Making contracts online
An online contract is an agreement created wholly or partly through communications over computer networks. Online contracts can be created by various means, including an exchange of e-mail messages, the submission of an order via a website or, in a business-to-business (b2b) context, through the exchange of messages over dedicated telecommunications lines (this is known as electronic data interchange (or EDI) and is discussed separately in the Practice Note Electronic data interchange (EDI) ( www.practicallaw.com/A25190)).
As communications and trade become increasingly global through the use of electronic communications networks, the traditional jurisdictional approach to the interpretation and enforcement of contracts will be placed under increasing strain. Individual jurisdictions are currently developing their own laws to deal with international electronic contracting, but there are signs that governments across the world will move towards a common approach to the formation and interpretation of contracts.
For the time being, the rules which apply to the formation of contracts online are largely the same as the traditional rules that apply to contracts generally, although the amount of legislation dealing specifically with electronic contracting is steadily increasing. This note considers the following issues under the laws of ten jurisdictions (Australia, Brazil, Canada, France, Germany, Italy, Spain, Sweden, the UK and the US):
How the traditional legal rules concerning the formation of contracts apply in an online context.
The extent to which new legislation or court decisions deal specifically with online contracting.
The circumstances in which, by virtue of court decisions or statutory provisions, terms may be implied into online contracts, or express terms may be overridden by mandatory laws of countries in which parties to online contracts are based.
The extent to which the parties to an online contract can make an effective choice of the law which is to apply to the contract and the courts or tribunals which are to have jurisdiction to deal with any disputes that arise.
Related issues, such as the use of digital signatures in online contracting and methods by which payments may be made online, are discussed in the Practice Notes Security and digital signatures ( www.practicallaw.com/A26590) and Payment on the internet ( www.practicallaw.com/A26636).
What is a contract?
A contract is an agreement between two or more parties that a court will enforce. Under the laws of most jurisdictions, the following elements must be present for a valid contract to arise:
An offer by one party;
Communication of acceptance of that offer by the other party;
Consideration flowing between the parties (for example, the payment of money); and
An intention by the parties to be legally bound.
A notable exception is Italy, where the contract must perform an economic function which is recognised under Italian law.
Additionally, in all countries the parties entering the contract must be legally capable of doing so.
In some jurisdictions, certain formalities must also be fulfilled. For example, the German Civil Code prescribes certain written form requirements. The application of these requirements to online contracts is considered under Forming a contract over the internet.
(See Country Question 1.)
Can a contract be formed electronically?
In all jurisdictions surveyed, most types of contract can be formed without written formalities, and so in general can be formed electronically. There are a number of typical exceptions to this, such as the creation or execution of a will, or a contract for the sale of real property. In some jurisdictions, however, there are more stringent rules with which companies engaging in e-commerce may need to comply in order to ensure that their contracts are enforceable. The French Civil Code, for example, provides that all contracts must be evidenced in writing if they are of a value in excess of EUR800 and at least one of the parties is a non-business entity.
A number of jurisdictions have legislation specific to e-commerce contracts:
In Australia, e-commerce legislation is based on the 1996 UNCITRAL Model Law on Electronic Commerce (UNCITRAL Model Law). Its primary aim is to make electronic communication equivalent to paper in the formation and evidencing of contracts. The Australian Electronic Transactions Act 1999 has been effective since 15 March 2000, and represents a light-touch approach to the development of a regulatory regime for electronic communications. At federal level, the Act applies to a limited number of federal statutes passed before 1 July 2001 and applies to all federal statutes passed on or after 1 July 2001 except those listed in the regulations to the Act. Governments at state and territory level have indicated their willingness to enact mirror legislation which would have the effect of recognising electronic transactions under state laws, and a number of states have already proceeded with the implementation of such legislation.
In Brazil, according to Provisional Measure 2200 (MP 2200) of 29 June 2001, digital certificates that comply with special rules are presumed valid for the purposes of establishing the authenticity, integrity and legal validity of electronic documents. Other certifications that do not comply with these rules may be considered valid for the same purposes if deemed valid by both parties or accepted by the person to whom they are presented.
In Canada, legislative initiatives on electronic contracts introduced at provincial and territorial level are based on a model law known as the Uniform Electronic Commerce Act (UECA). The basic principle of the UECA is that paper-based and electronic communications are functionally equivalent.
The French Electronic Signature Act 2000 specifically provides that electronic documents have the same evidential weight as paper documents. Electronic documents therefore satisfy the requirement under the Civil Code for written evidence of any consumer contract worth more than EUR800. Legislation implementing the E-Commerce Directive (see EU Position below) provides that where writing is necessary for a contract to be valid, such writing may be in electronic form except for contracts dealing with family matters, succession, donations, matrimonial matters, or security agreements (unless they are entered into by a person in the exercise of their profession).
In Germany, electronic contracts are generally valid, but contracts concerning real estate must still be in writing. Legislation addressing formal requirements for contracts is currently being considered.
In Sweden, electronic contracts are generally valid under Swedish law which, it is considered, already reflects parts of the E-Commerce Directive (see EU position below). However, contracts concerning real estate, consumer credit and some family law matters are still required to be in writing.
In the UK, the Electronic Communications Act 2000 facilitates electronic communications by allowing electronic signatures to be legally admissible as evidence of the authenticity or integrity of a communication, and grants the government the power to modify existing legislation to authorise the use and storage of electronic communications. Transactions can therefore now be evidenced by documents which are signed electronically.
In the US, all 50 states and the federal government have enacted, or are currently considering enacting, some form of legislation on the conduct and enforceability of electronic transactions. As a result of the Electronic Signatures in Global and National Commerce Act (E-SIGN Act) and the Uniform Electronic Transactions Act (UETA), most transactions in the US can now be done in electronic form, even when applicable statutes require a written and signed document.
The E-Commerce Directive requires EU member states to ensure that their national laws allow contracts to be concluded by electronic means, and to remove any prohibitions or restrictions on the legal effectiveness or validity of electronic contracts (Article 9(1), Directive 2000/31/EC on certain legal aspects of information society services, in particular electronic commerce, in the internal market, OJ 2000 L178/1).
Member states may exclude certain types of contract from this requirement, for example, contracts that create or transfer rights in real estate, and contracts governed by family law or by the law of succession (Article 9(2)).
The E-Commerce Directive had to be implemented by 16 January 2002, although most existing member states did not meet the deadline.
(See Country Question 2.)
Forming a contract over the internet
In most jurisdictions there are no special rules relating to the formation of contracts over the internet: the ordinary rules of contract apply. However, regard should be paid to the following legislation that is relevant to contract formation generally (as distinct from issues of offer and acceptance specifically, which are discussed separately below):
In the EU, the E-Commerce Directive provides that an online supplier must clearly, comprehensibly and unambiguously describe to consumers, in advance, the different technical steps which are necessary before the formal conclusion of an electronic contract (except where the contract is concluded by e-mail or equivalent individual communication). It also provides that online suppliers must describe the technical means for identifying and correcting input errors prior to the placing of the order, and the languages offered for the conclusion of the contract (Article 10(1)).
