Formation of Electronic Contracts under traditional Common Law Principles

TABLE OF CONTENTS

- CHAPTER ONE
THE PHENOMENON AND SIGNIFICANCE OF ELECTRONIC COMMERCE
1.1 INTRODUCTION
1.2 MEDIUM OF E-COMMERCE
1.3 HISTORICAL DEVELOPMENT OF E-COMMERCE
1.4 SIGNIFICANCE OF E-COMMERCE VIA INTERNET
1.5 METHODS OF ONLINE CONTRACTING
1.5.1 ELECTRONIC MAIL (E-MAIL)
1.5.2 CLICK-WRAP AGREEMENTS
1.6 LEGAL CHALLENGE OF E-COMMERCE

- CHAPTER TWO
LEGAL GAPS OF ELECTRONIC COMMERCE
2.1 LACK OF ELECTRONIC TRANSACTION LAWS

- CHAPTER THREE
THE OFFER IN THE ELECTRONIC CONTRACT
3.1 APPROACH
3.2 REQUIRED ELEMENTS OF CONTRACTING
3.2.1 THE OFFER IN CLASSICAL SCENARIOS
(1) DISPLAY OF GOODS FOR SALE
(2) ADVERTISEMENT AND UNILATERAL CONTRACT
(3) MECHANICAL PROCESS ON ONE CONTRACTUAL SIDE
3.2.2 APPLICATION OF OFFER RULES TO E-COMMERCE
(1) EMAIL
(2) MECHANICAL CONTRACTING
(3) UNILATERAL CONTRACT OFFER
(4) DISPLAY OF GOODS AND ADVERTISEMENTS
(a) PASSIVE SITES
(b) ACTIVE SITES
(5) OUTLOOK AND ADVICE

- CHAPTER FOUR
THE ACCEPTANCE IN THE ELECTRONIC CONTRACT
4.1 ACCEPTANCE OF AN ELECTRONICAL OFFER
4.1.1 TRADITIONAL POSITION AT COMMON LAW
4.1.2 COMMUNICATION OF ACCEPTANCE
4.1.3 THE POSTAL RULE
(1) ACCEPTANCE BY POST
(2) JUSTIFICATION AND CRITICS
4.1.4 POSTAL RULE AND MODERN COMMUNICATIONS
4.2 APPLICATION OF COMMON LAW TO E-COMMERCE
4.2.1 ACCEPTANCE BY EMAIL
(1) TECHNOLOGY OF EMAIL TRANSMISSION
(2) ARGUMENTS IN FAVOUR OF POSTAL RULE
1. DIGITAL EQUIVALENT
2. EMAIL INSTANTANEOUS
3. COMMON AGENT
4. TIME OF COMMUNICATION BY EMAIL
5. PLACEMENT OF RISK ON OFFEREE
(3) ARGUMENTS AGAINST POSTAL RULE
1. EMAIL “ALMOST” INSTANTANEOUS
2. DELAY OF TELEX SIMILAR TO EMAIL
3. SENDER HAS CONTROL OVER COMMUNICATION
4. EXCEPTION TO GENERAL RULE
5. INTERNET SERVICE PROVIDER NO AGENT
6. SIMILARITIES OF INSTANTANEOUS AND NON-
INSTANTANEOUS METHODS
7. CHOICE OF COMMUNICATION METHOD CONSENSUAL
8. DETERMINATION OF APPLICABLE LAW
9. RECEIPT RULE APPLICABLE IN FOREIGN JURISDICTIONS
10. GENERAL RULE UNDER VIENNA SALES CONVENTION 1980
11. GENERAL RULE OF THE MODEL LAW ON E-COMMERCE 1996 ..
12. GENERAL RULE OF THE UN CONVENTION ON THE USE OF ELECTRONIC COMMUNICATIONS IN INTERNATIONAL CONTRACTS 2005
4.2.2 ACCEPTANCE BY CLICK-WRAP

- CHAPTER FOUR
CONCLUSION AND RECOMMENDATION
APPENDIX
REFERENCES
PRIMARY SOURCES
TABLE OF STATUTES
TABLE OF STATUTORY INSTRUMENTS
TABLE OF EUROPEAN LEGISLATION
TABLE OF TREATIES, CONVENTIONS AND OTHER LAWS
CASE LAW
SECONDARY SOURCES
JOURNAL ARTICLES
TEXTBOOKS
OTHER MATERIALS
ELECTRONIC SOURCES

