Establishment and licensing

Different jurisdictions take different views about whether the establishment of a business requires some form of registration and/or licence. Some requirements are near-universal – there may be no countries where an unlicensed bank can operate lawfully. Clearly, an e-commerce business needs to comply with the rules of the country where it establishes itself. The difficult question is deciding how far the business should also comply with the rules of countries with whose residents it does online business, but where it has no establishment. This depends on how far those rules apply to foreign online businesses.

Most states apply their laws only to activities undertaken within the state, or the effects which those activities have within the state. This generally works quite well offline. However, determining the location where electronic commerce activities take place or have effects is extremely difficult. Traditional tests for localisation of commercial activities look for particular trigger events, the most common of which include:

  • the place of delivery of products sold;
  • the place where services were performed;
  • the place where advertising is viewed;
  • the place where a purchaser took steps towards concluding a contract; and
  • whether the supplier ‘targeted’ the jurisdiction in question.

All of these are largely metaphysical concepts where products and services are supplied on-line, or where products are advertised and contracts concluded via a website.

The alternative is to adopt ‘country of origin’ regulation between a group of states, coupled with an appropriate degree of harmonisation or convergence of those states’ national laws.

The most striking example of country of origin regulation is found in arts 3 and 4 of Directive 2000/31/EC on electronic commerce, which provide:

Article 3

  1. Each Member State shall ensure that the Information Society services provided by a service provider established on its territory comply with the national provisions applicable in the Member State in question which fall within the coordinated field.
    1. Member States may not, for reasons falling within the coordinated field, restrict the freedom to provide Information Society services from another Member State

Article 4

1. Member States shall ensure that the taking up and pursuit of the activity of an Information Society service provider may not be made subject to prior authorisation or any other requirement having equivalent effect …

A number of exceptions to this principle are set out in the Annex to the Directive, but its general effect can be expressed quite simply. An electronic commerce business in one Member State is free to do business with residents of every other Member State provided that it complies with its own national laws, even if its activities would contravene the laws of the purchaser’s Member State. Thus, for example, a UK electronic commerce business cannot be subject to action for breach of Germany’s unfair competition law simply on the ground that its website is visible to German customers and it does business with German consumers.

This adoption of the country of origin principle is only possible because of the large degree of harmonisation which has already taken place in fields such as consumer protection, and because the Directive’s other provisions on commercial communications (arts 6 and 7) and the provision of information about the business (art. 5) introduce common controls on the potentially controversial aspects of these activities. How far the principle will be adopted on a global scale depends very much on the degree to which the economic pressures exerted by electronic commerce result in convergence of these aspects of other jurisdictions’ laws.

6.2 E-commerce contracts – applicable law and jurisdiction

A general rule of contract law is that parties are free to contract as they wish. This includes the freedom to agree the laws and the jurisdiction[1] which they wish to govern the contract. They do this to ensure not only that they know the laws which govern the contract but also that they know the rules and procedure of the courts which may have to determine any dispute that arises as a consequence of the contract. However, the fact that the parties can choose the law or jurisdiction does not necessarily mean that the choice is valid or enforceable. In some cases the choice itself will be ineffective. In others, the choice will be effective but certain provisions of a different law (which would have applied had there been no choice of law or jurisdiction) will continue to apply.[2] 

In the absence of a choice of law and/or jurisdiction clause, the UK courts will apply the Rome Regulation4 and the Brussels Regulation5 to determine these matters. The explanation below covers only the rules which might apply to the most common kinds of B2C e-commerce contract, and thus omits rules which can only apply to offline dealings. Additionally, these instruments contain special rules for particular types of contract, such as sales by instalment on credit and sales of package holidays, so the full legal position is rather more complex than this simplified explanation. 

The basic rules for contracts are:

  • The applicable law is that of the country where the seller of goods, or the supplier of services, is habitually resident.6 If, though, the contract is ‘manifestly’ more closely connected with another country, that country’s law will apply.7 If the default rules in article 4(1) of the Rome I Regulation do not give an unambiguous answer, the applicable law is that of the country where the contracting party who is to make the characteristic performance of the contract is habitually resident8 – for sales of goods or supplies of services, this will usually be the seller’s or supplier’s country.
  • The courts which have jurisdiction to hear claims arising out of that contract are the courts of the country where the defendant is domiciled9, the courts of the country where the contractual obligation in issue was to be performed10 and, if the litigation relates to the operations of a branch, agency or other establishment, the courts of the country where that branch, agency or other establishment is domiciled.11

It is important to note that there can only be one law applicable to a contract[3], but by contrast a claimant is often given a choice of jurisdictions in which to sue.