In many countries, there are information obligations which suppliers must comply with when entering into online transactions with consumers (such as the Distance Selling Directive in the EU and the E-SIGN Act in the US). These are discussed under Terms implied by statute and other mandatory statutory provisions, Rules on distance selling.
(See Country Question 3.)
What constitutes an offer?
In many jurisdictions (including Australia, Canada, Germany, Sweden, the UK and the US), a distinction is drawn between an offer and an “invitation to treat”.
An offer is capable, if accepted, of binding a seller who has indicated a desire to sell certain goods. In contrast, an invitation to treat is typically regarded as a request by a seller to others to make an offer (to the seller), or to engage in negotiations with a sale in mind. There is so far no case law on whether the owner of a website that advertises goods and services is making an offer to customers, or merely an invitation to treat. However, by analogy with the situation in which goods are displayed in a shop, it is considered that such an advertisement is likely to amount to an “invitation to treat”.
Nonetheless, in the following jurisdictions an online advertisement either will, or is likely to, constitute an offer:
Brazil, where the mandatory rules of the Consumer Protection Code provide that a supplier’s (online) advertisement will be treated as an offer to supply the goods or services advertised to the consumer, so that the supplier will be obliged to supply the goods or services to every consumer who wishes to purchase them.
Italy, where an online advertisement for the sale of goods and services will constitute a legal offer which will give rise to a binding contract if another party purports to accept it, unless the online supplier specifies otherwise in the advertisement.
In addition, it should be noted that in some jurisdictions (for example, Australia), an online advertisement by an online supplier may constitute a legal offer if the advertisement includes all the relevant details about the products or services, including the terms and conditions of supply and details of the supplier.
In jurisdictions where the offer/invitation to treat distinction applies, it will therefore be vital (in the absence of any case law on the point) for a website owner who advertises goods for sale to ensure that the advertisement on the website operates as an invitation to treat rather than as a legal offer. Otherwise, if the advertisement is held to constitute a legal offer, the business will be contractually obliged to supply the goods to every customer who accesses the website and purports to purchase them, even if the business does not stock enough goods to fulfil all the orders. This could leave the business open to claims for breach of contract from customers all over the world.
Steps that should be taken by online suppliers in order to ensure that they do not inadvertently become contractually obliged to customers accessing the site are set out in the box: Practical steps: offers and invitations to treat.
(See Country Question 4.)
Practical steps: offers and invitations to treat
Include a prominent notice on the website (and an appropriate clause in online terms and conditions) stating that the supplier will not be bound unless and until it accepts the customer’s offer.
Include a clear statement that the purchase of goods is “subject to availability”.
Construct an online order form containing the supplier’s standard terms and conditions. Ensure that these terms apply to the offer made by the customer and that, if the customer does not agree to purchase goods and services subject to these terms, he is not able to purchase them at all.
Ensure that the method of trading allows the online supplier to verify the identity of the customer. A seller of alcohol in a shop is not allowed to sell to customers who are not of legal age. Similarly, on the internet, there may be restrictions on the persons to whom a business is able to sell its goods and services. The website should therefore be constructed so that, in effect, it operates like a shop window: if the supplier does not want to proceed with a sale once the customer has identified himself, it must be able to refuse to accept the customer’s offer.
What constitutes acceptance and at what time does it take place?
It is vital to be able to determine clearly when an offer is accepted, for two main reasons:
It is only on acceptance that a legally binding contract comes into existence (an offeror is entitled to revoke the offer at any time before it is accepted);
The place of acceptance determines the jurisdiction in which the contract is concluded, which is important for dispute resolution (this is considered further underChoice of governing law and jurisdiction over disputes).
Most jurisdictions determine the time at which acceptance takes place by means of rules that distinguish between instantaneous methods of communication (for example, telephone or fax) and non-instantaneous methods of communication (such as the postal system). In the case of instantaneous methods of communication, the “receipt rule” is commonly applied, whereas the “postal rule” may apply if communication is non-instantaneous:
Receipt rule. Where communication is instantaneous, acceptance takes place when and where the communication of acceptance is actually received by the offeror (the place of sending is irrelevant for these purposes). This is known as the receipt rule. For example, if the acceptance is communicated by telephone, acceptance takes place when and where the offeror hears the offeree’s words. If the acceptance is sent by fax, then acceptance occurs when and where the fax is received.
Postal rule. Under the postal rule, if the parties contemplate acceptance being communicated by post, then (unless the offer states otherwise) acceptance will be effective, and so a binding contract will arise, from the moment that the acceptance is posted, and the contract will be formed at the place of posting. The offeror will be unable to revoke the offer once the acceptance has been posted, even if the offeror has not received the acceptance (indeed, even if the acceptance is never received, provided that the offeree can adduce sufficient evidence that the acceptance was posted). If the offeror does not want the postal rule to apply, he must clearly state in the offer that a binding contract will only arise upon actual receipt of acceptance.
Acceptance by e-mail or over a website
In jurisdictions that recognise the receipt and postal rules, it is not yet clear which rule applies to e-mail and website-based contracts:
E-mail contracts. E-mail is not an instantaneous communication medium and the sender does not normally receive any immediate feedback concerning the delivery of the message. There are therefore arguments for applying the postal rule to e-mail, which would mean that the contract is formed once the offeree sends an acceptance message. The contract would be formed at the location of the offeree (not at the offeree’s server and not at the location of the offeror).
However, e-mails can get lost, become garbled or be rejected by corporate firewalls. The offeror may be unaware that its offer has been accepted and that a contract has formed, whereas the offeree will usually receive an error transmission message informing him that the message was not received. Accordingly, reasons exist for arguing that e-mail acceptances should be subject to the receipt rule.
However, if the receipt rule applies, timing problems arise. It is not clear when the actual receipt of an e-mail occurs - when the offeror opens the e-mail or when the e-mail arrives on the offeror’s e-mail server. Whether a person has continuous internet access or has to ’dial up’ access periodically may also affect the time and location of receipt.
Website contracts. It is more likely that the receipt rule applies to contracts entered into over a website. The offeror completes the electronic order form and orders goods or services from the seller. When he submits the form there is a direct and real-time link between the buyer (typically the offeror) and the seller. Usually, the buyer will receive immediate feedback informing it that its offer has been accepted by the seller. If the link between the buyer and the seller is lost, this will become apparent to the buyer, who will then know that a contract has not been made. This means that acceptance is not effective until it reaches the buyer, thus creating the contract in the buyer’s jurisdiction.
