UK: Forming Contracts Online

Last Updated: 12 March 2008
Article by Hannah Rigby

Signing up, virtually speaking

Rapid advances in computer technology and the advent of the internet have created numerous new ways of doing business and, therefore, forming contracts. So what is the legal status of such online agreements? This article looks at the legislation governing online signatures in electronic commerce and direct selling, focusing in particular on the Trading Scheme Regulations 1997 and associated guidance.

The Electronic Communications Act 2000 granted the Department for Business, Enterprise and Regulatory Reform (DBERR, formerly known as the Department of Trade and Industry ("DTI")) a specific power to introduce regulations under which any legal requirement that a document be in writing, signed, copied or printed can be satisfied electronically.

The E-commerce Directive 2000 also required EU Member States to ensure that their legal systems allow contracts to be concluded electronically. The Directive itself is not directly enforceable, but it places an obligation on Member States to amend existing legislation to that end. In the UK the E-Commerce Regulations 2002 implemented the Directive and made this provision directly enforceable. Government guidance has made it clear that existing UK legislation will be reviewed and (where appropriate) revised case by case, for example by making orders under the Electronic Communications Act.

Trading schemes

So how might these developments affect the business model of a direct sales organisation?

The Fair Trading Act 1973 defines a "trading scheme" to include any method where a participant can earn an income based on the activities of another. So the network or multi-level marketing method of selling, a method commonly used by direct sales organisations, is usually regulated as a trading scheme.

Trading schemes are principally regulated by the Trading Schemes Regulations 1997 (the "Regulations"). These say that no promoter of a trading scheme can supply goods or services to a participant unless the following requirements have been satisfied:

  1. the promoter and the participant joining have signed a written agreement which contains all of the terms under which the latter participates;
  2. that agreement contains a specified form of written warning and this must be printed immediately above the space for the participant's signature; and,
  3. a copy of the agreement shall have been furnished to the participant joining.

These references to "signing", "writing", "furnishing" copies and "written warnings" show that hard-copy paper contracts were envisaged when the Regulations were first introduced. And, indeed, this view is supported by the Government's guidance at the time. The then-DTI said that consumers who were potential participants in a trading scheme needed to be fully aware of the consequences of their involvement as well as the terms under which they joined. For these reasons the extra safeguards of a hard-copy contract were incorporated into the Regulations.

DBERR and trading schemes

Historically the DTI regarded it necessary to amend the Regulations if a ‘pure’ online sign-up was to replace a hard copy contract. In other areas with similar requirements DBERR has drafted regulations specifically allowing these requirements to be satisfied electronically, but it had not previously accommodated the Trading Schemes Regulations.

In October 2007 DBERR wrote to the Direct Selling Association (DSA) to say that in its opinion the Regulations can be complied with electronically, as follows:

"that the requirements in the Regulations as to "writing" can be satisfied by an electronic document;

that the words "printed immediately above the space for the participant’s signature" do not require the document to be a physical paper document; and,

that the requirement for a signature can be satisfied by something which fulfils the function of a signature by indicating that the person agrees to be bound by the document. This could be, for example, by the person typing their name in a place indicated for a signature, or clicking on a button when it is clearly stated that that is how the person should indicate their intention to be bound by the agreement."

Following DBERR's interpretation – into a safe harbour?

Is DBERR correct that nothing further needs to be done to allow online sign-up for trading schemes? If the existing regulations are applied in accordance with DBERR's guidance this would have the effect of making the Directive directly enforceable, which it is not, but it also raises the additional question as to why DBERR did not provide similar guidance in relation to, say, consumer credit (instead it drafted new regulations).

Of course the law cannot be changed simply by means of a letter from DBERR stating its view of the law. The DBERR communication makes this clear and also notes that "ultimately it is for the Courts to decide what the Regulations mean". But, although DBERR cannot change the law in this manner, it does have discretion as to how it is enforced and it is unlikely that DBERR will prosecute a business that has followed its own interpretation of the law. Thus, if an online sign-up method is adopted which meets DBERR's interpretation, we can safely assume that prosecution would be unlikely even if the action might still be unlawful.

Reassuringly this view is further supported by other examples of similar practice. The Home Office issued a letter in relation to its interpretation of the lotteries legalisation and the impact on sales promotions and competitions. It was almost certainly an inaccurate statement of the law (breach of which was a criminal offence and over which the Home Office had exclusive jurisdiction), permitting sales promotions and competitions which on the face of it were unlawful. Nonetheless, the sales promotions industry widely adopted the Home Office interpretation and no enforcement proceedings were ever taken; the risk was known but it was regarded as safe enough in practice.

Civil consequences also arise from DBERR's letter. A contract which fails to comply with statutory formalities is void and the consequences which follow from that are usually set out in the legislation which specifies the formalities. It seems likely that a purely electronic contract which signed-up a new participant to a trading scheme would be unlawful and therefore void, so as to be unenforceable. When parties to an illegal contract enter into subsequent agreements based on that illegal contract then these too are illegal, having been tainted by the original. So the risk is that contracts for the subsequent sale of goods will also be unlawful if the original contract between the promoter of the trading scheme and the participant was unlawful.

It is also likely that terms such as restrictive covenants in the contract, or compliance with a particular method of selling, would also be void. The latter would normally only result in termination of the participant, but loss of rights to enforce restrictive covenants could be more serious.

What now?

The DSA has provided procedural guidance to its members for online sign-ups. This reflects the contents of the DBERR letter and takes account of the requirements of the Trading Schemes Regulations insofar as that is possible in the light of the comments above. Our advice to direct sales organisations is to adopt the guidance proposed by the DSA but also to take advice with respect to the organisation’s individual circumstances. The DBERR approach is helpful but does not provide a 'one size fits all' solution.

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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