Credibility of E-commerce
-----on obtaining and establishing the capacity qualification of online transaction party

-----J. Gary Gao Y. Q. Richard Song

　　Along with the boom of the E-commerce worldwide, it has also been developed greatly in China within a comparatively short period of time and the volume of transactions is increasing day by day. In the meantime, the legitimacy, security and credibility of the E-commerce are gradually becoming the hot issues. However, in China there still haven’t been promulgated any specific laws and regulations to regulate E-commerce so far. Therefore, the PRC authorities have to apply the traditional legislation as a makeshift to regulate E-Commerce, focusing on the supervision and administration of transaction parties. Based on the actual circumstances in China, this paper is attempting to address a general overview on the obtaining and establishing the capacity qualification of online transaction parties, in particular, the natural person. We hereby hope to make some valuable contributions to the PRC legislation in this field.

1. Establishing of the capacity qualification of transaction parties under the traditional laws

(1) Basic legal provisions about the capacity qualification of transaction entity
One fundamental principle of civil law is that the capacity qualification of civil subject should be established by the law, that is to say, who are entitled to be involved in civil activities enjoy civil rights and bear civil liability shall be subject to provisions of law. Furthermore, the commercial law always follows the principle that the parties should be approved before entering into the market. In accordance with this principle, the investors can merely establish the business vehicles in the forms provided in the commercial law, where the material requirements and procedures for establishment have been set forth correspondingly.

China adopts a legitimacy mode that combines the civil law and commercial law. The General Principles of Civil Law of PRC (hereinafter referred to as “the General Principles ”), is the basic law governing the civil and commercial activities in China. The General Principles stipulates that the civil entities include natural persons and legal persons (natural persons shall include, but not be limited to, individual industrial and commercial units, rural contracting households and individual partnership). However, there is no definition of commercial entities (“businessman”) and business activity as well as their category. In other words, the General Principles cannot give a clear answer to the questions that who are businessmen and what actions constitute commercial activities. Strictly speaking, the General Principle itself does not clearly stipulate whether or not the civil entities stated by itself are able to carry out commercial activities.
(2) the detailed legal provisions governing obtaining and establishing of the capacity qualification of transaction parties
There is no uniform law on the registration of business in China. Accordingly, the regulations on business registration are scattered in many civil and/or commercial substantial laws and procedural laws mainly including the General Principles (concerning individual and commercial households), Provisional Regulations of PRC Governing Individual Sole Investment Enterprises (concerning the registration of the individual sole investment enterprises), Administrative Regulations of PRC Governing the Registration of Enterprises as Legal Person (concerning non-company enterprises and enterprises with foreign investment), Provisional Regulations of Private Entity (governing registration of Private Enterprises), Administrative Regulations of PRC Governing the Registration of Companies (concerning companies).In practice, any entity should be registered in Administration for Industry and Commerce (hereinafter referred to as “AIC”) and granted the business license prior to the commencement of the commercial activities (the permission or approval by relevant government authorities should be obtained if the entity engages in special lines of industry before commencing the aforesaid registration procedure.). In some sense, the business license is the ID card of the transaction entity in China. The company qualified as legal person will be officially established by law as legal person after it is granted the business license. The entities without qualification of legal person, such as individual industrial and commercial households, individual sole investment enterprises, partnership enterprises and branch of legal corporations, are also entitled to engage in business activities once they obtain the business license.

Except for the persons of limited or no capacity for civil acts, the natural persons may have full capacity for civil acts, engage in civil activities, enjoy civil rights and assume civil obligations. But the current Chinese laws do not clearly state whether or not the natural person is entitled to engage in commercial activities directly.

