BUREAU VAN DIJK, MANAGEMENT CONSULTANTS (BvD)

CENTRE DE RECHERCHES INFORMATIQUE ET DROIT

FACULTES UNIVERSITAIRES NOTRE-DAME DE LA PAIX NAMUR (CRID)

CENTRO DE ESTUDIOS DE DERECHO E INFORMATICA DE LES ILLES BALEARS

UNIVERSITAT DE LES ILLES BALEARS (UIB)

GMD - FORSCHUNGSZENTRUM FÜR INFORMATIONSTECHNIK

INFORMATION TECHNOLOGY LAW UNIT OF THE CENTRE FOR COMMERCIAL LAW STUDIES

QUEEN MARY AND WESTFIELD COLLEGE (QMW)

INSTITUT FÜR INFORMATIONS-, TELEKOMMUNIKATIONS- UND MEDIENRECHT

WESTFÄLISCHE WILHELMS-UNIVERSITÄT (ITM)

NORWEGIAN RESEARCH CENTER FOR COMPUTERS AND LAW

UNIVERSITY OF OSLO (NRCCL)

International Consumer Purchases through the Internet:

An Inter-legal Perspective

Lee A. Bygrave and Morten Foss⁽¹⁾
Norwegian Research Center for Computers and Law
Advisors to the Commission of the European Communities under the framework of the Electronic Commerce Legal Issues Platform (ECLIP)⁽²⁾

1. Introduction

1.1. The significance of the Internet

The sale and purchase of goods and services over the Internet have now reached significant proportions. It is expected that such trade will continue to grow. A large percentage of this trade involves purchases of goods or services by consumers. Often such a purchase is made from a vendor based in a country other than that in which the consumer is domiciled. Thus, many Internet-based consumer contracts are and will be international in the sense that the legal relationship between purchaser and vendor has connections - actual and/or potential - to the legal systems of more than one country.

1.2. The legal issues in a nutshell

Should there arise a legal dispute in connection with a consumer contract concluded over the Internet between parties based in different countries, it will be necessary to determine which country's court has jurisdiction to resolve the dispute. Thereafter, it will be necessary to determine which country's law should be applied. Should the convicted party fail to honour its liabilities pursuant to the court judgement, it will also be necessary to determine the extent to which judicial decisions may be enforced across national borders.

The rules governing resolution of these matters typically go under the rubric of "private international law". This nomenclature is somewhat misleading as the rules concerned are primarily national in character; ie, they are part of, and stem from, a country's domestic legal system. Concomitantly, each country has its own private international law, which often varies from the law of other countries. However, some regions of the world - notably Western Europe - have partially harmonized some of their respective sets of rules in this field.

It should be stressed that contractual liability is not the only matter that can create problems in the context of international consumer contracts over the Internet. Problems might also emerge with respect to maintaining the privacy/data protection rights of consumers, since foreign vendors will often acquire personal data on the consumers with which they deal. The question will then arise as to which country's law should be applied in determining the extent of privacy/data protection for the consumer concerned.

1.3. The concept of consumer

As a point of departure, it is up to each country's national laws to define what constitutes a consumer for legal purposes. We find, therefore, a large number of national definitions of the concept of consumer. Across the board of Western countries' legal systems, however, the variations between these definitions are marginal. Generally speaking, a consumer is defined as a natural/physical person who enters into a contract with a commercial organization for the purchase and delivery of certain goods or services that are primarily intended to be used outside his/her trade or profession.

1.4. Limitations on the scope of issues canvassed

In this paper, we only canvass inter-legal issues arising out of consumer contracts for the purchase of goods or services. Moreover, we only assess these issues using the legal systems of Western Europe and the USA as reference points.

In our analysis, we refrain from a very detailed presentation of the relevant legal rules; our chief concern is to depict the broad thrust of these rules in a manner that facilitates a policy discussion in which both lawyers and non-lawyers can participate.

