The nature of electronic contracts

The popular saying that the only thing that is constant is change has been proved by the advent of the Information Technology age and the Internet. Indeed there is no gainsaying the fact that the Internet has changed the way we think and do business, a question that must be answered is weather it has changed the law. While the answer to this may vary depending on the perspective of the individual, one thing that is clear is that the application of long standing legal principles has to change if the law must catch up with the speed of developments in this area of human activity. It is predicted that $1.25 trillion worth of goods and services will be sold to consumers over the Internet by the year 2005 with over 200 million people expected to use the Internet.[1] Founder of Microsoft, Bill Gates predicted in 1998 that the price of a personal computer would be cheaper than the Television in ten years. If this happens one can only imagine the extent to which e-commerce will leapfrog in the coming years. Nigeria is gradually inching up the ladder of Internet users with a growth rate in use of the Internet at 110%, with the number of users increasing from 200,000 in year 2000 to the latest figure of 420,000. While this growth may be considered too slow the fact that many legal questions relating to security, privacy, authenticity and much more have not been answered has not helped matters. New forms of technology such as digital signatures E-cash and smart cards are being used to help electronic commerce grow into a widely accepted form of business.

Electronic contracts.

Essentially basic legal principles applicable to electronic contacts do not defer from the normal paper based contracts. However “Parties engaged in online transactions face novel legal challenges that test the limits of existing statutory and case law. In many instances, the rules in electronic commerce transactions will follow from the rules set forth for paper based transactions”[2]. Or put differently “.. few of the legal issues posed by the new informatics technologies are novel. Of course, the new information technologies are novel, by definition. They may generate some novel social practices. Furthermore, novel social practices might even generate novel law. But we should not expect much novel law, for at least two reasons. First, new technologies more often facilitate existing practices than generate new ones. Second even new social practices are often well served by traditional legal devices. Devices resembling the statute of frauds, for example, have been on the lawyer’s shelf since the days of Hammurabi, ready for use when appropriate, and returned to the shelf when not.”[3] “Most legal doctrines are flexible and likely to accommodate new social practices in their interstices.”[4] ‘Finally, much of the best work is not really “about” cyberlaw at all. Instead, it applies existing legal doctrine or political theory to a new arena.”[5]

The same ingredients of a contract such as offer, acceptance, intention to create a legal relationship and consideration are still present in electronic contract as in the paper based ones, which they seek to replace. A closer look at some of the characters of Electronic contracts will be useful.

  1. Offer and acceptance and the communications upon which legal relationships develop are done online. Messages therefore create the overwhelming majority of communications giving rise to legal relations. For paper-based contracts there is no problem meeting the handwriting and signature requirements of present law such as the statute of frauds that requires certain contacts to be in writing. However for e-contracts there is the concern as to weather they meet this writing and signature requirements. The traditional requirement of writing is not limited to ink on paper. Thus the judiciary more than a century ago has led the way in the developments in giving recognition to electronic forms of communication giving rise to contacts. Telegraphs[6], faxes, western union mailgrams and even tape recordings have been held to be writings to under the statute of frauds. “It makes no difference whether that operator writes the offer or the acceptance … with a steel pen an inch long attached to an ordinary penholder, or whether his pen be a copper wire a thousand miles long. In either case the thought is communicated to the paper by use of the finger resting upon the pen; nor does it make any difference that in one case common red ink is used, while in the other case a more subtle fluid, known as electricity, performs the same office”.[7]

Only a few such, as unilateral ones are formed by performances. In many cases the terms are often not quite clear to the buyer. There is the issue of distinguishing whether an offer is actually an offer or an invitation to treat. Owners of most web sites escape this problem by making it clear that an offer on their site is not an offer to buy but an invitation to treat in which it is only accepted when they confirm and accept the order. Orders and the acknowledgement are deemed received when the parties to whom they are addressed are able to access them (i.e., the contract will be deemed concluded when the client receives the order confirmation in its inbox.

