International Electronic Trading: Some Legal Issues

March 1, 2000

Mr Susman is Head of the Legal Services Branch in the Department of Tradeand Industry responsible for Telecommunications Law.

There is a myth that commercial law and the rules ofprivate international law which relate to it do not deal with the legalquestions that may arise out of electronic trading. Nonsense. They may notprovide the right answers to those questions, but that is a different matterentirely. Suppose, for example, that an Internet Web site is managed by acompany carrying on business in country A, using an electronic server in countryB, that the Web site advertises goods for sale by another company carrying onbusiness in country C, and that an Internet user in country D orders goods viathe Web site. Whether, in the event of a dispute, jurisdiction lies in the thecourts of A, B, C or D, and which substantive law would be applied by the courthearing the dispute, are all questions capable of being answered by existingrules of law. That is not the problem.

The problem is that the way in which the internet works- its instantaneous worldwide availability and the speed and ease with whichtransactions can be concluded – means that these questions arise in far morecases involving far more people than hitherto. In particular, consumers used tothe protection of the law of their own country of residence are now, for thefirst time ever, making contracts in large numbers with traders in otherjurisdictions; and, on the other hand, traders selling goods on the Internetfind themselves contracting to sell goods to purchasers in jurisdictions wherepreviously they might never have contemplated doing business. Rules regarded assatisfactory for other types of trading need to be reassessed in theirapplication to electronic trading.

For us in the United Kingdom, there is a sharpdistinction to be drawn between Internet trading with other Member States of theEU and trading with countries outside the EU – what in EU-speak are called thirdcountries. Within the EU, there is a large and growing body of harmonisedbusiness and consumer-protection law, together with the Brussels Convention onjurisdiction and the enforcement of judgments, and the Rome Convention on thelaw applicable to contractual obligations; and over all those are the generalprinciples of Community law on the free movement of goods and the freedom toprovide services. Outside the EU, there is by comparison very little, despitethe sterling efforts of UNCITRAL and the Hague Conference and the impact of WTOagreements. Thus my focus is within the EU.

I start with the Rome and Brussels Conventions, towhich all Member States are parties. Under the Rome Convention, the basicproposition is that the parties to a contract may choose their own governinglaw. Subject to that, the general rule is that the governing law is the law ofthe country with which the contract is most closely connected, which in mostcases is presumed to be the country where ‘the party who is to effect theperformance which is characteristic of the contract’ has his habitualresidence or central administration (in the case of a body), or his principalplace of business or other place of business through which performance is to beeffected. In other words, in a sale of goods, it is where the seller is; in acontract for professional services, it is where the professional person is; andso on. This works as well for contracts made over the Internet as for contractsmade by other means. The difference is that the electronic trader is likely toreceive orders from anywhere in the Community – not to mention anywhere else inthe world – and his purchasers may well not consider, when they order theirgoods electronically, that they are doing so under a foreign legal system.

The general rule does not apply in a number of specialcases, the most important of which in the case of electronic trading is that ofconsumer contracts. The rule in the Rome Convention is that, when the acquirerof goods or services under a contract is a consumer (ie acting outside his tradeor profession), express choice of law cannot exclude the protection of the‘mandatory rules’ of the law of the country of his habitual residence; andin the absence of a choice of law, the whole contract is governed by the law ofthe consumer’s habitual residence. For the electronic trader, that means thatif he accepts orders on his Web site from anywhere in the Community (or, indeedanywhere else in the world, because applicable law under the Rome Convention isnot limited to that of one of the Member States), he must be prepared for hiscontracts to be governed by any and every system of law, or at least by theirmandatory consumer protection rules.

There is no convention yet in respect ofnon-contractual obligations – tortious or delictual liability – equivalent tothe Rome Convention in respect of contractual obligations, although one isproposed, often referred to as ‘Rome II’. In the United Kingdom, theapplicable law is determined, except in respect of defamation, in accordancewith ss 11 and 12 of the Private International Law (Miscellaneous Provisions)Act 1995, under which the general rule is that the applicable law is the law ofthe country where the injured person or property was at the time – what might becalled ‘the law of the victim’. If an electronic trader in one Member Statecauses injury to a person or property in another, whether his own law or the lawof the victim applies will depend upon the rules of private international law ofthe jurisdiction hearing the case: the United Kingdom, or another jurisdictionwith the same rule as us, will choose the law of the victim; but other MemberStates may well choose the law where the electronic trader committed hisallegedly wrongful act. Thus he may well cause the same injury to two differentpeople in two different Member States – for example, make a negligentmisstatement on his Web site or negligently send software downline containing avirus – and find himself subject to two entirely different sets of rules, bothof private international law and of substantive law. This, of course, could beso of anyone else doing business in more than one state; but the chances of ithappening are much greater for the electronic trader.

