EU online trading at risk – the ECJ rules on choice-of-law clauses in general terms and conditions

Long version of the article by Dr Sylvia Kaufhold in the FAZ newspaper of 29 June 2016, page 18: “Risk for online traders – ECJ could trigger wave of cease-and-desist letters“

Following a referral by the Austrian Supreme Court of Justice (Vienna Supreme Court of Justice, decision of 9 April 2015 – 2 Ob 204/14k) proceedings that may have significant effects on cross-border e-commerce are currently pending before the European Court of Justice (ECJ). The injunction claim by an Austrian consumer protection association against Amazon EU, Luxembourg, essentially involves whether and under what conditions an online trader – at least if it is domiciled in a Member State of the EU – is entitled to include a choice-of-law clause in its general terms and conditions in favour of the law of its own country and what consequences this has on how the other clauses in the terms and conditions are worded. The Opinion of Advocate General Henrik Saugmandsgaard has now been published (Opinion of 2 June 2016, case C-191/15 – Verein für Konsumenteninformation (Consumer Information Association) against Amazon EU Sàrl). If the ECJ agrees with this Opinion, European online retailers will have to immediately discontinue their cross-border activities even if the choice-of-law clause used by them is worded correctly according to the Advocate General’s specifications. Otherwise, there is a risk of cease-and-desist letters, this especially from consumer protection associations and also from competitors. In contrast, online retailers who deliver to Europe from third countries are likely to be spared. This is because European consumer protection associations are not entitled to request that injunctions against “intra-Community breaches” of consumer protection laws be imposed on such retailers from the start (see section 4a of German Act Relating to Actions for Injunction in the Case of Breaches of Consumer Law and Other Laws).

I. Factual aspects and background

The facts underlying the cross-border injunction claim against Amazon EU, Luxembourg, are typical for current e-commerce practices and ought not to pose any major problems in the digital single market:

A retailer wishes to sell and deliver goods to domestic and international customers on the basis of a single website, in particular using the same general terms and conditions. The questions arising in this situation include what law will ultimately apply to the individual contracts with consumers from the different countries and whether consumer associations from other Member States can bring legal action against the retailer (cease-and-desist letters, fines, etc.) if its general terms and conditions possibly do not comply 100% with the consumer protection rules of the various countries of delivery since the retailer has drafted them in accordance with its own law. Even within the EU, these rules have not yet been fully harmonised, for example in relation to warranty rights and damages.

II. Legal assessment

1. Wording of choice-of-law clauses and their effect in individual cases (individual consumer protection)

In contrast to Art. 4(1)(a) of European Rome I Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I), which uses of the place of domicile or home country of the seller to infer the applicable legal regime, Art.  6(1) Rome I assumes that consumer contracts entered into on a cross-border basis are governed by the law of the consumer’s home country. This applies in any event if the retailer “targets” its activities at the foreign market concerned, which in the ECJ’s case law is the case simply if there is a willingness to deliver. Thus retailers have to take into account that the contract law of all the countries to which they intend to deliver goods will apply.

Art. 6(2) Rome I explicitly states that it is admissible to agree on different governing law, but at the same time immediately limits its effects: the choice of law may not lead to consumers losing the mandatory protection afforded by the law of their own country. In the event of a dispute, the law that is more favourable to the consumer has to be determined by the court by carrying out a “favourability check” and applying this irrespective of what is specified in the choice-of-law clause. The Advocate General now believes, in line with a judgment of the Federal Court of Justice from 2012, that choosing the law of the retailer’s home country in its general terms and conditions breaches the Unfair Contract Terms Directive and is therefore ineffective if the choice-of-law clause merely refers to the law of the retailer’s home country without at the same time stating that the mandatory consumer protection law has priority in accordance with Art. 6(2) Rome I.

Regardless of the correct legal justification of this requirement, it does not come as a surprise to German retailers and is certainly capable of preventing consumers being under false impressions about their rights. Apart from this, the consumer’s position is strengthened in the event of disputes because they can always invoke the law of their own country in cases of doubt and even base this claim on the advice to this effect given by the retailer in the choice-of-law clause. Thus, the Advocate General’s opinion in relation to required wording for the choice-of-law clause is to be approved.

