Adrienne Seaman is an assistant solicitor in StephensonHarwood’s IT and Telecomms Unit. Her focus is increasingly on e-commerce andshe has recently been involved in advising a range of clients, includingretailers, financial service providers and banks on the establishment andoperation of Internet trade.
The increasing importance of e-commerce is seen every day, with pressattention focusing on the deluge of new and innovative trading techniques.Venture capital is readily available, as demonstrated by the success ofinitiatives such as First Tuesday and the credibility added to the whole sectorby the explosion in market capitalisation in the industry worldwide.
Governments, particularly in Europe, have recognised the vital role ofe-commerce for any successful economy and are rushing to implement measures toencourage growth. The Institutions of the European Union are pushing hard tostay at the front of the field, particularly to avoid any individual action bysingle Member States which may have a fragmentary effect on the Internal Market.
An important issue for the success of e-commerce is legal certainty, withparties needing to know the legal context in which they trade and the applicableexpectations and obligations if they are to trade with any degree of certainty.Traditional principles of association with a physical location do not apply inthe e-context, so new solutions to the applicable regime must be found.
In an attempt to understand the many competing issues inherent in theallocation of law and jurisdiction on a European level, the European Commissionheld a Public Hearing in Brussels on 4 and 5 November. The aim of the Hearingwas to receive views from interested parties as to what approach should beadopted (if any) on a pan-European basis on the jurisdiction and choice of lawthat should apply to relations between parties involved in Internet trade. TheCommission had prepared a series of questions relating to the attitude ofparties to long-distance and electronic trade, the issues taken intoconsideration in deciding whether to trade electronically, parties’experiences of current domestic and private international law provisions and theeconomic impact of those provisions and of the changes to them proposed by theCommission. The Commission was particularly concerned about provisionsapplicable to consumers.
This article sets out some of the main issues raised by parties at the PublicHearing. Groups that were represented included parties currently trading overthe Internet, those advising on e-commerce, consumer groups, academics andjournalists and the arguments set out below derive from both oral and writtensubmissions. The enormous range of views and difficulty in reconciling bothsides of the debate is clearly demonstrated. The only obvious conclusion thatcan be drawn is that action is desperately needed but that there is no singleclear solution that will satisfy the legitimate concerns of all parties.
The Current European Approach
Aspects of jurisdiction and choice of law allocation are dealt with in otherEU initiatives, such as the draft E-Commerce Directive (which provides thatparties wishing to trade on the Internet should comply with the local rules ofthe Member State in which they are established) and the Distance SellingDirective (which requires that, when purchasing at a distance, consumers are notdeprived of the protection which would be available to them locally).
In the absence of specific provisions, general aspects of privateinternational law, including jurisdiction and choice of law, are dealt with on apan-European level under the Brussels and Lugano Conventions on jurisdiction andthe Rome Convention on choice of law in relation to contractual obligations.These Conventions did not originally fall within the remit of the European Unionbut now do so, following the Amsterdam Treaty which came into effect this summerand which extends the competence of the Commission to matters of home rule,justice and contract law. The Commission has proposed amendments to bothConventions (to be known as the Brussels and Rome Regulations respectively). Theproposed amendments in relation to consumers were the major topic for discussionat the Hearing.
Jurisdiction and Contract Law Issues
Proposals
The Brussels Convention currently provides that, subject to some exclusions,the applicable jurisdiction for contractual disputes with consumers must be thecourts of the country in which the consumer is domiciled and where conclusion ofthe contract was ‘… preceded by a specific invitation addressed to him or byadvertising and… the consumer took in that state the steps necessary for theconclusion of the contract’.
In relation to the applicable law of a contract, the Rome Convention sets outexactly the same test which, if satisfied, will prevent the parties agreeingthat any law applies to the contract which would have the effect of deprivingthe consumer of the protection afforded to him under the mandatory rules of thelaw of the country in which he has his habitual residence. The exact meaning ofmandatory rules is unclear but it is reasonably safe to assume that legislationsuch as the Unfair Contract Terms Act and consumer protection regulation wouldfall within this category.