2. Jurisdiction

2.1. Legal foundations

In the USA, it is primarily the courts that have created the rules governing matters of jurisdiction. In Western Europe, by contrast, these matters are currently regulated primarily by international treaties. For member states of the European Union (EU), jurisdictional matters are regulated by the Brussels Convention of 1968,⁽³⁾ while the Lugano Convention of 1988⁽⁴⁾ regulates these matters for members of the European Free Trade Association (EFTA).⁽⁵⁾ However, the provisions of each Convention are identical with respect to consumer contracts. In the following, we will refer only to the provisions of the Brussels Convention.

2.2. Main rule - party autonomy

The legal point of departure in both Europe and the USA is that parties are free to make a binding agreement between themselves as to which country's courts shall be competent to judge a dispute between them. This is what may be termed the principle of party autonomy. The main rationale for the principle is that it promotes legal certainty between the parties and restricts "forum shopping" by plaintiffs.

2.3. Limitations on party autonomy

If there exists a qualified degree of difference between the parties in terms of their respective negotiating strengths, both European and US law lay down important restrictions on the freedom of the parties to choose which country's court has jurisdiction. Such differences will often be typical for a range of consumer contracts. Under US law, the determination of what constitutes a sufficient degree of difference as to justify restricting party autonomy, rests upon a broad discretionary assessment of whether the parties' jurisdictional choice will have unfair consequences in the concrete case at hand.⁽⁶⁾

Under European law, by contrast, the opportunity for such discretionary assessment has been restricted through the introduction of special jurisdictional rules for particular kinds of consumer contracts.⁽⁷⁾ The effect of these rules is that (i) the vendor may only sue the consumer in the country where the latter is domiciled, and (ii) the consumer may always sue the vendor in the consumer's country of domicile.⁽⁸⁾ A precondition for applying these rules is that the consumer purchase has sufficiently strong connections to the consumer's country of domicile. This precondition is viewed as fulfilled when the criteria in Art. 13 of the Brussels Convention are met.⁽⁹⁾ Thus, the main differences between US and European law on this point is that the latter does not operate with a broad discretionary assessment of the circumstances of the case at hand; neither does it explicitly operate with a fairness criterion.⁽¹⁰⁾

2.4. Cases when the parties have not agreed on jurisdiction

When the issue of jurisdiction has not been fully addressed and agreed upon by the parties, the Brussels Convention stipulates that the vendor may be sued in the country of the consumer's domicile, but only in those cases in which the criteria of Art. 13 are met. If these criteria are not met, the consumer will have to fall back on Art. 2(1) which states that a defendant shall be sued in the state where he/she/it is domiciled. Alternatively, the defendant party to a contract may also be sued "in the courts for the place of performance of the obligation in question" (Art. 5(1)).

In the USA, the legal point of departure is that the defendant must be sued in the court of the country or state where he/she/it is domiciled. Allowance is made to sue the defendant in the courts of another state if the defendant has established "minimum contacts" with that state.⁽¹¹⁾ In assessing whether such contacts have existed, one looks at the extent to which the defendant "purposely established" the contact in question and "create[d] continuing relationships and obligations" with the citizens of the state concerned.⁽¹²⁾ The contact had by the defendant with the state must be of such a character and extent that the defendant must have expected to be sued in the courts of that state.⁽¹³⁾ In the context of the Internet, case law suggests that the greater the potential for interactive contact between a vendor operating through the Internet and purchasers from a particular state, the greater the possibility that the courts of that state will be given jurisdiction.⁽¹⁴⁾

3. Choice of law

3.1. Legal foundations

In the USA, the provisions of the Uniform Commercial Code (UCC)⁽¹⁵⁾ determine choice of law with respect to consumer purchases of movable goods.⁽¹⁶⁾ In other cases, choice-of-law issues have to be resolved in accordance with the international private law of each state⁽¹⁷⁾. For reasons of space and simplicity, however, we will not analyse the latter laws; the UCC will constitute our main US point of reference. It suffices to say that the individual state laws are far from uniform in terms of the methods they respectively lay down for determining choice of law.

In Europe, the resolution of choice-of-law issues is largely governed by the provisions of the Rome Convention of 1980.⁽¹⁸⁾ Member states of EFTA are not formally entitled to sign and ratify the Rome Convention, so choice-of-law issues are settled pursuant to the national laws of these states.⁽¹⁹⁾. In this paper, we will not analyse the latter laws.

