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Is ADR the Superior Mechanism for Consumer Contractual Disputes?—an Assessment of the Incentivizing Effects of the ADR Directive

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Abstract

The European legislator has adopted a Directive on alternative dispute resolution (ADR) which sets out minimum requirements for ADR entities throughout the European Union (EU). From a law and economics point of view, law enforcement is crucial to induce compliance. ADR can be viewed as a means of strengthening consumer law enforcement, leading to compliance at lower costs. Certain conditions, however, have to be fulfilled to exploit the benefits of an ADR mechanism successfully. The goal of this paper is to look into these conditions more specifically and critically assess the ADR Directive in light of these requirements. It is divided into a theoretical section and the analysis of the EU Directive. The main concern results to be the fact that ADR boards with very strong links to traders are allowed under the Directive. When looking at the composition of the bodies, a complicated compromise was enacted that is able to impede the working of such ADR bodies. Given that the Directive aims at minimum harmonization, Member States have the opportunity to provide for a better design in their respective countries responding to this main concern and other critical points identified in the paper.

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Notes

  1. See T. Borg, Towards a More Efficient Enforcement of EU Consumer Rights, 2013 <http://www.european-consumer-summit.eu/index_en.html> last accessed on 29 October 2014.

  2. See Directive 2013/11 EU of the European Parliament and of the Council of 21 May 2013 on alternative dispute resolution for consumer disputes and amending Regulation (EC) No 2006/2004 and Directive 2009/22/EC (Directive on Consumer ADR). It was adopted together with a regulation on Online Dispute Resolution (Regulation (EU) No. 524/2013 of the European Parliament and of the Council of 21 May 2013 on online dispute resolution for consumer disputes (Regulation on Consumer ODR)). The latter sets up an online platform for dispute resolution as a single point of entry for the out-of-court resolution of online disputes.

  3. With the exception of health, education, and non-economic services of general interest.

  4. See recital 4 ADR Directive.

  5. “Europeans’ subjective financial thresholds for taking a complaint to Court appear to be higher than for turning to ADR. Around four in ten interviewees would lose EUR 500 or more to go to Court, compared to also four in ten who say they would lose only EUR 200 in an out-of-court dispute settlement body,” see EC (2011b), p. 225. Regarding businesses, most businesses (73%) were satisfied with their experience with ADR and 82% would use it again in the future. Seventy per cent would prefer to use ADR rather than going to court to settle disputes’; see European Business Test Panel (EBTP), Alternative Dispute Resolution (2011), p. 2 because “disputes are settled quickly (55%)” and it allows them to maintain their reputation (25%). See Allensbach-Umfrage as cited by Hirsch 2014, p. 206.

  6. One early work is the Shavell paper.

  7. See similarly Wagner 2014a. This contribution focuses on contract law. Law enforcement, more generally in law and economics literature, is traditionally discussed from a deterrence perspective. From this angle, a potential wrongdoer is assumed to be deterred ex ante by the magnitude of a sanction multiplied by the probability of detection and conviction. If correctly calibrated, the threat of the enforcement response works as an incentive for such an individual to behave in a law-abiding way (Becker 1968).

  8. See, for instance, Shavell 1984, for the types of costs of civil procedure; regarding lower costs of ADR procedures, see Shavell 1995; Creutzfeldt-Banda 2012. A recent study suggests time and cost savings in using ADR in federal government litigation for the USA: Bingham et al. 2009. In the conclusion, the authors acknowledge various limitations of the data set. The European Commission estimates that the introduction of quality ADR could lead to savings accounting for about 0.17% of EU gross domestic product (GDP): see EC (2011a); for a similar line of reasoning, see Wagner 2014a.

  9. From an economic point of view, optimal deterrence is usually the goal; see Becker 1968. Similarly, Faure 2013 looks at the trade-off between cost savings by a new solution, such as ADR, weighted against an increase in error costs.

  10. See Shavell 1995, p. 6: in his terminology, “ex ante agreements to employ ADR” lead to behavioural changes that benefit both parties.

  11. As acknowledged previously, behavioural research presents complementary and competing evidence.

  12. The Directive defines “ADR entity” as “any entity, however named or referred to, which is established on a durable basis and offers the resolution of a dispute through an ADR procedure […]” (Art. 4 (1) (h)) and, regarding the ADR procedure, refers to the minimum requirements as set out in the Directive which the characterization in this article follows in principle.

  13. This is, for instance, the case in the Netherlands. In Sweden, financing is entirely by the state. The Directive takes no stance on this question.

  14. See Art. 8 (b) ADR Directive.

  15. They may, furthermore, vary in the degree to which they are binding.

  16. In this context, clearly, behavioural biases may be at play and it merits empirical investigation to assess individuals’ motives that trigger bringing a case beyond rational choice theory.

