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UBC Theses and Dissertations

The protection of the online consumer through online dispute resolution and other models of redress Schulze Suedhoff, Ulrich 2001

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T H E P R O T E C T I O N O F T H E O N L I N E C O N S U M E R T H R O U G H O N L I N E D I S P U T E R E S O L U T I O N A N D O T H E R M O D E L S O F R E D R E S S by U L R I C H S C H U L Z E S U E D H O F F State Board Examination, Universitaet zu Berlin, 2000 A THESIS S U B M I T T E D IN P A R T I A L F U L F I L L M E N T O F T H E R E Q U I R E M E N T S F O R T H E D E G R E E O F M A S T E R O F LAWs. in T H E F A C U L T Y O F G R A D U A T E STUDIES (Faculty of Law) We accept this thesis as conforming to the required standard T H E U N I V E R S I T Y O F BRITISH C O L U M B I A October 2001 © Ulrich Schulze Suedhoff, 2001 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of The University of British Columbia Vancouver, Canada DE-6 (2 /88) Abstract Traditional redress mechanisms such as litigation and traditional alternative dispute resolution generally fail to strengthen consumer confidence in e-commerce. Rather they may represent an additional source of uncertainty. In particular litigation fails to offer the certainty the consumer seeks. To date, neither European nor American courts have found reliable criteria for determining Internet jurisdiction and have failed to provide consistency in their decisions. In addition, uncertainty arising from unclear concepts on the enforcement level and the high volume of disputes with low monetary value have led to the development of online ADR providers that allow individuals from across the world to settle disputes. Both online mediation and online arbitration serve consumers as appropriate instruments to enforce their rights arising out of online disputes. They are designed for disputes with small monetary value and are capable of overcoming jurisdictional obstacles. On the enforcement level, online arbitration based on the New York Convention provides the consumer with a powerful tool on global level. Online consumer arbitration can ensure a maximum of enforceability if the consumer arbitration rules of online ADR providers incorporate the requirements of the New York Convention. In addition or instead of online ADR, businesses increasingly rely on other dispute avoidance and dispute settlement instruments in order to promote consumer confidence. Some of those models employed by e-commerce companies succeed in promoting trust, while others do so only to a limited extent. In particular, mandatory credit card chargeback regimes give consumers an effective and quick means of disputing a transaction with a merchant at almost no cost. On the other hand, escrow services seem to be less appropriate for the typical small amount e-commerce transaction mainly since consumers are generally not willing to pay the added costs for the use of the escrow service for the average small amount transaction. Trustmark and seal programs provide the potential to give guidance to the consumer about consumer protection standards of the online seller before any damage is done and offer ii effective and inexpensive certification, monitoring and enforcement procedures. However, to date trustmark and seal systems have applied these powerful tools only to a limited extent. A proliferation of trustmark and seal programs make it hard for consumers to distinguish between differences in the programs and to assess their quality. Rating and feedback systems provide an immediate and inexpensive source of information to buyers about sellers and a strong incentive for good performance to repeat sellers. These systems are prone to abuse and information gathered through these systems is often unreliable. In my thesis I argue that traditional litigation no longer provides the most appropriate means of dispute settlement in the case of small amount cross-border consumer transactions. Neither do traditional ADR mechanisms provide the most convenient and efficient method of settling online consumer disputes. Online A D R and several other models of redress successfully replace traditional mechanisms since they better meet the challenges of online disputes and live up to recognised consumer protection principles. I argue that online arbitration based on international arbitration law such as the New York Convention presents a particularly viable instrument for the settlement of the average small-amount online consumer disputes. After having sketched the jurisdictional hurdles for the resolution of online disputes I analyse whether both online A D R and other trust-creating models are capable of providing an efficient and fair redress instrument for the consumer. For this purpose, the practises and policies of online dispute resolution providers are mirrored in recognised consumer protection principles and the international legal framework. Likewise the potential and limits of other trust-creating models are explored under the question of to what extent they serve the consumer as a viable instrument to impose her rights. The guiding questions of this evaluation will be if and to what extent these recently evolved institutions meet - according to their policies and practises - the challenges set up by the particularities of online consumer transactions. iii Table of Contents Abstract i i Chapter I - Introduction to the thesis 1 Chapter II - Online Dispute Resolution 16 A. Alternative Dispute Resolution 16 I. Arbitration 16 II. Mediation 18 B. From Alternative Dispute Resolution to Online Dispute Resolution 21 I. Adaptation of Traditional ADR to the Online Environment 21 II. Evaluation of the Efficiency of Online ADR 25 III. Evaluation of Online ADR in the Light of Consumer Protection 28 1. General 28 2. Consumer Protection Principles 28 i. Independence and Impartiality 30 ii. Affordability 31 iii. Transparency 31 iv. Effectiveness 32 v. Due Process 34 vi. Legality 34 3. Online Arbitration 36 a. Description Virtual Magistrate 36 b. Evaluation Virtual Magistrate 37 i. Independence and Impartiality 37 I V ii. Affordability 38 iii. Transparency 38 iv. Effectiveness 39 (1) Legal Obstacles according to the New York Convention 41 (a) Applicability of the New York Convention to Consumer Disputes 42 (b) The Arbitration Agreement 43 (1) Agreement in Writing 44 (ii) Arbitrability of Consumer Disputes 53 (a) European Law 54 (P) American Law 55 (c) Place of the Proceedings 58 (d) Enforcement 61 (2) Conclusion 62 v. Due Process 64 vi. Legality 64 c. Conclusion 65 4. Online Mediation 69 a. Description SquareTrade 69 b. Evaluation 70 i. Independence and Impartiality 70 ii. Affordability 71 iii. Transparency 71 iv. Effectiveness 71 v v. Due Process 73 vi. Legality 73 c. Conclusion 73 IV. Conclusion 77 Chapter III - Other Models of Redress 81 I. Dispute Avoidance 82 1. Information Intermediaries 82 a. Trustmarks and Seals 83 b. Rating and Feedback Models 88 2. Transaction Intermediaries 92 a. Payment Intermediaries 92 II. Dispute Settlement 98 1. Credit Card Chargeback 98 2. Escrow 107 III. Conclusion 110 Chapter IV - Conclusion 114 Bibliography 118 vi Chapter I: Introduction to the thesis The enormous growth of the Internet community has already had huge impacts on global commerce. Both large and small businesses are able to communicate, contract, and in some cases even deliver products and services around the world quickly and inexpensively. A new form of global competition in markets for goods and services which were nationally isolated in the past, low barriers of entry and direct online marketing at almost no costs led to an enormous sales potential in electronic commerce. Consumers can now reap the rewards of more choices and lower costs due to global competition, more efficient allocation of resources and the greater transparency of markets. But at the same time they also share the disadvantages of additional costs and mistrust caused by legal uncertainty. Lack of consumers' trust and confidence in the electronic marketplace is regarded as the principal brake on the full potential of e-commerce 1. A large part of this uncertainty stems from open questions related to jurisdictional issues, redress mechanisms available to consumers, and the applicability of consumer protection law 2. Consumers want a safe and trustworthy online environment and a strong and affordable remedy in their hands to enforce their rights when a transaction goes wrong 3. If the seller is located abroad, the consumer faces several jurisdictional hurdles. For instance, suppose that a consumer with domicile in France orders a book online at amazon.com, an e-commerce retailer with place of business in Washington/U.S., and after payment is taken in advance via credit card and the 1 Fukuyama, in: 'E-Commerce and the Challenge of Trust', p. 2, available at www.ml.com/woml/forum/ecommercel.htm. 2 Frank Diedrich, in 'A Law of the Internet? Attempts To Regulate Electronic Commerce', p. 2, 2000 (3) The Journal of Information, Law and Technology (JILT), available at http://elf.warwick.ac.uk/iilt/OQ-3/diedrich.html. 3 Perritt, in: 'Dispute Resolution in Cyberspace', Ohio State Journal on Dispute Resolution, Vol. 15:3 2000, p. 675. 1 book is delivered to the consumer, she becomes aware that the delivered book is the wrong one. One of the first difficulties the consumer has to face is finding a local court with jurisdiction to adjudicate, with the authority to subject the foreign seller to the process of its courts. Courts' decisions or international statutes do not exist or are inconsistent and contradictory and fail to provide clear guidance for the consumer. In the following section I will sketch the jurisdictional uncertainties in American and European law. Against this background I unfold the guiding concept of my thesis at the end of this chapter, hoping to provide more clarity on the issues at stake. According to American law, courts may assert jurisdiction if the parties have a 'minimum contact' with the forum 4. A plaintiff may not sue a defendant in a jurisdiction unfamiliar to the defendant, unless that defendant has established some relationship with that forum that would lead him to reasonably anticipate being sued there. If a party has substantial systematic and continuous contacts with the forum (e.g. it is the domicile or residence of the defendant), a court may exercise jurisdiction over a party for any dispute, even one arising from conduct that is unrelated to the forum. The contacts of a non-resident are sufficient to satisfy the minimum contact requirement if he 'purposefully availed' himself of the benefits of being present in, or doing business in, the forum, and the claim brought against the defendant arose out of the defendant's activities in the forum's state 5. If a party is not present or domiciled in the state and does not have any other systematic and continuous contacts with the state, local courts may exercise jurisdiction over a party for causes of action arising out of activities 4 International Shoe Co. v. Washington, 326 U.S. 310, 66 S. Ct. 154, 90 L.Ed. 95 (1945), available at http://caselaw.lp. findlaw.com/scripts/getcase.pl?navbv=search&court=US&case=/us/326/310.hto 5 International Shoe Co. v. Washington, supra note 4. 2 taking place outside the state which are expressly intended to cause an effect within the state 6. American courts are struggling to transfer the minimum contact test to the online context. So far they have not developed a coherent jurisdiction related to Internet disputes. In one of the early decisions, a U.S. court concluded that the activities of a company, which erected a passive website consisting of advertisements and a toll-free telephone number, met the minimum contact requirement. The company purposefully directed its advertising activities towards the foreign state on a continuous basis and therefore could reasonably have anticipated being brought before the court there 7. After this decision, the court had to face massive criticisms particularly based on its conclusion that anyone creating a website purposefully directs their activity towards worldwide jurisdiction without assessing the specific activity of the website provider8. A more thorough analysis of the actual Internet activity was conducted in Zippo Manufacturing Company v. Zippo Dot Com., Inc.9, a landmark decision which seemingly brought more clarity to jurisdictional issues and provided an analytical framework now most commonly used by lower courts. In Zippo, a trademark infringement case, the defendant conducted business over his website, which displayed an advertisement, and an application form that customers could fill out to subscribe to the defendant's news service, permitting a customer to submit an application and to provide a credit card number. The court 6 American Law Institute's Restatement (second) of Conflicts of Laws 37 (1971) stating that 'a state has power to exercise judicial jurisdiction over an individual who causes effects in the state by an act done elsewhere with respect to any cause of action arising from these effects unless the nature of these effects and the individual's relationship to the state makes such jurisdiction unreasonable'. 7 Inset Systems, Inc. v. Instruction Set. Inc, 937 F. Supp. 161 (D. Conn. 1996), available at http://www.imls.edu/cyber/cases/inset.htiril. 8 Geist, in: 'Is There a There There? Towards Greater Certainty for Internet Jurisdiction', p. 16, available at http://aix 1 .uottawa.ca/~geist/geistiurisdiction-us.pdf. 9 Zippo Manufacturing v. Zippo Dot Com., 952 F. Supp. 1119 (W.D. pa. 1997 available at http://cyber.law.harvard.edu/metaschool/fisher/domain/dncases/zippo.htm. 3 held that due to the defendant's business activity he targeted or directed its activities toward the forum. He purposefully availed himself of the benefits of the law of the forum so that the forum could exercise jurisdiction consistent with traditional jurisdictional principles. The new standard set by the Zippo test was that the court assessed the defendant's website according to its level of activity. The more passive a website, the less likely foreign jurisdiction would be held to be triggered. As long as the defendant clearly does business over the Internet, entering into online contracts with residents of foreign jurisdictions involving the known and repeated transmission of files over the Internet, he operates an active website and falls under foreign jurisdiction. In between, interactive websites for the exchange of information at the threshold to doing business must be assessed on a case by case basis according to the level of interactivity and commercial nature of the exchange of information that occurs on the website. However, in the aftermath of Zippo courts realised that the new standard also left an area of uncertainty and could hardly serve as a secure test for the assertion of adjudicative jurisdiction. Courts had a difficult time classifying websites falling as neither active nor passive in the 'middle zone' and both businesses and consumers were unable to assess in advance how courts might judge the interactivity of a middle zone website 1 0. In Cybersell, Inc. v. Cybersell, IncV, the court introduced criteria to determine jurisdiction based on actual effects. In this service-mark infringement case, a company advertised its services on its website and invited interested parties to contact it for additional information. The court was asked whether the allegedly infringing activities provided on the defendant's website were sufficient to trigger the jurisdiction of the forum of the service mark holder. Formally the Geist, supra note 8, p. 34. "Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414 (9th Cir. 12/2/97), available at http://laws.lp.findlaw.com/9th/9617087.html. 4 court followed the Zippo approach by analyzing the nature and the quality of Cybersell's websites and concluded that the website of Cybersell was rather passive. However, in refusing jurisdiction, the main argument of the court was that no forum's citizen actually visited the site and actually entered into any contractual relationship. With this effect-based argument the court demanded that the mere potentiality of commercial activity is insufficient to constitute jurisdiction. The court held that jurisdiction over a foreign defendant is justified when the defendant's intentional actions expressly aimed at the forum state and caused harm to the plaintiff in the forum state with actual or implied knowledge of the defendant. However, the effect-based approach alone does not provide any more certainty than the active/passive test did. Since Internet-based activity by nature creates effects in jurisdictions all over the world, a more reliable criterion must compliment this approach. In Bancroft & Masters, Inc. v. Augusta National Inc}2, a trademark infringement case, a targeting-based analysis was proposed as a more reliable test for assessing whether a business seeks to enter or to avoid a particular jurisdiction. Unlike the effect-based approach, the targeting-based analysis seeks to identify the intentions of the parties, assess the action taken to enter or avoid a particular jurisdiction and the harm which is suffered in the forum state resulting from the action 1 3 . However, difficulties arise around the issue of what constitutes 'targeting'. In line with the traditional jurisdictional principle of foreseebility, scholars have asked whether or not businesses wish to become connected to any given jurisdiction. The intent to be exposed to different jurisdictions is considered Bancroft & Masters, Inc. v. Augusta National Inc. 223 F.3d 1082 (9th Cir. 2000) available at http://laws.lp.findlaw.com/9th/9915099.html. 13 Bancroft & Masters, Inc. v. Augusta National Inc.,supra note 12, p. 1087. 5 determinative 1 4. Evidence of intent could be provided through criteria as the geographic location of tort victims, off-line order fulfillment, financial intermediary record, web traffic, etc. 1 5 . However, the targeting approach of the U.S. courts is in the end not convincing and uncertainty remains. Which criteria determine whether a jurisdiction is targeted? To what extent, for example, can the language of the website seriously be regarded as a determining factor in the case of such a commonly used language as English? While country-specific criteria such as language, currency accepted for payments, knowledge of a local brand, etc. might help to determine positively which countries a business directs its activities at, it is much less reliable to determine which countries those activities are not directed at 1 6 At the European level, adjudicative jurisdiction is governed by the Brussels Convention 1 7 . In the absence of a forum selection clause, the basic jurisdictional rule is that a defendant shall be sued in the state where he is domiciled 1 8 . Where consumers' contracts for the supply of goods or services are proceeded by a 'specific invitation' addressed to the consumer or by advertising, the Convention derogates in art. 13 (3) (a) from the basic rule 1 9. Art. 14 provides that while the Geist, supra note 8, p. 40. 1 5 Geist, supra note 8, p. 41. l6Foss, Bygraves, in: 'International Consumer Purchase through the Internet - Jurisdictional Issues pursuant to European Law', International Journal of Law and Information Technology, Vol. 8, No. 2, p. 120. 1 7 1968 Brussels Convention on Jurisdiction and Enforcement of Judgment in Civil and Commercial Matters, signed on the 27th of September 1968, available at http://europa.eu.int/ISPO/ecommerce/legal/documents/498v0126-l/498y0126-l EN.doc. 1 8 Art. 2 (1) of the Brussels Convention. 1 9 Article 13 of the Brussels Convention provides: "In proceedings concerning a contract concluded by a person for a purpose which can be regarded as being outside his trade or profession, hereinafter called 'the consumer', jurisdiction shall be determined by this Section, without prejudice to the provisions of point 5 of Articles 4 and 5, if it is: 1. A contract for the sale of goods on installment credit terms; or 2. A contract for a loan repayable by installments, or for any other form of credit, made to finance the sale of goods; or 3 Any other contract for the supply of goods or a contract for the supply of services, and (a) in the State of the consumer's domicile the conclusion of the contract was preceded by a specific invitation addressed to him or by advertising; and (b) the consumer took in that State the steps necessary for the conclusion of the consumer can sue the business in either her home jurisdiction or the state in which the business is domiciled, she can only be sued in her home state 2 0 . The rationale behind this provision is that a seller who sets up a business in order to benefit from the consumer has to accept the risk of being sued in the courts of the consumer's jurisdiction. In the online context, these provisions cause uncertainty and lack of clear guidance for the consumer. It remains particularly unclear to what extent e-commerce transactions preceded by online advertising or e-mail communication of the seller fall under the ambit of 'advertising' in the sense of art. 13 (3) (a). This is an important question since e-commerce leads to an increase in cross-border selling to consumers and is often preceded by marketing where the seller and the buyer are located in two different EU member states. The rules determining the jurisdiction in the case of a 'specific invitation' and 'advertising' through the seller are based on the principle of territory and designed for the 'off-line' world. In the online environment, they present some particular problems of interpretation. For instance, it remains unclear whether the seller's communication of promotional information via a website or e-mail before a contract is concluded constitutes 'advertising' or a 'specific invitation'. Some argue that 'advertising' does not include promotional information contained on a seller's websites since a website itself is comparable with the shop of a vendor and therefore a place where a vendor receives purchase orders and conduct contract. Where a consumer enters into a contract with a party who is not domiciled in a Contracting State but has a branch, agency or other establishment in one of the Contracting States, that party shall, in disputes arising out of the operations of the branch, agency or establishment, be deemed to be domiciled in that State. This Section shall not apply to contracts of transport". 2 0 Article 14: "A consumer may bring proceedings against the other party to a contract either in the courts of the Contracting State in which that party is domiciled or in the courts of the Contracting State in which he is himself domiciled. Proceedings may be brought against a consumer by the other party to the contract only in the courts of the Contracting State in which the consumer is domiciled. These provisions shall not affect the right to bring a counter-claim in the court in which, in accordance with this Section, the original claim is pending". 7 sales. A shop as such does not advertise, but sells . However, advertising and selling do not exclude each other and the end that the seller primarily pursues will depend on each individual website. A website that directs marketing to the consumer advertises products independently from the fact that products or services are also contracted over the website 2 2. The same reasoning is valid for e-mails as long as they contain promotional information. Furthermore, it remains uncertain to what extent an e-mail or website communication addressed to an individual user falls under the wording of a 'specific invitation' in the sense of the Convention. In contrast to the 'advertising' criterion, the word 'specific' suggests a narrower interpretation and embraces the seller's efforts to connect individually to consumers in foreign fora 2 3 . As long as the user does not request the transfer of promotional information from the website himself, the site as such does not represent a 'specific invitation'. E-mail communication sent to an individual consumer is likely to qualify as a 'specific invitation'2 4. In order to qualify as a consumer contract, art. 13 (3) (a) requires that the conclusion of the contract was preceded by a specific invitation addressed to the consumer or by advertising in the state of the consumer's domicile. Departing from the principle of territory laid down in this provision, uncertainty arises about the interpretation of the place where the marketing through a website or email communication has to take place in order to be within the state of the consumer's domicile. 2 1 Schu (1997) in: 'Consumer Protection and Private International Law in Internet Contracts', International Journal of Law and Information Technology (1997) 5, p. 192 (213). 2 2 Foss, Bygrave, supra note 16, p. 115. 2 3 According to the Giuliano/Lagarde Report on the 'Rome Convention on the Law Applicable to Contractual Obligations (Official Journal 1980 C 282), which provides guidance in the interpretation of the Brussels Convention, the criterion 'specific invitation' embraces activities as mail-orders and door-step selling and is intended to cover communication that are addressed to specific persons, not necessarily limited set of persons, see Schu, supra note 21, p. 199. 2 4 Foss, Bygrave, supra note 16, p. 117. 8 In the case of a website, the provision leaves open the question of when marketing actually occurs in the state of the consumer's domicile. Art. 13 (3) (a) suggests both the interpretation that marketing must be directed from outside to the state of the consumer or that the promotional information merely accessed by consumers in a certain state suffices 2 5. With reference to the latter interpretation, one could argue that the lines between directing and accessing promotional information blur in the online context since using the net as a marketing tool directs advertising to all states from which the vendor's website can be accessed 2 6 . Therefore, access to a website suffices to trigger the jurisdiction of the consumer's domicile. Others rely on a stricter interpretation of the Convention and demand that the seller must have intentionally directed the advertisement to the consumer's state 2 7. But even a bundle of country-specific criteria (language, currency, etc.) determining which particular jurisdiction has been targeted only reduces uncertainty to a limited extent 2 8. Several provisions of the Brussels Conventions show that they are not updated and adjusted to the particularities of electronic commerce. Already at this stage it can be concluded that the Brussels Convention hardly provides ideal solutions for determining jurisdiction in e-commerce. Recently some significant Foss, Bygraves, supra note 16, p. 118. 2 6 Stone, in: 'Internet Consumer Contracts and European Private International Law' (2000), Information and Communication Technology Law, p. 5, 8. 2 7 Giuliano Report, supra note 23, p. 24. 2 8 See supra note 16. 9 changes were introduced replacing and updating several provisions of the Brussels Convention to the online environment 3 0. Some of the above mentioned difficulties in the interpretation of online marketing will disappear, however others remain. Particularly, the proposal fails to provide clarity about its understanding of 'directed activities' in the context of online marketing 3 1. The amended provisions seem to introduce the concept that the consumer's jurisdiction is triggered if the seller directs his activities to the consumer's state through interactive websites 3 2. This impression stands in The new Regulation was approved by the European Union on 30th November and is published in the Official Journal as the 'Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters'. The new rules of jurisdiction are set to become law throughout Europe from March 2002. They are also available at http://europa.eu.int/eur-lex/en/lif/dat/2001/en 301R0044.html. 3 0 These Articles replace the original Articles 13 to 15 and provide rules for on-line consumer contracts. The new Regulation states, inter alia: " Article 15: 1. In matters relating to a contract concluded by a person, the consumer, for a purpose which can be regarded as being outside his trade or profession, jurisdiction shall be determined by this Section, without prejudice to Article 4 and point 5 of Article 5, if (a) it is a contract for the sale of goods on installment credit terms; or (b) it is a contract for a loan repayable by installments, or for any other form of credit, made to finance the sale of goods; or (c) in all other cases, 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. Article 16: 1. A consumer may bring proceedings against the other party to a contract either in the courts of the Member State in which that party is domiciled or in the courts for the place where the consumer is domiciled. 2. Proceedings may be brought against a consumer by the other party to the contract only in the courts of the Member State in which the consumer is domiciled. Article 17: The provisions of this Section may be departed from only by an agreement: 1. Which is entered into after the dispute has arisen; or 2. Which allows the consumer to bring proceedings in courts other than those indicated in this Section; or 3. Which is entered into by the consumer and the other party to the contract, both of whom are at the time of conclusion of the contract domiciled or habitually resident in the same Member State, and which confers jurisdiction on the courts of that Member State, provided that such an agreement is not contrary to the law of that Member State'. 