3.2. Main rule - party autonomy

The point of departure for both the UCC (see § 1-105(1)) and Rome Convention (see Art. 3) is that the parties are free to choose which country's law is to apply.

3.3. Limitations on party autonomy

Under the UCC, a precondition for respecting the choice of law made by the parties is that the transaction concerned has a "reasonable connection" to the law chosen (§ 1-105(1)). This precondition will usually be met in practice. The Rome Convention does not operate with such a precondition. However, the Convention does set down significant limits on the parties' freedom of choice in certain situations. The Convention does not permit the parties to choose a law that gives the consumer a lower level of protection than he/she enjoys pursuant to his/her own country's laws. At the same time, this restriction only applies if certain conditions laid down in Art. 5 are satisfied. These conditions are identical with those laid down in Art. 13 of the Brussels Convention (see section 2.3 above).

Also in the USA, the parties' choice of law may be at risk of restriction if it would lead to the consumer losing the protection he/she enjoys under federal or state laws. Moreover, there seems to be a tendency in the USA to restrict party autonomy when there exists a qualified difference between each party's negotiating strength. Manifestations of this tendency can be found in, inter alia, § 2A-106 of the UCC (dealing with consumer leases) and §§ 292-293 in the Restatement (Second) of the Conflict of Laws (dealing with insurance agreements).

3.4. Cases in which the parties have not agreed on choice of law

Both the UCC and Rome Convention have rules for when the choice of law has not been fully agreed upon by the parties. Acccording to the UCC, its own material rules shall apply in such cases if the legal dispute has an "appropriate relation" to the state concerned (§ 1-105(1)). What consitutes an "appropriate relation" is to be worked out by each court on a discretionary, case-by-case basis.⁽²⁰⁾

Under the Rome Convention, the law of the country where the consumer is domiciled shall apply, if the criteria laid down in Art. 5 are met (Art. 5(3)). If these criteria are not met, one must fall back on Art. 4, which stipulates that one shall apply the law of the country with which the contract "is most closely connected" (Art. 4(1)). It is presumed that the closest connection will be with the state "where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence …" (Art. 4(2)).

3.5. Choice of law with respect to privacy and data protection

As mentioned in the introduction to this paper, it is quite possible that vendor-consumer relationships will give rise to issues relating to the privacy and data protection rights of consumers, as vendors will often acquire personal data on the consumers with which they deal. Where the vendor is situated in a different country to the consumer, the question will need to be faced as to which country's law should be applied in determining the extent of privacy/data protection for the consumer concerned. We will not canvass this issue in detail as it is somewhat peripheral to the main concerns of this paper, but it is worth considering at least summarily given the considerable overlap between consumer and privacy/data protection.

We are unsure of how US law deals with choice-of-law issues in a privacy/data protection context. In Europe, however, Art. 4 of the EC Directive on data protection⁽²¹⁾ lays down specific rules for resolving such issues. The main rule is that the principal criterion for determining applicable law is the place of establishment of the data controller (typically the vendor),⁽²²⁾ irrespective of where the data processing occurs. This criterion will therefore become the norm for countries governed by the Directive. When the data controller (vendor) is established in several EU member states simultaneously, the controller "must take the necessary measures to ensure that each of these establishments complies with the obligations laid down by the national law applicable" (Art. 4(1)(a)). When the data controller is not established in a member state, the law of the latter may still apply in two cases:

(i) the controller is established in a place where the member state's law applies by virtue of international public law (Art. 4(1)(b)); or

(ii) in order to process personal data, the controller "makes use of equipment, automated or otherwise, situated on the territory of the said Member State, unless such equipment is used only for purposes of transit through the territory of the Community" (Art. 4(1)(c)).

In the latter case, the controller must have a representative established in the particular member state.

The provision of Art. 4(1)(c) has important ramifications for US-based vendors dealing over the Internet with consumers domiciled in Europe. It could be that some of the net activities of such vendors (e.g. setting "cookies" on the computer used by the consumer) involve utilization of equipment in an EU member state, thereby bringing these activities within the ambit of European data protection law.