  17. Behavioural research has pointed to biases that play with enforcers, such as judges. See, for instance, Guthrie et al. 2001 and follow-on works.

  18. Moral hazard arises because an individual does not internalise the full consequences of actions and, therefore, has a tendency to act less carefully than otherwise.

  19. In almost all jurisdictions, the general position is that the loser pays the costs of the court, evidence, and lawyer (in civil litigation). Some exceptions are possible. The rule is sometimes applied in a relaxed way, for Italy, see Micklitz and Poncibò 2008.

  20. See Eurobarometer 342 study, pp. 204: Consumers gave the following reasons as to why they did not take a consumer contractual dispute to the civil court: “Around a quarter (26%) say that the sums involved were too small, with 16% saying it would have taken too much effort. 13% of respondents gave as a reason that they thought the procedure would be too expensive with respect to the sum involved and 12% said they thought it would take too long.” Most of the consumers choose the option that when getting back to the retailer, they had already received a satisfactory result.

  21. This concern may be stronger in some European MS than in others. In Germany, for instance, the court systems work rather well also for claims of low value; see Conference “Die Umsetzung der Richtlinie über alternative Streitbeilegung,” Berlin, Humboldt University, 16 January 2015. Roth 2013, p. 641, disputes that the German consumer is overburdened in court when it comes to small claims.

  22. Compensation is an important motive for individuals to sue.

  23. More generally, Eidenmüller and Engel (2014) set out that the procedure depends on the “resolution standard” employed.

  24. This is made explicit in Art. 7 (1) (i) and Art. 9 (2) (b) (iii) ADR Directive.

  25. ADR bodies cannot decide as accurately as civil court on certain matters of law and should hence not even be empowered to engage in the further development of the law.

  26. On the other hand, regarding the costs of ADR becoming “judicialized,” see Stipanowich 2004.

  27. This reasoning is analogous to that stipulated for administrative versus criminal law procedures and their differences; for those findings, see Ogus et al. 2006.

  28. This may be true to differing degrees depending on the countries. Traditionally, the notion stems from the common law countries.

  29. The ADR board in the travel sector in the Netherlands publishes all its decisions. They even publish guidelines.

  30. See Van den Bergh 2007; Cseres 2012; for tort law scenarios, see Shavell 1993; the hit-and-run offender is a classic example of an attempt to conceal someone’s identity. See also Verein für Konsumenteninformation. Kammer für Arbeiter und Angestellte für Wien 2011–12, referring to the problems of locating certain operators in Austria.

  31. Other enforcement mechanisms, like administrative or criminal law enforcement, may be able to generate much more information.

  32. See Main 2005, p. 330; Hodges et al. 2012, pp. 444: “a certain vulnerability to capture by special interests, some consumer ADR schemes are currently not satisfactory concerning independence.”

  33. In addition, research has been conducted regarding the repeat player effect; see Rutledge 2008, quoting various studies.

  34. Note again, small claims courts are disregarded in this analysis.

  35. See again EC 2011b. See Benöhr and Weber 2012, e.g., for Spain: consumers are said to be reluctant to file in court because of the formal procedure even if no costs are attached to it; see also Eidenmüller and Engel 2014, regarding Germany, p. 7 (“likely that transaction costs associated with going to court are prohibitively high for many consumers”); Verein für Konsumenteninformation Kammer für Arbeiter und Angestellte für Wien 2011–12 for Austria refers to additional social barriers.

  36. As stressed in the beginning, small claims procedures would need to be assessed separately.

  37. As said in individual cases, it is less of a problem than in mass cases.

  38. Public enforcers generally have more investigative powers than private ones; criminal law has the widest powers.

  39. This is the case in Sweden. The board sometimes waits for a precedent to be established in court, see Weber et al. 2012: The Board refers to Supreme Court cases.

  40. A “rights-based” approach for ADR bodies should be favoured.

  41. Mentioned as a danger in relation to the implementation of the ADR Directive that would shift court cases to the ADR boards by Tonner 2014.

  42. Recommendation 98/257/EC on the principles applicable to the bodies responsible for the out-of-court settlement of consumer disputes, OJ L 115, 17.04.1998, p. 31; Recommendation 2001/310/EC on the principles for out-of-court bodies involved in the consensual resolution of consumer ADR, OJ L 109, 19.4.2001, p. 56.

  43. This involved the telecom sector (Directive 2009/136/EC of the European Parliament and of the Council of 25 November 2009 [2009] OJ L337/37) and the energy sector (Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity [2009] OJ L211/94), the Consumer Credit Directive (Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC [2008] OJ L133/66), and the Payment Services Directive (Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC [2007] OJ L319/1). All require that adequate and effective ADR schemes are put in place, according to Cseres and Schrauwen (2014).