3 1 According to the opinion of the Economic and Social Committee, the 'directing such activities' in Article 15 was not 'clear enough', in: 'Opinion of the Economic and Social Committee on the Proposal for a Council Regulation (EC) on jurisdiction and enforcement of judgments in civil and commercial matters' (COM (1999) 348 final - 99/0154 - (CNS)) available at http://www.esc.eu.int/fr/docs/fr docs op February.htm. 3 2 "The concept of activities pursued in or directed towards a Member State ... applies to consumer contracts concluded via an interactive website accessible in the State of the consumer's domicile. The fact that a consumer simply had knowledge of a service or possibility of buying goods via a passive website accessible in his country of domicile will not trigger the protective jurisdiction. The contract is thereby 10 contrast to earlier drafts of the Convention which included a provision stating that a company should be considered as 'directing' its activities to any member state in which its website was accessible3*. In addition to these contradictions, the proposal does not provide a definition or at least an indication of its understanding of 'interactive websites' and thus fails to lessen uncertainty. Summing up, to date neither the European nor the American courts have found reliable criteria to determine Internet jurisdiction and have failed to provide consistency in their decisions. However, even if a consumer's local court has jurisdiction over the foreign seller and issues a judgment against her, the buyer must enforce the judgment abroad unless the seller has local assets. Particularly smaller e-commerce enterprises of global reach operate primarily from abroad and 1 rarely have subsidiaries which would provide assets for the execution of a judgement. In most circumstances there is even no legal guarantee that the judgment can be enforced abroad. A legal framework on the global recognition and enforcement of foreign judgements is in progress. But even if the Hague Convention on Civil Judgement and Enforcement 3 4 were adopted sometime in the future, it would merely serve the consumer to a limited extent. The whole adjudicative procedure from the determination of the competent court to the enforcement of judgements remains expensive, time-consuming and often unpredictable for the consumer. Additionally, most consumers are already reluctant to engage themselves in an expensive lawsuit while the value of the online transaction is very low 3 5. treated in the same way as a contract concluded by telephone, fax and the like and activates the grounds of jurisdiction..." COM (1999) 348 final, 14.07.1999, p. 16. "international Center for Commercial Law, 'Consumer Contracts and Jurisdiction', available at http://www.icclaw.com/devs/uk/it/ukit 060.htm. 34Preliminary draft of the 'Hague Conference on Private International Law to the Convention on Jurisdiction and Foreign Judgements in Civil and Commercial Matters', available at www.hcch.net/e/conventions/draft36e/html. 3 5 Perritt, supra note 3, p. 675. 11 These observations suggest that traditional redress mechanisms as currently employed generally fail to strengthen consumers' confidence in e-commerce but rather represent an additional source of uncertainty. A different kind of redress may be especially attractive for online consumers contracting with foreign e-commerce ventures. Since litigation fails to offer the certainty that the consumer seeks, consumer's confidence must be promoted differently. In this context, ADR (alternative dispute resolution) is often regarded as a kind of "magic key" to respond to these challenges and to promote consumer's confidence in e-commerce 3 6 . Arbitration, mediation and other forms of ADR provide a range of convincing advantages to solve jurisdictional hurdles arising out of online consumer transactions. Since speed and low transaction costs are the major advantages of the Internet, disputes arising in online transactions require quick and inexpensive settlement. Experts can conduct arbitration proceedings and the costs may be lower than in court litigation, particularly if time is considered as a cost factor. In mediation the settlement process primarily remains under the control of the parties and does not follow a strict legal procedure. Due to the informal way of settling the dispute, mediation allows the parties to craft a solution that meets the parties' particular needs. However, some particularities of online consumer transactions raise the question of whether the recognised concepts of traditional ADR offer an efficient and fair remedy for the consumer in the online environment and thus succeed in lessening uncertainty. As the above mentioned example indicates, the average online consumer transaction is of a relatively low monetary value, often involves more than one country W|ith differing jurisdictional and consumer protection rules and is thus embedded into a highly complicated legal context, particularly on the enforcement level. Furthermore, it is concluded over an inherently anonymous 12 medium lacking consumers' trust. Due to these particularities, disputes arising out of online consumer transactions might justify an adaptation of traditional A D R mechanisms. Currently, there seems to be a gap between traditional A D R schemes and the challenges of online commerce. Traditional ADR, particularly arbitration, can still be very cost and time intensive. Will a consumer be willing to rely on arbitration if the costs of the proceedings will swamp the value of the underlying transaction? Is the reliance on the principle of territory in arbitration law still an adequate criterion for online transactions? How can the settlement agreement be enforced if the consumer is not willing to get involved in costly enforcement procedures by the courts? Is international arbitration law applicable for online disputes? How can the lack of trust traditionally established through face-to-face contact during the transaction process be compensated in the case of online transactions which are inherently anonymous? Instead, can strict compliance with recognised consumer protection principles lessen consumers' uncertainty and promote trust? The market responded to the lack of efficient redress instruments for e-commerce consumers and several online dispute resolution provider and other models of redress evolved. For instance, SquareTrade offers negotiation and mediation services and conducts almost the entire proceedings online using SquareTrade's online interfaces and email communication. The Virtual Magistrate handles exclusively online consumer disputes and conducts the arbitration proceedings via e-mail. Online dispute resolution providers allow consumer complaints to be settled rapidly, conveniently and at less cost than traditional, face-to-face ADR methods. However, these new forms of dispute resolution only serve to lessen the Pitofski in: Federal Trade Commission: summary of the joint workshop for ADR in online consumer transactions, p. 14, available at www.ftc.gov.bcp/altdisresolution/00606adr.pdf. 13 consumers' uncertainty and promote trust if they comply with the recognised standards of consumer protection and - in the case of online arbitration - with the international legal framework. Efforts to strengthen consumer's confidence can only be convincing if they apply consumer protection principles strictly. In addition to online dispute resolution, credit card charge back schemes and escrow models have experienced a comeback in e-commerce and provide consumers with efficient and strong redress instruments. Feedback and rating systems, trustmark schemes and other models of. redress are employed by e-commerce sites to strengthen consumer confidence in online transactions. In my thesis I argue that traditional litigation no longer provides the most appropriate means of dispute settlement in the case of small amount cross-border consumer transactions. Neither do traditional ADR mechanisms provide the most convenient and efficient method of settling online consumer disputes. Online A D R and several other models of redress successfully replace traditional mechanisms since they better meet the challenges of online disputes and live up to recognised consumer protection principles. I argue that particularly online arbitration based on international arbitration law as the New York Convention presents a viable instrument for the settlement of online consumer disputes. Having sketched the jurisdictional hurdles for the resolution of online disputes in the introductory chapter, I will now analyse whether both online ADR and other trust-creating models are capable of providing an efficient and fair redress instrument for the consumer. For this purpose, the practises and policies of online dispute resolution providers will be mirrored in recognised consumer protection principles and the international legal framework. Likewise, the potential and limits of other trust-creating models will be explored under the question of to what extent they serve the consumer as a viable instrument to impose her rights. 14 The guiding question of this evaluation will be if and to what extent these recently evolved institutions meet - according to their policies and practises - the challenges set up by the particularities of online consumer transactions. It is important to stress that this is an investigation of a rapidly changing phenomena. While the general issues and principles discussed will remain relevant, the details about specific models may inevitably be out of date. 15 Chapter II: Online Dispute Resolution A. Alternative Dispute Resolution Jurisdictional uncertainty, one of the main reasons for consumers' mistrust in online transactions, might be reduced through stronger reliance on dispute resolution processes that settle disagreements arising from online transactions. An analysis of the potential and limits of Alternative Dispute Resolution (ADR), including mediation and arbitration to bridge jurisdictional hurdles, can serve as a starting point in the search for instruments to booster consumers' confidence. I. Arbitration Arbitration is the submission of a dispute to one or more impartial persons for a final and binding decision 3 7 . Arbitration is the type of out-of-court dispute settlement which most closely resembles the dispute settlement system by courts. Like a judge, the arbitrator will make a decision which is imposed on the parties 3 8. However, in contrast to the court system the parties may select the decision-maker (the arbitrator or arbitrators) and the rules of the arbitration procedure. The parties control the range of issues to be resolved by arbitration, the scope of the relief to be awarded, and many of the procedural aspects of the process. The enforceability of international awards is ensured by the New York Convention on an almost global level 3 9 . Richard Hill, in: 'Primer on International Arbitration', available at http://www.bamet.com/oikoumene/arbprim.html. 3 8 Goldman, in: 'The Complementary Roles of Judges and Arbitrators in Ensuring that International Arbitration is Effective', in Sixty Years Of ICC Arbitration, 260, 257-285. 3 9 Vahrenwald, in: 'Out-of-court dispute settlement systems for e-commerce. Report on legal issues. Part IV. Arbitration', available at http://econfidence.irc.it/default/show.gx70biect.obiect id=EC FORUM0000000000000FD5. 16 Potential There are several reasons for favouring the use of arbitration in online disputes. Arbitral proceedings are relatively speedy 4 0 and can be provided - in comparison to formal litigation - at relatively low costs 4 1 . Arbitral awards based on existing international enforcement mechanisms like the New York Convention provide a powerful tool for international enforcement. A consistent application of the principle of party autonomy allows greater flexibility for the disputing parties, while, at the same time, it creates some certainty for the parties through significant predictable guarantees of the arbitration procedure 4 2. The rules governing arbitration can be as informal or as complex as the parties agree 4 3 with the result being that parties may 'tailor' the dispute settlement to serve their particular needs. Furthermore, an arbitration hearing is normally not open to the public, whereas court proceedings are normally open to the public and news media. Problems Traditional arbitration can still be very cost and time intensive . In particular arbitration based on regulation for commercial arbitration such as the Even in comparison to summary proceedings arbitration is - particularly for small claim procedures -speedy since such procedures often involve limitations concerning the taking of evidence. 4 1 This generalising statement does not neglect the fact that if a conflict can be solved quickly by a court, the arbitration procedure can be comparatively a lot more expensive, see P. Kleve, R.V. de Mulder and J.G.L. van der Wees: "Re-engineering Dispute Resolution in an EDI-environment", Law, Computers & Artificial Intelligence, vol. 4, no. 1, 1995/25-32 at 28. 42Kleve, de Mulder, van der Wees, supra note 41, p. 28. 4 3 http://www.ca-adr.com/faqs.htm. 4 4 Christian Buehring-Uhle in: 'Arbitration and Mediation in International Business', Kluwer The Hague 1996, at 49. The adaptation of arbitration to disputes involving smaller claims such as domain name disputes has induced arbitral institutions to offer rules on expedited arbitration or small claim arbitration. The costs for such proceedings are lower than in traditional arbitration, see e.g. http://wipo 1 .wipo.int/docs/arbrules.html. 17 New York Convention may need adaptation to small claims or consumer arbitration. Arbitral tribunals may face problems in issuing awards for online disputes that will be sanctioned by national courts because of states' public policies relating to recognition and enforcement procedures. The existing legal framework for traditional arbitration does not correspond with the formal requirements of international instruments in electronic commerce (arbitral agreement in writing, online hearings, use of audio- and videoconferencing technologies). II. Mediation In mediation the parties to a dispute try to reach a voluntary settlement with the aid of a third party. In the international context, mediation is regulated to a minimum extent 4 6 and does not follow a strict legal procedure 4 7. The process primarily remains under the control of the parties with the result that the parties may, at any time, terminate the mediation or conciliation procedure. Potential The procedural rules for mediation are relatively simple and involve low costs, the procedure is speedy and under the control of the parties. One of the prime advantages is that due to the informal way of settling the issue, the proceedings might cover a wide variety of disputes. Mediation allows the parties to craft a solution that meets their particular needs. And since the 4 5 Redfern, Hunter (1999), 1-81, p. 46. 4 6 Regulatory initiatives include the UNCITRAL Conciliation Rules (1980) and the Mediation/Conciliation Rules of the Centre of the Americas (1996), available at http://www.uncitral.org/en-index.htm and http://www.iamed.org. 4 7 Vahrenwald, supra note 39, Part III, p. 8 18 parties dominate the mediation process and can terminate the debate at any time, they don't lose anything by joining the mediation. By the creation of a non-threatening discussion of the issues at stake, confidence is created. The parties are more likely to preserve a relationship to work together in future. Mediation requires the parties to agree on a solution and consequently, since both parties can live with the solution agreed upon, there are less likely to be significant enforcement problems. Problems However, these advantages could also represent potential drawbacks. In particular the level of flexibility is partly caused by the non-binding nature and the lack of enforceability of the mediated agreement. Due to the high level of flexibility it might be difficult for the parties to predict the results of the settlement4 8. The typical environment which is suited to mediation may be a complex contractual situation in which dispute settlement by other means than mediation would be very time consuming and expensive. This uncertainty might deter parties from resorting to mediation as their preferred dispute resolution mechanism particularly when higher values are at stake. It is right that parties are regularly likely to comply with the agreed settlement of a voluntary mediation process, but only as long as the law is looming in the background for non-compliance with the agreed settlement. In the case of international mediation, no international instrument will assist the parties in the enforcement of this settlement abroad. A contract might result from the Hart, in: 'Online Dispute Resolution and Avoidance In Electronic Commerce', August 1999, available at http://www.law.ualberta.ca/alri/ulc/current/hart.htm. 19 settlement of the dispute. Such a contract will only be enforceable if legal proceedings are initiated against the breaching party based on a breach of contract 4 9. This sanction again involves expensive and time-consuming proceedings and thus provides a rather unattractive enforcement mechanism. Vahrenwald, supra note 39, Part III, p. 8. 20 B. From Alternative Dispute Resolution to Online Dispute Resolution Some of the limits of mediation and arbitration as the preferred dispute settlement mechanism in online disputes result from particularities of the online environment. As the preceding chapter illustrated, the average online consumer transaction is of a relatively low monetary value 5 0 , often involves more than one country with differing jurisdictional and consumer protection rules and is thus embedded in a highly complicated legal context, particularly on the enforcement level 5 1 and is concluded over an inherently anonymous medium lacking consumers' trust 5 2. I. Adaptation of Traditional ADR to the Online Environment Due to these particularities, disputes arising out of online consumer transactions might justify an adaptation of traditional ADR mechanisms. Currently, there seems to be a gap between traditional ADR schemes and the challenges of online commerce 5 3 . Low economic barriers to entry led to a stronger participation by individuals and small entities and finally result in a large caseload of disputes arising out of small-amount transactions. However, as indicated before, traditional ADR, particularly arbitration, can be very cost and time intensive. A 5 0 See chapter I, Introduction. 5 1 See chapter I, Introduction. 5 2 Katsh, Rifkin, in: 'Online Dispute Resolution', p. 85. 21 rational person will not engage in a $10,000 lawsuit or arbitration procedure over a $200 transaction. High dispute resolution costs threaten to swamp the value of the underlying transaction and therefore fail to represent a real settlement alternative for the consumer. Traditional dispute resolution depends to a large extent upon the principle of territory to determine jurisdiction 5 4, obviously an inadequate criterion for the determination of jurisdiction in online commerce. The inappropriateness of traditional dispute resolution models for online consumer conflicts also becomes clear with regards to enforcement mechanisms since only in the case of commercial arbitration is there an instrument of international recognition and enforcement 5 5. And finally, the Internet's lack of geographic borders and spaces enhances the possibility of stranger-to-stranger transactions. It is very difficult for consumers to verify the identity of sellers operating online, while a message can pass through the network leaving no useful record of its origin, destination or content. However, the consumer's willingness to settle a conflict depends to a great extent on trust established through face-to-face contact during the transaction process or during the settlement session or through other cues to rely on to build trust 5 6. In online transactions, parties often do not know each other and do not have an ongoing virtual or real-time relationship of any kind 5 7 . While in face-to-face mediation or arbitration this trust is established during the settlement sessions, in online ADR it seems far more difficult, though no less important, to establish and maintain trust. Due to this lack of trust, consumers 5 3 Perritt, supra note 3, p. 675. 5 4 E.g. Art. V. (d) of the New York Convention states that the recognition and enforcement of the arbitral award may be refused if the composition of the arbitral tribunal or procedure was not in accordance with the law of the country where the arbitration took place, available at http://www.internationaladr.com/tc 121 .htm. 5 5 New York Convention, available at http://www.internationaladr.com/tc 121 .htm. 5 6 Katsh, Rifkin, supra note 52, p. 85. 22 feel an even stronger need to have access to an efficient and fair redress mechanism in order to put things right if the deal goes wrong. As a consequence, a question arises as to what extent both mediation and arbitration need to adapt to the settlement of low value, anonymous and border-less consumer disputes, the type of disputes most likely to arise on the Internet. ADR must correspond firstly to the particularities of online consumer commerce, particularly to the frequency of small-value claims and the demand of a speedy and convenient solution. For those claims an efficient, cheap, quick and convenient redress mechanism must be provided 5 8. Secondly, enforcement of the results of the dispute resolution on global level must be ensured. In the case of online arbitration, particularities arising from the use of online tools to settle the conflict might urge to a review of formal requirements set up by traditional international arbitration law. Mediation might be combined with other redress mechanisms (e.g. trustmark schemes) to ensure the enforceability of the settlement agreement and to provide the consumer with an efficient redress instrument. And thirdly, both mediation and arbitration must compensate for the lack of trust in the inherently untrustworthy environment of online transactions. Online ADR is required to offer a fair dispute resolution process based on recognised consumer protection principles. Summing up, the appropriate redress mechanism for consumer disputes arising in the online environment must be efficient (quick, cheap and convenient) 5 7 Esther van den Heuvel, in: 'Online Dispute Resolution as a Solution to Cross-Border E-Disputes: An Introduction to ODR', available at http://www.oecd.org/dsti/sti/it/secur/act/online trust/vandenheuvel.pdf. 5 8 Rufus Pilcher, in: 'Trust and Reliance - Enforcement and Compliance: Enhancing Consumer Confidence in the Electronic Marketplace', p. 138, available at http://www.oecd.org/dsti/sti/it/secur/act/online trust/Consumer Confidence.pdf. 23 and fair (there must be compliance with recognised consumer protection principles including the enforceability of the decision). In the following chapter I will analyse whether online ADR is capable of providing an efficient and fair redress instrument for the online environment. First I will outline the advantages and disadvantages of online ADR in comparison to traditional ADR in order to assess whether online ADR is capable of providing an efficient settlement mechanism in general. I will continue with an analysis of the actual compliance of online ADR providers with consumer protection principles. Therefore, I will develop benchmark criteria of consumer protection determining what constitutes a 'fair' and 'efficient' dispute resolution process suitable for consumer disputes in the online environment and compare the approaches of online dispute resolution provider with these criteria. 24 II. Evaluation of the Efficiency of Online ADR Potential Online ADR is independent from physical distance and geography. Practitioners and parties from anywhere in the world can settle a conflict more quickly than could be done with traditional ADR. It can be assumed that the use of generally accessible networked technology is less costly (e.g. because of the avoidance of travelling costs) and more convenient for the consumer. Also, the use of intelligent software might reduce other costs such as costs for translation or for obtaining legal advice. Software (e.g. voice recognition, conferencing/negotiation software, search tools, etc.,) might be integrated into the medium to enhance communication and the accessibility of and related documents. Furthermore, online ADR combines the advantages of written communication with a speedy communication tool 5 9 . Thus the speed of exchange can be determined largely by the parties, allowing time for consideration and response, but not restricted by slow and inconvenient conventional forms of written communication 6 0. Text or sound-based communication can easily be stored and retrieved at any given time and thus provide a perfect settlement protocol 6 1. Online ADR Background Paper, sec. 36, available at http://law.gov.aU/aghome/advisory/nadrac/ADR.html# Toc511558461. 6 0 King, in: 'Internet Mediation - A Summary', Australian Dispute Resolution Journal 11 (3), p. 180. 6 1 King, supra note 60, p. 183. 25 Problems However, while online communication appears to have some clear advantages over text based communication, one has to take into account that a large amount of information underpinning interpersonal communication is lost 6 2. In highly emotional issues (family affairs etc.) this might not necessarily constitute a disadvantage. Interpersonal dynamics (e.g. manner of speech, irritants, physical intimidation, etc.) may be minimised, enabling parties to focus on substance of the dispute, rather than on their personal reactions 6 3. However, online consumer disputes rarely involve emotional substance. The fact that parties feel more comfortable to let off steam and to address their concerns frankly in an anonymous environment like the Internet is true but this is less relevant for the disputes which are the topic of this analysis. According to some proponents of online ADR, the loss of interpersonal communication might be minimised by the use of video conferencing or similar 'high bandwidth' communication in future 6 4. Parties apparently have an initial period of embarrassment, but then settle into the medium quite comfortably 6 5. Others doubt that videoconferencing provides a proper instrument for interpersonal communication. Even taking into account a technological stage where picture quality is high and reliable, interaction is still in two-dimensions. In video conferencing eye 'contact' is via a fixed camera, and many of the cues 6 2 Exponents of body language claim that only 5% of the meaning in communication is the words used, and that factors such as voice tone and body language carry far more meaning, see Online ADR Background Paper, supra note 197, sec. 37. 6 3 Robert Bordone in: 'Electronic Online Dispute Resolution: A Systems Approach - Potential, Problems and a Proposal', Harvard Negotiation Law Review, Spring 1998, p. 175, 181. 6 4 To date, low bandwidth (<128kps) videoconferencing still produces lagging and blurring and requires parties to sit still, see Bruce Leonard Beal, in: 'Online Mediation: Has Its Time Come?' available at http://www.disputes.net/cyberweek2000/ohiostate/beal.htm. 6 5 Online ADR Background Paper, supra note 59, sec. 35. 26 gained from eye contact are lost . Initial face to face contact is reported to be very helpful to build trust, particularly in such an anonymous environment as the Internet 6 7. The lack of face-to-face communication might also be compensated by specific advantages of screen-to-screen communication. The screen could be designed to alert or notify the user of some action that should be taken, on-screen controls could be employed to clarify and communicate expectations to the parties, as for example time frames reminders, etc. 6 8 . Independent of interpersonal factors, sociocultural and psychological barriers may have a stronger impact on the use of online ADR. Lack of Internet literacy on the part of parties and practitioners may be a major impediments to the acceptance of on-line A D R 6 9 , while parties who are comfortable interacting in the virtual environment may be more willing to accept ADR as a means towards a quick, cheap and pragmatic solution to minor disputes. Despite these potential drawbacks one can conclude that in general online dispute resolutionis capable of providing a quick, inexpensive and convenient settlement tool for the online consumer. Online ADR Report Background Paper, supra note 197, sec. 38. 6 7 Katsh E, Rifkin J. and Gaitenby A. in: 'E-Commerce, E-Disputes and E-Dispute Resolution: In the Shadow of the e-Bay Law', Ohio State Journal of Dispute Resolution Vol. 15:3 2000, p. 705 (707). 6 8 Katsh, Rifkin, supra note 52, p. 144. 