The United Nations Convention on Contracts for the International Sale of Goods 1980 requires actual communication or delivery of acceptance under a contract to the offeror. The Convention applies to contracts for the sale of goods between parties whose places of business are in different states if the states contract to the Convention or if the rules of private international law lead to the application of the law of a contracting state. Parties to a contract may exclude the application of the Convention. 64 countries had fully or partly ratified, accepted, approved or acceded to the Convention by 15 December 2004. This includes most European countries, along with countries from most geographic regions, although Brazil and the UK are not parties.
In Australia, although there is no case law at present, it is considered that the “receipt rule” probably applies to electronic contracts, with a contract being formed at the time and in the country where the offeror’s web servers receive an electronic acceptance.
In Canada, it appears more likely that the postal rule applies to acceptance by e-mail (so that acceptance occurs at the time and place the offeree sends his acceptance to the offeror). The UECA model law contains guidance in determining the time and place at which an electronic message is sent. It provides that a message is “sent” when it “enters an information system outside the control of the originator”, where the sender can no longer recall it, and that a message is deemed to be sent “from the originator’s place of business”.
EU position. As mentioned above, the E-Commerce Directive provides that online suppliers must clearly, comprehensibly and unambiguously describe, in advance:
The different technical steps that are necessary for the formal conclusion of an electronic contract;
The technical means for identifying and correcting input errors before placing the order;
The languages offered for the conclusion of the contract. (Article 10(1).)
However, these provisions do not apply:
To contracts concluded exclusively by e-mail or equivalent individual communication (Article 10(4)); or
If, in contracts between parties who are not consumers, they are excluded (Article 10(1)).
The E-Commerce Directive does not stipulate the time at which a contract is concluded: this depends on national laws. However, it does provide that, unless otherwise agreed by parties who are not consumers, when a “recipient of the services” (the buyer) places an order through technological means:
The service provider (i.e. the seller) is obliged without undue delay and by electronic means to send an acknowledgement of its receipt of the buyer’s order (not to be confused with acceptance); and
The buyer’s order and the seller’s acknowledgement of receipt are deemed to be received when the parties to whom they are addressed are able to access them. (Article 11(1).)
Although, as mentioned above, the Directive does not expressly state the time at which a contract is concluded, if the seller’s acknowledgement of receipt is, in effect, a contractual acceptance of the buyer’s offer, the effect of the Directive is that the contract is formed when the buyer is able to access the seller’s acknowledgement of receipt. However, if the seller’s acknowledgement of receipt is merely an acknowledgement that the seller has received the buyer’s offer and will consider it in due course, then it does not amount to contractual acceptance, and the Directive provides no assistance as to when the contract (in future) will be formed. This means that when and where a contract is formed will depend on national laws. As it is more likely that the receipt rule applies to web-based acceptances (see the discussion above), in jurisdictions that recognise this rule the contract will be formed where the buyer is located. In this case, suppliers will be at risk of being sued outside their home countries and under the laws of the buyer’s place of domicile.
Article 10 of the E-Commerce Directive is likely to have the effect of making it clear when and where acceptance takes place and when and where the contract is concluded by forcing suppliers to spell out the “different technical steps” necessary to form the contract. In situations where Article 10(1) does not apply (for example, where a contract is between two businesses and the provisions in Article 10(1) are excluded), a supplier may wish to structure its website so that the postal rule applies and acceptance occurs on the supplier’s sending of the acceptance, and therefore in the supplier’s home country.
Practical steps that may be taken by online suppliers in order to deal with issues as to the time and place of acceptance of offers are set out in the box: Practical steps: acceptance of offers.
(See Country Question 5.)
Practical steps: acceptance of offers
The best policy for businesses selling goods and services over a website is to include clear terms on the website as to how offers and acceptances are to be communicated and received, and to make it clear that the buyer is making the offer (which the online supplier may or may not accept). For example, such terms should include provisions to the effect that:
The display of goods for sale constitutes a mere invitation to treat.
The buyer must complete and submit an order form (which will constitute an offer) via the website to the supplier.
The supplier will send an acknowledgment of receipt of the buyer’s offer which, however, will not constitute acceptance. This is particularly important if the supplier needs to check stock availability before agreeing to the sale.
The buyer will be sent a formal “acceptance” within a certain number of days of receipt of the buyer’s order.
The contract will be formed at the time the supplier despatches the communication of acceptance and at the place of business of the online supplier.
Incorporation of terms
The terms of a contract include:
The express terms of the contract (which are usually, but not always, in writing); and
Any terms implied by law (either pursuant to a court decision, or by virtue of mandatory statutory laws (usually for the protection of consumers)).
Incorporating express terms
A company doing business over the internet will want to ensure, as far as possible, that its standard terms and conditions of business apply to the contract. In most jurisdictions, including Australia, Brazil, Canada, Italy, Spain, Sweden, and the UK, a company’s standard terms will only be “incorporated” into the contract (and therefore be legally binding on the user) if the terms are brought to the other party’s attention before the contract is made (for example, the Spanish General Terms and Conditions Act 1998 provides that any terms and conditions not made available to a customer before the contract is formed are null and void). The customer will only be bound by the terms if he actually knew, or had sufficient notice, that the transaction was subject to those terms before the point at which the contract came into existence.
From a strict legal perspective, in most jurisdictions the most effective mechanism for ensuring that the company’s standard terms are binding is to set up the website in such a way that each customer has to scroll through all the terms and conditions, and then click on an “Accept” button, before being allowed to place an order (this type of contract is commonly referred to as a “web-wrap” or “click-wrap” contract). This ensures that it is only at this stage that the buyer makes a binding offer.
However, this mechanism can seriously impair the user-friendliness of the website. In practice, therefore, many suppliers prefer simply to place a clearly visible hypertext link to a separate page where the terms and conditions are displayed. From a marketing point of view, it is often considered to be more desirable to require buyers simply to click on an icon accepting that they have read the terms and conditions, and permitting them to do this even if they have not in fact read them (this has been referred to by the US courts as a “browse-wrap” agreement). Although this approach addresses the commercial need for user-friendliness, there is less certainty that the terms and conditions will be validly incorporated into the contract - clearly it will be more difficult in this case to show that the terms and conditions were sufficiently brought to the customer’s attention before the contract was entered into, since the customer may or may not have chosen to view the terms and conditions before submitting an order. Another option, which will increase the likelihood of the terms effectively being brought to a user’s attention, is to display the terms in a prominent place on the homepage of the website (so that the user does not have to click on a link to another page in order to see them).
In most jurisdictions, however, it is generally considered that the terms will be effectively incorporated as long as the warning as to the existence of the terms and conditions is prominent enough to be deemed sufficient notice of them. For example:
In Australia, click-wrap agreements are likely to be legally valid.
In Canada, it is presumed that click-through terms constitute a contract. The UECA, on which various provincial e-commerce statutes are based, provides that the contract may be accepted "by an action in electronic form", including "touching or clicking on an appropriately designed icon".
