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C o n t e n t s

ForewordMETİN FEYZİOĞLU

President of the Ankara Bar Association 7

A r t i c l e s

P e e r R e v i e w e d A r t i c l e s

Carriage Of Goods Course WorkHasan KAYIKET

The Evidentiary Effect of the Contract Particulars Under the Rotterdam RulesBelma BULUT

Free Movement of Companies within the EUUlvi ALTINIŞIK

Share Transfer Restraints in the Articles of Association under Turkish LawAzer HAVLİOĞLU, Dilara YÜREKLİ

Top Five Mistakes Made by Turkish Attorneys When Doing Business With AmericansAnna RAPPAPORT

Anglo-American LawLeegin Creative Leather Products, Inc. V. Psks, Inc., Dba Kay’s Kloset, Kay’s Shoes

Aykut ÖZDEMİR

Concept of Informed Consent in the Context of Research with Children and Child RightsDr. Recep DOĞAN

Crisis At Football Market After The “Bosman”: Are Competition Exemptions Admissible For Football?

Cengiz Kağan ŞAHİN

A Brief Look to the Legal Education in DenmarkRaşit UYSAL

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25

11

53

61

99

119

89

125

Dear Colleagues,

As always, it is a pleasure to present the new issue of Ankara Bar Review. The 2012/1 issue of the magazine addresses core topics in both Turkish and international law. This issue includes not only theoretical discussions but also articles containing practical information. The topics addressed cover a wide range both in term of the countries and the fields of law that are concerned.

Well-respected lawyers and academics have contributed in the making of this issue of Ankara Bar Review by submitting their valuable articles. Recep Doğan has discussed the concept of informed consent in the context of research with children and child rights. Belma Bulut has explained the evidentiary effect of the contract particulars under the Rotterdam Rules. Aykut Özdemir has done a case analysis with regard to competition law, concerning Leegin Creative Leather Products, Inc. V. Psks, Inc., Dba Kay’s Kloset, Kay’s Shoes. Hasan Kayıket has written about carriage of good by sea and focused specifically on the deviation and issues related to charterparty contracts and bills of lading. Cengiz Kağan Şahin has discussed the admissibility of competition exceptions for football and shed light on the Bosman case. Azer Havlioğlu and Dilara Yürekli have first dealt with the issue of share transfer restraints in the articles of association and then with voting agreements. Ulvi Altınışık has addressed the freedom of establishment of companies under European Union law. Raşit Uysal has explained the legal edu-cation system in Denmark. Finally, Anna Rappaport has explored the most common mistakes of Turkish attorneys when doing business with Americans.

I extend my appreciation and thankfulness to everyone who has contributed in preparing yet another great issue of Ankara Bar Review.

Yours sincerely,

Attorney at Law Metin FEYZİOĞLUPresident of the Ankara Bar Association

F o r e w o r d

Peer Reviewed Articles

* LL.M in Child Law and PhD from Keele University UK. Legal Advisor for the Ministry of Family and Social Policies, [email protected], [email protected].

PEERREVIEWED

ARTICLE

Concept of Informed Consent in the

Context of Research with Children and

Child Rights

Dr. Recep DOĞAN*

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ABSTRACT

Children are beginning to be perceived as competent social actors, as a result of the United Nations 1989 Convention on the Rights of the Child. However, children’s decision making capacity, and the concept of informed consent in research involving children has rarely been interrogated since the United Nations 1989 Convention on the Rights of the Child was signed. This article, therefore, discusses the concept of informed consent according to its elements and focuses on how to conduct ethical, lawful and scientific research with children.

Keywords: informed consent, research with children, child rights, medical and social science research.

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Concept of Informed Consent in the Context of Research with Children and Child Rights / DOĞAN

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cle 1. Introduction, Background and Preliminary Issues

Children’s decision making capacity, and the concept of informed consent in research involving children has rarely been interrogated since the United Nations 1989 Convention on the Rights of the Child, which was ratified by the Turkish Grand National Assembly on 27 January 1995. According to Article 90 of the Turkish Constitution, the Convention is part of the domestic law which means that the provisions of the Convention are fundamental legal rules binding upon administrative authorities and other agencies and individuals. The Convention highlights the importance of listening to children and taking their views seriously in all matters affecting them.[1] However, this rule has rarely been applied and interrogated in the context of research with children.

In this context, the literature on the ethics of research with children has largely been produced from within the field of medical and psychological research, and is mostly concerned with the risks that children are exposed to through participation in clinical studies.[2] With respect to research involving children, the concept of informed consent is complex and, in the opinion of this author, confusing. In order to solve this complexity, we should draw a distinction between medical and social science research such as psychological, sociological and educational research. Within the field of social science research, ‘informed consent has usually been seen as given as part of a “one-off” event at the outset, on the basis of the presentation of adequate information that provides sufficiently for the participants to “know” and “understand” what they are “getting themselves into”’[3]. In the field of medical research many of the discussions have been related to issues either addressing when children become informed and wise enough to make a sensible decision about research, or, trying to establish rules specifying the age up to which parental consent is necessary, and from which children’s own consent should be gained in addition to their parents’.[4]

Research with children is, to a large extent, different from research with adults. However, there has been a tendency to perceive research with children as one of two extremes: just the same or entirely different from adults[5]. Those

[1] The United Nations Convention on the Rights of the Child, Article 12[2] Edwards, R. & Alldred, P. (1999) ‘Children and Young people’s views of social research:

The case of research on home- school relations’, Childhood, 6 (2), 261-281[3] David, M., Edwards, R., & Alldred, P. (2001) ‘Children and school-based research:

‘informed consent’ or ‘educated consent?’, British Educational Journal, 27 (3), 347-365, p.348

[4] Edwards & Alldred, op.cit., n.2 [5] Punch, S. (2002) ‘Research with Children: The same or different from research with

adults?’, Childhood, 9 (3), 321-341, p.322

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clewho consider that children are ‘essentially indistinguishable from adults’[6] use the same methods as those used with adults, since they consider that children are basically the same as adults. Seen from this perspective, it is not necessary for the researcher to draw attention to any adult-child distinctions by treating them in any way other than as mature, competent people.[7] Those who consider that children are entirely different from adults use ethnography as the most appropriate way to get close to understanding the child’s world.[8] However, in the opinion of this author, none of those views mentioned above can fully address the evolving capacities of the child and their special vulnerability. Therefore, a method, which provides a balance between those two perceptions, should be devised and used. Otherwise, giving more weight to one of those views would be an inappropriate approach, which is inconsistent with the principle of respecting the evolving capacities of the child, set out by Article 5 of the UN Convention on the Rights of the Child. However, recently, James et al. (1998)[9] point out that there is another perspective where researchers tend to use methods which are based on children’s skills, and develop innovative and adapted techniques such as pictures[10], diaries[11], writing[12], sentence comple-tion[13] and drawings.[14] In this perspective researchers perceive children to be similar to adults, but to possess different competencies. Clearly, this perspective and its methods can fully address the evolving capacities of the child and their special vulnerability.

Due to their special vulnerability and inherent inability to give a fully informed consent, the issue of informed consent must be considered to be the central difference between research with children, and research with adults. Research carried out without addressing the issue of informed consent and examining whether or not a child has sufficient capacity to fully understand the concept of the proposed research, has to be regarded as unethical, unlawful and inconsistent with the universally accepted basic principles of scientific research such as objectivity, and impartiality. In this context, ‘it is widely recognized that

[6] James, A., Jenks, C. & Prout, A. (1998) Theorizing Childhood, Cambridge: Polity Press, p.31

[7] Alderson, P. (1995) Listening to Children: Ethics and Social Research, Ilford: Barnardo’s[8] Punch, op.cit., n.5[9] James et al. op.cit., n.6, p.189[10] Nesbitt, E. (2000) ‘Researching 8 to 13 years-olds’ perspectives on their experience of

religion’, in Researching Children’s Perspectives, A, Lewis & G, Lindsay. (eds.), pp.135-149, Buckingham: Open University Press, David et al., 2001, op.cit.,n.3

[11] Nesbitt, Ibid. [12] Morrow, V. (1999) ‘It’s Cool,…Cos You Can’t Give Us Detentions and Things, Can You?

: Reflections on Researching Children’, in Time to Listen to Children, P, Milner & B, Carolin. (eds.), pp.203-215, London: Routledge

[13] Ibid.[14] Ennew, J. & Morrow, V. (1994) ‘Out of the mouths of babes’, in Children’s Rights:

Monitoring Issues, E.Verhelen & F.Spiess-Chaert (eds.), pp.61-84, Gent: Mys Breesch

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cle in order to gain children’s consent and involvement in research, one has to go via adult gatekeepers who are able to limit researchers’ access to the children’.[15]

Within medical research, gatekeepers from whom consent will be gained may be parents or guardians, who have parental responsibility for child. In the field of social science, the concept of gatekeepers is extended to those in loco parentis such as head teachers, school governors or social workers, who work and care for the children.[16] Therefore, researchers, especially in school-based educational research, must obtain permission from the governing body of the school in addition to the child’s consent and that of the parents; because the governing body of the school has the discretion to assess a research proposal, either as curricular or extra-curricular which requires permission from parents.[17]

Thus, it is necessary that we should find answers to some questions arising out of the construction of the educational school-based research such as, ‘is a head teacher’s consent sufficient, or ought we to seek each child’s consent in the school who might participate in research?’ How do we do research with whole classes, if one or two children object?[18]

Although, all these questions are still being debated, in the opinion of this author, research carried out solely by obtaining the consent from the head teacher or school governor, creates an impression that the research is ‘just another form or piece of school work’[19] , which raises serious doubts over its validity and reliability, as it restricts the free will and choice of the child-participants, and disregards their autonomy and evolving decision making capacity. Moreover, such an approach would also be inconsistent with the essential components of informed consent, which require that consent must be given freely and volun-tarily without any outside interference or any element of coercion.

[15] Punch, op.cit., n.5, p.323[16] Croll, P. (1986) Systematic Classroom Observation, Sussex: The Falmer Press[17] David et al. op.cit., n.3[18] Alderson, P. (2004) ‘Ethics’, in Doing research with children and young people, Fraser,

S., Lewis, V., Ding, S., & Kellett, M. (eds.), pp.97-112, London: Open University Press[19] Denscombe, M. & Aubrook, L. (1992) ‘It’s just another piece of school work: the ethics

of questionnaire research on pupils in schools’, British Educational Journal, 18, 113-131; Pole, C., Mizen, P. & Bolton, A. (1999) ‘Realizing Children’s agency in research: partners and participants?’, International Journal of Social Research Methodology, 2, 39-54, David et al. op.cit., n.2, p.352

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cle2. Function of Informed Consent and the Ethical Status of Children in Research

As mentioned before, in the field of social science research with children, the concept of informed consent and its function have usually been seen as an information process, by which adequate information concerning the objectives and nature of a particular research study is provided, in order that children can make choices about their participation.[20]

From this perspective, the function of informed consent as a ‘form of informa-tion’[21] is relatively unproblematic. However, the function of informed consent in the field of medical research can not simply be explained as an information process, by which the objectives and nature of the research are explained. In this context, the function of informed consent is quite problematic, and far beyond the form of information. We can give two reasons, which provide the foundations for this difference. Firstly, contrary to medical research, social science research is less physically dangerous. Secondly, while beneficence in medical research generally has a present-directed and individually oriented meaning, in the field of social science research, beneficence generally has a future-directed and society-oriented meaning.[22] Thus, the Hippocratic tradition of medical ethics stipulates that:

‘Physicians have an obligation to seek their patients’ good, that is, to benefit them, and also a duty to refrain from harming them, or at least a duty not to add to the harms of their condition’[23]

Because of the Hippocratic tradition and the differences mentioned above, the function of informed consent in medical research is not only an informa-tion process by which the objectives and nature of the research are explained, but also a legal process by which a legal justification for care, treatment or research is provided.[24]. Traditionally, consent from the patient or research subject is required prior to the physician initiating any form of treatment, research, operation or study,[25] ‘without such consent, health professionals would commit a crime (battery) and a tort (trespass to the person) when they touch their patient.’ [26]

Although, this function of informed consent seems to provide a mechanism

[20] David et al, op.cit., n.3, Edwards & Alldred, op.cit., n.2[21] David et al. Ibid., p.348[22] King, M, P. & Churchill, R. L. (2000) ‘Ethical Principles Guiding Research on Child

and Adolescent Subjects’, Journal of Interpersonal Violence, 15 (7), 710-724; Alderson, op.cit., n.18.

[23] King & Churchill, Ibid., p.714[24] Montgomery, J. (1993) ‘Consent to health care for children’, Child Law, 5 (3), 117-124[25] Kaufmann, C, L. (1983) ‘Informed consent and patient decision making: Two Decades

of Research’, Social Science & Medicine, 17 (21), 1657-1664[26] Montgomery, 1993, op.cit., n.24. p.117

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cle for the protection of research subjects, the judiciary generally interprets and applies this mechanism in favor of health professionals by considering that the legal role of consent is primarily to provide a defense to actions against health professionals[27] Consent is a necessary condition for the lawful and ethical conduct of any kind of medical or social science research. In this context, we should discuss one final point, which is closely linked to the ethical status given to children in research and the issue of research designs.

There are three main levels of involving children in research. These three terms or levels can show crucial power differences in children’s status[28] In the first level, children are assessed as active participants who willingly take part in research which have flexible methods, and are based on their skills such as writing, sentence completion, painting or maps created by them.

In the second level, children are assessed as aware subjects whose consent is sought to be questioned, observed, or take part in research that has inflexible methods such as questionnaire surveys, especially those designed and developed for adults.

Finally in the third level, children are assessed as unknowing objects of research who are not asked for their consent and may be unaware that they are being researched.[29] This includes deceptive research ‘such as when researchers ask one question but are really looking for answers to another, perhaps unspoken question’[30], and covert participant observation [31] such as through two-way mirrors.

‘In this type of research the researcher may undertake observation without informing his or her research subjects that the observation is taking place. This is justified (or otherwise) on the basis that, if the subjects are aware that they are being observed, they may change their behavior and thus the researcher would not gain a true and accurate picture of normal behavior. This is described as the Hawthorne effect’ [32]

In these two types of research (deceptive research and covert participant observation) the ethical status of the children is highly controversial, and they clearly raise concerns about informed consent and the autonomy of children. In this context, one can expect or arguably claim that these two types of research can be ethically and legally carried out either by obtaining proxy consent from parent/s or guardians prior to research, or by obtaining consent from a com-petent participant after carrying out the research. Such arguments and claims

[27] Ibid., p.122[28] Alderson, op.cit., n.18.p.100[29] Ibid.[30] Ibid., p.100[31] Greig, A. & Taylor, J. (1999) Doing research with children. London: Sage Publications,

p.151[32] Ibid.

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cleare implausible and in breach of all codes of ethics. We can give two reasons for this. Firstly, consent has to be given prior to research. Secondly, as Lord Donaldson argued: “If the position in law is that upon the achievement of ‘Gillick competence’[33] there is a transfer of the right of consent from parents to child and there can never be a concurrent right in both….”[34], it naturally means that consent has to be given directly by the child-participant as long as he/she is competent. Therefore, as long as the child- participant is competent, consent has to be given directly by the child prior to research, and this right can not be used by the parent/s on behalf of a competent child.

3. The Age of Consent and Children’s Competence

3.1. Social science researchWhen do children become informed and wise enough to make a sensible decision about research? This is not a simple question to answer, because competence is not a standard of general ability and ‘there is no grey hinterland between competence and incompetence’[35] . This term is used to determine whether a person is adequately equipped to perform a special task.[36] Within social sci-ence research, it is generally accepted that children’s competence to consent to participate in research depends partly on each child’s own experience, educa-tion, the context and subject of the research and also partly on the skill with which the researchers talk with children and help them to make unpressured informed decisions[37]. Therefore, children of compulsory school age can be easily assumed to be competent to participate in educational school-based research, or other social science research.

3.2. Medical research and treatmentWith respect to medical treatment, children’s capacity to consent was exam-ined by the House of Lords in the Gillick[38] case. In this case, the House of

[33] Gillick v W Norfolk AHA [1985] 3All ER 402[34] Re R [1991] 4 All ER 177 at p.185[35] Montgomery, J. (2001) ‘Informed consent and clinical research with children’, in Informed

consent in medical research, Doyal, L. & Tobias, S.J. (eds.), p.173-181, London: BMJ Books., p.176

[36] Ibid.[37] Alderson op.cit., n.18, p.107, Morrow, V. & M, Richards. (1996) ‘The Ethics of Social

Research with Children: An Overview’, Children and Society, 10, 90-105, p.95; Kirby, P. (2002) ‘Involving young people in research, in The new handbook of children’s right: Comparative policy and practice Franklin B. (ed.), pp.268-284, London: Routledge, p.272

[38] Gillick op.cit., n.33

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cle Lords held that: ‘the test to be applied was whether the child had sufficient understanding and intelligence to enable him or her to understand fully what is proposed’[39]. Despite the fact that the House of Lords did not make it clear exactly what is meant by ‘understand fully’, it can be concluded from discussions in the House of Lords that it requires an appreciation of the consequences of treatment, including possible side effects, and the anticipated consequences of a failure to treat. Although it was formulated in the context of family planning, the test of maturity set out in the Gillick case is now used as a test of general application, and children who satisfy this test for competence are described as ‘Gillick competent’ . If it is accepted that Gillick competence extends beyond the context of treatment, then children who satisfy this test for competence can give a valid and legal consent to participate in medical research.[40] However, the test of maturity set out in the Gillick case by the House of Lords should be assessed in respect of each individual child, and each separate medical pro-cedure. Therefore, it is impossible to establish rules specifying the age up to which parental consent is necessary, and from which children’s own consent might be sufficient. Thus, King and Churchill report that children 12 years of age and older could qualify as mature minors for participation in child maltreat-ment research.[41] Alderson and Montgomery suggest that children 5 years of age should be assumed to be competent to participate in medical research, and the onus would be on adults to demonstrate the child’s incompetence rather than for the child to pass tests of competence, which many adults might fail.[42]

4. The Elements of Informed ConsentInformed consent has five essential elements.[43]. They can be described as choice, voluntariness, understanding, disclosure and finally competence, which the author has discussed above.

4.1. Choice and VoluntarinessWhen you say ‘I consent’, you mean that you freely agree to any proposal. This also includes an additional explanation that your consent to a certain study or research has been sought and granted without any outside interference, or any element of coercion.

[39] Montgomery, op.cit., n.24, p.118[40] Montgomery, op.cit., n.24[41] King &Churchill, op.cit., n.22, p.721[42] Alderson, P. & Montgomery, J. (1996) ‘What about me?’, Health Services Journal, 11,

22-24, p.24[43] Faden, R. & Beauchamp, T. (1986) A history and theory of informed consent, New York:

Oxford University Press; Hart, S, C. & Thong, Y, H. (1995) ‘Parental perceptions and attitudes about informed consent in clinical research involving children’, Social Science Medicine, 41 (12), 1647-1651

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cleThe possibility of acting under coercion and a child’s degree of choice differ between social science research and clinical research. In this context, the design of the research and procedure used, have a significant impact on the reliability of the research. For example, Powel and Vacha refer specifically to psychological research, and point out that:

‘It is possible that research projects can be designed to be “fun” and that the child will therefore enjoy participation. It is also possible that children will appreciate some type of concrete, post hoc reinforcement, like a pack of gum or an inexpensive toy, but it may be considered coercion if the child is informed prior to giving assent that he or she will receive a reward following participation’ [44]

However, the difference between coercion and persuasion in clinical research is not at all simple and clear. We can say that ‘persuasion aims to enlist the patient’s reason by providing information and coercion aims to manipulate the patient’s decision by influences which undermine independent reasoning.’[45]

With respect to a child’s degree of choice, we should discuss one final point, which is closely related to the designing of educational school-based research. The issue of children’s degree of choice in the educational school-based research raises serious concerns, since there is a differential power relation between the child and the teacher in a school environment. As Denscombe and Aubrook[46] and David et al.[47]point out, the school context is inscribed by differential power relations, making it very difficult for children and young people to opt out of participating in research. They argue that the high pupil response rates achieved in school-based studies is rooted in this ‘hidden pressure’, and that researchers need to consider the ethics of their practice in this respect.[48] Therefore, in order to avoid the risks of this hidden pressure, which confine the children’s degree of choice; researchers make it clear that there will be no punishment if any child refuses to participate in research. The child’s right to refuse must be respected,[49] also researchers must take all necessary precautions to enable chil-dren to understand that the research is neither a part of education nor another piece of school work. Indeed, it is a voluntary and non-educational activity.[50]

Continuing consent is another necessary condition for the ethical conduct of any research with children. Continuing consent during longer projects involves

[44] Powell, M, P. & Vacha, H, T. (1994) ‘Issues related to research with children: What Counseling Psychologist Need to Know’, The Counseling Psychologist, 22 (3), 444-453, p.450

[45] Gillett, G. R. (1989) ‘Informed consent and moral integrity’ Journal of Medical Ethics, 15 (3), 117-123, p.118

[46] Denscombe and Aubrook op.cit., n.19; David et al., op.cit. n.3[47] David et al. op.cit., n.3[48] Ibid., p.352[49] Powell & Vacha, op.cit., n.44[50] Denscombe and Aubrook op.cit., n.19; David et al. op.cit. n.3

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cle checking that children are still willing to carry on. Sometimes children are afraid to refuse, and the researchers need to watch out for cues and gently check how they feel[51]. In order to obtain free and continuing consent, researchers must provide children with the opportunity to withdraw from research whenever they wish. All of those rules have to be considered before setting any medical, or social science research with children, such as research with young offenders, sexually or physically abused children, otherwise research carried out without taking those rules into account- as mentioned before- has to be regarded as unethical, and inconsistent with the essential elements of informed consent.

4.2. Disclosure and UnderstandingDisclosure and understanding are another two crucial elements of informed consent. No matter how intelligent they are, children can not fully understand the whole concept of the research without the aid of professionals who seek consent. Understanding disclosed information and granting a valid and free consent is totally dependent on forming a good and mutual communication with children.[52] In order to do that, researchers should use simple language and methods which are based on children’s skills, and develop innovative and adapted techniques such as pictures, drawings and sentence completion. Additionally, researchers must take special care to explain the purpose of the research, the length of time it will take, the procedures that will be used, a description of the potential benefits and risks, as well as the child’s right to refuse to participate, in terms that the child will understand.[53]

5. ConclusionAs mentioned before, children are beginning to be perceived as competent social actors, as a result of the United Nations 1989 Convention on the Rights of the Child. However, perceiving children as competent social actors does not necessarily mean that research should be conducted in the same way as with adults. Due to their special vulnerability and inherent inability to give a fully informed consent, the issue of informed consent must be considered to be the central difference between research with children, and research with adults. Research carried out without addressing the issue of informed consent and examining whether or not a child has sufficient capacity to fully understand the concept of the proposed research, has to be regarded as unethical, unlaw-ful and inconsistent with the universally accepted basic principles of scientific research such as objectivity, and impartiality. Therefore, when doing research with

[51] Alderson, 2004, op.cit., n.18, p.107[52] Faden & Beauchamp, op.cit., .n.43[53] Powell & Vacha, op.cit., n.44, p.447

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clechildren and obtaining consent from them, researchers should always employ innovative and adapted techniques, and respect children’s evolving capacities and autonomy. A method, which is consistent with the principle of respecting the evolving capacities of the child, set out by Article 5 of the UN Convention on the Rights of the Child, should be devised and used. Otherwise, we can not talk about a scientific research; in other words, addressing the concept of informed consent and children’s evolving capacities and autonomy is sine qua non for conducting ethical, lawful and scientific research with children.

REFERENCES

Alderson, P. (1995). Listening to Children: Ethics and Social Research. Ilford: Barnardo’s.

Alderson, P. (2004). Ethics. In Fraser, S., Lewis, V., Ding, S., & Kellett, M. (Eds.), Doing research with children and young people (pp.97-112). London: Open University Press.

Alderson, P. & Montgomery, J. (1996). What about me? Health Services Journal, 11, 22-24.

Croll, P. (1986). Systematic Classroom Observation. Sussex: The Falmer Press.

