Electronic Commerce: legal jurisdiction
and applicable law
A submission by the London Investment
Banking Association to the European Commission in connection with
the Public Hearing on 4 and 5 November 1999
This paper sets out the London Investment Banking
Association's (LIBA) comments on the questions posed by the European
Commission in preparation for the public hearing to be held on
4 and 5 November 1999 (a representative from LIBA will be attending
the hearing).
LIBA is the trade association which represents
the major international investment banks and securities houses
in London. LIBA's members include the London branches of many
major European investment banks, as well as of investment banks
from the rest of the world. Cross-border trading, both within
the European Union and more widely, is the major element of LIBA
members' business; such business is increasingly transacted by
electronic means; LIBA members' counterparties and customers are
mainly public authorities, corporates, and high net worth individuals.
LIBA is happy for the Commission to publish
this paper.
SUMMARY OF
LIBA'S VIEWS
1. All EU electronic commerce measures currently
under negotiation need to be carried forward in a co-ordinated
way to ensure that Europe has a coherent and practical single
market for e-commerce. The Parliament, the Council and the Commission
should take the time and effort to fashion a system which is suitable
for the electronic age before making any amendments to the system
currently in force under the Brussels and Rome Conventions.
2. Decisions on the proposed Brussels Regulation
and the proposed review of the Rome Convention should therefore
be deferred to coincide with the finalisation of the Directive
on certain legal aspects of electronic commerce.
3. For e-commerce to thrive in Europe, ultimately
the legal structure must be based on jurisdiction by and under
the laws of the State of origin of the service (regardless of
whether or not the contract is entered into as a result of advertising),
unless the parties choose otherwise.
4. Consumer confidence should be promoted
by developing effective mechanisms for cross-border co-operation
to ensure consumers obtain proper redress under the State of Origin
provisions.
5. The final Brussels Regulation should
therefore exclude mandatory consumer State jurisdiction for e-commerce
transactions.
6. The final Rome Regulation should exclude
the mandatory application of the rules of the consumer's State's
law for e-commerce transactions.
DETAILED ANALYSIS
The Context of the Debate
The Commission's public hearing on the Conventions
governing jurisdiction and applicable law, and the planned amendment
as Regulations, takes place in the context of widespread adaptation
of legislation around the world to take account of how national
rules should operate in the context of the Internet, a communications
and trading medium which is by its nature international. Particular
initiatives include:
— European legislation, in particular
the proposed directives on certain legal aspects of electronic
commerce and electronic signatures, intended to promote a single
market in electronic commerce in the European Union.
— Various initiatives at a worldwide
international level designed to promote common standards for electronic
trading, including work in the OECD, UNCITRAL, and WTO.
— National legislation in the UK and
many other countries to update domestic law to accommodate electronic
writing, electronic signatures, and electronic transactions.
Given the central importance of the underlying
legal framework to the development of electronic commerce opportunities
in the Community, it is vital that the Commission's work on the
Brussels and Rome Conventions should be co-ordinated with other
European legislative initiatives (particularly in the light of
the linkages between the Conventions and Community law), and that
the rationale behind the detailed drafting of the revision to
the Brussels Convention should be carefully examined so that the
resulting provisions do not contradict or undermine the general
thrust of Europe's approach to legislating for electronic commerce
(for example, if the Rome Convention were to be converted to a
Regulation it would be necessary to include an Article clarifying
that its provisions were without prejudice and subject to the
provisions of the relevant Directives). It is a matter of particular
concern that the Council reached political agreement on the proposed
Brussels Regulation, and the Commission adopted it, without apparently
consulting the business community on the potential commercial
implications of the amendment to the text of Article 13 of the
Brussels Convention. LIBA therefore welcomes the opportunity which
the public hearing affords to make its views known.
For the future, it is particularly important
that there should be full public consultation on both Rome II
and the planned review of the Rome Convention.
The need for legal certainty
What is particularly important to investment
banks (especially in view of the complexity, size and commercial
risk of many products) is certainty as to which relevant provisions
they need to comply with. We believe that this need is shared
by all providers of electronic commerce services across borders.
In particular, providers need to be confident:
— that other States' laws and jurisdiction
will not apply simply because customers based in those other States
have accessed the service;
— that the parties are free to agree
which State's relevant provisions will apply, and that such agreement
will be binding;
— that in the absence of explicit agreement,
the relevant provisions will implicitly be those of the (disclosed)
State from which they are providing the service.
