Jurisdiction – how to sell outside the UK
This guide is based on UK law. It was last updated in
October 2007. There is an equivalent Hong
Kong guide.
Introduction
One of the fundamental advantages of e-commerce is its global
dimension, allowing businesses to reach new markets in far (and not
so far) flung places. Yet while this seems like a great commercial
advantage a range of complicated legal issues arise when
territorial borders are broken down.
Where business is conducted between parties in different
countries it is not always clear whose law should apply to the
contract, or which courts should resolve disputes arising between
the parties. The global reach of the internet makes it all too
tempting for businesses to start selling outside their home
jurisdiction. However, without putting some thought into the legal
issues involved they risk storing up legal problems for the future.
In this article we examine some basic rules for conducting business
outside the UK.
It is worth noting very early on that the laws and principles
applying to jurisdiction and choice of law are extremely complex.
It is not the intention of this article to discuss these laws in
depth. Rather, it will highlight some general principles and
thoughts on how best to manage the risks. It is very important that
before any business starts trading abroad it understands all of its
legal obligations and rights, and deals with these both in the
construction of the website and its contracts.
Importance
The question of which laws apply is very important. National
laws differ considerably and this can affect terms in the contract
or may mean the contract is simply not enforceable. It's also
expensive and inconvenient to sue abroad. Some examples:
- It may be a requirement that all contracts must be in the local
language failing which the contract will be void. For instance,
Canada requires that web sites must be in French as well as
English.
- In a number of European and other jurisdictions, contracts may
need to be in writing in order to be enforceable, and on-line
contracts may not meet this requirement. Within the EU this
is prevented by the EC Directive on Electronic Commerce, as
described below, but remains a risk outside of the EU.
- Local advertising laws may prohibit certain activities or
impose penalties for out of date information.
Certain businesses are heavily regulated. The most obvious
example is the Financial Services industry. It may not be lawful
for a company authorised to conduct investment business in the UK
to sell its products to citizens of the US. Similarly, gaming will
either be prohibited or, if permitted, will be subject to varying
degrees of regulation in different countries.
Business conducted within the EU
The general rule
Where parties are both domiciled in member states of the EU the
following general rules apply:
- the parties can choose which country's law applies to the
contract, and to the provision of the goods or services;
- the parties can choose which country's courts will have
jurisdiction to deal with any disputes;
- failing such agreement defendants can be sued in the courts of
the country where they are 'domiciled', or the country in which the
contract is performed.
In the case of individuals "Domicile" means the country in which
the individual has their habitual residence. This is normally
self-evident in the case of individuals, and in the case of
companies it generally means the country in which "it pursues
economic activity" (e.g. where it sells its products). If the
company is active in several places, it is the county in which
their central administration in based.
The Directive on Electronic Commerce 2002
The EU Directive on Electronic Commerce seeks to remove
obstacles to the use of electronic contracts. In particular,
EU members are obliged to ensure that their legal requirements
applicable to the contractual process neither create obstacles for
the use of electronic contracts nor results in such contracts being
deprived of legal effectiveness and validity on the account of
their having been made by electronic means. Certain
exceptions are set out by the Directive, including contracts that
create or transfer rights in property (except rental rights),
contracts requiring the involvement of a public authority,
contracts governed by the family law, and certain other
contracts.
The Directive sets out a number of pieces of information that
must be provided by a business selling via electronic means.
This includes:
- Steps necessary to complete the contract
- Whether the contract will be stored, and whether the customer
will be able to access the contract.
- Technical means for identifying & correcting input errors
prior to the placing of the order.
- Languages offered for the contract to be concluded.
The contractual terms and conditions applicable must also be
available to the customer, in a format which allows the customer to
store and reproduce them. Additionally, in the process
provided for making an order, businesses must make available to a
customer an appropriate, effective and accessible means of
identifying and correcting input errors. On the placing of an
order, a business must acknowledge receipt of the order by
electronic means without undue delay. The order, and
acknowledgement of the order, are only deemed received once the
customer has received this receipt.
The Brussels Regulation 2001
The general rules set out above regarding jurisdiction will
apply to many standard contracts between business. However, under
the 2001 European Council Regulation on the enforcement of foreign
judgments and jurisdictions (the "Brussels Regulation") there are a
number of other important rules to consider, in particular when
dealing with consumers.
