B2C in Europe and Avoiding Contractual Liability : Why Businesses with European Operations Should Review their Customer Contracts Now

Publié le 14/09/2004 par Cyril Ritter, David Naylor

In June 2004, 31 clauses in the standard contractual terms used by AOL’s French subsidiary in its online subscriber contract were held to be illegal by a French court. Most of the clauses that the French court held to be illegal breached mandatory rules of local contract law and/or consumer and data protection laws that…

In June 2004, 31 clauses in the standard contractual terms used by AOL’s French subsidiary in its online subscriber contract were held to be illegal by a French court. Most of the clauses that the French court held to be illegal breached mandatory rules of local contract law and/or consumer and data protection laws that are harmonized across the European Union (“EU”). There is therefore a significant risk that courts elsewhere in Europe would reach similar conclusions, if called to rule upon similar terms. Businesses employing such terms in contracts with European consumers in both the online and offline environments should therefore note that they may have exposure throughout the EU.

Further, most of the illegal clauses were in a form typically used by many companies — particularly US-based companies — in their standard consumer contracts. Companies should therefore exercise caution before using contracts drafted initially for the US market in Europe.

As a result of the French court’s decision, the illegal clauses (including crucial disclaimers and limitations of liability, as well as clauses relating to payment and termination) are unenforceable by AOL France (“AOL”). The court also awarded €30,000 damages against AOL, and required it to remove the offending clauses from its contract within one month (with a further fine of €1,000 per day for failure to do so) and notify its customers of the resulting changes to the contract. The court also ordered the company to publish the substantive parts of the court’s judgment on its website and in three national daily newspapers.

The clauses that the French court held to be illegal included provisions dealing with:

• Contract acceptance by performance (use of website)

• Cross-border transfer and disclosure of personal data

• Modifications to / discontinuance of service

• Modifications to payment terms

• Late payments

• Billing disputes

• Connection fees

• Per-minute billing

• Disclaimers of liability for AOL content, third party content, service interruptions, service performance, results from the use of the service and negligence

• AOL rights of termination

• Customer rights of termination

• Limitation of customer remedies and AOL liability

• Customer indemnities

• License of customer content to AOL

This alert provides a brief overview of the key aspects of the decision in Union Fédérale des Consommateurs v AOL France (“UFC v AOL France”) and seeks to identify the principal lessons to be drawn for businesses operating in Europe. In summary, most businesses dealing with consumers in Europe should carefully review their standard customer contracts. Otherwise, they run the dual risks that their contracts may be found to be unenforceable (either entirely or in fundamental areas) and that they will have liability in damages to consumers and, potentially, in some jurisdictions, legally recognized consumer protection bodies.

The Judgment in UFC v AOL France

The Union Fédérale des Consommateurs (“UFC”), which is a French consumer protection body, claimed that 36 clauses contained in AOL’s standard subscriber contract were illegal. The UFC’s action, which was upheld by the Court in respect of 31 of the 36 clauses, was based on: (a) principles of contract law, (b) unfair contract terms law (an area which was harmonized at the EU level by the 1993 Directive on Unfair Terms in Consumer Contracts), and (c) data protection law, which was also largely harmonized in the EU by the 1995 Data Protection Directive and the 2002 Electronic Communications and Privacy Directive.

US style class action law suits are rare in Europe. However, it is worth noting that the action against AOL was brought by a legally recognized French consumer protection body, rather than an individual subscriber. Businesses with operations elsewhere in Europe should be aware that there are similar consumer organizations and consumer protection agencies, with authority to enforce local consumer protection laws, in many EU Member States.

Foreign businesses operating in Europe also should not assume that a choice of law or exclusive jurisdiction clause selecting non-European law/courts will allow them to escape the consequences of this case. Such businesses may be subject to jurisdiction in European courts whether they operate through a subsidiary or not. For example, if a contract between a US business and a European consumer provided that New York law will govern the contract, a European court may strike the choice of law provision as being unfavorable to the consumer or an unfair contract term because it seeks to circumvent mandatory local law and/or European law provisions protecting consumers. Thus, foreign businesses should not view choice of law or exclusive jurisdiction clauses as being a means to avoid the restrictive consumer laws in Europe.

Below we examine the grounds on which the contract clauses were successfully challenged by the UFC.

Contract Law

In UFC v AOL France, several clauses were struck down by the Court because they were found to breach “mandatory” local laws (i.e., laws which parties to a contract may not, under the laws of that jurisdiction, circumvent or derogate from).

By way of example, the Court deemed illegal a clause that read as follows: “if you are not satisfied with AOL or with the service provided by AOL, your only remedy is to terminate your subscription.” The Court confirmed that a contract cannot waive the parties’ right to enforce it in court. Another clause in AOL’s standard contract provided that AOL would not be liable for damages to the subscriber arising from the subscriber’s use of the internet, unless the subscriber could demonstrate that the damage suffered resulted from AOL’s intentional behavior. This clause was held illegal because it had the effect of reversing the burden of proof in actions for damages. Finally, another clause provided for a general, total waiver of liability which also extended to AOL’s own service providers and “content” providers. The clause was held illegal on the basis that (a) under French law, in principle, contracts can only create rights and obligations for the contracting parties, as opposed to third parties; and (b) in any event, the clause was “by nature unfair”, as it created an obvious “imbalance” to the detriment of the consumer. In the context of consumer contracting, courts in several other European jurisdictions might also strike out such a clause, even in jurisdictions which give broader recognition to third party rights.

