Consumer protection in the field of e-commerce

1.2.3.1 EU regulation

At the time of writing, in the context of information and communications technology (ICT) there are two main directives which aim to protect con-sumers when buying online. These are the Distance Selling Directive and the E-Commerce Directive,¹¹ which aim not just to grant minimum rights for consumers but also to harmonise the Member States’ legislation in order to facilitate and boost the internal market.

Under the Electronic Commerce Directive, EU Member States must ensure that their legal systems allow the formation, completion and enforce-ment of electronic contracts.¹² The requirements to create a valid electronic contract are similar to those relating to traditional paper contracts. On the one hand, common law legal systems require the concurrence of at least three elements: (i) an agreement ad idem (offer and acceptance); (ii) consideration (the acquisition of something of value in return for what one gives or prom-ises, usually an agreed sum of money); and (iii) the intention to create legal relations. On the other hand, civil law countries do not see consideration as a compulsory element. In addition to the requisites to enter into traditional contracts, consumer electronic contracts must fulfil extra legal requirements.

First, consumers must be informed about the technical steps required to conclude the e-contract. Secondly, the terms and conditions must be avail-able in a manner that allows their storage and reproduction.¹³ Finally, the directive introduces a new element required for the formation of an e-contract, namely the confirmation, which requires the service provider to acknowledge the receipt of a consumer’s order.¹⁴

One of the challenges of e-contracts is the difficulty in verifying the identity of the parties. This obstacle is partly overcome through the use of

electronic signatures. In this regard, the European Commission has adopted a directive guaranteeing EU-wide legal recognition of electronic signatures.¹⁵ However, this directive provides for some exceptions such as contracts relat-ing to land transactions, where, even though the preparatory acts were carried out online, the final signature must be of the established accepted paper based type. Although the directive intends to be technological neutral, it estab-lishes two types of e-signatures, simple and advanced signatures. The latter type of signature has cryptographic assurance of the sender’s identity, and the integrity of the text to which is attached. This differentiation has attracted many criticisms for being biased in favour of advanced technologies, ie smart cards.¹⁶ The directive has been criticised for being over-regulatory to the point that it has restricted the development of ICT in this area. However, it can be argued that the market needs to know when an e-signature is legally binding; yet the need for legal certainty must be balanced with the risk of creating technological restrictions and barriers to the development of e-signatures.

Consumer protection in the EU is still developing. The Directive on Unfair Commercial Practice outlines ‘sharp practices’ such as pressure selling, pyramid schemes, misleading marketing and unfair advertising.¹⁷ It is important to point out that this directive, unlike the Directive on Consumer Rights (but in the same way as most EU directives in the field of con-sumer protection), only provides minimum harmonisation. In order words, the Directive on Unfair Consumer Practice has set minimum standards to contribute to the harmonisation of consumer protection law between the Member States, but allowing Member States to expand consumers’ rights further. Additionally, this directive obliges businesses not to mislead con-sumers with misinformation through acts or omissions.¹⁸ Through this direc-tive consumers are given the same protection against aggressive or misleading marketing whether they buy locally or from other Member States. It also provides additional protections for vulnerable consumers who are often the target of unscrupulous traders, such as rules regulating advertising that targets children.

The most significant European regulation in relation to e-commerce is the Directive on the Protection of Consumers in Respect of Distance Contracts, commonly referred to as the Distance Selling Directive.¹⁹ This directive, along with three others – Unfair Contract Terms, Sales and Guarantees and Distance Selling – are presently being merged into the Directive on Con-sumer Rights, which harmonises and updates the law of the EU Member States for consumer contracts for goods and services.²⁰ The new text is more in line with the e-commerce environment and introduces full harmonisation in its provisions, restricting EU Member States from introducing more or less stringent provisions when implementing it into their domestic legislations.²¹ The proposed Directive on Consumer Rights recognises a number of rights to consumers which cannot be waived in the terms of a B2C contract.

These are:

(i) Right to information: Consumers must be provided with certain infor-mation, such as the name and address of the supplier; main characteristics of goods and services; price inclusive of taxes; arrangements for payment;

existence of right of withdrawal, where applicable; information on after-sales; and guarantees etc.²²

(ii) Consumer protection against the fraudulent use of credit cards.

(iii) Cooling off period for distance and off-premises contracts, eg online contracts. Consumers can withdraw from transactions if they are not satisfied, without any justification. To invocate this right, a consumer must communicate his or her decision in writing to the business within 14 calendar days.²³ This period increases to a maximum of an extra three months where the supplier had not provided the relevant information.²⁴ The supplier must return any money received from the consumer (less the cost of returning the goods, except when the goods are defective) within 30 days, counting from the day the supplier had received the returned goods.²⁵ The right to cancel does not require any particular form, but consumers may use a standard form included in the Annex I of the directive. This right has some exceptions under which the consumer will not be entitled to cancel the contract: in case of goods made to the consumer’s specifications; audio, video recording or computer software where the consumer has broken the seal; newspapers, periodicals or magazines; contracts for gaming, betting or lottery services etc.²⁶ Surprisingly, the directive omits the exclusion of goods which cannot be returned for health, safety and/or hygiene reasons, such as lipsticks and underwear.

(iv) Prohibiting certain activities by the supplier such as inertia selling, which is the practice of sending products to people who have not asked for them, and then demanding payment.²⁷ It also restricts the use of automated calling systems without human intervention.