27 III. Evaluation of Online ADR in the Light of Consumer Protection 1. General Although the types of procedures and standards used by online A D R providers use vary enormously, they are all designed to create a quick, efficient and convenient settlement, for disputes with small monetary value and to neglect jurisdictional hurdles (including the enforcement of the decisions) to the largest possible extent 7 0. However, based on the preceding analysis it remains to be proved whether the practices of online dispute resolution providers actually comply with consumer protection principles and succeed in creating trust with the consumers. Or in other words, economic (which is the least expensive, the least time-consuming ADR mechanism), psychological (which is the most accessible, the most comfortable, easiest to use, most transparent mechanism, and which best bridges cultural differences) and legal criteria (which is the mechanism that best respects favorable rights of the consumer, which guarantees a fair adversarial process, which provides an enforceable final decision) determine the most adequate online ADR mechanism for online consumer disputes. 2. Consumer Protection Principles Starting from these general categories, several institutions have developed consumer protection principles and guidelines for online ADR King, supra note 60, p. 183. 7 0 Online ADR Report of the Center for Law, Commerce and Technology of the University of Washington, p. 14 et. seq., available at http://www.law.washington.edu/lct/. 28 providers . The most important are the European Principles for ADR , recently updated through the Commission Recommendation of 4 t h of April 2001 on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes 7 3, the Trans Atlantic Consumer Dialogue Principles 7 4 and the recommendations of the Global Business Dialogue for Electronic Commerce 7 5 . Although these terms vary in detail, they have some significant criteria in common and can serve as benchmark for the most efficient and fair online A D R mechanism for online consumer transactions. In terms of economic criteria, all entities agree that A D R instruments should be affordable 7 6 (offered free or at low cost to the consumer) and effective 7 7 (available, accessible and visible to the consumers, with timeliness of the mechanism and enforceability of the results). Sociopsychological criteria require that information on the ADR procedure is made transparent 7 8 while taking linguistic, cultural, and information differences into account. Full disclosure is necessary to enable customers seeking redress to take fully informed decisions on whether they wish to use the ADR offered or address themselves to a court of law. 7 1 See overview Anne Carblanc in: 'Privacy Protection and Redress in the Online Environment: Fostering Effective Alternative Dispute Resolution, background paper for the 22nd International Conference on Privacy and Personal data Protection Venice, 28-30 September 2000, available at http://www.oecd.org/dsti/sti/it/secur/prod/venice paper.pdf. 7 2 Commission Recommendation on the principles applicable to the bodies responsible for out-of-court settlement of consumer disputes (98/257/CE), available at http://europa.eu.int/comm/consumers/policy/developments/acce just/index en.html. 7 3 Commission Recommendation of 4 of April 2001 on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes (2001/310/EC), available at http://europa.eu.int/comm/consumers/policy/developments/acce just/acce just!2 en.pdf. 7 4 Alternative Dispute Resolution in the Context of E-commerce, available at http://www.tacd.org/cgi-bin/db.cgi?page=view&config=admin/docs.cfg&id=4. 7 5 Global Buisness Dialogue - Recommendations for ADR Provider, available at http://www.gbde.org/nn/2000/adr.html. 7 6 TACD principle 5, EU principle 4 , GBDe principle 5. 7 7 TACD principle 2, 5 and 8, EU principle 4, GBDe principle 3 and 4. 7 8 TACD principle 3, EU principle 2 , GBDe principle 6 and 9. 29 And finally legal criteria include issues relating to a fair and due process (both parties must be entitled to present their case in full, to hear the fact of the other party and to respond hereto, there must be a fair burden of proof, there is no need for legal representation), the principle of legality 8 0 (the consumer is not deprived of consumer protection laws, no imposition of online A D R on the consumer, decisions binding on consumers only where the consumer agrees as part of the settlement) and impartiality81 (both of the on-line ADR provider and of the personnel). i. Independence and Impartiality In order to strengthen the reputation and credibility of an organisation providing ADR, the online ADR provider offering online dispute resolution must be independent and the personnel must be impartial. Independence of the online ADR provider requires an independent governing structure and a neutral funding source 8 2 . The former could be guaranteed by reputable third parties 8 3. Furthermore, an ADR provider should be funded in a way that excludes the possibility of b ias 8 4 . Impartiality could be ensured by equal representation of consumers and businesses in the decision-making body 8 5 , by the appointment of those representatives for a fixed term 8 6 and by the insulation of the ADR personnel from pressure to favour merchants or consumers in resolving disputes e.g. through a code of conduct which includes rules to avoid conflicts of TACD principle 9, EU principle 3 and 6, GBDe principle 7 and 8. 8 0 TACD principle 10, 11, 12, EU principle 5 and 6, GBDe principle 10. 8 1 TACD principle 6, EU principle 1, GBDe principle 1. 8 2 Consumer International, in: 'Disputes in Cyberspace-Online Dispute Resolution for Consumers in Cross-Border Disputes - An International Survey', p. 16. 8 3 GBDe, supra note 73. 8 4 Consumer International, supra note 82, p. 16. 8 5 Consumer International, supra note 82, p. 16. 8 6 Commission Recommendation of 4th of April 2001 on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes (2001/310/EC), available at http://europa.eu.int/comm/consumers/policy/developments/acce just/acce just!2 en.pdf. 30 interest . No party should be required to rely on ADR if it does not trust the impartiality of the ADR personnel or the supervisory board. ii. Affordability Fees for the ADR service might deter consumers from engaging in online ADR. The ADR service should be provided to the consumer at no or only moderate cost. The prime advantage of online ADR to provide an inexpensive dispute resolution tool for the consumer should not be neutralized by excessive fees. iii. Transparency Since the online environment tends to mask a lot of information about the identity of the parties, it is particularly important in online ADR to disclose as much information to the engaging parties as possible. A D R systems should function according to published rules of procedure that describe unambiguously all relevant elements necessary to enable customers to seek redress 8 8 . Trust in the online redress mechanism can only be promoted if the consumer can take fully informed decisions. To ensure credibility and acceptance of an ADR system, the website of the ADR system should provide prominently and clearly information about the types and numbers of disputes handled, the proportion resolved in favour of the consumer or business, the procedures, the costs, the languages that can be accommodated, the basis for decisions (codes of conduct, etc.), the enforceability of decisions and the fact that both parties can withdraw from the proceedings at any time. Transparency 8 7 GBDe, supra note 73. 8 8 GBDe, supra note 73. 31 also requires the traceability of the dispute . The parties should be provided with online instruments to trace the status, time history and their standing/position/constellation in the dispute. Any agreed solution should be recorded on a durable medium and made available to the parties 9 0. Another essential criterion for consumers' trust closely related to the principle of transparency is the question of authentication of the parties. On the one hand, electronic signatures and public key infrastructures are in place to ensure the identity of the parties concerned in online dispute resolution. On the other hand, parties generally prefer contracting anonymously when they are interacting online 9 1. iv. Effectiveness ADR systems should be easily accessible and convenient. Since a wide range of competing online ADR schemes are offered to the consumer, businesses that participate in such systems should provide guiding links from their websites 9 2 . Requirements about the form of the submission of a case should be as simple and convenient as possible with maximum guidance for consumers in filing submissions 9 3 . To be effective, ADR systems must resolve disputes quickly if they are to meet the needs of both consumers and businesses in the speedy online environment 9 4. Reasonable time limits set up for considering disputes, rendering 8 9 Out-Of-Court Dispute Settlement Systems for E-commerce, Report of an Exploratory Study, p. 19, available at htm://www.federcomin.it/sviluppo/produzio.nsf/all/AB130AEEEE4848C7C125690E00393B4C/$file/Repo rtv20apr.pdf. 9 0 Commission Recommendation, supra note 72. 9 1 Report of an Exploratory Study, supra note 89, p. 19. 9 2 Report of an Exploratory Study, supra note 89, p. 17. 9 3 GBDe, supra note 73. 9 4 Report of an Exploratory Study, supra note 89, p. 18. 32 decisions, and complying with decisions should be incorporated in the provider's practice in order to handle complaints in an expeditious manner 9 5. ADR personnel should be trained both in basic legal concepts including laws, standards, codes and international agreements relevant to consumer protection in e-commerce, mediation skills and understanding of the online environment 9 6. Formal lawyer qualification and license should not be required. A D R systems should be designed and presented as a voluntary option for consumers, not as a legal or contractual requirement. Since a large part of e-commerce disputes are of international character 9 7, online ADR systems invariably involve business and consumers with lack of knowledge of each others' languages. Consequently online A D R providers should overcome language (and cultural) barriers between the disputants. Since different kinds of disputes demand different approaches, providers should offer a broad range of different online dispute resolution schemes taking into account the particularities of each type of online conflict 9 8. Scaleability also entails that the procedure of the dispute resolution corresponds to the type of dispute and amount in dispute 9 9, e.g. informal mediation procedure might be adequate for small amount disputes, while complex rules suit better high-value online transactions. In order to be effective, online ADR decisions must be enforceable by consumers. In the case of online arbitration, enforceability could be achieved 5 TACD, supra note 74. 9 6 Consumer International, supra note 82, p. 18. 9 7 Approximately 51% of the current online population are native English speakers, and the remainder represent 27 other languages, Global Research, Global Internet Statistics (by Language), available at http://www.glreach.com/globstats/index.php3. Native English speakers are expected to constitute less than 27% of the Internet population by 2005, Global Research, Evolution & Projections of Online Linguistic Populations, http://www.glreach.com/globstats/evol.html. 9 8 Report of an Exploratory Study, supra note 89, p. 18. 9 9 Consumer International, supra note 82, p. 18. 33 through binding decisions if the New York Convention could be applied for online consumer disputes 1 0 0 . As for both online mediation and arbitration, compliance with the rendered decision could be achieved through trustmark schemes. A trustmark subscriber who does not comply with the rendered decision would be expelled from future services and excluded from using the trustmark on his website and may be subject to adverse publicity 1 0 1. v. Due Process The procedure followed should provide a reasonable opportunity, whether online or offline, for all parties concerned to present their viewpoints before the competent body and to hear the arguments and facts put forward by the other party, as well as any experts' statements 1 0 2. These principles contemplate that both claimant and respondent set forth their positions and thus define the controversy to be resolved 1 0 3 . ADR systems should treat the parties equitably and fairly. The parties should have the choice of being advised by legal counsel or others, or of representing themselves in the proceedings 1 0 4 . If necessary, A D R systems should provide for translation services or other outside expertise. vi. Legality 1 0 0 This question will be analysed in the following chapter. 1 0 1 Katsh E, Rifkin J. and Gaitenby A., supra note 67, p. 731. 1 0 2 Consumer International, supra note 70, p. 19 1 0 3 Perritt, supra note 3, citing Judge Henry Friendly's criteria of procedural due process that can be applied to adjudicative procedures, Henry J. Friendly, in: 'Some Kind of Hearing', 123 University of Pennsylvania Law Review 1267(1975). 1 0 4 Commission Recommendation, supra note 72. 34 Consumers who submit disputes to ADR systems should not be asked to waive their legal rights nor should the consumer's rights to legal recourse or any other mandatory law of the consumer's jurisdiction be deprived in any way by the online A D R provider 1 0 5. Furthermore, consumers' use of ADR systems should not prevent law enforcement authorities, code enforcers, or others representing consumers' interests from using their cases in actions to stop fraud or abuse 1 0 6 . Online ADR systems are regarded to be of particular strategic importance for the enhancement of consumer trust in electronic commerce since such systems can settle disputes in an adequate fashion without necessarily engaging in cumbersome, costly, and difficult research on the detailed legal rules that would have to be applied in an official court procedure. ADR dispute resolution officers may make decisions on the basis of equity and/or legal provisions, codes of conduct or other rules 1 0 7 , provided firstly that the consumer is not deprived of the protections of national mandatory consumer law, secondly that the basis of the decision has been made sufficiently transparent and thirdly the rules which the officers based their decision on are clear 1 0 8 . Unambiguity about the basis of the decisions is particularly important since those rules are the background against which the ADR process takes place. The rules determine the parties' bargaining position and decide upon their strategies for the ADR process 1 0 9 . Commission Recommendation, supra note 72. Consumer International, supra note 82, p. 20. Commission Recommendation, supra note 72. Katsh, Rifkin, Gaitenby, supra note 67, p. 707. Katsh, Rifkin, Gaitenby, supra note 67, p. 708. 3. Online Arbitration a. Description Virtual Magistrate The Virtual Magistrate (VMAG) process serves as a good sample analysis of online arbitration. V M A G was first developed in 1995 with the intention to offer online dispute resolution instruments to online service providers which were accused of allowing access to illegal material such as postings or e-mail messages that infringed copyright, invaded privacy, represented consumer fraud or were defamatory. The V M A G system was designed to provide a mechanism for quick and inexpensive provisional dispute resolution deciding whether the accused material should be removed immediately or not 1 1 0 . Currently, the field of Virtual Magistrate's activities comprises conflicts arising out of messages, postings, and files allegedly involving copyright or trademark infringement, misappropriation of trade secrets, defamation, fraud, deceptive trade practices, inappropriate (obscene, lewd, or otherwise violative of system rules) materials, invasion of privacy, and other wrongful content 1 1 1. Consequently, besides the goal of establishing an efficient online dispute resolution tool, V M A G aims to provide system operators with informed and neutral judgments on appropriate responses to complaints about allegedly wrongful postings and users and others 1 1 0 Perritt, supra note 3, p. 685. 1 1 1 Basic Rules, VMAG Arbitration Program, available at http://www.vmag.org/docs/rules.html. 36 with a rapid, low-cost, and readily accessible remedy for complaints about online postings 1 1 2 . After filing a complaint arising from an online activity by one party, V M A G contacts the opposing party and they are invited to answer the complaint and take part in arbitration. An arbitrator is then assigned to the case, and in most instances will request more information. Communication is conducted via e-mail. b. Evaluation i. Independence and Impartiality The V M A G arbitration program is currently run by the Chicago-Kent College of Law. The National Center for Automated Information Research (NCAIR) 1 1 3 provided initial funding for the pilot. Currently the V M A G is administered as a non-profit institution by, and receives external funding from, the Chicago-Kent College of Law 1 1 4 . The plan is to fund the arbitration program in future through external funding sources 1 1 5 . A single arbitrator will be selected randomly from a pool of qualified and trained arbitrators selected jointly by the American Arbitration Associat ion 1 1 6 and 1 1 2 The VMAG arbitrators decide whether it would be reasonable for a system operator to delete, mask, or otherwise restrict access to a challenged message, file or posting. Other cases may call for decisions about the disclosure of the identity of an individual to a person other than the government. In extreme cases, the arbitrator may rule on whether it is appropriate for a system operator to deny a person access to an online system. See Basic Rules, supra note 111. 1 1 3 NCAIR is a non-profit, educational corporation that has been actively engaged in the study and application of technology to the legal and accounting professions since 1966, see http://www.vmag.org/docs/FAQ.html. 1 1 4 Consumer International, supra note 82, p. 67, p. 57. 1 1 5 VMAG Concept Paper, available at http://www.vmag.org/docs/concept.html. 116The American Arbitration Association (AAA) is a public-service, not-for-profit organisation (IRS section 501(c)(3)) offering a broad range of dispute resolution services to corporations, attorneys, insurers, individuals, trade associations, unions, consumers, and all levels of government. Services are available through the AAA headquarters in New York City and through offices located in major cities throughout the 37 a subcommittee of Cyberspace Law Institute (CLI) 1 1 7 . According to V M A G information, those arbitrators have to prove familiarity with the law and online systems 1 1 8 . ii. Affordabilitv Online Arbitration is provided free of monetary charge via the Chicago-Kent College of Law. iii. Transparency Decisions of the V M A G arbitration program are planned to be made public, as long as the arbitral tribunal does not rule that the filings must be sealed for good cause 1 1 9 . Published decisions and proceedings will be made available through a website maintained by the Center for Law and Information Policy at Villanova Law School. In any case, during the proceedings all information about the case is confidential until the decision is rendered. Moreover, a complainant may request that information pertaining to the complaint should be kept confidential and not made public. Requests for confidentiality will be decided by the arbitrator assigned to the c a s e 1 2 0 . United States. In addition, the AAA serves as a center for education and training, it issues specialised publications, and it conducts research on all forms of out-of-court dispute settlement, see http://www.adr.org. 1 1 7 The Cyberspace Law Institute (CLI) studies and helps to develop new forms of law and law-making required by the growth of global communications networks and online communities. The CLI seeks to gather together under one (virtual) roof, leading thinkers on the legal issues emerging in this new environment of computer-mediated communications. The CLI was founded in 1995 by co-directors Care E. Heckman, David R. Johnson, John Podesta, David G. Post, and Margaret J. Radin. More information about CLI can be obtained from its homepage at http://www. 11.georgetown.edu/lc/cli.htm 1. 1 1 8 VMAG Concept Paper, supra note 115. 1 1 9 VMAG Concept Paper, supra note 115. 1 2 0 Arbitration Rules, available at http://www.vmag.org/docs/rules.html. 38 Furthermore, V M A G reports publicly on its experiences and will attempt to establish a protocol for online dispute resolution that can be emulated by others. A listserve/newsgroup ("grist") will be established for each case, and participants will be directed to post messages to the grist 1 2 1. Messages posted to the grist will automatically be sent to all participants. The pool of arbitrators, and the identity of the magistrate responsible for each proceeding, will be disclosed publicly. iv. Effectiveness The V M A G arbitration program restricts its service to English. V M A G lacks a widely spread partnership program incorporating the V M A G arbitration program. Thus it does not appear to be sufficiently well publicised to enable interested costumers and businesses to become aware of it. This lack of publicity is then worsened by the fact that V M A G is not closely related to any major e-commerce sites and thus struggles to reach large numbers of potential costumers. Each Arbitrator will attempt to reach a decision within 72 hours (three business days) after acceptance of a complaint, although delays in communications and other factors may make it impossible to meet the 72 hour target for a decision in all cases. This 72-hour time period does not begin until all necessary parties have agreed to participate 1 2 2. When appropriate, arbitrators may issue interim decisions more quickly. The decision schedule may be extended at the request of the parties or for good cause. A candidate for arbitration must be knowledgeable about the law and online systems. Arbitrators must comply with a code of conduct that requires neutrality and provide for refusal from cases in which they may be perceived to 1 2 1 VMAG Basic Rules, supra note 111. 39 have an interest. The American Arbitration Association (AAA) and the V M A G arbitration program will provide training and orientation regarding the applicable procedures andprotocol for online arbitration 1 2 3. V M A G directs requests for mediation services to the Online Ombuds Off ice 1 2 4 , with whom V M A G co-operates. Online Ombuds Office was also funded by the National Center for Automated Information Research (NCAIR) 1 2 5 . This co-operation arrangement between V M A G and the Online Ombuds Office facilitates a broad range of particular services for different kinds of disputes. By directing their costumers to the most appropriate dispute resolution providers, V M A G is able to increase the effectiveness of online ADR. The enforceability of decisions rendered through ADR is essential for the promotion of consumers' trust. In the case of the Virtual Magistrate, the arbitral tribunal seeks to persuade all parties involved to agree to be bound by an arbitration decis ion 1 2 6 . The V M A G arbitral tribunal expects system operators to support and enforce decisions as with other private arbitration decisions. For example, when the V M A G decides that a message, file or posting should be deleted, masked, or otherwise restricted, a system operator regularly complies with that decision. However, in the rare case that one of the parties does not comply voluntarily with the arbitral award, the question arises as to what extent the arbitral award can be enforced. The V M A G system does not provide any consequences for non-compliance with the decisions. V M A G arbitration program nevertheless states that arbitration decisions are traditionally recognised by courts around the world and that parties to the proceeding may be able to enforce the decis ions 1 2 7 . However, the documentation VMAG Basic Rules, supra note 111. VMAG Concept Paper, supra note 115. http://www.ombuds.org/center/ombuds.html. Supra note 113. VMAG Concept Paper, supra note 115. VMAG Frequently Asked Questions, available at http://www.vmag.org/docs/FAQ.html. 40 provided on the V M A G websites remains silent and does not disclose any further indication of how such a worldwide enforcement of online arbitral awards could take place. Arbitration based on the New York Convention might provide an efficient way of enforcing decisions on global level. Since offline arbitration based on the New York Convention already proves to provide an effective and recognised system of solving international disputes 1 2 8 , one might wonder why the New York Convention does not enjoy the same popularity in online arbitration. One important reason for this is that the New York Convention faces some serious legal obstacles in its application to online arbitration, partly arising from the particularities of the Internet and partly due to particular protection of the consumer. For example, in the rather common case of an online arbitration agreement concluded between the complainant and the online ADR provider, it remains unclear whether the online arbitration agreement concluded through the exchange of email messages constitutes an 'agreement in writing' according to the New York Convention. In the following section I will analyse if and to what extent the New York Convention and existing national and international consumer laws can be applied to online consumer arbitration. (1) Legal Obstacles according to the NYC for Online Arbitration In the beginning of this section I analyse the applicability of the New York Convention to consumer disputes, the validity of the online arbitration agreement, the arbitrability of consumer disputes and the compatibility of online arbitration with the proceedings according to the New York Convention. 1 2 8 Due to the general acceptance of the New York Convention an arbitral award rendered in a contracting State may be recognised and enforced in all other of the 121 Contracting States. See Alan Redfern, Martin Hunter, in: 'Law and Practice of International Commercial Arbitration' (1999), 1-121, p. 68. The text of the New York Convention is available at http://www.hartwell.demon.co.uk/nyc text.htm. 41 (a) Applicability of the New York Convention on Consumer Disputes As the introductory chapter described, this thesis focuses on redress mechanisms for small value cross-border transactions concluded by the consumer via the Internet. In the first place, we must determine whether the New York Convention is applicable to those consumer contracts 1 2 9. Consumer contracts may be subjected to international 'commercial' arbitration, provided that they relate to the international trade. This may be assumed if the subject matter of the contract involves a transfer of property and of goods or services from one country to another 1 3 0 . Since the consumer in the above mentioned example ordered a book with the result that a transfer of goods was the subject matter of the contract 1 3 1, in principle the New York Convention would be applicable. There is no binding definition of the term 'commercial'. The New York Convention does not contain a definition of the term. However, states may make a reservation according to Article I (3) of the New York Convention which authorises them to exclude disputes from the application of the Convention which are not regarded as commercial under their internal laws. From this it may be inferred that the concept of 'commerciality' should be interpreted in a broad In the following analysis I refer to those contracting ctates which did not make the 'commercial' reservation of the New York Convention. Art I. (3) of the New York Convention reads: "... it may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the state making such declaration". 1 3 0 Eric Loquin in: 'L'Arbitrage des Litiges du Droit de la Consommation', 'Vers un Code European de la Consommation', proceedings of a workshop at the University of Lyon, 12 and 13 December 1997, Bruylant, Brussels 1998/357-381 at 372. 1 3 1 See example in the introductory chapter. 42 manner. This argument is supported by the purpose of the term 'commercial' which is stated to be "to distinguish between 'international commercial arbitration' governed by private law and 'international arbitration' of disputes between states under public international law" 1 3 2 . According to this interpretation consumer disputes can be considered as 'commercial' in the sense of the New York Convention. An analysis of other international arbitration conventions might clarify whether consumer arbitration is included in the concept of international commercial arbitration. Article 1 of the Inter-American Convention on Extraterritorial Validity of Foreign Judgements and Arbitral Awards (Montevideo Convention) 1 3 3 states that that Convention relates to arbitral awards rendered in 'civil, commercial or labour proceedings', thus expressly including non-commercial matters. According to the UNCITRAL Model Law on International Commercial Arbitration, it is not explicitly excluded that consumer disputes are regarded as 'commercial' in the sense of the Convention 1 3 4 . Summing up, in principle the New York Convention is applicable to consumer disputes. (b) The Arbitration Agreement The agreement to arbitrate constitutes the essential base of arbitration 1 3 5. Since there is a huge demand for the capacity to conclude an agreement to Christian Buehring in: 'Arbitration and Mediation in International Business', Kluwer, The Hague 1996 at 44. 