Most people think of a consumer as an individual buying personal, household or family items. This perception underlies the belief that consumers need special legal protection in the marketplace against professional traders. The vast majority of people certainly do not have the likes of IBM in mind when they think of the term "consumer." Not so in Latvia.
The Consumer Rights Protect-ion Law in Latvia has turned the ordinary person's assumptions, in this case quite reasonable, completely upside-down. The term "consumer" includes a legal person, ostensibly covering any enterprise no matter how powerful its bargaining position in the market. Why do companies of all types and sizes need rules designed to protect the weak individual? The legal text does not explain it, and the concept deviates from European norms.
The idea of contract is simple: pacta sunt servanda. You are bound to keep the promises you make. However, with mass-market merchandising and the emergence of the standard form contract 's "take-it-or-leave-it deals" 's the premise that one should be held to keep promises not freely made came under attack. Ergo, consumer law was developed worldwide, though not uniformly, since proposed solutions to information asymmetry abound.
Nevertheless, there is consensus that the consumer needs legal protections against large enterprises that might take advantage of them when buying goods or services, particularly purchases made under pressure or at a distance. Extending that protection to companies is not new. At the state level, U.S. consumer protection law is scattered with inconsistent notions of who is a consumer. But the expanded definition is dubious, since businesses are traders and expanding the definition introduces uncertainty to legal transactions.
The Consumer Rights Protection Law, amended as recently as Nov. 22, 2001, defines a consumer as "a natural or legal person who expresses a wish to purchase, purchases or might purchase goods or utilizes a service for a purpose which is not directly related to his or her entrepreneurial activity." Clearly, legal persons are covered. Indeed, the Latvian Financial Capital and Market Commission Web site informs EU member credit institutions seeking to provide services of this trap. The dilemma: When does a legal person buy a good or service "not directly related to his or her entrepreneurial activity." To deconstruct the text and settle this question would take a legal decision from a competent court.
Expanding consumer protection law into the field of big business goes beyond the theory behind consumer protection legislation that underlies all EU directives 's protection of natural persons without the ability to bargain with more powerful legal persons. The European Court of Justice in the Idealservice case reaffirmed that idea. There, an Italian company bought drink dispensers for its employees and then said a jurisdiction clause in the contract was invalid because it contravened the Unfair Consumer Terms Directive; in other words, the Italian company argued that its purchase was not related to its business, and that it was a consumer. The seller objected to this claim, and the Italian court referred the question to the ECJ. The court held that the definition of consumer in the UCTD applies only to natural persons. The drink dispenser purchaser lost its case 's rightly so.
According to the ECJ, the Italian directive was a servile transposition of the UCTD limiting consumers to natural persons. There is nothing in EU jurisprudence prohibiting Latvia from expanding the term consumer to include companies, given the EU's minimum harmonization methodology. While the legal authority to deviate from an established norm of the EU acquis communautaire is complicated and must be left for another day, let us look at how Latvian consumer law may meddle, perhaps unintentionally, in the efficiency of pure commercial transactions.
For example, a bank in Latvia lends to a business so that it can buy drink dispensers for its employees. The business decides to pay off the loan early even though the loan agreement contains a penalty for prepayment. The bank demands the prepayment penalty, but the company says, "No, we are a consumer 's the purchase of drink dispensers is not directly related to our business." At the same time the law says that "a consumer shall have the right to perform his or her obligations prior to the time period specified in the consumer credit contract. In such case, the consumer shall have the right to fair reduction of the total cost of credit."
If this were upheld, the bank could lose its expected profit on the loan or incur a loss, thereby subsidizing the business of its debtor. Whether a Latvian court would interpret the law to reach this result, or whether, given tax reasons, the business would exercise its right to pay early, are unknown, but it illustrates how the expanded definition of consumer makes contracting more expensive and conflicts with the EU principle of legal certainty.
The term consumer has an autonomous EU-wide meaning for that regulation 's a natural person. But the question remains: for what purposes create ambiguity.
A central aim of EU law is to create a single internal market to promote the free circulation of persons, goods, capital and services. The idea is to reduce transaction costs and increase efficiency 's in other words create more wealth. A central aim of commercial law anywhere in the world is to simplify, clarify and unify the law. The approach to "spilling over" consumer protection law to traditional business transactions violates both precepts.
Arguably there is merit in providing "consumer type" protection to small- and medium-sized enterprises. But the cost of that protection outweighs its value.
John J.A. Burke is associate professor at Riga Graduate School of Law