The above rules could have several problematic consequences for the interests of both data controllers (vendors) and data subjects (consumers), largely depending on the extent to which the privacy/data protection laws of each of the EU member states are brought into mutual harmony. We will not elaborate on these problems except to say that, although the data protection Directive aims to bring about a harmonisation of data protection laws across the EU and, indeed, assumes that such harmonisation will occur, there is evidence to suggest that considerable differences between the various data protection regimes will remain.

4. Recognition and enforcement of judgements

In Europe, Art. 31 of the Brussels and Lugano Conventions ensures that, with respect to consumer contracts, court judgements made in the territory of one of the Convention parties are recognised and enforceable in the territories of the other Convention parties. There are similar rules operating at the domestic inter-state level within the USA⁽²³⁾ but relatively few such rules governing the relationship between the USA and other countries.

5. The Limitations of International Private Law

5.1. National element

As indicated above, international private law is essentially part and parcel of each state's domestic legal system. In Western Europe, much of this body of law has been harmonized by way of multilateral treaties, making it relatively easy to discern the rules that must be followed there for resolving inter-legal disputes. In the USA, however, there remain relatively large differences between many states both in terms of the content of their respective rules for resolving inter-legal conflicts and in terms of the way these rules are applied. Moreover, it is difficult to gain an accurate overview of all of these rules. As a result, the transparency, accessibility and predictability of the US legal system in this field are far from satisfactory. There is also relatively great scope for "forum shopping".

One of the most important objectives of this field of law is to create legal certainty for parties that contract across state boundaries. If this objective is to be realized, it is incumbent that each state's rules be harmonized such that inter-legal disputes are resolved in the same manner independent of the forum in which resolution occurs.

5.2. Rules from a pre-Internet era

Under present rules, inter-legal disputes are resolved to a large extent through applying geographical criteria. One attempts to identify the physical places in which the various activities have occurred: where was the contract entered into?; where were the contractual obligations fulfilled?; in which state is the vendor's main office? The problem in the context of Internet transactions is that these sorts of questions are often difficult to answer conclusively. On the Internet, we lack many of the points of reference we are used to from the physical, off-line world. The Internet is a medium that essentially ignores national boundaries.

Present rules for resolving inter-legal disputes derive largely from the pre-Internet era. Concomitantly, they take little account of trade that occurs in a digital context. Hence, their application to consumer contracts entered into over the Internet is often problematic. This results in turn in a situation where the parties to such contracts are hard pressed to predict how potential inter-legal disputes will be resolved.

In order to alleviate the above difficulties, consideration needs to be given to changing current rules for dealing with inter-legal conflicts and/or to elaborating on the content of these rules.

5.2.1. Amending the rules

Reform is arguably required of many, if not all, of those rules that operate with precisely defined criteria that provide little meaningful guidance to the parties to Internet transactions. In the context of consumer contracts, we find a great number of such rules operating in European law. In the USA, the relevant rules tend prima facie to operate more flexibly by demanding a holistic consideration of the circumstances of each case. At first glance, the latter rules would seem to be better able to cope with the challenges posed by Internet. However, it should not be forgotten that these rules also require account to be taken of criteria that assume it is possible to link a particular activity to a particular territory.

A major challenge is to reach agreement as to what criteria should be used to replace the geographical reference points with which international private law currently operates. Perhaps, however, it will prove impossible to replace all such reference points; the challenge then will be to agree on criteria to supplement such points. Consideration will also need to be given to changing the legal weighting given to one such point relative to other such points.⁽²⁴⁾

Already now, we see attempts by national and supranational organs to determine how activities on the Internet shall be understood in relation to traditional legal concepts, rules and doctrines.⁽²⁵⁾ We see also attempts by these organs to stipulate requirements that Internet actors clearly identify themselves to other parties.⁽²⁶⁾ These are praiseworthy initiatives. Their success will hinge, of course, on the extent to which they gain the broad support of the international community.

5.3. The results of applying international private law

Regardless of how the current rules for resolving inter-legal disputes are changed in order to cope better with the Internet world, the result will, in most cases, still be the choice/application of either the court/law of the vendor's country or the court/law of the consumer's country. In practice, then, one of the parties will tend to find themselves in a less favourable legal situation than the other party.