1 3 3 The Montevideo Convention is available at http://www.sice.oas.org/dispute/comarb/caicmoe.asp. 1 3 4 UNCITRAL Model Law states in endnote 2: "The term 'commercial' should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business co-operation; carriage of goods or passengers by air, sea, rail or road". The UNCITRAL Model Law on International Commercial Arbitration is available at http://www.ius.uio.no/lm/un.arbitration.model.law.1985/doc.html. 1 3 5 Redfern, Hunter (1999), 3-01, p. 135. 43 arbitrate by the exchange of email messages or other electronic data interchange, ways must be found to interpret the New York Convention with respect to these technologies. Since the New York Convention was established in 1958, new forms of communication have been developed, with the result that both national laws and international conventions are struggling to adapt their arbitration rules to the new forms of communication. The New York Convention requires - inter alia - that the arbitration agreement is in writing and that the subject matter of the dispute is arbitrable and capable of settlement by arbitration 1 3 6. In international online consumer arbitration the conclusion of the arbitration agreement and the arbitrability of the dispute give rise to some particular problems. (i) "Agreement in Writing" It is not clear whether national courts, when enforcing awards under the New York Convention, would accept the exchange of email messages as an 'agreement in writing' by virtue of art. II 2. According to this article, the term 'agreement in writing' includes an arbitral clause in a contract or an arbitration agreement, signed by the parties (in the first alternative) or contained in an exchange of letters or telegrams (in the second alternative). According to art II. 1 of the New York Convention, there are four positive requirements of a valid arbitration agreement, another two are added by the provisions of art. V. 1. An arbitration agreement is valid if a) the agreement is in writing b) the agreement deals with differences which have arisen or which may arise between the parties c) the differences arise in respect of a defined legal relationship, whether contractual or not d) the differences concern a subject matter capable of settlement by arbitration e) the parties to the arbitration agreement have legal capacity under the law applicable to them and f) the arbitration agreement is not null and void, inoperative or incapable of being performed under the law to which the parties have subjected it, see New York Convention, supra note 111. 44 (a) Does an electronic arbitral clause contained in exchanged email communication comply with the requirements of the 1st Alternative? According to the New York Convention, the signature of both parties is required where arbitration is based on an arbitral clause within a contract or arbitration agreement and is not contained in an exchange of letters or telegrams. In the context of offline contracts, it is recognised that a signature is valid and effective if it corresponds to the requirements either of a particular form or of a particular function of the signature. Consequently, to analyse the question of whether an arbitration agreement can be concluded by the exchange of email messages with or without signatures one has to determine the functions which a signature must perform 1 3 7. The signature primarily (1) helps in identifying the transaction, (2) provides certainty as to the personal involvement and intention of the signing person and (3) associates the signing person with the document so that the signatory approves of and adopts the contents of the document 1 3 8 . Bearing this in mind, where a contract is concluded online by exchanges in writing without signatures the exchange of the corresponding intentions itself constitutes mutuality and consent and takes over the associative function of a signature. This interpretation of the New York Convention has also been reflected in several courts' decisions, e.g. the Court of Appeal in Basle held that "if the New York Convention had required a signature in the case of letters, then it would have said so expressly" 1 3 9 . With reference to the identification function, merely the exchange of email messages does not help to identify the person from whom the consent to the 1 3 7 Chris Reed, in : 'What is a Signature?', The Journal of Information, Law and Technology (JILT), available at http://eli.warwick.ac.uk/iilt/00-3/reed.html/. 1 3 8 Bruce Farrend, in: 'Policy Considerations Behind Legislation Recognising Electronic Signatures', available at www.law.alberta.ca/alri/ulc/current/efarrend.htm. 1 3 9 Obergericht of Basel, Hune 3, 1971 (1979) IV Yearbook Commercial Arbitration, p. 199. 45 document originates. However, the identification function of the signature in the offline context can already be questioned for good reason, since usually the hand-written mark on a piece of paper fails to identify someone and cannot be regarded as evidence that a particular person signed it. It only proves that somebody signed it, unless a handwriting analysis is used to determine who exactly signed the document 1 4 0 . Admittedly, the intentional function of the signature indicating the personal involvement of a party with the document and the intention of the signatory that the 'signature' is his or her signature can hardly be satisfied just by the presence of the signatory's printed name at the end of his or her email message. If the intention to sign cannot be proved, it is irrelevant that the maker of the document can be identified 1 4 1. An e-mail message can easily be 'signed' under a different name and even sent from the nameholder's account without any intent of the nameholder to sign the e-mail message. However, in Europe 1 4 2 , C a n a d a 1 4 3 and the United Sta tes 1 4 4 legislation referring to digital signatures recognises the validity of the intentional function of electronic signatures as long as those signatures correspond to the requirements of the national digital signature acts. National courts will clarify to what extent the printed name of the signatory in the email-message is recognized as an electronic signature in the sense of the national digital signature acts, and therefore constitutes an equivalent to a paper-based signature. In sum, the 'signature' requirement in art II.2 of the New York Convention can be partly complied with by the exchange of e-mails. However, the intentional function of the signature indicating the personal involvement of a party with the document cannot be satisfied just by the exchange of email messages. Since an Farrend, supra note 138. 1 4 1 Reed, supra note 137. 1 4 2 European Digital Signature Directive, COM (1998) 297, available at http://europa.eu.int/eur-lex/en/lif/dat/1999/en 399L0093.html. 1 4 3 Uniform Electronic Commerce Act, available at http://www.pkilaw.com/EUECA99A.htm. 1 4 4 Uniform Computer Transactions Act, available at http://www.law.upenn.edu/bll/ulc/ucita/ucital200.htm. 46 amendment of the New York Convention to adapt international arbitration expressly to electronic commerce is unlikely, the recognition and enforceability of electronic awards depends on the jurisprudence of national courts based on their interpretation of the digital signatures acts and the New York Convention. (B) Does an electronic arbitral clause contained in exchanged email communication comply with the requirements of the 2nd Alternative145? Comparative Interpretation Looking to other legal systems helps to interpret the New York Convention. Generally speaking, most countries require forum selection clauses or arbitration clauses to be "in writing". But a closer view of the singular jurisdictions shows that there is a sliding scale from very narrow to quite broad definitions of the "writing" criterion. In contracts with consumers, German law requires that the arbitral agreement be contained in a notarial deed (Urkunde) signed by both parties, which must not contain any terms beyond those of the arbitration agreement 1 4 6 . By contrast, in Switzerland an international arbitral agreement may take any form that permits it to be evidenced by a text 1 4 7, so that electronically transmitted arbitral agreements are valid under Swiss law. In British Columbia, an arbitration agreement is in writing if it is contained in a document signed by ... arbitral clause in a contract or an arbitration agreement, ... contained in an exchange of letters or telegrams, supra note 111. 1 4 6 German Zivilprozessordnung, art. 1031 (5). 1 4 7 Swiss Federal Private International Law Act, Artikle 178, para.l. 47 the parties or in an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement 1 4 8 . On the other end of the scale, the UK Arbitration Act 1996 accepts "anything being written or in writing include its being recorded by any means 1 4 9 , which would also encompass communication by the Internet. At the international level, art 7 (2) of the Model Law recognises "an agreement (as) in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication which provides a record of an agreement" 1 5 0 . Obviously there is no unique approach to interpret the "writing" requirement at both national and international levels with the result being that this provision must be interpreted against the background prevailing at the time of the enactment of the Convention. Historical Interpretation The second alternative of art. II 2 was added in order to facilitate practices in international trade of concluding contracts by correspondence. The underlying purpose was to enhance the possibility of concluding arbitration agreements in international trade and not to exclude future technological developments 1 5 1 . The exchange of email messages constitutes an exchange of corresponding intentions and consent in the same way that an exchange of letters or telegrams does 1 5 2 . According to this interpretation, exchanged e-mail messages fall under the scope of art. II 2, second alternative and constitute an 'agreement in writing'. 1 4 8 International Commercial Arbitration Act, Article 7 (4), available at http://www.qp.gov.bc.ca/bcstats/96233 Ol.htm#section2. 1 4 9 UK Arbitration Act 1996, section 5 (6), www.hmso.gov.uk/acts/actsl996/1996023.htm. 1 5 0 Art. 7 (2) of the UNCITRAL Model Law on International Commercial Arbitration, supra note 117. 1 5 1 N. Kaplan, in: 'Is the Need for Writing as Expressed in the New York Convention and the Model Law out of Step with Commercial Practice?, Arb. Int.'l Vol. 12 1 (1996), pp. 27-4327-43. 152Arsic, supra note 128, p. 216. 48 Systematic Interpretation This interpretation is supported by an analysis of the context, in which the New York Convention is embedded. First, the Working Group on Arbitration of the United Nations Commission on International Trade L a w 1 5 3 considered the question of whether article II (2) of the New York Convention should broadly be interpreted to include communications by electronic means as that concept is defined by art. 2 of the UNCITRAL Model Law on Electronic Commerce. It was recalled that the Guide to Enactment of the Model Law on Electronic Commerce 1 5 4 , an instrument adopted by the Commission, was drafted with a view to clarifying the relationship between the Model Law on Electronic Commerce and international instruments such as the New York Convention. The working group suggested that the Model Law on Electronic Commerce "may be useful in certain cases as a tool for interpreting existing international conventions that create legal obstacles to the use of electronic commerce, for example by prescribing that certain documents or contractual clauses be made in written form" 1 5 5 . Based on these thoughts, the working group's final recommendations for an amendment of the New York Convention included that "an arbitration agreement 'in writing' includes any form that provides a record of the agreement or is otherwise accessible and usable for subsequent reference, including electronic, optical or other data messages" 1 5 6 . However, since the UNCITRAL 1 5 3 Paper of the thirty-third session Vienna, 20 November - 1 December 2000, A/CN.9/WG.II/110 Settlement of international commercial disputes - Possible uniform rules on certain issues concerning settlement of commercial disputes, written form for arbitration agreement, interim measures of protection, conciliation - Report of the Secretary-General, available at http://www.uncitral.org/en-index.htm. 1 5 4 Available at http://www.uncitral.org/en-index.htm. 1 5 5 Sect. 6. 1 5 6 Sect. 2 of the long version of the recommendations, document A/CN.9/468, para. 100 (further discussion is reflected in paras. 101 to 106), available at http://www.uncitral.org/en-index.hmi. 49 Model Law on Electronic Commerce is not universally adopted, the working group considered that the use of the Model Law on Electronic Commerce as an interpretative instrument might be limited. Second, several recently developed drafts of legislation referring to the online context recognise electronic writings as functionally equivalent to paper based writings 1 5 7. There is a trend in modern legislation that rather than providing that a computer-generated document is for all purposes the same as a document written on paper, legislation provides that electronic messages can perform the same function as tangible documents. Against this background, only a broad interpretation of the 'writing' criterion satisfied by the exchange of email messages is in line with the spirit of modern legislation. Teleoloqical Interpretation Following modern legislation that focuses on the functional equivalence of electronic messages with tangible documents, a consideration of the function of the 'writing' requirement helps to determine what the proper interpretation of art. II 2, second alternative is. The function of the 'writing' requirement determines the question of whether the 'writing' criterion is a necessary condition for the validity of the act or if it is instead a simple probative condition. If it constitutes a condition for validity, the online arbitration agreement will be void, whereas if it is a condition of evidence, proof can be provided in a different way 1 5 8 . The formal requirement that legal documents are in "writing" is justified on the base of a 'warning function' and a 'probative function'. On the one hand, the 1 5 7 E.g. the Uniform Computer Transaction Act, sec. 107, 108, available at http://www.law.upenn.edu/bll/ulc/ucita/ucital200.htm and the Uniform Electronic Commerce Act, sec. 5, available at www.law.ualberta.ca/alri/ulc/acts/eueca-a.htm. 158Karim Benyekhlef, Pierre Trudel, Vincent Gautrais, in: 'Some Reflections On Conflicts Management in Cyberspace', available at www.disputes.net/cvberweek2000/ohiostate/cyberiusenglish.htm. 50 'writing' requirement makes the parties aware of the fact that they are undertaking enforceable legal obligations. The parties should not be exposed to this obligation and should not be bound by the agreement if one party does not comply with the form. On the other hand, 'writing' creates evidence that the agreement exists and was entered into, it narrows the scope of the subject matter subject to evidence and it provides more permanent evidence than a witness's recollection does. Thus 'writing' constitutes a condition for both the validity and the evidence of the agreement. It is necessary to consider whether an online agreement concluded through an exchange of e-mails fulfils these underlying functions of the 'writing' requirement. In reference to the evidence function, only the printout of the exchange of e-mails can create permanent evidence that the agreement exists to the extent documented in the e-mails if the e-mails clearly manifest that they refer to each other. In other words, in the case of disparate communication such as the exchange of e-mails, the parties are more likely to provide recognised evidence if they ensure that the exchanged communication is reduced to a single document. If the online arbitration clause is concluded through the exchange of emails and this communication is documented by a printout, the parties can provide evidence that the agreement with these specific terms was entered into and thus comply with the evidence function of the second alternative. In terms of the validity of the online consumer agreement, it is questionable if the mere exchange of e-mails is sufficient to make the consumer aware of the binding effects of her electronic offer or acceptance. In general, e-mail messages are a rather comfortable and quick communication method and therefore tend to be less carefully drafted than paper-based communication so that they might not alert the consumer to the binding effects of her communication. To the extent that an electronic document is less a traditional 'writing' than an oral agreement, the law should not treat it like a paper document. However, electronic documents that provide a documentary recording 51 of an agreement in a manner that establishes and memorialises the terms are closer to paper-based than to oral communication. There are good reasons to doubt that email communication stored on the hard drive of a computer sufficiently memorialises the terms agreed upon. Computer-stored information is not necessarily permanent and is not visible without further technical device. To be on the safe side, at least the printout of exchanged email communication provides sufficient documentary recording of the agreement concluded online and thus alerts the parties to the binding nature of their communication contained in the exchanged emails. Consequently, since compliance with the 'writing' requirement is also a condition for the validity of the online arbitration agreement and since the validity is guaranteed if the consumer is aware of the binding effects of her e-mails, the e-mail communication should be contained in a paper-based document, most commonly the printout of the email communication. With respect to the validity of the singular terms documented in the e-mail correspondence, the consumer can only be regarded as being aware of the binding character of the terms if she either refers within her electronic acceptance directly to a singular term within the electronic offer and the electronic offer, acceptance and the reference are documented separately or if she accepts singular terms of the electronic offer and both offer and acceptance are contained in one single document. 52 Conclusion The New York Convention requires that an 'agreement in writing' must include an arbitral clause that is either signed by the parties (in the first alternative) or contained in an exchange of letters or telegrams (in the second alternative). In terms of the first alternative, the exchange of email communication does not necessarily require a signature if the underlying function of the 'signature' requirement could be satisfied in another way. However, the intentional function of the signature indicating the personal involvement of a party with the document and the intention of the signatory cannot be satisfied just by the exchange of email messages. In this respect, the recognition and enforceability of electronic awards depend on the jurisprudence of national courts based on their interpretation of the national digital signatures acts and the New York Convention. With reference to the second alternative, an agreement contained in the printout of exchanged e-mail communication constitutes an agreement 'in writing' if the exchanged e-mails are contained in the same document or if the documented electronic offer and acceptance clearly refer to one another and this reference is also documented. (ii) Arbitrability of Consumer Disputes The arbitrability of a dispute is a condition for the validity of the arbitration agreement. The question of whether cross-border or international consumer disputes are capable of settlement by arbitration has to be decided on the basis 53 of the national law applicable to international arbitration 1 5 9. If the arbitral tribunal finds that, for example, arbitration clauses in consumer contracts are abusive and that according to the provisions of a national consumer protection law they are without effect, it could decide that the dispute is not arbitrable. National arbitration and other law impose limitations on the arbitrability most often imposed by public policy. National legislation considers protecting the weaker party e.g. through the prohibition of the abuse of a dominant position. Several national laws provide particular protection for consumers since they normally do not dispose of the knowledge and resources as commercial entities. Different legal systems have different standards of consumer protection. According to their standards of public policy, they impose different requirements on the validity of arbitration agreements. (a) European Law Differences in European consumer protection laws provide a good example of different national public policy goals imposing different requirements on the validity of arbitration agreements. Some national European laws exclude the possibility of resorting to arbitration by means of a contractual clause in the case of consumer contracts. The laws of other states provide for special dispute resolution systems in consumer affairs, whereas still other states expressly provide for the arbitration of consumer disputes 1 6 0 . For instance, while the French Civil Code provides that consumer arbitration clauses are generally void to the extent that the right of the consumer to go to court is excluded 1 6 1 , other countries like Spa in 1 6 2 explicitly strive to 1 5 9 Redfern, Hunter (1999), 3-21 et seq., p. 148. 1 6 0 Survey by Federici, Manfredi available at http://www.ftc.gov/bcp/altdisresolution/comments/skehan.pdf. 1 6 1 Arg. ex art. 2061 Code Civil and art. 631 Code Commercial, Herbert Smith, in: 'Le recours a l'arbitrage interne par les societes', available at http://www.le-iuriste.com/edit/ab002.htm. 54 encourage consumer arbitration. Although such restrictions as those in the French Civil Code are primarily applied to domestic arbitration and not to international arbitration involving consumers which would fall under the realm of the New York Convention 1 6 3 , these provisions illustrate the different standards regarding the arbitrability of consumer disputes in Europe. (/3) American Law In the United States, the arbitrability of consumer disputes might be in question if any legal remedy for the consumer to realise her rights is endangered. A dispute incapable of settlement by arbitration may be declared unenforceable according to the New York Convention 1 6 4 . According to the American contract law, a contract term may be "unconscionable" 1 6 5 in the absence of meaningful choice or bargaining power on the part of one party (procedural unconscionability) or on the basis of unreasonable favorability to the other party (substantive unconscionability) 1 6 6. The procedural element is satisfied if the contract was not negotiated individually and the party claiming unconscionability lacked meaningful choice in entering into the contract. The substantive element is satisfied by proof of "harsh" or "one-sided" results that unreasonably place contract risk on the party lacking bargaining power 1 6 7 . In American contract law the relevant question is whether consumer contracts containing an arbitration clause could be regarded as 'unreasonable' 1 6 2 The Spanish framework law for consumer protection establishes a particular consumer arbitration system for cases involving consumers, the Juntas Arbitrates de Consumo. Decisions of this body are free of charge and are enforceable in the same way as courts' decisions, see Survey by Federici, Manfredi. Supra note 143, p. 64. 163Vincent Tilman, in: 'Arbitrage et nouvelles technologies, Alternative Cyberdispute Resolution', Revue Ubiquite, 1999, no. 2, pp. 47-64. 1 6 4 Art. V(l) (a) of the New York Convention, supra note 111. 1 6 5 U.C.C. 2-302, available at http://www.law.cornell.edU/ucc/2/2-302.html. 166 Matter of State of New York v. Avco Financial Service, 50 N.Y.2d 383, 389-390, 429 N.Y.S.2d 181,406 N.E.2d 1075, (06/05/1980). 1 6 7 Mark Lemley, in: Shrink-wrap Licences, 68 S. Cal. L. Rev. 1239, 1241-1242. 55 and non-arbitrable since basic consumer protection principles were not considered. In the Brower v. Gateway 2000, Inc. dec is ion 1 6 8 a consumer purchased computers from the defendant Gateway 2000 through a direct sales system, by mail or telephone order. With respect to the date of purchase it was Gateway's practice to include with the materials shipped to the purchaser along with merchandise a copy of its "Standard Terms and Conditions Agreements". Those terms included an arbitration clause saying that any dispute arising out of this agreement shall be settled according to the ICC Arbitration and Conciliation Rules, conducted in Chicago. The award was to be final and binding on the parties. The court rejected the argument that the arbitration clause was unenforceable as a contract of adhesion, in that it involved no choice or negotiation on the part of the consumer but was a "take it or leave it" proposition. Although the parties clearly did not possess equal bargaining power, this factor alone did not invalidate the contract as one of adhesion 1 6 9 . The consumer could have made the purchase elsewhere and thus was not forced to accept any term of the agreement. With the express option to return the goods, the consumer was not in a "take it or leave it" position. The court argued that the positive action and the expenses required from the consumer to avoid the formation of the contract action could be see as a trade-off for the convenience and savings which the consumer presumably chose when she elected to make a purchase of such consequence by phone or mail as an alternative to on-site retail shopping. In terms of 'procedural unconscionability', the court concluded that during the contract formation process the appellant did not lack any meaningful choice in entering into the contract or disparity in the bargaining powers. The clause was 168 Brower v. Gateway 2000, Inc. , 246 A.2d 246 (N.Y. App. 1998), available at http://www.kentlaw.edu/classes/rstaudt/intemetlaw/casebook/brower.hto 56 not contained in "fine print" or otherwise hidden in the contract. The seller did not use "high-pressured tactics" or any other disparity in the parties' bargaining power 1 7 0 . The purchasers has enough time (30 days) to thoroughly examine the content of the contract including the arbitration clause agreement and the option to return the merchandise to avoid the contract was not a "precarious" one. With respect to the substantive element, which entails an examination of the substance of the agreement in order to determine whether the terms unreasonably favour one party, the court denied that the possible inconvenience of the chosen site (Chicago) alone rose to the level of unconscionability. However, the excessive cost factor 1 7 1 that was necessarily entailed in arbitrating before the ICC was prohibitive since it served to deter the individual consumer from invoking the process. Thus, barred from resorting to the courts by the arbitration clause in the first instance, the designation of a financially prohibitive forum effectively barred consumers from this forum as well. Since consumers were thus left with no forum at all in which to resolve a dispute, the arbitration clause was substantively unconscionable, unreasonable and consequently not enforceable by the national courts according to the New York Convention. 169 Carnival Cruise Lines v. Shute, 499 U.S. 585, 593-594, 113 L. Ed. 2d 622, 111 S. Ct. 1522, available at http://www.unl.edu/workslaw/carnival.html. 170 Seymour Gillman v. Chase Manhattan Bank, N..A. [1987] NY-QL 9451 521 N.Y.S. 2d 729, 135 A.D.2d 488. 1 7 1 A claim of less than $50,000 required advance fees of $4,000 (more than the cost of most Gateway products), of which the $2000 registration fee was non refundable even if the consumer prevailed at the arbitration. Consumers would also incur travel expenses disproportionate to the damages sought and would bear the cost of Gateway's legal fees if the consumer did not prevail at the arbitration; since the ICC rules follow the "loser pays" rule. Also, although Chicago was designated as the site of the actual arbitration, all correspondence had to be sent to ICC headquarters in France, see Brower v. Gateway 2000, Inc., supra note 151. 57 Conclusion In national legal systems particular safeguards are established by statutes or by courts providing that arbitration agreements are invalid and unenforceable since arbitration according to the conditions laid down in the arbitration clause would produce unbearable results for the consumer. An arbitration agreement is invalid if the consumer is left without any viable remedy to impose her rights either because the arbitration agreement required her explicitly to waive her right to go to court or arbitration produces unbearable results for the consumer and thus excludes any chance for her to impose her rights. (c) Place of the Proceedings Probably the most important aspect of online ADR is the fact that arbitration takes place in a territorially unlimited space conducted through a settlement instrument which is global by nature. 