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 (
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:
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...