 Article 1212 (1) of the Russian Civil Code and Article 26 (1) of the Turkish Private International Law Act. In other countries. 134 J. 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. Knut B. 2009). Note that the preferential law approach does not apply to all consumer contracts but only to those that meet certain requirements. 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). 311. Solomon. Yasuhiro Okuda. INT. supra note 84. INT'L L. PRIV. Pissler. supra. at 1717-19. 34 E UR. directs such activities to that country or to several countries including that country. 476 (2009). See for a detailed account of the new Korean law Knut B. A Major Reform of Japanese Private International Law. 94-100 (Jürgen Basedow. 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. 92-94.. See for a detailed account Paul Cachia. require an issue-by-issue comparison between the chosen law and the mandatory law of the consumer’s habitual residence. See for a detailed account Yuko Nishitani. Pissler. thus. Yasuhiro Okuda. R EV. 145. 2008). thus. 152-54 (2006). however. Harald Baum & Yuko Nishitani eds. the parties may choose the applicable law even if one of the parties is a consumer. similar provisions are in place. at 61. If. 2007 IPR AX 552. LEGGE APPLICABILE AI CONTRATTI 26 . provide for the minimum standard of consumer protection. PRIV. The mandatory provisions of the consumer’s habitual residence. it governs the contract. D R. 2010). 906-08 (2007). Yuko Nishitani. 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. Party Autonomy and Its Restrictions by Mandatory Rules in Japanes Private International Law. Koji Takahashi. 8 Y B. According to Article 6 (1) of the Rome I-Regulation. 67-68. in E INFÜHRUNG IN DAS KOREANISCHE R ECHT 115 (Korea Legislation Institute ed. Aspects de la réforme du droit international privé au Japon. for example. and the contract falls within the scope of such activities. Internationales Privatrecht. Die Reform des internationalen Privatrechts in Japan. Consumer contracts in European private international law: the sphere of operation of the consumer contract rules in the Brussels I and Rome I Regulations. 2 J.88 § 27 (1) of the new Korean Private International Law Act.90 The provisions. Background and Outline of the Modernization of Japanese Private International Law. 70 R ABELSZ 279 (2006). Einführung in das neue Internationale Privatrecht der Republik Korea. Under this 88 89 90 (R OMA I) 299 (Nerina Boschiero ed. Hironori Wanami. 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. 554-55. However. or by any means. 320-25 (2006). Unfortunately.

94-96. Korea. consumers in Europe. Russia and Turkey. the consumers must plead and proof the content of the mandatory provisions of their habitual residence. 181-82. Nishitani. supra note 88. Reform of Japan's Private International Law. Die Reform des internationalen Privatrechts in Japan. Korea. 535. the consumer. supra note 88. Japan. The only difference between the American version of the third model on the one hand and the European. at 153-54. who must find and determine the ap- 91 92 93 According to §§ 191. Japan. supra note 88. 27 . even though more skeptical account of the fundamental public policy doctrine and its application to class action waivers and credit card agreements James J. Japanese. 554-55. the choice of law is completely set aside with the result that the consumer’s law governs the transaction completely. According to Article 11 (1) of the new Japanese Private International Law Act. Nishitani. Okuda.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.93 It is therefore. Rühl. at 907. in contrast.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. Okuda. See also for a recent. Party Autonomy and Its Restrictions by Mandatory Rules in Japanes Private International Law.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. compare and – as the case may be – apply the mandatory provisions of the consumer’s habitual residence ex officio. supra note 88. 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. supra note 30. however. All in all. 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. Healy. 19 D UKE INT'L & C OMP. Under the American fundamental public policy doctrine. Takahashi. Consumer Protection Choice of Law: European Lessons for the United States. Turkey and the United States are protected against a choice of law with the help of the preferential law approach. Russia. supra note 88. 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. in contrast. 536-546 (2009). Rühl. supra note 72. Differences. L. Korean. at 168-71. at 321-22. Aspects de la réforme du droit international privé au Japon. J.

