Contracts

Golden Rule

The golden rule of complying with e-commerce law is:

be transparent!

By being completely and fully transparent about who you are, what you are doing and how you will serve your customer, you will find you are not only staying on the right side of the law, but you are also keeping your customers happy. Survey after survey has shown that customers are not happy with their e-commerce experience owing to lack of information. If you are generous with information, this will not be a problem. And in view of high customer acquisition costs on the web, it only makes sense to keep your customers happy.

The law in the field of e-commerce is continuously developing and fast moving, as numerous drafts pass into the statute books. The evolution of technology also means that legislation must be updated and requires constant review. Companies and individuals need to be aware of both the current and the prospective impact of legal provisions.

The EU is also developing law for e-commerce and the European Commission is trying to make life easier for small business. The Commission is working towards developing a common legal framework across Europe, referring to the freedom of circulation.

The purpose of EU law (which harmonises the differences between national laws) is to achieve the maximum opportunities for free trade. It is therefore critical for any organisation, trading or otherwise operating in the EU, to be aware of current and prospective European law. While national law and EU law are mutually dependent, EU law takes precedence over national law.

For the purposes of this guide, directives are the most common form of European legislation. Directives are essentially instructions to the Member States to introduce legislation. Directives indicate the goals to be achieved, but do not lay down the manner of achieving them. In general, enforcement measures and remedies are left to the Member States. On average, Member States have two years from the date of publication of a Directive to transform it into national law. E-commerce regulation is teamwork between harmonised EU Regulatory Framework and national rules. Doing business in a certain Member State one has to be aware of the European regulation but of course also of the national law.

In the guide we only use the short names of the various directives to keep the reading smooth. The directives with the full titles can be found in the Annex in order to enable interested readers to find them on the Internet.

The EU Directive on e-commerce ensures that Information Society services – which for the purposes of this guide can be considered e-business (a legal definition of “information society services” can be found in Directive 98/48/EC; laying down a procedure for the provision of information in the field of technical standards and regulations) – benefit from the Internal Market principles of free movement of services and freedom of establishment. Generally speaking, information society services can be provided throughout the EU if they comply with the laws in their home Member State. The E-commerce Directive establishes rules in areas including: definition of where operators are established; transparency obligations for operators; transparency requirements for commercial communications; conclusion and validity of electronic contracts; liability of Internet intermediaries; and on-line dispute settlement.

According to the E-commerce Directive, Member States shall ensure that their legal system allows contracts to be concluded by electronic means. Only for the following categories can Member States provide that the contracts cannot be concluded by electronic means:

· contracts requiring “surety and collateral securities” supplied by persons acting for non-professional reasons.

The E-commerce Directive covers all forms of e-business, including business-to-business (B2B) and business-to-consumer (B2C). Examples of sectors and activities covered include on-line newspapers, on-line databases, on-line financial services, on-line professional services (such as lawyers, doctors, accountants, estate agents), on-line entertainment services such as video on demand, on-line direct marketing and advertising and services providing access to the World Wide Web.

The E-commerce Directive will not apply to services supplied by service providers established in a third country (i.e. not in the European Union). It aims to be consistent with relevant international rules and discussions within international organisations (World Trade Organisation, Organisation for Economic and Commercial Development, UNCITRAL).

One of the big questions raised by e-commerce is, “which law is applicable?” When small companies sold goods or services from an outlet in a single country, this was not a question. Even mail order generally avoided raising this question.

The E-commerce Directive provides that information society service providers (ISPs) are subject to the law of the Member State in which they are established (the so-called country of origin principle). As long as ISPs comply with this law, they are free to pursue their activities throughout the Community. Certain areas are excluded from the application of the principle of the country of origin because some existing directives require the application of the law of the country of destination, or because the mutual recognition principle cannot be achieved and there is not sufficient harmonisation to guarantee an equivalent level of protection throughout the Community (see section below). These directives relate, for example, to contractual obligations concerning consumer contracts, copyright, related rights and industrial property rights, and permissibility of unsolicited commercial communications by e-mail.

National laws govern the main aspects of contract law. Laws governing the constitution of a contract and the point at which a contract is concluded currently vary from country to country. An offer of a product may be a binding offer in one country but not in another. In general, a contract is governed by the law chosen by the parties to the contract in what is called “private autonomy”. It is advisable to make a clear choice of law in order to provide certainty for both parties.