David, M., Edwards, R., & Alldred, P. (2001). Children and school-based research: ‘informed consent’ or ‘educated consent?’ British Educational Journal, 27 (3), 347-365.

Denscombe, M. & Aubrook, L. (1992). It’s just another piece of school work: the ethics of questionnaire research on pupils in schools. British Educational Journal, 18, 113-131.

Edwards, R. & Alldred, P. (1999). Children and Young people’s views of social research: The case of research on home- school relations. Childhood, 6 (2), 261-281.

Ennew, J. & Morrow, V. (1994). Out of the mouths of babes. In E.Verhelen & F.Spiess-Chaert. (Eds.), Children’s Rights: Monitoring Issues (pp.61-84). Gent: Mys & Breesch.

Faden, R. & Beauchamp, T. (1986). A history and theory of informed consent. New York: Oxford University Press.

Gillett. G. R. (1989). Informed consent and moral integrity. Journal of Medical Ethics, 15 (3), 117-123.

Greig, A. & Taylor, J. (1999). Doing research with children. London: Sage Publications.

Hart, S, C. & Thong, Y, H. (1995). Parental perceptions and attitudes about informed consent in clinical research involving children. Social Science & Medicine, 41 (12), 1647-1651.

James, A., Jenks, C. & Prout, A. (1998). Theorizing Childhood. Cambridge: Polity Press.

Kaufmann, C, L. (1983). Informed consent and patient decision making: Two Decades of Research. Social Science & Medicine, 17 (21), 1657-1664.

King, M, P. & Churchill, R. L. (2000). Ethical Principles Guiding Research on Child and Adolescent Subjects. Journal of Interpersonal Violence, 15 (7), 710-724.

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cle Kirby, P. (2002). Involving young people in research. In Franklin B. (Ed.), The new handbook of children’s right: Comparative policy and practice (pp.268-284). London: Routledge.

Montgomery, J. (1993). Consent to health care for children. Child Law, 5 (3), 117-124.

Montgomery, J. (2001). Informed consent and clinical research with children. In Doyal, L. & Tobias, S.J. (Eds.), Informed consent in medical research (pp.173-181). London: BMJ Books.

Morrow, V. & M, Richards. (1996). The Ethics of Social Research with Children: An Overview. Children and Society, 10, 90-105.

Morrow, V. (1999). It’s Cool,…Cos You Can’t Give Us Detentions and Things, Can You? : Reflec-tions on Researching Children. In P, Milner & B, Carolin. (Eds.), Time to Listen to Children (pp.203-215). London: Routledge.

Nesbitt, E. (2000). Researching 8 to 13 Years-olds’ Perspectives on their experience of religion. In A, Lewis & G, Lindsay. (Eds.), Researching Children’s Perspectives (pp.135-149). Buckingham: Open University Press.

Pole, C., Mizen, P. & Bolton, A. (1999). Realizing Children’s agency in research: partners and participants? International Journal of Social Research Methodology, 2, 39-54

Powell, M, P. & Vacha, H, T. (1994). Issues related to research with children: What Counseling Psychologist Need to Know. The Counseling Psychologist, 22 (3), 444-453.

Punch, S. (2002). Research with Children: The same or different from research with adults? Childhood, 9 (3), 321-341.

* Southampton University (PhD Student), Manchester University (LL.M), Marmara University (LL.B), Attorney (Turkey), Member of Istanbul Bar Association. email: [email protected].

PEERREVIEWED

ARTICLE

The Evidentiary Effect of the Contract

Particulars Under the Rotterdam Rules

Belma BULUT*

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Abstract

The contract particulars have crucial importance when an action is brought against the carrier. They assist to the claimants, and therefore, the Convention renders them some statutory evidentiary values. Depending on the holder of the transport document, the contract particulars in a transport document are traditionally specified as either prima facie evidence or conclusive evidence. The Rotterdam Rules follows the traditional division, but it introduces some novelties in respect of the conclusive evidence rule. This article examines that how the Convention regulates the prima facie evidence rule and the conclusive evidence rule.

Keywords: evidentiary effect, contract particulars, prima facie evidence, conclusive evidence, the Rotterdam Rules.

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The Evidentiary Effect of the Contract Particulars Under the Rotterdam Rules / BULUT


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cle 1. IntroductionThe contract particulars in the transport documents have vital effects over the international sales, since, in international trade, many goods are sold on the basis of the transport document.[1] The third parties, who are not the original parties of the contracts of carriage, act relying on the accuracy of the contract particulars in the transport documents. When the transport document is transferred to the third party by endorsement or assignment, the third party obtains to the right of sue, and if an action is brought against the carrier the particulars in the transport document will assist to him.[2]

The Rotterdam Rules define the contract particulars as “any information relating to the contract of carriage or to the goods (including terms, notations, signatures and endorsements) that is in a transport document or an electronic transport record”.[3] As it is seen, the definition of the contract particulars addresses to any information included in the transport documents.[4]

Although, the carrier and the shipper are free to put any information in the transport document the Convention provides a list related to the contract particulars that must be indicated in the transport document.[5] Pursuant to

[1] Unlike the former sea conventions, the Rotterdam Rules introduce some specific provisions about the electronic transport records. The evidentiary effect of the electronic transport records is the same with the evidentiary effect of transport documents and thus in this article the electronic transport records will not be explained separately.

[2] See, Richard Williams, Transport Documentation- the New Approach, in Rhidian Thomas (ed) A New Convention for the Carriage of Goods by Sea : the Rotterdam Rules : An analysis of the UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (Lawtext Publishing Limited, 2009), p. 211

[3] Art 1(23) of the Rotterdam Rules[4] The same view was pointed in the Working Group. See, Report of the Working Group

on Transport Law on the Work of Its Ninth Session, UN Doc., A/CN.9/510, para.153[5] Art 36 of the Rotterdam Rules :”1.The contract particulars in the transport document

or electronic transport record referred to in article 35 shall include the following information, as furnished by the shipper: (a) A description of the goods as appropriate for the transport;(b) The leading marks necessary for identification of the goods;(c) The number of packages or pieces, or the quantity of goods; and (d) The weight of the goods, if furnished by the shipper.

2. The contract particulars in the transport document or electronic transport record referred to in article 35 shall also include: (a) A statement of the apparent order and condition of the goods at the time the carrier or a performing party receives them for carriage; (b) The name and address of the carrier; (c) The date on which the carrier or a performing party received the goods, or on which the goods were loaded on board the ship, or on which the transport document or electronic transport record was issued; and (d) If the transport document is negotiable, the number of originals of the negotiable transport document, when more than one original is issued.

3. The contract particulars in the transport document or electronic transport record referred to in article 35 shall further include: (a) The name and address of the consignee, if named by the shipper; (b) The name of a ship, if specified in the contract of carriage;(c) The place of receipt and, if known to the carrier, the place of delivery; and (d) The port of loading and the port of discharge, if specified in the contract of carriage.

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cleArticle 36, some particulars must be furnished by the shipper (Art 36(1)), some particulars must be provided by the carrier (Art 36(2)), and some particulars must be added if it is possible under the circumstances (Art 36 (3)).[6] Accord-ingly, under Article 36, while some information must be mandatorily indicated in the transport document irrespective of whether provided by the shipper or the carrier, the inclusion of some information depends on the circumstances. It must be pointed that the absence of the mandatory contract particulars does not affect the validity of the transport document.[7] Further, according to Article 1(23) signature is one of the contract particulars and the Conven-tion requires that the transport document must be signed by the carrier or a person acting on behalf of it.[8] However, unlike the listed contract particulars, the outcomes of the absence of signature are left to the national laws, thereby, absence of the signature might affect the validity of the transport documents under the national laws.

The Convention has a detailed provision related to evidentiary effect of the contract particulars.[9] The evidentiary effect of the contract particulars shows an alteration with respect to the holder of the transport document. If the transport document is in the hand of the shipper, then the contract particulars are mere prima facie evidence against the carrier.[10] However, if the transport document is transferred to a third party, then the evidentiary effect of the contract par-ticulars will depend on the types of the transport document.[11]

4. For the purposes of this article, the phrase “apparent order and condition of the goods” in subparagraph 2 (a) of this article refers to the order and condition of the goods based on: (a) A reasonable external inspection of the goods as packaged at the time the shipper delivers them to the carrier or a performing party; and (b) Any additional inspection that the carrier or a performing party actually performs before issuing the transport document or electronic transport record.”

[6] For further about Art 36 see, Michael F Sturley, Tomotaka Fujita, G.J Van der Ziel, Rotterdam Rules: The UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, (Sweet & Maxwell, 2010), paras.7.024-7.043; Filippo Lorenzon, Transport Documents and Electronic Transport Records, in Yvonne Baatz and others, The Rotterdam Rules: A Practical Annotation, (Informa, 2009), paras 36.01-36.14; Williams (n 2) p. 196-205

[7] See, Art 39 of the Rotterdam Rules[8] See, Art 38 of the Rotterdam Rules[9] See, Art 41 of the Rotterdam Rules[10] See, Art 41(a) of the Rotterdam Rules[11] See, Art 41(b) and 41(c) of the Rotterdam Rules

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cle 2. Transport Document in the Hand of the Shipper

In respect of the prima facie evidence rule, the Rotterdam Rules follow the traditional execution. Article 41(a) indicates that “a transport document or electronic transport record is prima facie evidence of the carrier’s receipt of the goods as stated in the contract particulars”. Namely, contract particulars in the transport documents are nothing more than a rebuttable receipt that the goods have been received by the carrier as indicated condition in the contract particulars. Because of the prima facie evidentiary value of the particulars, the carrier is allowed to prove to the contrary. In order to apply primary evidence rule, firstly, the contract particulars have not been qualified by the carrier in accordance with Article 40 and secondly, the transport document must be in the hands of the shipper.[12]

Article 41(a) does not address to Article 36, thereby, the prima facie eviden-tiary value of the contract particulars is not limited to the contract particulars listed in Article 36. It seems that prima facie evidence rule applies to all par-ticulars irrespective of whether listed in Article 36 or added by the parties.[13] For the sake of example, when a transport document is in the hand of the shipper, the contract particular related to the description of the goods[14] or the weight of the goods[15] as well as the contract particular related to name of the carrier[16] or the name of the ship[17] is prima facie evidence against the carrier.

Article 41(a) merely mentions “the carrier’s receipt of the goods”. It is not clear whether receiving a cargo is also prima facie evidence for the shipment of the cargo, in cases, where there is a received for shipment bill of lading. For instance, a received for shipment bill of lading indicates that 1.000 bales goods have been received. Such statement is prima facie evidence of the car-rier’s receipt of the goods, but, is that statement also prima facie evidence as to the cargo that has been loaded on a ship’s board? If Article 41(a) is literally interpreted, it can be said that received for shipment bill of lading is not prima facie evidence for the shipment of the goods. On the other hand, the provision might be construed broadly and might cover both receiving and shipment of the goods. For example, under English law, if there is a statement that shows the goods have been received, the statement is treated prima facie evidence for both receipt and shipment of the goods.[18] Consequently, it seems that the

[12] See, Art 40, the chapeau of Art 41, Art 41(a) of the Rotterdam Rules, and see infra part 4. [13] See, Lorenzon (n 6) para. 41-02Guenter Treitel, F.M.B. Reynolds, Carver on Bills of

Lading, (Sweet & Maxwell, 2011, 3th Ed) para 2-060.[14] See, Art 36(1)(a) of the Rotterdam Rules[15] See, Art 36(1)(d) of the Rotterdam Rules[16] See, Art 36(2)(b) of the Rotterdam Rules[17] See, Art 36(3)(b) of the Rotterdam Rules[18] See, Indira Carr, International Trade Law, (4th edn 2010), p. 175

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cleissue will depend on whether the national courts will interpret the provision narrowly or broadly.

Contrary to the conclusive evidence rule, primary evidence rule does not make any distinction between types of the transport document.[19] Namely, if the transport document is in the hand of the shipper the document becomes prima facie evidence of the carrier’s receipt of the goods irrespective of whether the transport document is negotiable or non-negotiable.

Traditionally, the contract particulars in the bill of lading are treated as prima facie evidence when the bill of lading is in the hand of the shipper. Article III(4) of the Hague-Visby Rules states that the bill of lading is prima facie evidence that the goods have been received by the carrier.[20] Article III(4) expressly refers to Article III(3)(a), (b) and (c), which construct to the list of the contract particulars.[21] Accordingly, under the Hague-Visby Rules, in the hands of the shipper a bill of lading is mere receipt related to the leading marks, quantity or weight of the received goods and the apparent order and condition of the received goods. In respect of the leading marks, it should be clarified that the Hague-Visby Rules require that the leading marks must be necessary for the identification of the goods.[22]However, if the leading mark is simply written for another purpose rather than the identification of the goods then the leading marks will not have prima facie evidence feature against the carrier.[23]

Contrary to Article III (4) of the Hague-Visby Rules, Article 41(a) of the Rotterdam Rules does not directly refer to the contract particular related to the goods in Article 36. Instead of referring merely to Article 36, Article 41(a) addresses to all contract particulars related to the goods as indicated both in Article 36 and in clauses that added in accordance with the parties’ wishes. Consequently, under the Hague-Visby Rules, prima facie evidence feature of the bill of lading is bounded by the contract particulars which is indicated in Article III(3)(a), (b) and (c) whereas under the Rotterdam Rules, all contract particulars are treated as prima facie evidence against the carrier.

Additionally, the Hamburg Rules follow the traditional rule in the Hague-Visby Rules and state that, in the hands of the shipper, the bill of lading is prima facie evidence that the goods are received by the carrier.[24] Unlike the Hague-Visby Rules, the Hamburg Rules do not refer to the contract particulars

[19] See, Art 41 of the Rotterdam Rules, and infra part 3[20] See, Art III (4) of the Hague-Visby Rules “Such a bill of lading shall be prima facie

evidence of the receipt by the carrier of the goods as therein described in accordance with paragraph 3 (a), (b) and (c). However, proof to the contrary shall not be admissible when the bill of lading has been transferred to a third party acting in good faith.”

[21] See, Art III(3) regulates the contact particulars in a bill of lading. Contrary to Art 36 of the Rotterdam Rules, Art III (3) of the Hague-Visby Rules includes a short list.

[22] See, Art III(3)(a) of the Hague-Visby Rules. See, Carr (n 19) p. 177[23] ibid[24] See, Art 16(3)(a) of the Hamburg Rules

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cle related to the goods.[25] Also, the Hamburg Rules expressly mentions to the evidentiary effect of the shipped bill of lading. Article 16(3)(a) states that if there is a received for shipment bill of lading, the bill of lading is prima facie evidence that the goods have been received by the carrier, on the other hand, if there is a shipped bill of lading then the bill of lading is prima facie evidence that the goods have been loaded on board of a ship.

Finally, it should be added that, under the Rotterdam Rules, there is no division such as bill of lading or sea waybill. The Rotterdam Rules prefer to use the word “transport document” as a generic term and if the preconditions of being a transport document have been satisfied then the document is treated as the transport document irrespective of whether it is a bill of lading or a sea waybill.[26] The provisions about the evidentiary effect of the contract particulars in the Hague-Visby and the Hamburg Rules only cover the bills of lading and do not say anything about the other documents.[27] Accordingly, while in the former conventions only the contract particulars in the bill of lading are treated as prima facie evidence, in the Rotterdam Rules, if there is a document in the hand of the shipper and the document is treated as the transport document in the meaning of the Convention then all contract particulars are treated as prima facie evidence.

3. Transport Document in the Hand of the Third Party

A contract of carriage is concluded between the shipper and the carrier and the third party is not one of the original parties of the contract of carriage.[28] Therefore, like the former conventions, the Rotterdam Rules aim to protect the rights of the third party by assuming the contract particulars as conclusive evidence in favour of the third party.[29] The third party is out of the contract of carriage, but, when a transport document is transferred or assigned to him the third party will obtain some rights against the carrier. It must be pointed that the shipper cannot be treated as a third party since it is the original party of the contract of carriage. However, in the Working Group, it was considered that in cases of FOB sales although the seller arranged the contract of carriage

[25] See, Art 15 and Art 16(3)(a) of the Hamburg Rules[26] See Art 1(14) of the Rotterdam Rules. For further see, Sturley, Fujita, Van der Ziel (n 6),

para.7.006-7.010; Williams ( n 2) p. 193[27] See, Art III(4) of the Hague-Visby Rules and Art 16(3)(a) of the Hamburg Rules. Also

see, Report of Working Group III (Transport Law) on the Work of Its Eighteenth Session, UN Doc. A/CN.9/616, para. 50

[28] See, Art 1(1), Art 1(5), Art 1(8) of the Rotterdam Rules.[29] See, United Nations Commission on International Trade Law Working Group III

(Transport Law) Ninth Session, UN Doc. A/CN.9/WG.III/WP.21, para 148

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cleon behalf of the buyer and the buyer would be the shipper under the contract of carriage, the buyer had paid value relying on the particulars in the transport document; thus, it would obtain to the same protection as the third parties.[30] Pursuant to that suggestion, although the FOB buyer is not a third party if it acts in reliance of the transport document then its rights should be protected as it is a third party. However, that suggestion was not accepted, and in the final article, the Convention only protects to the rights of the third party, who is not the original party of the contract of carriage.

Under the Rotterdam Rules, when a transport document is in the hand of the third party, the evidentiary effect of the contract particulars differs on the basis of the types of the transport document. Pursuant to the Convention, types of the transport documents are (a) negotiable transport document, (b) negotiable transport document not to be required surrender, (c) non-nego-tiable transport document, and (d) non-negotiable transport document that requires surrender.[31] If a document has jointly met all preconditions of being a transport document under Article 1(14) then the type of the document is determined in accordance with the particulars in it. The transport document is classified as a negotiable transport document if it includes the phrase “to order”,”negotiable” or any other word that has the same meaning under the applicable law and indicates “that the goods have been consigned to the order of the shipper, to the order of the consignee, or to bearer, and it is not explic-itly stated as being ‘non-negotiable’ or ‘not negotiable’.[32] On the other hand, Article 1(16) defines the non-negotiable transport document that as opposite the negotiable transport document.[33] Namely, if a transport document does not fall into the definition of negotiable transport document then it is classified as non-negotiable transport document. Furthermore, the types of negotiable transport document not to be required surrender, and non-negotiable transport document required surrender depend on whether the goods can be taken over without surrender of the transport document or not. Although, the negotiable transport documents usually require surrender to obtain delivery of the goods, some the transport documents might expressly indicate that there is no need to surrender the document.[34] In such cases, the transport document is classified as negotiable transport document not to be required surrender. On the other hand, if there is a non-negotiable transport document then there is no need to surrender the document to obtain delivery of the goods unless the transport document indicates to the contrary.[35]

[30] Ibid para 149[31] See, Art. 1(15), Art. 1(16), Art. 46 and Art. 47(2) of the Rotterdam Rules[32] See, Art 1(15) of the Rotterdam Rules[33] See Art. 1(16) of the Rotterdam Rules[34] See, Art. 47(2) of the Rotterdam Rules[35] See, Art. 46 of the Rotterdam Rules

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cle 3.1- Article 41(b) of the Rotterdam RulesAfter the foregoing brief explanation about the types of transport documents, now, the evidentiary value of types of the transport documents will be exam-ined. Article 41(b)(i) indicates the evidentiary value of the contract particulars in cases where there are negotiable transport documents. According to the provision, the carrier is banned to prove contrary of any contract particulars if a negotiable transport document is transferred to the third party, who acts in good faith. The prerequisites of Article 41(b)(i) are that firstly pursuant to the chapeau of Article 41, the carrier has not qualified the particulars under Article 40, secondly, there must be a negotiable transport document in the meaning of Article 1(15), thirdly the negotiable transport document must be transferred to a third party and fourthly, the third party must act in good faith.[36] When the preconditions have been jointly satisfied then the contract particulars in the negotiable transport document are treated as conclusive evidence and the carrier is not allowed to prove contrary. It should be added that acting in good faith is sufficient for the application of the conclusive evidence rule in respect of Article 41(b). Although, in former draft article, it was required that the third party had paid value or had acted in reliance of the information on the transport document, the final article does not require such requirements.[37]

Furthermore, pursuant to Article 41(b)(ii) the contract particulars in a non-negotiable transport document, that requires surrender, are also conclu-sive evidence against the carrier if the transport document is the hand of the consignee acting in good faith.[38] Article 41(b)(ii) has the same preconditions with Article 41(b)(i). The one difference is that the usage of the word “the con-signee” instead of the word “a third party”. Under the Convention, there might be a third party who obtains a negotiable transport document by transferring and becomes the holder of the document, or there might be a third party who entitles to take delivery of the goods under a non-negotiable transport docu-ment and becomes consignee.[39] Namely, in cases of non-negotiable transport documents, the third party is specified as the consignee. The Convention defines consignee as “a person entitled to delivery of the goods under a contract of carriage or a transport document or electronic transport record”.[40] It should be emphasised that pursuant to the definition the consignee might be the shipper or any person other than the shipper. In order to apply Article 41(b)

[36] See, Art 1(15), Art 40, chapeau of Art 41, and Art 41(b)(i)[37] See, Report (n 29) p.48, paras 148-149 [38] See, Art 41(b)(ii) of the Rotterdam Rules [39] See, Report of Working Group III (Transport Law) on the Work of Its Twentieth Session,

UN Doc., A/CN.9/642, para. 11; Report of Working Group III (Transport Law) on the Work of Its Twenty-First Session, UN Doc., A/CN.9/645, para. 140; Williams (n 2) p.194

[40] See, Art 1(11) of the Rotterdam Rules

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cle(ii) the consignee must be a person that is not the shipper; otherwise instead of Article 41(b)(ii), Article 41(a) applies to the issue.[41]

At first sight, the evidentiary effect of the contract particulars in Article 41(b) seems as the same with the evidentiary effect of the contract particulars in the Hague-Visby Rules and the Hamburg Rules.[42] However, the Rotterdam Rules introduce some vital novelties. Firstly, one of the most important novelties in Article 41(b) is that it addresses to any contract particulars in the transport document. Although, the former draft article followed to the prior sea conven-tions and the effect of conclusive evidence rule is limited only to the description of the goods, in the final provision the effect of the conclusive evidence rule is widened. [43] Article 41(b) uses the word “any” without referring to contract particulars in Article 36. Therefore, under the Rotterdam Rules, not only the contract particulars that are listed in Article 36 but also the particulars that are added by the parties become conclusive evidence when all preconditions have been met. In this respect, the Rotterdam Rules provide more protection to the third parties than the former conventions.

Secondly, unlike the former convention, conclusive evidence rule applies both the negotiable transport document e.g. the bills of lading and the non-negotiable transport document, that require surrender, e.g. the straight bills of lading.[44] Accordingly, under the Rotterdam Rules, the scope of the conclusive evidence rule is broader than the former convention, and Article 41(b) protects both the rights of the holder and the consignee who is not the shipper.

Consequently, the Rotterdam Rules introduce a broad scope of application for the conclusive evidence rule by applying all types of transport documents and covering all information in the transport documents.