1 7 2. As a consequence of this inherently global nature of online arbitration questions arise about how the place of the arbitral proceedings can be determined under the New York Convention. As a rule, the New York Convention states that the law governing the arbitral procedure is determined by the parties, while the place of the proceedings has merely subsidiary character 1 7 3. Accordingly, the consumer and the seller designate the law applicable to the proceedings in the arbitration clause of the online contract and at first glance it appears that the place of the proceedings does not come into play. 1 7 2 David Johnson, David Post, in: "Law and Borders - The Rise of Law in Cyberspace", available at http://www.firstmonday.dk/issues/issuel/law/index.html. 58 However, in practice the parties often fail to agree on the law applicable. In such cases, as a subsidiary rule, the law of the place of the proceedings governs the validity of the arbitration agreement 1 7 4, the composition of the arbitral tribunal and the entire arbitration procedure 1 7 5 . In addition the place of the proceedings determines the competent authority to set aside or to suspend the award in the event of a failure of any choice of law made by the parties 1 7 6 . Starting from the general concept that arbitration is governed by the law of the place or the seat in which it is held (locus arbitri), it is unclear where that place is located in online arbitration. One could propose that the place of the arbitration is always the place where the arbitrator is. This solution would allow a clear and straightforward approach to determine the place of the proceedings. However, arbitrators frequently change their place of life between the beginning and the end of the arbitration procedure. Furthermore, this approach fails to give clear indications about whether it should be the domicile or the residence of the arbitrators that determine the place of the proceedings 1 7 7 . So this suggestion could even exacerbate uncertainty for the parties since it would be increasingly difficult to predict which legal system the arbitral process would take place under and the award would be rendered and enforced or set aside. Others propose that in disputes arising out of online transactions the place of the arbitration should be determined by the geographical location of the server through which the arbitration takes p lace 1 7 8 . However, the location of servers is completely independent of the location of the contracting and disputing parties. Without any substantial link between the parties and the server, a determination V.l (d) V.l.(a) V. l (d) V.l(e) Arsic, supra note 157, p. 218. Arsic, supra note 157, p. 219. 59 of the place of the proceedings according to the law of the place of the location of the server seems to be rather arbitrary. Neither of the approaches that are based on the idea that the place of the proceedings in online arbitration could be determined by a fixed physical place are convincing. The Internet is technically constructed to be independent of any place and this makes it difficult to trace the way data travels back 1 7 9 . Apparently, in the context of online arbitration the traditional approaches of determining the place of the proceedings in order to determine the applicable subsidiary law fail and new solutions must be provided. In recent years however it has been increasingly argued that a preferable approach would be to detach international arbitration from the control of the law of the place in which it is held. According to the "delocalisation theory", international arbitration "floats" without any attachment to the laws of the place of the proceedings. In this case, the arbitral tribunal would not have to use a time-and money-consuming process to find out whether there were any special provisions governing arbitration in the law of the lex arbitri. This theory is primarily based on the arguments that international arbitration is merely a set of procedural rules and that these may best be made by the parties themselves or by the arbitral tribunal on their behalf 1 8 0. Secondly, any legal control of the arbitral process ought not to come from the place in which the arbitration is held but from the country in which the enforcement of the award is sought 1 8 1 . Wider acceptance of this theory would solve problems arising out of the determination of the applicable law of the proceeding in online arbitration to great extent. This theory recognises the inherent difficulties of submitting online arbitration to legal controls, which vary considerably from country to country. The Johnson, Post, supra note 172. 0 Redfern/Hunter (1999), 2-18, p. 90. 1 Redfern/Hunter (1999), 2-18, p. 91. 60 delocalisation theory thus corresponds to the need for uniform standards in the regulation of international online arbitration. On the other hand, the delocalisation theory creates a legal vacuum. In contrast to the seat theory, which provides an established legal framework to international arbitration, delocalised arbitration is not firmly anchored in a definite legal system, which could both assist and control the arbitral procedure 1 8 2 . However another approach seems to combine both the need for an established legal framework and the practicability of online arbitration. Most arbitration laws already provide for the possibility that parts of the arbitral procedure take place outside of the chosen arbitration s i te 1 8 3 . In those legal systems, the 'seat' is not necessarily the geographic location of the place where the large part of the arbitration takes place, nor where the arbitrator is domiciled nor where the server is located. The 'seat' is rather regarded as the factor connecting the arbitration to a specific legal system and is independent of the place where the proceedings physically take p lace 1 8 4 . Since the arbitral tribunal is no longer bound to the 'physical place' of the arbitral proceedings, arbitrators or server, the place of a definite legal system which will both assist and control the proceedings could be designated as the 'seat' of the arbitration, independent from the actual setting of the proceedings. Consequently, no legal difficulties arise if the arbitrators conduct the proceedings over the Internet. (d) Enforcement 1 8 2 Redfern/Hunter (1999), 2-20, p. 92. 1 8 3 Art. 1037 (3) of the Dutch Code of Civil Procedure expressly provides that the arbitral tribunal may hold hearings, deliberate and examine witnesses and experts at any place within or outside the Netherlands which it deems appropriate, available at www.asser.nl/ica/naw-e.htm#Article 1037. 1 8 4 Swiss PIL Act, Chap 12, Art. 176 (1). This concept has now also been adopted in the 1996 Arbitration Act in the UK, supra note 131. 61 The prime advantage of arbitration that follows the rules of the New York Convention is that unlike judicial decisions from a particular forum, the award can be enforced effectively almost everywhere in the world. If parties refuse to comply with the award voluntarily, a need for recognition and enforcement of the award will arise. Both the seller and the consumer will be anxious to have a valid award. Legal difficulties at the enforcement stage may arise in two different ways. First, due to legal irregularities of the arbitration agreement or the place of the proceedings, the award itself might be unenforceable under the New York Convent ion 1 8 5 . Secondly, there may also be difficulties that arise merely at the enforcement stage. The New York Convention requires that a party applying for the enforcement of an award must present "the duly authenticated original award or a duly certified copy thereof' 1 8 6 and the "original agreement" 1 8 7 in order to obtain a "binding and enforceable award" 1 8 8 . Consequently, in order to make the award binding and enforceable in all the contracting states of the New York Convention, the parties to online arbitration should require the arbitrators to issue a hard copy of the award and of the agreement to arbitrate 1 8 9 . (2) Conclusion The analysis shows that the New York Convention is capable of satisfying the requirements of online consumer arbitration, although the final word about the interpretation of several provisions will be up to the jurisdiction of the enforcing national courts. Thus, uncertainty remains in relation to whether and to According to art. V. 1, the recognition and the enforcement of the award may be refused - inter alia - if the party proves that the said agreement is not valid under the law of the country where the award was made, V. 1. (a) or the arbitral procedure was not in accordance with the law of the country where the arbitration took place, V. 1 (e). 1 8 6 Art. IV. 1 (a). 1 8 7 Art. IV. 1 (b). 1 8 8 Art. III. 1 8 9 Schneider/Kuner, in: 'International Electronic Commerce', Journal of International Arbitration 1997, p. 18. 62 what extent an arbitration agreement concluded online can be held to satisfy the 'writing' requirement. To be on the safe side, an arbitration agreement concluded through the exchange of e-mails should be documented in one single document or, in the case of separate documentation of the electronic offer and acceptance, the offering and the accepting email clearly refer to one another and this reference is documented. In terms of the signature requirement, the exchange of email communication does not necessarily require a signature since both the identification function (identifying the parties of the transactions) and the associative function (associating the signing person with the document by their consenting to the content) could be satisfied alternatively. However, the intentional function (providing certainty as to the personal involvement and the intention of signing person) cannot be satisfied just by the exchange of e-mail messages. Thus the recognition and enforceability of electronic awards depends on the jurisprudence of national courts based on their interpretation of the recently introduced national digital signatures acts and the New York Convention. Since the New York Convention was primarily designed for commercial disputes, problems arise in relation to the arbitrability of consumer disputes. Different particular safeguards established by statutes or by national courts provide that arbitration clauses are not capable of settlement by arbitration and therefore unenforceable according to the New York Convention if they produce unbearable results for the consumer. This will particularly be the case if the consumer is either forced to waive the right to go to court or because arbitration would exclude any chance for the consumer to impose her rights. Finally, due to the inherent borderless character of the Internet, difficulties might arise in the determination of the place of the arbitral proceedings. However, in practice most national arbitration laws already provide for the possibility that parts of the arbitral procedure will take place outside of the arbitration site. Since the arbitral tribunal is no longer bound to the 'physical 63 place' of the arbitral proceedings, arbitrators or server, the place of a definite legal system which will both assist and control the proceedings could be designated as the 'seat' of the arbitration, independent from the actual setting of the proceedings. Consequently, no legal difficulties arise if the arbitrators conduct the proceedings over the Internet. Since an amendment of the New York Convention to adapt international arbitration expressly to online consumer arbitration is unlikely, the recognition and enforceability of electronic consumer awards depends on the jurisprudence of national courts. v. Due Process The arbitration parties of the V M A G process have the opportunity to be heard and to respond to each other 1 9 0. Besides the arbitrator's obligation to contact the parties, ask questions, collect information, solicit arguments, or take any other steps deemed to be appropriate and fair, he keeps the participating parties informed of these activities and shares information received with participating parties. Furthermore, participants will also be given a private e-mail address for the arbitrator in case there is a need for private communications, although it will be up to the arbitrator to determine if private communications will be accepted. vi. Legality In making a decision, the Virtual Magistrate does not automatically apply the law of any specific legal jurisdiction 1 9 1. It will consider the circumstances of VMAG Concept Paper, supra note 115. 1 VMAG Concept Paper, supra note 115. 64 each complaint, the views of the parties about applicable legal principles and remedies, and the likely outcome in any ultimate litigation or dispute resolution. However, the V M A G will not provide clear guidelines indicating which law or rules will be applied for which kind of facts. Due to this lack of transparency, the consumer may get the impression that the V M A G operates in a legal vacuum. She will have a hard time determining her bargaining position and her strategy for the arbitration process. Furthermore, the VMAG's refusal to be bound to the law of a specific jurisdiction leaves open the possibility that V M A G deprives the consumer from her right to legal recourse or other mandatory law of her jurisdiction. As a consequence, in terms of the principle of legality it will be difficult to promote consumer trust in the V M A G arbitration program. c. Conclusion In general, the V M A G arbitration program is strong in terms of independence, affordability, effectiveness and due process. However, according to the material available to the public it clearly does not satisfy the criteria of the principle of transparency and legality. It might be too early to draw a final conclusion about V M A G ' s compliance with consumer protection principles. Several initiatives incorporated in the V M A G Concept Paper and the V M A G Arbitration Rules have not been implemented yet. The publication of case results is definitely an important element of V M A G s strategy to convey the impression of giving an unbiased and impartial service and to build up consumers' trust. Published results take away the fear of hiding malpractice from the consumers and entail a higher chance of being accepted as fair redress instruments. Providing case results is highly important since it allows interested, external observers to assess the impartiality of the service. In the case of online arbitration, the publication of the awards contributes to a body of precedents and provides valuable guidance for a consumer to assess the offered online ADR 65 service before concluding the online transaction. On the other hand, the publication of 'quasi-judicial' precedents may be at odds with the some key advantages of online ADR, particularly with the principle of confidentiality and the rather flexible and informal dispute resolution procedure. However, with regards to the principle of confidentiality, arbitration does not necessarily need the same strong confidentiality protection as other dispute resolution mechanisms such as negotiation or mediation do. In the latter cases, informal, flexible and not necessarily juridical solutions, might require stronger confidentiality in order to offer incentives to settle the case. However, in arbitration, the procedure is more strongly bound to the applied arbitration rules and thus must provide a chance for the consumer to monitor whether those rules are actually complied with. Strict confidentiality protection might at least increase the suspicion that the business could use the confidentiality to hide arbitrary decisions from public control. However, so far no results have been published. It remains to be seen whether V M A G will succeed in complying with the commendable rule to publish the arbitration awards. However, a clear negative factor is that in terms of transparency however is that V M A G fails to provide clear guidelines about which law or rules will be applied for which kind of facts. As a consequence, a consumer will have a hard time to determine her bargaining position and her strategy for the arbitration process and might refrain from resorting to the V M A G arbitration program. The consumer might be confused by the V M A G documentation since it remains unclear from the V M A G website if their Concept Paper from 1996 and the Arbitration Rules from 1999 still represent an up-to-date documentation of the V M A G policy. The perception that the documented policies are outdated is exacerbated by the fact that a mayor relaunch of the service took place in 2000 without being mentioned anywhere on the V M A G sites. With respect to the affordability of the service, it remains to be seen how V M A G is going to fund their service in future without reliance on other financial sources. So far V M A G is still in its infancy and as a research project looked after 66 by an academic institution. However, in the long run V M A G has to prove that it is no longer dependent on external support. If the service turns out to be popular, V M A G will be forced to either charge consumers or businesses for the maintenance of the service. In addition, a service free of monetary charge to consumers might be prone to abuse. Filing a complaint doesn't hurt the consumer if no monetary loss is at stake or other thresholds restrict him from complaining about minor issues. Finally, good decision-makers cost money and consumers are willing to pay a reasonable amount if the service provided is good in quality. Providers offering low cost services tend to use less qualified and less experienced online ADR officials 1 9 2. The fact that the V M A G arbitration program is only offered in English clearly restricts the availability of this service and represents a further weakness. In addition, its availability is limited since V M A G lacks a widely spread partnership network incorporating the V M A G arbitration program. Thus V M A G does not appear to be well publicised so that interested customers and businesses can become aware of it. This lack of publicity is worsened by the fact that V M A G is not closely related to any mayor e-commerce site and thus struggles to reach large numbers of potential customers. This negative factor is partly compensated by the co-operation arrangement between the V M A G and the Online Ombuds Office, which facilitates a broad range of particular services for different kinds of disputes. The advantage of directing their customers to the most appropriate dispute resolution provider increases the effectiveness of the V M A G service enormously. Although the V M A G system does not provide any consequences for non-compliance with the decisions, presenting a clear disadvantages of its service, the enforceability of the V M A G awards can be achieved to some extent through the New York Convention. Although uncertainty remains about the courts' interpretation of several provisions, the V M A G could ensure a maximum of enforceability if its arbitration Consumer International, supra note 82, p. 25. 67 rules were adapted to the requirements of the New York Convention. The V M A G rules should in particular provide that the arbitration agreement concluded through the exchange of e-mails should be documented in one single document or, in the case of separate documentation of the electronic offer and acceptance, the offering and the accepting email should clearly refer to another and this reference should also be documented. In terms of the signature requirement of the New York Convention, the V M A G arbitration rules must correspond to the provisions introduced through national digital signature acts. Since arbitration clauses are unenforceable according to the New York Convention and under national laws if they produce unbearable results for the consumer, the V M A G rules should provide that the arbitration agreements are void if they force the consumer either to waive the right to go to court or if they exclude any chance for the consumer to impose his rights. And finally, in order to make the award enforceable in most of the jurisdictions of the contracting states of the New York Convention, the V M A G arbitration rules should require the arbitrators to issue a hard copy of the award and of the agreement to arbitrate. However, even if the V M A G arbitration program adapts the rules to correspond to the requirements of the New York Convention, the costs of legal enforcement on a global level of online consumer dispute awards may be as impractical as the costs of litigating them. Other sanctions discussed below such as trustmark programmes might ultimately provide the same assurance of enforcement as formal legal enforcement procedures at a lower price. And finally, since V M A G does not address the question of whether the provider is bound to mandatory consumer protection law of the consumer's jurisdiction, V M A G seems to violate the principle of legality. As mentioned above, from the consumer's point of view uncertainty remains because V M A G fails to provide clear guidelines indicating which law or rules will be applied for which kind of facts. Due to this lack of transparency, the consumer will have difficulty determining what both her bargaining position and her strategy for the 68 arbitration process should be. As a consequence it will be difficult to promote consumer trust in the V M A G arbitration program. 4. Online Mediation a. Description Square"!" rade SquareTrade is an online ADR provider that specializes in the settlement of disputes involving non-delivery of goods or services, misrepresentation, improper selling practices, un-honored guarantees or warranties, unsatisfactory services, credit and billing problems and unfulfilled contracts 1 9 3. After an electronic complaint is filed in which a complaining party states, in its own words, what has taken place, the other party is notified by e-mail. If the opposing party responds to the complaint, the parties try to resolve the problem themselves, using SquareTrade's proprietary technology and process. If an agreement cannot be reached, a mediator is assigned to the case. He assists the parties in exploring their positions and reaching a mutually acceptable agreement. The mediation process regularly results in a resolution that is mutually agreeable to both parties. In the event that the parties cannot agree, the parties may ask the mediator to recommend a resolution based on each party's position, and on principles of fundamental fairness. 69 b. Evaluation i. Independence and Impartiality SquareTrade arose out of a project initiated by the Center for Information Technology and Dispute Resolution at the University of Massachusetts analysing the nature of online conflicts and the impact of the online environment on disputes and dispute resolution 1 9 4. SquareTrade operates as a private business venture 1 9 5 and is re-financed by subscription fees from e-commerce marketplaces with which SquareTrade has contracted to provide trustmark-based services including online A D R 1 9 6 . SquareTrade has established an expert advisory board of leading practitioners and academics in the areas of Alternative Dispute Resolution (ADR) 1 9 7 and thus confirms the impression of being an independent entity. A SquareTrade mediator or arbitrator is supposed to disclose to all parties any and all conflicts of interest, potential or actual, as soon as he becomes aware that such a conflict may exist 1 9 8 . Information about these conflicts is provided on a website 1 9 9 . SquareTrade Case Filing and Responding, available at http://www.squaretrade.com/cnt/isp/hlp/help odr case.isp?vhostid=tomcat2&stmp=squaretrade#types. 1 9 4 Katsh, Rifkin, Gaitenby, supra note 67, p. 706. 1 9 5 Overview of the Investors available at http://www.squaretrade.com/cnt/isp/inv/investors.isp?vhostid=tomcat2&stmp=squaretrade. 196SquareTrade Seal Program, Membership Benefits and Fees, available at https://www.squaretrade.com/sap/isp/lnm/fees.isp?vhostid=tomcat2&stmp=squaretrade. 1 9 7 SquareTrade Board of Experts, available at http://www.squaretrade.eom/cnt/isp/adv/advisors.isp#e katsh?vhostid=tomcat2&stmp=squaretrade. 1 9 8 SquareTrade Standards of Practise for Online Dispute Resolution, available at http://www.squaretrade.com/cnt/jsp/lgl/standards med.isp?vhostid=tomcat2&stmp=squaretrade. 70 ii. Affordability The parties don't have to pay for filing the case as long as they try to resolve the problem themselves and do not proceed to the mediation stage. For online mediation, the user requesting a mediator will be charged a fee between $ 15 and $ 90 plus 0.25 - 1.00% of the amount in controversy, depending on the marketplace where the transaction took p lace 2 0 0 . iii. Transparency SquareTrade posts its Standards of Practice for Online Dispute Resolution, its privacy policy and confidentiality guidelines on its websi te 2 0 1 . The cost of online mediation is posted for users before they enter the process. However, the results of the settlement are not published. The customer is informed about his right to go to court in the event that the settlement agreement has not been followed through with and that she retains all rights to pursue recourse through traditional legal methods offline. iv. Effectiveness m Available at http://www.squaretrade.com/cnt/jsp/med/^  2 0 0 E.g. currently eBay users don't have to pay fees if a SquareTrade Mediator gets involved to assist buyers and sellers in resolving issues related to an eBay transaction, mediation fees available at http://cf.squaretrade.com/assign mediator/mediation pricing.cfm?vhostid=tomcat3&stmp=squaretrade&mr n=0. 201Available at http://www.squaretrade.com/cnt/isp/odr/overview odr.isp?vhostid=tomcat3&stmp=squaretrade and http://www.squaretrade.com/cnt/isp/lgl/standards med.isp?vhostid=tomcat3&stmp=squaretrade. 71 Initially the service was only available to eBay.com customers. Currently it can be used by several other online transactions marketplaces 2 0 2. It covers a wide range of e-disputes ranging from non-delivery of goods or services, misrepresentation, improper selling practices, un-honored guarantees or warranties, unsatisfactory services, credit and billing problems and to disputes arising out of unfulfilled contracts in general 2 0 3 . Requirements about the form of the submission of a case are kept to a necessary minimum and appear to be quite easy for the consumer to handle. According to the SquareTrade policy, problems are typically resolved in about 10 to 14 days 2 0 4 , although the length of the process primarily depends on how quickly the parties involved respond to messages. Most of the disputes are resolved in the first s tage 2 0 5 . A SquareTrade mediator or arbitrator will only handle disputes that he or she has the qualifications, experience, and ability to handle 2 0 6 . According to SquareTrade information, the parties normally comply with the agreed resolution 2 0 7. However, since the electronically signed resolution proposed by the mediator is a binding contract with the same legal effect as any other online contract, the non fulfilling party can be taken to court for breach of contract. The traditional legal system always remains an option for buyers and sellers involved in problems. Alternatively, the SquareTrade affiliate seal program ensures the compliance of companies with the settlement. If a company displays the SquareTrade online seal, this implies firstly that this company agrees to online 202SquareTrade partners overview, available at http://www.squaretrade.com/cnt/isp/prt/parmers.isp?vhostid^orncat3&stmp=:squaretrade. 2 0 3 SquareTrade Case Filing and Responding, available at http://www.squaretrade.com/cnt/jsp/hlp/help odr case.isp?vhostid=tomcat2&stmp=squaretrade#types. 2 0 4 Dispute Resolution: Responding to a case, available at http://www.squaretrade.com/cnt/jsp/hlp/help odr case respond.isp?vhostid=tomcat3&stmp=squaretrade#l ong. 2 0 5 After refining the direct negotiation process, success rates have risen from 40 percent to over 80 percent, see Katsh, Rifkin, supra note 52, p. 66. 206SquareTrade Standards of Practise for Online Dispute Resolution, available at http://www.squaretrade.com/cnt/isp/lgl/standards med.isp?vhostid=tomcaf3&stmp=squaretrade. 