Jurisdiction: Building Confidence in a Borderless Medium
July 26-27, 1999
The EU Proposes a New Legal Framework for Electronic Commerce
David Church, Partner
Mike Pullen, Associate
Dibb Lupton Alsop, Brussels
The global infrastructure for electronic commerce is very new and is
currently undergoing rapid growth. This can be seen from a number of
indicators including the share price of internet companies. It is still not
clear how electronic commerce will be regulated as it is a virtual medium
which transcends national borders. The regulation of electronic commerce
has been discussed in international forums such as the WTO, the OECD, and
WIPO. Over the next decade advances in electronic commerce will affect
almost every aspect of life. A wide range of products from books to
pharmaceuticals are already available on line. Furthermore new technology
is making it possible to pay for goods and services over the internet. This
is leading to a system of virtual money which can be stored on smart cards
and other technologies which provides the basis of electronic commerce.
On the 18th November 1998, the European Commission ("Commission")
proposed legislation in the form of a draft directive ("Directive") designed
to create a legal framework for electronic commerce within the EU. The aim
of the legislation is to facilitate cross border e-commerce transactions.
The Directive incorporates the fundamental principles of the internal
market, country of origin and mutual recognition. These principles have
been reaffirmed by the European Court of Justice ("ECJ") in a number of
cases involving the free movement of goods and services beginning with the
landmark Cassis de Dijon case.
If the Directive is adopted on the basis of the country or origin
principle it will mean that businesses using e-commerce will only have to
deal with one law (that of the country in which they are established) rather
than up to 15 different laws of the EU Member States. This is due to the
fact that the concept of mutual recognition obliges EU Member States to
accept that the laws of other Member States provide a level of protection
equal to their own law even if the laws of the other Member States are
different or less restrictive of certain activities.
The Main Elements of the Directive
The Directive makes proposals in the following areas:-
- The establishment of electronic commerce service
The Directive aims to address the current legal uncertainty
surrounding the issue of establishment by providing a definition of
the State of establishment in line with principles established by
the EU Treaty and the case law of the ECJ. It also prohibits the
use of prior licensing or special authorisation schemes for
e-commerce services and sets out certain information requirements
that the service provider must give in order to ensure the
transparency of its activities.
- Commercial communications (advertising, sponsorship,
direct marketing, promotions etc)
The Commission believes that commercial communications are a
fundamental part of the majority of electronic commerce services.
Therefore the Directive defines what constitutes "commercial
communication" and makes such communications subject to certain
rules regarding transparency in order to ensure consumer confidence
and fair trading. The Directive requires e-commerce businesses to
ensure that commercial communications by e-mail are clearly
identifiable in order to prevent harmful intrusion into consumer
The Directive also states that regulated professions (eg lawyers
and accountants) should be permitted to use commercial
communications providing they comply with the professional codes of
conduct drawn up by national professional associations.
- Online conclusion of contracts
The Directive states that electronic commerce will not fully
develop if the conclusion of on-line contracts is hampered by
certain formal and other requirements (eg language requirements)
which are not adapted to the needs of on line business. The
Directive proposes that Member States should be obliged to adjust
their national legislation to facilitate online contracts. In
addition the Directive clarifies the moment of the conclusion of a
contract in certain cases.
- Liability of intermediaries
The Commission recognises the need to clearly identify the legal
liability of on-line service providers for transmitting and storing
third party information. The Directive limits service provider
liability by using the mechanism of a "mere conduit" for
The Commission is seeking to ensure that existing EU and national
legislation is effectively enforced. The Directive intends to do
this by using the principle of mutual recognition and the
development of codes of conduct at EU level. Furthermore it aims to
increase cross border co-operation between national regulatory
authorities in the Member States and the setting up of an effective
cross border dispute resolution system.
Article 1 of the Directive sets out its objectives and scope. It clarifies
the primary objective which is to ensure that after the implementation of
the Directive, e-commerce services will be able to fully benefit from the
free movement of services between Member States of the EU.
Article 2 gives definitions of what constitutes "information society
services". This is in accordance with the definition laid down in Articles
59 and 60 of the EU Treaty. Information society services are defined as
"any service that is normally provided for remuneration at a distance by
electronic means and at the request of a recipient of services". The
Article also gives definitions of the terms "at a distance" by electronic
means and "at the individual request of a recipient of services".
