“Private law and market regulation –
interaction, interference or
inconsistency?”
Leiden Law School research conference 2
December 2016
From a traditional private law perspective, markets are shaped and sustained generally by firmly established
doctrines of contract, tort and property. From the traditional regulatory law viewpoint, specific markets are
moulded by distinct rules, standards and codes aimed at attaining certain policy objectives. These objectives
vary from bolstering fair competition, protecting socio-economically weaker parties, reducing health and safety
risks, fortifying trust and confidence and avoiding market instabilities. Regulatory regimes make use of dynamic
instruments such as market entry requirements, rules and standards of conduct and many more other
supervisory tools, whereas private law doctrines may seem static and at times perhaps even outdated and
inadequate.
Against this background, how do the frameworks of private law and market regulation interact with private law
doctrines? Do specific standards of conduct under regulatory law pre-empt common law duties? Should they?
Does non-compliance with administrative rules automatically translate into civil law wrongs? Should it? Within
private law, does the interaction with regulation lead to innovation or further isolation of private law?
Unmistakably, the interplay between private law doctrines and regulation challenges the legal system’s
consistency. Is this a matter of meaningful interaction or unproductive interference?
On December 2, 2016, Leiden Law School will host a conference on precisely these questions. For example,
does industry compliance with the applicable regulatory framework generate specific benefits in private law,
such as immunity from tort liability or a robust defence against claims in contract? Should the neglect of public
law standards of conduct automatically translate into private law remedies such as contract nullity or breach of
statutory duty? Or should civil adjudication be considered in isolation from the public law world? These
questions are to be approached from a combined perspective of doctrinal coherence of private law doctrines
and regulatory analysis of regulatory policy goals, instruments and trade-offs. Relevant insights from economic
and other behavioural sciences are part and parcel of the analysis.
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The Conference is organized by the Leiden Law School Coherent Private Law research group.
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Please register before November 25 at www.leidenlawconference.nl
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Leiden Law School research conference 2 December 2016
09:30 – 10:00
Registration and coffee (Academy Building)
Morning session
Morning chair: Prof Alex Geert Castermans
10:00 – 10:10
Opening and Introduction
Prof Alex Geert Castermans
10:00 – 10:30
Keynote address
Alexander Hellgardt
Senior research fellow at the Max Planck Institute (Munich)
Private law in the legislator’s regulatory toolbox
The balancing of private interests has hitherto been seen as the primary task of private law.
However, private law can also be conceived of as a tool which the legislator may use to regulate
economy or society. In this respect, private law competes with criminal law and administrative
law and serves the public interest. A new concept of private law does not only challenge
jurisprudential theories but also entails important consequences for legislation and legal
practice.
10:30 – 11:00
Paper presentation
Qi (George) Zhou
Associate Professor of Law, University of Leeds
Administrative Law or Contract Law: A Law and Economic Perspective on the Choice of Legal
Instrument for Regulating Contractual Discretion
Should lawmakers use administrative law, contract law or both to regulate contractual activities?
How a choice should be made? This paper answers these questions from a law and economics
perspective.
To do so, I will use the regulation of contractual discretion as an illustration. A contract often
gives one party an absolute discretion over performance of the contract. For example, in an
employment contract the employer may have an absolute discretion to decide the employee’s
bonuses; in a charterparty the shipowner may reserve an absolute discretion to disapprove
voyages proposed by the charterer; or in a consumer car lease, the leaser may have an absolute
discretion to change the car chosen by the leasee. Although a contract may confer on one party
an absolute discretion, the discretion is not an unfettered power. The exercise of contractual
discretion is normally subject to three forms of legal control. First, the exercise of contractual
discretion may be subject to judicial control. For example, in English contract law judges may
impose an implied term in fact on the power-holder that the discretion should be exercised
rationally. Second, the exercise of contractual discretion is regulated by private law duty. In the
UCC, the exercise of contractual discretion is subject to a duty of good faith in performance.
There is a subtle difference between the above two approaches. A judge can only imply a term in
fact if the term implied is not in conflict of any express term. So although the exercise of
contractual discretion is subject to judicial control under English contract law, in theory judges
cannot imply a term in fact if the parties have expressly ruled out judicial intervention in their
contract. On the contrary, the duty of good faith in performance in the UCC is a mandatory
private law duty which the parties cannot contract out. Third, the exercise of contractual
discretion may be regulated by administrative law. Most of consumer contracts are subject to
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Leiden Law School research conference 2 December 2016
regulatory law in the EU. In a consumer contract, an absolute discretion is subject to two legal
controls. First, the term giving the discretion must be reasonable and fair. Second, the discretion
must be exercised in good faith and reasonably. If the trader breaks these legal duties, not only
does the law affords private law remedies to the consumer, but also empowers the regulators to
sanction the trader for contravention of the regulatory law.
This paper makes a functional comparison of the three forms of legal from a law and economics
perspective. The paper proceeds as follows. Section 1 explains why contractual discretion is
widely used in practice. Section 2 presents the theoretical justifications for the regulation of
contractual discretion. Section 3 reviews the three types of legal control of contractual
discretion. Section 4 develops a theoretical framework from a law and economics perspective
and Section 5 uses the framework to compare the features of the three types of legal control.