72 mediation and secondly that it is willing to comply with the outcome of the mediation process. If it does not comply, the company will no longer be allowed to display the seal on its website. v. Due Process The dispute resolution process described above gives the parties an opportunity to be heard and to respond to each other. vi. Legality SquareTrade works to encourage the defendant party to respond to a case but does not guarantee that the other party will participate as the process is entirely voluntary. c. Conclusion In general, the SquareTrade mediation program scores high in terms of independence, affordability, effectiveness, due process and legality. However, the independence of the SquareTrade service might be endangered since the program is primarily funded by the subscription fees of seal holders. This means that the independence of the service and the impartiality of the decision-makers can be questioned. In the case of SquareTrade, this concern is alleviated by the fact that SquareTrade managed to establish an independent expert advisory board of leading practitioners and academics in the areas of ADR, although the function and influence of this board 207Dispute Resolution, Case Closing, available at 73 remains unclear 2 0 8 . A clear signal to consumers indicating that independence and impartiality of the service are important for SquareTrade is missing. For instance, a balanced stakeholder representation on the governing board would be more convincing. SquareTrade charges a moderate fee from the consumers and at the same time provides some protection against abuse and unnecessary claims. One of the biggest drawbacks of SquareTrade is that it does not publish the results of the settlement. Providing case results is highly important since it allows interested, external observers to assess the impartiality of the service. In arbitration, the procedure is more strongly bound to the applied arbitration rules and the publication of the awards contributes to a body of precedents providing a chance for the consumer to monitor those rules to see if they are actually complied with. However, confidentiality is much more important in mediation. In mediation, informal and flexible and not necessarily juridical or legal solutions, regularly require stronger confidentiality in order to offer incentives to settle the case. However, the availability of the settlement service is restricted since to date the dispute settlement program is only offered in English. Language and cultural differences are partly bridged since SquareTrade's mediators come from different cultural backgrounds and have mediated disputes in multiple languages 2 0 9 . Furthermore, SquareTrade has entered some strategic partnerships with highly frequented e-commerce marketplaces such as eBay, which provides SquareTrade with a huge potential customer base. This co-operation not only leads to good publicity, but also alleviates the language problem since customers contracting on those related e-commerce sites regularly master English before they get involved in the transaction. http://www.squaretrade.com/cnt/jsp/hlp/help odr closed.isp?vhostid=tomcat3&stmp=squaretrade#binding. 2 0 8 http://www.squaretrade.eom/cnt/isp/adv/advisors.isp#e katsh?vhostid=tomcat2&stmp=squaretrade. 2 0 9 Consumer International, supra note 82, p. 56. 74 SquareTrade definitely profits from the two-step settlement process. The scaleable mechanism best meets the needs of the consumer with different types of disputes. The parties are generally willing to settle the dispute on the negotiation level since the more formal, more expensive and more time consuming mediation process is looming in the background 2 1 0 . Only because of this 'filter' is the huge caseload received by SquareTrade manageable 2 1 1 . In addition, when disputing parties have the opportunity to craft their own solutions to a problem, they are more likely to comply with the agreement. Settlements based on tailored processes typically provide a more durable and satisfactory resolution than do decisions rendered by the court system. In order to be effective, the mediation agreement should be enforceable by the consumer through the legal framework or through other compliance mechanisms. Since the electronically signed resolution proposed by the mediator is a binding contract with the same legal effect as any other online contract, the non fulfilling party can be taken to court for breach of contract. The traditional legal system always remains an option for buyers and sellers involved in problems. However, this solution is not attractive for the consumer since one of the prime advantages of online ADR is the inexpensive and time saving solution whereas reliance on judicial enforcement is both costly and time consuming. SquareTrade also offers an affiliate seal program in order to ensure compliance of companies with the settlement agreement. Not only are all seal subscribers verified before they are accepted, but they are also monitored by SquareTrade to ensure they continue to meet the SquareTrade selling standards. If a company displays the SquareTrade online seal, this implies firstly that this company agrees to online mediation and secondly that it is willing to comply with the outcome of the mediation process. If it does not comply, the company will no Up to 80 % of the disputes are settled during the negotiation process, see Katsh, Rifkin, supra note 48, p. 66. 2 1 1 The largest co-operation partner of SquareTrade, eBay, has more than 2 million transactions taking place each week, see Katsh, Rifkin, supra note 52, p. 66. 75 longer be allowed to display the seal on its website 2 1 2 . Obviously this leverage is strong enough to ensure compliance by businesses with the dispute resolution results. Subscribers to the seal program provide a ready source of revenue for SquareTrade and thus alleviate the problem of cost recovery. Furthermore, businesses and private sellers transacting on e-commerce sites such as eBay avoid to risk their future online life and generally turned out to comply with the settlement results 2 1 3 . Thus there is a strong incentive for businesses to comply with the rendered decision when it is part of the seal or trustmark program. On the other hand, online ADR providers which are not connected to a seal or trustmark program face a double-fold challenge. Firstly, without the financial back-up of the seal subscribers these providers have to rely on user fees with the result that potential costumers might be detered from using the online A D R service. And secondly, if these providers won't succeed in offering incentives for businesses to comply with their decisions, the providers will have a hard time enforcing their decisions. Unless the online ADR provider is so widely known and used that it develops its own 'brand' standing for effective compliance, it will have to rely solely on the good faith of the disputing parties to comply with the rendered decision. But even then providers have no direct access to the funds of the non-complying business and the consumer might still need to resort to court in order to enforce his rights unless the online ADR provider offers a compensation fund out of which consumers are paid when businesses fail to comply with the rendered decision. This compensatory fund could be financed through the revenues of the provider. However, it remains to be seen if this - theoretically appealing - business model would work in practice. 2 1 2 Seal Member Agreement, available at http://www.squaretrade.com/cnt/isp/lgl/seal use,isp?vhostid=tomcat3&strnp=squaretrade. 2 1 3 Katsh, Rifkin, Gaitenby, supra note 67, p. 728. 76 IV. Conclusion Uncertainty arising from unclear concepts of jurisdiction and enforcement and the high volume of disputes with low monetary value have led to the development of online ADR providers allowing individuals from across the world to settle disputes. Both online mediation and online arbitration serve consumers as appropriate instruments to enforce their rights arising out of online disputes. They are designed for disputes with small monetary value and overcome jurisdictional obstacles. On the enforcement level, online arbitration based on the New York Convention provides the consumer with a powerful tool on the global level. Online consumer arbitration can ensure a maximum of enforceability if consumer arbitration rules incorporate the requirements of the New York Convention. An arbitration agreement concluded through the exchange of e-mails must be documented in one single document to satisfy the 'writing' requirement. In terms of the signature requirement of the New York Convention, the consumer arbitration rules must correspond to the provisions introduced through national digital signature acts. Since arbitration clauses are unenforceable under both the New York Convention and national laws if they produce unbearable results for the consumer, consumer arbitration rules should provide that the arbitration agreements are void if they force the consumer either to waive the right to go to 77 court or if they exclude any chance for the consumer to impose her rights. But even if an online arbitration provider adapt the rules to correspond to the requirements of the New York Convention, the costs of legal enforcement on a global level of online consumer dispute awards may be as impractical as the costs of litigating them. At least for small-amount transactions, other sanctions such as seal or trustmark programmes might ultimately provide the same assurance of enforcement as formal legal enforcement procedures but at a lower price. My sample study on the policies and practices of the online dispute resolution providers Virtual Magistrate and SquareTrade shows that both online mediation and arbitration are capable of strengthening consumer confidence by living up to recognized consumer protection principles. Both services are - in general terms - independent, affordable, effective, provide a fair process and don't restrict consumers' rights to appear before the courts. However, both services need to be improved in some aspects, particularly in terms of transparency and legality. In the case of the V M A G , the publication of case results helps to portray V M A G to provide an unbiased and impartial service and to build up consumers' trust. Published results remove the fear of hiding malpractice from the consumers, provide valuable guidance to assess the offered on-line ADR service before concluding the online transaction and thus have a higher chance of being accepted as fair redress instruments. The disclosure of case results does not necessarily conflict with the principle of confidentiality. Arbitration does not necessarily need the same strong confidentiality protection as other dispute resolution mechanisms like negotiation or mediation since the arbitration procedure is more strongly bound to the applied arbitration rules and thus must provide a chance for the consumer to monitor if those rules are actually complied with. In terms of affordability, V M A G has to prove that it is able to maintain its 78 service free of montetary charge without depending on external support in the long run. If the service turns out to be popular, V M A G might be forced to charge either consumers or businesses for the maintenance of the service. The fact that the V M A G arbitration program is only offered in English restricts the availability of this service. In addition, the availability is limited since V M A G lacks a widely spread partnership program incorporating the V M A G arbitration program. And finally, since V M A G does not address the question of whether the provider is bound to mandatory consumer protection law of the consumer's jurisdiction, V M A G seems to violate the principle of legality. At least from the consumer's point of view uncertainty remains since V M A G fails to provide clear guidelines indicating which law or rules will be applied for which kind of facts. Due to this lack of transparency, the consumer will have a hard time determining her bargaining position and her strategy for the arbitration process. As a consequence it will be difficult to promote consumer trust in the V M A G arbitration program. In general, the SquareTrade mediation program scores highly in terms of independence, affordability, effectiveness, due process and legality. Since the SquareTrade program is primarily funded by subscription fees from seal holders, consumers might question the independence of the service and the impartiality of the decision-makers. This concern is lessened by the fact that SquareTrade has managed to establish an independent expert advisory board of leading practitioners and academics in the areas of ADR. However, consumers' representation in the governing or supervisory board of SquareTrade would be a more convincing approach to promote consumers' trust in online dispute resolution. Also, SquareTrade does not publish the results of the settlement and thus raises doubt about the impartiality and transparency of its service. This is particularly true in the case of Squaretrade with its business-based funding structure. However, in contrast to arbitration, where the procedure is more strongly bound to the applied arbitration rules, confidentiality is much more important in mediation. In mediation informal and flexible, rather than 79 juridical or legal, solutions regularly require greater confidentiality in order to offer incentives to settle the case. The availability of SquareTrade is clearly restricted since to date the dispute settlement program has only been offered in English. SquareTrade's strategic partnerships with strongly visited e-commerce marketplaces such as eBay provide SquareTrade with a huge potential customer base and foster the publicity and availability of this service. In order to be effective, SquareTrade should rely on the affiliate seal program in order to ensure businesses' compliance with the settlement agreement. If the seal-subscriber refuses to comply with the outcome of the mediation process, the company will no longer be allowed to display the seal on its website. This leverage is strong enough to ensure compliance by businesses with the dispute resolution results. The alternative of taking the non fulfilling party to court for breach of contract is unattractive for the consumer since judicial enforcement is both costly and time consuming. 80 Chapter III: Other Models of Redress The particularities of online transactions suggest that we need to review current redress mechanisms. Since both litigation and traditional ADR no longer provide a viable remedy in the event that an online transaction goes wrong, consumers depend on other trust-creating models in order to lessen consumers' uncertainty. Separated by geographical, cultural and jurisdictional barriers and without the chance to glean information from face-to-face meetings with the seller, the global consumer needs trust in the services and products that are exchanged over the Internet2 1 4. E-commerce companies seek to promote trust by incorporating several redress mechanisms and trust creating instruments on their sites. These models either provide the consumer with an efficient and fair remedy or they aim to promote trust in a different way. Information intermediaries provide the online consumer with information about the online seller. Transaction intermediaries acknowledge the anonymous nature of online transactions and function as 'trusted hands' between the seller and the buyer. Both information and transaction intermediaries strive to promote trust between the online seller and the online consumer before the online transaction takes place and try to avoid conflict between buyer and seller. Other trust creating instruments such as credit card charge back systems or escrow services offer redress for the consumer Fukuyama, supra note 1, p. 3. 81 after the transaction goes wrong and aim to settle disputes between sellers and buyers. As with litigation and ADR, trust-creating models face similar challenges to those of e-commerce. Their success depends on the ways that they have of responding to the particularities of the online environment. They must be capable of creating trust for a large number of small-amount transactions that take place on global level through an inherently anonymous medium. In this chapter I will explore the potential and the limits of these trust-creating systems to promote consumers' trust in online transactions. Trust creating models are employed to boost consumers' confidence before disputes arises (dispute avoidance) and after the dispute has arisen (dispute settlement) 2 1 5. I. Dispute Avoidance For the most part, a consumer can assess service quality only after the delivery. She has no assurance that the product will contain the features that she anticipated or that the product will be delivered on the promised date. Nevertheless, gaining the consumer's trust is very important for the online business to reduce the level of perceived risk ex ante. Since consumers cannot see the outcomes of their shopping process ahead of time, they will judge an online seller on cues that they encounter as they shop. Businesses can attempt to reduce the perceived risk of consumers in many ways. 1. Information Intermediaries 82 A business' reputation can serve as both a source of information and as a potential source of sanctions 2 1 6 . For the consumer, the online seller's reputation is a source of information that can reduce uncertainty and guide a decision about whether to trust the partner 2 1 7. Information intermediaries as feedback and rating schemes rely on the fact that the existence of shared reputations serves as an incentive for the partner to be trustworthy because of the damaging effects of acquiring a bad reputation. a. Trustmarks, Seals and other Certifications A trustmark, seal or other certification, combined with an underlying code of conduct, can ensure good business practices and thus help to booster consumer confidence. Consumers need help to find reliable companies that meet certain basic consumer protection standards. Independent organizations establish standards for conducting e-commerce and certify that certain online businesses have met those standards. After registration, those businesses are permitted to display the seal or trustmark on their website if they comply with a code of conduct or certain best practices 2 1 8 . The entity that certifies the seller also monitors the seller's continued compliance with the trustmark's code of conduct and may provide information about the seller to end users upon request Hart, supra note 48. 2 1 6 Yamagishi, Toshio, and Midori Yamagishi. 1994. "Trust and Commitment in the United States and Japan." Motivation and Emotion 18(2): 129-166. 2 1 7 Peter Kollock, in: 'The Production of Trust in Online Markets', available at http://www.sscnet.ucla.edu/soc/faculty/kollock/papers/online trust.htm. 2 1 8 E.g. during the SquareTrade Identification and Approval process, SquareTrade requires the disclosure of contact information, pricing, including all applicable fees, of the policies on after sales services, such as refunds and warranties and accurate descriptions of good and services, the obligation to maintain privacy policy, to transact only on secure sites and to respond to any disputes filed against them within 2 business days, see SquareTrade Standards, available at https://www.squaretrade.com/sap/isp/lnm/standards.isp?vhostid=tomcat3&stmp=squaretrade. In addition, SquareTrade verifies the address and identity of potential seal members and reviews their marketplace feedback rating and the history of disputes filed with SquareTrade, see https://www.squaretrade.com/sap/isp/lnm/overview seal.isp?vhostid=tomcat3&stmp=squaretrade. 83 (e.g. the seller's ratings or feedback) 2 1 9 . If the trustmark holder is unable to provide adequate redress to the user or fails to comply with the trustmark code or guidelines, he risks losing the trustmark or seal on his website 2 2 0 . A web seal or trustmark can be both generated and removed dynamically from a server and thus facilitates the flexibilty necessary for the seal or trustmark holder to respond immediately to the behaviour of the seller. The detailed conditions and level of protection vary considerably 2 2 1 , ranging from certification of meeting certain privacy standards 2 2 2 to business standards for disclosures, contract terms and performance, security and guarantee schemes 2 2 3 and internal/third party dispute resolution for the case that a customer cannot resolve a problem directly with a trustmark holder. i. Potential By itself, dispute resolution or other redress mechanisms that apply after a dispute has arisen are often too late. Trustmark and seal programs provide the potential to give guidance to the consumer about consumer protection standards of the online seller before any damage is done. They offer effective and inexpensive certification, monitoring and enforcement procedures. Trustmarks and seals can be regarded as an inexpensive way to advertise the fact that a company has agreed to adhere to a set of common best practices, E.g. the SquareTrade Seal Program, FAQs, available at https://www.squaretrade.com/sap/isp/lnm/learn seal.isp?vhostid=tomcat3&stmp=squaretrade#benefits. 220See SquareTrade Seal Member Agreement, available at http://www.squaretrade.com/cnt/jsp/lgl/seal use.isp?vhostid=tomcat3&stmp=squaretrade. 2 2 1 There is a good overview of the different initiatives at Alan Wiener, in: 'Regulations and Standards for Online Dispute Resolution', available at http://www.mediate.com/articles/awiener2.cfm. 2 2 2 Better Business Bureau (BBB) Online Privacy Program, available at http://www.bbbonline.com/privacy/beneFits.asp or TRUSTe, available at www.truste.org. 2 2 3 E.g. the SquareTrade Seal Program includes a fraud protection guarantee covering the buyers of all approved Seal Members. In the unusual event that fraud has occurred, buyers will be covered up to a maximum of $250 of the final closing price of the transaction with an active SquareTrade Seal Member. The transaction must meet SquareTrade's Fraud Protection Guarantee eligibility guidelines, and the Seal Member must have been an active member displaying the Seal, https://www.squaretrade.com/sap/isp/lnm/fees.isp?vhostid=tomcat3&stmp=squaretrade. 84 principles or guidelines and eventually to provide redress mechanisms for a customer 2 2 4 . The consumer's ability to assess the seller's business practices is particularly important in the fast paced online world, where many consumers don't take the time to read lengthy website terms and conditions. In addition, trustmark schemes provide an efficient enforcement instrument. In the event that a web seller does not live up to its promises or violates certain principles, he risks losing his trustmark. A broad variety of trustmark and seal programs help to meet the specific needs of companies and to encourage competition between the different programs. This increases the choice for the consumer and, in the long run, might drive up standards in online business conduct. By leaving the choice to contract based on the exposed terms with the consumer, companies will avoid the risk of imposing any unfair contract term on consumers. And finally, in the event that there is a problem with the online seller, parties have a central place where they can lodge complaints. This centralized information collection also helps to evaluate and eventually imrpove the quality of the trustmark service. ii. Problems Although trustmark and seal schemes have the potential to provide inexpensive and efficient monitoring and enforcement mechanisms, only a few of them actually make use of these powerful tools. For instance, BBBOnline, a wholly owned subsidiary of the business-funded non-profit Council of Better Business Bureaus, is dedicated to promoting trust and confidence on the Internet through the BBBOnLine Reliability and E.g. the SquareTrade membership costs $ 7 per month, available at https://www.squaretrade.com/sap/isp/lnm/fees.isp?vhostid=tomcat3&stmp=squaretrade, 85 BBBOnLine Privacy programs 2 2 5 . It does not pre-clear or pre-approve any advertising of the participants, nor does it engage in active monitoring or bring enforcement actions if a merchant violates the BBB standards. Furthermore, it remains unclear if and when membership will be cancelled for those businesses that fail to comply with the BBBonline principles. TRUSTe, an independent, non-profit, business-sponsored privacy initiative dedicated to building users' trust and confidence on the Internet2 2 6, has the means to revoke the trustmark 2 2 7. However, TRUSTe has been challenged for not taking action against the trustmark holders 2 2 8 . Another concern is that information intermediaries always depend on existing information about merchant's past transactions and by nature face the problem of lacking initial trust 2 2 9. Seal or trustmark systems only provide reliable orientation for the consumer if they base their assessments on continuing observation of business's practices of online merchants 2 3 0 . In recent years many different seal and trustmark programs have evolved 2 3 1 . The more different the programs are, the harder it is for the consumer 2 2 5 To display the BBBOnLine Reliability seal on their web site, participants (Subscribers) must be a member of the Better Business Bureau (BBB), provide the BBB with information regarding company ownership, management and location (which may be verified in a visit to the physical premises), have been in business for at least one year, have a satisfactory complaint handling record with the BBB, agree to participate in the BBB's advertising self-regulation program, respond promptly to all consumer complaints and agree to dispute resolution, at the consumer's request, for unresolved disputes involving consumer products or services, available at www.bbbonline.com. 2 2 6 About TRUSTe, available at http://www.truste.org/about/truste/index.html. 2 2 7 The TRUSTe seal is awarded to web sites that adhere to established privacy principles of disclosure, choice, access and security. Web sites that display the TRUSTe privacy seal agree to comply with ongoing TRUSTe oversight and alternative dispute resolution processes. TRUSTe promises to provide consumers with simple, effective means to submit their privacy concerns directly to the web site. Users are requested to contact the Code Subscriber directly before filing a report with TRUSTe. If a satisfactory response is not provided, TRUSTe conducts an investigation, which may result in revocation of the trustmark, termination from the program or, in extreme cases, referral to an appropriate government agency, see TRUSTe License Agreement, available at http://www.truste.org/webpublishers/truste license agreement 6 l.doc. 228Despite a number of publicized complaints TRUSTe has never revoked a seal, Michelle V. Rafter, Trust or Bust, The Standard March 6, 2000, available at www.thestandard.com/article/displav/0,115L12445.00.html. 2 2 9 Pilcher, supra note58, p. 147. 2 3 0 E.g. BBBOnline requires a merchant to be in business for at least a year before it can be considered for the reliability seal, an exception can be made if a new business is a spin-off or a division of an existing business, which is known to have a positive track record with the BBB, available at http://www.bbbonline.com/reliability/requirement.asp. 2 3 1 Wiener, supra note 59, p. 15. 86 to distinguish between them, and to assess their quality . Since a consumer will not trust a seal that she doesn't know, the original function of these programs to strengthen consumer's trust will be perverted 2 3 3, and will confuse the consumer rather than strengthening her trust 2 3 4. This trend is even aggravated by the different standards of consumer protection that are applied by seal and trustmark programs . However, in response to this trend, the O E C D 2 3 6 , G B D 2 3 7 and other government-sponsored, business-led, consumer association and governmental initiatives have developed guidelines in order to ensure greater transparency, minimum voluntary standards and comparable levels of protection among competing trustmark programs. Trustmark and seal programs based on these guidel ines 2 3 8 not only provide better orientation for the consumer, they also force the subscribers to offer efficient monitoring and enforcement instruments and thus alleviate the above mentioned problems. It remains to be seen to what extent these guidelines help to unify standards for trustmark and seal programs and reinforce consumer confidence. Carina Toernblom, Head of Unit, Directorate General for Health and Consumer Protection, European Commission (EC), in: 'Report of the Conference "Building Trust in the Online Environment", The Hague', available at http://consumerconFidence.gbde.org/documents/haguereport.pdf. 2 3 3 Pilcher, supra note 58. 2 3 4 Surveys have shown that, for example, only 18% of users are familiar with BBBOnline and that even less, 8% of users, are familiar with Bizrate. See 'The Cheskin Research & Studio Archetype/Sapient, eCommerce Trust Study 3' (Jan. 1999), available at http://www.studioarchetype.com/cheskin/assets/images/etrust.pdf, p. 16. 2 3 5 See the overview compiled by the Global Business Dialogue in e-commerce, 26.9.2000, available at http://consumerconfidence.gbde.org/documents/trustmarksmiami.doc. 2 3 6 OECD Report First Report 'Government And Private Sector Initiatives To Promote And Implement The OECD Guidelines For Consumer Protection In The Context Of Electronic Commerce', available at www.olis.oecd.org/olis/2000doc.nsf/LinkTo/DSTI-CP(2000)7-FINAL. 2 3 7 Global Business Dialogue in e-commerce, Trustmarks Guidelines , supra note 231. 