These commercial imperatives are consistent
with the "state of origin" principle which underlies
much of the new electronic commerce legislation (including in
Europe), and with the Commission's interpretation of existing
single market financial services legislation (see the Annex to
this paper). Without the legal certainty that the State of Origin
principle provides, the commercial risk to the service provider
may well severely restrict its willingness to provide services,
thereby negating the opportunity that electronic commerce provides
to customers in terms of better choice and lower price, and frustrating
the future development of the internal market, in which electronic
commerce will be a driving force.
ROME CONVENTION
Any possible future amendment of the Rome Convention
to give consumers the automatic right to enjoy the mandatory rules
of the law of the country from which they accessed an electronic
commerce service could therefore give rise to serious commercial
uncertainty to firms whose websites are potentially accessible
from anywhere. It would give rise to both direct costs of tracking
and controlling access to and usage of websites (and associated
technical difficulties), and opportunity costs of business foregone
because the legal risk was too great to be commercially acceptable.
For consumers there would be costs flowing from a narrower market
and more limited choice. The impact of such a provision would
depend partly on the extent to which Community law (in the form
of the proposed Directive on certain legal aspects of electronic
commerce) supports the principle of jurisdiction by the State
of Origin of the service by introducing provisions which are generally
applicable to electronic commerce and which override those mandatory
rules of the consumer's State which constitute a restriction.
The Commission has already opined (in relation
to the Second Banking Directive, but based on Community jurisprudence,
and therefore we think the same principles would apply to other
investment services business) that it cannot be assumed, given
the precedence of Community law, that the application of the mandatory
rules of the consumer's state under the Rome Convention would
not fall foul of the freedom to provide services cross-border
if they constituted a restriction (see the Annex to this paper).
We think that any amendment to the Rome Convention which adopted
the principle that a website should be regarded as an advertisement
directed at a consumer merely because he was able to access it
would itself restrict the freedom to provide services cross-border.
The Rome Convention's current approach—that
when an electronic transaction arises as a result of an advertisement
which is actively directed at consumers in a particular country,
the consumer is entitled to invoke his State's mandatory rules—is
unlikely to be sustainable in the context of cross-border electronic
commerce. Currently the distinguishing factor is whether the provider
has effectively "entered" the consumer's State (whether
by active targeted advertising or otherwise)—in which case
consumer State mandatory rules are available (subject, though
to Community law), or whether the consumer has effectively taken
the initiative to "enter" the provider's State—in
which case the parties' choice of applicable provisions, or in
the absence of choice the relevant provisions of the State of
the provider apply. The debate on the proposed revision to the
Brussels Convention indicates how difficult it is to apply such
concepts to trading online across borders, and even adopting a
technologically neutral approach based on some concept of whether
the consumer had "entered" the website, or whether the
provider had "advertised" via the website to consumers,
would be unlikely to provide the necessary legal certainty to
providers and customers or avoid the costs referred to above.
The provisions should at least explicitly recognise that the mere
existence of a website does not in itself constitute an advertisement
merely because it happens to be accessible by a customer in another
State (we explain below why a website is not analogous to a targeted
advertisement); ideally they should provide that in the context
of electronic commerce, in the absence of choice otherwise, the
relevant provisions of the State from which the service is provided
should apply, regardless of whether the electronic transaction
resulted from advertising or not. For the reasons explained below,
the best practical protection for consumers of electronic commerce
services is not to give them rights under their own laws, but
to provide for international co-operation to resolve cross-border
disputes under the relevant provisions of the State from which
the service originates (or those of another State if agreed by
the parties).
BRUSSELS REGULATION
Provided that it is clear that there is no mandatory
requirement under the Rome Convention that the law of a consumer's
State applies to cross-border electronic transactions, the application
of the provisions of Article 15 and Recital 13 of the proposed
Brussels Regulation to electronic transactions might not be of
such direct concern to LIBA Members as would be a similar amendment
to the Rome Convention, depending on the definition of "consumer"
(see below). Nevertheless the proposed amendment to the Brussels
Convention does run counter to both the trend of legal developments
and the commercial needs of electronic commerce. More important,
the similarity of the relevant wording in the Brussels and Rome
Conventions is such that LIBA is extremely concerned to ensure
that such an amendment to the Brussels Convention is not used
to justify an unwarranted and damaging amendment to the Rome Convention.