In the US, click-through terms have presumptive validity through the recent enactment of the E-SIGN Act, as well as its state-based counterpart, the UETA, which has been adopted in 48 states. A court recently ruled that click-wrap terms are unenforceable if the user is not obliged to "click" on an "Accept" button or similar device (Specht et al v Netscape Communications, Corp., http://www.nysd.uscourts.gov/courtweb/pdf/D02NYSC/01-07482.PDF). In general, “browse-wrap” or "browse-through" agreements, as they have been called, are unenforceable in the US.
From a practical point of view, therefore, a seller should take reasonable steps not just to make the terms available to customers, but also to inform customers about the existence and meaning of those terms. Terms which limit or exclude liability should in particular be clearly highlighted and brought to the attention of the customer.
(See Country Question 6.)
Terms implied by law and mandatory statutory provisions
If the express terms of a contract are sufficiently brought to the attention of the buyer before he enters into the contract with the seller, they will bind the buyer. However, this is subject to the effect of any implied terms. Implied terms may arise:
As a result of a court decision; or
By virtue of a statute or any other mandatory statutory provision.
Terms implied by the courts
The courts may imply terms into a contract:
As a matter of fact.
As a matter of market custom or practice.
Terms implied as a matter of fact
A court will imply a term as a matter of fact into a contract in two circumstances:
Where the contract omits to say something so obvious that, had the matter been raised at the time of entering into the contract, both parties would have confirmed its inclusion as a term.
Where the term is necessary to give “business efficacy” to the contract.
As e-commerce evolves, terms may be implied as a matter of fact in this area. However, courts are reluctant to interfere in a contractual relationship and to imply terms when the provisions of the contract have been clearly detailed by the parties. Parties should therefore ensure that contracts are as detailed as necessary, as not only is this good practice, but it is also likely to reduce the risk of courts implying terms as a matter of fact.
Terms implied as a matter of market custom or practice
It is likely that new terms applicable to the internet will be implied by the courts into online contracts. These could include, for example, terms that, unless otherwise stated, the goods will be provided by the party operating the website; that goods ordered will be delivered within a reasonable time; and that, where a stated price is an obvious mistake, the supplier will not be bound. This creates a rather uncertain environment for online sellers.
(See Country Question 7.)
Terms implied by statute and other mandatory statutory provisions
Online contracts will, like traditional written contracts, be subject to terms that are implied by statute. The discussion below examines mandatory laws that regulate the nature and enforceability of contracts and contract terms in a number of jurisdictions, and considers the possibility of excluding their application. As the majority of such laws are for the protection of consumers, it is necessary to distinguish between those which apply to b2b contracts and those which apply to b2c contracts. A supplier proposing to sell goods or services through a website must be aware of such laws, as they can impose significant obligations, and hence liability, if such obligations are not satisfied.
In the UK, the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 imply certain terms into contracts under which one party agrees to provide the other with goods or services (whether b2b or b2c). The following terms will be implied into English law contracts for the sale of goods:
The seller has the right to sell the goods.
The goods are free from any encumbrance and the buyer will enjoy quiet possession.
Where the goods are sold by description or by sample, the goods will correspond with the description or sample.
If the seller sells in the course of business, the goods will be of satisfactory quality and fit for the purpose for which they are supplied.
In English law contracts for the provision of services, the following terms will be implied:
The services will be performed with reasonable skill and care.
The services will be performed within a reasonable time.
If no price is stated, and there is no other way of assessing the parties’ intention regarding it, the person requesting the services will pay a reasonable price.
Similar terms are implied into contracts in Australia and the US. The implied term that goods will be of satisfactory quality is replaced by a term of “merchantability”, but the practical difference between these terms is negligible.
In Australia, the Trade Practices Act 1974 (Cth) (TPA) operates by implying certain non-excludable conditions and warranties into contracts for the supply of goods and services by a corporation to a “consumer”. The definition of "consumer" for the purposes of the TPA is very broad, so the TPA often extends to commercial transactions. Unless goods are acquired for the purposes of re-supply or to be used up or transformed, in trade or commerce, during the course of a manufacturing or repair process, the buyer will be taken to have acquired the goods or services as a "consumer" (even if it is a corporation) if:
The price of the goods or services did not exceed A$40,000; or
The price exceeded A$40,000, but the goods or services were of a kind ordinarily acquired for personal, domestic or household use or consumption.
In addition, section 52 of the TPA provides that a person must not do anything in the course of trade or commerce that is misleading or deceptive or is likely to mislead or deceive. Clauses in any agreement that purport to “contract out” of such liability will not be sufficient to avoid liability under section 52.
The Brazilian Consumer Protection Code 1990 implies warranties into sale of goods contracts in relation to liability for product defects.
Several terms in addition to those described above in relation to the UK are implied into sale of goods contracts in Canada, unless they are varied by the parties (although terms generally cannot be varied in consumer contracts): prices for goods must be reasonable; sellers are obliged to deliver goods within a reasonable time; buyers are required to accept delivery and pay for goods; delivery occurs only after the buyer has had reasonable opportunity to examine the goods; and goods remain the seller's responsibility until transferred to the buyer. There is no implied warranty or condition with respect to fitness or quality of goods. However, there is an implied warranty of merchantable quality where goods are purchased based on a description alone, unless the buyer has first examined the goods, in which case there is no implied condition relating to any defects that ought to have been revealed through the examination.
In most jurisdictions, the extent to which a party may validly exclude or restrict liability for breach of contractual terms (whether express or implied) is subject to legal controls, which are generally much stricter in b2c transactions than in b2b transactions.
In Australia, certain statutory implied terms in consumer contracts cannot be excluded at all. In consumer contracts generally, rules in certain states prohibit harsh, oppressive, unconscionable or unjust provisions (for example, the Contracts Review Act 1980 in New South Wales).
Under Brazil’s Consumer Protection Code, suppliers in both b2b and b2c transactions are liable for defects and imperfections in products and services, as well as for any damage caused to third parties, regardless of fault, negligence or intention. As a matter of public policy, liability for such damage cannot be waived by the parties. However, in b2b transactions and in “justifiable” cases, the supplier may be able to limit the amount to be paid in respect of any breach or damage. As there is no statutory definition of what is “justifiable”, the application of this exception is a matter to be decided by the courts in each particular case.
In Canada, in a b2b transaction a company may generally limit or exclude its liability under a contract by agreement with the other party (although some terms implied by the Sale of Goods Act cannot be excluded or limited). The rules for contracting out of rights, duties or liability are stricter in Quebec than elsewhere in Canada. In b2c transactions, the terms of the provincial Consumer Protection Acts (which include all terms implied under the Sale of Goods Acts) and Unfair Business Protection Acts cannot be waived.
In Germany, unfair clauses are not permitted in b2c contracts.