The provision of internet television broadcasting is expressly excluded
from the definition as this is governed by Article 1(a) of directive
There is a certain amount of uninformed opinion surrounding the
definition contained in Article 2 which holds that services not provided for
remuneration paid by the recipient fall outside the scope of the Directive.
This is incorrect as the definition of services provided for remuneration
is taken from Articles 59 and 60 of the EU Treaty and re-affirmed by the ECJ
in Case 352/85 Bond van Adverteerder et al where the ECJ stated that the
term provision of services for remuneration covered services provided to
recipients where the remuneration was not given by the recipient but by a
third party eg an advertiser paying a TV broadcaster to transmit
advertisements to the public is a service for remuneration despite the fact
that the service is not paid for by the recipient.
Article 2 also gives a definition of service providers which encompasses
both natural and legal persons.
Paragraph (c) of Article 2 defines the concept of "established service
providers" This definition allows the Commission to determine the Member
State in whose jurisdiction the service provider is situated. It is based
on Article 52 of the EU Treaty and the judgement of the ECJ in case C-221/89
 ECR I-3905 at paragraph 20 where the ECJ stated that the concept of
establishment within the meaning of Article 52 of the Treaty involves the
actual pursuit of an economic activity through an establishment in a Member
State for an indefinite period.
This definition is based on criteria regarding the nature and stability
of the economic activity rather than formal legalistic criteria such as a
letter box address or the establishment of a technical method of
It should also be noted that in certain circumstances the ECJ has held
that a provider of services can be established in several Member States.
The ECJ has held that the Member State in whose jurisdiction the service
provider falls is the one where the service provider has its centre of
activities (see case C-56/96  ECR I-3143 at paragraph 19).
Article 2 also contains a definition of a recipient of services again
based on Articles 59 and 60 of the EU Treaty.
Article 3 - internal market
The object of this Article is the implementation of the freedom to provide
services under Article 59 of the EU Treaty. This is based on determining
the Member State responsible for regulating the activities of e-commerce
(the country of origin) and the prohibition on other Member States
restricting the freedom of e-commerce service providers to provide services
The Member State in which the service provider is established pursuant to
the definition in Article 2 is required to ensure that the service
provider's activities comply with the Directive as implemented into its
This Article does not override the 1980 Rome convention on applicable law
for contractual obligations or the 1960 Brussels convention on jurisdiction
and the enforcement of judgements.
Section 1 - Establishment and information requirements
Article 4 - The exclusion of prior authorisation
The purpose of this Article is to reinforce the principle of freedom to
provide services by facilitating access to the supply of services on the
internet. It constitutes a "right to a site" which can be exercised by any
natural or legal person wishing to provide e-commerce services over the
In short this provision prevents Member States from maintaining and
introducing any legislation requiring prior authorisation or licensing
before internet sites can be set up for the provision of electronic commerce
However this Article does not override existing requirements for
professional qualifications or authorisations by a professional body for the
provision of services which are not exclusively aimed at e-commerce
Article 5 - general information to be provided
This Article sets out the minimum information (e.g. the name, place of
establishment and e-mail address and VAT registration which the service
provider must give to consumers. It supplements the information
requirements which exist in directive 97/7/EC on the protection of consumers
in relation to distance contracts. It also extends the provisions of the
distance selling directive by placing the obligation on the service provider
to provide the information even where no contract is to be formed.
The information in question must be easily accessible from the service
being provided eg by clicking on an icon or a logo with hypertext link to
the page containing the information which should be visible on all the pages
of the website.
Prices indicated in Euros will meet the price information requirement
laid down in this Article.
Section 2 - Commercial Communications
Article 6 - Information to be provided
This Article establishes the principle that commercial communications must
be clearly identifiable as such by consumers eg commercial communications
should not be hidden in the form of an advertorial.
The person on whose behalf the commercial communication is carried out
must also be clearly identified eg the banner could carry the name of the
company or an icon or logo with a hypertext link to the page containing this
information which should be visible on all the pages of the site.
Promotional offers must also be transparent and must give the consumer
sufficient information so as not to leave any ambiguity as to their nature
and the conditions of entry and participation.