thus. this article only deals with the economic aspects largely focusing on efficiency. do well in this context. aa) Avoiding a Market for Lemons The first factor. The above described models. SYMEON C. SYMEONIDES.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.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. consumers do not need to fear that professionals will choose the law with the lowest consumer protection standard. The danger of a race to the bottom is effectively banned. the preferential law approach. supra note 72. The same holds true for the third model. 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. cannot stand from an economic perspective. 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. 28 . lies at the heart of consumer protection in choice of law. in its different versions: it makes sure that consumers will not lose the protection afforded to them by the law of their habitual residence. however. A MERICAN PRIVATE I NTERNATIONAL L AW 89-91 (2008). at least for the most part: the first model.Consumer Protection in Choice of Law plicable law. that excludes party autonomy. As a result. B ORCHERS & SYMONIDES. the avoidance of a market for lemons. 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. Of course. However. at 602-04. consumer protection may also be based on non-economic grounds.

Consumer Contracts under Article 6 of the Rome I Regulation. 29 .Revolution im Internationalen Verbrauchervertragsrecht. 106 Z EITSCHRIFT FÜR VERGLEICHENDE R ECHTSWISSENSCHAFT [ZV GLRW ISS] 120. O’Hara & Ribstein. at 1187. A race to the bottom that might eventually result in a market for lemons may not occur. a market for lemons might also be prevented under the second model that limits parties’ choice to certain laws. See Peter Mankowski. If not. Art. however. 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. 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. 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.97 At least. it will not have the disastrous effects that may eventually result in a complete breakdown of the market. supra note 87. 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.Consumer Protection in Choice of Law but never worse off. the eligible laws. supra note 5. the professional may be able to influence the relevant connecting factors and. they may effectively provide for application of a law with little or no consumer protection. this holds only true under the assumption that the standards of conflict of laws are enforced in practice. thus. 159-60 (2006). Die Rom I-Verordnung. supra note 87. Mankowski. may not effectively prevent a race to the bottom. a race to the bottom cannot occur. 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 141-42. 5 des Vorschlags für eine Rom I-Verordnung .96 Finally. The criterion of relationship. however. For example. 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. the professional can rely on the consumer’s lack of knowledge and choose the law that benefits him the most. a relationship between the chosen law and the parties or the transaction does not have anything to do with consumer protection. The second model. The same 96 97 Of course. poses problems when it comes to its implementation in practice. In addition. To begin with. Mankowski. at 140-41. And since carriers may influence both their habitual residence and their place of central administration.

98 See O’Hara & Ribstein. for example. It is merely the first economic test that a model has to pass.“.e. The following discussion. professionals may easily create contacts to the chosen law and. As I will show. As a result. 30 . by limiting parties’ choice to the laws of the U. i. it must provide for legal certainty and meet parties’ preferences as far as possible. will focus on the first and third model of consumer protection. In the United States. states. but not on a global level.S. and common cultural norms. does not suffice to make a final judgment about the economic efficiency of different models of consumer protection. the second model does not amount to an economically viable solution to the problem of information asymmetry present in international consumer transactions. Against this background.S. the parties might be permitted to choose only the laws of U. bb) Reducing the Costs of Regulation The first factor. an efficient model of consumer protection must keep the costs of regulation as low as possible. In addition to effectively banning the risks of information asymmetry. neither the first nor third model of consumer protection described above manage to succeed in both dimensions. parties’ choice could be limited to the laws of member states of the European Union. 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.98 And in Europe. this version of the second model would solve the problem of consumer transactions only on a regional. As a result. For example.Consumer Protection in Choice of Law holds true for the American substantial relationship doctrine embodied in § 182 (2) of the Restatement (Second). therefore. 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. effectively choose a law with a low consumer protection standard. a common legal system. However. supra note 6. thus. at 1187: „But lawmakers concerned about rogue jurisdictions should restrict the available choices rather than ban all choice. Here. states. the second model could be implemented. which are governed by a common constitution. the ability to effectively avoid a market for lemons.

