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APPLICABLE LAW AND JURISDICTION IN
ELECTRONIC CONTRACTS II
e-Business
Issue
By Teresa Rodríguez de las Heras Ballell
Associate Professor in Commercial Law
at the Carlos III University of Madrid (Spain)
www.emarketservices.com
January 2011
Abstract
One of the main consequences of the ubiquitous usage of Internet as a means to conduct
business has been the progressive internationalization of contracts created to support such
transactions. As electronic commerce becomes International commerce, the reality is that
commercial disputes will occur creating such questions as: "In which country do I bring
proceedings?" and "Which law is to be applied to solve disputes?"
Associate Professor in Commercial Law at the Carlos III University of Madrid, Spain, Teresa
Rodríguez de las Heras Ballell, has created a three-part series of articles to bring increased
clarity to such issues. This is the second one, in which she explains the choice of law
applicable to contract, and some special cases such as in absence of agreement, law
applicable to non contractual obligations and to performance of information society services.
Choice of law applicable to contract
The choice of law applicable to an e-contract is governed, in the first place, by the autonomy
of the parties, which may freely choose the law they wish to govern all or a part thereof. This
freedom of contract is particularly broad in the case of B2B e-contracts, because it is not
subject to a series of conditions that apply to consumer contracts, which may result in a
choice of law clause in a B2C contract being found to be abusive1.
Such choice of law may be express, or unequivocally derived from the terms of the
agreement or the circumstances of the case. When there is no express clause, the fact that
the parties, although not explicitly specifying the law to govern the contract, have given one
or more jurisdictional bodies exclusive jurisdiction for such disputes as may arise between
the parties may be used as one of the relevant factors when determining whether the choice
of law may be clearly derived from the terms of the contract.
The parties, in exercise of their freedom of choice, may even change the law initially
applicable to the contract, after it has been entered into. Such amendment will govern
matters arising thereafter related to the contract, although it will not affect the formal validity
of the contract. Nor, of course, may it prejudice third parties.
1
As an example of this varying treatment of B2B and B2C contracts, in the Spanish legal system
Royal Legislative Decree 1/2007, the Recast Text of the General Consumers and Users Protection Act
and other Supplementary Laws, in its article 90 provides that:
"Also abusive are clauses that provide for:
1. Submission to other than consumer arbitration, unless it involves an institutional arbitration
body created by the legal rules for a sector or a specific case.
2. Express submission to a judge or tribunal other than the one corresponding to the
consumer or user's domicile, the place of performance of the obligation or the place the
asset, if real estate, is located.
3. Submission of the contract to a foreign law as regards the place where the consumer or
user makes its purchase decision, or where the business acts to promote contracts of the
same or a similar kind."
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Nevertheless, the free choice by the parties of a foreign law as the law applicable to the
contract will not prevent continuing application of all mandatory provisions, that cannot be
waived by contract, of the law of the country where all of the other elements of the
transaction are located. Therefore, even as a matter of exercise of freedom of choice, the
contracting parties cannot evade application of mandatory rules that are naturally applicable
to the transaction by reason of its connection with a given country, merely by agreeing in the
contract that a foreign law is to apply.
This recognition of the autonomy of the parties to choose the preferred applicable law is
found in the majority of legal documents regarding international trade and the current rules
regarding conflict of laws.
Thus, on the one hand, when the rules of such instruments are not directly applicable to
their transaction, international conventions give broad autonomy to the parties to exclude,
modify or apply. Regarding B2B e-commerce, the following instruments are particularly
relevant, allowing the parties to choose an international convention as the applicable law,
which convention by reason of its international and uniform nature will be more responsive
to the needs of a transnational or decentralised transaction; or even to choose a nondomestic law:
- United Nations Convention of 11 April 1980 on Contracts for the International Sale of
Goods which is applicable to e-contracts for the international sale of goods2.
- United Nations Convention of 23 November 2005 on the Use of Electronic
Communications in International Contracts, not in effect, which would regulate general
questions related to e-contracts and expressly recognises broad autonomy of the parties3.
- Other instruments such as the UNIDROIT Principles that may supplement other texts, in
particular the 1980 Vienna Convention, or allow their adaptation to contracts that are not
typically contemplated in the text, or even serve as a kind of lex mercatoria.
In addition, in the case of the European Union, Regulation No 539/2008 of 17 June 2008, of
the European Parliament and of the Council on the law applicable to contractual obligations
(Rome I)4 replaces the well-known Rome Convention of 19 June 1980, although the latter
will continue to be applied to those States that, being parties thereto, are not bound by the
Regulation. Although by reason of its Community origin its application is pertinent to the
Member States of the European Union, it nonetheless is interesting to bear in mind that it
also is applied even when the law specified by the Regulation itself is the law of a State that
is not a Member State. The first rule of application is freedom of the parties in choice of the
law applicable to the contract (article 3).
