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A Consumer-Neutral Look at Jurisdiction in E-Commerce

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About The Author

Matt Bogdan (Former EU & International Law Editor)

Matt graduated with an LLB (2:1) from Durham University in July 2014. Most recently, he has been assisting with research on comparative company law at the Durham Law School. Matt is primarily interested in the TMT sector, but has also been involved in matters of public international law through Durham United Nations Society.

The past decade has seen a rapid development of business-to-consumer (B2C) electronic commerce, with the UK being at the very forefront of the online shopping “hype train”. Contrary to what one could reasonably suspect when comparing the size of UK’s e-commerce market to that of China, US or Germany, the UK is actually leading the world both in quantity of e-transactions and in per capita online spending. On the EU-level, things are not looking shabby either. E-commerce in Europe grows at a comfortable rate of 18% per annum and around 60% of EU consumers shop online. From the standpoint of a European single market enthusiast, however, the imbalance between consumer engagement in domestic and in cross-border e-commerce remains a concern – only 10% of European e-shoppers utilise the EU internal market and engage in cross-border e-commerce, as opposed to the overwhelmingly preferred domestic e-commerce.

This evident disparity calls into question, amongst other things, the existing legal framework on establishing jurisdiction in B2C e-transactions. Jurisdiction laws, which gain relevance in conflicts over commercial contracts, are key to promoting intra-EU commerce because they allow conflicting parties to identify the appropriate adjudicative processes and thus often affect the outcomes of legal proceedings.

Finding the Right Legislation

If the high level of fragmentation of the EU legal system was not a matter of fact, one could reasonably expect the jurisdiction laws on e-commerce to be contained in the E-Commerce Directive (ECD). Article 1(4) of the ECD, however, plainly states that the ECD ‘does not deal with the jurisdiction of the Courts’, which leads us to the so called ‘Brussels Regime’, a selection of European legislation on jurisdiction dating back to 1968. The most fundamental modernisation of the ‘Brussels Regime’ came in 2001 (notably, a year following the enactment of the ECD) in the form of the ‘Brussels I Regulation’ (Brussels I). Rather unsurprisingly given the timeframe, Brussels I was not drafted specifically with e-commerce in mind and instead contains “technology-neutral” provisions, which do not distinguish between physical and electronic variations of commerce. Another major revamp came into force in January 2015 under the rather unimaginative title ‘Recast Brussels Regulation’ (Recast Brussels). While the European legislators should certainly be commended for their efforts in tackling ‘torpedo actions’ and expanding the scope of the Brussels Regime to non-EU defendants (virtually every UK law firm has published a summary of the changes so feel free to choose your favourite, otherwise King & Wood Mallesons has a good one), for purposes of regulating B2C e-commerce, Recast Brussels has hardly delivered. The basic jurisdictional rules remain largely intact in their characteristic “technology-neutral” fashion, while Section 4 of Brussels I, directly addressing the relationship between consumers and businesses, attracted negligible alterations. Given that we are unlikely to see another major legislative update to the Brussels Regime any time soon and that the EU officials expressed a lack of interest in updating the ECD itself, it appears safe to infer that the EU legislators are content with the way jurisdictional issues in e-commerce are currently addressed in the EU law, while in fact, as it will be argued, they should not be.

Two preliminary remarks are due before moving on. First, due to limited space, no technical distinction between different types of e-commerce will be provided and instead the most popular form of e-commerce will be assumed, namely a B2C clickwrap contractual agreement concluded on commonly accessible Internet websites such as amazon.co.uk. Second, while in general the EU seems to lean towards a “pro-consumer” approach to law, this article will opt for a balanced approach that recognises the interests of both consumers and businesses.

Jurisdiction in the Online World

While the need for effective regulation of online commercial dealings is a rather self-evident proposition, it is debatable whether the existing “technology-neutral” legislation, ignorant of the differences between physical and online commerce, can be effective in the Internet-based environment. Some academics plainly assume its adequacy, whereas others, like Matthew Burnstein, suggest that private international law (which the Brussels Regime is an example of) should be adapted to the realities of the Internet. The latter position appears more convincing because legal rules cannot be understood as consisting of only normative determinations, but also of factual assumptions about the nature of the world upon which those determinations are based. Accordingly, traditional legislation on resolving commercial disputes, such as Recast Brussels, depends on geographical localisation to determine jurisdiction. This, however, becomes problematic in the world of borderless Internet, where parties transacting online cannot control the geographical flow of their content and are often unable to identify other transacting parties’ physical location.

On a theoretical level, since crossing State territorial borders by individuals or businesses serves as an explicit notice of entering a new regulatory space, it may be argued that online shopping can deprive the involved parties of such notice. For example, from the consumers’ perspective, the e-commerce retailer’s website ‘www.gunnars.co.uk’ (hosted on a British ‘.co.uk’ domain, based in the US, utilising payment and support systems from Norway) does not seem to provide any notices designating the relevant regulatory space. Accordingly, it may be deduced that subjecting individuals who engage in e-commerce to foreign jurisdictions is inherently unfair given the relative unavailability of notice.

