Internet Commerce in Foreign Countries

Vol. 28 No. 3

By

Ekaterina Schoenefeld practices commercial and international law in Princeton, New Jersey.

 

With the invention of the Internet, rapid technological advances, and decrease in technology costs, e-commerce has become more widespread, both domestically and internationally, giving a rise to numerous legal issues. Complying with federal laws and the laws of various states while doing business in the United States is already complicated enough, but ensuring the business’s compliance with the laws of foreign countries poses an additional challenge. When advising clients preparing to do business online both in the United States and in foreign countries, it is crucial that attorneys be familiar with applicable domestic laws, laws governing international transactions, and the laws of the respective foreign countries.

On the U.S. side, the Uniform Commercial Code, state common law, export and re-export control laws and regulations, and country-specific agreements and treaties still apply and remain highly relevant to the e-commerce transactions. In addition, the Export Administration Regulations contain a list of goods and services (Commerce Control List, i.e., commodities, software, and technology) that are subject to licensing requirements by the U.S. Bureau of Industry and Security.

As in the case of any domestic business, an attorney must ensure that the proposed business names, trademarks (if any), and website domains are available in all geographic areas in which the client intends to operate for all its respective lines of business. In addition to registering the businesses and obtaining the requisite licenses and permits, the clients might want to ensure that the businesses do not violate, and their assets (e.g., website content, marketing materials) are protected under, the copyright and trademark laws. The clients should also consider whether their businesses own any potentially patentable material (e.g., specific products, website design) that should be protected under the appropriate patent laws. The website of the business should contain all appropriate legal disclosures, disclaimers, terms, and conditions, as well as comply with laws of all jurisdictions in which the business intends to operate.

Additional considerations are language issues, sensitivity to cultural differences, and regulatory barriers, such as antitrust and customs laws.

 

Setting Up a Contract

With the ever-expanding use of the Internet, electronic communications inevitably became an integral part of negotiating and transacting business both online and off-line and, more often than not, became part of the contract formation process. Recognizing the changing environment of commercial transactions, several e-commerce-specific statutes were enacted, such as the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act. These statutes, among other things, validate the use of electronic signatures and electronic records in lieu of traditional paper ones.

Conducting business online presents its own unique challenges, such as using encryption to ensure the confidentiality of the information provided by a customer (provided this encryption complies with export and re-export laws). Another challenge is verifying the buyer’s identity. Unlike an in-person transaction, the online seller has limited means to ascertain that a potential buyer has in fact the legal capacity or authority to enter into a binding contract. One way to resolve this issue is to include a statement to that effect in the website’s terms and conditions, which should be easily visible and accessible. Another option is to require that the customer register or create an account prior to making a purchase, providing, among other things, the customer’s age or, in the case of a business-to-business transaction, the customer’s title.

Online sellers should be aware of privacy and data protection laws that, in some countries (e.g., member states of the European Union, or EU), are much more stringent than those in the United States. For instance, the European Commission’s Data Protection Directive prohibits transfer of personal data to non-EU countries that do not meet the European “adequacy” standard for privacy protection; the U.S. privacy laws do not meet this standard. But to close the gap between the differing approaches to privacy in the European Union and the United States, so-called “Safe Harbor” principles were developed that allow a U.S.-based company to conduct business in the European Union by complying with these principles, which require annual recertification with the U.S. Department of Commerce and a statement of that fact on its website. In short, cross-border sellers have an obligation to safeguard their buyers’ personal information according to U.S. laws as well as the laws of jurisdictions where they expect to conduct business.

Depending on the nature of the services rendered or goods offered for sale, there are two basic ways to set up such a contract. The first and historically traditional way is by negotiating each contract individually—the sellers advertise their goods or services on their websites, and the potential customers have an option to place an order by phone, online, or, in certain instances, via e-mail (e.g., for personalized services or custom-made goods). To establish the transaction’s trail in case of any dispute in the future, vendors should consider using means such as confirmation of an order, acknowledgment of receipt, digital signatures, and date- and time-stamping.

Another, and now the most common, way of selling over the Internet is by using a standardized agreement to which a customer must consent in order to complete a transaction. The enforceability and validity of such agreements are usually the main concerns of the sellers of goods or providers of services. Typically these agreements are rather lengthy documents, and discussion of their content is outside the scope of this article. A few common features are worth mentioning, however.

First, such agreements should be written in plain English, and customers should be given an opportunity to scroll through the entire agreement and to affirmatively express assent to its terms by checking the box and/or clicking the button “I agree.” Second, the agreement should qualify, or limit its applicability, with respect to the customers from each specific country where the business expects to make sales according to the laws of this country. For instance, such agreements often contain a forum selection clause mandating that all disputes should be resolved in a specific jurisdiction. So, a customer from New Jersey who bought online a defective product from a Delaware-headquartered corporation may find itself bound to litigate in Alaska, if the agreement so provides—hardly a convenient forum in case of a small business or an individual. However, in most European countries, a contractually imposed forum selection clause in the context of a consumer transaction would be unenforceable. Thus, the agreement should expressly state which terms would not apply or differ with respect to the customers from a specific country. In the context of business-to-business transactions, forum selection and choice of law clauses are generally appropriate and should be included.

