Choice of law

1.4.2.1 Choice of law for private sales

When two consumers (C2C or private sales) become involved in a dispute, for instance through the e-Bay auction house, the applicable rules are those used in business transactions (B2B). In practice, consumers in these cases are unlikely to look for redress in the courts, unless there is a large amount of money involved, eg someone who sells his own car through an online auction, and the buyer purchases the car with some mechanical problems unknown to the seller.

The law of every country gives parties bargaining on an equal footing (C2C and B2B) complete freedom to determine the choice of law as long as the legal system chosen by the parties has some connection with the parties or the sub-ject matter of the contract. However, when consumers deal with other con-sumers they would probably not write a contract, so they will be exposed to the default legal rules. Under these circumstances, in the (unlikely) event that the parties start a legal action, it will be the courts themselves which will decide about their competence. In making this decision courts will probably look at where the contract was made and where the execution of the contract occurred;

in the former example it would be upon the delivery of the car. If the delivery was done in the seller’s country, then the forum and the law of the seller’s country will probably be applicable. By contrast, if the delivery was done in the buyer’s country, then country and national law of the buyer will be applicable.

1.4.2.2 Choice of law under the EU Regulation

The main instrument governing the choice of law within the European Union since 17 December 2009 is the Regulation on the Applicable Law to Con-tractual Obligations (Rome I), which provides for uniform choice of law rules in contract for all Member States (except Denmark).⁹⁸ The new regulation has the aim of adapting the text to the growth of cross-border shopping, particu-larly on the internet.

1.4.2.2.1 ROME I REGULATION

The Rome Regulation makes a distinction between those contracts with a choice of law clause and those where there is no such clause.

Choice of law clause Most electronic contracts will contain a choice of law clause. Article 6 of the Rome Regulation provides that consumer contracts may have a valid choice of law clause but this clause may not deprive the consumer of the protection afforded by the mandatory rules of the country of his habitual residence if the business pursues or directs its commercial activity in the consumer’s Member State.

This provision distinguishes between active and passive consumers. The former would be those consumers who look for the business actively, and the latter would be those consumers who are approached by the business. The regulation gives special protection to passive consumers. This begs the ques-tion of whether an internet website constitutes advertising in the Member State of the consumer’s domicile. It seems that businesses advertising with a website directly in a Member State (eg by e-mail or through a website directed to the consumer’s country, ie using the consumer’s language, cur-rency etc) may not override the mandatory consumer protection laws of the consumer’s country.⁹⁹ Therefore, if a choice of law clause limits the rights recognised to consumers in their countries under the above circumstances, such clauses shall be voided and the mandatory rules of the consumer’s habit-ual residence will be applied instead.¹⁰⁰

No choice of law clause The lack of a choice of law clause is rare but it may happen in relation to e-mail transactions without standard terms or it can be used for some businesses as a marketing option having a short terms and conditions contract. The Rome Regulation states that in those cases the applicable law will be the law of the country where the consumer is habitually resident, when the contract is entered into according to the form listed above in Article 6, that is, with a specific invitation to buy. Furthermore, in some cases national laws have given consumers the presumption that the contract, unless proved otherwise, was formed in their habitual country of residence.¹⁰¹

When the conditions of Article 6 are not fulfilled, the law of the country in which the seller is located will be applied.¹⁰² In this regard, the E-Commerce Directive and the European Court of Justice consider that the seller’s location on the internet is the service provider’s nation of establishment, ie the Member State where the business is physically located, regardless of the location of the technology that hosts the website.¹⁰³

The regulation has been received with disappointment amongst businesses’

representatives, who fear that the new regulation may curb the growth of online sales. They argue that businesses (mainly SMEs) that sell products across borders will have to deal with consumer complaints under the legal systems of each Member State. Although consumer protection laws are gov-erned by EU law, in most cases it only establishes minimum standards, leaving it to the Member States to develop further consumer protection laws.

Conversely, consumer organisations welcome the new regulation, noting that increasing consumer protection will favour consumer trust in e-commerce, boosting consumer participation in the online market.

1.4.2.3 Choice of law in the US

The policy behind US law is the doctrine of freedom of contracts where the parties, including B2C transactions, have the autonomy of choosing their

applicable law. Hence, the US legal approach is not as sensitive and inter-ventionist as the EU towards the inequality of bargaining powers between consumers and businesses.