Naturally, common sense seems to dictate that the parties wishing to accept e-transactions should familiarise themselves with the relevant laws beforehand. Uta Kohl, however, dismisses this with reference to the concept of the rule of law, arguing that the parties’ ability to take notice of the new regulatory space is subject to the existence of clear, stable and prospective rules on jurisdiction, which inherently cannot be satisfied in the Internet environment. Though sensible, presumptions of ‘constructive notice’ are unrealistic and unworkable in e-commerce since neither consumers nor most e-commerce small and medium-sized enterprises (SMEs) will have the financial and administrative capacity to familiarise themselves, and stay compliant with, numerous potential jurisdictions.

It therefore follows on a pragmatic level that applying jurisdiction laws based on the notion of territory to Internet-based commercial disputes may expose the parties involved to an excessive amount of potentially relevant foreign jurisdictions. Although it does not solve the inherent problem, James Boyle has suggested that creating artificial borders through private filtering and control mechanisms may support the legislative framework and thereby make it more effective. Businesses may introduce a fillable questionnaire designed to identify the consumers’ country of origin. Likewise, consumers can take advantage of Article 5 ECD, which requires sellers to provide extensive information on their enterprise to consumers before contracting. Businesses may also attempt to bypass the Brussels Regulation by including a choice of forum clause in their terms and conditions. While all of these forms of self-regulation lead to the creation and development of an ‘electronic lex mercatoria’, and may ultimately be highly beneficial to e-commerce, they still do not solve the apparent problem of applying geographically-based regulations to commercial relations concluded in the cyberspace.

Both the theoretical and practical issues arising from the unsuitability of traditional jurisdiction laws to e-commerce highlight the importance of foreseeability, an essential element of any effective legal framework. Section 4 of Recast Brussels, which deals with ‘consumer contracts’, considered below, is what in European legislators’ minds ensures this ever needed certainty.

‘Consumer Contracts’ in E-Commerce

The application of Section 4 of Recast Brussels, which affords ‘consumers’ additional legal protection, is subject to the existence of a ‘consumer contract’ in commercial dealings. Thus, the status of a ‘consumer’ is of vital importance because it invokes the protective provisions designed to mitigate the traditional perception of consumers as the weaker parties to a contract. As is usually the case in the EU, most Directives adopt a definition of ‘consumer’ suitable for their own purposes and consequently no unified definition exists in the Community, which reflects the high level of fragmentation of the EU legal system. Nevertheless, for the purposes of Recast Brussels, a ‘consumer’ may be reliably understood as a natural person acting for purposes that are outside of his trade or profession (criterion a) and who is ‘economically weaker and less experienced in legal matters [than the business party]' (criterion b). Importantly, the criteria defining a consumer under Section 4 must be interpreted in the light of the objectives of the Brussels Regime. Some academics like Joakim Oren argue that the teleological interpretation of Brussels Regulation should be concerned with the protection of consumers, but this approach implies that Section 4 should be given precedence over the overall “voice” of the entirety of the legislation. It is key to be mindful that Section 4 essentially establishes a derogation from the basic jurisdictional principle enshrined in Article 2, namely that, by default, jurisdiction is designated by the defendant’s domicile (a principle largely favourable for businesses). Only the existence of a ‘consumer contract’ can invoke Section 4 and override Article 2. Thus, Section 4 should be interpreted strictly and so should be the criteria for identifying a ‘consumer’.

As regards the former criterion a, the European Court of Justice (ECJ) in Benincasa v Dentalkit ruled that the status of a purchaser should be ascertained with reference to the ‘nature and aims of the contract’, instead of the subjective situation of the person concerned. Accordingly, there exists a risk for purchasers of being denied the protection of Section 4 if they qualify as ‘a business’. This can happen when a person obtains goods for mixed usage or for professional usage that is outside of his professional speciality. The concept of ‘hybrid sellers’, though not novel, has become particularly problematic in e-commerce. Christine Riefa provides the example of eBay users who often use this online trading service as a second source of income, thereby blurring the distinction between consumers and businesses.

Further, since the barriers to e-commerce market entry have been lowered through the industrialisation of IT (notably, the development of cloud computing and of alternative funding mechanisms such as crowdfunding), it has become easier for individuals to set up profitable start-ups as hobbies. This increasingly blurred distinction between consumers and businesses could be resolved by having the principal purpose behind the purchase determine the overall nature of dealings. Accordingly, if goods were obtained primarily for business purposes, the transaction would fall outside of Section 4.

This leads us to the inevitable consideration of what ‘acting in course of business’ actually means. While the English law provides that transactions merely incidental to business activity are not done in the ‘course of business’ (R & B Custom Brokers), the ECJ has primary competence in interpreting the Brussels Regulations and so Johann Gruber v Bay Wa is the leading authority. The ruling laid out a 3-step test assessing whether a contract has a non-negligible business purpose and asserted that if there is no sufficient evidence to indicate a non-negligible business purpose, then the contract will fall under the protective provisions. The test is therefore quite strict - merely a non-negligible business purpose precludes the application of Section 4. Interestingly, AG Jacobs in his Opinion in that case advocated a prima facie exclusion of protection for ‘hybrid sellers’ unless the business purpose is insignificant, which is an even stricter test.