In Italy, the Civil Code requires that certain “burdensome” contractual clauses must be specifically agreed to by the party on whom the burden is being imposed (for example, limitation of liability provisions and unilateral termination clauses). The Civil Code also implements the EC Unfair Terms Directive (see below) and provides that certain contractual terms are considered particularly burdensome for consumers (for example, provisions dealing with the limitation of liability or warranties or the choice of jurisdiction, and the incorporation of terms and conditions of which the consumer is unaware).
In Sweden, liability for breach of contract cannot be excluded or limited if the party in breach acted with intent or gross negligence. In addition, the Contracts Act gives a court the power to disregard or modify terms and conditions that are “unreasonable”.
In the UK, there are a number of controls under the Unfair Contract Terms Act 1977:
Any term in either a b2b or a b2c contract which purports to limit or exclude liability for death or personal injury caused by negligence will be void.
In b2c contracts, or b2b contracts that are on standard written terms (which would generally include terms on a website), liability for breach of contract can be limited or excluded only so far as is “reasonable”. In determining what is reasonable the courts will consider such factors as the parties’ relative bargaining strengths, the availability of insurance and whether the affected party knew of the exclusion or limitation.
The exclusion of liability for breach of statutory implied terms is restricted. In a b2b contract for the sale of goods, for example, a term excluding or limiting liability for breach of the implied terms as to correspondence of the goods with description or sample, or the quality of the goods or their fitness for purpose, is valid only so far as the term is reasonable, and in a b2c contract such a term is void.
In addition, the following regulations apply:
Terms in b2c contracts must be “fair” (Unfair Terms in Consumer Contracts Regulations 1999, implementing the EC Unfair Terms Directive (see below)).
A business which supplies goods to consumers is required to ensure that any contract terms (including disclaimers) are accompanied by a clear and conspicuous statement to the effect that such terms will not affect the consumer’s statutory rights (Consumer Transactions (Restrictions on Statements) Order 1976).
In the US, limitation of liability clauses are widely upheld in b2b transactions, subject to "failure of remedies" principles. According to these principles, where the contracting parties’ proposed remedies fail in their essential purpose (that is, they leave the parties without any actual remedy), the courts are empowered to look beyond the enumerated remedies and allow for remedies imposed by the common law or the Uniform Commercial Code to “make the parties whole”. In consumer contracts, however, limitation of liability clauses are regulated and restricted through various state unfair competition laws and basic contractual principles of unconscionability.
EU position. The EC Directive on unfair terms in consumer contracts (93/13/EEC, OJ 1993 L95/29) (Unfair Terms Directive) has been implemented in all the EU member states surveyed, although Sweden takes the view that the Annex to the Directive (see below) does not require implementation. The key elements of the Directive, which applies only to consumers, are:
The Directive applies to any term in a contract between a seller or supplier and a consumer which has not been individually negotiated, and provides that any such term which is “unfair” is not binding on the consumer.
A term is “unfair” if, in a way which is contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer (Article 3(1)). A number of factors must be taken into account in assessing unfairness (Article 4), and the Annex to the Unfair Terms Directive contains an indicative and non-exhaustive list of terms which may be regarded as unfair.
The Directive requires any written term of a contract to which it applies to be expressed in plain and intelligible language, failing which the interpretation most favourable to the consumer will prevail (Article 5).
Member states are required to ensure that consumers do not lose the protection conferred by the Directive by virtue of the choice of the law of a non-EU country as the governing law of the country if the contract has a close connection with the territory of the EU member states (Article 6(2)).
Suppliers will therefore need to take account of the Unfair Terms Directive as implemented by national legislation (and in particular the “indicative” list of terms which may be regarded as unfair) when compiling standard online terms and conditions for sales to consumers.
Rules on distance selling
In many jurisdictions (and in particular the EU, where the EC Distance Selling Directive is relevant), suppliers will need to consider the application of distance selling rules, which may cover contracts with consumers for the sale of goods or services by mail order, telephone or fax, as well as contracts concluded over the internet. They typically require suppliers to grant consumers a cancellation period after conclusion of a contract and to provide consumers with specified information in writing.
In Australia, a Code of Practice has been developed along the same lines as the EC Distance Selling Directive (see below), but (unlike the Distance Selling Directive) it is not mandatory.
In Brazil, the Consumer Protection Code grants a statutory cancellation period of seven days to consumers who acquire products or services other than in the supplier’s establishment.
In France, The EC Distance Selling Directive was implemented by an Order of 23 August 2001 which amended the French Consumer Code. Prior to this amendment, French law already required suppliers (i) to grant to consumers a right of withdrawal, exercisable within a period of seven days from the receipt of the goods; and (ii) to provide consumers with specified information similar to that required by the Directive. Pursuant to new article L121-20 of the French Consumer Code, this right of withdrawal now applies not only to the sale of goods but also to the supply of services (in which case the seven days cancellation period runs from acceptance of the offer of services). Any party contracting in France with a consumer must also be aware of the strict provisions of the French Consumer Code regarding abusive clauses and door-to-door selling.
In the US, the E-SIGN Act contains consumer disclosure and consent provisions that apply whenever information relating to a transaction must be provided to a consumer in writing. The use of an electronic record to provide the consumer with the relevant information will be acceptable, but only if the consumer has consented to the use of an electronic record in lieu of paper.
EU position. The EC Directive on the protection of consumers in respect of distance contracts (97/7/EC, OJ 1997 L144/19) (Distance Selling Directive) has been implemented in all the EU member states surveyed, with the exception of Spain (where it has only been partially implemented). Implementation in these member states (to the extent that is has occurred) has been very similar.
Online suppliers in the EU will need to establish the necessary procedures to ensure that they comply with the requirements of the Distance Selling Directive as implemented in their respective member states.
The Distance Selling Directive is relevant to businesses which seek to conclude contracts with consumers for the sale of goods or services over the internet (it also applies to other forms of distance selling, such as mail order, telephone and fax). It does not apply to b2b transactions, and there are a number of specific exclusions from the scope of the Directive, including contracts relating to financial services or property, and contracts concluded at an auction. In addition, certain key provisions of the Directive are expressly stated not to apply to contracts for the provision of accommodation, transport, catering or leisure services, and contracts under which services are to be supplied on only one occasion.
The main features of the Directive are as follows:
Before entering into a contract, businesses must provide consumers with specified information, set out in a clear and comprehensible manner, including details of the supplier, a description of the goods or services being sold, the price of the goods or services (including all taxes) and the consumer’s right to cancel the contract (where applicable) (Article 4). After concluding a contract, businesses must provide consumers with confirmation in writing “or another durable medium” containing this and certain additional information (Article 5).
Consumers have at least seven days within which to withdraw from a contract (the seven days run from the date on which goods are delivered, or from the date of conclusion of the contract in the case of a supply of services). This period is extended to three months if the supplier does not provide the necessary confirmation of information in writing or another durable medium as required by Article 5. (If in this case the supplier then supplies the information required by Article 5 within the three-month period, the seven-day withdrawal period begins from that moment.) If a consumer exercises the right to withdraw, the supplier has 30 days in which to refund the purchase price (Article 6).