“Unfair” Contract Terms under the 1993 Directive

The underlying premise of the 1993 Directive on Unfair Terms in Consumer Contracts is that the consumer’s commercial position is inherently weaker than the seller’s, as regards both the consumer’s bargaining power and his level of knowledge of the product. The Directive provides that a contractual provision will be “unfair” (and unenforceable) if: (a) it was not individually negotiated between the parties and (b) it causes a “significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer”. Although there is an indicative list of unfair terms attached to the Directive, this drafting has provided the courts with a broad discretion to strike out provisions in European consumer contracts.

In UFC v AOL France, several clauses were struck down because they: (a) were arbitrary and blatantly unfavorable to the consumer, (b) were insufficiently precise — this lack of precision being favorable to AOL, (c) allowed AOL to unilaterally modify the service to be provided under the contract, or (d) constituted unjust enrichment (for instance, the Court held that AOL’s technical expertise could allow it to charge customers on a per-second basis rather than on a per-minute basis).

In addition, the Court held that the clause permitting AOL to terminate the contract at any time and without providing any reasons for termination was unfair and therefore illegal. The Court held that termination clauses must be favorable to consumers: consumers should be entitled to terminate the contract at any time, without reason, and subject to a reasonable notice period/minimum contract duration, but the service provider should not have symmetrical rights. The Court held that AOL should only be entitled to terminate the contract for a serious breach by the customer. Several grounds of termination (to the benefit of AOL) were struck down because they entitled AOL to terminate without the customer having committed a serious breach of the contract. The Court’s conclusion on this point is consistent with the indicative list of unfair terms that is attached to the Directive.

Data Protection Issues

The judgment in UFC v AOL France also illustrates the difficulties for businesses in complying with the EU’s very stringent data protection regime. AOL’s standard subscriber contract contained a clause — deemed illegal — to the effect that: (a) the subscriber’s personal data would be transferred outside the EU, and (b) the subscriber’s personal data would be communicated to third party direct marketers. Companies that hold or process personal data in Europe should note that the customer’s prior consent is generally required for cross-border data transfers and direct marketing. In this context, consent needs to be specific and communicated by means of a “positive act” (i.e., ticking a box expressing consent, rather than omitting to tick a box expressing objection). The Court rejected the provisions in the AOL contract on the basis that they relied on an ‘opt-out’ approach, which the court also considered too complex in terms of the steps required of the user, rather than ‘opt-in’ based consent.

Clauses That Were Upheld: What AOL Was Permitted To Do

AOL’s contract contained a few clauses that were challenged by the UFC, but upheld by the Court. For example, the UFC had argued that the clause providing for full liability of the subscriber in connection with the use of the subscriber’s AOL screen name should be held illegal because it failed to take account of the fact that the customer’s AOL screen name could be hijacked by hackers. The Court rejected this claim, holding that the UFC had not convincingly demonstrated the probability of this scenario. The Court also ruled that a clause stipulating that the subscriber could not use the AOL internet access service to send unsolicited mass e-mail was perfectly valid, as it was sufficiently clear and did not contravene any rule.

Bringing Contracts with European Consumers into Compliance – Outline Guidance

Generally, the 1993 Directive on Unfair Terms in Consumer Contracts requires contract terms to be drafted in plain and intelligible language and that ambiguities should be interpreted in favor of consumers. Businesses dealing with consumers in Europe would be well advised to ensure that their customer contracts do not include any of the terms contained in the indicative list of unfair terms which is attached to the Directive. In summary, contractual provisions in EU consumer contracts should meet the following requirements:

1. Clauses should comply with mandatory local laws, including consumer protection and data protection laws and — if transacting online — e-commerce and distance selling laws.

2. Clauses providing for non-European governing law or exclusive jurisdiction in non-European courts will not necessarily allow foreign businesses operating in Europe to avoid being subject to similar lawsuits in European courts. European courts may strike such choice of law or exclusive jurisdiction clauses as being unfavourable to the consumer or an unfair contract term because such clauses may have the effect of circumventing mandatory local law and/or European law provisions protecting consumers.

3. Clauses should avoid creating any “significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer”.

4. Clauses should be justified, as opposed to arbitrary or baseless, and proportionate. In UFC v AOL France, the Court struck down several clauses which were deemed blatantly unfavorable to consumers, such as a total, general disclaimer of liability.

5. Crucially, the drafting of the contract should be precise. Throughout Europe, the courts will generally reject insufficiently precise contract terms in consumer contracts on the basis that they are too readily capable of interpretation by the seller to the consumer’s detriment. In addition to the UFC v AOL France case, there is abundant European case law on vaguely worded contract terms.

A version of this legal update will appear in a forthcoming issue of both E-commerce Law Reports and E-commerce Law & Policy. For more information about these publications please visit http://www.e-comlaw.com/.

© Morrison & Foerster, 2004