Brussels Regulation – B2B
Where a contract between businesses does not contain
sufficiently clear terms on choice of law and / or jurisdiction the
Brussels Regulation sets down additional rules to determine which
EU member state's laws will apply. Under the regulation a recipient
of goods or services may rely on the laws of his own country in
relation to a contract with a seller based in another Member State
where the seller "directs" his activities towards that recipient's
country.
In the case of sale of goods or services this would mean that
the buyer can rely on any laws in his own country which cover to
the sale of those goods and services. These laws may be more
onerous (or more lenient) than those in the country of the
supplier. The supplier can only sue the recipient in the
recipient's country of domicile, but the supplier can be sued in
either country.
The key to whether these rules apply is understanding what is
meant by the seller "directing" his activities towards the
recipient's country. The regulation itself does not spell this out,
and while the recitals to the Regulation give some clues a clear
definition has yet to emerge. One commonly held view is that
"directs" should be interpreted in its widest sense: the mere fact
that a website is available in the recipient's country could be
enough to give the recipient's courts jurisdiction.
Other factors which could be taken into account might include:
where the seller has offered a choice of languages, currencies,
delivery times, or prices; or where the seller carries out
advertising or sends marketing material to customers in the member
state.
The solution in any particular situation may lie somewhere in
the middle of all of these factors. The fact that a website is
accessible in a member state is simply a consequence of the global
nature of the internet. A more appropriate test may be where the
seller accepts and processes orders from customers based outside of
the seller's domicile.
This interpretation might help a seller better control their
risks, as they can select which countries their goods and services
are supplied to, and ring fence themselves from risk.
To do this the site should state clearly what jurisdictions the
supplier will and will not sell to. It is not enough to stop there,
however, and the back-office systems must also be capable of
rejecting orders from individuals in excluded jurisdictions. This
is not always easy to manage, particularly for suppliers of
software and other digital products and services, where it is not
strictly necessary to know the country of domicile of the customer
in order to deliver the goods or provide the services.
Of course the problems can be avoided to a large part (provided
that the sale of the goods / services is legal in the recipient's
jurisdiction) if the seller makes sure that the contract between
himself and the buyer contains full and enforceable terms on
jurisdiction and choice of law.
Brussels Regulation – B2C
Reflecting the importance of protecting consumers who enter into
contracts with foreign companies the law places a strict limit on
the general rule above, where a contract is between a business and
a consumer. The Brussels Regulation provides that the contract
between the business and the consumer cannot deprive the consumer
of the protection of the laws of the country in which he has his
habitual residence. This is echoed in the E-Commerce Regulations
2002 which, while providing for a "country of origin" principle
meaning that suppliers will only be liable in their home
jurisdiction, specifically excludes consumer transactions from such
protection.
This means that the business will be obliged to meet all of the
legal requirements relating to the sale of goods or services of the
type being sold in the country where the consumer is based. As
before these laws may well be more onerous than those in the seller
is based. Further, in almost all business to consumer sales the
consumer can choose which country to take an action against the
business, but the consumer can only be sued in his own country of
residence.
Business outside an EU member state
The general rule
In the case of disputes involving countries which are outside
the scope of European law, there are a number of issues which must
be considered. There are a number of international conventions
dealing with choice of law, and consumer rights. If these do not
set out the relevant position it is then worth checking whether the
UK has entered into an agreement with the foreign jurisdiction. Any
such agreement would set out the basis on which jurisdiction is
determined between the countries. Failing this it would be
necessary to consider the legal position under UK law, and what the
courts consider to be the appropriate forum for hearing legal
issues.
Jurisdiction in the United States
The position in the United States is different. There has been a
string of cases dealing with internet jurisdiction. The
approach the US courts have chosen to take largely follows the
principles set out in a court case of 1997 in which a distinction
was drawn between different types of web site.
The court considered that there were three different types of
web site. First, there was an active web-site which was
transactional in nature. This enabled the people accessing the web
site to enter into binding contracts with the web site owner. The
courts considered that this was sufficient to establish a place of
business and, as such, would give the court jurisdiction.
The second form of active web site which was limited to the
exchange of information between the parties. Such a web site,
although interactive and providing a means of communication between
the parties did not seek to create any binding contracts and so
should not be treated as creating a place of business and in the
court's opinion would not give rise to the courts being able to
seize jurisdiction.
The court then considered that there is a third type of web
site, namely one which is passive and which is used solely to
provide information to the parties and as such could not give rise
to any suggestion that a place of business was established in the
US and, as such, the courts could not seize jurisdiction.