This is because the exclusion of party autonomy reduces parties’ choices and brings about 99 JONATHAN H ILL. thus. 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. the third model provides for significantly less legal certainty than the first model. 127-28 (2007). By the same token it incurs substantially higher transaction and litigation costs. Instead. It makes it very hard for the parties. supra note 96. 31 . Parties' Choice of Law in E-Consumer Contracts. It also makes it very hard for courts to determine the applicable law. Japanese. Korean. parties and courts may focus on the rules that determine the applicable law in the absence of a choice of law. supra note 87. As a result. 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.] 245. in contrast. The same holds true for the actual application of the law.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. at 656. 106. In contrast to the third model. C ROSS-B ORDER C ONSUMER C ONTRACTS 329 (2008). Stefan Leible. The first model. PRIV. 113. Rechtswahlfreiheit und kollisionsrechtlicher Verbraucherschutz. 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. J. 1995 JAHRBUCH JUNGER Z IVILRECHTSWISSENSCHAFTLER [JB. Der Vorschlag für die Rom I-Verordnung. at 151-52. (2) Party Preferences In view of party preferences the first model does not come off as well as in view of legal certainty. to predict which law will eventually apply to their contract. provides for legal certainty and reduces both transaction and litigation costs. See also in view of the proposal for a Rome I Regulation De Meyer. Peter Mankowski. In the European. 2006 IPR AX 101. The third model. Sophia Zheng Tang. 259. INT'L L. 3 J. especially for consumers. It goes without saying that this way of dealing with international consumer contracts is a lot more complicated than excluding party autonomy all together. Mankowski. ZW ISS.

at 413-414. supra note 12. Wealth Distribution and the Ownership of Rights. 1658-59. the contract price. R EV. supra note 14. Liability Rules and Income Distribution in Product Liability. Kobayashi & Larry E. 8 H OFSTRA L. To begin with. However. in T HE FALL AND R ISE OF FREEDOM OF C ONTRACT 325. See Ramsay. States become monopolists in view of consumer law and might have an incentive. LEG. see also Patrick J. The Pursuit of a Bigger Pie: Can Everyone Expect a Bigger Slice?. 1 J. Harold Demsetz.. 671 (1980). R EV. consumers may not agree to a choice of the professionals’ law in order to reduce the costs of the transaction and. (2008) 1645. 228 (1976). while regulation protects consumers from unknowingly purchasing a product which they 100 101 102 103 See generally Shapiro.100 In view of professionals this finding does not come as a surprise. see generally Lucian A. 66 A M. See Bruce H. R EV. The very idea of consumer protection in choice of law is to reduce professionals’ choices in order to avoid a market for lemons. H. Borchers. Since the professionals must adjust their contracts to a foreign law. 339-46 (F. E CON. 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. 1999). the exclusion of party autonomy also incurs costs for consumers. See Gómez Pomar. Ramsay. 223 (1972). 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.Consumer Protection in Choice of Law costs for both professionals and consumers. For example. at 8-13. Buckley ed. However. Koichi Hamada. Bebchuk. thus. Ribstein. STUD. L. Categorical Exceptions to Party Autonomy in Private International Law. to protect local consumers at the expense of international professionals.102 Costs for consumers may also occur because exclusion of party autonomy excludes competition of legal systems and the potential benefits associated with it.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. 82 T UL. consumers are effectively deprived of the potential benefits of a choice of law. supra note 14. whether and to what extent the above described costs occur depends on consumers’ preferences. at 413. Contract and Jurisdictional Freedom.101 In the worst case scenario. supra note 14. at 538-39. 32 . chances are high that consumers will have to pay a higher price for goods and services.