In practice suppliers favour the application of their own national legislation for all contracts conducted on their web site (or other e-commerce platforms). The rules of international private law almost ensure that the laws of the supplier’s nation will govern the contract made on his e-commerce platform. Provided the parties explicitly agree upon a governing law in their contract, their choice will be binding.

E-business managers may be surprised to know their web sites and e-mails contain invitations – even if not intentionally put there – to make a contract. Their web pages hold a description of products or services and a set of “self-contracting” pages that enable the web visitor to request these products or services.

How can the supplier explicitly agree upon a governing law in a contract? Firstly, he should inform his customers of his organisation’s identity, place of establishment, domicile and trading status.

The E-commerce Directive provides that, except when otherwise agreed and except for contracts concluded exclusively by exchange of e-mail messages, the service provider should communicate “comprehensibly and unambiguously” prior to the placement of the order, at least the following information:

In addition, the service provider must provide the recipient with the contract terms and general conditions in a way that allows him to store and reproduce them (e.g. by e-mail). Finally, except when otherwise agreed, the service provider must indicate any relevant codes of conduct to which he subscribes and information on how such codes can be electronically consulted. In the case of electronic transactions, care should be taken that both buyer and seller understand where the contract is accepted. If the vendor is located in Germany and the buyer in Italy or the buyer is on the move, which law governs the contract?

The supplier should incorporate on his web site an explicit clause of the applicable law. If the other contracting party accepts this clause, it will govern the contractual obligations of the parties based on the principle of party autonomy. The clause can be on the mandatory page (a page through which the purchaser must pass) and also in the general terms.

When the parties to the contract have not chosen the law applicable to a contract, the governing law is that of the country with which it is most closely connected. In almost all cases, a B2B contract is most closely connected with the country of the establishment of the provider of the product or service. Under the EU Directive on e-commerce, the place at which an e-business is established should be determined in accordance with the case law of the Court of Justice. It recognises that the place of establishment of a company providing services via an Internet web site is not necessarily the place at which the technology supporting its web site is located or where its web site is accessible. Usually, the place of establishment is the place where the business is legally registered. In the case of multiple establishments, the competent Member State will be the one in which the supplier has the centre of his activities.

According to the Rome Convention, specific rules are applicable to certain consumer contracts. These are contracts for the supply of goods or services to a consumer provided that one of the following conditions are met:

· the consumer has received in his home state a specific invitation addressed to him, or by advertising, prior to the conclusion of the contract and he takes, in his home state, all the necessary steps to conclude the contract;

· the supplier has received the consumer’s order in the country where the consumer is domiciled;

· the consumer travelled from his country to another one where he gave his order to buy a good, provided that the consumer’s journey was arranged by the seller for the purpose of inducing the consumer to buy.

Parties to these consumer contracts can choose the applicable law, but this choice shall not have the result of depriving the consumer of the protection afforded to him by the mandatory rules of the law of the country in which he has his habitual residence. Mandatory rules cannot be limited or excluded by contractual provision. They will apply even if a contract states they do not. In particular, contracting parties cannot, whilst agreeing to be bound by the laws of a particular country, opt-out of the mandatory consumer protection provisions of that country. When contracts (whether in hard copy or electronic form) are being drawn up, it is important to state which is the governing law; and critical to ensure that the clause in which the governing law is specifically stated is within an electronic contract.

Mandatory rules are laid down in the Distance Selling Directive, the E-commerce Directive and by national law.

According to the Distance Selling Directive, the supplier must provide the consumer with clear and comprehensible information concerning:

· the period for which the offer or the price remains valid and the minimum duration of the contract, where applicable;

· and where appropriate the minimum duration of the contract in the case of permanent or recurrent performance.

The consumer must receive written confirmation or confirmation in another durable medium at the time of performance of the contract. The following information must also be given in writing:

This information must comply with the principles of good faith in commercial transactions and the principles governing the protection of minors. In the case of telephone calls, the caller's identity and commercial purpose must be made clear at the beginning of the call.

The E-commerce Directive provides that, except for contracts concluded exclusively by exchange of e-mail messages, the service provider should communicate “comprehensibly and unambiguously prior to the order being placed”, at least the following information:

The service provider must provide the consumer with the contract terms and general conditions in a way that allows storage and copying (e.g. by e-mail). He must also communicate any relevant codes of conduct and information on how such codes can be consulted on-line.