With respect to jurisdiction, vendors will face significant commercial and legal problems if they risk having to face courts in all of the countries in which, e.g., their web-page(s) can be reached. A possible remedy for this problem would be for vendors to expressly refuse selling goods and services to consumers domiciled in particular countries, but implementing this remedy would detract considerably from realisation of the Internet's full commercial potential. As far as consumers are concerned, having to run a case before a foreign court will often increase the chances that the case is lost or never even brought before a court.

With respect to choice of law, vendors would find it intolerable if they were forced to take into consideration an almost countless number of different laws. In practice, the vendor would probably have to run Internet operations in accordance with the most restrictive of these legal regimes. For the consumer, there would be little advantage in having to take into consideration the laws of the country in which the vendor is established. It is also quite possible that consumer protection bodies in the country where the consumer is domiciled would refuse to accept the application of the latter laws were these to offer a lower level of protection than that offered by the laws of the consumer's country.⁽²⁷⁾

In light of the above comments, there is reason to claim that international private law will inevitably fail to offer, at least on its own, satisfactory solutions for the regulation of cross-border consumer purchases. It is therefore incumbent upon policy makers to examine alternative regulatory solutions that could supplement or partially replace the rules of international private law.

6. Alternative solutions

In the following, we do not attempt to canvass each and every one of the alternative solutions to the above problems. Instead, we canvass what we believe are the most important and useful of these solutions.

6.1. Extra-judicial dispute resolution bodies

One way of avoiding the difficulties associated with having to initiate judicial proceedings before a foreign court would be to set up and utilise extra-judicial organs for resolving (inter)legal disputes involving consumers. The proposal for an EC Directive on e-commerce specifically includes a provision to encourage the establishment of such bodies.⁽²⁸⁾ Numerous issues arise with respect to these organs' competence, enforcement powers, placement and operational medium. For instance, to what extent should such organs deal only with Internet-related disputes? To what extent should they operate primarily as "virtual", on-line bodies? We will not pursue these sorts of issues further in this paper, suffice it to say that they are the subject of on-going analysis pursuant to the ECLIP project.

6.2. Technological mechanisms

Another avenue for mitigating the problems identified in this paper is to develop technological mechanisms that make it easier to apply the rules of international private law to Internet contracts, in a way that is fair to the parties. For example, tools could be developed and applied for enhancing the possibility for the vendor and consumer to reliably ascertain in which country each is established/domiciled. Or, mechanisms could be developed allowing for choice-of-law clauses to be attached to digital object identifiers. One aim of the ECLIP research is to analyse in more detail the possibilities for utilizing technology as an aid for preventing and/or resolving (inter-)legal disputes arising out of e-commerce.

6.3. Harmonisation of rules

As well as harmonising rules on international private law, active consideration should be given to harmonising national rules on consumer protection. Achievement of the latter form of harmonisation would significantly reduce the practical significance of the problems related to choice of law, thereby lightening the situation of both vendor and consumer. In order to compete in a global market, vendors from states that refused to harmonise their laws with those of other states, would probably have to offer consumers (by way of standard contractual conditions) an equivalent level of protection to that offered by the other states. Of course, though, the chance of this occurring might diminish if the products or services being sold by such a vendor were (i) unique for the vendor, and (ii) in high demand.

6.4. Broadening international consensus on enforcement of foreign court judgements

In addition to the points set out above, ground must be prepared through international treaties to ensure that a greater number of states recognise and enforce judgements reached by foreign courts. There is little point in winning a judgement unless the judgement is also implemented.

7. Conclusion

This paper highlights that there is a clear need for a major international cooperative effort to secure adoption of a satisfactory global regime for resolving inter-legal disputes arising out of consumer contracts entered into on the Internet. Concomitantly, there is a clear need for greater focus on the sorts of problems taken up in this paper than we often find in the numerous forums devoted to promotion and/or analysis of e-commerce initiatives. In this respect, the preparedness of the FTC to initiate a broad discussion of these problems in a global perspective is heartening.

1. Research fellows of the Norwegian Research Center for Computers and Law (NRCCL).