1328 (1979). for example. Example taken from Shapiro. It does not exclude party autonomy all together but allows a choice of law in so far as it makes consumers better off. in contrast. in SYSTEMBILDUNG UND SYSTEMLÜCKEN IN K ERNGEBIETEN DES E UROPÄISCHEN 33 . It also increases the price for the service offered by trained surgeons. 87 J. Lemons. In other words: banning products and services which nobody wants may only improve welfare. 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. supra note 29. The situation would then be comparable to products and services that nobody wants. does a better job in view of the parties’ preferences.Consumer Protection in Choice of Law would not choose were they informed. The same would hold for the exclusion of party autonomy if consumers were in fact not interested in a choice of law. supra note 5. Unsystematische Überregulierung und kontraintentionale Effekte im Europäischen Verbraucherschutzrecht. See also Michael Martinek. and Licensing: A Theory of Minimum Quality Standards. at 539 . chances are high that at least some consumers would prefer to have a choice.“104 The first model. As a result. The heterogeneity of consumers’ tastes (and incomes) must be balanced against their lack of information. 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. at 257-58. is that consumer preferences are very hard to determine. the first model of consumer protection indeed seems to impair the parties’ preferences. Quack. since nobody wants to undergo surgery unless the surgeon is competent. The problem. at 538-39 . supra note 14. the third model reduces 104 105 106 107 108 109 Shapiro. 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. See also O’Hara & Ribstein.109 In contrast to the first model. However. Shapiro. See for a detailed account Hayne E.105 Take. supra note 14. Ribstein. POL. thus.107 The third model of consumer protection. does not impair consumers’ preferences if consumers are in fact not interested in choosing the applicable law. supra note 14. E CON. However. Of course. at 1186-87. the service of a surgeon without professional training. however. Leland.106 It certainly reduces consumers’ choice to allow only trained surgeons to practice. at 538-39. allowing only trained surgeons to practice does not incur any costs.

(3) Economic Efficiency For the overall efficiency of the first and the third model of consumer protection the above consideration hold some important implications. This is mainly because the perceived advantages of the first model are not as significant as it appears at first blush. a). thus. at 511. In fact. however. i. See infra C. the first model does not provide for as much legal certainty as one might think. 2. the law of the consumer’s habitual residence.Consumer Protection in Choice of Law consumers’ choice only in so far as a choice would make them worse off. the default rules. therefore. 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. 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. its application may turn out to be as complicated as application of the preferential law approach. for example the rules of a foreign law. i. More specifically. the second model. On the other hand.e. This is because the first model excludes party autonomy and. In fact. are replaced by other rules. 530-32. supra note 10. The exclusion of party autonomy incurs significant costs because it ignores some consumers’ preferences.e. The limitation of its effects incurs costs because it is complex and difficult to apply. may agree that the non-mandatory provisions of the law of the consumer’s habitual residence. is which of the two models is the better economic compromise? I submit that it is the preferential law approach and. this also 110 PRIVATRECHTS. 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.110 This law. thus. W ULF-H ENNING R OTH. INTERNATIONALES V ERSICHERUNGSVERTRAGSRECHT 505-06 (1985). usually allows modifications and deviations in so far as its provisions are not mandatory. As a result. submits consumer contracts to the law applicable in the absence of a choice of law. The decisive question. The parties. It follows that the third model impairs parties’ preferences significantly less than the first model. thus. 34 . To begin with.

protect consumers and avoid complex rules at the same time. at 651. para. at 685-86. See also Eidenmüller.e. Consumer Contracts and Insurance Contracts. the third model can be classified as an economically viable compromise that is to be preferred over the first model. supra note 86. supra note 109. at 338-39. at 282. Martiny. supra note 86. application of the preferential law approach is complicated and causes costs in practice. paras. 35 .Consumer Protection in Choice of Law means that the first model does not limit party autonomy as much as it appears at first sight. This follows. at 497. N IBOYET & D E G EOUFFRE DE LA PRADELLE. However. at 168-76. Internationales Verbrauchervertragsrecht. Martiny. at 1645. supra note 86. supra note 86. supra note 19. 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. supra note 86. supra note 86. at 17. B UREAU & M UIR W ATT. for example. the above considerations show that it is impossible to grant free party choice of law. 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. at paras. supra note 86. to the extent necessary. Ulrich Magnus.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. at 25.112 Of course. para. supra note 86. 62. 832. from Article 5 (2) of the Rome Convention. at paras. C OLLINS. Basedow. at 670-71. 828. supra note 86. Against this background. They grant a minimum standard of protection and allow contractual deviations for the benefit of the consumer. i. See also R OTH. 33-024. However.113 2. 112-15. LOACKER. K ROEGER. See for a detailed account A UDIT. Basedow.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. 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. supra note 1. at 100-03. supra note 86. In most national legal systems and international regulations consumer contracts are governed by the law of the consumer’s habitual residence.