A contract must be performed by a supplier within 30 days from the day following that on which the consumer sent his order to the supplier. If the supplier is unable to perform the contract because the goods or services are not available, the supplier must inform the consumer and refund any sums paid as soon as possible and in any event within 30 days (Article 7).
Rights conferred on consumers pursuant to the implementation of the Distance Selling Directive cannot be waived (Article 12(1)). In addition, member states are required to ensure that the rights conferred on consumers by the Distance Selling Directive will apply notwithstanding any choice of the law of a non-EU country as the governing law of a contract if the contract has a close connection with the territory of one or more EU member states (Article 12(2)).
Steps that may be taken by online suppliers in order to reduce the risks of non-compliance with mandatory statutory laws are set out in the box: Practical steps: complying with mandatory laws.
(See Country Question 8, in relation to b2b contracts, and Country Question 9, in relation to b2c contracts.)
Practical steps: complying with mandatory laws
Companies doing business over the internet should bear in mind that many countries impose their own mandatory laws (especially consumer protection laws) to protect their citizens, regardless of what the terms of a contract may say, and irrespective of what country’s law the parties have chosen to govern the contract. For example, it may not be possible for a supplier validly to exclude liability to French customers to the same extent that it could validly exclude liability to English customers. Similarly, certain types of contract might be perfectly lawful in one country, but illegal in another (for example, “two-for-one” offers are lawful in England, but not in Germany). To deal with this risk, the business should investigate the legal position in all strategically important territories and either:
Use a different set of terms and conditions for customers from particular territories (for example, with different exclusion and limitation of liability clauses); or
Post a notice on the website to make clear that its products and services are only available to customers in certain specified countries (or alternatively, that they are available for customers in all countries except those specified).
Choice of governing law and jurisdiction over disputes
Because internet transactions are not restricted to any one physical location, it can be very difficult to determine which country’s laws will govern the relationship between contracting parties and which country has jurisdiction to hear and determine any dispute. No business wishes to operate with uncertainty as to where potential claims may be heard. Websites are usually accessible from anywhere in the world, so a statement posted on a website could potentially give rise to liability under a host of different laws.
In addition, as has been mentioned above, many countries impose their own “mandatory laws” (for example, consumer protection laws) to protect their citizens regardless of whether the parties have agreed that another law should govern the contract. Therefore, for example, a UK company conducting business over the internet with a customer in another country may find that its contractual relationship with the customer is governed by laws of which it was completely unaware, even if the contract expressly states that English law applies. It may even be that the customer could sue the UK company in the courts of the customer’s own country for breach of those laws.
Businesses should therefore address two important issues:
Which country’s law will govern the online contract?
Which country’s courts or tribunals will have jurisdiction to deal with any disputes that arise?
This note deals with issues of governing law and jurisdiction in relation to contractual matters only. The application of such issues in the case of non-contractual matters is discussed in the Practice Note Enforcement of rights ( www.practicallaw.com/A24250), where the question of how and where to enforce any judgment obtained is also considered.
Contracts made via the internet are often made between parties located and carrying on business in different countries, so it is not always clear which law should apply to resolve disputes between the parties.
A relevant international convention is the 1980 Rome Convention on the Law Applicable to Contractual Obligations (Rome Convention), to which all the pre-accession (1 May 2004) member states are parties. The Rome Convention applies only to contractual obligations. Non-contractual obligations, such as liability for torts, are covered by national rules, although a new Rome II Regulation has been proposed to deal with non-contractual obligations.
The European Commission is considering modernising the Rome Convention by converting it into a Community instrument. This would apply to the existing Rome Convention parties and those member states that acceded to the EU on 1 May 2004.
If a dispute comes before a court within a country that is a party to the Rome Convention, the governing or “applicable” law of the contract will usually be determined by applying the provisions of the Rome Convention. In countries which are not party to the Rome Convention (including the ten countries which acceded to the EU on 1 May 2004), in the absence of any applicable agreement between the countries concerned, the courts in those countries will apply national rules.
The application of the relevant rules to a particular contract will depend on whether:
The contract contains an express choice of law;
The contract contains no express choice of law, but the courts infer an implied choice of law;
The contract contains no express choice of law, and no implied choice of law can be inferred; or
The contract is with a consumer.
Express choice of law
Rome Convention countries
The general rule laid down by the Rome Convention is that the law chosen by the parties (expressly or impliedly) will govern the contract (Article 3(1)). It therefore makes sense for parties doing business online to specify the law that is to govern their contracts, in order to avoid the uncertainties which arise where no express choice is made.
This choice is, however, subject to the overriding effect of any rules of the forum that are mandatory irrespective of the law chosen by the parties and of any mandatory laws of a country with which the contract is closely connected (Article 7(1)). “Mandatory rules” are defined as the rules of law which “cannot be derogated from by contract” (Article 3(3)) and as those rules of a state which are expressed to be overriding, notwithstanding the choice of a foreign law (Article 7(2)). This includes the many laws introduced to protect consumers (see Terms implied by statute and other mandatory statutory provisions). The parties cannot avoid the "mandatory rules" of a state by choosing another law to govern their contract where all of the elements relevant to the contract are connected to that state (Article 3(3)). Consequently, if all of the elements of the contract are, for example, connected with England, the mandatory rules of England will apply, even if the parties have made an express choice of a foreign law.
Countries which are not party to the Rome Convention
In the absence of any applicable agreement between the countries concerned, the courts will apply their national rules.
In Australia, Canada and the US parties are free to make an express choice of governing law. In Brazil, however, an express agreement on governing law will not be recognised.
(See Country Question 10.)
Implied choice of law
Rome Convention countries
If there is no express choice of law, the courts will infer an implied choice of law if this can be “demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case” (Article 3(1), Rome Convention). For example, if a contract is silent as to the governing law of the contract but states that any disputes must be resolved in the courts of a particular Convention country, a court is likely to infer that the parties intended the law of that country to apply to the contract.
Countries which are not party to the Rome Convention
In the absence of any applicable agreement between the countries concerned, the courts will apply their national rules.
Applicable law in absence of express or implied choice
Rome Convention countries
If there is no express choice of law, and it is not possible to demonstrate with reasonable certainty an implied choice of law, the Rome Convention provides that the contract is governed by the law of the country with which it is most closely connected (Article 4(1)). The Convention introduces a series of presumptions to help determine the most closely connected country.
The basic presumption is that the contract is most closely connected with the law of the country of residence of the party who undertakes to perform the obligation which is "characteristic" of the contract as a whole (or, in the case of a company, the place of central administration) (Article 4(2)). The "characteristic" obligation of a contract is not the payment of money, but rather the performance for which payment is due.
However, the basic presumption does not apply if:
The “characteristic” obligation cannot be determined; or
It appears from the circumstances as a whole that the contract is more closely connected with another country (Article 4(5)). Relevant connections include the place of residence or business of the parties, the place of performance of the contract, the place of contracting, and the location of the subject matter of the contract.