Therefore, if the court hearing a case is a court of a Member State of the European Union it
will apply Regulation No 539/2008 to determine the law applicable to the contractual
obligations. If the court belongs to a State to which the Regulation is not applicable (without
prejudice to possible application of other instruments), the court will resort to its own internal
rules to determine the law applicable to the case.
2
The scope of application of the Convention results principally from articles 1 to 5, complemented by
the generous recognition in article 6 of the autonomy of the parties, on the following terms:
"The parties may exclude the application of this Convention or, subject to article 12, derogate
from or vary the effect of any of its provisions."
3
Article 3:
"The parties may exclude the application of this Convention or derogate from or vary the
effect of any of its provisions."
4
Applicable to the Member States, excluding the United Kingdom and Denmark. Published in OJ L
177, 4/7/2008.
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Law applicable to eCommerce in absence of agreement
Despite the convenience of choice, the parties do not always expressly agree the law
applicable to the contract. And it does not always unequivocally derive from the terms
thereof or circumstances of the transaction. In that case, that is, in the absence of
agreement, it is necessary to resort to a series of rules and points of contact that will
determine the applicable law.
A series of presumptions based on the kind of contract are established in the various
regulatory texts. For example, a contract for the sale of goods is governed by the law of the
country of customary residence the seller, and a services agreement by the law of the
country of customary residence of the service provider, whereas a contract related to real
estate is governed by the law of the country where the real estate is located. It therefore is
necessary to look to such specific rules as may exist for each kind of contract.
But in general the rules for determination of the applicable law in the absence of agreement
may be reduced to the two stated below.
a). In the first place, the applicable law will be that of the country of customary residence of
the party that is to provide the consideration that characterises the contract. Identification of
the consideration characterising a contract is not always a simple task, but it may be easily
understood that in the case of a sale it will be delivery, and that in the case of a services
agreement it will be the performance of the service. But in the context of e-commerce the
element presenting the greatest interpretive difficulty is determination of the place of
establishment or residence of the contracting party responsible for that particular
performance. For this reason we dedicate a separate section to this question (see below at
1.3.).
b). In the second place, as the fallback rule for the entire system, the contract will be
governed by the law of the country with which it has the closest ties. That is, if one cannot
otherwise establish the applicable law, the "closest tie" rule will be used. But even if from the
circumstances of the case it appears that the contract has obviously closer ties with a
country other than the one resulting from application of the general presumptions
established by each set of regulations (for example, customary residence of the contracting
party responsible for the most characteristic performance) the law of the latter country will
be applicable. Therefore, the "closest ties" rule ultimately is the prevailing general rule.
Law applicable to non contractual obligations
The problem of determination of applicable law may also arise under circumstances in
which there is no contract between the parties. This is the case of the damages or harmful
consequences of a given unlawful act, management of third-party business, steps
preparatory to execution of a contract, unfair competition or anticompetitive acts, defective
products or, for example, violation of intellectual property rights5.
5
Within the European Union context, Regulation No 864/2007 of the European Parliament and of
the Council of 11 June 2007 on the law applicable to non-contractual obligations (Rome II),
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In such cases, the general rule is that the law to be applied will be the law of the country
where the direct damage occurred (lex loci damni), regardless of the place where the action
resulting in the damage was taken, or the places where indirect consequences occur.
Nevertheless, the law of the country with which the harmful act has the closest ties, if it is
not the same as the country where the damage occurred, always prevails over the aforesaid
determination of the applicable law.
Freedom of choice also continues to play an essential role as regards non-contractual
obligations. Although there is no prior contract in which the parties could have agreed the
applicable law, it is possible for the parties to choose the law applicable to the harmful act
by agreement after the act resulting in the damage, or if the contracting parties are engaged
in a business activity (B2B) by way of an agreement freely negotiated prior to the
occurrence of the damage. This choice of law must be express, or must unequivocally
derive from the circumstances of the case, but may not harm third parties.
As in the case of the law applicable to a contract, the choice by the parties of a foreign law
does not prevent application of the mandatory provisions of the country in which all of the
pertinent elements of the damaging act are located, if it is not the country the law of which is
chosen by the parties
Law applicable to performance of information society
services
Some of the activities undertaken by the service provider, whether aimed at entering into a
contract (the sending of publicity, preliminary arrangements, proposed contracts) or even
not necessarily tied to any contractual relationship (questions related to industrial and
intellectual property rights), are treated differently in comparative law, and therefore the
legality or illegality of the practice depends on the law that, in each case, is understood to be
applicable. In some cases, there is no prior contract between the parties, for which reason
there is no opportunity to agree the applicable law. In other cases, there are elements that,
because they involve certain interests, are not allowed to be subject to agreement of the
parties (consumer agreements).