supra note 88. INTERNATIONALES V ERTRAGSRECHT (2d ed. Heiss. at 223. Nielsen. Article 120 (1) of the Swiss Private International Law Act. Aspects de la réforme du droit international privé au Japon. Mankowski. at 448. See for a detailed account Fricke. Wagner. supra note 80. Looschelders & Smarowos. at 276-77. Nishitani. Heiss. supra note 80. at 134.116 § 27 (2) of the Korean Private International Law Act. Perner. supra note 87. at 288. supra note 80. supra note 88. 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. at 216-17. FRANK V ISCHER. supra note 79.121 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. in the case of mass risk insurance contracts this is usually the place of the consumer’s habitual residence. supra note 80. at 376-78. at 307-313. Merret.118 Article 26 (2) of the Turkish Private International Law Act and § 109 (b) sentence 2 of the Uniform Computer Information Transaction Act. Merret. at 1717-19. supra note 79.115 Article 11 (2) of the Japanese Private International Law Act. Heinze. supra note 79. at 30-33. supra note 79. supra note 80. at 555. Die Reform des internationalen Privatrechts in Japan. at 278. Mankowski. supra note 88. at 142-43. at 276-77. at 348. supra note 89. See for a detailed account Nishitani. See for a detailed account IVO SCHWANDNER. supra note 80. supra note 87. at 97. at 439. See for a detailed accout Pissler. Takahashi. supra note 89. supra note 80. Reform of Japan's Private International Law supra note 88. Gruber. Kenfack. supra note 80. at 362. supra note 80. Francq. 36 . Seatzu. PLENDER & W ILDERSPIN. supra note 80. E INFÜHRUNG IN DAS INTERNATIONALE PRIVATRECHT 255 (1998). at 220. at 60-61. supra note 80. See for a detailed account Contaldi. at 2-4. 2000). supra note 79. at 439. PLENDER & W ILDERSPIN. 1730-34. Miquel Sala. at 116-18. supra note 87. See for a detailed account Fricke. at 308-09. Miquel Sala. at 321-23. at 908. Heinze. Wagner. supra note 80. at 288-90.117 Article 1212 (2) of the Russian Civil Code. supra note 80. Party Autonomy and Its Restrictions by Mandatory Rules in Japanese Private International Law. at 116-18. supra note 84. supra note 87. at 107-08. supra note 79. note 64. supra note 79. supra note 80. at 447.Consumer Protection in Choice of Law consumer contracts in general. supra note 80. Rom I und Rom II aus der Sicht des Transportsrechts. supra note 79. at 154. note 31. Consumer Contracts under Article 6 of the Rome I Regulation. supra note 80. Solomon. Pissler. Einführung in das neue Internationale Privatrecht der Republik Korea. Die EG-Verordnungen Brüssel I. supra note 80.120 However. PLENDER & W ILDERSPIN. at 450. Okuda. at 62-63. López-Tarruella Martinez. at 7. Gruber. International consumer contracts in the new Rome I Regulation. Looschelders & Smarowos. at 284-86. Perner. supra note 79. Okuda. 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 88. at 654-655. at 288-89. at 61. Tonolo. at 449. Piroddi. supra note 80. supra note 87. Internationales Privatrecht. at 322. Piroddi. Neue kollisionsrechtliche Vorschriften für Beförderungsverträge in der Rom I-VO. LUCIUS H UBER & D AVID O SER.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 218-219.