  44. See Art. 2 ADR Directive. Additionally: The Regulation on Consumer ODR has a special focus on e-commerce and sets up a European online dispute resolution platform (“ODR platform”) allowing individuals to solve the disputes that have arisen from cross-border e-commerce transactions via this interactive platform that would direct consumers to the relevant ADR scheme to solve the dispute. It does not carry out dispute resolution itself.

  45. Exception: health and education, see Art. 2 (h) and (i) ADR Directive and the non-economic.

  46. See Art. 5 (2) (e) ADR Directive.

  47. See Art. 2 ADR Directive.

  48. See recital 21 ADR Directive.

  49. See Art. 2 (1) (b) ADR Directive.

  50. See Art. 2 (1) (a) ADR Directive. MS have certain possibilities to deviate from this, with special procedures being attached, such as requirements for the nomination procedure, being granted a period of office of a minimum of 3 years, committing not to work for the trader or a professional organization or business association of which the trader is a member for a period of 3 years after their position in the dispute resolution entity has ended. Furthermore, the dispute resolution entity may not have any hierarchical or functional link with the trader and has to be clearly separated from the trader’s operational entities and has a sufficient budget at its disposal, which is separate from the trader’s general budget, to fulfil its tasks: see Art. 6 (3) ADR Directive.

  51. Such natural persons are to have, at their disposal, a separate and dedicated budget sufficient to fulfil their tasks; see Art. 6 (4) ADR Directive.

  52. See Art. 5 (3) ADR Directive.

  53. Art. 9 (a) reads “The arguments, evidence, documents and facts put forward by the other party, any statements made and opinions given by experts, and of being able to comment on them.”

  54. See Art. 9 (2) (a), for instance. See, in particular, recitals 43 and 49 ADR Directive. One country where this happens is the Netherlands.

  55. It reads “possess the necessary knowledge and skills in the field of alternative or judicial resolution of consumer disputes, as well as a general understanding of law.”

  56. It reads “are appointed for a term of office of sufficient duration to ensure the independence of their actions, and are not liable to be relieved from their duties without just cause.”

  57. See Art. 7 (1) (c) ADR Directive.

  58. The expenses incurred can typically not be shifted via the loser pay rule.

  59. The Netherlands, for instance, has a special system based on a “business guarantee” by the trade association that ensures compliance. Typically, traders are registered at the Dutch ADR boards via their trade associations whereas they can also register individually. Whenever the trader is registered via the trade association and refuses to comply with the award, the trade association would step in and compensate the consumer and then claim back the money from its member. If the trader registers on an individual basis, a deposit scheme applies, according to which the money is secured.

  60. It is owed to the compromise of including all existing schemes under the Directive.

  61. See Art. 6 (6) ADR Directive.

  62. Meller-Hannich et al. 2014 and the legislative documents referred to. European Commission regrets this, as expressed at the Conference. “Die Umsetzung der Richtlinie über alternative Streitbeilegung,” Berlin, Humboldt University, 16th January 2015.

  63. See recital 22.

  64. See Tonner 2014, who regards it as very positive that courts would decide principle cases and argues that it should be made a legal requirement in the light of ensuring a further development of the law in civil courts. Roth 2013 fears that with the implementation of the ADR Directive, principal cases will not necessarily be filtered to the court system.

  65. See Art. 8 (2) (b) (iii)) ADR Directive.

  66. When ADR boards decide many cases of a similar nature in individual proceedings, they show some signs of mass dispute resolution. It requires a more in-depth analysis of how far some bundling of complaints is desirable within ADR procedures. Prima facie principal cases should be filtered to the courts.

  67. See Art. 8 (2) (b) (iii)) ADR Directive.

  68. Wagner 2014a; Meller-Hannich et al. 2014, pp. 35, 38 who argue that law “disappears” if cases are decided primarily out of court.

  69. See Art. 11 ADR Directive.

  70. Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 861/2007 of the European Parliament and the Council of 11 July 2007 establishing a European Small Claims Procedure and Regulation (EC) No 1896/2006 of the European Parliament and of the Council of 12 December 2006 creating a European order for payment procedure, COM (2013) 794 final.

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Acknowledgments

I wish to thank two anonymous referees for their most helpful comments and Jerg Gutmann for valuable comments on an earlier draft of this paper. The usual disclaimers apply.

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    Franziska Weber

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Weber, F. Is ADR the Superior Mechanism for Consumer Contractual Disputes?—an Assessment of the Incentivizing Effects of the ADR Directive. J Consum Policy 38, 265–285 (2015). https://doi.org/10.1007/s10603-015-9291-7

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