  1. Technologies mediate such messages that give rise to e-contracts. Such mediated messages must solve several issues. Is the message authentic? Does it have the credibility necessary to give rise to the creation of a legal relationship or obligation? What of security and confidence. “One of the reasons why e-commerce has not developed as originally expected is the lack of security on the Internet. It is obvious that consumers and industries are not sufficiently accustomed to transactions carried out between parties who are not face-to-face. When doing business over the Internet it is impossible to be sure of the true identity of the counter party, and whether that person is entitled to conduct business on a company’s behalf. This results in uncertainty and reduced trade.”[8]

We must facilitate, in the words of former President of the United States of America President Bill Clinton, the “emergence of a global transparent, and predictable legal environment to support business and commerce.” “Many businesses and consumers are wary of conducting extensive business electronically, however, because the Internet lacks a predictable legal environment governing transactions and because they are concerned that governments will impose regulations and taxes that will stifle Internet commerce.”[9] Technology has been developed in response to these challenges to give the needed assurances of authenticity integrity and security of records and messages.

  1. The form of authentication is different form paper based transactions where parties have to sign at the end documents to give formal expression to their intentions. Records kept with trusted repositories are difficult to alter, easy to date and authenticate. The use of biometrics and digital signatures using public and private key cryptography helps provide the necessary comfort and security. They serve to identify the sender of a message; they help indicate the intent of the person (to be bound by the terms of a contract) and to ensure the integrity of the document.
  2. Unlike paper-based contracts online contracts use a different platform. That is they are electronic in nature. In the words of the Uniform Electronics Transactions Act they use “an electronic agent”, which is defined as a computer programme or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by an individual”[10] Inspite of this definition it will be erroneous to treat an electronic device as an agent since it not a judicial person and cannot be held one as it lacks the necessary capacity to contract on behalf of another person. It simply responds to its internal programming and external parameters. In order words any instruction issuing from a computer is treated as issuing from its human controller in the formation of contracts.
  3. For most paper based contracts the rules are clear and the applicable law is certain. This is not so for e-contracts which are conducted over distances. Thus the certainty necessary for smooth business relationship is lacking. This is not helped by the fact most web-based businesses will normally specify which law will apply to the transaction using hyperlinks which are often not read by the consumer of online goods and services. The consumer is therefore most often left in the dark as to what law will govern the transaction. For even when such laws are specified the parties are not too sure that the courts will honour such choice of law or choice of forum.
  4. Consideration for online business and Payments for goods and services are made without physical exchange of money through the use of e-money like credit cards, debit cards (value cards), smart cards, cybercash etc., which basically move electronic cash off the computer to a credit card like device. Several payment solutions, all of which contain some form of encryption are being considered and used for electronic contacts.

Response to the challenges of e-contracts.

The major response to the challenges posed in doing online business has been in the area of legislation. The E-commerce directive in Europe has gone a long way in developing the necessary confidence required for e-commerce to thrive in Europe. Article 9.1 of the EU E-commerce Directive provides as follows:

Member states shall ensure that their legal system allows contracts to be concluded by electronic means. Member states shall in particular ensure that the legal requirements applicable to the contractual process neither create obstacles for the use of electronic contracts nor result in such contracts being deprived of legal effectiveness and validity on account of their having been made by electronic means.

Most European countries have enacted e-commerce legislation based on the guidelines or requirements of the e-commerce directive.

China has passed a new contracts law that recognizes electronic contracts and treats them the same way as paper based one. The Chinese contract law treats electronic messages as a valid form of writing consequently granting legality to contracts formed over the Internet. Its approach is to minimize the formalities parties must follow in order to create a binding contract and to allow them predict with more confidence what interpretation a court would apply to their e-mail messages. So also the e-commerce law of South Africa that recognizes e-mail messages as valid for the purposes of creating legal relationships.

Most of these legislative enactments define e-signatures; give effect to online contracts once they meet basic legal criteria. They lay down basic conditions or requirements that providers of online services must meet. The main aim of such legislation is to provide protection for consumers of online goods and services.

The Belgian E-Commerce Law specifies the general information, which a service provider must make available to the competent authorities and to the service recipient – that is, any natural or legal person who uses an information society service for professional or other reasons, particularly in order to find information or make such information accessible to the public.

This includes the following:

  • the identification details of the service provide – its official name, postal address, email address, and Commercial Register and value added tax numbers;
  • the details of the competent supervisory authority, if the activity in question is subject to regulation;
  • in the case of a regulated profession, details of the professional body and the country in which it is subject to regulation, along with a reference to the applicable professional rules;
  • the applicable code of conduct, together with a reference to the website where the code can be accessed (not required for websites of professionals); and
  • a clear and unambiguous indication of the price, specifying whether it is inclusive of tax and delivery charges.