Obviously, attorneys advising clients on doing business over the Internet in a foreign country should be generally familiar with the relevant laws of that country. Foreign states—just like the United States—have their own bodies of law applicable to cross-border transactions. For instance, the EU Distance Selling Directive applies to most types of contracts for goods or services sold to EU consumers and entered into by any means other than the simultaneous physical presence of the parties. Clearly, this directive directly applies to online international transactions. Among other things, the directive requires that consumers must be provided with comprehensive information prior to entering into a contract, confirmation of that information in a durable medium, right to cancel the contract within seven business days without giving any reason and without any penalty (except for the cost of returning the goods), right to performance within 30 days after placing an order, etc. These rights are considered to be fundamental and generally cannot be waived.

Finally, it is a good practice for attorneys to have a list of local counsel handy to use as a reference or referral source should their clients require legal assistance or more nuanced advice on the laws of a particular foreign country.

 

Legal Ramifications

Other important considerations are tax issues related to Internet transactions that are likely to have tax implications both for the sellers (income and sales taxes) and their customers (use taxes). Clients are commonly concerned with identifying which jurisdictions require sellers to be responsible for collecting sales taxes and which jurisdictions subject them to paying income taxes. Most U.S. states impose a sales tax on goods and/or services sold in that state. Similarly, the European Union’s value-added tax (VAT) is imposed on certain services and goods sold to customers located in the member states of the European Union, where each member state may have different VAT rates, and different tax rules would apply to sales of goods and provision of services. Because in a typical e-commerce transaction, a seller based in one state frequently conducts business with a customer located in another state or a foreign country, the common issues are which tax laws of which state or country would apply. But what if the business involves the sale of online services—such as those offered by social networking or dating websites—where the service itself is provided through the computer network and delivered over the Internet and which may be located anywhere in the world? The federal, state, and international tax laws applicable to Internet transactions are still evolving and can be quite complex and confusing.

 

Dispute Resolution

In advising clients on whether to include arbitration and/or mediation clauses, counsel should carefully consider the nature of the anticipated business transactions as well as the benefits and drawbacks of all available forms of dispute resolution, taking into account issues presented by the international aspect of the dispute. Traditionally, litigation used to be associated with lower costs and filing fees, independent decision makers, and a right to appeal. Today, however, litigation proceedings can easily take years, may involve an additional cost of hiring local counsel, and are likely to pose additional challenges associated with electronic evidence and discovery. By contrast, despite higher initial costs, arbitration may result in a faster resolution of disputes. Additionally, parties have the ability to choose arbitrators, language, and place of the proceedings. It also allows for modified or simplified rules of evidence and procedure and may provide for an easier enforcement of arbitral awards. Mediation is another form of dispute resolution that is essentially the settlement proceeding facilitated by a neutral third party and is non-binding. Online dispute resolution (ODR) is similar to arbitration or mediation proceedings except for the fact that—as its name suggests—it takes place online; it may be a good choice where traditional means of dispute resolution are not cost efficient or available. Whichever method of dispute resolution is ultimately chosen, counsel should include it in the contract terms to avoid confusion and the possibility of unnecessary costs that could result from parallel proceedings.

 

Venue and Jurisdiction

Any business selling goods or providing services over the Internet to customers located in another state or a foreign country will likely find itself one day subject to the jurisdiction of that state or country as a result of its activities there. Because an Internet-based business is accessible from anywhere in the world, the key issue is the extent to which such a business is exposed to liability in that jurisdiction and how to limit such exposure. In the absence of an enforceable forum selection clause, U.S. courts would still apply the respective federal or state forum analysis. However, more often than not, standard agreements include a choice of forum clause providing for a specific venue and jurisdiction for resolution of disputes arising out of the transaction. Such provisions often—but not always—will be effective in limiting the number of jurisdictions to which the Internet-based business is exposed within the United States.

In addition, counsel advising clients on transacting business in other countries must be familiar with the laws of these countries. For instance, the Brussels I Regulation and the Lugano Convention provide for uniform rules on jurisdiction and enforcement of judgments in civil and commercial matters. The European Community and individual states such as Norway, Iceland, and Switzerland acceded to the Lugano Convention; it applies to disputes where a defendant is domiciled in a state bound by it, regardless of where the plaintiff is located. Article 15 of the revised Lugano Convention specifically addresses consumer contracts; it is aimed at protecting consumers by prohibiting contractually imposed choice of forum provisions upon consumers. Other provisions address specific rules pertaining to sales of goods and performance of services.

 

Arbitration

International arbitration is one of the most prevalent methods of settling disputes between foreign parties. A carefully drafted arbitration clause should spell out the choice of law, the place of the arbitration, the language in which the arbitration will be conducted, the number and qualifications of the arbitrators, the arbitral institution, and arbitration rules (or non-administered arbitration), including discovery rights and obligations. The International Chamber of Commerce’s International Court of Arbitration and the American Arbitration Association’s International Centre for Dispute Resolution (ICDR) are two major arbitral institutions among many other equally important ones. Parties may also agree to be bound by the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules. The International Bar Association’s Rules on the Taking of Evidence in International Commercial Arbitration are also becoming prominent. Although the traditional advantage of arbitration over litigation as a faster method of dispute resolution is gradually eroding owing to the increased number and complexity of cases, the main advantage—easier enforceability of arbitral awards—still remains, as 144 countries have adopted the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention).

 

Conclusion

Advising clients on how to do business over the Internet can be both challenging and rewarding. Numerous complex laws and regulations that are already in effect and that continue to evolve—just like the Internet and the technology itself—make it a good fit as a practice area for any counsel who enjoys intellectual stimulation and growth. 

 

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