Online traders fight contracts battle

Date: 29/07/1999

By Peter Chapman

If the business gurus are right, the Internet is set to become the business medium of the 21st century.

Fortunes are already being made in the US as companies old and new push back the frontiers of commerce or adapt to the online revolution.

But European businesses fear that the electronic commerce industry on this side of the Atlantic could be held back for 20 years by plans for new EU rules which, they claim, will bury firms in legal red tape.

To make matters worse, they believe that the European Commission may be planning to export its plans to the world stage when online consumer protection guidelines are finalised next year at the Paris-based Organisation for Economic Cooperation and Development (OECD).

At the centre of the debate are two complex new pieces of draft legislation which affect both the way laws apply to online contracts and the marketing efforts of e-commerce players.

The first skirmishes centred on Commission plans to adopt a newly updated international legal treaty known as the Brussels convention as a legally binding EU regulation.

Mike Pullen, Brussels-based electronic commerce law expert with UK firm Dibb Lupton Alsop, claims the move, announced by the Commission earlier this month, unfairly targets the electronic commerce market and threatens to deter smaller companies from venturing into cyberspace.

The the Brussels convention allows consumers to take contractual disputes with foreign firms to court in their own country, provided that the company actively "directed" its efforts towards the "passive" customer, for example through a mail shot.

But changes to the convention which could soon become EU law mean that a company which simply sells its products through a Web site would be deemed to be actively "directing" its activities towards customers in all EU member states - whether or not the company had set out to sell to foreign customers - simply because they were capable of accessing the site from their computers.

The real legal headaches for e-commerce firms begin when the Brussels convention is combined with another international agreement governing the applicable law for contracts known as the Rome convention.

This allows a court based in the consumers' home country to "tear up the contract" and demand that its own national laws are used to settle international disputes if the contract concerned was based on the law of a country with lower consumer protection rules.

"Effectively that means a company could not insist on using the law of the Isle of Man, for example, where consumer protection rules are more or less non-existent," explains Pullen, who is leading the industry lobbying campaign against the proposals.

However, it also means that a court in France, where there is a requirement for all contracts to be written in French, could declare an e-commerce contract written in English, under English law, null and void. The result is that all the company's standard form contracts would be illegal in France.

Firms could face similar local problems across the EU, and while large companies could employ teams of lawyers to draw up contracts tailored to each market, critics say the burden on small and medium sized enterprises doing business online would be tremendous.

Worse still, they add, is a separate plan hatched last year by Austria while it held the EU presidency to add to the 1980 Rome convention - with calamitous implications for the EU's 'single online market'.

'Rome II', which is also likely to be proposed as a draft regulation in the autumn, will effectively force companies to comply with general rules - totally unrelated to contracts - in any of the countries where their online services can be accessed by potential customers.

"For example," warns Pullen, "that would mean that a UK company offering a 'two for the price of one' discount under English law may fall foul of German unfair competition law under which such promotions are illegal".

If firms did not follow the rules, they could be forced to stop selling, be fined or, ultimately, even bankrupted.

Critics of the plan warn that this would be the total opposite of the approach taken in the draft electronic commerce directive launched last year by outgoing Internal Market Commissioner Mario Monti and would pander to protectionist tendencies within the EU who oppose the free movement of goods which the Internet promises.

The thrust of this proposed directive, which is currently being scrutinised by EU governments and MEPs, is to apply single market rules to the fledgling e-commerce market, allowing a company based in one member state to market its products in another as long as it meets the laws of its 'home' country.

"Rome II is a real fright. If the Commission were to proceed with that, we would be in terrible trouble," warns Lionel Stanbrook, deputy director-general of the UK's Advertising Association.

Such fears are echoed by single market officials within the Commission. "If this goes through, it would blow a hole right through the e-commerce directive," said one.

But the European consumers lobby group BEUC has welcomed the plan to give all online customers the right to take legal action in their own country.

BEUC director Jim Murray complains that industry is pressing the Commission to force consumers seeking redress to take expensive court action in a foreign and unfamiliar legal system in another country, and in a foreign language. "This amounts to denying consumers access to justice. This is not what consumers want from a single market," he insists.

But Pullen maintains that the consumer protection argument is misplaced. "The Brussels convention means your local court is allowed to rule on a case. But even if it finds in your favour, you must engage foreign lawyers to get that judgement enacted in the country where your opponent is based," he points out.

The upshot, he claims, is consumers do not use the Brussels or Rome conventions as the basis for taking legal action in cases involving conventional trade, let alone for that done over the Internet.

That, he says, is because the legal costs (which are likely to run into thousands of euro) are too high to make it worth pursuing action over the small purchases most consumers make on the Internet. Only large companies or organisations would find it economically worthwhile to exercise their rights.

Moreover, argue internal market officials, the e-commerce directive already includes proposals to improve rights of redress for consumers through voluntary schemes run by industry. These are designed to avoid the need for litigation in the first place.

While the current debate is focusing on the technicalities, European employers' federation UNICE is also bitterly angry about the outgoing Commission's failure to consult industry on the issue.

UNICE company affairs expert Hugo Lueders said the organisation would consider launching legal action in the European Court of Justice if member states adopt one or both of the regulations.

He said that the Commission had ignored its obligation to consult industry - which is enshrined in the Amsterdam Treaty - and gone ahead with plans for the Brussels convention regulation on the strength of a call for such a proposal from EU justice and home affairs ministers.

He added that its plan for a belated hearing with interested parties in September is too little, too late. "The whole thing has been under cover. Brussels must break this tradition of secrecy," he insisted.

For a supposedly dynamic industry, the harsh truth is that the e-commerce world was caught napping on this issue.

One of the problems, say e-commerce lawyers, is the complexity of the subject, which often confuses legal practitioners new to the topic - let alone lobbyists trying to influence the Commission, Parliament and EU governments.

But Stanbrook claims all is not yet lost and that disaster can be averted if commerce departments in member states finally wake up to what their colleagues in the legal departments have agreed to.

"EU legislation often has to go through a phase of fantasy before people understand the issues," he says. "However, I am pretty positive we will get a satisfactory solution somewhere in the middle."

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