Section 6 highlights the key factors which should be considered in choosing a proper legal
instrument for the regulation of contractual discretion.
The paper aims to make two contributions to the existing literature. First, it aims to provide a
critical evaluation of the existing regulation of contractual discretion. Second, it aims to draw
some implications for a broader understanding of interactions between private law and
administrative law.
11:00 – 11:15
Discussant & discussion
5 minutes comments by discussant Dr Kai Purnhagen (Wageningen)
10 minutes general discussion
11:15 – 11:45
Paper presentation
Peter van Wijck
Associate professor of Law & Economics, Leiden University
Do private damages actions drive out leniency applications?
In the enforcement of European competition law both public and private actors play a role.
Public enforcement dominates. Leniency programs may enhance the effectiveness of public
enforcement. These programs give cartelists incentives to reveal the cartel and disclose relevant
information to the competition authority. The incentives originate from a reduction in sanctions.
In 2014 the European Commission decided to stimulate private enforcement: Directive
2014/104/EU aims at removing practical obstacles to compensation for victims of infringements
of EU competition law. The literature suggests that facilitating private damages actions tends to
limit the effectiveness of leniency programs. If customers of a cartel are able to claim
compensation, the incentive to apply for leniency may vanish: paying a lower fine will be
replaced by possibly even higher damages compensation. Although victims will generally claim
full compensation, in practice they may obtain only partial compensation (possibly by
settlement). The compensation can be expected to depend on the strength of the victims’ legal
positions.
This paper analyses the behaviour of potential cartelists in a two-period setting. In period one,
cartelists first have to decide whether they enter into a cartel. If so, they have to decide whether
to apply for leniency. If not, they may be detected by the competition authority. If the cartel is
revealed or detected, customers may claim damages. In period two cartelists face the same
situation. This paper considers, inter alia, the influence of the strength of the victims’ legal
positions on the behaviour of cartelists. We find that an improvement in the victims’ legal
positions may lead to a reduction of the frequency of leniency applications. The deterrent effect
of competition law tends to increase.
Paper co-authored with Miriam Buiten & Jan Kees Winters
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Leiden Law School research conference 2 December 2016
11:45 – 12.00
Discussant & discussion
5 minutes comments by discussant
10 minutes general discussion
12:00 – 13:00
Lunch break
Afternoon session
Afternoon chair: Prof Matthias Haentjens
13:00 – 13:30
Paper presentation
Erdem Büyüksagis
Professor of civil law and dean of the Law Faculty at Antalya International University; Partner at
law firm Baur Hürlimann AG (Zurich)
Pharmaceuticals and security: the judiciary’s role
In general, the Product Liability Directive 85/374/CEE creates a regime of strict liability for
defective products. Art. 7(d) of the Directive nevertheless establishes a safe harbour for
manufacturers who prove that the defect is due to compliance of the product with mandatory
regulations issued by the public authorities. Since drug manufacturing process must meet
mandatory safety standards, the application of such an exoneration rule is particularly significant
for drugs, a type of product which is unavoidably unsafe, and given the present state of scientific
knowledge, cannot be made any safer.
In the case-law of many Member States and other European countries like Switzerland which
fully transposed the Directive into their national law, compliance with mandatory regulation per
se is, nonetheless, not enough for a drug manufacturer to escape liability. At first sight, such an
application might be considered as protecting consumers. However, in Switzerland, where
several pharma giants have their headquarters, in a decision handed down in January 2015, the
Federal Supreme Court unexpectedly stated that although a manufacturer cannot escape his
liability by complying with mandatory regulations, (s)he can do it by warning physicians of
dangers inherent to the drug. According to the Court, upon such a warning, it is the physician’s
duty to take into account the propensities of the drug, as well as the susceptibilities of the
patient. Hence, the Court applied the American “learned intermediary” rule, and created a
standard that pre-empts the manufacturers’ legal duty to warn of dangers of which they are
aware or should have been aware on the basis of reasonably available knowledge.
To my mind, while such a rule can be seen as justifiable in many instances, it should not become
a bright-line rule of exemption from liability for failure to inform the consumer. In order to avoid
any inconsistency between the general product liability law and the specific application of that
law in the field of pharmaceutical liability, it is necessary to use the learned intermediary rule
only when the reasoning behind that rule is applicable. As such the interplay between the
private law doctrine of product liability and the regulation of pharmaceuticals would turn into a
meaningful interaction.
