By Marcus Leach

The Federation of Small Businesses (FSB) is calling on the Government to support plans for a Europe-wide law that small firms can use when drawing up contracts within the EU.

Government plans to boost an export-led recovery will falter unless it changes its contradictory position on complex contract law for small firms doing business in Europe.

The Government is currently encouraging business expansion into the European single market, with figures showing that if all barriers to trade within the EU were withdrawn, UK GDP would increase by more than seven per cent 1.

Small businesses will play a key role in this export-led recovery, but the FSB is concerned that this messaging from the Government is contradictory when the rhetoric is compared with action:

Businesses that currently trade across the EU and sell online have to be aware of and use 27 different types of contract law in the different countries they trade in.

One third (31%) of businesses trying to trade across the EU still encounter legal or regulatory barriers2 while half of small firms (51%) have said they would expand their business activities if they could apply a single European contract law for cross-border transactions3 . Further, 76 per cent of businesses say they would expect to save costs if they could use a single European contract law across the EU, rather than having to use different laws when trading in different countries4 .

The FSB supports the Government’s development of the Single Market but calls on the Government to reduce the burden of having to use different laws across 27 member states and to consider an optional single, more simple, contract law for small firms doing business in Europe, in order to facilitate cross-border trade.

The European Commission will consider optional contract law in the autumn and the FSB urges the UK Government to support an optional EU-wide law for small businesses drawing up contracts when they trade within Europe.

John Walker, National Chairman, Federation of Small Businesses, said:

“An optional EU-wide system of contracts is clearly the only way to solve the legal barriers small businesses face when selling within the EU. Currently, small businesses could have to spend thousands of pounds on legal advice to get to grips with local laws and they clearly cannot afford this. It could mean that they end up simply trading exclusively in the UK, which will not support the Government’s plans for an export-led recovery.

“While the Government continues to promote the Single European Market, it must consider an optional contractual instrument that small firms can choose to use in order to make cross-border trade much easier and realise that growth.

“We believe that the Government’s position to oppose the optional instrument is wrong and contradictory to its aims to promote ‘made in the UK’. Therefore, we strongly call on the Government to revise its position in order to allow small businesses to really share in the benefits of the Single Market.”

Viviane Reding, European Justice Commissioner, is in the UK to discuss the concept of optional contract law. She said:

“European consumers want better deals and businesses want to sell products in more countries. That’s the simple rationale for an optional European contract law initiative. To be successful, the optional instrument would be a set of contract law rules that could be used voluntarily in cross-border transactions across the EU. This would reduce the transaction costs for cross-border trade and help businesses expand into more countries.

“Many companies decide that it’s simply not worth the expense and trouble to sell in small and medium-sized EU countries. The Federation of Small Businesses reported that it costs firms around £8,000 in legal and translation costs for every Member State they trade with. For example, a micro-company in the UK with six employees and an average annual turnover of £133,000 has a successful product and wants to sell across Europe. They could face transaction costs of around £243,000 for hiring contract law experts to take into account the laws of the other 26 countries. This should be changed by any European contract law initiative.

“An optional instrument would mean that a business would have to pay just once for a lawyer to expand across Europe. More trade would lead to more imports, more competition in the domestic market and therefore more choices and lower prices for consumers.

“In a vote on 7 June, the European Parliament called for an optional European contract law instrument, which could be chosen voluntarily. I am also considering this option. My goal is that SMEs and consumers should benefit from a user-friendly contract law instrument, especially when it comes to cross-border transactions in the Single Market."

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