2 3 8 For example, in the United Kingdom, the government has developed a non-profit organization, TrustUK, to accredit - based on the OECD principles - codes of conduct for electronic commerce, which meet minimum standards and offer consumer protection. One of the accredited code programs is Web Trader, which was developed and administered by consumers' organizations in Belgium, France, Italy, the 87 b. Rating and Feedback Models Similar to seal and trustmark programs, rating and feedback systems help to strengthen consumers' confidence in e-commerce by providing the user with important information about the contracting partner and his past business performances before an online transaction takes place. Although different systems' approaches are different, they vary in detail. Bizrate, a private venture funded by selling feedback research and promotional activities 2 3 9 bases its ranking of the online sellers' practices on ratings provided by their consumers. Consumers assess the buying process, whether the delivery arrived on time and whether it met their expectations. Other rating models like Consumer Reports Onl ine 2 4 0 do not rely on customer information for their ratings but test the sites on their own and publish the collected results on their websites. Feedback systems, introduced by eBay and subsequently adopted by various other auction s i tes 2 4 1 , allow online auction bidders who have recently completed a transaction to rate and comment upon the seller's performance. The ratings and comments can be accessed and read by any potential user. Non compliance with the agreed terms of the transaction by the seller or the buyer can result in a decreased or negative rating and shows up in their feedback files. Netherlands, Portugal, Spain and the United Kingdom, available at www.which.net/webtrader/code of practice.html. 239 i • www.bizrate.com. 2 4 0 http://www.consumerreports.org/main/home.isp. 2 4 1 EBay, The Feedback Forum, at http://pages.ebay.com/services/forum/feedback.html, Amazon.com, Posting Auctions & zShops Feedback, at http://sl .amazon.com/exec/varzea/ts/help/rating-other-users/l02-8095162-9714525. Yahoo! Auctions, 'What are Yahoo! Auctions Ratings and Feedback?', at 88 i. Potential Rating and feedback systems provide an immediate source of information to buyers about sellers and an incentive for good performance to repeat se l lers 2 4 2 The system gives a strong and inexpensive leverage in c2c (consumer to consumer) and b2c (business to consumer) transactions of smaller value by empowering buyers to use information generated by other buyers. In addition, 'leaving feedback' is particularly important for the buyer in order to express her feelings in a public forum where she get the chance to 'let off steam' and reduce her feelings of being 'ripped off 2 4 3 . Thus, for psychological reasons, the user might prefer the feedback system to other information providers 2 4 4. At the same time these systems provide incentives for sellers to behave according to the rules of the community by using peer pressure to reinforce the sense of community. Often one of the biggest concern of online sellers related to how a dispute might affect their future participation on an e-commerce s i te 2 4 5 . They don't want to risk their future online life or even their economic well-being due to bad ratings. Consequently, they try hard to comply with the rules. Even a few negative ratings can seriously damage a reputation, and so frequent traders are very careful about nurturing their ratings by providing swift execution of http://help.vahoo.com/help/auctions/agen/agen-07.html. MSN Auction, User Comment Display, at http://auctions.msn.com/scripts/MyAccountHelp.asp?sec=6. 2 4 2 Katsh, Rifkin, Gaitenby, supra note 67, p. 729. 2 4 3 According to a study of the Online Auction User Association, 76 % of sellers surveyed and 86 % of buyers listed the ability to rate the transacting party as the most important criteria in choosing an auction site, OAUA Report, Nov. 24, 1999, p. 4-5. See Calkins, in: "My Reputation Always Had More Fun Than Me: The Failure of eBay's Feedback Model to Effectively Prevent Online Auction Fraud", 7 Rich.J.L. & Tech. 33 (spring 2001), available at www.richmond.edu/iolt/v7i4/notel.html, FN 32. 2 4 4 Calkins, supra note 243, p. 14. 89 honest trades. Furthermore, feedback systems provide inexpensive reporting about a transaction partner's integrity and thus represent a low-price alternative to the high-cost reportings of a credit report agency 2 4 6 . Since credit checks are primarily concerned with the payment of goods of higher value and do not report on sellers' performances, feedback models better suit the average sale of low-priced goods. ii. Problems For rating and feedback systems, similar limits exist to those that apply to trustmark and seal programs. Both types of information intermediaries face the problem of establishing initial trust since the information demanded depends on the performance history of the transaction partner. They serve as an instrument to strengthen the consumer's trust in relation to online sellers only to a limited extent. But even within this limited scope of past repeated transactions, an online seller can still commit fraud by performing a number of legitimate small amount transactions in order to acquire good feedback before committing fraud on a bigger sca le 2 4 7 . In the case of feedback systems it becomes obvious that their biggest advantage in providing an informal assurance about the integrity of the transaction partner constitutes the main drawback of these systems. Since the information user builds his trust in the transaction partner merely on the information provided and cannot rely on any further redress, a fraudster could 2 4 5 Katsh, Rifkin, supra note 52, p. 114. 2 4 6 Credit reports involve costs, since fees depend on a certain procedure prescribing how to view a report and verify the credit card, see Fair Credit Reporting Act, Charges for Certain Disclosures, 15 U.S.C. par. 168 (j). For example, eBay offers a credit reporting service through the credit reporting agency, Equifax, called ID Verify. EBay provides information to Equifax, and Equifax then verifies that information against its own consumer and business databases. This service is entirely voluntary, costs $5 for the user and is prescribed by eBay to use before participating in its "Great Collections" specialty auctions of high-end, rare collectibles, available at www.ebay.com. 247Another, more straightforward tactic could be applied by a user animating another person to leave some positive comments with the result that this user builds up a positive feedback account. 90 have an easy game with naive buyers. The problem might be a little less serious in the case of rating systems relying on an evaluation based on their own tests. They base their rating on repeated transactions and have the chance to filter the information collected about sellers' practices 2 4 8 . Furthermore, due to their experience they might be in a better position to unmask the fraudulent merchant. They are able to design their test methods according to their experience in a way that makes it hard for fraudsters to cheat the system. But even in the case of non-fraudulent behaviour, the information gathered through users' comments about the transaction's partners' integrity might be low in quality, particularly in comparison to credibility information provided by credit report agencies 2 4 9 . Another inherent drawback of rating systems comes from the fact that a small number of dishonest sellers can disrupt consumer trust in the marketplace as a whole when consumers can't distinguish the 'good guys' from the 'bad guys'. Even if reputation mechanisms succeed in leading to a high degree of compliance, they do not necessarily produce consumer trust 2 5 0. Furthermore, the low costs of feedback and ratings systems are only one part of the truth. Although the direct costs for the information left through the buyer and seller comments are low for the provider, they might be expensive for the user of this service. The transaction costs for the user might be enormous if he has to rely on the cumbersome process of reading through the comment files before actually entering into the contract. Last but not least, the potential damage of false negative comment is a subject of great concern. First, there is the risk that one can be wrongly accused. A negative comment can be filed solely on the weight of a single person's report, without any further fact-finding. A wrong accusation can result from a misunderstanding or the deliberate desire to damage someone's name. And secondly, negative reputation systems are ineffective to the extent that it is easy 2 4 8 Bizrate promises to collect sufficient evaluations of the evaluated businesses. They publish the results only after a minimum of numbers of tests to ensure that the information is accurate and not the opinion of only a few customers,, http://www.bizrate.com/help/ratings guide.xpml#online stores 1. 2 4 9 Calkins, supra note 243. 91 for an individual to assume a new identity (e.g. through a new e-mail address) and so cast off the negative reputation. These drawbacks could be prevented through an alternative reputation system based on positive references. Rather than marking and avoiding untrustworthy traders, the point would be to mark and seek out those market participants who had a history of successful trades. 2. Transaction Intermediaries a. Payment Intermediary (1) Internal Payment Intermediary Several auction sites attempt to strengthen consumer confidence by relying on a system in which the buyer pays a payment company (e.g. Yahoo's PayDirect or Amazon.com Payments) rather than paying the seller directly and the payment company pays the seller. Internal payment intermediaries are often operated by closely related e-commerce sites, particularly auction sites. i. Potential Particularly in online auctions, consumers prefer transferring their payment to an intermediary instead of paying an unknown seller. Payment intermediaries can be located more easily and can act for an e-commerce site that has a reputation at stake. Most transactions involving payment intermediaries require the sellers to supply a credit card for identity verification and thus the risk of non / Pilcher, supra note 58, p. 121. 92 wrong delivery is reduced* 3 1. Furthermore, unauthorized transactions are less likely since the personal credit card information is only conveyed to the intermediary. Due to the reduced risks of paying via intermediaries, e-commerce transactions settled over intermediaries are regularly covered for a higher value by a guarantee against non / wrong delivery than those paid by cheque or money order 2 5 2 . ii. Problems The availability of some payment intermediaries is restricted to only a few countries 2 5 3 . Payment intermediaries only provide the consumer with certainty to a limited extent. For example, a consumer will hardly learn more bout the seller and the transaction that the fact that her money was transferred to a secure intermediary. Apart from the extended guarantee under certain conditions, she does not have an opportunity to check the merchandise before she accepts the release of her money 2 5 4 , nor is she provided with an efficient redress mechanism if the received merchandise or service is defective or not as descr ibed 2 5 5 . Thus, the application of payment intermediaries remains a rather weak tool to strengthen consumers' confidence in e-commerce transactions. 2 5 1 See e.g. https://edit.secure.yahoo.com/config/wallet register. 2 5 2 E.G. Amazon.com Payments transactions are covered up to $2,500 by the Amazon.com A-to-zZGuarantee while purchases not paid over this intermediary are covered only up to $250, available at http://sl.amazon.com/exec/varzea/subst/help/guarantee-no-links.html/104-8623021-8409538. 2 5 3 E.g. PayDirect is available only to buyers in the United States. However, Billpoint is available to buyers in forty countries. Amazon.com Payments is available to buyers in twenty-eight countries. 2 5 4 As in Escrow services, see analysis in the following chapter. 255Under some legal systems, there might be an obligation imposed on payment intermediaries to guarantee a chargeback on the buyer's demand under certain conditions in credit card transactions, see the following chapter. In these cases, the payment intermediary is treated as a 'seller', see Paula Selis'Anita Ramasastry and Charles S. Wright in: 'Bidder Beware: Toward a Fraud-Free Marketplace - Best Practices for the Online Auction Industry' (April 17, 2001), available at http://www.law.washington.edU/lct/publicatioris.html#bidder. 93 Furthermore, in online auctions the application of a payment intermediary depends on a seller's willingness to accept such payments 2 5 6 . The seller might be unwilling to accept payments since the sites usually charge sellers for using the serv ice 2 5 7 . (2) Third Party Payment Intermediary Other e-commerce sites rely on third party payment intermediaries 2 5 8. At P a y P a l 2 5 9 , the buyer builds up an online account and transfers money to this account via credit card, check or electronic transfer. Once PayPal receives notice that the buyer has made a purchase, PayPal transfers money to the seller's PayPal account. Communication indicating that payment is requested or available is made via e-mail. P a y B o x 2 6 0 operates similarly, although the communication takes place via mobile phone and the Internet. A seller needs to be able to accept a funds transfer and to register his or her bank account with the e-commerce site in order to receive payments through the intermediary system, available at https://pavments.amazon.com/exec/help7Fbuyer-overview. 2 5 7 For example, Billpoint uses two different service fees based on the transaction history of the seller. Under the standard service fee available to normal sellers, the fee is $.35 for transactions up to $15, and $.39 + 2.5% for transactions greater than $ 15, with a per transaction limit of $500. Under the merchant service fee, available to sellers with significant positive transaction history on eBay, the fee is $.35 for transactions up to $15, and $.35 + 1.75% for transactions greater than $15, with a per transaction limit of $2000, see eBay, Billpoint Transaction Fees at http://pages.ebay.com/help/sellerguide/bp-fees.html (defining Merchant Service as available to sellers with eBay sales greater than $1,000 per month, minimum of six months on eBay, 96% or greater positive feedback rating, and good eBay account status). 2 5 8 Paybox.net, paypal.com, etc. 2 5 9 http://www.paypal.com. PayPal offers funds transfer services in multiple contexts - not just for online auctions. 2 6 0 The Paybox approach is straightforward and consists of four steps: 1. The payer communicates his or her mobile phone number to the payee (an alias will also suffice by the end of August). 2. The payee forwards this number and price information to Paybox.net. 3. Paybox.net checks the identities of payer and payee and checks for any restrictions before a voice computer calls the payer asking if he or she is willing to pay the amount x to merchant y, and the payer is requested to confirm this by typing in his or her PIN. 4. The payer types in the four digit PIN for Paybox (not his or her SIM-card PIN) and the voice computer thanks for paying. The rest is conventional payment clearing and settlement. The fees are for merchants of 3% per transaction and a one-time charge of ca. EUR 250 for using the Paybox software (no annual or 94 i. Potential PayPal and Paybox act as a neutral payment intermediary and represent more than mere payment systems for the consumer. Besides the advantages of the internal payment intermediaries mentioned above, third party intermediaries provide some extra security and convenience for the user. Although the ends are the same, the approaches vary significantly. Since Paybox can rely on both mobile phone infrastructure and the Internet as communication channels, it is able to provide several security layers to prevent abuse 2 6 1 . In addition it offers a rather convenient service since the system is easy to use and does not require any additional equipment than the mobile phone. Moreover, the user has to provide her banking information only one time when she signs up for the service and not for every transaction 2 6 2 . PayPal chose another approach to gain consumer's confidence and offers an extended consumer protection program 2 6 3 . This program includes a buyer complaint policy designed to help buyers recover from sellers who do not ship the promised goods. If a buyer is unable to resolve the dispute with a seller directly, the buyer can file a Buyer Complaint Form with PayPal . PayPal will investigate the buyer's claim and contact the seller. If the seller does not present appropriate proof of shipment, a full refund or other evidence of a satisfactory resolution, PayPal will seek to collect the amount from the seller. However, monthly fee). But terms vary with transaction volume and countries, detailed description available at http://www.irc.es/cfapp/invent/details.cfm?uID=80. 2 6 1 If made online the initial sign up process is SSL encrypted. Furthermore, if a transaction shall be made the payer has to have his mobile SIM-Card in his mobile phone and the mobile phone PIN to switch it on. Otherwise he is not reachable by mobile phone, which would prevent any transaction. Moreover, the payer has to know his paybox PIN to confirm the transaction. The payee has to have his mobile phone and his SIM-Card and his mobile phone PIN as well. Otherwise he would not be able to call up PayBox and demand the money from the payer. Thus, the system offers a very high degree of security as the user has to have unique equipment and unique knowledge to use it. 262Johannes Braeutigarh, in: 'Mobile Payment Systems', available at http://www.ebs.de/Lehrstuehle/Wirtschaftsinformatik/Lehre/SeminarOO/p braeutigam.pdf. 263PayPal Security Center, available at http://www.paypal.com/cgi-bin/webscr?cmd=p/gen/security-main-outside. 95 PayPal does not guarantee recovery of payment. In addition, PayPal covers all transactions conducted through PayPal with insurance against unauthorized withdrawal 2 6 4, in the case of eBay doubling the amount of insurance offered to eBay customers and extending the policy 2 6 5 . With the multiple layers of protection for both buyers and sellers, payment intermediaries that have similar concepts to PayPal or Paybox offer a viable alternative, particularly for smaller sites that are unwilling to assume the risk of guaranteeing problematic credit card transactions between a buyer and a seller. Another advantage of external payment is the low cost factor. Credit card transactions can cost merchants up to 3 percent of an item's sale price, not including a small fixed cost per transaction 2 6 6. By contrast, transactions processed through payment intermediaries cost almost nothing. For instance, PayPal offers free personal accounts for consumers, although it limits the number of credit card charges they may receive. For merchant seller, PayPal provides premier accounts offering an unlimited amount of credit card charges at a fee of 1.9 % per transaction. ii. Problems It remains to be seen to what extent third party payment intermediaries can overcome their original function as payment systems and manage to strengthen consumers' confidence. They do not offer more security for the Protection against unauthorized withdrawals from your account at PayPal, including unauthorized withdrawals from any checking account you may have linked to PayPal, available at http,.//www.paypal.com/cgi-bin/webscr?cmd=p/gen/travelers-outside. 2 6 5 For purchases made on eBay using PayPal, PayPal offers domestic users additional protection if a buyer pays a verified seller but does not receive goods. However, this additional protection is excluded in the case of disputes about the quality or attributes of delivered goods, goods that have been lost in the mail as shown by seller's presentation of proof of shipment, payments for services, payments to unverified sellers, or a seller's failure to deliver intangible goods, available at http://www.paypal.com/cgi-bin/webscr?cmd=p/auc/billpoint-chart-outside. 2 6 6 See the following chapter. 96 consumer than the knowledge that their payment is directed to a safe address. In particular the consumer does not learn any information about the products or services offered online. Consequently, third party payment intermediaries might only help to avoid a dispute arising out of online contracts as long as they are combined with other information intermediaries and/or models of dispute resolution. 97 II. Dispute Settlement Another important approach that e-commerce sites take to lessen consumers' uncertainty is the development of models of redress - the knowledge that if something went wrong, there are ways for the consumer to remedy it. While dispute avoidance strategies such as seals, trustmarks, rating and feedback systems minimize the potential of a conflict before the transaction takes place, redress mechanisms such as credit card charge back or escrow models may settle the dispute after it has arisen. 1. Credit Card Chargeback A credit card chargeback enables a cardholder who paid for goods or services to dispute certain or all aspects of the transaction through the credit card issuer. The credit card issuing banks operate as financial intermediaries between the consumer and the merchant to settle the dispute crediting the consumer and debiting the merchant via the merchant's bank. This might happen in cases where the consumer can establish to the card issuer's satisfaction that the merchandise or service was not received, that it was defective or not as described, that the amount charged did not match the agreed purchase price, or that the charge was erroneously entered. 98 However, the exact limits of this right vary significantly from company to company and jurisdiction to jurisdiction 2 6 7. Credit card companies do not adopt a uniform practice. Instead, there appear to be internal company regulations, which apply to international transactions 2 6 8 and internal company policies that apply to domestic transactions 2 6 9. Differences in practice appear to be attributable to differences in domestic regulations. National laws range from an immediate right of the consumer to dispute the transaction against the card issuer to a non-allowance of revocation of the transaction in relation to the credit card 270 company For example, in the United States, according to the Truth in Lending Act (TILA), the cardholder's liability is limited in relation to the card issuer in the case that he can establish to the card issuer's satisfaction that the merchandise or service was not delivered or not accepted by the consumer since it was defective or not as described, that the amount charged did not match the agreed purchase price, or that the charge was erroneously entered 2 7 1 . After the cardholder alleges 2 6 7 Domestic rules are determined by the domestic branch of the credit card company, whereas international rules governing international transactions are adopted by the international headquarters of the credit card company. Differences in the domestic rules of the credit card companies with regard to the rights for the consumers to dispute the transaction appear to stem from differences in national regulation, see 'Comparative Review of Laws and Voluntary Codes Relating to Certain Aspects of Consumer Protection and E-commerce', Report commissioned by the Office of Consumer Affairs of the Industry of Canada, 11/1999, www.piac.ca/newpage21 .htm. 268According to Visa International, credit card issuers (those who deal with consumers) and acquirers (those who deal with merchants) operate according to the Bylaws and Operating Regulations of the credit card company (e.g., Visa, MasterCard, American Express), which rules are replicated in the agreement between merchant and credit card acquirer, see 'Comparative Review', supra note 267. 2 6 9 Chargeback rules for domestic transactions are instead determined by the domestic Visa company, and may differ by jurisdiction, see 'Comparative Review', supra note 267. 2 7 0 The legal principle governing payments in France is "payment is irrevocable". In the chargeback regime this has translated into a situation where chargebacks are provided for billing errors and merchant errors, but they are not provided for product-related disputes. Thus, if a cardholder fails to receive a product or is dissatisfied with the product, the only recourse is to resolve the dispute with the merchant directly or in court, see Report of the Working Group, 'Payment Card Chargeback when Paying over the Internet', available at http://europa.eu.int/comm/internal_market/en/ecommerce/chargeback.pdf. 2 7 1 Sec. 1666 (b) TILA. The credit card company is obliged to investigate complaints from cardholders about those 'billing errors' within 60 days from the date of the first billing statement. Furthermore, within 30 days of receipt of a cardholder's written notice of dispute, the credit card company must acknowledge receipt, and must resolve the dispute within two billing cycles or 90 days, which ever is less. Payment may be withheld if disputed billing errors are contested in writing within 60 days of receipt of the credit card 99 such non-acceptance or non-delivery, the card issuing bank may not insist on the charge without determining that such goods were actually delivered and providing the consumer with a statement of such determination 2 7 2. Other jurisdictions refuse to accept defenses or claims of the cardholder against the issuer stemming from her transaction with the merchant. The cardholder will be charged when she authorized the payment, independently from the non-delivery or non-acceptance. The latter must be resolved directly between the cardholder and the merchant. In Europe, a comparable legislative framework providing reassurance that a refund will be made if problems occur does not exist. While in the U.S. credit card companies act as intermediaries and are obliged to serve consumer protection objectives through their "chargeback" systems, in the EU such responsibility exists only to a limited extent. Although there are other consumer protection laws providing rights for the consumer against the supplier, the overall protection against the card issuer prescribed by national law appears to be weaker. The Recommendation 97 /489/EC 2 7 3 covers transactions by electronic payment instruments. It includes provisions about liability in case of fraudulent unauthorized transactions, Art 8. Moreover, it recommends refunding by the issuer of the payment instrument in the event of error of processing. bill. If a cardholder makes a good faith effort to resolve a dispute satisfactorily with a merchant, the cardholder is then entitled to assert any claims and defenses which resulted from the transaction against the credit card issuer, sec. 1666 (a) (3) available at http://online-finance-loan-and-credit-service.com/credit-info/Credit-Protection-Laws-TILA.htm. 2 7 2 1 5 U.S.C. par. 1666(a)(3)(B)(ii). 2 7 3 See OJ L208 of 2 August 1997, pp. 52-58, available at http://www2.bologna.enea.it/MIDAS-NET/official.html. 100 The Directive 87/102/EEC on Consumer Credi t 2 7 4 permits that the consumer can, under certain circumstances, exercise claims against the grantor of the credit ("connected lender liability")2 7 5. However, it is uncertain whether this 'connected lender liability' could be extended to payments carried out with a credit card. In contrast to the USA and the UK, an explicit obligation for the use of credit cards does not exist. This decision depends on each Member State and most Member States excluded credit cards from this provision 2 7 6 . The Directive 97 /7 /EC 2 7 7 protects consumers with respect to distance contracts and provides them with the right to request cancellation and be refunded with their payment where fraudulent use has been made of their payment card, art. 8, or where the consumer didn't receive the merchandise or the service, art. 7 (2). However, the latter right is directed against the supplier of the good or the service and the card issuer is not involved. Furthermore, although art. 8 provides a legal right to be reimbursed, it does not specify how to refund the cardholder in the event of fraudulent use. It just says that the consumer has to be re-credited with the sums paid or have them returned. It could be done via a chargeback, if the issuer operates chargeback, but it is not compulsory for the merchant. And thirdly, for the case that the consumer refuses to accept the product or service (e.g. if they are defective or not as described), art. 6 gives the consumer the right to withdraw from the contract during a cooling-off period of 7 days. The only charge that may be made to the consumer as a result of this exercising of her right of withdrawal is the direct cost of returning the goods. And again, this right is directed against the supplier, and the card issuer is not involved as long as the distant contract is not linked with a credit 2 7 8. 2 7 4 Available at http://europa.eu.int/comm/consumers/policy/developmerits/cons cred/cons credOl en.html. 2 7 5 Article 11 of this Directive gives the legal right to the consumer to take action against the supplier of credit in the case of a disagreement with the merchant who refuses to solve amicably. The link is established between the selling contract and the payment act. 2 7 6 See OECD document OECD/GD (96) 142,'Consumer Redress in the Global Marketplace: Chargeback', available at http://www.oecd.org/dsti/sti/it/consumer/proaVe 96-142.htm. 2 7 7 Available at http://europa.eu.int/eur-lex/en/lif/dat/1997/en 397L0007.html. 2 7 8 Art. 11, Directive 87/102, supra note 274. 