Forming contracts electronically is becoming increasingly common and there are many issues which businesses need to be aware of. The purpose of this article is to identify some of these issues (rather than to consider them in detail).

Consider the following exchange:

Russian butter company Web site advertisement: "Project manager required for design and installation of large butter factory. Tenders close 18 March and contract will be awarded to lowest tender. To commence 8 June. For specifications click here. For standard terms and conditions click here. E-mail tenders to email@russianwebsite.com"

Response from Australian process engineers by e-mail: "We would be willing to accept the contract at a price of US$4m. Able to start as required. We attach our standard terms and conditions."

Response from Russian butter company by e-mail: "Excellent. Look forward to you coming on site."

A little simplistic perhaps, but ask yourself the following questions:
- was there a contract between these parties?
- what was the offer: the advertisement on the Web site or the e-mail from the process engineers?

This may be a crucial question in determining the terms and conditions that apply. Are they the terms and conditions on the web site or those attached to the e-mail from the process engineers? What if the process engineers did not click on the link to the terms and conditions on the website, or the attachment to their e-mail was never opened?

This may also be important if a dispute later arises. Which law applies, Russian or Australian? Where should disputes be resolved, Russia or Australia?

What if the e-mails were deleted and the advertisement removed from the Web site? Could anyone prove any of these things?

How Is A Contract Formed?

Requirements may differ from jurisdiction to jurisdiction, but in general, no particular form of communication is required to create a contract. In the countries we usually deal with, it may be done verbally, or in writing or electronically (through e-mail, electronic data exchange or a Wweb site). It is important to remember that however a contract is formed, the same basic legal requirements must be satisfied. In most countries we deal with, there must be:

1. An intention to create legal relations.
2. An offer from one party to another.
3. An acceptance of that offer.
4. An exchange of value, eg money for effort.
5. Certainty of terms.

Issues With Electronic Contracts

Intention to create legal relations
Can we say that there is an intention to create legal relations if a Web site provides automated responses? It seems likely that this will be viewed in a broad sense. In other words, the Web site owner is intending to create legal relations with anyone who accepts an open offer. This in turn may create its own difficulties.

An offer from one party to another
There are potential problems where an offer can be accepted by anyone rather than the other party being invited to make an offer. The latter approach may be preferable where the seller wishes to exclude certain buyers. A difficulty arose recently over the sale of World War II memorabilia by USA internet-based retailers. It is illegal to sell certain types of memorabilia in some European countries. The retailers had to take steps to stop some people from buying them.

Acceptance of an offer
Difficulties may arise around acceptance of an offer. Consider an exchange where one party e-mails an offer and the other party e-mails a reply accepting that offer. When does the acceptance take place? What if the acceptance e-mail is rejected by an e-mail gatekeeper due to size or content restrictions? Another example might be an electronic data interchange which requires specific formats and an acceptance is unreadable to the receiver.

Exchange of value
Agreeing to an exchange of value is not a particularly significant issue here. However, the means of accepting payment can be. Information belonging to both the seller and buyer needs to be as secure as possible.

Certainty of terms
A seller will often wish the contract to have standard terms and conditions. There are several ways in which this can be done, including "click wrap" agreements. These force a customer to scroll through terms and conditions and click on an "I accept" button before being allowed to proceed. The courts in New Zealand have yet to examine these agreements. But traditional rules of contract mean that a click wrap agreement is unlikely to be effective unless the terms and conditions are accepted before the contract is formed.

Other Issues

Statutes
Legislative requirements may cause difficulties. For example, a contract for the sale of land must be in writing. An electronic exchange may not meet this requirement as the law currently stands.

Issues arising from ease of international trade
With the development of e-commerce on a global scale, trading internationally becomes increasingly easy. Issues will include:
- which country's law will apply to the dealings?
- in which country will disputes be resolved?
- will the resolution of any dispute be enforceable?
- what laws of trade and consumer protection will apply?
- are there tax implications?

Intellectual property and confidentiality
Electronic information is notoriously susceptible to unauthorised access and distribution. You should take steps to protect any confidential information shared when concluding a contract electronically. It is also important to consider the consequences of breach of confidentiality. You may wish to limit liability or exclude certain types of loss.

Intellectual property rights will often be involved. Where the intellectual property is yours, it should be protected. Where it is someone else's, you will want to be sure that using it will not infringe on that person's rights.

Proving the deal
At some point a business may have to prove that a contract exists or explain its actions to a court or some other forum (ege.g. an arbitration or tribunal). It is important that you can show a paper trail. You need to take the utmost care to keep relevant electronic information and store it so that you can retrieve it easily.

The courts have rules about whether the paper trail can be used as evidence, based on questions such as relevance and reliability. The reliability of electronic records needs to be assured. Can the court be sure that the named sender of an e-mail was the actual sender? Is the message received the same as that sent? Is undetectable tampering possible? Can electronic signatures be relied upon?

Dealing With The Issues

The Electronic Transactions Bill 2000 is currently before Parliament. It aims to address some of these issues by dealing with specific situations. For example, it provides for electronic signatures and for electronic information to be considered to be in writing in certain circumstances.

Other issues may be best dealt with in other ways. For instance, you could reduce the risk of the contract being unenforceable by specifying what is required for acceptance and stating which country's laws will apply.

With proper advice, you can include the means to address these issues in electronic contracts. This will reduce the risk of unnecessary and costly disputes. It will also ensure that your actions are properly documented if any disputes arise.

Copyright The Lawlink Group Ltd 2001

Every effort has been made to ensure that this information is accurate. However, it is general introductory information only. It does not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.

For more information contact Harkness Henry's IT and e-commerce lawyers Christine Grice or Mark MacLennan. Harkness Henry is a Lawlink member firm in Hamilton.

Website:
Harkness Henry
Email mark.maclennan@harkness.co.nz

July 2001
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