3.2- Article 41(c) of the Rotterdam RulesArticle 41(c) goes a step further and extends the scope of the conclusive evi-dence rule to the non-negotiable transport documents that do not require surrender. In the Working Group, there was an intensive debate about Article 41(c), and some suggested that the conclusive evidence rule should also apply the particulars in non-negotiable transport documents whereas others sug-gested that the conclusive evidence rule is inconsistent with the nature of the

[41] See supra part 2. Also, see, Sturley, Fujita, Van der Ziel (n 6) para.7.086; Tomotaka Fujita, Transport Documents and Electronic Transport Records, in Alexander Von Ziegler, Johan Schelin, Stefano Zunarelli, The Rotterdam Rules 2008: Commentary to the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, (Wolters Kluwer, 2010), p.185

[42] See Art III(4) of the Hague-Visby Rules and Art 16(3)(b) of the Hamburg Rules[43] See, Report (n 29) p.48; Sturley, Fujita, Van der Ziel (n 6) para.7.085[44] See, Art 41(b)(i) and Art 41(b)(ii). Also, Anthony Diamond, The Rotterdam Rules,

LMCLQ (2009), pp.445, p.507; Francesco Berlingieri, Revisiting the Rotterdam Rules, LMCLQ (2010), pp. 583, p.625

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cle non-negotiable transport documents.[45] Finally, the Working Group combined those two views and Article 41(c) introduces a weaker conclusive evidence rule with more stringent preconditions.[46] In order to apply the conclusive evidence rule under Article 41(c), firstly the carrier has not qualified the contract par-ticulars under Article 40, secondly, in the hand of the consignee there must be a non-negotiable transport document that does not require surrender, thirdly, the consignee must act in good faith and fourthly, the consignee must rely on the contract particulars in the transport document. When the foregoing four prerequisites have been jointly satisfied, then the conclusive evidence rule applies to the following particulars;

“(i) The contract particulars referred to in article 36, paragraph 1, when such contract particulars are furnished by the carrier;

(ii) The number, type and identifying numbers of the containers, but not the identifying numbers of the container seals; and

(iii) The contract particulars referred to in article 36, paragraph 2.”[47]

As it is seen, Article 41(c) requires one more precondition in addition to the preconditions indicated in Article 41(b). Accordingly, the consignee, who has possession of a non-negotiable transport document, must act both in good faith and in reliance of the information in the transport document. For instance, if the consignee does not know that the information is incorrect and has paid the purchase price relying on the information in the non-negotiable transport document, Article 41(c) will be applicable.[48] It is said that that precondition might be added to prevent the consignee, who is also the shipper, to benefit the conclusive evidence rule.[49] However, it seems that there is no need such an extra condition because in the hands of the shipper the contract particulars in the transport document are only prima facie evidence under Article 41(a) irrespective of types of the transport document. This is because; if the consignee is also the shipper it does not need to be protected under conclusive evidence rule since the shipper has concluded the contract of carriage with the carrier.[50]

[45] See, Report of Working Group III (Transport Law) on the Work of Its Eleventh Session, UN Doc., A/CN.9/526, paras. 45-48; United Nations Commission on International Trade Law Working Group III (Transport Law) Twelfth Session, UN Doc., A/CN.9/WG.III/WP.32, p. 43; United Nations Commission on International Trade Law Working Group III (Transport Law) Sixteenth Session, UN Doc., A/CN.9/WG.III/WP.56, p.37; United Nations Commission on International Trade Law Working Group III (Transport Law) Seventeenth Session, UN Doc., A/CN.9/WG.III/WP.62, paras 44-46; Report (n 28) paras 45-68

[46] See, United Nations Commission on International Trade Law Working Group III (Transport Law) Twentieth Session, UN Doc., A/CN.9/WG.III/WP.94, p.2; Report (n 40) para 14; Fujita, Transport Documents and Electronic Transport Records, (n 42) p.186

[47] See, Art 41(c) of the Rotterdam Rules[48] See, Sturley, Fujita, Van der Ziel (n 6) para. 7.090[49] See, Diamond (n 45) p.507; Berlingieri (n 45) p.626[50] See, Report (n 28) para.66

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cleAdditionally, unlike Article 41(b), pursuant to Article 41(c), instead of all particulars only the contract particulars that are listed in Article 41(c)(i)-(iii), are specified as conclusive evidence against the carrier. In this way, the carrier is prevented to benefit the inaccuracy of the particulars which have been furnished under the control and knowledge of it.[51] Article 41(c)(i) requires that the particulars, which are listed in Article 36(1), must be provided by the carrier. It should be pointed that the particulars in Article 36(1) are generally furnished by the shipper, but sometimes they might be provided by the carrier.[52] In respect of Article 41(c)(i), the provider of the information has a decisive role upon the evidentiary value of the particulars in a non-negotiable transport document. If the information is provided by the carrier then it will be specified as conclusive evidence and the carrier cannot prove contrary, however, if the shipper is the provider the carrier is allowed to prove contrary.[53]

On the other hand, the particulars indicated in Article 41(c)(ii) are often furnished by the shipper and verified by the carrier whereas the particulars referred in Article 41(c)(iii) are provided by the carrier under his knowledge and control.[54] The aim of the provision prevents the carriers to apply inaccurate information that has been furnished by them. However, contrary to Article 41(c)(i), Article 41(c)(ii) and (iii) do not expressly state that the information must be furnished by the carrier. Therefore, according to strict literal interpretation, it might be said that in respect of Article 41(c)(ii) and (iii) the provider of the information is not important and even though the information is furnished by the shipper it might be treated as conclusive evidence if all preconditions have been met.

Last but not least, Article 41(c) introduces a novelty, and for the first time, an international convention regulates evidentiary effect of non-negotiable transport document.[55] Further, the parties are free to increase the evidentiary value of the particulars in a non-negotiable transport document.[56] However, because of the Article 79, they cannot downgrade the evidentiary value of the particulars.[57]

[51] See, Williams (n 2) p. 214[52] See, Sturley, Fujita, Van der Ziel (n 6) para.7.089[53] See, Report (n 28) para. 61[54] See, Sturley, Fujita, Van der Ziel (n 6) para.7.089[55] See, Berlingieri (n 45) p.625[56] See, Report (n 28) para 67.[57] See Art 79 of the Rotterdam Rules

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cle 4. The Evidentiary Effect of the Qualified Contract particulars

Contrary to the Hague-Visby Rules, the Rotterdam Rules follow the Ham-burg Rules and provide an express provision about the evidentiary effect of the qualifying clauses.[58] Article 41 starts with an exception and states that if the contract particulars are qualified by the carrier in accordance with Article 40 then Article 41 will not apply. Article 40 allows the carrier to qualify the information in the transport document that is furnished by the shipper.[59] It should be pointed that the carrier must qualify the information as indicated method in Article 40; otherwise there will not be a valid qualification clause, which will be able to prevent the application of Article 41.[60]

Pursuant to 40, the carrier can only qualify the information listed in Article 36(1) i.e. only the contract particulars related to the goods can be qualified by the carrier. The important point is that the Convention limits the exception to the extent that qualifying clauses, namely, only the qualified contract particulars will lose their prima facie or conclusive evidentiary value.[61] For instance, if the carrier qualifies the information about the weight of the cargo it does not affect the evidentiary value of the leading marks or other particulars listed in Article 36(1). Because of the limited scope of the carrier’s right to qualify the information, the evidentiary value of the particulars cannot be completely superseded by the carrier.[62] Consequently, when the carrier validly qualifies the information listed in Article 36(1) then the qualified particular does not have any evidentiary effect under Article 41, but Article 41 will still apply for unqualified particulars.

5. ConclusionThe Convention regulates the evidentiary effect of the transport documents with a detailed and complex provision. While, in respect of the prima facie evidence rule the Convention follows to the traditional execution, in respect of the conclusive evidence rule the Convention introduces some novelties. First time an international convention regulates the evidentiary effect of all types of transport documents. Under the Convention not only the contract particulars in negotiable transport documents but also the particulars in non-negotiable transport documents, which require surrender, are specified as conclusive

[58] See Art III(4) of the Hague-Visby Rules, Art 16(1), (2), and (3) of the Hamburg Rules, and the chapeau of Art 41 of the Rotterdam Rules.

[59] See. Art 40 of the Rotterdam Rules. [60] See, Sturley, Fujita, Van der Ziel (n 6) para.7.075[61] See, Report (n 29) para. 150; Report (n 28) paras.71-72[62] See, Report (n 28) para. 72.

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cleevidence against the carrier. Furthermore, the evidentiary effect of the particulars in non-negotiable transport documents, that do not require surrender, is also regulated expressly. However, it should be kept in mind that because of the complex wording, the Convention might cause some new problems.

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BOOKS

Carr, I., International Trade Law, (4th edn 2010)

Fujita, T., Transport Documents and Electronic Transport Records, in Alexander Von Ziegler, Johan Schelin, Stefano Zunarelli, The Rotterdam Rules 2008: Commentary to the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, (Wolters Kluwer, 2010)

Lorenzon, F., Transport Documents and Electronic Transport Records, in Yvonne Baatz and others, The Rotterdam Rules: A Practical Annotation, (Informa, 2009)

Sturley, M F., Fujita, T., Van der Ziel, G J., Rotterdam Rules: The UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, (Sweet & Maxwell, 2010)

Treitel G., Reynolds FMB., (Sweet & Maxwell, 2011, 3th Ed)

Williams, R., Transport Documentation- the New Approach, in Rhidian Thomas (ed) A New Convention for the Carriage of Goods by Sea : the Rotterdam Rules : An analysis of the UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (Lawtext Publishing Limited, 2009)

ARTICLES

Berlingieri, F., Revisiting the Rotterdam Rules, LMCLQ (2010), pp. 583

Diamond, A., The Rotterdam Rules, LMCLQ (2009), pp.445

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CONVENTIONS

The Hague-Visby Rules

The Hamburg Rules

The Rotterdam Rules

REPORTS

United Nations Commission on International Trade Law Working Group III (Transport Law) Ninth Session, UN Doc., A/CN.9/WG.III/WP.21

United Nations Commission on International Trade Law Working Group III (Transport Law) Twelfth Session, UN Doc., A/CN.9/WG.III/WP.32

United Nations Commission on International Trade Law Working Group III (Transport Law) Sixteenth Session, UN Doc., A/CN.9/WG.III/WP.56

United Nations Commission on International Trade Law Working Group III (Transport Law) Seventeenth Session, UN Doc., A/CN.9/WG.III/WP.62

United Nations Commission on International Trade Law Working Group III (Transport Law) Twentieth Session, UN Doc., A/CN.9/WG.III/WP.94, p.2

Report of the Working Group on Transport Law on the Work of Its Ninth Session, UN Doc., A/CN.9/510

Report of Working Group III (Transport Law) on the Work of Its Eleventh Session, UN Doc., A/CN.9/526

Report of Working Group III (Transport Law) on the Work of Its Eighteenth Session, UN Doc., A/CN.9/616

Report of Working Group III (Transport Law) on the Work of Its Twentieth Session, UN Doc., A/CN.9/642

Report of Working Group III (Transport Law) on the Work of Its Twenty-First Session, UN Doc., A/CN.9/645

Articles

* Attorney at law.

Anglo-American Law

Leegin Creative Leather Products, Inc. V. Psks, Inc.,

Dba Kay’s Kloset, Kay’s Shoes

Aykut ÖZDEMİR*

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Anglo-American Law / ÖZDEMİR


Introduction

Mainly, agreements restricting competition are grouped in two: as horizontal agreements concluded between competitors of the same level of the market, and vertical agreements concluded between

undertakings operating at different levels of the market. Vertical restraints mostly are those imposed on the distributor or the retailer of the product by the producer or wholesaler. On the one hand, vertical restraints are defined as the means to coordinate a cartel, which is to be established among producers and among distributors, and on the other, are considered as tools that can be used to exercise a type of effective distribution. Resale price maintenance is what is most discussed with regard to vertical restraints. Resale price maintenance has been accepted to be against the per se law ever since the Dr. Miles case of 1911 in the United States.

Nevertheless, the per se approach has faced heavy criticism in time, and there have been certain exceptions in the said rule. Recently, the Supreme Court has concluded in the Khan case in 1997 that the maximum resale price mainte-nance should be assessed under the rule of reason. In addition to assumption of facilitating cartels, the Resale price maintenance is the subject matter of efficiency descriptions such as provision of certain services, which increase sales via avoiding free-riding, facilitating market entry, expansion of the number of sales points, avoiding double markup, protection of the product image, and reduction of monitoring costs. Therefore it would be a rather accurate approach to assess resale price maintenance under “per se” legal rule or “rule of reason” as there is no economical reasons to make a separate evaluation.

In the present case; Leegin designs, manufactures, and distributes leather goods and accessories, including belts sold under the brand name “Brighton” PSKS operated a women’s apparel store in Lewisville, Texas, that sold Brighton products. Leegin sold only to small specialty stores that it believed could offer customers better service and would “support the Brighton product”. It had an announced policy of selling only to dealers who did not discount its suggested retail prices. When PSKS was found to be discounting the Brighton line of products, Leegin asked it to stop, and ceased selling to it when it refused. PSKS sued, alleging a violation of Section 1 of the Sherman Act as interpreted in Dr. Miles. The district court judge excluded Leegin’s offer of evidence of pro-competitive effects, as is appropriate for a per se offense. A jury awarded PSKS damages in the amount of $1,200,000 which trebled and with attorney’s fees and costs added, it amounted to almost $4,000,000. The Court of Appeals for the Fifth Circuit, following the example of the Sixth Circuit in Khan, properly rejected Leegin’s argument for application of the rule of reason and affirmed.

The Supreme Court began its discussion of the applicable law by reiterating that the Sherman Act prohibits “only unreasonable restraints” and “resort to

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per se rules is confined to restraints,” such as horizontal price fixing and mar-ket division “that would always or almost always tend to restrict competition and restrict output.” “The per se rule is appropriate,” it continued, “only after courts have had considerable experience with the type of restraint at issue.” Consequently, Dr. Miles is overruled and vertical price restraints are to be judged by the rule of reason.

Summary of American Law on the IssueThe Sherman Antitrust Act was the first United States Federal statute to limit cartels and monopolies. It falls under antitrust law. Section 1 of the Sherman Act prohibits “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce”. The courts have interpreted the act to prohibit only unreasonable restraints of trade. The rule usually applied to business practices which has become known as a rule of reason. According to this rule, the actual or potential competitive effects of a challenged practice under the relevant market circumstances are analyzed in order to make a decision regarding the legitimacy of the practice. Restraints found to be reasonable are not condemned, whereas unreasonable restraints of trade are. Certain practices, however, have been found to be inherently unreasonable. When such practices are concerned, no inquiry into their actual effect is required. They are illegal per se. The per se illegality rule is appropriate for such restraints of trade.

In Dr. Miles Medical Co. v. John D. Park and Sons case, the United States Supreme Court affirmed a lower court’s holding that a massive minimum resale price maintenance scheme was unreasonable and thus offended Section 1 of the Sherman Antitrust Act. The decision rested on the assertion that minimum resale price maintenance is indistinguishable in economic effect from naked horizontal price fixing by a cartel. Subsequent decisions characterized Dr Miles as holding that minimum resale price maintenance is unlawful “per se” that is, without regard to its impact on the marketplace or consumers.

In 1968, the Supreme Court extended the “per se” rule against minimum resale price maintenance to maximum resale price maintenance, in “Albrecht v. Herald Co.” case. The Court opined that such contracts always limited the freedom of dealers to price as they wished. The Court also opined that the practice may channel distribution through a few large, efficient dealers, prevent dealers from offering essential services, and that the maximum price could instead become a minimum price. Several decades after, the Supreme Court overruled Dr. Miles, holding thatcades after such vertical price restraints are not per se unlawful but, rather, must be judged under the “rule of reason.”

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Summary of Turkish Law on the IssueTurkey adopted its very first competition legislation in time. The Law on the Protection of Competition no 4054 was adopted by Turkish Parliament on 7 December 1994 provided for identical provisions to the competition rules of the EEC Treaty. Article 4, prohibiting agreements and concerted practices that have as the their object or effect the prevention, distortion or restriction of competition is mirroring the Article 81 and Article 6, condemning abuse of dominant position including non exclusive list of such practices almost as a copy of Article 82. The Law covers a very wide range of activities. Not only formal agreements and decisions which impair competition but also rather looser forms of agreement and, moreover, parallel actions of the undertakings which are referred to as concerted practices are within the scope of the Law.

The Law states that a “competition authority” which enjoys administrative and financial autonomy is to be established for the implementation of the provisions. The Competition Authority shall be comprised of a Competition Board, a Directorate and Service Departments. The duty of full implementa-tion of the Law lies with the Competition Board, that is the decision making body of the competition authority.

By taking into consideration the relationship of the parties to an agreement or their position in the market, a distinction has been developed between horizontal and vertical agreements. Horizontal agreements are those which are made by firms that are at the same level of trade or industry, such as agreements between retailers or manufacturers or between wholesalers. Unlike horizontal agreements, vertical agreements are concluded between the parties who are not at the same level of trade or industry such as agreements between the wholesaler and the retailer or between the licenser and the licensee or between the manufacturer and the seller. Vertical agreements are not concluded between actual competitors, even tough there is always possibility that the parties to such agreement may be potential competitors. Vertical agreements are concluded between parties not at the same level of an industry or trade. Despite the fact that these are not made between competitors, vertical agreements still fall within the scope of the Law, since such an agreement may restrict competition between one of the parties to the agreement concerned and a third party.

Consequences of the infringement of competition rules are also mentioned in the Law. It is explicitly stated in article 56 of the Law that all the practices which are contrary to the prohibition foreseen in article 4 shall be void and the parties to such agreements cannot request the performance of their obliga-tions arising from such agreements. Besides invalidity of such agreements, the Law, in article 57 and 58, also provides for compensation to be paid by those who had violated the law to persons who suffer damages by reason of such prohibited practices.

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Article 4 also introduces a “presumption of concerted practice”. If there is a lack of sufficient proof of the existence of an agreement, a presumption arises that the undertakings concerned have engaged in a concerted practice if competition is prevented or distorted or limited and there exist a similarity in the market concerned regarding price changes or in the balance of supply and demand or in the activities of the undertakings. If it is not possible to prove the existence of an agreement which distorts competition, but there is still an indication, explicit or disguised, of an anticompetitive activity in the markets, the competition authorities will be able to take an action against the undertakings who are deemed to have been involved in such activities. In such cases these undertakings must rebut the presumption of concerted practice and prove that they are not in such parallel conduct or, if they are, their conduct was based on proper economic grounds. In certain circumstances, prohibited practices which fall within the scope of article 4, may be exempted from the implementation of the prohibition clause. If the agreement, decision or concerted practice concerned meets certain requirements stated in article 5 of the Law, then the Competition Board may declare the provisions of article 4, inapplicable.

AnalysisApplication of the “Per Se” rule is simple. Did the defendant engage in the proscribed practice? If so, it is irrelevant whether there has been injury to com-petition. For instance, the law has traditionally characterized price-fixing as a per se violation. Assume the defendants have fixed the price at precisely the same level as would prevail in a perfectly competitive market. It matters not; injury to competition is irrelevant. Assume the widgets are priced even lower than the competitive price. Consumers may receive an unexpected windfall; nonetheless the sellers have violated the law. On the other hand, application of the “Rule of Reason” is more complicated. The true test of illegality ,under the Rule of Reason, is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may sup-press or even destroy competition.” In other words, we are instructed to weigh the procompetitive aspects against the anticompetitive aspects. How does one do that? To answer that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.

Mostly, per se illegal activities are intended to support horizontal integration, in which a larger company owns or consolidates control over several smaller

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subsidiary companies that produce the same good or market the same product. Vertical integration, by contrast, occurs when a single company absorbs several companies involved in related aspects of a product’s manufacture and sale. The quintessential example of vertical integration is the industrial manufacturer that controls all phases of production and distribution, from the acquisition of raw materials to the transportation of finished goods.

Relatedly, minimum resale price maintenance ,the practice at issue in this case, is a type of vertical restraint wherein a seller of goods conditions their sale upon a buyer’s agreement to not resell the goods below a specified price. While minimum resale price maintenance is illegal per se, maximum resale price maintenance and non-price vertical restraints like granting distributors exclusive territories are not. Rather, such practices warrant scrutiny under the rule of reason standard.

ComparisonTo prevent trusts from creating restraints on trade or commerce and reducing competition, United Stated Congress passed the Sherman Antitrust Act in 1890. The Sherman Act was designed to maintain economic liberty, and to eliminate restraints on trade and competition. The Sherman Act is the main source of Antitrust law. American antitrust law began to take shape only when the Supreme Court began to build the basic framework of antitrust analysis in its decisions.

Certain anticompetitive acts or agreements are considered to be so injuri-ous to the public that there is no need to determine whether competition is actually reduced or otherwise injured they are violations of the Sherman Act per se; and Rule of Reason: Acts or agreements that are not considered to be illegal per se are analyzed by comparing their positive effects (e.g., efficiency) against their potentially anticompetitive effects. If the act or agreement is found not to unreasonably restrain trade, it will not be considered a violation of the Sherman Act.

The “Rule Of Reason” , not a “Per Se Rule” of unlawfulness, is now the stan-dard by which minimum vertical price restraints will be assessed under federal antitrust law because the rule of reason approach is a case-by-case, balancing approach, companies will need to pay careful attention to how the case law regarding minimum resale price restrictions develops in federal and state courts.

In contradistinction to US Antitrust Law, Turkish competition law is regulated by the Law, “The Act on the Protection of Competition.” Article 4 of the Law prohibits “agreements, concerted practices, and decisions” that prevent, distort or restrict competition, or that have the potential to do so. The law includes a non-exclusive list of anticompetitive practices that constitute potential violations.

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The Act empowers the Board to issue individual and “block” exemptions from Article 4, as well as case-specific “negative clearances” declaring that the given case does not violate the law.

At this jucture, US Law and Turkish Law are similar to prohibit resale price maintenance. However Turkish Law doesn’t have concepts such as “Per Se Rule” or “Rule Of Reason” . A unique feature of Article 4 of Law is the “concerted practice presumption,” under which the existence of unlawful collusion among competitors may be inferred if market conduct or conditions are similar to those that arise where competition is artificially distorted. The non-exclusive list of anticompetitive vertical practices in Article 4 includes resale price fixing, discrimination between similarly situated parties, tying, and actions designed to impede competitors or prospective entrants. According to decisions of the Competition Authority vertical price maintenance is not a flagrant violation.

In my point of view, sanction of the vertical price maintenance in Turkish Law is bear resemblance to “Rule Of Reason” in US Antitrust Law.

* Attorney at law.

Carriage of Goods Course Work

Hasan KAYIKET*

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Carriage of Goods Course Work / KAYIKET


This assignment will consider the significant legal issues that arise when the goods are carried by sea. This assignment will therefore consider a number of issues. However, the main focus will be on deviation and

the issues that arise in particular in respect of charterparty contracts and bill of lading as these are the most important legal issues that arise as a result of carriage of goods by sea. These legal issues can make it difficult to operate in relation to freight and claim for the return of the deposit. Although, it should also be recognised that the law has developed considerably with the onset of globalisation, meaning that international codes and laws are being created in an attempt to solve some of the issues that arise when the parties agreed to make contracts for carrying goods between the ports by ships. It is beter to start identifying the general principles of carriage of goods by sea and then a brief explanation of the case will be examined.

Where the goods are carried by sea by the shipowner, either directly or with an agent, or a ship is provided, the agreement between the parties is called the contract of affreighment[1]. It could be said that there are some variety of contractual forms. In traditional differentiation, the contracts are divided in two which are classified as the charterparties and bill of lading[2]. The form of charterparty is an agreement that the shipowner provides an entire or a part of his vessel either for a specific destination or a period of time. In addition to this, the charterer agrees to pay a balance of money to the shipowner. There are some different kinds of charterparties like voyage charters, time charters, time trip charters and demise charters[3]. On the other hand, when the shipowner offers his vessel for carrying goods to ship cargo, the contract for the carriage could be named as a bill of lading. In some cases, a bill of lading can be used apart of a contract as a shipping document.

In the case, Hain Steamship Company Ltd v Tate & Lyle Ltd[4], Tate & Lyle, the respondents, bought sugar to be delivered from two ports in Cuba and one port in San Domingo to West Indies so a vessel which is named Tregenna was chartered for carrying the sugar. After loading in the ports of Cuba, the master of the vessel was not informed clearly to go to San Domingo because of a failure in communication. When the vessel was on the way to home with the cargoes of sugar, the shiponwers and chartereres noticed the mistake and informed the master quickly to go to San Domingo for loading the rest of sugar. On leaving the port of San Domingo, Tregenna was stranded and damaged. Some of the cargo was lost and the rest of the cargo was carried by another

[1] Baughen S., Shiiping Law, Cavendish Publishing, 4th edition, 2009, p.8-10[2] Wilson J. F., Carriage of Goods By Sea, Pearson Publishing, 7th edition, 2010, p.3[3] Boyd S., Eder B., Burrows A., Foxton D., Berry S., Smith C., Scrutton on Charterparties

and Bills of Lading, Sweet & Maxwell Publishing, 21st edition, 2008, p.2[4] [1936] 2 All ER 597

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another vessel to the United Kingdom. Before the arrival of the ship to the United Kingdom, the bill of lading was endorsed to Tate & Lyle but the occur-ance of deviation was ignored by the respondent. Tate & Lyle which was the indorsees of the bill of lading noticed that the deviation had occurred because of Hain SS Company. The liability had occurred because of devation and the freight would be payable to the respondents. Then, an action was brought by Tate & Lyle against the appellants that the liability of the loss of sugar could not be attributed to them. Finally, a decision was made by the High Courts in United Kingdom and the case was brought to the House of Lords after the Court of Appeal by the application of Hain SS Co[5]. The problem about the case is about the deviation and whether it is unjustified or not. Also, the other problem is about the party, which noticed the deviation, could declare itself not to be bound by the contract or the contract will be in breach automatically when the deviation comes out.

