Contract Governance in the EU: Conceptualising the Relationship between Investor Protection Regulation and Private Law

• DOI: http://doi.org/10.1111/eulj.12130
• Author: Olha O. Cherednychenko
• Date: 01 July 2015
• Published date: 01 July 2015

Contract Governance in the EU:

Conceptualising the Relationship between

Investor Protection Regulation and

Private Law

Olha O. Cherednychenko*

Abstract: The instrumental use of private law, in particular contract law, by the EU

raises a complex issue concerning the relationship between contract-related regulation

and traditional private law and underlines the need for conceptualising the interplay

between the two from the contract governance perspective. The present article aims to

apply this new analytical approach in the investment services field where there is con-

siderable tension between the EU investor protection regulation embodied in the Markets

in Financial Instruments Directive (MiFID I and MiFID II) and national private laws.

The article explores various models of relationship between investor protection regula-

tion and traditional private law within a multi-level EU legal order, considering the

strengths and weaknesses of each field in pursuing public and private interests involved in

financial contracting. This analysis also offers some lessons for the broader narrative of

how European integration in regulated areas dominated by public supervision and

enforcement could proceed.

I Introduction

The EU has never accepted the traditional conception of private law as it has evolved

in national legal systems over the last two centuries. Whereas national private laws

have been primarily concerned with justice between market participants rather than

the pursuance of specific public goals, the EU has tended to regard private law, in

particular contract law, as an instrument for achieving the collective objectives of

European integration. Alongside the central objective of establishing the European

internal market, these objectives include, inter alia, consumer protection. As has been

widely noted, the acquis communautaire in the field of private law is therefore regu-

latory in nature.1Although opinions may differ concerning the instrumentalisation of

* Associate Professor of European Private Law and Comparative Law, University of Groningen, The

Netherlands.

1See, for example, H.-W. Micklitz, ‘The Visible Hand of European Regulatory Private Law’, (2009) 28

Yearbook of European Law 3.

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European Law Journal, Vol. 21, No. 4, July 2015, pp. 500–520.

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private law,2it cannot be denied that contract law is widely used today as a tool to

pursue public goals.

The instrumental use of contract law by the EU challenges the internal logic of

national contract law systems and raises intricate issues concerning the relationship

between contract-related regulation and traditional private law. The interplay between

the two is particularly complex in regulated areas dominated by public supervision and

enforcement, such as investment services. As is well known, the relationship between

the investment service provider and its (potential) client was traditionally to be settled

by national private law, in particular contract law. In the course of private law

adjudication, civil courts across Europe set ex post duties of care and loyalty to be

observed by financial institutions towards their clients, such as the duty to know one’s

client.3The Markets in Financial Instruments Directive I (hereafter MiFID I)4and its

successor—the Markets in Financial Instruments Directive II (hereafter MiFID II)5—

have accommodated many private law duties of care and loyalty within their ambit

transforming them into the ex ante contract-related regulatory duties of financial

institutions within a financial supervision framework. This development has led to

considerable tension between the EU investor protection regulation and national

private laws, as well as a great deal of uncertainty in a multilevel EU legal order. In

particular, may the duties of financial institutions under national private laws be more

or less strict than their regulatory duties of European origin?

While at present an answer to this question remains unclear, the answer we provide

has a direct bearing on the ability of EU legislation to pursue its regulatory goals and

the overall shape of European integration more generally. After all, the more room is

left for national private law in the areas regulated by the EU, the more diverse and

pluralistic legal landscape is likely to emerge. Conversely, the less room is left for

national private law in such areas, the more uniformity and centralisation will most

probably ensue. Each scenario for European integration has its strengths and weak-

nesses in terms of ensuring legal homogeneity and certainty, capturing the complexity

of a particular market and protecting the weaker market actors, in particular when

they seek justice before national courts.

This article aims to conceptualise the relationship between EU regulation and

traditional private law, with a particular focus on contract-related rule making in the

investment services field. For this purpose, the article applies the contract governance

approach. This analytical perspective includes both the internal (contractual justice)

dimension and the external (public goals) dimension of the bilateral contractual

relationship into the analysis. In particular, it focuses on the improvement of the

institutional framework for contract-related rule making or, in other words, the

governance of contract law.6The contract governance approach, therefore, allows us

to better understand a complex interplay between financial supervisory authorities

and civil courts in the area of investment services.

2Cf, for example, E.J. Weinrib, The Idea of Private Law (Harvard University Press, 1995) and H. Collins,

Regulating Contracts (Oxford University Press, 1999).

3Eg BGH 6 July 1993, BGHZ 123, 126 =NJW 1993, 2433 (Bond).

4Dir 2004/39/EC [2004] OJEU L145/1.

5Directive 2014/65/EU [2014] OJEU L173/149.

6See, in particular, F. Möslein and K. Riesenhuber, ‘Contract Governance—A Draft Research Agenda’,

(2009) 5 European Review of Contract Law 248, 268 et seq and P. Zumbansen, ‘The Law of Society:

Governance through Contract’, (2007) 14 Indiana Journal of Global Legal Studies 191.

July 2015 Contract Governance in the EU

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