This information must be provided in an easy, direct and permanently accessible manner, and the service recipient should be able to access the information regardless of whether a contract is actually concluded. In general, a clear hyperlink to the information, appearing on each page of the website, should be sufficient. However agreements through the use of e-mails are excluded from these requirements.

The specific information that must be provided prior to the placement of any order by a service recipient includes the following:

  • the language in which the contract may be concluded;
  • the appropriate technical means to identify and correct input errors prior to placement of the order;
  • the technical steps to follow in order to conclude the contract so as to avoid unwanted agreements (eg, click on “I accept”);
  • whether the contract will be filed by the service provider; and
  • whether the contract will be accessible to the service recipient.

Finally After the placement of an order, the following additional principles apply:

  • The service provider must acknowledge receipt of the order without undue delay and by electronic means;
  • The acknowledgement must contain an order summary; and

The order and the acknowledgement are deemed received when the parties to whom they are addressed are able to access them (ie, the contract will be deemed concluded when the client receives the order confirmation in its inbox) (Article 10).

On December 19 2003 the Internet Sales Contract Regulations took effect in Nova Scotia (Canada) under the provincial Consumer Protection Act. To boost confidence in online activities it requires online merchants to provide specific information to buyers before and at the time of sale. The information required includes:

  • vendor contact information;
  • a description of goods and services; and
  • explanations of costs and payment schedules.

The vendor must also advise consumers of the options available to them if they are not satisfied with their product.

If a consumer proceeds with the sale, an Internet sales contract must be provided. The consumer also has the right to cancel an order in certain circumstances, including where he or she does not receive the option to decline a contract or to correct an error, or where the Internet sales contract does not contain the specified information.

In the first case regarding the new E-commerce Act in Austria, the first defendant advertised telephone hotlines and services under the domain ‘www.sexhotphones.at’, while the second defendant was the web host that stored the information. The plaintiff, who offered chargeable telephone services, called for the defendants to cease and desist from publishing information on the Internet that did not include contractual terms and conditions. The Supreme Court ruled that if a website merely advertises a product or service, and no contract can be concluded through it, then the service provider need not make contractual terms and conditions available in accordance with Section 11 of the E-commerce Act.(1) The court reasoned that Section 11 – as part of Chapter 4 of the act, which is entitled ‘Conclusion of Contracts’ – was drafted to regulate cases where contracts could be concluded over the Internet.

Closer home, the draft Nigerian Electronic Signature Act when passed into law should also provide some of the comfort needed and give some of the assurances needed. However a speedy passage of the draft into law will be of great value.

Conclusion

To promote electronic commerce and enjoy the speed and efficiency of electronic business, the required functional infrastructure most be provided. Secondly in most countries where e-commerce is thriving, the judiciary has taken an activist posture and has not ceased to give legal efficacy to electronic contracts. It has adopted the interpretation that accords with new technology and has not shied away from giving electronic contracts the same recognition as paper based ones as long as established legal principles are met. Our judges must not shy from doing the same. A party must not be denied the benefits of a contract just because he used an unfamiliar platform to contract or because an electronic record was used in its formation.

The role of the judiciary cannot be overemphasized. This is because the duty of adjudication, interpretation of these statutes and giving effect to online contracts rests with it. This has to be done through provision of the relevant infrastructure and training for judicial and law officers. A judge will be significantly hampered by his exposure and learning.

[1] Alan Tikwart, J D., 1998, The Admissibility of Digital Signatures and E-Cash in Relation to the Statute of Frauds.

[2]  Thomas J. Smedinghoff and Ruth hill Bro. Moving with change: Electronic Signature legislation as a vehicle for Advancing E-Commerce. John Marshall Journal of Computer and Information Law, Vol. XVII, No. 3 spring 1999 at page 723.

[3] Joseph H. Summer, Against Cyberlaw, 2000

[4] Ibid

[5] Ibid

[6] Joseph Denunzio Fruit Co. V. Crane, 79 F. Supp.117 (S.D Cal. 1948)

[7] Howley v. Whipple, 48 N.H. 487 (1869)

[8] Gomez-Acebo & Pombo http://www.internationallawoffice.com/Ld.cfm?i=1038595&Newsletters__Ref=7279

[9] White House outlines Public Policy Plan for Electronic Commerce, 16 No. 4 Banking Pol’y Rep. 7

[10] Joseph H. Summer, Against Cyberlaw, 2000.