However, where one of the parties is a consumer the rules are different:

  • The applicable law will be that of the consumer’s country of habitual residence if the business conducts its activities in that country or ‘by any means, directs such activities to that country’13, except where the contract is for services to be supplied to the consumer in a different country.14 A choice of law is allowed, but this may not ‘have the result of depriving the consumer of the protection afforded to him by provisions that cannot be derogated from by agreement by virtue of the law which, in the absence of choice, would have been applicable’.15 This means that the ‘mandatory’ rules of the law of the consumer’s country of habitual residence will continue to apply.
  • Where ‘the contract has been concluded with a person who pursues commercial or professional activities in the Member State of the consumer’s domicile or, by any means, directs such activities to that Member State or to several States including that Member State, and the contract falls within the scope of such activities’16, then the consumer may sue either in his jurisdiction of domicile or that of the supplier, but can only be sued in his home domicile.17 Any advance choice of jurisdiction clause is normally invalid, though an enforceable agreement about jurisdiction may be entered into after the dispute has arisen.18

Because it is extremely rare to encounter a B2B e-commerce contract which does not contain a choice of both law and jurisdiction, the provisions relating to B2C contracts are generally of most concern for electronic commerce activities. The fundamental test is the same for both law and jurisdiction – did the online supplier ‘direct’ its activities to the consumer’s country of residence?

This immediately raises the question whether a website, which by definition can be accessed world-wide, amounts to activities directed to those jurisdictions in which the website is accessible. The US courts apply the ‘minimum contacts’ doctrine19 to decide questions of jurisdiction, which is functionally very similar to the ‘directed activities’ test under the Brussels Regulation and the Rome I Regulation. They have answered this question by making a distinction between an ‘active’ website, which solicits those outside the jurisdiction to undertake a commercial transaction with the website owner, and a ‘passive’ website which merely provides information. The former is sufficient to satisfy the minimum contacts doctrine[4] whereas the latter is not.[5]

[1] These are two separate issues. Parties can choose a jurisdiction without choosing a law or choose a law without choosing a jurisdiction. However, failure to specify both law and jurisdiction is likely to lead to substantial uncertainty.

[2] See e.g. UK Unfair Terms in Consumer Contracts Regulations 1999, SI 1999 No 2083, reg. 9, which provides:

These Regulations shall apply notwithstanding any contract term which applies or purports to apply the law of a non-Member State, if the contract has a close connection with the territory of the Member States.

4  Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), OJ L177/6, 4 July 2008.

5  Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, OJ L12 p 1, 16 January 2001.  The new Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (Brussels Regulation (recast)) will be applied from the 10th January 2015.  

6  Rome I Regulation art 4(1)(a) & (b).

7  Rome I Regulation art 4(3).

8  Rome I Regulation art 4(2).

9  Brussels Regulation art. 2.  Brussels Regulations (Recast) Art.4

10  Brussels Regulation art. 5(1). Brussels Regulations (Recast) art 7(1)

11  Brussels Regulation art. 5(5) Brussels Regulations (Recast) art 7(5)

[3] Unless the contract is severable into parts to which different laws should be applied, Rome Convention art. 4(1).

13  Rome I Regulation art 6(1).

14  Rome I Regulation art 6(4)(a).

15  Rome I Regulation art 6(2).

16  Brussels Regulation art. 15(1)(c).  Brussels Regulation (Recast) Art 17(1)(c)

17  Brussels Regulation art. 16. Brussels Regulation (Recast) Art 18

18  Brussels Regulation art. 17. Brussels Regulation (Recast) Art 19

19  Derived from International Shoe Co. v. Washington, 326 U.S. 310.

[4] Maritz Inc v Cybergold Inc 947 F Supp 1328 (ED Mo, 1996); Zippo Mfg Co v Zippo Dot Com Inc 952 F, Supp 1119.

[5] Bensusan Restaurant Corp v King 937 F Supp 295 (SDNY, 1996) aff’d 126 F 3d 25 (2nd Cir, 1997).

All papers are written by ENL (US, UK, AUSTRALIA) writers with vast experience in the field. We perform a quality assessment on all orders before submitting them.

Do you have an urgent order?  We have more than enough writers who will ensure that your order is delivered on time. 

We provide plagiarism reports for all our custom written papers. All papers are written from scratch.

24/7 Customer Support

Contact us anytime, any day, via any means if you need any help. You can use the Live Chat, email, or our provided phone number anytime.

We will not disclose the nature of our services or any information you provide to a third party.

Assignment Help Services
Money-Back Guarantee

Get your money back if your paper is not delivered on time or if your instructions are not followed.

We Guarantee the Best Grades
Assignment Help Services