In some circumstances, the courts of a Convention country may decline to apply the law specified by the Rome Convention, for example if the application of a rule of the applicable law would be manifestly incompatible with the public policy of that country (Article 16). Matters of public policy of EU member states include the competition rules of the EC Treaty, and the principles of free movement of goods and services, and freedom of establishment.
Countries which are not party to the Rome Convention
In the absence of any applicable agreement between the countries concerned, the courts will apply national rules.
In Brazil, for example, the governing law is that of the place where the relevant obligations were established. In relation to a contract, the obligations are said to be “established” in the place where the person proposing the transaction resides (Introduction law of the Brazilian Civil Code).
Special rules for consumer contracts
Rome Convention countries
The Rome Convention provides that a choice of law made by the parties to a contract cannot deprive a consumer of the protection afforded to him by the mandatory rules of law of the country in which he has habitual residence if:
In that country the conclusion of the contract was preceded by a specific invitation addressed to him or by advertising; and
He had taken in that country all the steps necessary on his part for the conclusion of the contract. (Article 5.)
Countries which are not party to the Rome Convention
In the absence of any applicable agreement between the countries concerned, the courts will apply their national rules.
In Australia, for example, contracting parties are free to make an express choice of governing law, but this choice is subject to the overriding effect of any mandatory consumer rules, including those in the Trade Practices Act. Similarly in Brazil, the Consumer Protection Code is a law of public order and, as such, the Brazilian courts will apply it in any dispute involving a Brazilian party, regardless of any choice of law provision in the agreement between the parties.
(See Country Question 11.)
Jurisdiction over disputes
When a dispute arises, it is necessary to consider which courts have jurisdiction to hear and determine the outcome of the dispute.
In Europe, the following international measures are relevant:
Brussels Regulation. EU member states other than Denmark (but including the ten countries which acceded to the EU on 1 May 2004) are subject to the EC Brussels Regulation (Regulation 44/2001 of 22nd December, 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, OJ L12 16 January 2001) (Brussels Regulation). This determines which member state’s court (if any) has jurisdiction to hear a dispute and the circumstances in which an order made by the court of one member state must be recognised and enforced by the court of another member state. The Brussels Regulation applies in civil and commercial matters only. Various matters (such as arbitration disputes) are specifically excluded. The Brussels Regulation took effect on 1 March 2002 and replaced the 1968 Brussels Convention (see below) except as between Denmark and the other EU member states. The changes introduced by the Brussels Regulation relate mainly to obligations in consumer contracts (see Special rules for consumer contracts), and the Brussels Regulation and the Brussels Convention are the same in most other respects.
Brussels Convention. As mentioned above, the 1968 Brussels Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters (Brussels Convention) now only governs issues of jurisdiction and enforcement of judgments as between Denmark and the other EU member states.
Lugano Convention. The 1988 Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Lugano Convention) governs issues of jurisdiction and enforcement of judgments as between the EU member states and the European Free Trade Area (EFTA) states (other than Liechtenstein). The EFTA states are Iceland, Liechtenstein, Norway and Switzerland. The Lugano Convention is, so far as material, identical to the Brussels Convention.
E-Commerce Directive. The E-Commerce Directive is also relevant, although only to a limited extent, as Article 1(4) of the Directive states that it “does not establish additional rules of private international law nor deal with the jurisdiction of the Courts”.
Beyond Europe, the draft Hague Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters (draft Hague Convention) deals with the same issues as the Brussels Regulation, but over a much wider geographical area: 64 countries are members of the Conference.
The application of the relevant rules to a particular contract will depend on whether or not the contract contains an express choice of jurisdiction, and whether the contract is with a consumer.
(See Country Question 12.)
Express choice of jurisdiction
Brussels Regulation countries
Under the Brussels Regulation, if one or more of the parties is domiciled in an EU member state and the parties have agreed that a court of a member state is to have jurisdiction to settle disputes, that court will have jurisdiction (Article 23). This jurisdiction will be exclusive unless the parties have agreed otherwise. A court will usually uphold such a jurisdiction clause provided that the agreement conferring jurisdiction is in writing or evidenced in writing. Any communication by electronic means which provides a durable record of the agreement is equivalent to “writing” (Article 23(2)).
If an agreement conferring jurisdiction to settle disputes on the court of an EU member state is concluded by parties, none of whom is domiciled in a member state, the courts of other member states do not have jurisdiction unless the chosen court declines jurisdiction (Article 23(3)). If a court declines jurisdiction, the courts of any other member state may then assume jurisdiction based on their own national laws.
The choice of jurisdiction by the parties to an agreement may be expressed as exclusive or non-exclusive. A choice of jurisdiction which is not expressed to be exclusive or non-exclusive will have effect as an exclusive choice of jurisdiction (Article 23(1)).
Countries not subject to the Brussels Regulation or the Brussels or Lugano Conventions
In disputes involving defendants domiciled in countries which are not subject to the Brussels Regulation or the Brussels or Lugano Conventions, until such time as the draft Hague Convention is concluded the position will depend on any agreement as to jurisdiction made between the countries concerned or, in the absence of such an agreement, on national rules. The rules proposed under the draft Hague Convention are broadly similar to those under the Brussels Regulation.
(See Country Question 13.)
No express choice of jurisdiction
Brussels Regulation countries
The general rule in the absence of an express choice of jurisdiction is that a person domiciled in an EU member state should be sued, whatever the person’s nationality, in the courts of that member state (Article 2(1), Brussels Regulation).
The domicile of a person or an entity (for example, a corporation) is determined by the domestic laws of the national court (Article 59). A company or other legal person is domiciled at the place where it has its statutory seat, central administration or its principal place of business (Article 60(1)).
An issue for those conducting business over the internet is whether a website is a “place of business”. The E-Commerce Directive provides that the place of establishment of a company providing services via a website is the place where it pursues economic activity (that is, the centre of its operations), rather than the place at which the technology supporting the website is located or the place at which the website is accessible (Recital 19). The E-Commerce Directive also provides that the presence and use of the technical means and technologies required to provide an information society service do not, in themselves, constitute an establishment of the provider. (This view has also been adopted by the draft Hague Convention.) On this basis, it seems clear that a website or server presence alone could not be considered a “place of business”. If a business has several places of establishment, it is important to determine from which of those the service concerned is provided (or, where this is difficult, the place where the business has the centre of its activities relating to this particular service).
There are a number of exceptions to the general rule, which may permit proceedings to be brought elsewhere. The most important of these are:
Contract. In addition to the right to bring proceedings in the courts of a defendant’s domicile, a claimant has the option of bringing a contractual claim in the courts of the EU member state where the “obligation in question” was to be performed (Article 5(1)(a)). (Article 6 of the draft Hague Convention gives claimants the same option.) Unless otherwise agreed by the parties, the place of performance of the “obligation in question” is:
in the case of the sale of goods, the place in a member state where, under the contract, the goods were delivered or should have been delivered; and
in the case of the provision of services, the place in a member state where, under the contract, the services were provided or should have been provided (Article 5(1)(b), Brussels Regulation).