In practice, carrying out business activities must have business license. Otherwise it would constitute illegal activities by the Chinese authorities. But under current Chinese law, there is no legislation governing a natural person directly obtains business license in its own name. According to Chinese laws governing administration of industry and commerce, a natural person shall apply for the business license in the names of individual and commercial households, individual-owned enterprises, partnership enterprises etc, rather than its individual name. Therefore, under the current Chinese laws, although the natural person may engage in civil activities, enjoy civil rights and assume civil obligations, it has to obtain the business license before carrying out the business activities. Otherwise, it will be treated as illegal. However, the natural person actually cannot get the business license in its own name. Accordingly, the natural person is not entitled to engage in business activities in objective terms. And under such legal circumstances in China, whether a natural person can engage in commercial transactions, shall be mainly subject to whether its activities could be regarded as business operation activities or not. If the transactions are qualified as business operation activities, the natural person will be prohibited to conduct since actually he can't get the business license. In case it does not constitute business operation, the natural person is allowed to carry out due to its civil law capacity. Unfortunately, there is no exact definition of business operation and distinction between the occasional business operation and continuous business operation in current Chinese laws. Uncertainty exists in rules to judge whether a natural person's transactions are illegal business operation or not.

2. Establishment of the capacity qualification online transaction parties under the current laws

The transaction parties in the E-commerce are normally referred to as online transaction parties. In reality, there exist two different circumstances that (i) the online transaction entities are merely the existing form of the actual transaction entities on Internet and reflect the true characteristics of actual transaction entities, and (ii) the online transaction entities are invisible and there is no corresponding actual entity in real world. However, the current Chinese laws do not recognize the invisible entity and have no system governing establishment of capacity qualification of online transaction entities. Apparently, it is necessary for Chinese authorities to make the new legislation to fill the room in this respect with a view to speeding up the development of E-commerce.
(1) Website of business operation nature
Telecommunication Regulations of PRC and Administrative Measures Governing Internet Services contains some provisions governing the operational websites, according to which, the establishment of operational websites shall obtain the permit for providing Internet services and registered as business entities. According to the Provisional Measures Governing Registration of Operational Websites enacted by AIC of Beijing, the establishment of operational website is governed by the provisions about the establishment of branch of enterprise. In addition, the operational website will be granted Registration Certificate of Operational Website and public announcement will be given by AIC afterwards. In other words, the Registration Certificate of Operational Website is the ID of the relevant website.
(2) Online transaction entities
The current Chinese laws and regulations do not expressly stipulate whether or not the online transaction entity without its own websites (i.e. set up exclusive sale shop on other one's website) should apply for registration in AIC. The Notice on Registration of the Online Business Activities enacted by AIC of Beijing used to stipulate that the entities with business licenses should apply for the registration of online business activities, however, it was already replaced by the Provisional Measures Governing Registration of Operational Websites as noted before and has no legal effectiveness so far.

Since there is no clear provisions concerning the verification of qualification of the online transaction participants, the online transaction entities themselves play a primary role in this respect. For instance, the providers of E-commerce platform ("Platform-service Provider") normally require that the online transaction entities become the members or users of the websites managed by the Platform-service Provider before access to the online business.

In case where the online transactors are enterprises, the Platform-service Provider would request and examine their business licenses. As for the natural persons, the Platform-service Provider would verify their real name before providing the online services with a view to ensuring that the online transaction entities in cyber space relate to the actual transaction entities in real world. The main purpose of this arrangement is, inter alia, to assure that the transaction entities in real world are bound to assume the consequences of online business activities and maintain the safety and credibility of E-commerce. However, the verification of real name of natural persons can merely reveal its real identity rather than judgment of its qualification of carrying out business activities.

As noted before, since the criterion for determining the business activities of natural persons is uncertain, therefore whether or not the natural persons possess the legitimate qualification for online transaction activities is ambiguous as well. Online business is not the face-to-face transaction in the traditional manner. The platform managed by the Platform-service Provider operates like a venue, a lot of sellers gathering together and a "market" is thus formed. These sellers accept the services provided by the Platform-service Provider and register as members of the E-commerce website operated by the Platform-service Provider. Where the sellers are natural persons, due to the fact that the concept of business operation is not clearly defined in the law, the Platform-service Provider can not judge whether the individuals utilizing the platform to sell their products are conducting business operation activities or not, therefore they could not simply accept or reject the utilization of the platform by the natural persons. For purpose of safety, the Platform-service Provider probably need to completely reject the utilization by natural persons of the platform to sell goods in order to avoid the legal risk of being held liable for providing the platform to natural persons for their illegal business activities. E-commerce is based on internet and the majority of the users of Internet are natural persons, therefore, if the Platform-service Provider reject or restrict the utilization by natural persons of their platforms in order to avoid the legal risks likely to be incurred, the development of E-commerce would be adversely affected.