101 In addition to the national regulatory regime in those jurisdictions without chargeback obligation of the credit card issuer, the decision about whether to trigger a chargeback on a cardholder's complaint rests with the issuing bank. Consequently, there is no proper right of the consumer to be refunded and credit card companies do not view chargebacks as consumer remedies. Rather, they see chargebacks as a set of "technical" rules that apply between the credit card issuing bank and the merchants. In those cases, a margin of discretion is left to card issuers to settle disputes by direct intervention between a dissatisfied cardholder and a non-compromising merchant. i. Potential There are some convincing advantages in favour of credit card chargeback both for the consumer, the merchant and the credit card issuer. Since the card issuer is the initiator and controller of the credit cycle and its concomitant agreements, the card issuer is in a strong position to dictate the primary obligations of the merchant to the cardholder and to hold the former accountable. The merchant is usually more cooperative in the settlement of the dispute in relation to the credit card issuers facing the threat of potential penalties, including erosion of reputation or revocation of privileged business status with the card company. If the merchant doesn't comply with the terms of the agreement with the intermediary, the credit card issuer might terminate the service and cut off the revenue stream and thus force the merchant to stick to the stipulated agreement. This intermediary position of the card-issuing bank is also the reason for the prime advantage of credit card systems - the availability of funds 2 7 9 . The complaining customer requires the intermediary bank to debit the merchant's account and no longer has to be concerned about the enforceability of her rights. 102 In contrast to dispute avoidance mechanisms and ADR regimes, the winning party can immediately execute into the assets of the losing party. Furthermore, a chargeback also turns cross-border disputes into a domestic issue, at least for the consumer. The consumer does not have to address herself to a merchant who could be on the other side of the world. Instead, the consumer can communicate with her card issuer, who is almost invariably in her country. Thus chargebacks are a valuable form of redress for trans-border electronic commerce because of the lack of jurisdictional difficulties 2 8 0. The consumer is provided with a quick, efficient and powerful instrument at no costs to charge back the transferred payment from the merchant on global level. In addition, since the consumer simply has to dispute the transaction, the burden of initiating lawsuits is removed from her. But there is also one clear advantage for the merchants. Through the intermediary position of the credit card issuer, which is typically linked to both parties directly or indirectly through contracts, the merchant has an opportunity to verify the identity of the consumer 2 8 1 . And even for the credit card sector the chargeback right for the consumer entails major advantages. Since card issuers face competition on the quality of the chargeback services made available to consumers, credit card companies tend to exceed their legal obligations with respect to chargebacks. This motivates Perritt, supra note 3, p. 676. 280 TACD, in: 'Payment Card Redress and Protections', available at http://www.tacd.org/db files/files/Files-193-Filetag.rtf. 2 8 1 Many sites require sellers to provide a credit card in order to verify the seller's identity. Currently, eBay, Yahoo!, Amazon, and MSN require sellers to enter a credit card upon registration. Particularly for online auctions, requiring entry of a seller's credit card information for participation is supposed to provide a means for verifying the seller's identity. In particular, the site can use the credit card to check if the seller has been banned from the site in another name. However, not all sites verify the validity of the credit card (i.e., find out whether it is stolen) while other sites run a verification of the seller's credit card on the assumption that a would-be fraudster is more likely to try to hide behind a stolen or defrauded credit card than to provide his or her actual credit card, which could be traced if the fraud were detected, see Selis, Ramasastry, Wright in; 'Bidders Beware', supra note 255. 103 consumers to use credit cards as their preferred means of payment. Any purchase paid for by a card generates revenue for the card issuer. Experience has shown that the cost of operating chargebacks systems is outweighed by the increase in payment traffic for the card issuers and the profits this generates 2 8 2 . ii. Problems On the other hand, credit card chargeback regimes entail some disadvantages which might reduce consumers' trust and increase their uncertainty. Over time, different priorities in public policy have led to diverging national chargeback regimes and some national regulatory regimes provide serious obstacles for stronger chargeback rights for the consumer against the credit card issuer. Even in the U.S., the most consumer-friendly jurisdiction in terms of credit card chargeback rights, the liability of the credit card company is limited under the TILA in some important respects 2 8 3 . First, creditors are not liable (and not therefore subject to chargebacks) in disputed transactions of less than U S $ 5 0 2 8 4 . Nor are they liable in disputed transactions that occur outside the cardholder's state or more than 100 miles from the cardholder's, mailing address. Both provisions are clearly not appropriate for small amount e-commerce transactions. Furthermore, the time frame in which a chargeback can be initiated is very strict, This tendency could be observed on the US market, see speech of David Byrne, 'Cyberspace and Consumer Confidence to the Annual Conference of the Kangaroo Group of MEP's on 18* September' available at http://europa.eu.int/comm/dgs/health consumer/library/speeches/speech55 en.html. 2 8 3 Supra note 271. 2 8 4 Art 1666 (e). 104 but operating rules of the credit card issuers loosen the 60-day limit to varying degrees 2 8 5 . In other jurisdictions, one of the biggest concerns is the lack of consumer knowledge about the rights stemming from national consumer protection law and voluntary codes of practice of the credit card issuers. In the US, the obligation to disclose the consumers' rights to dispute the transaction and chargeback is mandated by the Federal law. Significantly, in jurisdictions lacking the credit card companies' obligation to charge back merchants, the companies often refuse to uncover the possibility of chargebacks to the consumer, even if chargeback is possible according to the domestic rules of the company. Or in other words, despite of the different legal requirements between Europe and US, the practices of credit card companies do not differ significantly across jurisdictions 2 8 6. What does differ is the level of disclosure of those practices to consumers. Where required to do so, credit card issuers disclose to cardholders their policies regarding chargebacks. Where not required to do so, they tend not. This policy is even more surprising since the card acquirers always retain the right to charge back merchants in certain circumstances 2 8 7 . Credit card issuers seem careful to avoid any unnecessary obligations, including that of charging back merchants in the event of a customer dispute 2 8 8 . Furthermore, psychological reasons might be an obstacle. Consumers might feel uncomfortable about the fact that they have to check the monthly 2 8 5 American Express (AmEx) nominally sticks with 60 days, but extends it on a "case-by-case" basis. A spokesperson indicated that early buyers would be protected in the case of Premier. Despite the 60-day language in its card member agreement, a Diners Club spokesperson said that it would honor all legitimate requests for chargebacks and refunds for failure to provide service, no matter how long ago you bought. MasterCard extends the limit to 270 days, with additional time allowed in certain cases. Visa extends the limit to 120 days, again with additional time on a case-by-case basis, see 'Comparative Review', supra note 259. 2 8 6 'Comparative Review', supra note 267. 2 8 7 'Comparative Review', supra note 267. 2 8 8 A review of several European cardholder agreements underlined the reluctance of credit card companies to disclose their chargeback policies in contrast to card issuers in Australia and the US, where law requires 105 credit card statement and contact the card issuer in case of a potential error, sometimes a long time after the transaction was concluded. Even if redress mechanisms exist, insufficient disclosure by merchants of refund and exchange policies could lead to consumer frustration and lack of confidence in the use of credit cards as the preferred cross-border payment system. Abusive use of credit cards is probably the main source of uncertainty for the consumer, impeding their reliance on credit card use as the preferred payment and dispute settlement instrument for online transactions 2 8 9. Roughly speaking, the reason for every second Internet-related chargeback is non-authorization of the cardholder 2 9 0. In response to this massive imbalance, Visa and MasterCard have introduced new rules consisting of a classification of certain types of businesses into a high-risk category 2 9 1 . For those businesses falling into this high-risk category, the penalties Visa and MasterCard can enact for chargebacks rise exponentially 2 9 2. However, the misuse of chargeback mechanisms by consumers does not need to be an obstacle for their application. Delivery services providing a delivery confirmation can help the merchant to prevent consumers from falsely alleging a disclosure, see e.g. www.visa.de, www.visa.es. www.visa.fr, www.mastercard.de, www.mastercard.es. www.mastercard.fr. 2 8 9 Recent surveys report a chargeback ratio of 2.5 per cent regarding Internet transactions in 1999 and 1.5 per cent in 2000, while the ratio in non-Internet-related field was about 0.1 per cent, 'Impressions and Lessons on the Future of Internet Payments from CashWorld 2000', available at http://www.europemedia.net/shownews.asp?ArticleID=1767. 2 9 0This statistic is based on a 1999 survey were provided by Europay for cross-border transactions of so-called 'Pay Later' products (for which the debit of the account is deferred), i.e. carrying the MasterCard brand, available at http://europa.eu.int/comm/intemal market/en/ecommerce/chargeback.pdf. 29,Businesses considered high risk include travel agencies, taxi and limousine services, computer network and/or information services, mail-order houses, catalog merchants, membership clubs, and some online merchants. 2 9 2Visa: Chargebacks must be less than 2.5% of total monthly dollar volume or 50 chargebacks per month; One-time $5,000 "review fee" for violations occurring in months one through five; $25,000 fee after six months of violation. Mastercard: Chargebacks must be less than 2.5% of total monthly dollar volume or 1% of total monthly transactions; $25,000 fee per month for the 3rd, 4th, and 5th months of violation; $50,000 fee per month for the 6th and 7th months of violation; $75,000 fee per month for the 8th and 9th months of violation; $100,000 fee per month for all subsequent months of violation. 106 that the merchandise has never arrived or arrived defective. Thus a merchant could prevent a chargeback. Moreover, the introduction of effective systems of identification and authentication 2 9 3 of the players of payment over the Internet on a wide scale could have a double positive effect on consumers' confidence. It would immediately reduce non-authorization chargebacks in the cases where either the transaction has not been carried out by the legitimate cardholder or whereit has been carried out by bad faith cardholders. And in the long run it takes the reluctance from the credit card companies to disclose their chargeback policy. 2. Escrow Escrow services offer the consumer an opportunity to check the merchandise before she accepts the release of her money, and thereby ensure that the buyer actually gets what she paid for. Basically, the buyer pays the escrow service for the goods in advance, the seller ships the goods and the buyer has an opportunity to inspect the goods and to approve or reject them. If the goods are approved and accepted, the escrow service releases the funds to the seller. If the buyer is not satisfied, the escrow service releases the payment back to her, once the seller has received the returned merchandise. Both parties must register with the escrow service and enter into an escrow agreement before the transaction takes place. The escrow service usually charges fees ranging The use of an address verification system (AVS) prevents purchases that are associated with a non-valid billing address, e.g. when the shipping address is different from the billing address. In this case, the customer might have to send a copy of both sides of their credit card with proper identification or a phone call should be made for identification purposes. See Keeling, in: 'Credit Card Security on the Internet', available at http://bama.ua.edu/~keeli002/research/proiect2.html. 2 9 4 E.g. escrow services such as escrow.com or iescrow.com. 107 from 1% to 4 % of the transaction value, based on the amount of the transaction and the terms of payment (whether cash or credit) 2 9 5. i. Potential All in all, escrow services seem to offer an efficient redress after the dispute has arisen to the consumer. The escrow system overcomes a lack of initial confidence before the transaction takes place since the consumer knows that she will get her money back if the merchandise is not delivered as agreed upon. Thus escrow systems promote the consumer's confidence before and after a dispute arises. Furthermore, again the availability of funds constitutes an often-underestimated advantage of escrow models since the winning party can immediately execute upon the assets of the losing party 2 9 6. ii. Problems While escrow services eliminate many of the risks associated with online transactions, they are used only to a very limited extent. These services are relatively new and the significant fees they charge may only make sense for high value items. Consequently it is not surprising that only around 1% of the online buyers use escrow services 2 9 7 . The user sees no need to use the escrow service for smaller items as long as they are covered by an insurance or shopping guarantee of the seller. Additionally, buyers might have a hard time understanding the relatively complex construction of escrow serv ices 2 9 8 . Sellers might be deterred by the delay in receiving payments via the escrow service and Available at http://www.tradenable.com. Perritt, supra note 3. Bidder Beware, supra 255. Bidders Beware, supra note 255. 108 thus hesitate to offer the use of the escrow service as an instrument to ensure safe transactions. However, some of these impediments seem to be manageable. One way of overcoming these barriers is consumer education. If consumers are helped to understand the structure and working of escrow services, they may be more willing to use them. The problem of high added costs in relation to free alternative protection instruments remains. This represents the most persistent obstacle for a broader acceptance of escrow services as preventive measures for the average online transaction to gain consumer trust. 109 III. Conclusion Some trust-creating models employed by e-commerce companies succeed in promoting trust while others do so only to a limited extent. Dispute settlement mechanisms such as credit card charge back systems and escrow services tend to provide stronger redress mechanisms than do dispute avoiding instruments. Mandatory credit card chargeback regimes give consumers an effective means of disputing a transaction with a merchant at no cost. In particular, credit card chargeback systems appear to meet the challenges of online transactions and disputes. Since the local card issuer is responsible for the chargeback, cross-border disputes are turned into a domestic issue. Thus chargebacks are a valuable form of redress for global electronic commerce because of the lack of jurisdictional difficulties at the enforcement level. They are also capable of creating trust in transactions concluded over an inherently anonymous medium. However, restraints on the chargeback rights at a national level and by the chargeback rules of the credit card companies raise doubts as to whether the current legislative regime is appropriate for small amount Internet transactions on a global level. Even in the U.S., the most progressive and consumer friendly jurisdiction in terms of chargeback rights, the liability of the credit card company is limited to disputed transactions of less than US $50. Other provisions such as the exclusion of liability for transactions that occur outside the cardholder's state or more than 100 miles from the cardholder's mailing address underline that the currently guaranteed chargeback rights are inadequate for e-commerce transactions. 110 In the E U , national laws refuse to accept defenses or claims of the cardholder against the issuer stemming from her transaction with the merchant. The cardholder will be charged when she authorized the payment, independently from the non-delivery or non-acceptance. The latter must be resolved directly between the cardholder and the merchant. Since the cardholder is in a weaker position vis-a-vis the merchant than the credit card issuer, chargeback mechanisms in these countries offer a much less powerful instrument for consumer redress than they do in the U.S. However, even in the European countries, the actual practice of credit card companies provides for chargeback rights directly against the credit card issuer. Admittedly, these rights are less strong since they are not backed up with a mandatory legal chargeback mechanism in the relationship between the cardholder and the card issuer. Rather they depend on the discretion of the credit card issuers. The main problem however is of a more psychological nature since consumers are often not sufficiently aware of the already existing rights or the voluntary services that may be available to them. Consumer confidence would be strengthened if credit card companies were obliged through national regulatory regimes to disclose their chargeback policies. The policy of credit card companies might be understandable from the issuers point of view since the more the public becomes aware of the guaranteed chargeback rights, the higher the chance is of a potential abuse. On the other hand this approach is shortsighted since in the long run the credit card issuers also profit from greater consumer confidence and an increased use of the credit card as the preferred payment instrument. In any case, this argument of the credit card companies again proves the importance of abuse avoidance if chargeback mechanisms should become one of the prime redress instruments for the consumer. By law merchants who are not only in the U.S. but also in other countries could be required to disclose their refund and exchange policies completely and thus reduce the lack of consumer's confidence in the use of credit cards as the preferred cross-border payment system. Moreover, the introduction of effective 111 systems of identification and authentication of the stakeholder involved in payment over the Internet would reduce unauthorized chargebacks and promote consumers' trust. Despite these drawbacks, it appears that credit card charge back systems provide the consumer with a quick, efficient and powerful instrument on global level at no costs. From a policy perspective it might be advisable to introduce compulsory chargeback rights for the consumer against the issuer in order to strengthen the effectiveness of this redress mechanism. Where these rights already exist, credit card companies and national legislators are required to adapt charge back systems to e-commerce transactions. Escrow services, on the other hand, seem to be less appropriate for the typical small amount e-commerce transaction. The consumer is not willing to pay for the added costs for the use of the escrow service. In general, information intermediaries aim to avoid disputes before they arise and thus by nature face the problem of initial trust. The information demanded depends on the performance history of the transaction partner. This drawback is inherent in both trustmark and seal programs, as well as rating and feedback systems. Trustmark and seal programs provide the potential to give guidance to the consumer about consumer protection standards of the online seller before any damage is done and offer effective and inexpensive certification, monitoring and enforcement procedures. However, to date trustmark and seal systems have applied the powerful tool of revoking the trustmark or seal in the case of non-compliance only to a limited extent. A proliferation of trustmark and seal programs make it hard for consumers to distinguish between differences in the programs and to assess their quality. It remains to be seen to what extent guidelines developed by different public and 112 private associations will help to unify the standards for trustmark and seal programs and reinforce consumer confidence. Rating and feedback systems provide an immediate and inexpensive source of information to buyers about sellers and a strong incentive for good performance to repeat sellers. These systems are prone to abuse and information gathered through these systems is often unreliable. And even worse, a small number of dishonest merchants can already disrupt consumer trust in the marketplace as a whole since consumers regularly can't distinguish the good guys from the bad guys. However, if they are regarded as a needed supplement to the existing menu of options, they represent a viable and very important tool for the promotion of consumers' confidence before an online contract arises. 113 Chapter IV: Conclusion In my analysis I began with the assumption that the lack of trust and confidence on the part of consumers caused by legal uncertainty in the electronic marketplace restricts the potential of e-commerce. I showed that traditional redress mechanisms such as litigation and traditional alternative dispute resolution generally fail to strengthen consumers' confidence in e-commerce. Rather they can represent an additional source of uncertainty. In particular litigation fails to offer the certainty the consumer seeks. To date, neither European nor American courts have found reliable criteria for determining Internet jurisdiction and have failed to provide consistency in their decisions. In addition, uncertainty arising from unclear concepts on the enforcement level and the high volume of disputes with low monetary value have led to the development of online ADR providers allowing individuals from across the world to settle disputes. The market has responded to the lack of efficient redress instruments for e-commerce consumers and several online dispute resolution provider and other models of redress have evolved. My sample study on the policies and practices of the online dispute resolution providers Virtual Magistrate and SquareTrade showed that both online mediation and arbitration providers are capable of offering an efficient and fair redress mechanism for the consumers, and they strengthen consumers' confidence by living up to recognized consumer protection principles. Both online mediation and arbitration serve consumers as appropriate instruments to enforce their rights arising out of online disputes. They are designed for disputes with small monetary value and are capable of overcoming jurisdictional obstacles. On the enforcement level, online arbitration based on the New York Convention provides the consumer with a powerful tool on global level. Online consumer arbitration can ensure a maximum of enforceability if consumer arbitration rules incorporate the requirements of the New York Convention. Arbitration 114 agreements concluded through the exchange of e-mails must be documented in one single document to satisfy the 'writing' requirement. In terms of the signature requirement of the New York Convention, the consumer arbitration rules must correspond to the provisions introduced through national digital signature acts. Since arbitration clauses are unenforceable under the New York Convention and national laws if they produce unbearable results for the consumer, consumer arbitration rules should provide that the arbitration agreements are void if they force the consumer either to waive the right to go to court or if they exclude any chance for the consumer to impose his rights. But even if online arbitration providers adapt their arbitration rules to correspond to the requirements of the New York Convention, the costs of legal enforcement on global level of online consumer dispute awards may be as impractical as the costs of litigating them. Other sanctions such as e.g. trustmark programmes might ultimately provide the same assurance of enforcement as formal legal enforcement procedures at a lower price, for both online arbitration and online mediation. Both the V M A G and the SquareTrade services are - in general terms -independent, affordable, effective and provide a fair process. However, in terms of transparency and legality, both services need to be improved. My analysis has been restricted to two sample studies. Practice and policy of other online dispute resolution providers as well as their compliance with recognised consumer protection principles may differ significantly from SquareTrade and the Virtual Magistrate. Their efforts to strengthen consumers' confidence can only be convincing if they apply consumer protection principles strictly. Either in addition to or instead of, online ADR businesses increasingly rely on other dispute avoidance and dispute settlement instruments in order to promote consumers' trust. Some of those trust-creating models employed by e-commerce companies succeed in promoting trust while others do so only to a 115 limited extent. In particular, mandatory credit card chargeback regimes give consumers an effective and quick means of disputing a transaction with a merchant at no cost. In chargeback systems, the cardholder can rely on the strong leverage of the credit card company towards the merchant and these systems thus offer a powerful instrument for consumer redress. Constraints on chargeback systems exist at the national level and national legislation is required to adapt chargeback systems to the particularities of e-commerce transactions. In those countries without mandatory chargeback rights, national legislation is required to back up the voluntary chargeback rules of the credit card companies. In all countries consumer education could help to create stronger awareness of the already existing rights or the voluntary services that may be available to consumers. In addition, consumer confidence would be strengthened if national regulatory regimes required credit card companies to disclose their chargeback policies. On the other hand, escrow services, seem to be less appropriate for the typical small amount e-commerce transaction since consumers are generally not willing to pay the added costs for the use of the escrow service for the average small amount transaction. In general, information intermediaries aim to avoid a dispute before it arises and thus by nature face the problem of initial trust. The information demanded depends on the performance history of the transaction partner. This drawback is inherent in both trustmark and seal programs as well as rating and feedback systems. Trustmark and seal programs provide the potential to give guidance to the consumer about consumer protection standards of the online seller before any damage is done and offer effective and inexpensive certification, monitoring and enforcement procedures. However, to date trustmark and seal systems apply these powerful tools only to a limited extent. A proliferation of trustmark and seal programs makes it hard for consumers to distinguish between differences in the programs, and to assess their quality. It remains to be seen to what extent guidelines developed by different public and 116 private associations help to unify the standards for trustmark and seal programs and reinforce consumer confidence. Rating and feedback systems provide an immediate and inexpensive source of information to buyers about sellers and a strong incentive for good performance to repeat sellers. These systems are prone to abuse and information gathered through these systems is often unreliable. And even worse, already a small number of dishonest merchants can disrupt consumer trust in the marketplace as a whole since consumers regularly can't distinguish the 'good guys' from the 'bad guys'. 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