This determination of the place of the “obligation in question” applies regardless of the nature of the obligation, even where the obligation is the payment of the financial consideration for the contract. It also applies where the claim relates to several obligations.
Tort. A person may be sued in tort (for example, negligence), delict or quasi-delict in the member state where the harmful event occurred or may occur (Article 5(3), Brussels Regulation). The European Court of Justice has held that the place where the “harmful event” occurred could either be the place of the event giving rise to the damage or the place where the damage occurred (Handles Keekerij GB Bier BV v Mines de Potassse d’Alsace SA (1976) ECR 1735).
Branches, agencies or other establishments. In a dispute arising out of the operations of a branch, agency or other establishment which is in a different state from the head office of the business, the courts of the state in which the branch, agency or other establishment of the defendant is situated will have jurisdiction (Article 5(5)).
Applying the same reasoning as described above in relation to the issue of whether a website can be said to be a “place of business”, it seems clear that a website could not be considered a “branch, agency or other establishment”.
Consumer contracts. The special rules which apply to consumer contracts are discussed separately under Special rules for consumer contracts below, although in this context it is useful to note the provision that where a consumer enters into a contract with a party who is not domiciled in the member state, but has a branch, agency or other establishment in one of the other member states, that party shall, in disputes arising out of the operations of the branch, agency or other establishment, be deemed to be domiciled in that state (Article 15(2)).
Countries not subject to the Brussels Regulation or the Brussels or Lugano Conventions
In disputes involving defendants domiciled outside the countries which are subject to the Brussels Regulation or the Brussels or Lugano Conventions, until such time as the draft Hague Convention is concluded the position will depend on any agreement as to jurisdiction made between the parties or, in the absence of such an agreement, on national rules.
In Brazil, for example, the courts of the place where the relevant obligations were established have jurisdiction. In relation to a contract, the obligations are said to be “established” in the place where the person proposing the transaction resides (Introduction law of the Brazilian Civil Code).
In Canada, in the context of online disputes, the common law courts rely on a ’passive site versus active site’ test to determine which court should have jurisdiction. A ’passive’ site is a website that is accessible in Canada and simply provides information. A passive site will not generally be subject to the laws or courts of Canada. ’Active’ sites are websites that involve significant interaction with Canadian users and can fall under the jurisdiction of the courts in the countries in which the site can be accessed. In a case involving two Canadian-based litigants who had accessed the defendant’s ’passive’ site operated in the US, the British Columbia Court of Appeal held that the defendant’s passive internet presence was insufficient to give the court jurisdiction - the fact that a resident of a particular Canadian jurisdiction could access the website was not enough (Braintech v Kostiuk, 1999 BCCA 0169).
Special rules for consumer contracts
Brussels Regulation countries
As the typically weaker parties to a contract, consumers receive special protection under the Brussels Regulation. For the purpose of the Regulation, a consumer is defined as a person acting outside his trade or profession (Article 15(1)). There are special provisions in respect of:
Contracts for the sale of goods on instalment credit terms (Articles 15(1)(a));
Loans payable by instalments or any other form of credit made available for financing the sale of goods (Articles 15(1)(b)); or
Any contract that has been concluded with a person who pursues commercial or professional activities in the member state of the consumer’s domicile or who, by any means, directs such activities to that member state or to several states including that member state, and the contract falls within the scope of such activities (Articles 15(1)(c)).
In these cases, a consumer can choose to sue the other party to the contract either in the courts of the place in which the consumer is domiciled or in the courts of the member state in which the other contracting party is domiciled (Article 16(1)). However, if the other contracting party wishes to sue the consumer, it must bring proceedings in the courts of the member state where the consumer is domiciled (Article 16(1)).
This ’protective’ jurisdiction under Article 15(1)(c) differs from the corresponding provision under the Brussels Convention which requires, for the protective jurisdiction to apply, that a consumer actually took the steps necessary for the conclusion of the contract in the member state in which it was domiciled (Article 13(3)(b), Brussels Convention). Under Article 15(1)(c) of the Brussels Regulation, the protective jurisdiction can apply to contracts concluded in a member state other than that in which the consumer is domiciled. This removes a problem with the corresponding provision under the Brussels Convention, namely that a consumer cannot rely on this protective jurisdiction when he has been induced, at the contractor’s instigation, to leave his home state in order to conclude the contract.
The removal of the condition in the Brussels Convention that the consumer must have taken the steps necessary for the conclusion of the contract in his home state has significant implications for contracts concluded online. For such contracts, the place where the consumer takes these steps may be difficult to determine, and they may in any event be irrelevant in creating a link between the contract and the consumer’s home state. Hence, in the view of the European Commission, the need for the new approach under Article 15 of the Brussels Regulation according to which the contractor creates the necessary links with the consumer when “directing” his activities towards the consumer’s state (Proposal for the Brussels Regulation (599PC0348) (COM (1999) 348)).
Although the introduction in Article 15(1)(c) of the tests of a person who “pursues commercial or professional activities in the member state of the consumer’s domicile” or who “directs such activities” to that member state is designed to make clear that the protective jurisdiction applies to consumer contracts concluded via an interactive website accessible in the state of the consumer’s domicile, the precise scope of the phrase “directs such activities” remains unclear. The Commission has stated that the fact that a consumer simply had knowledge of a service or the possibility of buying goods via a passive website accessible in his country of domicile does not trigger the protective jurisdiction (Proposal for the Brussels Regulation, above), but there is no firm statement of the law in this area. A solution that has been suggested is for new legislation to provide that the mere fact that a website is accessible from a particular country should not of itself amount to the directing of the contents of that website towards consumers in that country.
It is clear, therefore, that Article 15 of the Brussels Regulation gives rise to concerns for businesses trading online within the EU, as they face potential litigation in every member state unless they state clearly on their websites that their products or services are only intended for consumers domiciled in a specified member state or states.
Countries that are not signatories to the Brussels Regulation or the Brussels or Lugano Conventions
The draft Hague Convention applies a similar though not identical approach to that of the Brussels Regulation in protecting the interests of consumers. A consumer may bring a claim in the courts of the signatory state in which he is habitually resident if:
The conclusion of the contract on which the claim is based is related to trade or professional activities that the defendant has engaged in or directed to that state, in particular in soliciting business through means of publicity; and
The consumer has taken the steps necessary for the conclusion of the contract in that state [emphasis added] (Article 7, draft of 30 October 1999).
In addition, the national laws of many countries usually contain special provisions designed to protect the interests of consumers in matters of jurisdiction.
(See Country Question 14.)
Robbie Downing is a partner at Baker & McKenzie, London.