Which laws apply?
The question of forum should not be confused with the question
of applicable law. The starting point is to look at the Rome
Convention 1980. For countries which follow this Convention, any
contract shall be governed by the law chosen by the parties. This
choice may either be express or implied.
Express
On the whole, courts are reluctant to interfere with an express
choice of law agreed between the parties in business to business
transactions.
Implied
Normally, an express term that specifies the choice of laws is
preferable. However, it is worth considering the ways in which a
law may be implied into a contract.
- If there have been previous dealings between the parties, then
this may enable the laws of a particular country to be
implied.
- Similarly, if there is a standard contract which is commonly
used within the industry or sector which is based on the law of a
particular country then that may enable the law of that country to
be implied.
- If the parties have chosen a particular forum in which any
disputes would be held, then, in the absence of any other choice,
it would be logical to imply that the chosen law is the law of that
jurisdiction.
- If no forum has been chosen, but the contract refers to
specific legislation, then that may also enable a particular
country's law to be implied. For example, if the Companies Act 2006
is used for definitional purposes, this may be sufficient to imply
English law.
Characteristics of the Contract
What then if there is no express choice and it is not possible
to imply a choice? The courts will look at the country most closely
connected to the party, who is due to effect performance under the
contract which is the "characteristic of the contract", at the time
of the conclusion of the contract. The characteristic of the
contract is the delivery of the goods or services, rather than the
mere payment of them, which clearly gives the advantage to the
seller rather than the customer.
Exceptions
As always, there are exceptions. These exceptions give further
protection to consumers. It is not permitted to have a choice of
law which deprives 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. This ties in with the Brussels Regulations,
as the definition of consumer is the same. At present this means
that the consumer is only protected if targeted by the vendor.
However, if the interpretation of the Brussels Regulations
discussed above is accepted, then putting up a web site might, in
itself be enough to give such protection to consumers.
Points to remember
While it is always recommended that businesses seek specific
advice about the laws of the country into which they are selling,
the following general tips apply when selling outside of the
UK.
- Legality of goods / services
Before doing anything else consider whether it is possible to
legally sell into the foreign country – are the goods or services
legal in that country? For instance the sale and promotion of
alcohol is illegal in certain Muslim countries. Also consider
whether there are any restrictions on the export / import of what
you are selling – strict international controls govern the transfer
of certain technology.
Consider how practical issues will be dealt with. Will the
business still be able to guarantee delivery within a reasonable
time?
If there are countries which the business chooses not to sell
into, or cannot sell into, then it is important to ensure that the
back-office systems are not able to process orders from those
countries.
In addition it might be necessary to specify on the site and in
the terms and conditions which countries the site is intended to
sell to, and / or if there are any which it is not.
The website should contain a well drafted set of website terms
and conditions including clauses clearly identifying chosen
markets, choice of law, jurisdiction and preferred form of dispute
resolution. Consider adopting a "best of breed" approach when
drafting terms – meeting the strictest legal controls of all of the
countries into which you sell goods or services. This helps to make
sure that even if your terms are questioned the business is likely
to have met or exceeded its legal obligations.
Terms will need to be properly incorporated into the order
process. When drafting terms and conditions, the following
issues must be considered:
- When selling B2B to customers based in the EU then it is
important to ensure that your choice of law and jurisdiction
clauses are valid and enforceable. It may nonetheless be worth
adapting the terms and conditions to meet the obligations in the
recipient's jurisdiction, in the event that a recipient is able to
build a claim allowing him to rely upon the Brussels Regulation to
claim jurisdiction. Pay particular attention to limitations of
liability and exclusions of warranties.
- If selling to consumers then make changes to the terms and
conditions for each country which is being sold into. While these
can be based on the business' standard terms and conditions in all
cases these should be amended by a lawyer qualified in the country
in which the consumer is based. It may also be necessary to make
some changes to reflect local consumer laws. In all cases it is
always worth having the agreement translated into the local
language.
- As well as the terms attached to the actual sale, remember that
there are a variety of other legal obligations which will need to
be complied with in the countries in which the site operates. For
instance different countries have different laws relating to
website accessibility. Equally, while European laws like the
E-Commerce Directive and the Distance Selling Directive apply to
all countries in the EU, different countries will interpret each
slightly differently.
If your business needs advice on these issues or if
you have any questions, get in touch with one of our contacts.