Second.123 Since this is usually the consumer. moving the seat of the company or through founding a subsidiary or regional office. 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. thus. professionals could determine the law – similar to a choice of law – through. e. supra note 30. In contrast to most other legal systems. for example. at 1717. most of the connecting factors which determine the applicable law can easily be manipulated. supra note 84.124 With regard to professionals. 37 . it effectively prevents a market for lemons caused by asymmetric information. See Solomon. supra note 20. 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. 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.g. The risk of a market for lemons. in contrast. in contrast to other connecting factors. Furthermore it can be assumed that consumers have the best access to information about the law of their habitual residence. Rühl.122 However. no need for an express provision dealing with consumer contracts. If. at 613. With regard to consumers this finding flows from the fact that they know the law of their habitual residence the best. the nationality 122 123 124 See Rühl. supra note 72. As a result. there is. Rühl. see also Roth. However. at 181-82. thus. the consumer’s habitual residence reduces the costs associated with the determination of the applicable law. the professional’s habitual residence would determine the applicable law. 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. the Restatement (Second) usually calls for application of the law of the consumer’s habitual residence. at 167-71. which also cannot be influenced by the professional. 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. Of course. the professional may influence the applicable law even without a choice of law clause. supra note 30.Consumer Protection in Choice of Law result.

Consumer Contracts and Insurance Contracts. the consumer’s habitual residence raises the professionals’ costs compared to a connecting factor located in the professionals’ sphere. Thanks to globalization and increased regional integration. reduces the chance that professionals will outsmart the consumer. 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. 38 . 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. Internationales Verbrauchervertragsrecht.J. Basedow. services contracts and other types of contracts on a day-to-day basis. Council Regulation 8EC) No. D. are the cheapest cost avoider. courts usually do not need to engage in the cost-intensive inquiry of foreign law. 2001 O. Roth. consumers enter into international and interstate sales contracts. thus. thanks to email and the internet. but may apply their own law. 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. Consumer Contracts under Article 6 of the Rome I Regulation. therefore. very often without being aware of it. supra note 86. 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. (L 12) 1. at 142. which the professional also could not manipulate. This. However. See also Basedow. As a result. at 14. supra note 20. Of course.127 In addition. In most cases these contracts are governed by general contract terms provided by the professional. application of the law of the consumer’s habitual residence avoids a split of jurisdiction and applicable law. supra note 87. at 278. Since consumer cases usually involve small claims this reduces litigation costs. avoiding a split of jurisdiction and applicable law increases the chance that consumers will actually enforce their rights.Consumer Protection in Choice of Law of the consumer. at 607-11. in turn. 125 Third. supra note 86. CONCLUSION Cross-border consumer transactions are among the most frequent transactions conducted around the world. Professionals. 125 126 127 See also Mankowski.

As a result. in contrast. enter into a large number of similar contracts on the same market. Russia. several mechanisms can be applied: to begin with. provides for a minimum standard of consumer protection which effectively prevents a market for lemons. Russian and Turkish model – calls for application of the law of the consum- 39 . According to this approach a choice of law may not deprive consumers of the mandatory provisions of the law of their habitual residence. 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. From an economic perspective these clauses pose serious problems. Since consumers are not able to distinguish between professionals who choose consumerfriendly laws and those who don’t. Korean. the European model – and likewise the American. thus. 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. 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. 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. However. However. the law can rely on the self-healing powers of markets. Therefore. In the absence of a party choice of law. 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. albeit with differences in detail. this may lead to a race to the bottom and a market for lemons. To avoid such a development. this is not because consumers are strategically “inferior” or “weaker” than professionals. Korea. in Japan. Professionals. Rather. The preferential law approach. Japanese. most importantly screening and signaling mechanisms. it is because consumers know less about the applicable law and have no incentive to invest into the gathering of the relevant information. Turkey and the United States promises the greatest benefits in terms of efficiency. 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.

the Korean. consumers are. the Russian and Turkish model. 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. 40 .Consumer Protection in Choice of Law ers’ habitual residence. the respective rules and regulations enhance efficiency – even though they were not drafted with economic theory in mind. As a result. the American. well protected against the risks flowing from information asymmetries. the Japanese. thus. Under the European.