Potential Problems Using Electronic Contracts

The brief will investigate the potential problems that can arise in electronic contracts. It will discuss some of the problems and discuss how the domestic legislation and the international entities endeavour to regulate such contracts to ensure that Ecommerce continues to grow and thus promote the growth of a healthy economy.

Introduction

When parties enter into contracts with each other and they are interacting face to face, it is easier to avoid mistakes than when they are at a distance and contracting with each other through the internet as medium. When parties enter into electronic contracts the whole contract can literally be concluded within seconds at the click of a button.

The traditional paper based contract law has rules that apply to matters such as jurisdiction, validity, formation of contract, modifications to contracts. In the world of online trading these are all issues that arise in online contracts and is a challenge to the traditional concepts of contract law. [1]

An example of an electronic contract that went horribly wrong occurred in 2002 when Eastman Kodak placed a camera for sale on its United Kingdom website for £100 instead of £329. Before Kodak could rectify the error, thousands of orders had already been placed. The company was faced with an option of honouring the contracts or face a lawsuit by the disgruntled customers. Initially Kodak said that it was a mistake and they would not fill the orders. One of their arguments was that the orders were simply bids to accept its offer for sale but it was not a cogent argument as the company accepted the orders and thereby formed an online contract. In the end Kodak was left with little choice but to honour the contracts. The total cost to Kodak was enormous and Kodak shrugged off the question whether customers would have won the lawsuit by saying that trade on the internet is a grey area.

ECommerce has rapidly grown to such an extent that the US market for online transactions was between $100 billion to $130 billion. [2] In the United Kingdom it has grown to the point where it accounted for £17 billion worth of commerce. [3] The internet market is extremely large and continues to grow as new methods of Ecommerce develops.

Recognition of the legality of electronic contracts

The first issue that arises is to ensure that online contracts are legally enforceable. Before the advent of the internet contracts were normally concluded either in writing or by oral agreement. The United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG) [4] which was adopted in 1980 provides for the recognition of contracts in international sale of goods. It does not provide for E-Commerce but a frequently overlooked article in the CISG provides for a description of what writing means in the context of contracting. Article 13 provides that for the purposes of the convention, writing includes telegram and telex. [5] Hill argues that this article is sufficient to include electronic contracts. [6]

The United Nations Commission on International Trade Law realised that the growth of electronic commerce required it to take steps to recognise that contracts can be validly concluded by using the internet. The steps taken by the UNCITRAL had to ensure that users of E-Commerce should be able to electronically sign the contracts to ensure their enforceability.

The UNCITRAL therefore adopted the Model Law on Electronic Commerce and in article 16 of the UNCITRAL Model Law on Electronic Commerce formally recognition is provided for the legality of an online electronic contract. The UNCITRAL Model Law on Electronic Commerce requires that States ensure that such contracts are legally binding on the parties. Article 7 of the UNCITRAL Model Law on Electronic Commerce further confirms that electronic signatures are recognised. [7]

The United States adopted the UNCITRAL Model Law by the adoption of the Uniform Electronic Transactions Act [8] and the Electronic Signatures in Global and National Commerce Act (E-Sign). [9]

The EU also adopted the UNCITRAL Model Law. The adoption took place by way of the adoption of the Directive on Electronic Signatures [10] and the Ecommerce Directive. [11] . The question of validity of an electronic signature will come to the fore once proof of the signature is required. [12]

United States

The E-Sign Act was enacted in June 2000. [13] The courts had to decide whether electronic transactions satisfy the requirement of writing. The courts were partially guided by the statute of frauds. The courts held that the requirements of the Statute of Frauds are satisfied in electronic transactions. [14]

The UETA and the E-Sign were both adopted in an endeavour to bolster the enforcements of electronic contracts. The acts are procedural statutes that are subject to existing substantive law. [15] The UETA further strives to eliminate the obstacles that the Statute of Frauds may present to electronic contracts. It states that a record or signature may not be denied legal effect simply because it is in electronic form. It further provides that a contract may not be denied legal effect because an electronic record was used in its formation. If the law requires that a record be in writing, an electronic form will satisfy the requirement and lastly that an electronic signature will satisfy the requirement of signature. [16]

It is clear that the United States intended to implement the provisions of the UNCITRAL Model Law. Comment 1 to the UETA clearly states that the medium in which a record, signature or contract is created does not affect its legal significance. E-Sign also allows parties to sign documents online and such digital signature can take on many different forms.