The Brussels Convention on jurisdiction and judgmentsis subject to a proposal to convert it, with amendments, into an EC Regulationunder new Title IV of the EC Treaty. At present, Articles 13 and 14 of theConvention provide that in addition to any other available jurisdiction underthe Convention, a consumer may bring proceedings in the courts of his owndomicile if, amongst other things, the conclusion of the contract was precededby advertising in the state of his domicile. That has been interpreted asmeaning that the trader must have directed the advertising to that state: he isnot subject to its jurisdiction merely because a publication in which headvertises finds its way into that state if he is not targeting consumers inthat state; and the same is thought to apply in respect of an advertisement on aWeb site accessible in a state which is not directed to consumers in that state.

The proposed Regulation would replace the advertisingrule with a broader rule under which a trader would be subject to thejurisdiction of the state of the consumer’s domicile if he ‘directs …..activities’ to that state: this would more clearly catch the electronictrader’s Web site, whether or not it contained an advertisement, if it was‘directed’ to that state, but still leave room for the trader to argue thathis Web site was not directed to that state, even though accessible there. TheCommission have, however, proposed a recital for the Regulation which would saythat a Web site was to be taken as directed to a state if it was accessiblethere. Since an Internet Web site is accessible anywhere in the world, thatwould subject an electronic trader to the jurisdiction of the courts of anyMember State where a consumer who chose to contract with him resided, eventhough he had no intention of targeting consumers in that state (for example, byusing an express disclaimer or by not using the language or currency of thatstate). Fortunately, in HMG’s view, it seems likely that this proposed recitalwill be omitted, following strong opposition both from Member State governmentsand from commercial interests.

Finally, I turn to the E-Commerce Directive. ThisDirective will do a number of things, most of which are not of concern to us. Itcontains a number of harmonised common rules about the conduct of businesselectronically which will apply as much to trade within a single Member State asto trade between Member States. What is of interest to us is Article 3(2), whichprovides:

‘Member States may not, for reasons falling within the co-ordinated field, restrict the freedom to provide Information Society services from another Member State.’

‘Information Society services’ is a misleadingexpression. It extends to any activity carried out in the course of electronictrading, including the making of contracts for the supply of goods. The‘co-ordinated field’ includes measures which apply to electronic traders andothers generally as well as to electronic traders alone, but excludesrequirements applicable to the delivery of goods or to services not providedelectronically. This means that if a contract is made electronically for thesupply of goods or the provision of services off-line, the Directive will applyto the making of the contract, its validity and its express and impliedprovisions, and possibly to the performance of any obligation to pay for thegoods or services, but not to the performance (or non-performance) of theobligation to supply the goods or provide the services.

Article 3(2) will have an impact in three main types oflegal relationship: regulatory, contractual and tortious (or delictual). I amnot concerning myself this afternoon with the regulatory impact. The tortiousimpact is fairly straightforward: if an electronic trader does something on linewhich is a tort or delict in the Member State where the injury or damage occurs(the victim’s state) but not in the trader’s home state, he will not beliable; or if it is a tort or delict in both states but the measure of damagesis greater in the victim’s state than in the trader’s state, the lowermeasure will apply. It will be seen immediately that this will have an impact onss 11 and 12 of the 1995 Act. It will protect the trader in another Member Stateagainst the fierceness of our libel laws, and protect British traders againstthe application of German unfair competition laws (which prohibit all sorts ofthings which are lawful here). A trader who negligently sent contaminatedsoftware down-line to a customer in another Member State would not be liable foreconomic loss if the law of his own state did not render him liable for that,whatever the law of the customer’s state might provide.

The impact on contractual relationships will be morecomplex. I must first point out that Article 20 of the Rome Convention providesthat Community law prevails over the provisions of the Convention. In fact, theDirective will leave application of the Convention largely unaffected, becausethere are a number of exceptions to Article 3(2), set out in Annex I, two ofwhich are for express choice of applicable law and for consumer contracts. Thatleaves only business-to-business contracts where there is no express choice oflaw; and even there, as I explained earlier, the applicable law under the RomeConvention will often be that of the electronic trader’s place of business.There will, however, be some cases where the Rome Convention will designate asthe applicable law a law other than that of the electronic trader’s place ofbusiness. In such a case, the Directive will not displace the designation. Whatit will do will be to cause any rule of the applicable law which is moredisadvantageous to the electronic trader than the law of his home state not toapply, leaving, by implication, his home-state law to apply instead. Apart fromsuch a disapplied rule, however, the designated applicable law will continue toapply. For example, if a contract with an English electronic trader was governedby German law but the German rule on measure of damages applicable to the casewas more disadvantageous to the trader than the English rule, German law wouldapply except in respect of measure of damages, for which English law wouldapply. This may be seen as rather analogous to preservation for consumers of theprotection of the mandatory rules of their own state whatever law mightotherwise govern the contract.

Finally the Directive has no application to thejurisdiction of courts. There have been many claims to the contrary which youmay have seen in the press, but the Brussels Convention is wholly unaffected byit.