Recognition of the legality of electronic contracts

Abstract

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.

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. In the United Kingdom it has grown to the point where it accounted for £17 billion worth of commerce. 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) 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. Hill argues that this article is sufficient to include electronic contracts. 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.

The United States adopted the UNCITRAL Model Law by the adoption of the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act.

The EU also adopted the UNCITRAL Model Law in two stages. The first stage was the adoption of the Directive on Electronic Signatures. The second stage was the adoption of the Ecommerce Directive.. The question of validity of an electronic signature will come to the fore once proof of the signature is required.

United States

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.

One of the EC's goals is to ensure that the EU becomes the most competitive and dynamic knowledge based economy in the world. The EC adopted the E-Commerce Directive 2000/31/EC to create the legal framework for electronic commerce in the internal market. The Directive is aimed at removing 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.

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. 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.

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.

There is legislation that contains consumer protection and also 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 that provides for consumer protection and The Requirements of writing (Scotland) Act 1995.

The opportunity to harmonise the rules on contract forming arose with the requirement to harmonise the requirement for online contracts. 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. 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.

The court in Adams 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.

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. The contract comes into existence the moment the offer is accepted by the buyer. The problem here is of course that it does not contemplate the situation where the offeror does not have sufficient stock to fill all orders and the question that arises is whether 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 which lessens the harshness of its rule on the moment of contract.

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 provides 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 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.

Conclusion

Bibliography

Books

  • 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)
  • 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

Legislation

  • Consumer Credit Act 1974 available at as at 24 January 2010
  • Directive 1999/93/EC of the European Parliament and of the Council or 13 December 1999 on a community framework for electronic signatures as at 24 January 2010
  • Directive 2000/31EC available at < http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32000L0031:EN:NOT > as at 24 January 2010
  • The Electronic Signatures in Global and National Commerce Act available at as at January 2010
  • The Requirements of writing (Scotland) Act 1995 as at 24 January 2010
  • The United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG) available at as at 24January 2010
  • The Uniform Electronic Transactions Act (1999) available at as at 24 January 2010
  • United Nations UNCITRAL Model Law on Electronic Commerce (1996) with additional article 5 bis as adopted in 1998 and Guide to Enactment available at as at 24 January 2010

Journals

  • Eaglesham J., A Troubled Deal on the Internet, Financial Times 11 February 2002, available at 2002 WL 3306015 (as quoted by Hill J. E., The Future of Electronic Contracts in International Sales: Gaps and Natural Remedies under the United Nations Convention on Contracts for the International Sale of Goods Northwestern Journal of Technology and Intellectual Property Volume 2, Number 1 (Fall 2003) Northwestern University School of Law available at as at 23 January 2010
  • Hill J. E., The Future of Electronic Contracts in International Sales: Gaps and Natural Remedies under the United Nations Convention on Contracts for the International Sale of Goods Northwestern Journal of Technology and Intellectual Property Volume 2, Number 1 (Fall 2003) Northwestern University School of Law available at as at 23 January 2010
  • Ibrahim M. A. Dr., Abadneh A. Dr Tahat H The Postal Acceptance Rule in the Digital Age Journal of International Commercial Law and Technology Vol 2, Issue 1 (2007)

Internet

  • 2002 US eCommerce: The Year In Review as quoted by Murray A. D., Contracting Electronically in the Shadow of the E-commerce Directive (Available at as at 24 Janaury2010
  • European Commission The EU Single Market Electronic Commerce as at 24 January 2010
  • EUR-Lex Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee - First Report on the application of Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce)/* COM/2003/0702 final */ < http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52003DC0702:EN:NOT > as at 24 January 2010
  • Inter Active Media in Retail Group as quoted by Murray A. D., Contracting Electronically in the Shadow of the E-commerce Directive (Available at as at 24 Janaury2010

Other Sources

  • E-Commerce - UK: UK Consultation on the Implementation of the Electronic Commerce Directive Chapter 5 available at as at 24 January 2010
  • Murray A. D., Contracting Electronically in the Shadow of the E-Commerce Directive available at < www.100megsfree4.com/andrewmurray/EContracting.pdf> as at 24 January 2010