The peculiarities of performance of services by way of the Internet means that the services
may be performed in a given country, the legislation of which treats a given practice as
being legal, while the destination, intended or by happenstance, of the service is in a
country the legislation of which treats the same activity differently. There are two possible
consequences of this form of operation: either we assume that the provider need only
comply with the law of the country from which the services are provided, regardless of the
destination or the place from which the services are accessed; or we conclude that the
provider must comply with the law of the country to which its services are addressed, a
result that in the case of the Internet is particularly burdensome for the service provider, and
highly uncertain (by reason of the feared "worldwide effect" associated with Internet activity).
For purposes of adopting a preventive strategy that reduces the risks of undesired violation
of certain regulations, the following principles must be taken into account.
published in OJ L 199/40, 31/7/2007, is applicable. It is applicable to the United Kingdom and
Ireland but does not bind Denmark.
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In the first place, in each case it is essential to identify the applicable rules, and what
requirements are subject to the control of the country of origin of the services. For example,
in the provision of financial services the prudential rules (authorisation and licences, capital,
conditions for establishment, insurance and guarantees) generally are supervised in the
country where the provider is established, whereas the applicable rules of conduct
(reporting and transparency, contractual conditions, customer rights) are those of the
country to which the services are directed. In the case of providing information society
services, the majority of provider obligations are imposed and supervised under the law of
the country where it has its establishment. Nevertheless, there are certain activities that by
reason of their impact on certain groups or interests are controlled at the destination (the
sending of publicity, direct insurance, commercial communications by e-mail or the like,
industrial and intellectual property rights), generally the place where the user of the services
is located or to which the services are addressed. Therefore, in the second place, it is
essential to determine when the services are considered to be addressed to a given
territory.
The stream-of-commerce standard involves difficult controversies regarding application of
the rule, with the risk of overlap of laws or regulatory gaps by reason of disqualification.
Resort to groups of indicia, such as means of advertising (invasive, directed, receptive),
language, payment currency, active or passive site, express prohibitions of acquisition by
certain customers or in certain countries, presentation that is "decentralised" or personalised
by country, points of contact, that result in an attempt to address an information society
service to a specific territory are imprecise and may lead to highly uncertain solutions.
Furthermore, it offers solutions that are constructive or determined a posteriori, which
results in a lack of predictability that is not to be recommended in the conduct of economic
activities, if one wishes to protect the principle of appearance and good faith.
When the performance of services is channelled through the Internet, therefore, the
determination of the destination of the services is a complex task the results of which are
not always obvious. Indeed services, content and products are made available to the public,
and it is the user that accesses them.
In light of such uncertainties, it is to be recommended that there be an attempt to attenuate
these effects, by adopting specific preventive measures that may fall within three kinds of
strategies:
- A multinational (glocal) strategy: By way of this strategy the attempt is to offer universal (or
quasi-universal) service, but subject to the various legislations and legal traditions,
designing a website with multiple national versions or interfaces, the appropriate choice of
which is a responsibility imposed on the user based on the place of access or residence.
Each version of the website is adjusted to the legislation of the destination. The greater the
number of laws to be contemplated, the greater cost and sophistication required for the
design of the webpage, but the more predictable the results.
- Selective strategy (local). Using this strategy one or more countries are selected as the
specific destination of the services, and the activity is developed only in accordance with the
legislation of those countries (in addition to what is required to respect the law of the country
where the service provider is located). In this case, it is essential to incorporate express
references (and even technological resources) into the webpage that clearly indicate the
target of the services, or even unequivocally warn that the content may not be accessed
from, or the services or products received in, certain countries. This warning would be to the
effect that the products are not provided outside of a given territory, and it is impossible to
continue with the order if the country of residence of the user does not coincide with the
countries targeted for the service, one or more languages associated with other territories
are used, etc.
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- Universal strategy (global). Pursuant to this strategy there is just one website, potentially
addressed to any user, regardless of its place of residence. It is the least costly strategy
from a design point of view, but involves uncertainty from an operating point of view. In
order to assure respect for certain mandatory laws at the point of destination, it is necessary
to include in the "Terms for use of the webpage" and the "Service conditions" a clause
pursuant to which it is acknowledged that if any of the clauses is void under the law of the
country of destination, that law will be applied.
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