2. Effect of choice of law in proceedings by associations (collective consumer protection)

Viewed logically, a choice-of-law clause with the consumer law proviso referred to above would now have to be regarded as admissible under European law and, if it is not individually enforceable simply due to Art. 6(2) Rome I, to at least offer retailers the advantage that they can generally draft their general terms and conditions on the basis of the chosen law. However, in the opinion of Advocate General Saugmandsgaard this is not the case. He does not classify the statutory entitlement of consumer associations for discontinuation of cross-border breaches of consumer law by using ineffective general terms and conditions (collective consumer protection) as a contractual obligation, but as an exclusively non-contractual obligation. And he wishes only to apply the law of the state in which the collective consumer interests are affected to this obligation in accordance with Art. 6(1) of Regulation (EC) No 864/2007 of 11 July 2007 on the law applicable to non-contractual obligations (Rome II). This means that only the law of the consumer’s place of residence would be relevant, regardless of the applicable contract law. A choice-of-law clause expressly worded to point out the mandatory consumer rights in the general terms and conditions would be completely lacking in effect, and the provision in Art. 6(2)(1) Rome I explicitly allowing choice of law would be superfluous.

The reason for the Advocate General coming to this remarkable conclusion must also be that the Austrian court referring the question had initially asked what law was applicable in proceedings brought by an association, and only then asked whether the specific choice-of-law clause was admissible under the law on general terms and conditions. This led to the logical connection necessarily existing between general admissibility of choice of law in general terms and conditions and the review of the other clauses for compliance with the law on general terms and conditions in proceedings brought by associations based on this being obscured.

Taking the Advocate General’s point of view, the question of which law should specifically serve as the standard of review for the breach of law to be established or the review of the terms and conditions for compliance with the law also remains unanswered in the end. In contrast, according to the case law of the Federal Court of Justice (judgment of 9 July 2009 - Xa ZR 19/08 (KG) – Ryanair-AGB), which the Austrian Supreme Court of Justice explicitly referred to in its order for reference, this question has to be additionally qualified by contractual law (which is incidentally also the position taken by Amazon, the Federal Government and the EU Commission in the preliminary ruling proceedings). This case law states that the law of the state that would be applicable to the contracts intended to be concluded by the retailer in the specific circumstances is taken as a benchmark. If a choice-of-law clause exists that is transparent, and therefore effective, this can only be the law chosen.

However, in collective consumer protection the link to contract law does not go so far. In this respect the Advocate General’s standpoint that provisions requiring “a specific, actually existing obligation to be assumed” (II(50) of Advocate General Saugmandsgaard’s Opinion) also have to be included in the (abstract) standard of review, is to be approved. This applies to the favourability check which according to Art. 6(2)(2) Rome I is only feasible and sensible in particular cases and therefore has to be completely omitted during proceedings brought by associations, unlike what was obviously assumed by the Vienna Supreme Court of Justice at the lower instance (for a detailed examination see Kaufhold, Internationale Webshops – anwendbares Vertrags- und AGB-Recht im Verbraucherverkehr, EuZW 2016, 247).

III. Conclusion – outlook and importance of conflict of laws for the digital single market

It can only be hoped that the ECJ will resolve the Advocate General’s circular reasoning and, at least in proceedings brought by associations, enforce the choice of law that is also explicitly allowed in consumer contracts under European law in the necessary manner. But even if the ECJ agrees with the Federal Court of Justice’s solution of qualifying the injunction claim under contract law, European online trading needs clear rules to distinguish between the possibly conflicting laws when running a webshop. The legal situation is extremely confusing, not only within the law on general terms and conditions and contract law. The country of origin principle that applies anyway under the E-Commerce Directive should, at least in collective consumer protection, i.e. in relation to the retailer’s general compliance with the rules applying at its place of domicile, be strengthened. Individual consumer protection based on the law of the consumer’s home country, which is characterised by contract law, would not be affected by this. It could for example be determined that every online retailer has to make it clear what law their webshop is subject to on their homepage, at the same time providing information on the proviso regarding mandatory local law. Such privileged treatment could apply within the EU in any case and would not necessarily have to include traders from third countries. Compared to the current EU Commission’s Digital Single Market strategy, which also aspires to full harmonisation of contract law fragmented across individual directives (see draft Directives of December 2015 on certain aspects concerning contracts for online sales of goods and provision of digital content) solutions involving conflict of laws provisions would be far less incisive for the law of Member States and therefore preferable under the principle of subsidiarity. Apart from this, further (minimum) harmonisation must be backed above all by sustainable and well thought-out solutions and should not further promote the legal fragmentation caused by European directives. It is to be hoped that the Commission will fundamentally reconsider its regulatory approach in the context of its digital strategy, at least in relation to contract law, and that it will concentrate on achieving the necessary refinements to current conflict of laws provisions in the Rome I und Rome II Regulations.