The net result of these Conventions is that, where a supplier addressesadvertising to a particular State and a consumer in that State contracts withthe supplier, then, regardless of any contrary terms contained in the contractbetween them, the consumer will be able to bring legal action in his localcourts and obtain the protection of his local consumer protection laws.
The proposed Brussels Regulation gives the court of a consumer’s country ofhabitual residence jurisdiction where a supplier directs activities tothat State, clearly widening the circumstances in which a consumer may rely onthe protection of his local court. The Commission has said the amendment takesinto account the need to protect the consumer (being the weaker party) and thedevelopment of marketing techniques. Making available interactive marketingfacilities in a Member State triggers local protection for a consumer and willnot allow a supplier to deprive him of that protection by inducing him to go toanother State to conclude a contract.
As yet the Commission has not produced proposals for amendment to theequivalent provisions in the Rome Convention. The results of the review of theBrussels Convention will no doubt be relevant in this context and in any eventit is unlikely that any Member State’s court which has jurisdiction woulddeprive a local consumer of local protection. A proposed extension of the RomeConvention in relation to non-contractual obligations has been published and isdiscussed below.
Arguments
The various consumer representatives present argued vigorously that consumerprotection (a vital principle of the European Union) demands better measuressuch as those set out in the Brussels Regulation and that any other provisionwould deny consumers the basic natural justice right to effective access to thecourts. Consumer confidence is critical to the success of e-commerce and can beachieved only by allowing consumers to seek redress quickly and cheaply under alegal system with which they are familiar. Consumers do not have the resourcesto familiarise themselves with other legal systems and, as the recipients ofe-commerce services, should not be expected to do so, nor should consumers beexpected to bear the risks or costs involved in the cross-border enforcement oftheir rights.
The supplier representatives, however, argued that to expect parties wishingto trade via the Internet to ensure that they complied with the legal systems ofall of the Member States placed a disproportionately harsh burden on them. Thiswould be particularly the case for small or medium-sized enterprises, which maybe regarded as exactly the type of supplier likely to benefit most from thepotential new Internet distribution methods. The need for consumer confidencewas contrasted with the need on the part of suppliers to have a reasonabledegree of legal certainty as to the risks to which they are likely to beexposed. If these are too high or uncertain, suppliers may be put off electronictrading altogether. The availability of insurance for commercial ventures underthe proposed legal framework was called into question. Further, the removal ofthe requirement for the consumer to complete the steps to enter into thecontract in his home State in order to obtain its protection gives the consumerthe possibility of claiming residence in a State where he obtains betterprotection, giving him a disproportionate advantage over, and increasinguncertainty for, suppliers.
It was argued that consumer confidence does not depend heavily on the abilityof consumers to sue in their local courts and that the costs of taking anyaction are often disproportionate to the claim. A strong argument was made thatthe costs of enforcing a judgment against a supplier in a different State wouldmean court action would not be viable for consumers in the majority of cases,even if they had obtained the judgment in a local court.
With respect to the argument that consumers should not have to acquaintthemselves with 15 different legal systems, it was argued that the on-goingharmonisation of consumer protection laws throughout the EU means that allMember States will have been involved in negotiating and agreeing at leastminimum rights for their consumers and they should not then be able tore-instate their own local protection via these Conventions in those areas.
Many suppliers agreed that the supplier’s country of origin, plus mutualrecognition by other Member States, is the only option for jurisdiction andapplicable law which is both viable and consistent with the principles of theInternal Market.
There were attempts to equate the conduct of e-commerce to traditionalcommercial activities. Some of the consumer representatives argued that inestablishing a Web site the supplier is effectively invading the consumer’shome and that e-commerce is therefore something from which the consumer requiresprotection. Many suppliers, however, argued that in drafting the proposals theEuropean Commission has misunderstood the fundamental way e-commerce operates,as the establishment of a trading Web site in one State inevitably makes thesite available to the world at large. Changing the Brussels Convention test tocatch such a passive presence, therefore, is a move in the wrong direction andwould be equivalent to bringing within the Convention parties who advertise inthe national newspapers of one Member State, where a copy of the newspaper istransported to another Member State and a consumer in that State responds to theadvert. Under the current rules, a supplier would be caught only if he took outan advert in the national newspapers of the second State.