UETA and E-Sign, however only applies when the parties agree to conduct transactions by electronic means. [17] This requirement does not pose any real problem as in most instances parties will be in agreement as to the form of the contract. The contracts will normally arise out of offerings made on the internet. However, the parties can also agree between themselves in negotiations that the contract will be in electronic form and will come into existence once they have both indicated assent to the proposed terms. [18]

The courts have held that there must be clear and unambiguous evidence that the parties intended to contract under UETA [19] and the court held that the fact that the parties previously negotiated the terms of a contract by email did not suffice to make a finding that the parties intended to contract electronically. [20]

E-Sign protects persons by providing that if the customer does not want to accept an electronic contract he or she can ask for a paper copy and it must be provided in that form. Customers must further be informed of the method to withdraw his or her consent to for an electronic contract and have notices sent by mail. E-Sign deals must be confirmed by computer to prove that the customer understood the rules applying to the contract. All notices about an account have to arrive by email to ensure that the company can confirm that the customer’s system can open the electronic envelopes. The form of the contract must be saved in such a manner as to make the final form unalterable and lastly critical notices must still be sent via U.S. mail. [21]

The consumer enjoys a lot of protection under E-Sign as one of the requirements is that the contract must be confirmed by computer to ensure that the customer understood it. The effect of the E-Sign is to promote certainty to the consumer as to whether there is a contract or not.

The courts are wary of assuming that parties intended their contracts to be formed by electronic means and as has been seen in the EPCO judgement the court held that the fact that the parties entered into prior email negotiations did not mean that they intended the ultimate contract to be in paper format. The courts may over time change their stance on this issue as the prevalence of E-commerce increases and electronic contracts become the rule rather than the exception.

The European Commission

The European Union is a market with a diverse membership, each with its own domestic legislation. To ensure uniformity in some matters the EC adopts Directives that the member states are required to implement into their domestic legislation. If a member state does not do so, the EC can act against the member state and award damages to an individual that has suffered as a result of the recalcitrant member [22] .

One of the EC’s goals is to ensure that the EU becomes a very competitive and dynamic economy. [23] The EC adopted the E-Commerce Directive 2000/31/EC to create the legal framework for electronic commerce. The Directive has been adopted to remove the barriers that exist in cross border online services between citizens of member states. It is further intended to provide legal certainty to participants in the EU. [24]

The concept of the internal market is the creation of an area without any internal borders to ensure the free movement of goods, services and freedom of establishment between the members. [25] The Directive is therefore aimed at ensuring that new member states as well as existing members implement and apply the legal framework for electronic commerce. According to the EC, the cornerstone of the Directive is the legal certainty and the clarity that the internal market clause of the Directive provides. [26]

The Directive ensures that persons who enter into online contracts within the EU will have certainty as to the legal consequences of the contract and will further create an environment of trust between citizens of different members. This will again indirectly ensure the growth of online commerce and contribute to the wealth of the member states. If the certainty did not exist, consumers will be exposed to risks which may a negative consequence on the economy. [27]

There is legislation that contains consumer protection and some also requires that documents be in writing and the Directive that such contracts are valid if they are made through the internet. Examples of these are the Consumer Credit Act 1974 [28] and The Requirements of writing (Scotland) Act 1995. [29]

The opportunity to harmonise the rules on contract forming arose with the requirement to harmonise the requirement for online contracts. [30] The problem in this regard is that there is no uniformity in the EU in relation to the formation of contracts and consumers do not know when they have a legally binding contract. The diversity of rules creates a barrier to consumer confidence in electronic commerce and may result in consumers may avoid online contracting. [31] The Courts in the UK and in Scotland have identified the various stages of contract formation to assist the parties to know when the parties have reached consensus ad idem. The stages are invitation to treat, the offer and acceptance of the offer. The courts also adopted rules dealing with postal contracts. [32]

The court in Adams [33] held that a contract comes into being once the offeree posts the acceptance of the offer. This rule will also determine which court has jurisdiction to hear the case. Ibrahim argues that the postal rule can also apply to email contracts and is the proposed construction of contracts in the UK. [34]

This construction is however not the domestic law of all member states and according to the rules in Spain and Belgium the offer of goods on a website is an offer to the buyer and the contract comes into being at the moment that the purchaser accepts the offer of the supplier. [35] The problem here is of course that it does not contemplate the situation where the offeror can no longer supply the item due to excess demand. Does it therefore mean that the supplier will be guilty of a breach of the contract in such circumstances? Belgium law recognises that the offer is accepted once the offeror has reviewed the offer. The Belgium rule therefore gives the supplier the opportunity of avoiding the harsh rules that normally apply in Belgium.

