Select Committee on European Union Written Evidence


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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