The argument relating to the imposition of jurisdiction and choice of law onconsumers makes the assumption that the consumer has no choice but to accept thesupplier and its terms. Many suppliers argued that this will frequently not bethe case in a competitive market, particularly where barriers to entry are low.
Solutions
The use of disclaimers to give the Web site owner discretion over theconsumers with whom he intends to deal was considered. There is considerableuncertainty as to whether a disclaimer which purports to prevent persons inspecified States trading via the site will be effective. For example, underFrench law all terms in a consumer contract must be in French. If a Web siteestablished in the UK, in English, containing a disclaimer stating it wasavailable only to UK consumers was accessed by a consumer who was habituallyresident in France, then it is very likely that a French court would find it hadjurisdiction and that the disclaimer was invalid.
An alternative view is that parties should be free to decide whether totransact with others cross-border and, if they chose to do so, should accept thepossibility of having to seek redress in a foreign court. It is arguable that itis easier to ascertain the location of the supplier than the consumer, sincemany suppliers include contact details on their Web sites and in many cases itwill be obvious from the products on offer, the trade marks used or even theelectronic address. This is particularly likely to be the case where the productis to be supplied to the consumer digitally, so that the consumer does not needto supply a physical address, and the consumer’s electronic address gives noindication as to location (eg ‘name@hotmail.com’). The argument concludesthat it should be the courts of the more ascertainable location (ie thesupplier’s local courts) which should have jurisdiction.
A variation on this argument is that it is open to suppliers to ask consumerswhere they are habitually resident and then to refuse to contract with anyconsumers resident in States where the supplier does not wish the courts to havejurisdiction. Consumers who give false information would not be able to obtainthe benefit of local jurisdiction. In the UK suppliers often already need toknow whether purchasers are dealing as consumers and their location for VATpurposes. Additional risks or expenses arising out of local consumer protectionrules in particular States could be reflected in local pricing. However, manyrepresentatives regarded this approach as unrealistic, as consumers would be toolikely to give false information if they could obtain lower prices in somejurisdictions. Further, the fragmentary effect on the Internal Market of thissolution, as well as its incongruence with the ‘without frontiers’ andinnovative basis on which the Internet is founded, seem likely to detract fromthe appeal of this approach and may even constitute an infringement of EUprinciples of competition and free movement.
Dispute Resolution
It was argued that the very low volume of cross-border consumer litigationshows that the Brussels Convention does not provide an effective disputeresolution mechanism for consumers.
Parties on both sides suggested that one of the European Institutions couldassume responsibility for e-commerce dispute resolution, with suggestionsranging from the responsibility for making available over the Internetinformation concerning the relevant consumer laws in all Member States to theestablishment of a supra-national ‘virtual court’, supported by nationalbodies, which would be able to give fast and cheap verdicts without the need foreither party to incur typical cross-border expenses, and which would be subjectto a set of rules which were equally available (and unfamiliar) to both. From acompletely different perspective, it was suggested that a solution would be theharmonisation of Member States’ small claims procedures, either by making thesame procedures and protection available across Europe or by the networking oflaw enforcement agencies.
Various other solutions were proposed on the basis that consumers might get abetter result under some form of alternative dispute resolution mechanism, suchas a national ombudsman or a system of self-regulation or kite marking to beinitiated by responsible suppliers. There was no consensus as to whether anyalternative system should be voluntary or compulsory. There was, however,pressure against any discrimination between the treatment of e-commerce andtraditional trading methods. Several more unusual suggestions were made,including reliance on the widespread use of delayed payment mechanisms (such asthe credit card system common in the UK), so that disputes could be resolved ata time when the supplier has yet to receive payment. Such a solution would, ofcourse, require substantial changes in the business operations of manysuppliers.