3. The establishment of qualification of online transaction entities under the foreign laws

According to the modern commercial laws, conducting one profit-oriented business activity is the substantial condition for becoming a businessman. Accordingly, the individuals and entities that meet the aforesaid condition could be recognized as businessmen after going through relevant legal procedures. For instance, Article 1 of the Commercial Code of France stipulates that “ the businessman refers to the person carrying out business activities as their regular occupation.” Article 1 of the Commercial Code of German provides that “the businessman under this Code refers to the person engaging in business.” Article 4 of the Commercial Code of Japan states that “the businessman under this Code refers to the person engaging in business activities in its own name.” From the aforesaid definitions of businessman under modern commercial laws, we can draw a conclusion that a businessman embraces three features as follows: (a) conducting business activities stipulated by the commercial law; (b) conducting business activities in its own name; (c) conducting same kind of business activity in a continuous manner, which becomes its occupation or operational business. It is generally accepted that the above item (c) is the most important feature of businessman, and is the key factor that distinguishes businessman from the parties in other legal relationship.

In accordance with the modern commercial law, the qualification of businessman is granted after business registration which should be handled according to relevant legal procedures. Some exceptions exist. In other words, not all businessmen need business registration. In practice, there exist concept of discretional businessmen or free businessman. They do not need to go through the procedures for business registration. They could decide whether to apply for business registration at their own discretion. And those small-size businessmen whose capitals are below the statutory amount or whose organizations or activities are not completely in compliance with the conditions for businessman, no business registration is required by law either.

The verification and establishment of qualification of online transaction entities varies all over the world due to the difference of laws concerning the transaction entities. In the developed countries, the establishment of online business entity is subject to the freedom principle, and no specific qualification is required for natural persons for their conducting business activities, any natural person or enterprise is allowed to establish online transaction entities or engage in business activities. For instance, there is no special limitation on the natural persons to engage in E-commerce in the U.S.A. In Australia and New Zealand etc., the transaction entities consist of companies, partnership enterprises, individual sole investment enterprises and some dealers without the concept of individual industrial and commercial households as provided by Chinese laws. Furthermore, the dealers stipulated in these countries do not need to apply for business registration and obtain the business license just as stated by Chinese laws. Hence, they do not face any legal obstacle to possess the qualification of online transaction entities.

In Australia and New Zealand, the regulations governing vendors' qualification mainly focus on the supervision of results of its transactions, for instance, although it is unnecessary for vendors to undertake business registration, each one shall conduct tax registration with no exception. This is worth of reference by Chinese authorities.

Since there is no specific limitation on the qualification for engaging in E-commerce business in number of overseas countries, individuals can engage in E-commerce by comprehensively using the online transaction platform provided by Platform-service Provider. For example, it is even unambiguously stipulated in the users' agreement of eBay, the most successful E-commerce platform presently in the world, that the platform service provided by eBay is merely for individuals' online transactions. If an individual becomes an user of eBay as a representative of an enterprise entity, he/she shall indicate that the enterprise agrees to accept eBay’s user’s agreement.

4. Provide a flexible legal environment for E-commerce to meet the requirement of New Economy

The world has entered into the age of Internet since 1990s. E-commerce has been perfected in the late 1990s, no matter in the technology and management, or safety. China is still a developing country, and we haven’t actually entered the age of industrialization. In order to directly build up New Economy by skipping the times of later-industrialization, we shall have breakthroughs in both legislation and law execution so as to compete in the trendy of globalization.