13.30 – 13:45
Discussant & discussion
5 minutes comments by discussant Gitta Veldt (Leiden)
10 minutes general discussion
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13:45 – 14:15
Paper presentation
Dörte Poelzig
Professor of Civil Law, German and International Business Law, University of Passau
Private Law and Market Regulation - Coordination and Interlocking with public law
Private law as an instrument for the enforcement of provisions that are in the public interest has
come to the fore in the last years and has been acknowledged in many fields of European Union
law. This use of private parties does not only serve the legal protection of subjective rights but
also the effective enforcement of the law in the public interest. Private enforcement has come
to exist alongside public enforcement. Quite strikingly, the discussion has come to focus on the
question: private enforcement or public enforcement? However, in many areas of the law, the
status quo is this: private enforcement and public enforcement. The reality is not marked by the
alternative but the coexistence of both forms of enforcement. This can be seen in European
competition law: violations are on the one hand sanctioned by means of elaborate tools of
supervisory measures – such as fines and the skimming of advantages that resulted from the
violation – as well as civil law claims for damages or obtained advantages. A coexistence of
private enforcement and public enforcement is also noticeable in capital markets law:
admittedly, private law has lately somewhat receded to the background due to the extension
and intensification of supervisory provisions as a reaction to the financial crisis. Nevertheless,
there are a number of civil law tools of private enforcement: for instance, civil law claims for
damages. And finally, in consumer protection law which is predominantly enforced by civil law,
by means of the Regulation 2004/2006, the European legislator has called for public
enforcement in the member states in the form of the duty to cooperate with supervisory bodies
besides the existent private enforcement mechanisms. Even if this does not apply to all areas of
the law, the coexistence of civil law and public law mechanisms for the enforcement of European
provisions in the member state remains largely used. Although the ECJ has acknowledged the
importance of private enforcement as a supplement for regulatory supervision, the two pillars of
enforcement are still predominantly dealt with in an isolated manner. The fundamental question
which has not been been dealt with in extenso is hence: may there be negative consequences of
the co-existence of private and public enforcement and how can private law and public
regulation be sensibly coordinated? In my paper I would look at three different fields of tension
in which the coordination and interlocking of both mechanisms of enforcement will be
necessary.
14:15 – 14:30
Discussant & discussion
5 minutes comments by discussant Dr Iris Houben (Leiden)
10 minutes general discussion
14:30 – 15:00
Refreshments
15:00 – 15:30
Paper presentation
Candida Leone, PhD Fellow, University of Amsterdam
Of private law, market regulation and telling them apart in the EU
The paper argues that there is nothing specific to “private law” market regulation which justifies
considering it as separate from other techniques of market regulation; if we are to claim a
reserved space for private law and its (organising) principles, in particular the idea of coherence,
this claim needs to be based on non-market arguments.
Coherence, after all, although long cultivated as a “value in its own right” in legal scholarship,
has always been portrayed as instrumental to the promotion of other principles, such as private
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Leiden Law School research conference 2 December 2016
autonomy and equality before the law. Arguments that try to defend it based on the
preservation of private law’s market-facilitating techniques, on the other hand, seem prima facie
weaker when faced with the sophisticated tools developed for the regulation of contemporary
complex markets: one may end up just having to accept that private law is just incapable of
dealing with the increasing regulatory complexity we are called to master.
The paper will take the example of the so-called Unfair Terms Directive (Directive 93/13 EC) to
show how, even when apparently operating within private law, market regulation concerns
redesign the contours of legal rules and are able to single-handedly deal substantive wounds to
contract law dogmatic and even the unity of procedural laws. Despite occasional mention of
“general principles of civil law”, the CJEU- and EU law in general- tend to be blind to formal(ised)
principles of national private law, yet they are to some extent sensitive to other, substantive,
non-market ideas which also find expression in (national) legal systems.
This background should induce private lawyers to look deeper into the reasons of our subject
and, in particular, the reasons of coherence. I submit that the battle for coherence- or for what it
stands for- only makes sense if we find, and are able to defend, reasons that do not pertain to
market regulation; if it is only “our way to regulation” that we would be defending, we may
better concentrate on other fights.
15:30 – 15.45
Discussant & discussion
5 minutes comments by discussant Dr Kasper Jansen (Leiden)
10 minutes general discussion
15:45 – 16:15
Keynote address
Prof Michael Faure
Professor of law and economics, Maastricht & Rotterdam
Interdependencies between private law and regulation in remedying new risks
The law and economics methodology has shown that (new) risks can create market failures,
related to the danger of externalizing risks by operators. The question arises how a smart mix of
instruments can be designed to internalize those externalities, yet at the same time still
providing sufficient incentives for innovation. Although, using the Coase Theorem as a starting
point, law and economics scholars will traditionally first point at the possibility of the market
mechanism to remedy market failures, contractual bargaining will often not be possible, as a
result of which other remedies need to be put in place. Private law mechanisms such as liability
rules may deter operators from externalizing risk to society, but private law rules also have
inherent limitations. That is why ex ante government regulation is often seen as the primary tool
to control risks related to ultra-hazardous activities. However, also (public) regulation has a
number of limitations as a result of which it should be optimally combined with the use of
private law, more particularly liability rules. That, however, raises a number of questions on the
interdependencies. It is more particularly the search for an optimal design of the interaction
between private law and regulation that will allow those instruments to jointly work as a smart
mix.
16.15 – 16.30
General discussion
16.30 – 16.45
Prof Matthias Haentjens
General concluding remarks
16.45 – 17.45
Drinks
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Leiden Law School research conference 2 December 2016