National legislation can contain general information requirements for the provision of information society services.

In the absence of a choice of law under a contract, the governing law is that of the country in which the consumer normally lives. This means that – in cases where no law was chosen – suppliers are subject to, and are best advised to be aware of, the national laws of 15 different EU member States.

Suggestion

Make it crystal clear on your web site where your business is located, which law is applicable (typically your own law), and provide the consumer with all the necessary information mentioned above. The way to do this is to ensure all main entry and informational pages on your site include your company’s location. You should also clarify, on the page where your customer clicks to make a purchase, that the sale is subject to the laws of. The number of web sites that seem to hide their physical whereabouts is amazing!

Written confirmation or confirmation in another durable medium includes confirmation directly transmitted (e.g. by e-mail) onto the hard disk of a computer. Looking further into the future, there is no clarity about confirmation via WAP or other developing technologies. For example, what happens if a connection is cut during a transaction?

According to most legal systems, three elements must be present for a contract to be formed – and normally a sale closed:

the E-commerce Directive specifies that the seller has to acknowledge the receipt of the buyer’s order without undue delay and by electronic means.

Currently, the electronic catalogue on an e-commerce platform is not a real, definitive contractual offer, and therefore not immediately binding upon the supplier. The first contractual act is an offer made by the purchaser. The supplier will still be able to check the relevant personal data of the purchaser. The supplier can accept the offer by generating a confirmation of sale page, sending a confirmation e-mail or just by delivering the product or service.

The vendor is obligated to indicate the different technical steps that must be taken to conclude a contract. The consumer must be able, before concluding the purchase, to identify and correct any errors in the order, modify the order, consent to the purchase, and retain a complete accurate record of the transaction. The languages offered for the conclusion of the contract must be clear (see mandatory rules for the Distance Selling Directive; p. 20-21).

Community legislation does not specify at what time an electronic contract is deemed to be concluded. It is therefore determined by reference to Member States’ laws. The E-commerce Directive provides for consumer contracts that:

· the service provider must acknowledge receipt of an order electronically and without undue delay; and

· technical means to identify and correct input errors prior to the placement of the order must be available.

Suggestion

When a customer in your e-shop completes his order and clicks on the “proceed to checkout” button, give him a preliminary receipt with all items purchased, their cost and any optional features (such as colour, size, etc). Have tick boxes and fields so he can change his order without having to cancel the entire order. Every time he makes a change, give him a new preliminary receipt. Make it clear that this is a preliminary receipt and he must still click on the “Buy” button to finalise his order (amazingly, a large number of people leave e-commerce sites at the preliminary receipt stage thinking they have already completed the purchase – so it is critical to ensure the customer understands at what point the order is made and at what point it is not.)

Once the customer clicks on the “Buy” button to finalise his order, you should immediately send him a follow up receipt via e-mail. This ensures your customer has a receipt (many will neglect to print or save the receipt page on their browsers). It is also a last chance to clear up any misunderstanding before you ship the products.

Some of the information to be provided before the conclusion of the contract (see box above) and other elements (i.e. the address to which complaints can be addressed, information on after-sales services and guarantees, conditions and procedures for exercising the right of withdrawal), must be communicated to the consumer in writing or in another durable medium such as by electronic mail. This must be done in good time during the performance of a contract and, for goods, at the time of delivery at the latest.

Case Study

Gizmo electronics has some E-733 computers that it intends to put on sale for just 999 Euro. Unfortunately, their web master is new and accidentally advertises on the web site: “Gizmo E-733 computers marked down to just 9.99 Euro until 31 August!” He also sends the same message on an e-mail to 100 of the company’s best customers.

Within a day, dozens of orders have come in and Gizmo’s marketing manager realises there has been a terrible mistake. He pulls the web page down and stops any more e-mail promotions being sent. Legally, how does he stand?

Orders from the web page, provided he has not acknowledged them, are not binding. Remember, a web page with an offer is an invitation to make a contract, but not a contract.

E-mails, however, can include a binding offer. And once a customer has acknowledged his desire to accept the contract, Gizmo is legally obliged to fulfil the order at the rate offered in the e-mail.