THE DEFINITION
OF "CONSUMERS"
The extent of the impact of the amendment to
the Brussels Convention proposed by the Commission, and on investment
banks would depend partly on where the boundary was drawn between
consumers and other market participants (we have argued in other
contexts for a definition of "consumer" which includes
individuals acting outside their trade, business, or profession,
but excludes individuals who agree to be classed as "expert").
Nevertheless, there are general reasons of principle why we think
that the amendment proposed to the Brussels Convention, and any
similar amendment to the Rome Convention, would be inappropriate
to the dynamics of electronic cross-border trading, would discourage
the development of cross-border (and domestic) electronic commerce,
and would not in any case provide the most effective mechanism
for protecting consumers.
CONSUMER PROTECTION
Customers (particularly "consumers")
and their political representatives are properly concerned to
ensure that the interests of users of electronic commerce services
are adequately protected in potentially unfamiliar cross-border
transactions. Some have argued that such protection can be ensured,
and customers can therefore have the confidence to trade, only
if consumers are able to enter into electronic transactions with
the protection provided by their own domestic legal measures,
exercisable in their own jurisdiction.
This argument is partly based on an analogy
between websites and advertising. But there is a strong argument
that advertising—which depends on a message targeted at
and transmitted to a recipient without his prior consent—is
very different from websites, which a user must actively obtain
access to. Provided that a website discloses clearly and unambiguously
where the service is provided from and the jurisdiction to which
it is subject, the service provider should be entitled to proceed
on the basis that the customer understands and accepts that the
transaction occurs under the relevant provisions of the place
from which the service is provided (unless the parties agreed
that the provisions of another country would apply).
Scope for the automatic application of the provisions
of the State of the customer would discourage service providers
as a result of exposure to multiple and possible contradictory
local legal and regulatory requirements—the cost-saving
opportunities offered by electronic commerce could be undermined
by the cost of identifying local requirements in States where
the website might be accessed, tailoring products to different
national laws, or controlling or denying access to services by
customers in particular jurisdictions. In addition, any apparent
advantage to the customer arising from being able to sue in his
domestic court under his domestic law could be nullified as a
result of judgements' not being easily enforceable in practice.
Even where arguments for mutual recognition of judgements are
in place the consumer can face procedural obstacles and such agreements
may not extend to arbitrations and other forms of alternative
dispute resolution. All of these factors would powerfully inhibit
the growth of international electronic commerce.
LIBA'S PROPOSALS
FOR A
WAY FORWARD
What is needed is a framework in which national
laws and jurisdictions can be reconciled with the international
commercial implications of electronic commerce, and which will
provide both customers and providers with confidence to exploit
the opportunities of the medium. Such a framework can be provided
by combining mutual recognition of State of Origin laws and jurisdiction
with effective mechanisms for international co-operation to resolve
cross-border disputes in order to provide consumers with redress
when appropriate.
Such a framework should ultimately involve international
agreement and co-operation on cross-border out-of-court dispute
resolution and redress mechanisms. However the following principles
should apply to determine the relevant provisions in the event
of a dispute about electronic commerce, either in or out of court:
— The parties to the contract would
be free to contract under the relevant provisions of any State.
Either party would of course have the right to decline to contract
if they did not agree.
— In the absence of any explicit agreement
on the relevant provisions, and provided that the provider disclosed
the State from which the service was provided, the relevant provisions
would be those of the State from which the service is provided
(under the characteristic performance test).
— Community law (in the shape of the
proposed directive on certain legal aspects of electronic commerce)
should make clear that the State of Origin principle applies to
all aspects of the provision of an electronic commerce service
(except for the parties' choice of contract law), and that it
overrides any mandatory law provisions which might be invoked
under the Rome Convention, regardless of whether the contract
arose as a result of advertising. In respect of cross-border contracts
which are covered by the Electronic Commerce directive, there
should be international co-operation to ensure that consumers'
rights are properly under the relevant provisions of the State
of Origin of the service if a dispute arises.
Treating contracts entered into via a website
as subject to the relevant provisions of the State of Origin provides
certainty for the service provider (which, through encouraging
the provision of a service, will enhance customer choice). It
also means that judgements should be more easily enforceable,
since the State with jurisdiction is also the State from which
the provider carries on business. Both of these factors will powerfully
reinforce the growth of cross-border electronic commerce within
the internal market, without diminishing consumer protection in
practice.
27 October 1999
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