Cyprus: Online Contracts-Controlled By Lawyers Or Technologists?

The traditional proposition which remains generally true is that "a contract is an agreement giving rise to obligations which are enforced or recognized by law".1 It can be formed by a variety of methods which includes also the internet. Indeed, online contracts are now part of our every day life and are growing exponentially. However, valid contract formation over the internet is fundamentally important to electronic commerce and its further development. It appears that the courts and the majority of legal commentators2 agree that online contracts are valid, legally binding and enforceable provided that they meet all of the essential requirements of a valid contract formation those being offer and acceptance, consideration, intention to create legal relations upon certain agreed terms .

There is no doubt that the internet raises complex technological issues which may render difficult any attempt to establish that a valid contract has been formed especially when analyzing the issues of "offer" and "acceptance".

We now have to deal with new concepts such as the "virtual goods" or "intangible goods", until recently, unknown to the traditional business transactions. Legal concepts which are based on the existence of a tangible medium such as "instrument", "document", "original", "signature", must adapt to accommodate contracts that are now made over the internet. Legal concepts such as "delivery", "receipt", "dispatch", need to adapt to the fact of borderless electronic commerce and internet's speedy and automated transactions.3 But while technology makes business quicker and easier to transact, at the same time the lack of written physical documents exchange, makes it particularly difficult to analyse such transactions by applying the existing legal rules. The certainty and predictability of remedies afforded by a paper contract are complicated by the new technology and techniques and as a result commercial parties may be reluctant to contract electronically.

Consequently, there is an urgent need that international legal frameworks adapt to establish the same certainty and predictability for electronic contracts as for paper contracts by making laws and procedures compatible, "if the market is actually to operate by electronic means in the context of globalization."4 Legislatures around the world are evaluating traditional contract law requirements in light of these technological changes.

There are three main types of electronic contracting5:

  1. contracts for physical goods-goods are ordered over the internet with payment via the internet but delivery occurs in the usual way,
  2. contracts for services, such as electronic banking services, financial advise or consumer advise, and
  3. contracts for electronic or digitized products, such as software, music etc which can be ordered, paid for and delivered online.

In any of the above case the contract may be formed either through an exchange of email or by completion of a document on an internet website which is submitted to another party electronically6. Therefore, a distinction can be drawn between contracts made via emails and contracts made through the websites. Contracts concluded via websites are commonly referred to as click-wrap contracts.

In both cases, it is legally and also commercially important to be able to specify whether7, how, when and where such contracts are formed over the internet.8 Legislatures seem to have agreed that, existing legal requirements of contract formation, with certain adaptations may be used to make such an analysis with success.

Therefore, based on the traditional analysis of contract formation as indicated above, the process can be analyzed into the following two stages: the offer, when one party sets out the terms on which he is prepared to contract and the acceptance when the other party, unconditionally, agrees to these terms. However, in case there is a dispute between the parties regarding whether a contract has actually been formed, or regarding the specific terms of the contract or the time and place of the contract's formation, a lawyer must be able to analyse each party's messages or acts of submission of website documents or forms and decide about the exact time that those messages took effect.9 It is important, however, to be able to distinguish between an offer and an invitation to treat. The test that is applied in order to distinguish between an offer and a mere invitation to treat over the internet is that of the intention of the parties- whether the seller intended to be bound by the customer's response or not and whether the customer had also intention to be bound when he communicated his acceptance. Most probably the parties are unlikely to have had prior dealings and therefore in the absence of an express statement or actual knowledge by the recipient that the maker does not intent to be bound, the test of intention will be an objective analysis. However, considering the resemblance of web shop display of goods in a normal shop which is based on the rational that a shop owner should not be bound to an unforeseeable number of acceptances, the pure display of goods is likely to be treated as an invitation to treat. Christensen suggests that in addition to the intention of the parties, the interactivity or non-interactivity of the website may also be relevant.10

The contract is formed when and where acceptance takes place with the exception of the "postal rule". According to that rule if the offer contemplates acceptance by post the acceptance is effective once posted. The rule is designed to remove uncertainty from the contract formation process. But a question arises as to whether the postal rule applies to contracts made via email acceptances and website contracts.

