UK: Technology Neutral Contracting

Last Updated: 15 October 2001

Article by Zoe Fahy and Nick Rudgard

The Government stated in its March 1999 Consultation document that 'as far as possible the law is technology neutral in its application'. In short, its intention was to create a level playing field to ensure the risks associated with on-line contracting are not too far removed from those arising from traditional paper based contracts. Unfortunately, this assumption is flawed. The reality is that contracting on-line presents different challenges for modern business.

Pre-contract considerations

Before contracting online, businesses should establish any restrictions on their potential customer base. Once a business launches its website, there are no geographic boundaries - unless blocking technology or passwords are employed. Theoretically anyone with access to the Internet can access the website.

There are several reasons why businesses may choose to restrict their activities either geographically or to a particular market. Many have long established distribution networks, both in their home territory and abroad and they may be reluctant to encroach upon existing arrangements.

Also, many countries have in place mandatory laws, (for example prohibiting the sale of certain products such as alcohol or services such as gambling), or standards which may apply to any contract with a party based in that country. Whilst a business cannot practically investigate laws world-wide, it can address such issues, either in its terms and conditions, or by placing notices on its website.

Another difficulty is ascertaining the identity of the customer, and ensuring that any communications remain secret and confidential. How can you be sure that the individual/company with whom you are contracting is who they actually say they are, that they actually sent the communication, or that it hasn’t been intercepted by an unauthorised person, or even altered by them?

The use of digital signatures (now admissible in court pursuant to the Electronic Communications Act 2000) can alleviate such risks. A common misconception is that a digital signature is actually some form of signature, when in fact it is really a form of technology. The originator of a communication uses a "private key" (a piece of software based on mathematical algorithms) to scramble the communication and send it to the recipient. The scrambled communication is actually the "digital signature". By using the public key, the recipient can unscramble the message, verify that the communication was actually sent by the sender, and that it has not been altered by anyone else. However, the risk of forged or stolen public keys remains, and even the use of a digital signature does not guarantee the sender’s actual identity.

Formation of the contract

Any business that traditionally contracts on its standard terms and conditions is likely to want to contract in the same way on-line. However it is not as simple as merely posting existing terms and conditions on the web-site.

Regulatory requirements: A business should refer to the Distance Selling Regulations 2000 ("the Regulations"), and the EU Electronic Commerce Directive 2000 ("the Directive").

The Regulations apply to "distance contracts", i.e. contracts concerning goods or services between suppliers and consumers under an organised distance selling sales scheme. Suppliers must provide consumers with certain information and give them the right to cancel contracts within a seven day cooling off period. Businesses who fail to comply, run the risk that their contracts are unenforceable, and injunctions may be used to enforce compliance.

The Directive (to be implemented in the UK by 17 January 2002), requires that suppliers give consumers additional information prior to an order being placed with the supplier (for example, the steps required to conclude the contract), and to acknowledge receipt of orders without undue delay. Implementing UK Regulations are awaited, but businesses should now note the more general provisions of the Directive, some of which apply whether or not the other party is a consumer (for example, details of name and address).

Incorporation: Businesses' terms and conditions should form the basis of any contracts formed on-line. To achieve this, they must have been brought to the attention of the other party. The website might, for example, require a buyer to click on an acknowledgement that it has read and accepts the terms and conditions, before proceeding to place an order. Even if a buyer doesn’t read the terms and conditions, he would not be able to argue that they weren’t brought to his attention. Alternatively, a hypertext link might link the buyer to the full text of the terms and conditions, although the danger here is that there is no guarantee that the buyer will click on the link.

Formation: Existing case law demonstrates the difficulty of determining the point at which a contract is concluded, and on-line guidance is minimal.

In advertising goods/services for sale via a website, there is a danger that a contract is formed once a buyer places his order. If the contract is formed in this way, the business may find itself with vast quantities of orders but insufficient stock to fulfil them. It may also find itself a party to a contract with a party whose identity it has not had the opportunity to verify.

In order to avoid these problems, businesses can construct their websites like a "shop window". Offering goods/services for sale via the website is then likely to constitute an "invitation to treat", and any order subsequently placed is likely to constitute an offer to buy.

Any acceptance of an offer needs to be communicated to the buyer/other party before a contract is formed. The difficulty is determining at what point the acceptance is actually communicated – acceptance could be via email or simply clicking on a button/icon on the website. Whilst technology has certainly advanced, it is not 100% reliable - transmission of the acceptance may fail or be incomplete. Unlike post or faxed communications, e-mail needs to be collected by the recipient.

What happens if it goes wrong?

As the on-line environment knows no boundaries, a dispute could arise with a party based in a country other than that where the business is established. The contract between the parties should specify which country has jurisdiction. If the contract is silent, the Brussels Convention provides that defendants must be sued in their own domicile, with certain exceptions.

For businesses contracting with parties domiciled in the EU, a new Regulation is due to come into force in March 2002 which increases the uncertainty in this area for online traders. The Regulation amends the Brussels Convention in a number of areas, but one of the most contentious amendments is in relation to consumer contracts. Under both the Convention and Regulation, consumers can choose (regardless of what the contract says) to sue either in their home courts, or in those of the business. However, the difference is that the Regulation applies to contracts formed with suppliers who "direct [their] activities to [a consumer’s] member state".

It is not entirely clear what is meant by "directing…activities". The online environment now means that businesses have the opportunity to offer their goods/services for sale worldwide, without specifically targeting a particular country, market or customer. Surely "directing" one’s business activities would seem to imply more than being able to access the website?

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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