Regulatory Competition in Contract Law: : Empirical Evidence and Normative Implications

Regulatory competition has been high on the agenda of lawyers and economists for several years. Initially, the focal point of the debate was corporate law. Only recently the attention has shifted to other areas of law, notably contract law. However, in contrast to corporate law where there is little doubt that states do compete for corporate charters both in the United States and in Europe, it is hotly debated whether there is – or whether there can be – regulatory competition in contract law. In the first part of the following article I argue that this question must be answered in the affirmative: empirical evidence shows that there is regulatory competition in contract law just like in other areas of law, notably corporate law. Most importantly, empirical evidence shows that businesses and consumers actually choose the applicable contract law based on the quality of the law and that states actually respond to these choices by adjusting their contract laws. With this finding, however, the discussion about regulatory competition in contract law has not yet reached its end. To the contrary: the fact that states actually do compete for application of their contract law raises a number of normative questions. Should regulatory competition be promoted because it induces a race to the top? Should it be banned because it induces a race to the bottom? In the second part of the paper I argue that regulatory competition in contract law will generally induce a race to the top. It should, therefore, generally be promoted. However, I also argue that regulatory competition may induce a race to the bottom in some cases, namely where a choice of law does not account for the interests of all parties affected by the choice. In these cases, I conclude, that regulatory competition should be regulated. More specifically, I argue that it should be regulated on the level of private international law by limiting freedom of choice.