First of all, in the case which is mentioned above, Lord Atkin had made some comments about deviation so explaining what is meant by the deviation could be a good starting point. Deviation is the mistake or error of the geograhphi-cal route by the vessel, which is carrying the cargoes between the loading and discharging ports. There is still not a common understanding about whetcher deviation could be recognized as a fundamental breach of the contract or not. However some attempts have been made to differentiate justified deviation from unjustified deviation. An example could be seen in Hague and Visby Rules. It is stated that:

“Any deviation in saving or attempting to save life or property at sea or any reasonable deviation shall not be deemed to be an infringement or breach of these Rules or of the contract of carriage, and the carrier shall not be liable for any loss or damage resulting therefrom.”[6]

It could be undersood that, deviations except for these conditions, that are listed in the article, would be considered as an unjustified deviation. From the perspective of maritime law in Hague and Visby Rules, the deviation, which has occurred because of Hain SS Co., whould be considere as an unjustified deviation because there is not any link to the article in relation to the deviation in the case. On the other hand, it could be said that the deviation has been causing fundamental breach of the contract for 200 years but in the case, the respondents did not use their right to breach of the contract in the time of unjustified deviation and it was noticed after the indorsement of bill of lading so Lord Atkin insisted at this point of problem.

The first doctorine and the way of thinking about the deviation goes to 1830s.

[5] Hughes A.D., Casebook on Carriage of Goods By Sea, Blackstone Publishing, 2nd edition, 1999, p.92-97

[6] Art. 5(4), 1968

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In the past times, the geographical routes were chosen by express choice of the parties[7]. However, if there is not an express choice to term written by the par-ties, then the solution would be looking to the implied terms of the carriage of goods contract. In the case, Davis v Garrett[8], the court accepted in the favour of respondent that, there could be some exemption clauses that a vessel might change the direction of the route. Although, the problem about the judgement in the case is that in today’s world there is not only one destination between the ports and sometimes more than one cargo could be loaded from more than one port to be carried to the discharging port. Another way of deviation which was considered deviation seriously was in the case Balian and Sons v Joly, Victoria and Co. Ltd[9]. It was decided that the innocent party of the contract could not rely on the terms of the contract if the deviation was unjustified. The parties are free to agree on the conditions of the contract and if the vessel deviates from the agreed route, then the shipowner would be liable. The next step for the problem about deviation was seen in the case Joseph Thorley Ltd v Orchis Steamship Company Ltd[10]. It was accepted by the Court of Appeal that if there is no sensible connection between the deviation and the damages, then there should not be a breach of contract. After the judgement, the importance of insurance had started playing an important role on the carriage of goods by sea. The idea of Lord Atkin in Hain SS Co. which was the importance of looking at the roots of contract had the same affect on the case Joseph Throley. The exemption clauses[11] could not be regarded as part of the contract. The bill of lading should be regarded as a whole[12] cotract.

Between the years 1906-1936 there had been uncertainity for the rules which could be applied to the deviation cases. While some of the judgements had been influenced from the Davis case, the other ones had been inspired of Balian case. At the end of this period, it could be seen from the judgements that there was not a clear language used by the courts to be applied for reaching a solution for the parties of carriage of goods. However, the decision in Hain SS Co. is regarded as the beginning of new century according to deviation. It was stated that deviation will always be a serious matter in the carriage of goods by sea. The principle had changed because at the time when the deviation had occurred, if this was known by the charterers and the contract was not repudiated by

[7] Dockray M., Deviation – a doctorine all at sea, Lloyd’s Maritime and Commercial Law Quarterly, 2000 p.81-82

[8] (1830) 6 Bing[9] (1890) 6 T.L.R. 345[10] [1907] 1 K.B. 660[11] Beale H., Chitty on Contracts, Sweet & Maxwell Publishing, 30th edition, 2010, p.

14-025[12] Lord Atkin noted that “the parties of contract entitled to treat deviation as going to the

root of the contract” in Hain SS Co.

58



them, then after the carriage was finished, the shipowner could not be sued in relation to breach of the contract because of the deviation. The doctorine was brough to an end by the case, Suisse Atlantique Societe d’Armement SA v NV Rotterdamsche Kolen Centrale[13]. A vessel was chartered by the respondents to carry coal from United States to Europe. The respondents commenced an arbitration against the appellants because of deviation It is said that, excep-tions clause could not be revoked becase there is not such a rule that enables fundamental breach. The matter is all about the construction of the contract. If there is no rule that allows fundamental breach of the contract because of deviation, then the application could be only for the demurrage payments. It is treated by the lords that, deviation is governed by the law of contract.

The intention of the parties and the construction of the contract should be examined all together in order to reach a solution about whether the deviation could be recognized as fundamental breach or not. In other words, the demise of fundamental breach started because the deviation could easily be prevented by liberty clauses by the parties[14]. This case is important because the influence of liability and exemption clauses were to be regarded as a doctrine in other cases in relation to matter of construction. In the case, Photo Production Ltd v Securicor Transport Ltd[15], it could be seen that the principal of fundamanetal breach was repealed. The importance would be given to the clear meaning of the contracts because if there is not a clear clause, the cases would be solved by the courts using construction of terms[16], which used in the contract so, the connection between Hain SS Co could be seen slighty. In my opinion, Lord Atkin meant the same thing by saying that it is entitled to go to the roots of the contract for finding a solution.

The present status of deviation is still linked with the judgement in the case Hain SS Co. v Tate & Lyle. Deviation surives as an independent legal theme today in relation to carriage of goods by sea but today’s doctrine could differ from the old doctrine related to the matters of construction of the contract and the intention of the parties[17]. After the development of Carrige of Goods by Sea Act[18], there had been some changes about the liability of the parties. On the other hand, there are not enough rules to cover the deviation about in which cases it could be considered as a fundamental breach or not so, therefore the best answer is insurance. The common law doctorine of deviation could be

[13] [1967] 1 A.C. 361[14] Todd P., Excluding and limiting liability for misdelivery, Journal of Business Law, 2010,

p.4-7[15] [1980] AC 827[16] Kenya Railways v Antares Co. Ltd known as The Antares [1987] 1 Lloyd’s Rep 424[17] Mills C. P., The future of deviation in the law of the carriage of goods, Lloyd’s Maritime

and Commercial Law Quarterly, 1983[18] S.3, 1992

59



ignored in connection with whether a shipowner can rely on the execptions by the rules of Hague – Visby. The best answer to the question could be referencing to the language of the rules. Another solution could be defining the deviation as an unjustified deviation or a quasi deviation which means the unauthorised storage of cargo on deck. Nowadays, the loss or damage of the cargo could be protected by insurance if the loss or damage of the cargo is arouse from the deviation. However, the value of cargo is a problem for insurance because it is not easy to determine the value of cargo and if the deviation occurs how much would be paid to the innocent party. It could be risk between the insurer and the parties despite the damages could be regarded as recoverable by the insurer. Before summing up all the ideas, it could be said that the principles is still an enigma today. The problem in the past years has been slightly solved by insur-ance. Although, it is still valid that the construction of carriage of contract and the intention of parties exists to determine the problem.

This essay has touched on some of the legal issues that may arise when the goods are carried by sea. It is clear therefore that there are a number of significant legal issues that can arise when carrying the goods by sea, not least in relation specifically to bills of lading and charterparties. Provided that those operating in carriage of goods by sea, take precautions such as ensuring to insure the cargo and expressly intending what is meant by the contract at the outset, the risk of having to bring or defend proceedings under deviation is unlikely to occur. It might be difficult to say that deviation still exits today because the rule in Hain SS Co. & Tate & Lyle has not been overruled yet. The parties are insuring the cargo in order to prevent problems which might occur because of deviation.

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REFERENCES

BOOKS AND JOURNALS

Baughen S., Shiiping Law, Cavendish Publishing, 4th edition, 2009

Beale H., Chitty on Contracts, Sweet & Maxwell Publishing, 30th edition, 2010

Boyd S., Eder B., Burrows A., Foxton D., Berry S., Smith C., Scrutton on Charterparties and Bills of Lading, Sweet & Maxwell Publishing, 21st edition, 2008

Dockray M., Deviation – a doctorine all at sea, Lloyd’s Maritime and Commercial Law Quar-terly, 2000 p.81-82

Hughes A.D., Casebook on Carriage of Goods By Sea, Blackstone Publishing, 2nd edition, 1999

Mills C. P., The future of deviation in the law of the carriage of goods, Lloyd’s Maritime and Commercial Law Quarterly, 1983

Todd P., Excluding and limiting liability for misdelivery, Journal of Business Law, 2010

Wilson J. F., Carriage of Goods By Sea, Pearson Publishing, 7th edition, 2010

LEGISLATION

Carrige of Goods by Sea Act 1992

Hague–Visby Rules 1968

CASES

Balian and Sons v Joly, Victoria and Co. Ltd (1890) 6 T.L.R. 345

Davis v Garrett (1830) 6 Bing

Hain Steamship Company Ltd v Tate & Lyle Ltd [1936] 2 All ER 597

Joseph Thorley Ltd v Orchis Steamship Company Ltd [1907] 1 K.B. 660

Kenya Railways v Antares Co. Ltd [1987] 1 Lloyd’s Rep 424

Photo Production Ltd v Securicor Transport Ltd [1980] AC 827

Suisse Atlantique Societe d’Armement SA v NV Rotterdamsche Kolen Centrale [1967] 1 A.C. 361

Crisis at Football Market After the “Bosman”:

Are Competition Exemptions Admissible

for Football?

Cengiz Kağan ŞAHİN

Promoter: Prof. Frank HOFFMEISTERReaders: Prof. Frank HOFFMEISTER,

Prof. Marc MARESCEAU,Prof. Dirk ARTS

Academic Year: 2007-2008

63

Crisis at Football Market After the “Bosman”: Are Competition Exemptions Admissible for Football? / ŞAHİN


1. IntroductionSports has been a prominent issue in European Union agenda and within this field football has been the most interesting and attractive branch of sports. This study will examine the legal conformity of making competition exemption to enhance competition in the field of football. Following such a context; firstly the applicability of EU Law to the field of sport will be elaborated. Within this issue, the evolving relationship between sport and European Union, the sports connection to the community law is essential. The Helsinki report constitutes a basic document in which general problems linking the sport and the Com-petition Policy were deliberated. Thus, it will be presented before the related articles of the EC Treaty. Then, the actors of football and their legal positions will be introduced. The various markets will be distinguished in order to reveal the affects of restrictions on an upstream market on the downstream markets. After that; the main actors of football market including the footballers, the FIFA and the UEFA will be explained. The changing situation of footballers and transfer system will be elaborated. The conditions for competition exemption in the area of football will be expressed in addition to the expectations of the EU from the market. Mentioning this issue, the paper will deal with relevant legislations about the competition exemptions. Since the Bosman case constitutes a turning point as it caused many unexpected results and circumstances in the football market; it will be analyzed as a main issue in this thesis. The history of Bosman, the interpretation of the ECJ of the case and the results that affect the European football market will be given. Covering these issues, the main aim of the thesis is to find an answer to whether competition exemptions are admissible for football or not.

2. Relationship Between Sport and the European Union

The original Treaty of Rome establishing the European Economic Community was primarily an economically inspired and economically oriented treaty. At the time of drafting of this Treaty at 1950’s, professional sport was still very much in its infancy and the economic dimension of sport was still insignificant. Sport was almost exclusively exercised on a purely amateur basis. Unsurpris-ingly therefore, no explicit reference to sport was included in the EEC Treaty. Several decades later, sport still did not expressly appear within the Community Treaty.[1] However, the existence of sports and its relation with the European market was an undeniable fact. The distinctive features of the sports and its

[1] S. Van den Bogaert, ‘Practical Regulation of the Mobility of Sportsmen in the EU Post Bosman’ (Kluwer Law International, 2005) p. 4.

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relation with various issues drew up the agenda for sports to be regarded as a subject for consideration. First of all, the developing relationship of sports with economics and professionalism have been influential in this context. They have made a remarkable and irresistible entry within the field of sport. Additionally, sporting events often also generate enormous amounts of revenue for organizers, sponsors, advertisers, television broadcasters, etc. The principle of solidarity is an important element in sports that links the various levels of sporting practice, from recreational to top-level professional sport.[2] This character reinforces the sports to be a professional field beside a field of recreation.

Recently, sports have become a vast industry and since the management and labor structures in the field have become more complex with the development of the professional sport.While tension between management and labor may exist in every industry, it started to dominate the professional sports industry in the 1990’s. The unique characteristics of the sports industry, such as highly specialized job functions and varying levels of skills, affect the nature of agree-ments between employers and employees by making it difficult to characterize their respective rights.[3] Once the Court’s rulings had made it absolutely clear that sporting activities were at least partly subject to Community law, the European institutions, especially the European Parliament and the European Commission, gradually started to demonstrate a greater interest in the subject. In the first place, they voiced serious concerns about the lawfulness under Community law of sporting rules such as the nationality restrictions and the transfer systems which were applicable in different sporting disciplines. Their interventions in relation to sport did not remain strictly limited to issues which could be situated in an economic context. This had everything to do with the second relevant development since the entry into force of the EEC Treaty. With the adoption of the Single European Act and the Treaties of Maastricht, Amsterdam and Nice, the original European Economic Community has been transformed in the European Community and subsequently the European Union, and has been attributed powers which far exceed the economic sphere.

The increasing importance of sport even in the legal world and in particular in Community law has become evident within the European Union. For many years there have been disputes, often made in public, between sports associations and the Commis sion concerning different sports, in particular For mula 1 and football, and divergent opinions in several aspects, such as the sale of tickets or of broadcasting rights for championships.[4] In addition to questions concerning

[2] D.-G. Dimitrakopoulos, ‘ More Than a Market? The Regulation of Sport in the European Union’ (2006) 41 Government and Opposition, p. 574

[3] A.-L. Lee, ‘The Bosman Case: Protecting Freedom Of Movement in European Football’ (1996) 19 FILJ, p.1255

[4] A. Egger & C.-S. Hackl, ‘Sports and Competition Law: A Never-ending Story?’ (2002) 23 ECLRev, p. 81.

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single cases, there have been on-going general discussions about the monopoly of federa tions or the ownership of clubs. Some specific legal problems were settled by decisions adopted by the Commissioner for Competition Policy and some more general problems were addressed in the so-called Helsinki Report presented by the Commission.[5]

3. Relevant Market and Its Actors

A. Relevant MarketEven if the determination of the relevant market in the context of Article 81 does not have the same importance as in the context of Article 82, the exami-nation of possible interferences with competi tion requests the definition of the market. As to the geographically relevant market of transfer rules, it need only be said that it covers the territory of all the associations in which the transfer regulations are applied.[6] As regards to the relevant product market, the fact has to be underlined that in professional sport certain particular features prevail which distinguish it from other economic branches. But that alone does not denote that there cannot be a market, or even several markets, in this sector too.

There exist different several markets; however they are interconnected. The fact that restrictions on an upstream market affect the downstream markets reveals this explicitly.It is first necessary to distinguish the different markets as the exploitation market, the contest market and the supply market.

1. Exploitation marketThe first market is the exploitation market in which both individual clubs and national and-international associations act as undertakings and exploit their performances. It is therefore a market of secondary goods, including things such as the exploitation of broad casting rights for matches.

2. Contest marketUpstream of the exploitation market forms another market, that is contest market, in which the performances which are exploited are produced. This is the market in which the typical product of professional sport is produced: the sporting contest. The contest is essentially a joint production of the clubs. Production takes place complimentarily by two clubs playing against each other, with the intervention of external factors such as spectators and sponsors also intervening. This market has certain particular features. Thus it lives very much on the standard of the teams and the uncertainty of the result. That presumes

[5] Report from the Commission to the European Council, COM(l999) [6] A. Egger & C.-S. Hackl, ‘Sports and Competition Law: A Never-ending Story?’ (2002)

23 ECLRev, p. 86.

66



certain, balance of the teams, but not perfect and constant; as otherwise every match would end in a draw. Equally unsatisfactory, of course, would be an extreme difference in the standard of play of the two opposing teams.

3. Supply marketThe third market is the supply market where the clubs “sell” and “buy” players. The circumstance that the production factor “professional footballer” consists of human beings is moreover not a partic ularity of professional sport but a characteristic of many branches of the economy in the service sector, and merely shows the high rank of “human resources”. As the European Court of Justice (ECJ) has already recognized, human labor too can be the subject of economic activity.

On the supply market, the clubs, similar to the contest market, have opposing interests which are expressed in the fight for the best players. The importance of the acquisition of good players for a club may in practice even lead to sev-eral clubs using transfers as an instrument of control, by considering which player could be “sold” to which club without the other club thereby becoming a danger to the selling club.

In favor of the substitutability of players one can mention the fact that the transfer system provides for schematic formulae for calculating the amount of transfer fees. Further, the potential functional exchangeability of players should be seen in connec tion with what actually happens in the market. Thus practice shows that what matters is the “sporting value” of the players. Here, the criterion is primarily the price level, that is, the transfer sum, the football-er’s playing performances, his age and previous suc cess (perhaps objectivised according to the standard of his previous club) probably also being taken into account, and the intended purpose, generally the function of the player (for example, attacker). Differ entiations are thus altogether appropriate. That demand is not so narrowly restricted is shown by the circumstance that a club which is unable to engage a particular player then, after the failure of this trans-fer, engages another player, possibly a less expensive one. It follows from the considerations above that the three markets are actually closely connected, but must be distinguished precisely for the correct definition of the relevant market. The relevant market for the transfer regulations is therefore the market which is formed by the supply of and the demand for players, hence the acquisition market. However, that does not exclude the possibility of possible interferences with competition having an effect on the downstream markets.

Having mentioned the characteristics of the football market and its evolving relationship with the European Union, the actors of the football market mainly including the footballers, and the two prominent football institutions, related to the issue, FIFA and UEFA, will be mentioned.

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B. FootballersThe employment conditions of professional players are among the most impor-tant issues in sports.[7] Players’ wages and the restrictions, on which clubs apply on players they employ, determine the distribution of the players between the clubs. Consequently, employment conditions substantially determine the level of inequality between clubs in any league. In line with this, the transfer regula-tions constitute an important topic within the issue of employment conditions for footballers.

In order to examine the transfer regulations in the light of competition law, what matters most is not the contractual relations between a player and his club, but the relationship between the former and new clubs. Nonetheless, certain clauses concerning transfers, such as a right to give notice, might also be found in the contract between a player and his club. Furthermore, it has to be kept in mind that pro fessional footballers are employees and not self-employed providers of services.[8]

The most contentious area of the transfer system revolves around out-of-contract players. Before Bosman era, FIFA regulations specified that even these players could be prevented from moving clubs unless, and until, a transfer fee was paid. The obvious deficiency this presents lies in the restric tion it places upon the free movement of footballers between Member States. It is precisely this legal irregu larity that first aroused the curiosity of the European Commis-sion and instigated the wrangling that would continue unabated for most of the next decade.[9]

The organisation of professional football has long attracted the criticism of the European Parliament. In 1989, the Janssen Van Raay Report condemned the transfer fee system as “a latter-day version of the slave trade, a violation of the freedom of contract and the freedom of movement guaranteed by the Treaties.” Also ciritisims made by media against the old transfer system: “just think, there are tens of thousands of footballers in the world who, because of the rules, are trapped in one club against their will or transferred to another club they don’t want to go to”. [10] Article 48 is the fundamental Treaty right guaranteeing freedom of movement for EC workers and providing for the abolition of discrimination based on nationality. [11]

[7] A. King, ‘The European Ritual: Football in the New Europe’ (Ashgate, 2003) p. 69.[8] A. Egger & C.-S. Hackl, ‘Sports and Competition Law: A Never-ending Story?’ (2002)

23 ECLRev, p. 86 [9] D. Mcauley, ‘They Think It’s All Over’ (2002) 7 ECLRev, p. 331 [10] See De Standaard (Belgian newspaper), August 22. 1992. [11] P.-E. Morris, S. Morrow & P.-M. Spink, ‘EC Law and Professional Football: Bosman and

its Implications’ (1996) 59 MLRev, p. 894

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C.UEFA FIFAOrganized football in the European Union is played by clubs joined together in national associations. [12]Each national association belongs to the Fédér ation Internationale de Football Association (“FIFA”), which or ganizes football internationally from its headquarters in Switzer land. FIFA is further divided into confederations for each continent, such as the Union of European Football Associa tions (“UEFA”), which is comprised of European national as sociations, including those from Member States. Football matches are played within national associations by club belong ing to that association or an affiliate. Every professional player must be registered with his national association in order to play for a club. These organiza tions govern both professional and amateur football.[13]

Football bodies have believed their transfer rules were immune from E.U. law.[14]But at Bosman, ECJ reaffi rmed the view that sporting activities were multifaceted and that EU law applied to the economic facet of those activities. Second, it dealt a heavy blow to a key component of the regulations governing the transfer of professional footballers, the edifice that had hitherto exempli-fied the ‘specificity’ of sport. It obliged UEFA and FIFA–the game’s governing bodies that were previously immune to external pressures–to reconsider this structure in its entirety. In that sense, the ruling opened a path that the Com-mission (in its capacity as guardian of the Treaties) and the game’s governing bodies had to follow.[15]

4. Applicability of Community LawAs the European Commission specified in its working paper relating to sport, there are three major areas of Community activity which have a direct influence on sporting affairs: first, the free movement rules; secondly, the competition rules; and thirdly, the different provisions concerning Community policies such as health, education, culture, etc.[16]According to what has been settled in the case law of the court, the practice of sport comes under competition law, in so far as it constitutes an economic activity within the meaning of Article 2

[12] Opinion of Advocate General Lenz, Union Royale Belge des Sociétés de Foot ball v. Bosman, Case C-415/93, slip op. at 4, \ 4 (Eur. Ct. J. Sept. 20, 1995). One national association exists in each Member State, ex cept the United Kingdom where, for historical reasons, there are four.

[13] A. Egger & C.-S. Hackl, ‘Sports and Competition Law: A Never-ending Story?’ (2002) 23 ECLRev, p. 81

[14] D. Mcauley, ‘They Think It’s All Over’ (2002) 7 ECLRev, p. 334 [15] D.-G. Dimitrakopoulos, ‘ More Than a Market? The Regulation of Sport in the European

Union’ (2006) 41 Government and Opposition, p. 569[16] S. Van den Bogaert, ‘Practical Regulation of the Mobility of Sportsmen in the EU Post

Bosman’ (Kluwer Law International, 2005) p.8.

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E.C. [17] It follows that, in addition to sporting activities, the rules laid down by sports associations are also not outside the scope of the E.C. Treaty. Only activities which are purely social, artistic or sporting do not come under E.C. competition law.[18]

Arguments were also submitted on the question of the application of Com-munity law to rules laid down by sporting associations. The Court reiterated earlier rulings in Walrave[19] and Dona v Mantero,[20] finding Community law applicable to professional sport in general, in so far as it constitutes an eco-nomic activity, to the rules of private sporting associations, and to professional footballers specifically, as workers and citizens of the Community.[21]

Contrary to common expectations, judgments in Dona v Mantero did not lead to a stream of challenges against the compatibility with Community law of certain sports rules and practices before national courts and tribunals. The ranks were closed in sporting circles. The sporting federations involved in the different disputes tried to minimize the impact of the decisions as much as possible.[22]The influence of E.C. law on European football has come to most people’s attention through the 1995 Bosman judgment of the ECJ. UEFA’s transfer rules and nationality clauses were found to violate the free movement of workers (Article 39 E.C). The nationality clauses involved restrictions on the number of foreign players (those who are not nationals of the country where the domestic league is located) that can be fielded in a match. As a result of the abolition of the transfer fee, European clubs were no longer permitted to demand financial compensation from the club that acquires one of their former players, whose contract has run out. This decision had a vast impact on the whole European football scene.[23]

Bosman ruling of the ECJ highlighted the incompatibility of the previous regime with key provisions of the Treaty and rendered change unavoidable, but it did not resolve a key issue: ‘How far should change go and how should the Commission -the ‘guardian of the Treaty’, apply the principles of the free move ment of workers and the free provision of services to the area of profes-sional sport where there was no sport-specific Treaty provision and no secondary

[17] Case 36/74 Walrave and Koch v. Association Union Cycliste Internationale [1974] E.C.R. 1405; [1975] 3 C.M.L.R. 120, para. 4, and Case CM15/93 n. 3 above, para. 73.