This, however, ignores the issue of customer relations as recent similar cases have shown. And it is arguable that the cost of filling those dozens of loss-making orders would generate substantial positive publicity while refusing them would generate negative publicity.

Terms of trading should be incorporated into any contract between the buyer and seller, even if the terms are also on the relevant web site. National laws regulating contracts currently require that the general terms be made available to purchasers at the time of concluding the contract.

The general terms should be directly available to a customer when he makes an electronic purchase. This can be done, for example, by presenting the purchaser, when he concludes his order, with a web page of the general terms and an “Agree” button he must click to finalise the order. In addition to this, an explicit reference or hyperlink to the general terms can be made on the purchase order form. Moreover, it is advisable to have the general terms easily accessible (i.e. a minimum number of clicks away) from anywhere in the web site. The customer browsing an e-commerce site for fun may well decide to make a purchase. Allowing him to access general terms readily will only encourage that purchase.

General terms must be clear, easily readable and clearly arranged with regard to contents. As mentioned previously, the general terms can incorporate a clause stating which country’s law will govern the contract.

The EU Directive on Unfair Contract Terms applies also to on-line contracts. It covers all contracts concluded between a seller or a supplier and a consumer for the supply of goods and services, but only the contractual terms that have not been individually negotiated (i.e. only standard contracts). It forbids any clause in a contract that creates a significant imbalance in the party’s rights and obligations to the detriment of the consumer.

The Distance Selling Directive states that the consumer has the possibility of withdrawal from the contract without reason or penalty (except for the direct cost of returning the goods i.e. postage). In the case where the supplier has met his obligations regarding the provision of information, the consumer has at least seven working days (depending on national regulations) to cancel the contract:

· for goods, from the day when the consumer has received the written confirmation or the information

· for services, from the day of the conclusion of the contract or from the day of the written confirmation of the information (where this confirmation occurred after the conclusion of the contract).

In the case where the supplier has failed to meet his obligations to inform the consumer about his rights, this period is extended to three months. The directive, which is only applicable to consumer contracts, requires that the supplier repay the money paid by the consumer within thirty days of cancellation.

Where the consumer exercises his right of withdrawal, the supplier must reimburse the sums paid free of charge within 30 days. Similarly, credit agreements aimed at ensuring the payment of the contract involved must be cancelled without penalty.

It should be noted that in some cases the consumer cannot exercise his right of withdrawal for products such as the supply of newspapers, unsealed audio or video recording or computer programs, periodicals and magazines.

In principle, the supplier has thirty days in which to perform the contract. Where the supplier fails to perform his side of the contract, the consumer must be informed and any sums paid refunded. In some cases, it is possible to supply an equivalent good or service. The possibility must be provided for in advance of the conclusion of the contract or it must be mentioned in the contract in a clear and comprehensible way.

The Distance Selling Directive also provides that if a consumer’s payment card has been used fraudulently for a distant contract, the consumer must be able to:

Suggestion

Since you are legally obliged to cancel an order and refund the consumers money if the consumer is not satisfied, why not use this as a marketing tool in the form of a money back guarantee?

If you are not completely satisfied with our product, return it within seven days and we’ll give you a complete refund – no questions asked!

According to the E-Commerce directive all Member States will have to remove any legal obstacle that could hamper the use of electronic contracts. The Electronic Signature Directive provides that electronic signatures cannot be denied legal effect (for the validity of contracts and as evidence in court) solely on the basis that they are in electronic format. Most Member States have already recognised the equivalence between electronic signatures and hand-written signatures and the admissibility of electronic signatures as evidence in court proceedings.

Contracts may be concluded orally but in practice they are written down to avoid misunderstandings. The reason is one of evidence and sometimes validity of the contract. If one country’s national legal regulation requires a written form or a similar formality, an electronic contract is not valid. Another country’s national law may only require written requirements in specific cases, such as agency contracts, where one party requests a written contract, or real estate sales.

The implementation of the Directive on a Common Framework for electronic signatures and certification service providers will change the validity of electronic contracts concerning formal issues. Electronic signatures accompanied by a valid certificate will have equivalent validity to hand-written signatures throughout the EU, thus removing problems caused by varying national laws regarding the validity of electronic signatures.

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3. E-commerce Law - Contracts