The rules and conditions of entry to competitions and games must be
clearly indicated to consumers by means of a logo or icon with a hypertext
link to the relevant web page.
It should be noted that the only competitions allowed under the Directive
are those related to commercial communications. Gambling is expressly
excluded from the scope of the Directive (see Article 22(1)).
Article 7 - Unsolicited Commercial Communications
The aim of this Article is to ban spamming practices ie the sending of
unsolicited e-mail to consumers. This Article obliges Member States to
enact legislation requiring unsolicited commercial communications to have a
specific message on the envelope so that the recipient can immediately
identify it as a commercial communication without having to open it.
Article 8 - Regulated Professions
This Article sets out the general principle that members of regulated
professions are permitted to use commercial communication, to the extent
necessary for these professions to be able to provide e-commerce services,
provided that such communications meet the professional rules of conduct
applicable to them.
The Commission has also reserved the right to define what type of
information is compatible with the professional rules of conduct in the
Committee set up under Article 23.
Section 3 - Electronic Contracts
Article 9 -Treaty of Electronic Contracts
This Article requires Member States to change their legislation in order to
allow contracts to be concluded by electronic means.
Member States will have to:
- Repeal provisions which expressly prohibit or restrict the use
of electronic media for contracting.
- Refrain from preventing the use of certain electronic systems as
intelligent electronic agents for making a contract.
- Refrain from creating a two tier system which gives electronic
contracts less legal effect than paper contracts.
- Repeal formal contractual requirements which cannot be met by
electronic means or create ambiguities when applied electronic
Please note this does not affect the requirement of a signature which is
governed by the proposal for a directive on the common framework of
For example, statements that the contract be "written" or that a document
can be presented or that there is an original copy of the contract or that
the contract must be "printed" or "published" will have to be amended as
this will hinder electronic contracting.
Requirements as to human presence ie that contracts be negotiated or
concluded by natural persons or in the presence of both parties will also
need to be changed to allow electronic contracting.
This Article also contains a number of derogations from the general rules
in respect of:-
- contracts requiring the involvement of a notary;
- contracts which must be registered with a public authority to be
- contracts governed by family law;
- contracts governed by the law of succession.
The Member States are required to submit complete lists of excluded
contracts to the Commission.
Article 10 - Information to be provided
In order to achieve a high standard of fair trading and consumer protection
this Article sets out the different steps which are necessary to conclude an
It requires Member States to enact legislation for concluding an
electronic contract using a mechanism to ensure that the parties can give
full and valid consent.
Article 11 - Moment at which contracts is concluded
The aim of this Article is to define with certainty as to when a contract is
concluded in situations where:-
- the contract is concluded when the recipient of the service:
- has received from the service provider, electronically, an
acknowledgement of receipt of the recipient's acceptance; and
- has confirmed receipt of the acknowledgement of receipt;
- acknowledgement of receipt is deemed to be received and
confirmation is deemed to have been given when the parties to whom they are
addressed are able to access them;
- acknowledgement of receipt by the service provider and
confirmation of the service recipient shall be sent as quickly as
Section 4 - Liability of Intermediaries
Article 12 - Mere conduit
Article 12 creates an exemption from liability for service providers in
situations where they act as a mere conduit for the transmission of
information over a communications network.
This exemption covers both cases in which a service provider would be
directly liable and cases where the service provider would be considered
secondary liable. This exemption from liability also includes criminal
liability e.g. a service provider would not be liable for the dissemination
of pornographic material from a website connected to its system where it
merely provided a conduit for the dissemination of the information over the
In order to qualify for the exemption service providers must meet certain
pre-conditions. These are as follows:
- The service provider must not initiate the transaction. This
means that the transaction must not be under the control of the service
- The service provider does not select the receivers of the
- The provider does not select nor modify the information
contained in the transmission.