[18] A. Egger & C.-S. Hackl, ‘Sports and Competition Law: A Never-ending Story?’ (2002) 23 ECLRev, p.82

[19] Case 36/74, [1974] ECR 1405.[20] Case 13/76, [1976] ECR 1333.[21] P.-E. Morris, S. Morrow & P.-M. Spink, ‘EC Law and Professional Football: Bosman and

its Implications’ (1996) 59 MLRev, p. 894[22] S. Van den Bogaert, ‘Practical Regulation of the Mobility of Sportsmen in the EU Post

Bosman’ (Kluwer Law International, 2005) p. 5 [23] J.-P. Van den Brink, ‘E. C. Competition Law and the Regulation of Football: Part I’

(2000) 21 ECLRev, p. 359

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EU legislation (directive, regulation, decision)?’[24]

Even if Community law is in principle applicable to sport, it does not cover all aspects of it. In particular Community law does not avert regulations which are exclusively of sporting interest as sport can in practice function only within fixed rules. These include sporting rules in the strict sense, in particular rules of play, such as the length of a match or the number of players in a team. However, transfer rules go beyond such sporting rules in the strict sense.

5. Competition at Football MarketOne of the primary goals of EC Treaty’s is the establishment of a common market, designed to promote economic develop ment and performance, high levels of employment and social protection, high standards and quality of life, economic and social unity among Member States and sustainable, non-infla-tionary economic growth.[25] The internal market represents a limited objective within the broad concept of a common market comprised of several commu-nity activities. The EC Treaty de scribes the internal market as an area in which goods, persons, services, and capital move freely across Member State bounda-ries.[26] Furthermore, the EC Treaty protects competition from distor tion to facilitate the establishment of the com mon market. Pursuit of these objectives is indispensable to the achieve ment and existence of the common market.[27]

A. Relevant LegislationWhen challenging football transfer and nationality rules, the Commission has sought to reach for a number of Articles in their armory.[28] First of these, Article 39, guarantees the fundamental freedom of movement for workers within the European Union. Article 39(2) in addition state s:

‘Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the member states as regards employ-ment, remuneration and other conditions of worker employment.’

Importantly, because Article 39 is specifically related to establishing a common market, it can have no effect on situations wholly internal to a Member State.

[24] D.-G. Dimitrakopoulos, ‘ More Than a Market? The Regulation of Sport in the European Union’ (2006) 41 Government and Opposition, p. 565

[25] See EC Treaty, supra note 11, art. 2, [1992] 1 C.M.L.R. at 588. The establish ment of a common market is one of the Community’s principal means for achieving its tasks.

[26] See EC Treaty, supra note 11, art. 7a, 1 2, [1992] 1 C.M.L.R. at 592 (“The inter nal market shall comprise an area without internal frontiers in which the free move ment of goods, persons, services and capital is ensured in accordance with the provi sions of this Treaty.”); see also supra notes 53, 73 and accompanying text (discussing internal market).

[27] A.-L. Lee, ‘The Bosman Case: Protecting Freedom Of Movement in European Football’ (1996) 19 FILJ, p. 1263

[28] D. Mcauley, ‘They Think It’s All Over’ (2002) 7 ECLRev, p. 331

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The other relevant E.C. “weaponry” is Article 81 and Article 82, establishing E.C. competition policy. Article 81 prohibits:

‘All agreements between undertakings, decisions by asso ciations of undertak-ings and concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market.’

Article 82 holds that:‘Any abuse by one or more undertakings of a dominant position within the

common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between member states.’

Unlike Article 39 however, the competition rules do not suffer from being inoperative to domestic transfers.

The four fundamental freedoms of the European Union include the free movement of goods, persons, services, and capital.[29]In the context of the free movement of persons, Article 48 specifically protects freedom of movement for work ers. Freedom of movement for workers includes the right to move between Member States for purposes of seeking, ac cepting, and maintaining employment.

Discrimination on grounds of nationality is prohibited within the EC Treaty’s scope of application.[30] Article 48 ex pressly extends this prohibition of discrimination to employ ment relationships.[31] Consequently, Member State nationals have the right to be employed in other Member States under the same terms and conditions as nationals of that state.

The free movement of workers is intended to contribute to the goal of establishing a common market by ensuring that la bor, one of the main factors of production, flows freely be tween Member States. Nevertheless, the transfer system has traditionally limited the bargaining positions of players by putting control of player movement in the hands of club management. Article 48’s provisions are subject to limitations justified by considerations of public policy, public security, or public health, and do not apply to public service employment.

Unimpeded economic competition is vital to an effec tive, market-based economic system.[32] Most economists encourage competition for its ability to allocate resources ac cording to consumer choice, to avoid waste in acquiring

[29] EC Treaty, , art. 3(c), [1992] 1 C.M.L.R. at 588.[30] EC Treaty, , art. 6, [1992] 1 C.M.L.R. at 591. “Within the scope of application of this

Treaty . . . any discrimination on grounds of nationality shall be prohibited.” Id.[31] art. 48(2), [1992] 1 C.M.L.R. at 612. “[Freedom of movement for workers] shall entail the

abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment.” Id.; see also Dona v. Mantero, Case 13/76, [1976] E.C.R. 1333,

[32] A.-L. Lee, ‘The Bosman Case: Protecting Freedom Of Movement in European Football’ (1996) 19 FILJ, p. 1266

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mar ket power, and to stimulate efficiency in the marketplace, and consequently to promote opportunities for job creation. Accord ingly, EC competition rules, articulated in Articles 85 and 86, address activities, both of Member States and of private per sons and firms, that are likely to restrict competition within the merits once they have been implemented. Article 85(1) prohibits agreements between undertakings and associations of undertakings that distort competition within the common market.

B. Competition exemptionsThe Structure of Article 48 recognizes Specific Exceptions Based on Principles Not Relevant to the Practice of Sport. EC Treaty Article 3 provides for the abolition of obstacles to fundamental freedoms, including freedom of move-ment for persons, as a means of promoting development of economic activities. Subsequent articles, such as Article 48, provide additional, specific protection for these freedoms. In this regard, the delib erate structure of the EC Treaty illustrates the EC Treaty’s intended application to all economic activities between Member States, except as specifically provided for.

The only exceptions recognized by Article 48 deal with protecting the general interests of a Member State or other pub lic health, safety, or policy concerns specifically relevant to the individual whose freedom of movement is affected.

The ECJ’s deferential treatment of Article 48 and the re strictive approach taken toward application of Article 48’s excep tions strongly counsel against creating a wholesale exemption from the application of Article 48 for rules laid down by sport ing associations. The ECJ, as the final authority on interpreta-tion of TEU provisions, ruled that because the terms of Article 48 define a fundamental freedom, they must be interpreted broadly. Conversely, because the exceptions contained in Ar ticle 48(3) impose limitations on a fundamental freedom, the Court interprets them narrowly. The ECJ’s rigid protection of freedom of movement for workers, particularly in the context of sport, illustrates Article 48’s significance to the European Union, suggesting that an amendment to circumvent Article 48 is improper.

Andrew L. Lee states that IGC should reject proposals to exempt sports associations from Community law, because freedom of movement for workers is a strictly protected right of fundamental importance to the European Union and because the public’s interest in sport and the sporting associations’ inter est in maintaining financial and competitive balance between clubs are better served by alternatives to the transfer system that do not impede freedom of movement.

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6. The Bosman

A. Bosman caseAs mentioned before, in the 1970s, the Commission had ruled on two significant sports cases, Dona vs Mantero and Walrave. Both cases addressed the ques-tion of discrimination against professional sportsmen on the grounds of their nationality. Followingly, these cases set important legal decisions for the Euro-pean Community, they were specialist rulings with little immediate economic effect. [33] However, the Commission also became interested in football at the same time expressing concern about the foreign player restrictions. Beginning in the 1960’s, football associations, including UEFA introduced rules limiting the number of players of for eign nationality any club could field in a match. These for eign player rules use the term “nationality” to refer to whether a player is qualified to play for a country’s national team, as op posed to a literal reference to a player’s country of origin.

In 1978, the Commission issued a press release describing a gen tleman’s agreement between UEFA and the Commission. UEFA agreed to amend its rules to allow clubs to field not more than three players who are nationals of other Member States, plus two players counted as assimilated based on how long they have played in the host Member State. Following further discussions with the Commission, the national football federations in Europe promised to lift this two-player limit but, in the event, the Commission did not enforce this ruling. The Commission was easily deterred by the football authorities at the time. [34]

After that at the 1985 Milan conference when the Single European Act was initiated, the Addonino report recognised sport as a serious concern to the European Union for the first time; sport provided “a unique opportunity for promoting a sense of belonging to the single Community”. Recognizing the cultural significance of sport, the Commission now began to focus on foreign player restrictions more seriously. The Commission attempted to set a deadline for the abolition of all restrictions on European Union players for the start of the 1986-87 season.

In June 1985, UEFA proposed a compromise. Instead of an open European transfer market, restrictions should be eased so that any player who had played in a league for more than five seasons was ‘naturalized’, that is, he was counted as a native player But even this measure was not implemented immediately and there was extensive debate in the course of the late 1980s between the Com-mission and UEFA about this liberalization. UEFA finally agreed to expand the foreigner restrictions so that from 1992, three foreigners and two naturalized

[33] A. King, ‘The European Ritual: Football in the New Europe’ (Ashgate, 2003) p. 70[34] A. King, ‘The European Ritual: Football in the New Europe’ (Ashgate, 2003) p. 70

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players were eligible to play for any European club.Although the Commission accepted this agreement in 1992, it was clear that

the Commission fundamentally opposed the transfer system and the foreigner rulings since they were incompatible with the Treaty of Rome. That opposition became stronger during the early 1990s as the financial position of European football improved dramatically as a result of the influx of new television money. The growing economic and cultural significance of European football impelled the Commission to consider it more seriously. Conse quently, during the early 1990s, the Commission urgently wanted to impose European legislation on football and the most effective way of achieving this end was by means of a court ruling. The foreigner restrictions could be most decisively challenged at the European Court of Justice. Yet, in order to challenge the restrictions legally the Commission required an appropriate test-case and for that, they had to wait until a legal challenge appeared. In the event, the disputed transfer of Jean-Marc Bosman from Standard Liege to Dunkerque in 1990 provided the ideal opportunity for the Commission to achieve its objectives of applying Union laws to European football.

Jean-Marc Bosman is a Belgian national who was formerly a professional football player in the Belgian club RC Liege under a contract which ran until 30 June 1990. Prior to expiry of his contract, Liege offered Bosman a new contract which included a massive reduction (almost 75 per cent) of total salary which would have placed him on the minimum salary permitted by the URBSFA, the Belgian football governing body. Bosman, however, eventually attracted attention from the French club Dunkerque, and a transfer fee was agreed between Liege and Dunkerque. Unfortunately, the proposed transfer eventu-ally collapsed due to the failure of a clearance certificate from the URBSFA to arrive at the French Football Federation in time and doubts as to Dunkerque’s ability to pay the transfer fee.

Subsequently, Bosman was only able to obtain employment with a Belgian Third Division club amid suspicion, following his decision to make a challenge to the lawfulness in EC law of football transfer fees for out of contract players and restrictions on the number of foreign players which can be selected in a team,1 that he was ‘boycotted by all European clubs who could have taken him in.’2 Bosman’s case underwent a protracted journey through the Belgian legal system, eventually reaching the Appeal Court in Liege where he sought financial compensation from Liege, URBSFA and UEFA, together with a declaration that URBSFA and UEFA rules on transfer of players and participation of foreign players were inapplicable to him. The Appeal Court opted to exercise its power under Article 177 of the EC Treaty to refer the matter to the European Court for a preliminary ruling. The terms of its reference were as follows:

(Articles 48, 85 and 86 of the [EC Treaty] to be interpreted as)

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• (i) prohibiting a football club from requiring and receiving payment of a sum of money upon the engagement of one of its players who has come to the end of his contract by a new employing club;

• (ii) prohibiting the national and international sporting associations or federations from including in their respective regulations provisions restricting access of foreign players from the European Community to the competitions which they organize?

The ECJ held that the transfer system and the rules on for eign players offended the principle of freedom of movement for workers[35] guaranteed by Article 48. The Court answered both of the referred questions in the affirmative, but limited its judgment and analysis to Article 48.[36] The Opinion of Advocate General Carl Otto Lenz, however, did examine the transfer rules and the rules on foreign players under EC competition rules, finding a restriction of compe-tition[37] in violation of Article 85(1),[38] but no infringement of Article 86.[39]

1. Jurisdiction and Applicability of Article 48After finding jurisdiction under Article 177 to rule on the referred questions, the Court restated the applicability of Arti cle 48 to rules laid down by sporting associations. According to the Court, sport constitutes an economic activity subject to Community law if an employment relationship, or the inten tion to create one, exists. Bosman satisfied the criteria of Arti cle 48 by accepting an offer of employment actually made in another Member State. By virtue of Article 48’s direct eff ect, Bosman could seek to have his right to move freely be tween Member States for purposes of employment judicially en forced.

2. The ECJ’s Interpretation of Article 48 with Respect to the Transfer RulesThe Court considered the transfer rules an obstruction to the fundamental Community principle of freedom of move ment for workers guaranteed by Article 48. The Court noted that obstacles to freedom of movement are only justified by pressing concerns of public interest in pursuit of a legitimate aim compatible with the EC Treaty.[40]

The ECJ found no adequate justification for the obstacles to freedom of

[35] Bosman, slip op. at 22, 25, f f 113, 137.[36] Bosman, slip op. at 25, f 138.[37] Opinion of Advocate General Lenz, Bosman, slip op. at 103-04, f 262.[38] See supra notes 112-14 and accompanying text (discussing Article 85(1 )’s pro hibition

of agreements restricting competition).[39] Opinion of Advocate General Lenz, Bosman, slip op. at 113, f 286.[40] Bosman, slip op. at 20-21, f 104; see also supra note 231 and accompanying text

(discussing general principle of proportionality). According to Advocate General Lenz, only an interest of the association of “paramount importance” can justify a restriction on freedom of movement. Opinion of Advocate General Lenz, Bosman, slip op. at 87, f 216.

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movement imposed by the transfer rules.[41] However, The Court accepted UEFA’s goal of maintaining the fi nancial and competitive balance[42] as legiti-mate in light of the social importance of sporting activity in the European Union.[43] The Court found that the transfer rules did not advance finan cial or competitive balance because those rules failed to preserve the degree of equality and uncertainty of results necessary to maintain the sporting equilibrium. The rules did nothing to prevent the richest clubs from securing the best players or to prevent financial resources from being a decisive factor in com petition. The Court also accepted UEFA’s goal of encourag ing the recruitment and training of young talent as legitimate, but found no relationship between the transfer system and the achievement of that goal. The Court found that the transfer system was not justified by either of these goals, because less restrictive means of achieving them existed, such as a collective wage agreement[44] or a profit sharing plan.[45].

3. The ECJ’s Interpretation of Article 48 with Respect to the Rules on Foreign PlayersThe Court also found that the rules on foreign players ob structed freedom of movement for workers in Member States. Article 48’s prohibition on nation-ality-based discrimination re garding employment, as implemented by Council Regulation 1612/68, precludes the application of rules restricting access of Member State nationals to participation in competitions or ganized by those associations.[46] The Court found that by restricting a player’s opportunity to

[41] Bosman, slip op. at 21-22, f f 105-14 [42] Opinion of Advocate General Lenz, Bosman, slip op. at 88, \ 219. A profes sional league

will flourish only if the competitive balance between clubs is maintained. Id. If the league is clearly and consistently dominated by any one team, the necessary tension is absent and the fans will lose interest. Id. AAA

[43] Bosman, slip op. at 21, f 106. “In view of the considerable social importance of sporting activity and in particular football in the Community, the aims of maintain ing a balance between clubs by preserving a certain degree of equality and uncertainty as to results and of encouraging the recruitment and training of young players must be accepted as legitimate.” Id.

[44] See Opinion of Advocate General Lenz, Bosman, , f 226 (dis cussing possibility of collective wage agreement).

[45] Ad vocate General Lenz described the wisdom of a profit sharing plan, observing that the competitive nature of sport differs from that existing in other markets in that sports leagues are characterized by mutual economic dependence between clubs. Id. at 91, \ 227. Redistributing a proportion of income would make it possible for clubs to pro mote their own interests and those of football in general. Id. at 92, f 228. If limited to a small part of income, profit sharing measures appropriately ensure competitive bal ance between clubs, thereby preserving the incentive for a club to perform well. Id. at 92,

[46] Bosman, , I 137. It is irrelevant that the rules do not expressly limit the number of foreign players that may be employed. Id. By limiting participation in matches, the essential element of a professional player’s activity, the rules obviously also restrict a player’s chances of employment. Id.

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par ticipate in matches based on his nationality, the rules on foreign players limited that player’s choices of employment in viola tion of Article 48.

No sufficient justification existed for the obstacle imposed on freedom of movement by the rules on foreign players, there fore, the Court declared those rules incompatible with Article 48. The rules on foreign play ers did not adequately maintain the sporting equilibrium between clubs, because those rules did nothing to prevent afflu ent clubs from acquiring the best national players, which would undermine the competitive balance despite the foreign player rules.[47]

4. Interpretation of Article 85 with Regard to the Transfer Rules and the Rules on Foreign PlayersThe ECJ did not address the transfer rules and the rules on foreign players under Articles 85[48] and 86[49] once it found those rules illegal[50] under Article 48.[51] Advocate General Lenz’s opinion did present a clear analysis of the rules in that context.[52] The Advocate General found no abuse of a domi nant posi-tion in violation of Article 86, because the rules aff ected only the relationship between clubs and players, as op posed to the power on the market exercised by the clubs in rela tion to competitors, customers, or consumers.

It was logical for Lenz to advocate new forms of redistribution given his recognition of the importance of competitive balance. Each club keeps its home gate receipts in the competition, while UEFA, which markets the tournament centrally, then distributes the television money to competing clubs according to their performance. The reason that the clubs involved accept this situation is that this central marketing method has increased the value of the competition and therefore the revenue which clubs earn. Moreover, the entire structure of that competition is elitist, favouring the biggest clubs in each nation. Lenz’s untenable assumption that clubs would voluntarily give up portions of their revenue has not been lost on those within football:

‘Of course, you could dream up all sorts of theoretical bases for clubs redis-tributing wealth but get real. Do you imagine that somehow the big clubs are

[47] Bosman, , 135. The Court rejected the proposition that main taining the public perception of a link between clubs and their countries justifies the obstruction of freedom of movement. Id. at 24, % 131-32. The Court found this argu ment unconvincing in light of the lack of measures to maintain a link between a club and its locality within a Member State, and because international competitions are or ganized based on team performance, rather than player nationality. Id. Finally, the court felt that maintaining a pool of national players for national teams was an inade quate goal, because association rules permitted players to play for their national team regardless of where they are registered to play.

[48] EC Treaty, , art. 85, [1991] 1 C.M.L.R. at 626-27.[49] Id. art. 86, [1991] 1 C.M.L.R. at 627-28.[50] Bosman, , 138.[51] EC Treaty, , art 48, [1991] 1 C.M.L.R. at 612.[52] Opinion of Advocate General Lenz, Bosman, 99-113, ft 253-86.

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voluntarily going to give money away to their smaller brethren? Nonsense. It isn’t going to happen. What the transfer system did was to provide a market mechanism that redistributed wealth. There is no way you are going to do it voluntarily’[Personal interview, Rick Parry 9 February 2000].

Operating in a competitive economic environment, football clubs will give up revenue only if they receive something in return. The transfer system was a way of exploiting this economic reality for the good of disadvantaged clubs. The transfer system operated in line with economic realities rather than in the face of them.

Consequently, Advocate General Lenz ruled against the transfer system: ‘it thus follows in my opinion that transfer fees ... are not justified by a reason in the general interest’ (ibid.: 255, para. 247).

UEFA argued that the consideration of the foreigner restrictions were arti-ficially attached to the Bosman case since these restrictions had nothing to do with his contractual difficulties. UEFA were surely correct here but since foreigner restrictions breached EU law so obviously and since the Bosman case presented such a good opportunity to consider them legally, the Commission was unlikely to allow these restrictions to remain unchallenged. Predictably, Advocate General Lenz opposed restrictions on foreign players; ‘No deep cogitation is required to reach the conclusion that the rules on foreign players are of a discriminatory nature’. They represent an absolutely classic case of discrimination on the grounds of nationality. Those rules limit the number of players from other Member States whom a club in a particular Member State can play in a match’ (Blanpain and Instow 1996: 210, para. 135). Given that free labour movement had been accepted as one of the pillars of European integration since the 1980s, it was self-evident that the foreigner ruling was unsustainable. Nevertheless, Lenz went to some lengths to demonstrate that its loss would not have the effects which the football authorities had predicted and that their position on this matter was illogical, if not hypocritical. The foreigner restrictions were defended on the grounds that national sovereignty was an important part of football since fans identified more closely with players from their own member states. Lenz rebutted this argument decisively:

‘The vast majority of clubs in the top divisions in Member States play for-eign players. The greater majority of supporters are much more interested in success of their club than in composition of the team. If nationals who come from other parts of the relevant State are accepted without question, one can-not see why that should not also be the case for nationals of other Member States,’ [ibid.: 214-15]

Indeed, confirming Lenz’s point, not only were players from other parts of a Member State regarded as legitimate, but fans rarely objected to foreign players.

The Bosman decision raised the–often painful–awareness in sporting circles

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that sporting rules are in principle subject to a test of compliance with Commu-nity law. Contemporaneously, the decision also caused a change in the mindset of the Community institutions about sport.[53] It led to both an intensification and a deep ening of Community intervention in sports matters.[54] Sport even started figuring regularly on the agenda of the European Council during the various intergovern mental conferences.

In Bosman,[55] the Court of Justice, in true ‘procession of Echternach’ style, first appeared to retreat one step from its previous findings before finally moving some steps forward again. The Court ruled that even though the trans fer rules in question did not discriminate on grounds of nationality, they still directly affected players’ access to the employment market of other Member States and were thus capable of obstructing the freedom of movement of workers.[56] And the Court did not leave it like that. When the UEFA objected that the Court’s interpretation made Article 39 EC ‘more restrictive in relation to individuals than in relation to Member States, which are alone in being able to rely on limitations justified on grounds of public policy, public security or public health’,[57] the Court rejected this argument for being based on a false premise, and ruled in an unequiv ocal way that ‘there is nothing to preclude individuals from relying on justifications on grounds of public policy, public security or public health. Neither the scope nor the content of those grounds of justification is in any way affected by the public or private nature of the rules in question’.19 This statement was wider than it strictly had to be, for at the time, only measures regulating employment or the provision of services in a collective manner were caught by the free movement provisions.20

[53] S. Van den Bogaert, ‘Practical Regulation of the Mobility of Sportsmen in the EU Post Bosman’ (Kluwer Law International, 2005) p.7

[54] Since the Bosman ruling, above n. 1, several disputes involving sports matters have reached the stadium of the Court of Justice: see Joined Cases C-51/96 and C-191/97 Christelle Deliège v Ligue Francophone de Judo et Disciplines ASBL and Others [2000] ECR1-2549; Case C-176/96 Jyri Lehtonen and Castors Canada Dry Namur-Braine v Fédération Royale Belge des Sociétés de Basketball [2000] ECR 1-2681; Case C-264/98 Tibor Balog v Royal Charleroi Sporting Club ASBL, removed from the register; Case C-438/00 Deutscher Handballbund v Maros Kolpak [2003] ECR 1-4135. See also, e.g., European Parliament, Resolution on the broadcasting of sporting events of 22 May 1996, [1996] OJ C 166/109; European Parliament.