Non-Contractual Obligations
A second major area for discussion was the Austrian Presidency’s recentproposal (as required under the Amsterdam Treaty) for a Rome Regulation, whichwill deal with applicable law in relation to unfair competition and practices.The proposal constitutes an extension to the Rome Convention as it will apply tosuppliers, regardless of whether they actually enter into contracts. The RomeConvention currently deals only with applicable law in relation to contractualrelations.
The current proposal again focuses on the location of the consumer and statesthat the law applicable to obligations arising from unfair competition or unfairpractices shall be the law of the country where such action affects eithercompetitive relations or collective consumer interest.
The areas of concern that are covered are particularly important asdisparities in competition law across the EU mean that activities such as ‘3for the price of 2’ promotions are perfectly legal in some States and illegalin others (such as Germany). There have already been reports of action taken orthreatened by Member States against suppliers who offer promotions which areaccessible in Member States where such promotions are illegal. The majorargument in support of such actions is the right of a State to protect theconsumers within its jurisdiction.
Suppliers are, however, concerned that they are being exposed to the veryhigh risks of being prosecuted in States (possibly where they do not evenconduct trade), when they are complying with the laws of the country in whichthey are established. Further, suppliers argue that the potential scope of suche-commerce activities increases the risk, as it is not yet clear whether MemberStates will find that they have jurisdiction over areas such as defamation oreven criminal matters. Given the very high dependence on advertising ine-commerce, suppliers argue that the proposals are particularly prejudicial,especially to small and medium-sized enterprises which are in desperate need ofadvertising revenue and less able to bear risks. The argument has been raisedthat there should be no difference in treatment between electronic and otherregulation and that the proposals will create different treatment due to thevery nature of e-commerce.
A concern raised by several parties is the potential for Member States to usetheir competition rules to obstruct the growth of pan-European e-commerce inorder to protect their own industries. The European Commission has raisedconcerns that the differences in competition law could have a detrimental effecton the development of e-commerce and the Internal Market, with restrictivenational laws forcing consumers to go to foreign jurisdictions in order toobtain advantageous terms which are lawfully on offer in other Member States. Afurther concern is that such potential risks will serve only to stifleinnovation in e-trade and distribution, with suppliers being unprepared toexperiment with new marketing or trading techniques. The European Commission hasdecided to commence proceedings against Germany in the European Court of Justicein relation to its restrictive promotions laws which, the Commission claims, area violation of the freedom to provide cross-border services.
An interesting point was raised during the Hearing relating to disclosurerequirements on suppliers’ Web sites. It was pointed out that many suppliersdo not disclose sufficient information about their corporate entity to enableparties to bring proceedings against them. For example, under the laws ofseveral Member States company directors must be served with legal proceedings,so their names and an address must be available. In some cases such informationbecomes available only when parties actually enter into a contract with thesupplier and in some cases that information is not available at all. Ifconsumers are to be protected from unfair practices they must be able to takeaction before entering a contract.
Conclusion
The fact that the Commission called a Public Hearing and the range ofarguments presented highlight the very great difficulties inherent inestablishing any regulatory regime for e-commerce. Both sides raiseddiametrically opposed arguments to support their legitimate concerns and itseems impossible to devise any solution that will not be highly prejudicial toone side.
The European authorities and Member States recognise the importance ofkeeping Europe at the heart of the development of e-commerce; this must negatethe appeal of any measure which has the effect of stifling innovation orimpairing progress. However, consumer protection is a very important tenet ofthe European Union and its Member States. Additional concerns on a Europeanlevel are the promotion of the Internal Market and consistency in any approachwith existing principles, such as proportionality.
Nearly all the representatives agreed that the ability to exploit electronictrade will be crucial to the EU’s continued economic success and that a properlegal framework is vital to that success. Nearly all the parties also agreedthat the Commission should call a moratorium on any further proposals until aproper analysis of the economic impact of any proposals has been undertaken andany interested parties have been allowed a period for full consultation. At theend of the Public Hearing it remains unclear what direction the Commission willtake.
Given the speed with which e-commerce is developing and its enormous successdespite these uncertainties, it remains to be seen whether, in fact, commercialpractice will establish itself during any moratorium and eventually dictate thesubstance of the legal framework.