Article 13 - Caching
This Article governs temporary forms of storage which is referred to as
"systems caching". This form of storage is used by service providers to
enhance the performance of networks and does not constitute a separate use
of information transmitted over the network therefore copies of information
made available on line by third parties are temporary kept in the operators
system or network for the purpose of facilitating the access of subsequent
users to the information. These copies are made by technical or automatic
process and are intermediate between the network where the information was
originally made available and the final user. In such cases the service
provider shall not be liable providing that the following conditions are
- the provider does not modify the information;
- the provider complies with conditions on access to the
- the provider complies with rules regarding the updating of the
information, specified in a manner consistent with industrial
- the provider does not interfere with the technology, consistent
with industrial standards, used to obtain data on the use of the
- the provider acts expeditiously to remove or to bar assess to
the information upon obtaining actual knowledge of one of the
Article 14 - Hosting
This Article sets a limit on the liability of service providers as regards
the activity for the storage of information provided by recipients of the
service or at their request (e.g. the provision of server space for an
The exemption from civil and criminal liability cannot be claimed if the
service provider knows that the user of its service is undertaking illegal
activity. The test is whether or not the service provider has actual
knowledge of the illegal activity.
The exemption from liability as regards complaints for civil damages will
not be granted if the service provider is aware of the facts and
circumstances from which the illegal activity is apparent. The test here is
Service providers will not lose the exemption from liability if on
obtaining actual or constructive knowledge of illegal activity they act
expeditiously to remove or disable access to the information.
The Commission also actively encourages industry self-regulatory mechanism
including the establishment of codes and conduct and hotline mechanisms to
report illegal content.
Article 15 - No obligation to monitor
Article 15 states that service providers are under no obligation to monitor
third party content placed on their system. However this rule does not
prevent a court or a law enforcement agency from requesting a service
provider to monitor a site for a given period of time.
Chapter 3 - Implementation
Article 16 - Code of Conduct
The Commission is encouraging the creation of self-regulatory codes of
conduct at EU level. In order to ensure that switch codes are consistent
with EU law interested parties are encouraged to inform the Commission of
any draft codes. Voluntary agreements to which public authorities are party
must be notified to the Commission in accordance with the terms of Directive
Article 17 - Out of court dispute settlement
Article 17 seeks to establish a form of pan-European alternative dispute
resolution for e-commerce transactions.
Article 18 - Court actions
The aim of this Article is to ensure that Member States take measures to
ensure the availability of legal remedies in urgent cases (e.g.
Article 19 - Co-operation between authorities
The purpose of Article 19 is to encourage co-operation between regulatory
authorities in regulating the internet.
Article 20 - Electronic media
The aim of this Article is allow implementing measures to be adopted
concerning the electronic means which might be considered appropriate for
facilitating alternative dispute resolution and co-operation between the
regulatory authorities and Member States.
Article 21 - Sanctions
This is a standard EU provision requiring Member States to put appropriate
sanctions in place for violations of the Directive.
Article 22 - Exclusions and derogations
The directive contains a number of derogations. These are as follows:
However before relying on such a derogation there is an obligation on the
Member State to inform the Commission.
- A general derogation providing that the application of the
directive does not cover taxation and the free movement of personal data as
guaranteed under directive 95/46/EC.
- Member States are also allowed to derogate from the provisions
of the directive on the grounds of public policy, public security and public
morality and consumer protection.
- Derogations from Article 3 in respect of
- copyright, neighbouring rights, rights referred to in Directive
87/64/EEC and Directive 96/9/EC as well as industrial property
- the emission of electronic money by institutions in respect of which
Member States have applied one of the derogations provided for in
Article 7(1) of Directive / /EC;
- Article 44 paragraph 2 of Directive 85/611/EEC;
- Article 30 and Title IV of Directive 92/49/EEC, Title IV of
Directive 92/96/EEC, Articles 7 and 8 of Directive 88/357/EEC and
Article 4 of Directive 90/619/EEC;
- contractual obligations concerning consumer contracts;
- unsolicited commercial communications by electronic mail, or by an
equivalent individual communication.
Section 5 - Advisory committee and final provisions
Article 23 - Advisory Committee
Article 23 sets up a consultative committee charged with assisting the
Commission in implementing its power of enforcement.
These are the standard Articles contained in all internal market Directives
dealing with re-examination, implementation and entry into force.
Perhaps the most contentious issues surrounding the adoption of the
Directive are that it is based on the principles of mutual recognition and
country of origin.