[55] Case C-415/93 Union Royale Belge des Sociétés de Football Association ASLB v Jean-Marc Bosman [1995] ECR 1-4921.

[56] Bosman, above n. 15, para. 103.[57] Bosman, above n. 15, para. 85.

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B. Results of BosmanMost obviously, the Bosman ruling has increased the financial pressure on the clubs by inflating wages. Following the ruling, player wages have increased because in order to protect themselves from losing the transfer fee of players after the expiry of their contracts, clubs had to sign players on longer contracts. Players have accepted these longer contracts only if they were a substantial improvement on what they had previously received.[58]

With the ending of nationality restrictions, the big clubs have been able to create large playing squads which have become essential if the clubs are to remain successful in domestic and European competition. The liberalization of the international market for players has allowed these clubs to recruit talent. The Bosman ruling has effectively redressed the decline in playing standards in the late 1970s and early 1980s where the biggest clubs could not accumulate talent while smaller teams, like Nottingham Forest or Malmo, could thrive. The biggest clubs are conscious that this deregulation has benefited them:

“In the Spanish league, any poor player from the second division can cost us £5-£10 million. The presidents of club boards sees that a player is being widely recognized and he raises the players’ wages by 10 per cent, while add-ing a club fee of £5 to £10 million. As the latter occurs throughout Europe it helps to close the market down.” [Jaume Sobriques, FC Barcelona, personal interview, 22 May 2000]

For Sobriques, the restriction on foreign players put a false market value on national talent and effectively allowed smaller teams to exploit their oligopo-listic position within national markets. They put a false market value on their players when selling them to the big clubs. For Barcelona, the Bosman ruling has opened access to a Europe-wide transfer market.

“What do the people want in any country and all the supporters of any club want? They want good players and results and in the professional world that means you have to spend money. You have to get the best players. And then you have competition and the competition is the other big clubs. Of course. You have to look to the other important clubs in Europe, instead of looking at the other clubs in your country, because the normal competitor is the big clubs.” [Juan Onieva, personal interview, 19 April 2000]

In the Bosman case the ECJ expressly recognized certain aims connected with the transfer system. These include “maintaining a balance between clubs by preserving a certain degree of equality and uncer tainty as to results” and “encouraging the recruit ment and training of young players”. As regards the maintenance of a balance, the ECJ concluded in that judgment, however, that “the application of the trans fer rules is not an adequate means of maintaining

[58] A. King, ‘The European Ritual: Football in the New Europe’ (Ashgate, 2003) p. 7

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financial and competitive balance in the world of football. Those rules neither preclude the richest clubs from securing the services of the best players nor prevent the availability of financial resources from being a decisive factor in competitive sport, thus considerably altering the balance between clubs.” As regards promoting young players, the ECJ found that the specific form taken by the transfer system neither encourages recruitment and training of young players nor is it an adequate means of financing such activities. Finally, the ECJ pointed out that the aims purportedly pursued could “be achieved at least as efficiently by other means”

But also some other big clubs complain from “biggest” clubs behaviors. Arsenal menager Arsene Wenger himself has been accused of snatching play-ers without due compensation being paid, with the likes of Cesc Fabregas and AC Milan newboy Mathieu Flamini all moving to north London before their clubs were eligible for a prior ageed transfer fee:

“There is a game going on in Europe where the big clubs tap up our play-ers.They let us do the work and develop the players and then they think they can just come in and offer him big wages, but after they cannot come up with the transfer request.It should be the other way round.We were destabilised by some clubs who did not respect the fair play rule in tapping up players.I think we suffered from that at the end of the season. We haven’t done that, but that has been done to us.’’[59]

In football, an environment is taking shape in which the bigger clubs usurp the power that previously resided with the national football associations, thereby increasing the gap with their smaller counter parts. Inequality of wealth between clubs will be one of the major issues facing the future of football.

For instance, Gordon Taylor, while supporting the Bosman case as president of FIFPro, has emphasised the problems which the ruling posed for the devel-opment of native English players in his role as the chairman of the English Professional Footballers’ Association:

“We were very much aware of the Bosman judgment and we supported him, both financially and morally, though we knew in England, it could disrupt our system -and was probably bound to. We thought we had a pretty fair system. We also had built into the system a 5 percent levy on every fee that goes to a player’s pension scheme that gives them a tax-free sum on retirement at age 35; that is for all players. In a strange way, those who are loyal do better than those who move. FIFPro knew that the problem it could create was freeing up the movement of labour. There should be no restrictions. Also the challenge was, of course–which Bosman’s lawyers threw in–the limit on the number of foreign players. This was almost as a side issue but it was that side issue that we

[59] http://www.goal.com/en/Articolo.aspx?ContenutoId=801195

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would worry about because we knew it would free up labour, but particularly cross-border, and that they would look at the restrictions because we had a maximum of three foreign players. All the players’ associations were uneasy about that because, particularly countries like ourselves, Italy, Spain and Ger-many, knew that there would be a gravitation to their countries because they are high-economy football countries. That is a fair description. That is exactly what happened. It made it a lot easier. You suddenly had players like your Zolas coming over etc. ... It really increased a flow that had started as a bit of a trickle with non-EU players in 1978 with Villa and Ardiles, coming into a stream now ... You’ve got a situation where Chelsea play a side without one United Kingdom player which would have been unheard of in the past. There is a feeling from the players’ body that we should try and stop this movement of youngsters. “football clubs will become like Euston station, with different arriving, staying for a short while and leaving again almost non-stop”. [Gordon Taylor, personal interview, 10 February 2000]

It was no understatement to say that “football was getting like the wild west”[60] and with all parties refusing to placate each other, the “whole thing sounded as confus ing as the EU’s fishing policy”.[61]

C) Recent System 2001After several years of discussions and some months of negotiations the rep-resentatives of the World of Foot ball and the European Commission reached agree ment on “Principles for the amendment of FIFA rules regarding interna-tional transfers (new basic rules)” on March 5, 2001. These negotiations were followed by a more formal ceremony at the margins of the European Council at Stockholm on March 24, 2001, where this agreement was signed by the Swedish Prime Minister for the Presidency, the President of the Commission and by FIFA’s and UEFA’s Presidents. The amendments in the Regulations for Status and Transfers of Players were made by the Executive Committee at the occasion of the World Youth Championship in Argentina in July 2001. Apart from the new basic rules the following were adopted, “Regulations governing the Application of the Reg ulation for the Status and Transfer of Players”. On August 24, 2001, FIFA sent Circular No. 769 sum marizing and explaining the two sets of rules.

The main points were:• For players under 23, a system of training com pensation would be introduced

to encourage and reward the training effort of clubs, in particular small clubs.• Conditional international transfers for players under 18 years.

[60] Matthew Garrahan, “England targets transfer abuse”, Finan cial Times, January 31, 2001[61] Robert Philip, “The Whole Thing Sounds As Confusing As the EU’s Fishing Policy”,

Daily Telegraph, February 14, 2001.

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• One transfer period per season, with a limit of one transfer per player per season.

• Minimum/maximum contract length of one/five years.• Contracts to be protected for a period of three years up to 28 years; two

years thereafter.• Financial compensation to be paid whether con tract is breached unilaterally

by player or club.• Proportionate sanctions to be imposed for those contracts breached unilater-

ally without “sporting just cause” during the protected period.• Creation of an International Court for Football Arbitration (ICFA).

For, as one MEP admitted, “the fact that everyone is more confused now, after months of deliberations, has just proved to me that politicians and bureaucrats, especially European ones, should not get involved in subjects they simply do not understand”.[62]

7. ConclusionsThe main object of this paper is to find the answer of a competition exemption admissible for football market. Through this point: the relationship between sport and the European Union, football market and its actors, applicability of Community law to this issue, rules for competition exemptions, the “Bosman case” and the recent transfer rules mentioned. As clearly understood from ECJ’s ruling at Bosman, Court dismissed the claims for a competition exemption for football market. It was a totally understandable decision at the time of events because no one, even Marc Bosman himself could estimate the results of the ruling. Football market changed dramatically from lots of aspects after Bosman.

First of all; the economic dimension of sport has become much more bigger and trend continues. The quality of stadium accommodation has been improved, clubs have developed their merchandising arms, and the value of broadcasting rights has increased dramatically. [63] UEFA says the estimated gross income for the 2006/07 UEFA Champions League is €750m eclipsing last season’s revenue of approximately €610m.[64] Also, in 1986 the combined annual turnover of the 22 First Division clubs in England was only £50 million. At 2007 only Manchester United’s annual turnover reached £245 million.[65]

Strong financial status is very essential to be successful at football market. Teams involved in league competitions effectively operate as collections of talent.

[62] Chris Heaton-Harris, “Transfer Changes” (2002), www.argyletrust.org.uk/youth.html[63] T. Hoehn & S. Szymanski, ‘The Americanization of European Football’ (1999) 28

Economic Policy, p. 205 [64] http://www.uefa.com/competitions/UCL/news/Kind=1/newsId=454148.html[65] http://www.guardian.co.uk/football/2008/jan/07/newsstory.manchesterunited

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A description of league structures is based on two fundamental hypotheses:For each team, increased wage expenditure leads to better performance on

the pitch.For each team, improved performance on the pitch leads to increased revenues.Teams consisting of better players generally perform better than their rivals.

The dominant factor in explaining performance is wage expenditure. Improved performance on the pitch generates increased revenue because at the margin fans are attracted by success, and advertising, television and sponsorship income tends to be highly sensitive to success.[66]

After Bosman financially strong teams had the chance to buy best players all around the world and this situation causes some serious problems at football market. First of all competition started to die at European football, Champions League becomes the hermetic league of big clubs. Maybe small clubs have the chance to join the competition but the rules of group draws and distribution of Champions League always on the side of big clubs. For example if a small clubs wins the Champions League it can earn 20 million Euros but if Man-chester United wins the cup it will earn approximately 40 million euros just because of its former achievements. Also statistics shows being succesfull at Champions league at the monopoly of same clubs. At last 4 years there was 32 quarter finalists (8 teams for every year), 28 of them from three big football countires (England, Spain,Italy) plus 3 big teams (Bayern Munchen, Olympique Lyonnais and PSV). At 2008 before the quater final draws at Nyon 12 out of 16 teams was there last year. There was 2 aditions to this “classic” 12 which are Sevilla F.C. from Spain and Schalke 04 from Germany. So nowadays at Euro-pean football market there is no room for surprises.Alan Shearer, the England captain from 1996 to 1998, reiterated the criticism:. The uncertainty of how the season unfolds is the great thing about football:

‘Romance and glory referred to the sporting uncertainty of the European Cup when smaller clubs could defeat larger ones because economic consider-ations were putatively secondary to sporting values. In the Champions League, the romance of uncertain outcome has been stifled by a growing emphasis on financial power.’

Not only the football world members who are unhappy with the situation. Also members of the Commission started to questioning the issue. In the words of Commissioner Van Miert (1997):

“Special features of the sporting world place restrictions on the production and organization of sporting events which would be inadmissible in other sectors of the economy ...if the spectator is to enjoy an interesting and high-quality event, the outcome of the competition must be uncertain. For this

[66] T. Hoehn & S. Szymanski, ‘The Americanization of European Football’ (1999) 28 Economic Policy, p. 218.

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reason there must be a balance of strength between the opponents... since the interests of the various clubs are intertwined, the market is intrinsically unstable whenever there is a financial imbalance between the clubs. This imbalance must therefore be corrected...I have always argued for solutions based on a solidarity fund between clubs (a percentage of earnings should be shared)... the league would then function as a body responsible for the redistribution of income... the question which still has to be solved in this connection is how far the establishment of such a fund would enable joint sales of broadcasting rights to qualify for exemption.”

Also these statistics give rise to a new wave for the football clubs try to be the new Chelsea. More investors all around the world started to buy clubs from big leagues and inject unrealistic moneys to transfer market. These investors want short term success and have nothing to do with the national team of the country which they invest. So they bought more foreign players and there is no chance to play for youth players.Steve McClaren former England National football team coach questioning the rise of the foreign players :

“Eventually the Premier League could be all foreign and do we want that? I don’t think we do.I always talked at Middlesbrough of having more home-grown players because there is then more soul in the club and the more home-grown players you have, the bigger the soul is. But we are in danger of losing our soul if we have too many foreign influences in our football.”[67]

So as mentioned with facts and statistics, financial gap between clubs get-ting bigger at European-wide. Beign successfull is on the hands of a monopoly and try to train up youth players almost becomes non-sense. Mike Bateson, then chairman of Torquay United, a minor English club, expressed a common viewpoint:

“I am damned if I’m going to put my money into a youth system just to let the bigger clubs snaffle up the product. The fat cats may get fatter, but the scrawny ones down this end will die of starvation. A lot more players are going to be out of work.”

The facts at European football are not promising and situation going worse. But the main question is there enough “public interest” for exempt football from competition rules in some extent. It is necessary to look general principles of proportionality.

The general principle of proportionality provides that legiti mate objectives may not be accomplished through excessive means. According to the ECJ, limitations on the free move ment of persons are permissible only to the extent that they are necessary for the public interest. Initially, an appropriate relation-ship between the means used and the end sought must exist. Stated differently, the means must be capable of achiev ing the proposed goal. When a choice

[67] http://www.goal.com/en/Articolo.aspx?ContenutoId=717873

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exists between several measures to achieve a legitimate goal, the measure least restric tive of individual freedom is the only permissible alterna tive. So it is pos-sible to apply exemptions to football market but the means employed must be proportionate; the disadvantages caused, such as restriction of a fundamental free dom, must not be disproportionate to the aims pursued.

The “6+5” proposal of FIFA chairman Sepp Blatter is already rejected by European Parliament and it seems it is too restrictive in the means free move-ment of workers and it is impossible to implement. But there is still hope. UEFA has received EU an alternative proposal to insist on eight of a squad’s 25 players being “home-grown” regardless of nationality–ie, trained by any club in the country for at least three years between the ages of 15 and 21. Europe’s commissioner for equal opportunities Vladimir Spidla said:

“Compared with the intentions of Fifa to impose the ‘six-plus-five rule’, which is incompatible with EU law, the “homegrown players” rule proposed by Uefa seems to comply with the principle of freemovement of workers.”

This new approach from UEFA seems workable for the market and and acceptable for the European Union. This solution will be the best for support-ers, players, clubs and national teams.

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BIBLIOGRAPHY

1. CASES

Case C-13/76 Donà v Mantero (1976) ECR 1333

Case C-176/96 Jyri Lehtonen and Castors Canada Dry Namur-Braine v Fédération Royale Belge des Sociétés de Basketball [2000] ECR 1-2681

Case 36/74 Walrave and Koch v. Association Union Cycliste Internationale [1974] E.C.R. 1405; [1975] 3 C.M.L.R. 120, para. 4, and Case CM15/93 n. 3

Case 48/75, State v. Royer, [1976] E.C.R. 497, 509, [1976] 2 C.M.L.R. 619, 636

Case C-264/98 Tibor Balog v Royal Charleroi Sporting Club ASBL

Case C-415/93 Union Royale Belge des Sociétés de Football Association ASLB v Jean-Marc Bosman [1995] ECR 1-4921.

Joined Cases C-51/96 and C-191/97 Christelle Deliège v Ligue Francophone de Judo et Disciplines ASBL and Others [2000] ECR1-2549

2. PRIMARY SOURCES

EC Treaty

The Development and Prospects for Community Action in the field of Sport, Commision Working Paper, September 1998,p. 13

Opinion of Advocate General Lenz, Union Royale Belge des Sociétés de Foot ball Ass’n v. Bos-man, Case C-415/93, slip op. at 4, \ 4 (Eur. Ct. J. Sept. 20, 1995

Report from the Commission to the European Council, COM(l999)

3. SECONDARY SOURCES

A. Egger & C.-S. Hackl, ‘Sports and Competition Law: A Never-ending Story?’ (2002) 23 ECLRev, p. 81-91.

A.-L. Lee, ‘The Bosman Case: Protecting Freedom Of Movement in European Football’ (1996) 19 FILJ, p. 1255-1316.

A. King, ‘The European Ritual: Football in the New Europe’ (Ashgate, 2003)

D.-G. Dimitrakopoulos, ‘ More Than a Market? The Regulation of Sport in the European Union’ (2006) 41 Government and Opposition, p. 561-580.

D. Mcauley, ‘They Think It’s All Over’ (2002) 7 ECLRev, p. 394-399

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J.-P. Van den Brink, ‘ E. C. Competition Law and the Regulation of Football: Part I’ (2000) 21 ECLRev, p. 359-368

P.-E. Morris, S. Morrow & P.-M. Spink, ‘EC Law and Professional Football: Bosman and its Implications’ (1996) 59 MLRev, p. 893-902

S. Van den Bogaert, ‘Practical Regulation of the Mobility of Sportsmen in the EU Post Bosman’ (Kluwer Law International, 2005)

T. Hoehn & S. Szymanski, ‘The Americanization of European Football’ (1999) 28 Economic Policy, p. 205-230

4. WEB DOCUMENTS

Chris Heaton-Harris, “Transfer Changes” (2002),

www.argyletrust.org.uk/youth.html

De Standaard (Belgian newspaper), August 22. 1992, www.standaard.be/Artikel/Detail.aspx?artikelId=GVI12D8T6&kanaalid=611–40k

‘Higher Revenues Expected’(2006), http://www.uefa.com/competitions/UCL/news/Kind=1/newsId=454148.html

‘UEFA Ask EU For Exemption Over 6+5 Rule’ (2008), http://www.goal.com/en/Articolo.aspx?ContenutoId=754473

‘Wenger: No More Tapping Out’ (2008), http://www.goal.com/en/Articolo.aspx?ContenutoId=801195

* Attorney at law.** Attorney at law.

Share Transfer Restraints in the

Articles of Association Under Turkish Law

Azer HAVLİOĞLU* Dilara YÜREKLİ**

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Share Transfer Restraints in the Articles of Association Under Turkish Law / HAVLİOĞLU, YÜREKLİ


In Turkish law, the articles of association is an agreement prepared in accor-dance with the principles and mandatory provisions regulating joint stock companies set forth in the Turkish Commercial Code (“TCC”) and signed

by the founders to incorporate a joint stock company. Pursuant to the TCC, the internal organization, powers and duties of the branches and rights and responsibilities attached to the ownership of shares shall be stated in the articles of association. Provisions included in the articles of association in accordance with the principles and mandatory provisions of the TCC, called real provi-sions, bind not only the founders who signed the articles of association but also the existing and future shareholders as well as the company and its branches. However, the articles of association may also include provisions the regulation of which the TCC does not require. These provisions are not considered man-datory provisions of the articles of association; therefore, rights arising out of these provisions will not bind the company, its branches or the existing and future shareholders, therefore, they cannot be enforced by the instrumentalities set forth in the TCC even though such provisions are included in the articles of association. Such provisions only create contractual obligations and bind the parties who have consented to their terms under the Code of Obligations.

Legal Status of Shareholders’ Agreements and Their Relationship

with the Articles of AssociationPursuant to Article 405 of the TCC, with some exceptions, the only obligation of the shareholders can be the capital contribution undertaken by the respective shareholder to the company and this obligation is limited to the amount of capital that each shareholder has undertaken to contribute. Under this prin-ciple, shareholders are not obliged to pay any amount other than their capital contribution and also, they cannot be instructed how to exercise their rights arising from their ownership of the shares, even by the articles of association. For this reason, shareholders who wish to bind each other with different types of commitments or set up a system in which they wish the company to operate have to do so by entering into shareholders’ agreements. Shareholders’ agree-ments are contracts concluded by and between shareholders in accordance with the principles of the Code of Obligations. Under the principle of freedom of contract set forth in the Code of Obligations, issues that cannot be handled within the articles of association, such as, inter alia, personal representations and undertakings of the shareholders towards each other, performance of the company, contractual penalties, voting arrangements, and share sale and/or purchase obligations, may be regulated in a shareholders’ agreement. However, since the obligations arising from shareholders’ agreements are contractual in

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nature, those obligations will only bind the parties to such agreements and the remedies which can be imposed in case of breach will be the ones provided under the Code of Obligations.

Linkage SystemPursuant to Article 461/1 of the TCC, unless otherwise provided for in the articles of association, registered shares shall be transferred to the other sharehold-ers or third parties without being subject to any restriction. Under the TCC, the transfer of registered shares can be prohibited or restricted by setting up a linkage system (bağlam sistemi) in the articles of association. The linkage system targets the balance between the needs for the transfer of shares unrestrainedly and the protection of the company. If a linkage system is provided for in the articles of association, the company shall have the obligation or discretion to refuse to register the transfer of linked registered shares (bağlı nama yazılı hisse senetleri) to the share ledger of the company with no reason, if stated thusly in the articles of association or for the reasons listed in the articles of association. Since rights arising out of the ownership of shares such as voting can only be used by the shareholders who are listed as such in the share ledger of the company, this refusal will not affect the validity of transfer but the title of the shares shall remain with the existing shareholder while the ownership rights are transferred to the other party, unless otherwise provided for in the agreement.

As mentioned earlier, shareholders may enter into shareholders’ agreements with other shareholders and undertake obligations other than their obligation to pay their capital contribution. Such undertakings may include a right of first option (öncelik hakkı), pre-emption rights (önalım hakkı) or put or call options (alım ve satım hakları). If those rights are envisaged in a shareholders’ agreement, they will only be asserted and enforced against the other parties to the agree-ment. The unavailability of enforcement for such rights against the company and its branches may interrupt the shareholders’ main purpose in granting such rights. For this reason, shareholders may try to have the company adopt the provisions of their shareholders’ agreement into the articles of association in order to provide for enforcement by the instrumentalities set forth under the TCC. Before examining the validity of such rights when listed in the articles of associaton, we will give information with respect to their characteristics below.

First OptionAccording to the first option right, if a shareholder wishes to sell his/her shares, he/she has to communicate this intention to the other shareholders and shall offer to sell these shares thereto for the price determined or to be determined

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in the agreement using the method set forth in the agreement in which the first option is granted before selling these shares to third parties. Terms of the first option can be determined in two ways. If a shareholder grants first option, thus undertaking to first offer the shares for sale to the holder of this option, but is not obliged to sell his/her shares to the holder, such first option will be defined as a right of first proposal (teklifte öncelik). Then, the shareholder’s communication of his/her intent to sell will not be considered an offer and will not prevent the shareholder from negotiating the sale with third parties. In other words, the only obligation of a shareholder who granted first option is not to sell the shares to third parties if the holder of such option is ready to conclude the sale on the same terms. If the terms of a first option oblige its grantor to make an irrevocable offer for the sale of shares to the holder of first option first when he/she wishes to sell his/her shares, such first option right will be defined as a right of first refusal (icapta öncelik). In this case, the holder of the first option can conclude the contract by accepting the offer, and unlike the situation with the right of first proposal, the shareholder who granted first option in the form of a right of first refusal cannot revoke his/her offer after it has been accepted by the holder of this right. If the holder of the first option as a right of first refusal rejects the offer, the shareholder who granted first option as a right of first refusal will not be able to sell his/her shares to third parties for a lower price.

Instead of a right of first refusal, first option can be granted as a right of first acceptance (kabulde öncelik). In this case, the grantor of such option will be obliged to accept the offer made by the holder of such right as long as its terms are not worse than the terms of third parties’ offers.

Pre-emption RightThe pre-emption right provides the opportunity to its owner to buy the shares of a shareholder with a unilateral statement if such shares are offered for sale or sold to third parties. It can be decided in shareholders’ agreements that the pre-emption right shall not be implied in cases of the sale of the respective share to some persons determined in the shareholders’ agreement and also a person to whom a share is sold shall be party to the shareholders’ agreement. The exercise of the pre-emption right is conditional upon the occurrence of an event which can be defined as the shareholder’s voluntary conclusion of a valid sales agree-ment with a third party for the sale of the shares. The pre-emption right can be exercised with the arrival of a unilateral statement that establishes a legally binding sales agreement between the holder of the right and the shareholder for the sale of shares obligating the shareholder to transfer the shares to the holder of such a right. If the shares are transferred to third parties regardless of

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the exercise of the pre-emption right by its lawful holder, the transfer will be valid and the transferred shares cannot be retrieved. However, the shareholder in breach will be liable for damages.

