Dealing with informational asymmetries under the proposed CESL and CISG

Author:Christian Twigg-Flesner
Position::Law School, University of Hull, Hull, UK
SUMMARY

Purpose – This paper aims to explore the way in which informational asymmetries between the two parties to a contract for the sale of goods are dealt with under two legal regimes designed for transnational sales contracts: the UN Convention on the International Sale of Goods (CISG) and the proposed Common European Sales Law (CESL). Design/methodology/approach – Having considered the ... (see full summary)

 
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Introduction

The focus of this article is on the role of informational asymmetries between sellers and buyers of goods, and the various provisions in the UN Convention on Contracts for the International Sale of Goods 1980 (CISG) and the proposed Common European Sales Law (CESL)1 that deal with such asymmetries. The CISG was adopted in 1980 and is concerned with certain aspects of international sale of goods contracts (contracts between parties whose places of business are in different states2). It primarily deals with the formation of contracts and the respective duties of the seller and buyer, as well as the associated remedies for breach of those duties. The focus of the convention is on commercial contracts; consumer contracts are generally excluded from the scope of the CISG3.

The CESL marks the culmination of a project which has been on-going for over a decade. In 2001, the European Commission launched a consultation exercise on the need for action by the European Union (EU) in the field of contract law ( Common Market Law Review, 2002 ; Twigg-Flesner, 2008 )4. This eventually resulted in the Draft Common Frame of Reference (DCFR) ( von Bar et al., 2009 ), which was produced by a network of European legal scholars. The DCFR is a detailed blueprint for legislation on most aspects of private law. However, as the original focus of the project was on contract law, a further exercise was undertaken by a group of experts to prepare a Feasibility Study on EU Contract Law (2010) , which then became the basis for the proposed CESL now under discussion. The CESL is a two-part measure: first, there is the so-called “chapeau” part which contains the provisions commonly found in EU legislation (recitals, definitions, scope of application). This part does not contain the substantive rules on the sale of goods. The second part of the CESL, found in Annex I to the Regulation, provides the substantive rules. Unlike the CISG, CESL is designed to apply to contracts between commercial sellers (traders) and consumers (B2C), as well as commercial transactions between a large business and a small to medium-sized enterprise (SME)5. As such, CESL focuses on different types of contracts (B2C and B2SME) with the underlying assumption that one of the parties in both types of contracts is in a weaker bargaining position than the business or the larger business in the case of SMEs. The CISG's scope of application is not limited by considering the bargaining strength of the buyer, but instead excludes contracts for certain types of goods (effectively consumer goods) from its scope, with the intention of removing consumer contracts from the ambit its jurisdiction. This variation in the scope of application might suggest that the treatment of informational asymmetries will vary noticeably between the two measures. This article will first explore the notion of “informational asymmetries”. This will then be followed by an in-depth analysis of the relevant provisions in the CESL and the CISG.

Informational asymmetries

In this section6, the notion of informational asymmetry is explored. The focus is on the relationship between a seller and buyer of goods. It is well-known assumption about consumer markets that the information about goods (and services) is distributed unequally to the detriment of the consumer. This may also be true in many business transactions. This is a long-recognised problem and is the basis of Akerlof's (1970) famous “lemons problem”, which postulates that there is a risk when the buyer does not possess all relevant information that the buyer might purchase poor-quality goods. The obvious response to this problem is to require the seller to provide as much information about the goods as possible, but there are a number of reasons why the seller might not always be willing to reveal relevant information. Indeed, the issue of informational asymmetry is not as straightforward as it seems because there are a number of different forms of informational asymmetries. For present purposes, there are four types of circumstances:

  • The seller has information about the goods which the buyer does not have (“seller-biased asymmetry”).
  • The buyer has information about the goods which the seller does not have. For example, the buyer may be aware of particular aspects of the goods through third-party reports, or through having inspected the goods before deciding to purchase them (“buyer-biased asymmetry”).
  • There is information about the goods of which neither the seller nor the buyer is aware. This is a common situation where there is some sort of latent defect not apparent on an inspection of the goods (by either party), or when unexpected and unforeseeable problems occur when the goods are used in combination with other goods.
  • There is information about the goods of which both seller and buyer are aware.
  • Strictly speaking, only the first two situations could be described as true instances of an informational asymmetry. The third situation is one where the particular information is known to neither party, and as such, there is no asymmetry between the parties at all. Similarly, in the final situation, there is once again no asymmetry. However, each situation raises the question of whether there should be a specific rule of law which would seek to redress the fact that there is a lack of information about the goods. Also, it is important to note that it is not always the seller who has the upper hand when it comes to an unequal distribution of information. Leaving aside the final situation, in which there is no real problem about the distribution of information, it is necessary to consider how the information asymmetry in the other three situations might be addressed.

    Where the seller has information about the goods, there are a number of approaches which could be utilised to ensure that the buyer is not disadvantaged as a result of the informational asymmetry. The most obvious approach would be to impose a positive obligation on the seller to disclose whatever information he has to ensure that the buyer is able to make a fully informed decision. A more subtle approach would be not to require the seller actively to furnish the buyer with all the relevant information, but instead to impose liability on the seller if there is a problem affecting the goods of which only the seller was aware. This generally would be the type of information that if the buyer knew about it beforehand, then the buyer would not have entered into the contract or would have entered the contract, but on different terms. Finally, rather than placing the burden on the seller, the buyer could be required to enquire about information relating to the goods, or inspect them prior to purchase.

    Turning to the converse situation, where the buyer has information affecting the goods, it would similarly be possible to require the buyer to disclose the information to the seller so as to avoid the seller entering into a transaction which he would not have entered into, or would have entered, but only on different terms, had he been aware of the information. Alternatively, the buyer who has information which the seller does not have might be precluded from relying on this information subsequently in bringing a claim against the seller, such as if buyer knew that the goods were of a lower quality than would otherwise have been expected.

    Which of the various approaches to be taken in the circumstances set out above will depend on a range of factors. Also, they are not necessarily mutually exclusive and a combination of rules could be introduced to give effect to various requirements to disclose information or to allocate liability between the parties. In general terms, a more adversarial and non-interventionist attitude would favour a limited obligation to disclose information and place the burden on the party who is at an informational disadvantage to acquire all relevant information. A more co-operative attitude would require at least some disclosure by the party with the relevant information, and impose at least some liability on that party in order to lower the level of informational asymmetry.

    The difficult case, however, is one where neither party has relevant information and one or both of the parties would not have entered into the transaction, or would have entered the contract only on different terms, had the party possessed the information at the time of contract formation. The obvious example in the sale of goods is the case of a hidden defect, which neither the seller nor the buyer was aware before entering into the contract. Here, the obvious question is which of the two parties to the contract of sale should have to assume liability for dealing with the consequences of this problem, and on what conditions. For example, the seller could generally be held liable (as is, indeed, the case with most systems of sales law, including the CISG and the proposed CESL), but the extent of his liability could be restricted in some way by imposing certain obligations on a buyer as a precondition to claiming a remedy against the seller.

    The foregoing has been a brief outline of the main forms of information asymmetry that can be found in sales...

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