In the UK, France and Germany the rule is that the advertisement is an invitation to treat and the purchaser makes the offer which can be accepted or declined by the offeree. I the Kodak situation above the online orders were accepted automatically as this was the way that the website was set up to deal with online orders.

The EC did not go far enough to harmonise the moment of contract and articles 9 to 11 of the Directive that deals with online contracts, only provide for the procedure of contracting online. The differences between the civil laws systems and the common law systems still exist and the citizens of different member states will still not be sure when the contract has come into existence. Snijders [36] argues that Article 11 of the Directive supports the civil law receipt theory and the offeree chooses the medium and is best positioned to insure against risks.

South Africa

In South Africa the implementation of the UNCITRAL Model Law was by means of the Electronic Communications and Transactions Act 25 of 2002. [37] If the contract is required to be in writing an electronic contract will be valid if it is accessible in a manner that is usable for subsequent reference.The South African legislation provides that contracts for the sale of land, long term leases of land, wills and bills of exchange may not be electronically concluded.

Uncertainty still exists in South Africa as to whether a click on an icon would constitute a legally recognisable act of a party’s intention to be contractually bound to the unilaterally imposed terms. The absence of face to face negotiations in electronic transactions means that the consumer does not have any input into the terms of the contract and that the vendor unilaterally imposed the terms. [38]

In South Africa a valid offer is required and thus the exact essential and material terms of the proposed agreement is required. The South African courts have been reluctant to accept agreements that are vague or incomplete. [39] Another vexing problem that consistently raises its head is the absence of regulatory provisions on jurisdiction in internationally concluded contracts. [40]

The main issue in South Africa in relation to electronic contracts is also the matter of jurisdiction. If for instance, a South African enters into an online contract by clicking on the icon and a contract has come into being with a supplier in Russia and the server is in Spain, where did the contract come into being and which courts will have jurisdiction to hear any dispute between the parties?

Conclusion

It is commendable that the United Nations and its member states make provision for electronic contracts in an endeavour to keep up with the changes in the nature of contracting. Countries have different legislation and the law on contract varies between countries.

A solution to the problem with the moment of contract and jurisdiction can be removed by all countries adopting the same regulations relating to their online contracting and thereby creating a common law that will apply in all instances. Such a move will promote much more certainty in electronic contracts as all parties will know exactly what their entitlements and responsibilities are in such contracts.

The issue of jurisdiction can also be addressed so that the participants in this market will know which court’s rules will apply although the jurisdiction issue will not be an issue any more as all electronic contracts will be determined by the same set of rules.

Bibliography

Books

• Bhana D., Bonthuys E., Nortje M., Students Guide to the Law of Contract (2 Edition) (2009) Juta Law
• Emerson R. W., Business Law(2004) Barron’s Educational Series
• Miller R. L. and Jentz G. A., Fundamentals of Business Law Excerpted Cases(2ndnd Edition) (2007) South Western Cengage Learning
• Snijders H. J., Weatherill S. R., E-Commerce Law: National and Transnational Topics and Perspectives (2003) Kluwer Law International

Cases

• Adams v Lindsell 1 B & Ald 681; 106 ER 250; [1818] EWHC KB J59, (K.B.) (1818)
• EPCO Carbon Dioxide Products v JP Morgan Chase Bank, NA (WDLa 2007)
• Francovich and Bonifaci v Italy [1991] EUECJ C-6/90, [1991] ECR I-5357, [1993] 2 CMLR 66, [1992] IRLR 84, [1995] ICR 722, Case C-6/90 available at as at 23 January 2010
• Kantor v. Kantor 1962 (3) SA 207
• In re RealNetworks, Inc. Privacy Litig., 2000 U.S. Dist. LEXIS 6584 (N.D. Ill. 2000)