As mentioned earlier, the pre-emption right can only be exercised upon the shareholder’s voluntary conclusion of a sales agreement with a third party. Even if such a sales agreement is cancelled or terminated, the exercise of the pre-emption right remains valid and enforceable.

If all shareholders give each other the pre-emption right reciprocally, each holder of the right can obtain an amount of the shares subject to the pre-emption right in proportion with their share ratio. If some of the shareholders do not use their pre-emption right, the shares which they are otherwise entitled to obtain may be bought by other shareholders, provided that the legitimate interests of all shareholders are kept in balance.

Under the TCC, when new shares are issued in accordance with the pro-cedures set forth for the capital increase of the company, the shareholders are provided with a statutory pre-emption right to buy newly issued shares, which gives them the ability to buy a number of newly issued shares in proportion with their share ratio. However, under the TCC, this pre-emption right can be restricted or eliminated in the articles of association or by a general assembly resolution and the newly issued shares can be left to third parties wholly or partially. However, such elimination or restriction of the pre-emption right may not treat the shareholders with the same rights and responsibilities differently.

On the other hand, since shareholders’ agreements are contracts entered into by and between shareholders in accordance with the principles of the Code of Obligations, unless their provisions are also adopted into the articles of association, shareholders’ agreements do not have to treat the shareholders with the same rights and responsibilities equally.

Put Option and Call OptionThe purpose of the put option and call option granted in shareholders’ agree-ments is generally leaving the company or the exclusion of a shareholder from the company. If a shareholder is provided with a put option, that shareholder will have the right to force the other party to buy its shares. If a shareholder is provided with a call option, that shareholder will have the right to buy the shares of the other party. The agreements granting such options will also include a sales price or a method which will be used to determine the sales price.

Put option and call option can be exercised with an arrival of a unilateral statement of a party that establishes a sales agreement to the other party. When the person who granted a put option receives a unilateral statement from a holder of the option exercising such option, he/she is obligated to buy the

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shares subject to the option. On the other hand, upon the exercise of a call option with a unilateral statement, the person who granted the option will be obligated to transfer the shares subject to the option. In order to form a valid sales agreement by exercising put or call options, the terms of the sale, such as quantity of shares and the sales price, have to be determined in advance or be determinable. While the sale price or the method which will be used to determine the sales price can be set forth in the shareholders’ agreement, the duty to determine the sales price may be left to a third party in the agreement. If the sales price is not determined or made determinable in the shareholders’ agreement, such determination should be made taking the unilaterally exercis-able nature of these options into consideration. It should be borne in mind that the main purpose for granting such options in shareholders’ agreements is to provide the shareholders with the opportunity to transfer their shares or to buy other shareholders’ shares upon the occurrence of the events set forth in the agreement, not to maximize the profit which will be obtained by the sale of the share.

If a first option, pre-emption right or call option is granted in favor of the company in the shareholders’ agreement, the company can take over its own shares by exercising such right only if such take-over is included in one of the exceptions set forth in Article 329 of the TCC.

The Issue with the Regulation of Restraints on Transfer of Shares Set Forth in the Shareholders’ Agreements and the Articles of Association

As mentioned above, under the TCC, transfer of shares can be restricted by providing a linkage system in the articles of association which gives the com-pany the right to refuse to register the transfer of linked registered shares to the share ledger of the company with no reason if stated thusly in the articles of association or for the reasons stated in the articles of association. In order to constitute a real provision of the articles of association which can be asserted and enforced against the company and its branches, the provisions setting forth restraints on transfer of shares shall not restrict the transfer of shares more than the statutorily allowed linkage system does, because doing so would create an obligation other than paying capital contribution. It would cause liability for damages and violate the core principles of the TCC.

First option, pre-emption right and all versions of put and call options are similar to a linkage system in the sense that all of them limit the right to choose the other party to the agreement. If the regulation of the first option is envis-aged in the articles of association, it will constitute one of the real provisions of the articles of association and will bind all existing and future shareholders, the company and its branches. Therefore, even if the company refuses to register the transfer of shares to the share ledger of the company, the other party to the transfer will not be able to hold the shareholder liable for damages. This means

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that the regulation of first option in the articles of association will not impose an obligation on shareholders other than paying capital contribution like dam-ages. Therefore this will not violate the core principles set forth in the TCC.

However, since pre-emption rights and all versions of put and call options can be exercised unilaterally, imposing an obligation to buy, sell or transfer shares and restrict the alienability of shares more than the statutorily allowed linkage system does, even if these rights are regulated in the articles of associa-tion, they will not be recognized as real provisions of the articles of association and will not have the ability to bind either the shareholders or the company or its branches and cannot be asserted against third parties. Since these rights remain contractual in nature even if regulated in the articles of association, in the event that the company refuses to register the transfer of registered shares to the share ledger of the company, the shareholders who granted those rights may fail to fulfill their obligations to the holders of such rights and can be held liable for damages. Since imposition of additional obligations other than payment of capital contribution, such as liability for damages, is prohibited under the TCC, these rights violate the core principles set forth in the TCC.

As a result, these regulations will only constitute an agreement between shareholders who manifested an intention to be bound with their terms even if regulated in the articles of association and since the company or its branches cannot be forced to act in conformity with these regulations, most of the time, specific performance will not be available as a remedy in the event of breach.

The Issue with Assertion of Claims against Third Parties

As mentioned above, even if shares that are subject to first option, pre-emption or put and call options are transferred to third parties in breach of these obli-gations, the transfer remains valid and the shares cannot be retrieved from a third party by claiming such a violation. The shareholders might wish to have the ability to retrieve the shares in the event of breach by regulating these rights in the articles of association and registering the articles of association with the Trade Registry. However, regulation of these rights in the articles of association does not does not make it possible to assert them against third parties, since only the provisions of the articles of association whose regula-tion in the articles and registration and declaration by the Trade Registry is required pursuant to Article 300 of the TCC may be asserted against third parties. It should be borne in mind that even first option rights, which bind the existing and future shareholders of the company and the company and its branches when regulated in the articles of association, cannot be asserted against third parties because its regulation in the articles of association and

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registration and declaration by the Trade Registry is not mandatory pursuant to Article 300 of the TCC.

Conclusion

Although first option rights can be regulated in the articles of associa-tion, pre-emption rights and put and call options cannot be regulated independently in the articles of association and such rights can be made

enforceable against the company and its branches when regulated within the framework of the statutorily allowed linkage system. As mentioned above, since by setting forth a linkage system in the articles of association, the company can be obligated not to register the transfer of shares in the share ledger for the reasons listed in the articles of association, in the event that a violation of provisions set forth in the shareholders’ agreements is listed as a reason not to register the share transfer to the share ledger, the company can be obligated not to register share transfers violating such provisions. Although this solu-tion does not give the opportunity to retrieve shares transferred in violation of the shareholders’ agreements it at least gives the opportunity to prevent the transfer of ownership rights arising out of the ownership of the shares and lets shareholders’ agreements stand with the articles of association.

* Judge / Ministry of Justice DG for EU Affairs.

Free Movement of Companies within the EU

Ulvi ALTINIŞIK*

101

Free Movement Of Companies Within The EU / ALTINIŞIK


ABSTRACT

As the cross-border mobility of goods, services, labour, capital increased, the freedom of establishment of companies gained more attention in the EU. In the last decade, European company law has evolved significantly with the judicial contribution of the European Court of Justice. After its restrictive interpretation in Daily Mail the Court took a more liberal approach with regard to the freedom of establishment of companies. Under caselaw of the ECJ, with the aim of taking advantages of more appropriate rules, establishment of companies, their subsidies or branches in other Member States does not constitute an abuse of rights; furthermore it is referred to as exercise of freedom of establishment guaranteed by the Treaty. Once companies establish themselves or subsidies within the Union they enjoy the same rights as with the nationals of the host Member State. The Court took a liberal approach in terms of equal treatment and extended its scope so that it covers the taxation and social security protection of the employees as well.

Keywords: EU Company Law, freedom of establishment of companies, equal treatment, european company, free movement of companies.

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ABBREVIATIONS

Art. : ArticleCMLRev : Common Market Law ReviewCOM : CommissionECJ : European Court of JusticeECR : European Court Reportseds : EditorsEEC : European Economic CommunityELJ : European Law JournalELRev : European Law ReviewEU : European Unionibid : in the very same placeIEA :The Institute of European Affairs.n : noteOup : Oxford University Presspara : paragraphparas : paragraphspp : pagesTFEU :Treaty on the Functioning of the European UnionUK : United Kingdomvol : volume

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I. IntroductionFreedom of establishment constitutes one of the fundamental principles of the European Union. It plays a crucial role in relation to completion of the inter-nal market with the other freedoms. Due to changes and challenges that have taken place in the global and internal market, freedom of establishment has to be exercised in a more flexible manner than it was in the early stages of the European Communities. In this regard as the cross-border mobility of goods, services, labour, capital increased, the freedom of establishment of companies gained more attention in the EU.[1] Especially in the last decade, European company law has evolved significantly with the judicial contribution of the European Court of Justice. This essay aims to assess the extent of freedom of establishment of companies under EU law. To this end I will focus on the free movement rights of companies, such as transfer of seat, setting up branches, subsidies, exceptions to free movement, justifications for restrictive measures, equal treatment of companies, and taxation issues. The rights granted to natural persons are excluded from the scope of the study.

II. The Freedom of Establishment Under Articles 49 and 54 of TFEU

A. GENERAL SCOPEArticle 49 of TFEU provides that restrictions on the freedom of establishment of nationals of a Member State in another host Member State are prohibited. From the legal persons’ perspective the setting-up of agencies, branches or subsidies in the host Member State is also subject to the same prohibition.The second paragraph of the article states that freedom of establishment includes setting up and managing companies and firms within the meaning of Article 54 of TFEU which provides:

“Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purposes of this chapter [the Chapter on freedom of establishment], be treated in the same way as natural persons who are nationals of Member States.

‘Companies or firms’ means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons gov-erned by public or private law, save for those which are non-profit-making.”

Article 54 aims to maintain the treatment of companies in the same way as

[1] See M Kiikeri, The Freedom of Establishment in the European Union , Report to the Finnish Ministry of Trade and Industry, 2002, general remarks, 10.

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with natural persons in relation to freedom of establishment. However, due to the artificial nature of companies and differences between companies and natural persons this does not seem possible.[2] In the second paragraph of the Article non-profit making activities are excluded from the scope of the provisions which can be compared with the exclusion of workers who are not remunerated and services which are not provided for remuneration.[3]

The Court ruled in one of its earlier cases that Article 43 (now Art. 49 TFEU) has “direct effect” and can be invoked directly by individuals in order to remove discriminatory restrictions.[4]

Only companies which are set up under the national law of a Member State, and have their principal place of business and registered office within the Community enjoy freedom of establishment. Nevertheless, there are some exceptions to the grounds of public policy, public security and public health (Article 46, now Art.52 TFEU)

Companies exercise their freedom of establishment through primary and secondary establishments. A company may take part in the incorporation of a company in another Member State or transfer its seat from a home state to a host state in the case of primary establishment. Secondary establishment means that while keeping its home office in one Member State a company establishes branches, agencies or subsidies in another Member State.[5] Under Article 55 of TFEU (Ex Art. 294) Member States are obliged to deal with these companies on an equal basis in relation to participation in the capital of the new company.

Since the essence of controversies is based on several specific terms, it is logical to begin by defining these terms. The first question is then, what is a subsidiary? A subsidiary is controlled by another company or corporation, usually through the ownership of shares in the subsidiary by the parent. In company law, ownership of 50% plus one share is enough to create a subsidiary. Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from branches, which are businesses fully integrated within the main company, that are not legally or otherwise distinct from it. A branch is a particular store or office location of a business with more than one such location, and differs from the head office only by being situated in another place. [6]

[2] P.Craig/G de Burca, EU Law, Text, Cases and Materials (Oxford: OUP Fourth Edition 2008), 806; C. Barnard, The Substantive Law of the EU: The Four Freedoms, (Oxford: OUP second Edition 2007), 331.

[3] Craig/Burca, ibid.[4] Case 2/74 Case 2/74, Reyners v. Belgium [1974] ECR 631, 660, [1974] 2 CMLR 305.[5] Barnard(n2), 332; H. C. Hirt, Freedom of Establishment, International Company Law

and the Comparison of European Company Law Systems after the ECJ’s Decision in Inspire Art Ltd’(2004)EBLRev, 1189-1222, 1194.

[6] http://encyclopedia.thefreedictionary.com/subsidiary.

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The supplementing Directive[7] on the involvement of employees Art 2(c) contains a definition of “subsidiary”: a “‘subsidiary’ of a company means an undertaking over which that company exercises a dominant influence defined in accordance with Article 3(2) to (7) of Directive 94/45/EC”.[8]

The company’s registered office is the place where the company’s offices are located according to its official registration and its statutes. The head office of a company is where the management and main administration are actually situated.[9]

B. FREE MOVEMENT OF COMPANIESCompanies or firms are entitled to set up primary and secondary establishments in other Member States. In the event that such activities take place, some specific issues are raised in relation to the nationality of the company, the applicable law that governs the establishment, and the activities of the company. Although repealed Article 293 of EC Treaty provided that Member States shall enter into negotiations concerning retention of legal personality when companies transfer their seats from one Member State to another, there was no existing convention on the basis of repealed Article 293.[10]

Basically, there are two conflicting theories trying to find a solution to the question of which law is applicable to a company incorporated in one Member State but has commercial ties with another Member State. The incorporation theory suggests that a company is a creature of the system under which it was incorporated. The system is thus in the most appropriate position to govern the validity of the formation of the company and related issues. It is not possible to change the governing law unless the company is dissolved or set up anew in another Member State. The UK, Ireland, the Netherlands and Denmark hold this theory in their national legal order.[11] On the other hand real seat theory recognises that the place of a company’s management, control, real seat or principal place of business determines the applicable law to the company. The continental Member States, namely France, Germany, Spain, Portugal Belgium, Luxembourg, and Greece, adopted this theory.[12]

[7] Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees, OJ L 294 p 22-32.

[8] Council Directive 94/45/EC of 22 September 1994, OJ L 254, p 64-72.[9] P. Storm, The Societas Europaea: a new opportunity? (Dirk van Gerven and Paul Storm

(eds), The European Company (Vol I 2006)) 5 expressed by C H Dickens, Establishment of the SE Company: An Overview over the Provisions Governing the Formation of the European Company, (2007)EBLR, 1423-1464, 1426.

[10] P. Dyrberg, Full Free Movement of Companies in the European Community at last?,(2003)28(4) ELRev 528-534, 529.

[11] A. Roussos, Realising the Free Movement of Companies, EBLRev(2001)january/february,8. ; E. Wymeersch, ‘The Transfer of the Company’s Seat in European Community Law’(2003) 40 CMLRev,661-695, 666- 667.

[12] İbid.

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In comparison, incorporation theory seems to be in favour of the mobility of companies. Companies can move their principal or management offices to other Member States without the question of re-incorporation in the host country.[13] In other words, since the company abides by the law of the coun-try where it was incorporated regardless of its central administration, its legal capacities are recognised by the national legal orders of the host states.[14] How-ever, it has been criticised that this may lead to ‘mailbox’ companies where the establishment procedures are simpler and cheaper. This situation may put the interests of employees, creditors, or investors in danger in the host country and increase the competition among Member States.[15] On the other hand the real seat theory enables Member States’ control over the foreign companies which have their head offices in their territories. Thus, host countries protect their domestic interests. [16] The most criticized side of this theory is that it restricts the free movement of companies by requiring reincorporation of the company in the event that it transfers its main office to the host country. [17] Otherwise they lack legal capacity and can not conclude legally binding contracts or take legal actions before courts.[18]

In relation to the case-law of the ECJ, it is obvious that the Court held the same opinions regarding the freedom of establishment as in its earlier cases. In Factortame[19] it stated that under article 52(now Art 49 TFEU) freedom of establishment covered pursuance of an economic activity through a fixed establishment in another Member State. Following this, in some other cases such as Commission v France,[20] Segers[21] the Court declared the restrictions on the establishment of the agencies, branches, or subsidies unlawful. [22]

Daily Mail[23] was an important case with regard to the transfer of the primary establishment of a company from one Member State to another. An investment

[13] Dyrberg(n10)529. for analyses of the theories and conflict of law issues see, R. R.Drury, Migrating companies,(1999) ELRev 24(4), 354-372.

[14] Hirt(n5) 1195. [15] Ibid; Dyrberg(n10), 529-530. [16] Ibid.; M. Lauterfeld, ‘Centros and the EC Regulation on Insolvency Proceedings: The End

of the ‘Real Seat’ Approach towards Pseudo-foreign Companies in German International Company and Insolvency Law? EBLRev(2001) March/April, 79-88, 79.

[17] Hirt(n5), 1196; Roussos(n11), 8;Dyrberg(n10)530.[18] For the situation in Germany see N. Rothe, ‘Freedom of establishment of Legal Persons

within the European Union: An analysis of the European Court of Justice Decision in the Überseering Case, American University Law Review, (2004)vol 13, 1104-1141.

[19] Case C-221/89[1991]ECRI-3903.[20] Case C-270/83[1986]ECR273.[21] Case 79/85 Segers v. Bedriifsvereniging voor Bank- en Verzekeringsweren, Groothandel

en Vrije Beroepen [1986] ECR 2375.[22] Roussos (n 5)9.[23] 81/87 R. v. H.M. Treasury et al., ex parte Daily Mail and General Trust PLC [1988] ECR

5483.

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company Daily Mail, was incorporated under British law; in order to benefit from tax advantages, the company decided to move its main office from the UK to the Netherlands. British authorities refused to give their consent to the transfer under British law. The company then claimed that under Article 43 (now Art. 49 TFEU), official consent of the authorities was not necessary for such a transfer. The conflict was brought to the ECJ via preliminary ruling procedure and the Court held that freedom of establishment was exercised through setting up secondary establishments such as branches, subsidies or agencies. After having stated that British national legislation did not prevent this type of exercise of rights, the Court pointed out that the provisions on freedom of establishment did not confer rights to transfer its registered office of a company while retaining its status as incorporated in the first Member State. This denial of freedom of establishment of a primary establishment received much criticism from tax lawyers and academics.[24]

However, in Centros [25] the Court did not refer to its earlier decision in Daily Mail. This may be because, unlike Daily Mail, the Centros case basically dealt with the secondary establishment of the companies. Centros Ltd was registered in the UK and its shares were owned by a Danish couple residing in Denmark. Centros had never traded in the UK prior to this point . The only reason it registered in the UK was to avoid the payment of a minimum share capital requirement in the establishment phase. After its establishment, Centros attempted to set up a branch in Denmark which was refused by the authorities on the grounds that they were trying to set up a primary establishment and circumventing the law. Centros initiated legal proceedings against the refusal and finally the national court referred to the ECJ. First, the Court noted that the situation fell within the scope of the Treaty and that the circumvention of minimum capital could not have been considered sufficient to exclude the application of Articles 43 (now Art 49 TFEU) and 48 (now Art. 54 TFEU). Finally, it concluded that the refusal to register a branch of a company consti-tutes an obstacle to the exercise of the free movement of establishment. In the following stage, the Court dealt with the problem as to whether the minimum capital requirement in Danish law was justified or not.

The judgment in Centros brought about several interpretations in academic literature, especially in Germany where real seat theory was adopted. Some argued that the Court overruled the Daily Mail judgment and the real seat theory was no longer applicable to the conflicts of law in international company law issues. Others stated that the facts of both cases were quite different.[26] In

[24] Roussos (n 5)11; Dyrberg(n10), 532.[25] C-212/97 Centros Ltd v. Erhvervs- og Selskabsstyrelsen [1999] ECR I-1459, [1999] 2

CMLR 551[26] For discussions see Lauterfeld(n16), 81; Roussos(n11), 13-14-15. For an analysis of the

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fact, both Danish and British laws approved incorporation theory and Danish authorities referred to Centros Ltd as a foreign company governed by British law. However, it was the domestic legislation that required a minimum amount of capital to be paid. Therefore it had been argued that real seat theory was not affected. [27]

The situation was not clarified until the Überseering[28] judgment where a Dutch company owned a property in Germany and concluded a contract with the construction company NCC for renovation of the building. However, due to some defects, NCC’s performance was not satisfactory for Überseering. In 1994, all shares of the company were obtained by two German nationals and Überseering transferred its head office and place of management to Germany. Its legal actions against NCC were rejected both in the first and second instance on the basis that Überseering did not have legal capacity in Germany. Under German conflicts of law the legal capacity of a company is determined by the law of the place (real seat theory) where the head office is located. The legal capacity of Überseering was thus subject to German law, which stated that foreign incorporated companies should be reincorporated in Germany in order to acquire legal capacity. Überseering appealed the decisions and the German Supreme Court requested a preliminary ruling from the ECJ in relation to interpretation of the Articles 43 (now Art 49 TFEU) and 48 (now Art 54 TFEU) EC Treaty.

The Court pointed out that the host Member State’s denial of legal capac-ity of a company incorporated in another Member State imposed illegitimate restriction on the freedom of establishment. Thus, under articles 43(now Art 49 TFEU) and 48 (now Art.54 TFEU), the host Member State was obliged to recognise the legal capacity and capacity to be a party in legal actions of the company which transferred its seat to its territory.[29]

Another significant judgment is the Inspire Art[30] in terms of formation of companies, registration and branch. Inspire Art Ltd was incorporated in Britain where its registered office was, and also had a branch in Amsterdam. Under Dutch company law, foreign companies should be registered with an indica-tion that it was a ‘formally foreign company’. Inspire Art was asked to comply with this provision and to use the ‘formally foreign company’ indication in its

Centros Case see also, P. Cunha/P. Cabral, ‘Presumed Innocent’:Companies and the Exercise of the Right of Establishment Under Community Law, (2000) ELRev25(2), 157-164; M. Siems, ‘Convergence, competition, Centros and conflicts of law: European company law in the 21st century’(2002)ELRev 27(1), 47-59

[27] Lauterfeld,(n16)81.[28] Case C-208/00 Überseering BV v Nordic Construction Company Baumanagement

GmbH [2002] ECRI -9919.[29] For further analyses see Rothe(n18), 1123;Hirt (n 5), 1200-1201; Dyrberg(n10), 533-535.[30] Case C-167/01 Inspire Art [2003] ECR I-10155

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business transactions. However it refused to do so and the conflict was referred to the ECJ by the national Court. In fact, Inspire Art was established in Britain in order to circumvent Dutch company law and take the benefit of the Brit-ish law in relation to minimum capital requirement. Under Dutch company law stricter rules were applied to foreign companies with regard to minimum capital and director’s liability. In relation to the first question the Court stated that the formation of a company for the sole purpose of enjoying the benefit of more favourable legislation did not constitute abuse even if that company conducted its activities entirely or mainly in that second State. [31]Thus, it was stated that application of such national rules on minimum capital and director’s liability constituted restrictions on freedom of establishment under articles 43 (now Art 49 TFEU) and 48 (now Art.54 TFEU).[32]

In Centros, Überseering and Inspire Art the Court ruled in favour of incor-poration theory and clarified the abuse theory. In this regard, the establishment of companies, branches, or subsidiaries in another Member State with the aim of benefiting from more favourable provisions does not really constitute circumvention of the domestic legislation of the Member State in question or abuse. That is something permitted and guaranteed within the freedom of establishment, by the Treaty. [33]

C. THE EXCEPTIONS TO THE FREE MOVEMENT OF COMPANIESExceptions to the freedom of establishment of companies are similar to those applied in goods and services. Basically, there are two types of restrictions: one is Treaty based restrictions and the other is created by caselaw.