The role of E-commerce is quite distinct, for it not only promotes the flow of commodities, but also is propitious to the reduction of transaction costs and improvement of market efficiency. During the specific SARS period, E-commerce has incomparable advantages over traditional convenient stores and wholesale markets. For example, during the period of SARS prevalence, E-commerce became a safer method of transaction. Premier Wen Jiabao firmly affirmed the function of E-commerce during the period of SARS, and clearly pointed out that E-commerce shall be encouraged. Under the China’s present relatively severe situation of unemployment, encouraging individuals to be engaged in E-commerce redounds to lessening the pressure of unemployment and improving the life quality of lay-offs, which has a realistic significance.

China’s E-commerce at the moment stays in its initial phase of development. Since it is still neonatal, a lot of regulations need to be explored and practiced. The legislation on China’s E-commerce requires the basis of adequate E-commerce practices. In this situation, it is necessary to provide flexible legal environment for E-commerce. As the principal participators of E-commerce are individuals instead of enterprises for the time being, individuals shall be encouraged to actively participate in E-commerce, which has positive meanings for both the development of E-commerce and provision of practical experience for E-commerce legislation. In other words, restricting individuals from their participation in E-commerce will result in the limitation of E-commerce to some degree.

The restriction of individuals’ engagement in business under current Chinese legal environment has definitely left negative impacts on the development of E-commerce in China. Firstly, since individuals cannot be engaged in operational activities, and it is difficult for Platform-service Provider in E-commerce to technologically judge whether transactions by using their transaction platform are attributed to operational activities, consequently in order to avoid legal risks, they may reject individuals to conduct business on their respective platform. Most of Internet users so far are individuals, the restriction of individuals’ engagement in E-commerce means the limitation of E-commerce itself, which deviates from the international tendency and policies of promoting E-commerce. Secondly, as for platform providers in E-commerce transactions, allowing individuals to be engaged in E-commerce by utilizing their platforms, may take legal risks. But the restriction of individuals’ use of platforms is just for the avoidance of legal risks, the development of Platform-service Provider will also be limited. Therefore, the limitation of Platform-service Provider in E-commerce transactions also means the restriction of E-commerce development in that country, due to the specific standing of Platform-service Provider for online transaction in E-commerce.

E-commerce in China has a late commencement compared with other countries. China shall have breakthroughs in legislation and law enforcement, so as to achieve high-level development of E-commerce and realize bouncing development. Since the ‘operational activities’ are not clearly defined in current laws, we shall refer to such mature foreign legislation and law-enforcement experience of allowing merchants and hucksters not to undertake business registrations, and occasional transactions not constituting business operation activities. As for individuals’ engagement of E-commerce, it shall not be limited by the traditional legal framework that individuals shall not be engaged directly in operational activities during the process of law enforcement, and the definition of operational activities shall not be interpreted mechanically. Fragmentary, occasional transaction activities engaged in by individuals should not all be regarded as illegal operations.

Furthermore, as for the transaction activities engaged in by individuals on Internet, the traditional model of supervision shall not be applied. The supervision method of E-commerce shall vary from the current supervision of the capacity qualification of transaction entity to the supervisions of transactions’ safety and legality and transaction result by approvals such as taxation for instance. Only in this way can the delay of standing laws, regulations and corresponding supervision activities and even hindered development of E-commerce be solved fundamentally. In fact China has adopted the approach comparatively flexible legal environment to encourage the development of a specific market. For instance, there exist no restriction on the capacity qualification of transaction entity as for individuals’ engagement in securities transaction, and the individual income tax from securities transactions is also exempted, in order to develop our country’s market for securities transactions. These have played an active and meaningful role in the emergence of China's securities market and its bouncing development. As for the supervision approach of business registration, China is gradually unfastening its regulations, for example, the control over the operational scope in an enterprise’s application, which used to be comparatively rigid, has now been obviously flexible. The core of new economy is innovation. China can have a stride on the renovation of legislation philosophy and supervision approach, in order to promote the further development of E-commerce.

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