In accordance with Johann Gruber, the steps require consideration of the objective circumstances surrounding contract formation, the commercial party’s awareness of the purpose of the contract and their reasonable lack of knowledge about the intended private use by the other party. While the ruling provides a mechanism for identifying ‘consumer contracts’, it has not escaped criticism (see for example Edoardo Gambaro’s essay) for being too vague and potentially overly dependent on the human and financial resources of national courts with respect to the scope of investigation necessary for conducting the test. This could possibly produce inequalities across the Community and lead to the “trademark” European by-product – forum shopping practices. The ECJ approach could result in incidental online traders, such as some eBay users, being deprived of the protection afforded by Section 4 and so the English law approach in R&B Custom Brokers, should be preferred.

From a risk management perspective, it also appears reasonable to argue that the risk of a false negative, i.e. consumer being denied consumer protection, outweighs the risk of a false positive, i.e. business being given protection erroneously, because in the latter case the subsequent, regular transactions will automatically correct the mistake and deprive the business of misplaced protection.

The latter criterion b, namely the weaker bargaining position of consumers, originates from the traditional perception of consumers as lacking the financial resources and experience to bargain on equal footing with businesses. This perception is evidently shared by the EU authorities, who seem to have dropped everything in their “ultimate quest” of improving and harmonising consumer protection in the EU, with the new Consumer Rights Directive (in force since June 2014) being their most recent achievement. While the objective itself is beyond doubt a noble one, it can be argued that at least in the online environment, the established dichotomy in bargaining positions has been challenged. Basing her argument on the famous ‘declaration of cyberspace independence’ coined by John Perry Barlow, Amy Bomse observed that ‘privileges or prejudices’ in the cyberspace are hindrances to the functioning of a competitive market. While this is rather an overstatement, it is difficult to deny a shift in the classic “B2C status quo”.

The usual argument is that businesses initiate and coordinate the entire transacting process, in which consumers are merely passive actors. Nevertheless, in the e-commerce environment, it is actually the consumer who browses and compares various websites, and has the ability to initiate and control the conclusion of a clickwrap agreement. Upon initiating the contract, he also receives extensive information about the seller’s business (courtesy of the ECD), which greatly exceeds the information provided to traditional consumers in physical commercial relations and puts a heavy burden on businesses, ultimately leading to high levels of non-compliance.

On the other hand, consumers are still usually subject to standard form ‘adhesion contracts’, over which they have no power to negotiate. But complaining about them would be synonymous to being ignorant of the realities of modern competitive markets. Businesses’ ability to adjust to their customers’ needs is conducive to their survival (believe it or not, this applies even to "customer-favourite" Ryanair). It follows that consumers have a real ability to improve their position through mass-actions, bad publicity or boycotts.

Moreover, e-commerce consumers are also considered to be more rational and savvy, which makes opposition to abusive sellers more likely. So while it is undeniable that consumers cannot directly affect the terms of adhesion contracts since it would disturb the smooth running of business, they may still indirectly influence the sellers. In this way the standardised terms become bargaining items themselves.

Another popular argument is that consumers are ‘weaker’ parties because they generally do not read the online terms and conditions available on e-commerce websites, however this does not cause a prima facie inequality of bargaining position, but merely demonstrates an ill-advised practice of consumers with equal bargaining power.

The consumer community also points to the issue of economic imbalances, whereby businesses are financially better prepared to deal with the risks and costs associated with being sued in a foreign jurisdiction, especially given that e-commerce provides sellers with an unprecedented access to a significantly wider market than in the traditional ‘brick and mortar’ commerce. This, however, holds true only in relation to highly profitable, large e-businesses, whereas for SMEs the onus of dealing with multiple jurisdictions usually represents an excessive financial burden. Naturally, the “harmonising spirit” prevalent in the EU law-making, coupled with direct applicability and direct effectiveness of EU legislation, lessens this burden since the discrepancies between national legal systems are gradually diminishing. In practice, however, any prudent business will nonetheless seek legal advice and will always incur some administrative costs, such as for the translation services.

There exist, however, some hardly refutable arguments indicating inequality, namely that most e-commerce transactions commence with the prepayment by the consumer. Hence, while some call for a general abandonment of the ‘unequal bargaining position’ concept in Internet-based commercial dealings, it appears more reasonable to suggest that the perceptive preoccupation of the EU legislators with protection of consumers based on their “weaker” position should be adjusted to the modern realities of e-commerce.

Concluding Thoughts

Commerce and the Internet make a great couple. Never before have consumers had the access to such a great variety of goods and never have sellers been able to access consumer bases of this scale. As is usually the case with regulating disruptive technologies, law always has to play catch-up. In relation to e-commerce, at least in the EU, there is still work to be done. The existing, geographically-based legislation that represents the stereotypical, uninformed customer entering a shop for the first time and feeling lost, may not be the way to go into the future. With online shopping only becoming more popular, the need for an all-encompassing and specific piece of legislation targeted at e-commerce will become increasingly apparent.

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Tagged: Commercial Law, Consumer Rights, European Union

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