Mutual recognition is an established and uncontroversial principle which
is constantly applied in a multitude of sectors (e.g. the New Approach
Directives on technical standards which apply to products including toy
safety and low voltage). Despite this, consumer groups have attacked this
aspect of the Directive. It seems surprising, if not perverse, that a
concept which is uncontroversial when applied on a daily basis to product
safety should become so when applied to the marketing of electronic
The Commission has chosen to use the principles of the country of origin
and mutual recognition rather than full harmonisation as the basis for the
Directive because it recognises Member States of the EU operate a number of
different sets of rules regarding marketing promotions and commercial
communications which are impossible to harmonise without killing off the
electronic commerce sector in its infancy. As a case in point, under the
unfair competition laws of several Member States (e.g. Germany) it is
forbidden to offer three for the price of two discounts or loyalty bonuses.
These types of restrictions are normally justified on the grounds of
consumer protection. However, they are frequently characterised as
restrictions on the freedom to trade which do nothing more than protect
inefficient economic actors from fair competition. These laws have also been
criticised as damaging to consumers interests as the restriction on the use
of competitive tools such as promotions keeps prices at an artificially high
level by discouraging new market entrants. This has been recognised by the
Commission and it is taking a complaint against Germany for restricting
the free movement of goods and services by imposing a ban on loyalty
The decision to base the Directive on the principles of mutual
recognition and country of origin will also help to overcome the setback
suffered by the internal market when the ECJ delivered its ruling in the
Keck case where it stated that restrictions on commercial communications
which applied equally to both imported and domestic products and did not
discriminate in law or in fact against traders fell outside the scope of
Article 30 of the Treaty. This judgement has been used as a legal
justification for the failure by the Commission to pursue infringement
proceedings in respect of national laws that restrict the free movement of
services. This is despite the fact that the ECJ has consistently refused to
apply this principle to services under Article 59 ( see Bosman, Alpine and
de Agostini). The ECJ's refusal to apply the Keck doctrine to the free
movement of services is hardly surprising, the restrictions which the ECJ
stated fall outside the scope of Article 30 in the Keck judgement are
secondary restrictions in so far as the free movement of goods is concerned,
ie goods can still enter the market even though they cannot be marketed
effectively. However, if this concept was to be applied to the free
movement of services, it would constitute a primary barrier to free movement
because services would not be allowed to cross borders. This would have the
effect of fragmenting the internal market and distorting trade flows.
The Directive is a major step forward in increasing Europe's
competitiveness in this rapidly developing area. It will allow a great deal
of consumer choice, for example, a consumer in Member State A who is not
able to take advantage of a three for the price of two offer through normal
retailing channels in that State due to the existence of the unfair
competition law may dial up a web site in Member State B and receive such an
offer as the web site established in Member State B will not be subject to
the restrictions in Member State A.
Also, consumers will continue to enjoy a high level of protection as the
Directive does not affect the provisions of other legislation such as the
Distance Selling Directive, the Unfair Contract Terms Directive and the
Products Liability Directive which impose an approximated set of rules for
consumer protection across the EU.
Consumers will also retain their right to sue suppliers in the consumers
country of domicile under the provisions of the Brussels Convention.
Furthermore, contracts concluded between suppliers and consumers who are
domiciled in different Member States cannot be used to take away the rights
which a consumer would enjoy in his country of domicile which are protected
under the terms of the Rome Convention.
The Directive also allows Member States to derogate from its provisions
on a case by case basis to impose restrictions on information society
services supplied from another Member State if necessary to protect public
interest on the grounds of protection of minors, fights against racial
hatred, sexual racial discrimination, public health or security and consumer
protection. However, such restrictions would need to be proportionate to
their stated objective. Moreover, it introduces the important caveat that,
the restrictions can only be imposed after the Member State where the
service provider is established has been asked to take adequate measures and
failed to do so and the intention to impose restrictions has been notified
in advance to the Commission and to the Member State where the service
provider is established.
As stated above the Directive has been strongly criticised by consumer
groups. In the author's view this criticism is based on a misunderstanding
of the law. The consumer groups' view that the adoption of the Directive
will have a negative effect on the present EU consumer protection
legislation is mistaken. The fact of the matter is that the Directive
actually strengthens EU consumer protection law by requiring, inter alia,
transparency of commercial communications and increased co-operation between
regulators. Therefore, the author finds it surprising that the consumer
groups are taking such a negative view of a Directive which has many
benefits for consumers whilst allowing the growth and expansion of
businesses providing e-commerce services.