The directive imposes an obligation on all Member States to observe this common set of rules for consumer protection and to implement them with the assistance of an efficient means of enforcement. In addition, it imposes the obligation of actively informing consumers and businesses about these rules.²⁸

1.2.3.2 Electronic commerce in the global context: EU and US comparison

In order to consider consumer law in an international context it is first neces-sary to make a comparison between the two largest world economies where, on the one hand, the United States has a greater economic and legal integration owing to the fact that it has been operating a single market economy since its constitutional foundation and, on the other hand, the more recent forma-tion of the EU results in a more fragmented market, despite its increasing integration. However, in terms of consumer regulation, the EU has achieved a

higher level of legal integration and legal codification than that obtained in the US. In the US, consumer protection focuses on false advertising, particu-larly when directed at minors and deceptive business practices, such as coercing consumers into unfair contracts. In contrast to the EU, the US has not enacted new legislation to protect consumers who contract online²⁹ and it has taken an approach of ‘favoring business efficiency, flexibility, and prac-ticalities’.³⁰ The Federal Trade Commission (FTC) strategy for protecting consumers is basically enforcing the existing regulations applicable to con-tract law, as well as educating consumers and businesses on how to participate in e-commerce.³¹

The effectiveness of these diverse policies in protecting consumers is argu-able; in fact, both policies have contributed to the growth of e-commerce.

The EU approach supports heavy consumer protection, taking a ‘precaution-ary’ approach with the aim of promoting a sustainable growth of competitive e-commerce within the internal market. The US view, in contrast, suggests that excessive consumer protection, such as that of the pro-consumer European regulation, may be detrimental to the evolution of e-commerce by restrict-ing innovation.³² The US ‘hands off’ regulatory approach is based on liberal ideas which support the premise that small and medium sized firms will not be economically viable if they have to comply with high consumer protection policies.

Notwithstanding the different approaches, many requirements in online contract formation are common in both jurisdictions. For instance, one pecu-liarity of electronic agreements is that these e-contracts are usually dealt with faster than some paper-based contracts. As a result, when contracting online, it is more likely that errors will be made, particularly at the time of the consumer’s acceptance.³³ In these cases, service providers in both jurisdictions must make technical means available allowing customers to identify and correct input errors prior to the placing of the order.³⁴ Additionally, the US FTC has statutorily prohibited unfair acts and advertising that are likely to cause substantial consumer injury. With the same purpose in mind, the EU has created the Directive on Misleading Advertising.³⁵ Also the Unfair Terms Directive (soon to be the Directive on Consumer Rights) has some similarities with the US Restatement (Second) Conflict of Laws, whereby any term included in the contract will be invalid if one party believes that the other party would not consent if that party was aware of the inclusion of such a term.³⁶

There are still many European provisions in relation to consumer protec-tion that differ widely from the US ‘hands off’ approach. Among them, the most significant are the absence of the ‘cooling off period’ in the US regula-tion; the US provisions that allow an easier enforcement of standard form contract terms; and the validation of post-payment disclosure of material terms in consumer transactions.³⁷ This approach is in direct conflict with that taken in the EU, where generally the law limits the enforcement of standard form contract terms; it recognises a consumer’s right to withdraw and it

requires the full disclosure of terms prior to the formation of the contract and payment by the consumer.³⁸

Overall, it is difficult to say which of these policies is more effective for encouraging market development. Ramsay notes that there is very little empirical data on whether central policies such as the cooling-off period actually have any impact on the market.³⁹ It seems clearer, however, that legal harmonisation will benefit the cross-border market since consumers’

expectations will be more easily fulfilled.

1.2.3.3 The need for harmonisation

The base for harmonisation of national legislation in the EU is grounded in Article 114 of the Treaty on the Functioning of the EU, which stresses the need for a high level of protection for consumers.⁴⁰ From a consumer’s point of view there still appears to be a lack of confidence in e-commerce;

consumers do not yet feel well protected when engaging in cross-border transactions. The main reason given by consumers’ surveys is the difficulty of resolving after-sales problems (88 per cent) and the problems of initiating legal action in the courts (83 per cent).⁴¹ However, as Vogenauer and Weatherill pointed out, these difficulties are not only caused by the lack of uniformity in the legislation but also stem from problems arising from the different languages and cultures involved in cross-border transactions.

According to them, it is not surprising that nearly eight in ten consumers would propose, as a solution to the cross-border barriers, the unification of the law and the introduction of the possibility of suing in their own countries.⁴²

From the business owners’ point of view, the difficulties of cross-border transactions derive from the need to comply with disparate domestic regula-tions, in particular with consumer protection laws and fiscal regulations. In the same survey businesses also propose, as a solution to these cross-border difficulties, the harmonisation of laws as well as the establishment of ADR services to resolve disputes.⁴³ In many cases small and medium enterprises (SMEs) and consumers do not know the law and procedure of the other Members States, which accordingly makes them uncomfortable in engaging in cross-border transactions, even between Member States where the law is quite similar. A European harmonisation in contract law may encourage cross-border trade by giving the perception to SMEs and consumers that their expectations will be fulfilled at the national and also at the regional level.

In addition, the harmonisation of international private law rules at an international level would contribute to facilitating a greater access to justice.⁴⁴ However, European legal harmonisation in respect of consumer protection differs from the US policy. This is because the EU is drafting a new con-sumer regulation from scratch, whereas the US is taking a different legal strategy by trusting market self-balance more and thus avoiding the introduction of consumer laws that could hinder the growth of the market.⁴⁵

Taking these divergent policy approaches into account, a higher degree of harmonisation in substantive law cannot be reached in the short term; it will be more practical to seek a higher degree of harmonisation in the enforcement of national and cross-border remedies.⁴⁶ The continued evolu-tion of e-commerce depends to a large extent on the trust and confidence of the stakeholders and that can only be obtained by fulfilling their legitimate legal expectations.