Choice of law clause The main difficulty with the US law is the large number of state laws that are potentially applicable.¹⁰⁴ The most relevant regulations in the US are the Second Restatement of Conflict of Laws, the Uniform Electronic Transaction Act (UETA), the Uniform Commercial Code (UCC) and the Uniform Computer Information Transactions Act (UCITA).

The US Second Restatement of Conflict of Laws is a compilation of legal rules, which, in spite of being quite influential, are not binding, unless parties contract them in expressly. It essentially provides that the law chosen by the parties will be applied in all cases, except under two circumstances: first, when the chosen state has no substantial relationship to the parties or the transaction; and, secondly, when the application of the chosen law would be contrary to a fundamental policy of a state, which has a greater interest in the issue, but only when that state would be the chosen one if there was not a contractual clause.

UETA is the first comprehensive effort to prepare state law for the e-commerce era. It is a proposed law of procedural rules which recognises the validity of electronic contracts and e-signatures. It also covers only those aspects of the electronic transactions that the parties did not agree in their contract. This Act has been implemented in the majority of the US, strength-ening the enforceability of online transactions.¹⁰⁵ Nonetheless, UETA will only be applied to electronic transactions when the contracts are not governed by the UCITA and UCC statutes.

The latest revision of the UCC was made in 2001 by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. In this revision the proposed law gives even more autonomy to the parties in deciding the applicable law, eliminating the former condition that the chosen law had to have a reasonable relationship with the contract.¹⁰⁶ It must be noted that this new proposal is not applicable to B2C contracts.

The UCITA, originally intended to be part of the UCC, is a controversial regulation that has been created to deal with electronic information transac-tions. It was promulgated in 1999 but has only been implemented in two states, namely Virginia and Maryland. Currently, there is substantial doubt about the UCITA gaining more acceptances among other states’ parlia-ments.¹⁰⁷ The UCITA has been criticised for disadvantaging consumers, despite still providing a certain level of consumer protection. The Act states that ‘parties in their agreement may choose the applicable law. However, the choice is not enforceable in a consumer contract to the extent it would vary a rule that may not be varied’ under that law of the jurisdiction applicable in the absence of that agreement.¹⁰⁸ This policy has driven the UCITA to move away from the current version of the UCC, where a court is permitted to invalidate a choice of law provision if the chosen law does not bear a

‘reasonable relationship’ to the transaction.¹⁰⁹ The drafters of the UCITA considered that this court control of the choice of law imposed undue costs and uncertainty on e-commerce. Under the UCC, as well as under the UCITA, parties may opt out of it, save with some exceptions, such as those related to consumer protection.

No choice of law clause The Second Restatement provides that in the event that the parties have not chosen the applicable law, the law governing the electronic contract will usually be that of where the consumer is domiciled, that is, the location from where the acceptance was transmitted and to where the goods were delivered. The UCITA automatically selects the law of the licensor’s principal place of business if product delivery is accomplished online or by electronic delivery, ie downloads of software.¹¹⁰ The location of the licensor does not depend on the location of the computer that contains the information, but on the place of establishment. This rule mirrors the E-Commerce Directive’s place of establishment provision. By contrast, when the delivery is carried out through a tangible medium, most states rely on the UCC, which, akin to the Rome Regulation, states that the governing law will be that of the consumer’s location.¹¹¹

Overall, in fact US courts and legislators tend to recognise choice of law clauses even when those favour businesses, but only as long as there is a reasonable relationship between the parties, the transaction and the chosen law. The reasoning behind this is that respecting choice of law clauses and favouring businesses is believed to result in lower prices for consumers.

Although there is consumer protection in the US, it must be taken into account that a significant proportion of legal protection for consumers stems from the state law, where the governments of the states appear reluctant to relinquish domestic control over the consumer protection to the federation.

By contrast, in the EU it is European law which directs the consumer protec-tion policy, imposing greater limitaprotec-tions on the choice of law clauses. Finally, it must be noted that since the competent law is chosen after deciding on the competent forum, the latter will have significant influence over the applicable law; not surprisingly, judges are often unwilling to apply foreign laws.