It could be argued that, if email contracting is similar to contracting by post, then the postal rule should be applied to email acceptances as well. There are indeed methods of communication such as telex that do no benefit from the postal rule as they are not considered to be instantaneous. It is therefore crucial whether email can be characterized as an instantaneous means of communication or not.11 One could argue that email is not an instantaneous form of communication because there can be gap in time between dispatch and deemed receipt. Indeed, the mere possibility of delays, incorrect addresses or technological failures may not be sufficient to create a strict rule that an email acceptance is effective at a time other than communication. Furthermore, as pointed out by Reed12, as opposed to ordinary post, there is no identifiable third party to whom the message is entrusted. If, however, email contracting can be considered as a non instantaneous communication then a questions arises as to the point of time that it should be deemed to have been sent. Shall we consider that receipt occurred at the point at which an email arrived at the service provider's server or at the point at which the email is downloaded to the recipient's computer system? Some commentators assume that the email is considered to be received at the time when it enters the offerror's ISP13, while others consider that email is received at the time the email entered the mailbox of the offeror even if he does not log into it and read the email. In any case, however, it is crucial to determine the exact point of time the offeror could access the message and download it to his computer system.

In respect of website acceptances, however, it could be argued that since there is no actual space in time between the sending and the acceptance of the offer, unlike emails, are instantaneous. Reed14 points out that, contract formation through websites is an automated process controlled by the website software. It follows therefore that email acceptances and website acceptances will not receive the same treatment. There is therefore, much greater clarity in applying the postal rule to website acceptances rather than to email acceptances. Murray, goes further to suggest that, website acceptances demonstrate the characteristics of a telephone conversation rather that a mail message and as the sender is in position to be able to determine whether their message has been successfully received the postal rule will not apply because it does not need to.15 Murray further attempts the formulation of a new rule stating that "where an offer contemplates acceptance by a non-immediate form of communication, that acceptance is effective from the time it leaves the acceptor's control." Others who suggest that this distinction between instantaneous and non-instantaneous means of communication should not be made at all.16

In any case, a suggestion is that, if the contract is classified as one where the postal rule applies, then the place of conclusion of the contract would be the place where the acceptor commits his acceptance and if the contract is classified as one to which receipt rules would apply, then the place where the contract would be formed would be the place where the offeror receives acceptance.

As a legal respond to the complex issue of when and where electronic messages are received, both, the Australian Electronic Communications Act 199917 and the US Uniform Electronic Transactions Act 199918 set out certain legal presumptions: time of receipt is the entry of the message into the system of the recipient but the place of sending and receipt is presumed to be the sender's and the recipient's respective business addresses.19

An alternative would be to allow the parties to agree in advance the time and place that their messages shall take legal effect. 20It is therefore possible for an online seller to indicate in his website how and when a customer will be contractually bound.

There have been several attempts to respond to the various legal issues raised by the emerging phenomenon of online contracting or to lay down a workable legal framework to generally facilidate ecommerce, include, among others, the following:

The UNCITRAL Model Law on Electronic Commerce originated to further progress and harmonize internal trade by including electronic transactions within the scope of international contracts, to accommodate increasing use. It is intended to facilitate the use of modern means of communications and storage of information. It is based on the establishment of a functional equivalent in electronic media for paper-based concepts such as "writing", "signature", and "original" by providing standards by which the legal value of electronic messages can be assessed and plays a significant role in enhancing the use of paperless communication.21 Furthermore, it allows for future technological developments to be accommodated and does not discriminate between different forms of technology ( EDI, email, internet, telegram, telex, fax etc)

The Model Law, in article 11 states that, "An offer and acceptance may be expressed by means of data messages". Furthermore, Article 14, provides that "where the originator has stated that the data message is conditional on receipt of the acknowledgement, the data message is treated as though it has never been sent". The provision in Article 15 provides some solution in cases where the parties haven't agreed upon the time of receipt of a message by stating that and it states particularly that, "unless otherwise agreed between the originator and the addressee, the time of receipt of a data message is determined as follows: (i) if the addressee has designated an information system for the purpose of receiving data messages receipt occurs either at the time when the data message enters the designated information system, or, if the data message is sent to an information system of the addressee that is not the designated information system, at the time when the data message is retrieved by the addressee, and (ii) if the addressee has not designated an information system, receipt occurs when the data message enters an information system of the addressee.

The EU has created a coherent regulatory framework for electronic commerce and provided in particular for online contracts. The E-Commerce Directive is designed to facilitate the provision of electronic commerce services. Articles 9, 10 and 11, deal with electronic contracts in business-to-consumer ("B2C") transactions although they do not address the full process of how a contract may be concluded by electronic means. Article 9, in particular, requires Member States to ensure that electronic contracts are rendered valid and to remove any prohibition or restriction on the use of electronic contracts, with certain permitted exceptions. Article 11 imposes an additional duty upon the online seller to send an acknowledgement of receipt upon a communication made by the consumer. The E-Commerce Directive adopts a minimalist approach, requiring a service provider to set out all the necessary steps so that consumers can have no doubt as to the point at which they are committed to an electronic contract. Article 2(b) of the Directive defines a service provider as "any natural or legal person providing an information service. Electronic contracts are just as legal and enforceable as traditional paper contracts that are signed in ink within the EU.