Article 45 of the EC Treaty provides that provisions on freedom of establish-ment shall not be applied in the case of exercise of official authority. Activities which have direct and specific connection with the exercise of official authority are excluded from freedom of establishment rules.[34] Thus, the Court held in Commission v. Spain[35]that activities of private security undertakings and their staff did not constitute exercise of official authority. The Court reiterated the same approach in Commission v. Belgium,[36] or that the activities of security firms, security systems firms and internal security services are not normally directly and specifically connected with the exercise of official authority.[37]

Article 46 is another provision that grants Member States to derogate from

[31] Para 96.[32] Para 104.[33] For the importance of Inspire Art see, E. Vaccaro, Transfer of Seat and Freedom of

Establishment (2005) EBLR, 1348-1365, pp 1356-1359[34] Case 2/74, Reynes v. Belgian State [1974] ECR 631, [1974] 2 CMLR 305.[35] Case C-114/97, Commission v. Spain [1998] ECR I-6717.[36] Case C-355/98 Commission v. Belgium [2000] ECR I- 1221[37] Ibid para 26.

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freedom of establishment rules on the basis of public policy, security and health exceptions. In the event of adoption a direct discriminatory measure can only be justified under the above mentioned express derogations. However, when the restriction stems from an equally applicable rule which does not constitute intentional discrimination, then the restriction shall be justified on public inter-est grounds.[38] The ECJ formulated the conditions for justifying a restrictive national measure in Gebhard[39]and applied the same formula in further cases. Any restrictive measures shall fulfill the four criteria that are known today as the Gebhard formula, in order to be deemed as justified:

First of all they have to be applied in a non-discriminatory manner, secondly they have to be justified by imperative requirements in the general interest, thirdly they have to be suitable for the attainment of the objective pursued and finally they must not go beyond what is necessary to obtain the objective (proportionality).[40]

In Centros the Danish government refused to register the branch of the company whose administration office was located in the UK. The Dutch government tried to justify its measure by the aims of protecting public and private creditors and preventing fraud. While the Court accepted that these arguments might form a justification ground, it concluded that the measure was neither proportionate nor suitable for attaining the aim and finally dismissed the argument.

In Überseering, German law denied legal capacity of a company which had transferred its seat to the country. It was put forward that German restriction aimed to protect minority shareholders, creditors and tax authorities by requir-ing minimum capital. Again the Court stated that the arguments were on valid grounds; however such measures were deemed to be tantamount to outright negation of the freedom of establishment conferred on companies by Articles 43 EC (now Art 49) and 48 EC(now Art.54 TFEU) and failed to justify the measures.[41] Although the ECJ did not explicitly express that the measure was disproportionate, it is clear that the measure went beyond the objective aimed.

In relation to Inspire Art, the ECJ held that the Dutch government and Cham-ber of Commerce failed to prove that restrictive national rules on minimum capital and director’s liability satisfied the criteria of efficacy, proportionality and non-discrimination.[42]

Sevic[43] is another recently decided case in which the ECJ applied the Gebhard

[38] Craig/de Burca (n2)803.[39] Case C-55/94, Gebhard v. Consiglio dell’Ordine degli Avvocati e Procuratori di Milano

[1995] ECR I-4165.[40] Ibid, para 37.[41] Paras 85-93.[42] Para 104. see Hirt(n5)1206-1208.[43] Case C-411/03 İ Systems [2005]ECRI-10805.

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formula. Sevic merged with a company that was incorporated in Luxemburg and then it applied for registration in the commercial register of merger of Germany However the application was rejected on the grounds that German national legislation only provided for mergers between two companies established in Germany. The Court replied that cross-border mergers constituted an exercise of freedom of establishment and rejection of registration was contrary to the Articles 43 (now Art 49 TFEU) and 48(now Art.54 TFEU). The Court then searched for justification and ruled that the national rules could be justified on the basis of protecting the interests of creditors, minority shareholders, employees and preservation of the effectiveness of fiscal supervision and the fairness of commercial transactions. Nevertheless, national law was not proportionate.[44]

In some cases the Court accepts that national measures are proportionate, such as in Pfeiffer.[45] Pfeiffer was a company operating supermarkets in Austria under the name of Plus Kaufpark. There was another German rival company called Löwa, using the same name ‘Plus’ and running business in the same sector in Austria. Relying on national provisions on unfair competition, Pfeiffer issued a court order restraining Löwa using the same name ‘Plus’. Upon reference, the ECJ declared that such an order against a company established in another Member State was contrary to Article 43 (now Art 49 TFEU). However, since there was a risk of confusion of names, the domestic legislation was justified under the general interest pertaining to the protection of industrial and com-mercial property. [46] In this case the Court stressed that issuance of a restraining order did not go beyond the objective aimed by the domestic legal order. [47]

It has been established by the caselaw that direct discriminations infringe upon Article 49 and can be saved only by expressed derogations in Article 46. On the other hand indirect discriminations violate Article 43(now Art 49 TFEU), unless they are justified under public interest requirement, that is to say Gebhard formula, and express derogations.[48]

D. EUROPEAN COMPANY (SOCIETAS EUROPAEA-SE) AND RESTRICTIONS ON FREEDOM OF ESTABLISHMENTEuropean company is a form of European public limited liability company which may be established within the Union, in order to maintain companies to transfer their registered office without closing the company or creating a new legal person. [49] In other words one of the main objectives in creating the

[44] Ibid Para 28,29,30.[45] C- 255/97 Pfeiffer Grosshandel Gmbh v. Löwa Warenhandel Gmbh [1999] ECR I-2835[46] İbid para21.[47] İbid para23.[48] Barnard (n2)345.[49] Article 8 of Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute

for a European company (SE), OJL 294, p 1-21.

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European company is cross-border mobility. Since they shall be located in the same place, transfer of the registered office means transfer of the head office as well. Roughly, in Article 8 of the Regulation it is stated that transfer process shall not be completed without a transfer proposal, publication, a justificatory report, a two-month transition period, a general meeting approval, protection of creditors and possibly minority shareholders, and certificate and subsequent registration in the new Member State, followed by publication again. As one can easily predict, although it is created for cross-border mobility of the companies the transfer procedure seems time consuming and cumbersome.[50] Moreover, there are several obstacles which have a potential to violate freedom of establishment, namely the protection of minority shareholders who oppose the transfer, the two-month period where no decision on transfer may be taken, the requirement for a certificate attesting the transfer, and opposition to the transferral on grounds of public interest.[51]

There is another significant provision of the Regulation which may con-stitute an obstacle for freedom of establishment. Under Article 7 a company can not transfer its registered office to another Member State while leaving its head office in the first Member State or vice versa. This restricts freedom of establishment in relation to companies that want to benefit from the domestic rules of a Member state by establishing their head office in that Member State without transferring their registered office. [52]

Under Article 230 EC (now Art. 263 TFEU), since the Regulation can not be in contradiction with the Treaty provisions on freedom of establishment, it shall be partly annulled by the ECJ. [53]

IV. Equal Treatment, Taxation, And Beyond

A. Equal TreatmentArticles 49 and 54 of TFEU foresee that once a company has established itself or a branch in the host Member State then it must enjoy the same terms and conditions, benefits and social advantages available to national companies. In Commission v Italy[54], Italian legislation authorized the State to conclude contracts in some sectors of public activity, such as taxation, health and agri-culture, only with the companies in which all or the majority of the shares were

[50] Dickens(n9)1462.[51] Article 8(5)(6)(8)(14) of the Regulation.[52] Wymeersch(n 11), 692;ibid 1462-1463; for transfer of seat of SE see M. G.Riestra,

‘The Transfer of Seat of the European Company v Free Establishment Case-Law’ (2004) EBLRev.1295-1323, 1306 and onwards.

[53] Dickens(n9) 1463.[54] Case C-3/88[1989]ECR4035.

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directly or indirectly in public or state ownership. In this case, the development of data processing systems for the public sector was in question and the Italian government tried to justify the legislation on the grounds of confidentiality of the processed data and public service activity. First, the ECJ noted that the principle of ‘equal treatment’ of which Articles 52 (43 ECT, now Art. 59 TFEU) and 59 (48 ECT, now Art. 65 TFEU) of the Treaty embodied specific instances, prohibited not only overt discrimination by reason of nationality but also all covert forms of discrimination. Although Italian legislation did not discriminate on the basis of nationality, it favoured Italian companies and breached Article 43 (now Art. 49 TFEU).[55] Following this, the Court dismissed the arguments of the Italian government and stated that since the activity was of a technical nature itself, it did not constitute a public service and could not be justified based on the facts.[56]

In Segers[57]the Court took the protection of freedom of establishment further on the grounds of equal treatment of national and non-national companies. Mr. Segers was a Dutch national and director of a company incorporated under English law. The company conducted its whole business through its subsidiary in the Netherlands. After a while Mr. Segers applied for health insurance in the Netherlands. However, his application was rejected on the grounds that the social security legislation was only applicable to companies whose registered office was in the Netherlands, not to companies incorporated under foreign law. [58] In this case the Court reiterated that freedom of establishment of com-panies included having a registered office, central administration or principal place of business within the Community to pursue their activities in another member state through an agency, branch or subsidiary. Although entitlement to the reimbursement of costs related to sickness pertained to a person and not to a company, the equal treatment of national and non-national companies precluded Member States from discriminating against employees in connection with social security protection. Discrimination against employees in relation to social security protection indirectly restricted the freedom of companies of another member state to establish themselves through an agency, branch or subsidiary in the member state concerned.[59]

B. TaxationIn principle, difference in the treatment of taxpayers is contrary to Article 49.[60]

[55] İbid para 8-9.[56] Ibid Para26.[57] Case 79/85 Segers v. Bedriifsvereniging voor Bank- en Verzekeringsweren, Groothandel

en Vrije Beroepen [1986] ECR 2375.[58] Ibid Para 5.[59] Ibid paras 13-14-15.[60] Case C-251/98 C. Baars [2000] ECR I- 2787, para 31.

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However, it should be stressed that not all differences of treatment are incom-patible with the freedom of establishment. In taxation there is a distinction based on resident and non resident companies which falls outside the scope of the discrimination provisions. Generally speaking, resident companies are liable to tax on all their worldwide income where as non-resident companies are just liable for the profits saved in the host Member State in question. [61] This approach is also adopted by the Court in Futura Participations[62].

There are several examples concerning tax restrictions imposed by Member States on companies whose registered office is in that state, whereas its subsidies or branches are located in other Member States. For example, in Commission v France[63] France granted tax credits to insurance companies whose registered office was in France, but not to those with registered offices in another Member State. The Court decided that traders are at liberty to choose appropriate legal form in which to pursue their activities in another Member State and that freedom of choice must not be limited by discriminatory tax provisions.[64] Therefore domestic legislation breached Article 43(now Art. 49 TFEU) and could not be justified on the facts.

The ECJ used the formula based on the removal of hindrances, obstacles or restrictions to the freedom of establishment. One can observe this in Futura Participations. Luxembourg tax law required that if the branch of a company wanted to take tax benefits, it had to keep two accounts: one in Luxembourg and the other one in the Member State where it had its seat. The Court said that the rule constituted restriction to freedom of establishment and was con-trary to Article 43(now Art.49 TFEU). Although the rule was justifiable on the grounds of ensuring effectiveness of fiscal supervision, the Court found that the rule was not proportionate.[65]

Marks and Spencer[66] was another high-profile case subject to restriction analysis. Under British tax law, resident companies in a group granted the right to offset their profits and losses among themselves. M&S declared that it had ceased trading in continental Europe due to losses of its subsidies there and asked for group relief in the UK. The claims for relief were rejected on the ground that group relief could only be granted for losses recorded in the UK. The Court ruled that any domestic legislation preventing a parent company

[61] N. Travers, ‘Residence Restraints on The Transferability of Corporate Trading Losses And The Right of Establishment in Community Law’, Case Comment(1999)ELRrev24(4),403-409,44;Barnard(n2) 347.

[62] C-250/95 Futura Paticipations SA et al. v. Administation des Contributions[1997] ECR I-2471.

[63] Case 270/83 Commission of the European Communities v French Republic.[1986]ECR273

[64] Para 22.[65] (n51).[66] Case C-446/03 Marks &Spencer Plc v Halsey [2005]ECRI-10837.

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from deducting losses—which were incurred in another Member State by its subsidiary—from its taxable profits which were compatible with the Community law. Nevertheless, if the parent company proved that those losses were not or could not be taken into account in the state of residence of those subsidiaries, it was contrary to the freedom of establishment to preclude a group relief for the parent company. The Court then considered whether the restrictions could be justified, and noted that the facts were justified in terms of public interest. However, restrictive provisions failed in a proportionality test.

The Court has established that Member States may treat companies differently in relation to cross border tax issues as far as they can prove it to be justified and proportionate. In this regard, prevention of tax avoidance and preventing companies from enjoying the same tax advantage twice may be accepted as legitimate objectives. However, they are subject to critical observation whether they are necessary and proportionate. [67]

[67] Craig/Burca(n2)812.

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Conclusion

After its restrictive interpretation in Daily Mail the Court took a more liberal approach with regard to the freedom of establishment of compa-nies. Consecutively, in Centros, Überseering and Inspire Art, the ECJ

decided in favour of incorporation theory which facilitated free movement of companies. Now it is clear that with the aim of taking advantages of more appropriate rules, companies can establish themselves, subsidies or branches in other Member States. Under caselaw of the ECJ this does not constitute an abuse of rights; furthermore it is referred to as exercise of freedom of establish-ment guaranteed by the Treaty.

Once companies establish themselves or subsidies within the Union they enjoy the same rights as with the nationals of the host Member State. The Court took a liberal approach in terms of equal treatment and extended its scope so that it covers the social security protection of the employees as well.

In relation to taxation, Member States can not prevent companies from enjoying the same tax advantages unless they prove that domestic restrictive legislation is necessary and proportionate. In conclusion, the European Court of Justice has offered the companies the opportunity of conducting their entire business activity outside the state of incorporation.[68]

[68] Dickens(n9)1361.

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BIBLIOGRAPHY

Barnard, Catherine, The Substantive Law of the EU: The Four Freedoms, Oxford: OUP second Edition 2007

Craig Paul, De Búrca Gráinne, EU Law, Text, Cases and Materials, 4th edition, Oxford, Oxford University Press 2007

Cunha, Patricia /Cabral, Pedro, ‘Presumed Innocent’:Companies and the Exercise of the Right of Establishment Under Community Law, (2000) ELRev25(2), 157-164

Dickens, Christine Hodt, ‘Establishment of the SE Company: An Overview over the Provisions Governing the Formation of the European Company’, (2007)EBLR, 1423-1464

Drury, Robert R. ‘Migrating Companies’ (1999), ELRev24(4), 354-372

Dyrberg, Peter, ‘Full Free Movement of Companies in the European Community at last?’(2003)28(4) ELRev 528-534 Roussos, Realising the Free Movement of Companies, EBLRev(2001)january/february

Guide to the Case Law of the European Court of Justice on Articles 43 et seq. Ec Treaty Freedom of Establishment, European Commission, 1.1.2001.

Hirt, Hans C, ‘Freedom of Establishment, International Company Law and the Comparison of European Company Law Systems after the ECJ’s Decision in Inspire Art Ltd’(2004)EBLRev, 1189-1222

Kiikeri, Markku, ‘The Freedom of Establishment in the European Union , Report to the Finnish Ministry of Trade and Industry’, 2002

Lauterfeld, Marc, ‘Centros and the EC Regulation on Insoşvency Proceedings: The End of the ‘Real Seat’ Approach towards Pseudo-foreign Companies in German International Company and Insolvency Law?’EBLRev(2001) March/April, 79-88

Riestra, Manuel Garcia,‘The Transfer of Seat of the European Company v Free Establishment Case-Law’ (2004) EBLRev.1295-1323

Rothe, Nicole, ‘Freedom of establishment of Legal Persons within the European Union: An analysis of the ;European Court of Justıce Decision in the Überseerıng Case’, American University Law Review, (2004)vol 13, 1104-1141

Siems, Mathias‘Convergence, competition, Centros and conflicts of law: European company law in the 21st century’(2002) ELRev27(1), 47-59

Travers, Noel, ‘Residence Restraints on The Transferability of Corporate Trading Losses And The Right of Establishment in Community Law’, Case Comment (1999) ELRrev 24 (4),403-409

Vaccaro, Enrico, ‘Transfer of Seat and Freedom of Establishment’ (2005) EBLR, 1348-1365

Wymeersch, Eddy, ‘The Transfer of the Company’s Seat in European Community Law’(2003) 40 CMLRev,661-695

* LL.M., Faculty of Law, University of Copenhagen.

A Brief Look to the Legal Education ın Denmark

Raşit UYSAL*

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A Brief Look to the Legal Education in Denmark / UYSAL


In Denmark there are four Universities offering Law as education, among which the Faculty of Law at the University of Copenhagen is the largest with more than 4.000 students. It is the oldest law faculty in Denmark, as

it was opened in 1479. According to the 2010 Academic Ranking of World Universities (arwu.org) the University of Copenhagen has furthermore occupied a ranking in the top 10 among European universities.

The study programmesThe law school consists of two study programmes: Bachelor of Law and Master of Law.

The bachelor degree (LL.B) takes three years (six semesters) to complete and corresponds to 180 ECTS points. The bachelor programme mainly consists of mandatory courses, in which the main subjects are Public Law and Private Law, including EU Law. At the end of each semester the exams are taken to pass the courses. In the last semester of the programme the students are also required to compose a bachelor project. As a comparison it can be mentioned that the Danish bachelor degree is considered equivalent to the British bachelor degree.

Finally, after the completion of the bachelor degree, there is the master degree (LL.M) which takes two years (four semesters) to complete and corresponds to 120 ECTS points. In this part of the education there are only two mandatory courses, titled Procedural Law and Tax Law. Contrary to the courses in the bachelor programme, each course corresponds to 10 ECTS points which means students must take three courses per semester (exclusive of fourth semester—see below) to complete the master programme within two years (if one wishes to do so). Similar to the bachelor programme there are exams at the end of each semester. The aspect in which the master programme most differs from the bachelor is the fourth (and last) semester, when the students are obligated to compose the final master thesis only. This thesis has to correspond to 30 ECTS points since the master programme “only” contains nine different courses.

Legal practiceAfter graduation from law school, typically, one either works as a jurist (also known as a “law school-graduand” in Denmark), or becomes an attorney, prosecutor or judge. In the following section I will briefly state the procedure for becoming an Attorney at Law as it corresponds to my own educational background.

In Denmark to become an Attorney at Law, one has to work as an “assistant attorney at law” for three years in a law office. Assistants usually have their own cases to attend to and are entitled to appear before the District Courts and

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the Maritime and Commercial Court. The important thing to notice is that the assistant always acts on behalf of a principal (an Attorney at Law). During this period the assistants are required to participate in various legal courses concerning the position as an Attorney at Law. These courses are offered by The Danish Bar and Law Society (Advokatsamfundet). Moreover, the assis-tants have to pass the bar exam at the end in order to acquire the Danish title “Advokat” (Attorney at Law).

The judicial systemThe Danish court system consists of judicial powers with thereto administra-tive functions attached. Among the administrative functions belong inter alia, probate matters, bankruptcy, bailiff’s court, and general administration. Therefore, there are no separate independent courts for these matters, as they belong to the ordinary judicial powers.

The courts of Denmark are composed of the Supreme Court (Højesteret), the two high courts (Østre- og Vestre Landsret), the Maritime and Commercial Court (Sø- og Handelsretten), the Land Registration Court (Tinglysningsretten), and 24 district courts (Byretterne).

District courts (first tier) hear civil, criminal, enforcement, probate, and bankruptcy cases. Within the jurisdiction of these courts are also notarial acts. Some district courts will continue to handle registration in certain jurisdictional districts until such registration is taken over by the Land Registration Court. The bottom line is that as a main rule, all cases start in the district court.

The two high courts (the High Court of Western Denmark and the High Court of Eastern Denmark) –second tier– try appeals from the district courts. However, a civil case may be referred to a high court under certain condi-tions, for instance in cases where expert knowledge on intellectual property law is needed.

As the name of the Maritime and Commercial Court says, this court hears cases concerning maritime and commercial matters from all over the country. Among the matters are cases on the subject of the Danish Trade Marks Act, the Design Act, the Marketing Practices Act, the Competition Act, cases concerning international trade conditions, and other commercial matters. Cases concern-ing EU-trademarks and EU-designs must start and be tried in the Maritime and Commercial Court, whereas cases relating to the above mentioned acts, by request, may be referred to the Maritime and Commercial Court.

The final court of appeal (third tier) in Denmark is the Supreme Court. Similar to the Maritime and Commercial Court, the Supreme Court is situated in Copenhagen. The court reviews judgments in both civil and criminal cases delivered by the two high courts and the Maritime and Commercial Court. In

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criminal cases, it shall be noted that the Supreme Court does not review the question of guilt or innocence. Furthermore, it is important to point out that only in exceptional cases is there a right of appeal to the Supreme Court. This means that the court only hears cases where it is obvious that a judgment is needed to clarify an ongoing uncertainty concerning rules of law.

Lastly, it shall be mentioned that Denmark, contrary to Turkey and other countries, does not have any constitutional court since such subjects are handed by the Supreme Court.

* Boden Law Office, [email protected].

Top Five Mistakes Made by Turkish Attorneys When Doing Business

with Americans

Anna RAPPAPORT*

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Top Five Mistakes Made by Turkish Attorneys When Doing Business With Americans / RAPPAPORT


1. Saying you practice in too many diverse areas of law — The most highly paid and well regarded attorneys in the u.s. are those who are experts in a very specific area of law. Generalists are not afforded much respect in the u.s. legal environment. If my grandmother wants to make a will she may go to the lawyer down the street who does estate planing, tort claims, commercial contracts, and minor criminal defense. However, large companies want to know that they are going to the expert on a subject; and if one lawyer practices in too many areas they will assume that he is not truly an expert in any of them.

2. Making plans at the last minute — In Turkey it is common to schedule meetings only a day or two in advance. Whereas in the u.s. meetings are often planned two or three weeks ahead. Being busy is often seen as a sign of a person’s importance. Thus, assuming that someone will be available to meet with you at the last minute may be seen as rude. If you are going to New York or London for meetings, it would be wise to start scheduling meetings a month in advance.

3. Writing unclear legal memos — I have edited memos for Turk-ish law firms and I have noticed that many memos do not give clear answers to the question presented. American attorneys will not expect a Turkish attorney’s English to be perfect. However, the information conveyed in a memo should be clear. The standard memo format used universally in the u.s. is called irac, which stands for Issue, Rule, Application, Conclusion. A legal memo is not creative writing. It is supposed to be concise, clear, and easy to read. Following this format keeps the writing clear and focused.

Turkish law on a particular issue may not be well established or the statute may seem to be saying one thing while courts have actually

As the legal marketplace becomes progressively more competitive, it is more important than ever to truly understand your clients’ business

culture and adapt accordingly. Being knowledgable and hardworking is no longer sufficient to ensure success. Are you making any of these common mistakes?

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Top Five Mistakes Made by Turkish Attorneys When Doing Business With Americans / RAPPAPORT


ruled in a way that seems contradictory. In the u.s. as well there are numerous aspects of the law which are inconsistent or unclear. The important thing is to state clearly the ways in which a law or policy may be ambiguous. An American company may not be happy to hear that the answer to their question is not black and white, but they are accustomed to such responses from their own attorneys. As long as you explain precisely what is known and what is not known and why the final answer is unclear, this will be considered a perfectly acceptable response. Knowing what you don’t know is important. Without a clear understanding of what is known or not known, it is impossible to evaluate risk.

4. Insufficient use of “please” and “thank you” — A Turkish attorney commented to me that Americans say “thank you” even when you haven’t done anything for them. “Please” and “thank you” are used less frequently in Turkish than in English. In Turkish you have different ways of communicating politeness, but when com-municating in English I recommend using “please” and “thank you” far more than you would ordinarily. At the end of a meeting you can thank someone for his time. At the beginning of an email you can thank a person for responding so quickly. When in doubt just thank a person for their assistance.

5. Being unable to adequately respond to questions about conflict checks — Before hiring a new attorney or taking on a new client, American firms must check for conflicts of interest. I recently worked with a Turkish associate who represented one side of a dispute while working at one firm but then changed jobs and ended up working for the opposing side of the same case. In the u.s. this would be considered a very serious violation of professional ethics. Large inter-national firms have sophisticated software systems to track potential conflicts, all of which must be resolved before accepting a new client or taking on a new matter. Due to the size of Turkish firms, this is less frequently an issue here. However, an American firm would be much more comfortable working with you if you can assure them that you have some sort of system in place for doing a conflicts check.