The Uniform Electronic Transaction Act (UETA) is an important US Legislation applicable to electronic contracts. UETA as expressly defined in Articles 3 and 4, only applies to transactions related to business, commercial and government matters and to transactions conducted by electronic means. UETA plays a similar role to the E-Commerce Directive in that it seeks to "remove barriers to electronic commerce." Unlike the E-Commerce Directive, however, UETA is "not a general contracting statute" and it does not require the recognition of electronic contracts.24 Instead, it approaches its goal "by validating and effectuating electronic records and signatures" on which contracts may be based. UETA provides:

(a) A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

(b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation

It seems that, while internet may have provided businesses and consumers with plethora of technologies and techniques and while contracting online by using these technologies and techniques (websites using forms technology to conclude a contract, websites using click-wrap, shrink-wrap and browser-wrap agreements, websites using Java or ActiveX technology, websites using the shopping mall technologies) may leads to uncertainty with regard to the traditional legal requirements and consumer protection, the law is responding by adapting to their emerging. The law, in order to safeguard consumers' interests when contracting online and enabling electronic contracts formation, have set out certain pre-contractual, contractual, settlement and post-contractual conditions that have to be met. Law is trying to control online transactions and face the legal problems that inevitably are involved by enabling the assessment of current legal requirements.

It is true that technology innovations run and it is difficult to keep up the pace with the changes. However, neither the lawyers nor the technologists have full control of online contract formation. They are in need of each others if e-commerce is to develop further. Technologists, driven by powerful competitive market forces, provide the technological mechanisms but unless lawyers do provide consumers with the required certainty, security and predictability inn using them, they will be in hesitant to do it. It is important that the underlying principles and structures remain valid when dealing with online contracting. There is no doubt, however, that new technologies will emerge, new systems and techniques for negotiating and forming contracts online will come into use. Consequently, new legal issues will be raised and lawyers will be faced with new challenges. Whether law shall find the appropriate legal mechanisms to respond to these challenges depends on the very nature of the technology that will be involved. I'm confident that it will. At least this is what Law History has showed us.

Footnotes

1. G.H. Treitel, The Law of Contract, eighth edition, 1991, Introduction

2. See Chris Reed and John Angel, Computer Law, 6th edition p.202 where Reed observes that "tht basic principles of contract formation are still the same,........so that the existence of a contract and its terms are discovered by identifying the offer and then determining whether that offer has been accepted."

3. United Nations Commission on International Trade Law (UNCITRAL): Raising confidence in E-Commerce: the legal framework. UNCITRAL Secretariat, Vienna, Austria.

4. Council Directive 2000/31, Directive on Electronic Commerce (hereinafter the "E Commercial Directive), preamble 61. See also Christina Hultmark Ramberg, The Ecommerce Directive and formation of contract in a comparative perspective, European Law Review, 2001

5. Sharon Christensen, Formation of Contracts by Email – Is it Just the same as the post? [2001] QUTLJJ 3

6. Sharon Christensen, Formation of Contracts by Email – Is it Just the same as the post? [2001] QUTLJJ 3

7. It is already indicated above that, courts recognise such contracts.

8. Andrew D. Murray: Entering into contracts electronically: The real WWW

9. Chris Reed and John Angel, Computer Law, 6th edition p.202

10. Sharon Christensen, Formation of Contracts by Email – Is it Just the same as the post? [2001] QUTLJJ 3. The author suggests that a non-interactive site which in fact only provides information that can be confirmed by phone or delivery of goods, as opposed to an interactive site, "will convey through it's non interactive nature the implied intention on the part of the seller to negotiate the terms of any contract".

11. In Christensen's words "to consider a classification of email as either instantaneous or ono-instantaneous may lead to the application of postal rule in inappropriate situations".

12. Queen Mary University of London, Notes on Online Contracting-Unit 2, E-Commerce Law

13. Dickie 1998

14. Chris Reed and John Angel, Computer Law, 6th edition, p.204

15. Andrew D. Murray: Entering into contracts electronically: The real W.W.W in Edwards & Waelde (eds), Law & the Internet: A Framework for Electronic Commerce (2nd Edition, Hart, Oxford 2000)

16. ibid, footnote 11

17. Section 14

18. Section 15

19. Chris Reed and John Angel, Computer Law, 6th edition, p.202

20. According to Holwell Securities Ltd v. Hughes [1974] 1 WLR 155, it is permissible for the parties to stipulate what acts will constitute acceptance.

21. Article 5: "Legal recognition of data messages information shall not be denied legal effect, validity or enforceability solely on the grounds that it is in the form of a data message".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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