- CHAPTER ONE - THE PHENOMENON AND SIGNIFICANCE OF ELECTRONIC COMMERCE

1.1 INTRODUCTION

Approximately eight years ago, an electronic invention called the Internet has initiated a phenomenon of exuberant fascination and economic upturn of individuals and businesses at the same time. The steady increasing amount of online users presents a beneficial medium through which commercial entities can advertise and sell their commodities without mentionable delay. Potential consumers have borderless access to products at competitive prices independent of regional distances.¹

Consequently, it is simply to ask the question “How do people contract over the Internet and are the familiar Common Law principles applicable?” This question is in particular in such an extent controversial and important to resolve, since there is no English court which has dealt with this subject so far.

As the traditional contract law has been developed and modified due to new and unfamiliar communication means over centuries, it may be that the existing principles are hardly applicable and insufficient to determine the formation of an electronic contract. Though, it is also imaginable that courts may easily alter the contract law rules to an appropriate extent as they already did with other communication methods.

This dissertation is concerned with the demanding topic of formation of contracts in the area of electronic commerce (abbreviation hereinafter: e- commerce). It tackles legal issues in an environment of various forms of commercial and non-commercial activities using electronic means. As the fields of electronic commerce and practicing business online are constantly increasing all over the globe, legal issues of complex content are steadily challenging traditional law principles, courts, lawyers and legal scholars to develop governing laws and adequate solutions.

The dissertation faces and investigates how existing concepts of contract law may apply to cyberspace in a variety of contractual situations and which kind of issues may occur. Hence, the dissertation endeavours to provide contributions in order to clarify imaginable e-commerce conflicts and discloses possible solutions to dispel existing uncertainties of e-commerce users. In order to determine why certain sectors of electronic commerce comprise a multitude of interesting and challenging aspects for every legal practitioner and every person operating online, it is necessary and expedient to provide a comprehensive overview of the broad field of e-commerce and to what extent the dissertation investigates present issues.

1.2 MEDIUM OF E-COMMERCE

As the formation of contracts is basically well developed and governed under Common contract laws, one might expect there to be no crucial difference between electronic contracts and those concluded in the form of traditional paper-based means. However, this does not correspond completely and has presented the law with a number of challenges, due to differences in the way of communicating free of a paper-based medium.² Therefore it is necessary to determine which electronic communication methods are covered by e- commerce and investigated within this dissertation.

In accordance with the impact of the Internet as the most powerful tool available to modern businesses to conduct trade with customers worldwide, the term “electronic commerce” is often used as equivalent to Internet commerce, even though it has according to different definitions a much longer history of origin.³

In a study of the secretariat of the World Trade Organization (WTO) about electronic commerce and the role of the WTO, it is described widely: “…electronic commerce is broadly defined as referring to six instruments, namely: “the telephone, the fax, television, electronic payment and money transfer systems, Electronic Data Interchange and the Internet.””⁴ According to the press release of this study on the WTO website e-commerce is defined as the production, advertising, sale and distribution of products via telecommunication networks.⁵

The United Nations Commission on International Trade (UNCITRAL) rather refers to e-commerce than defining it in the Preamble of the Model Law on Electronic Commerce (1996), whereby e-commerce involves “the use of alternatives to paper-based methods of communication and storage of information”, which clearly excludes communicating by telex or fax.⁶

Lodder and Kaspersen have created another wide interpretation of the term e-commerce in 2002, which defines e-commerce as “any business transaction concerning goods and services, where participants are not in the same physical location and communicate through electronic means”.⁷

Finally, according to Todd’s definition e-commerce is “any transaction involving goods or services where digital electronic communication performs an essential function”.⁸

It is clear that there is no general accepted interpretation of electronic commerce, but it is commonly acknowledged that contractual issues occurred in an online environment are covered by the term e-commerce. Hence, the dissertation is basically concerned with electronic contracts concluded via Internet.

1.3 HISTORICAL DEVELOPMENT OF E-COMMERCE

The previous section has shown the term e-commerce is much broader than only referring to the Internet.⁹ As most of it is currently internet-based, the story of the entire technology has started with constructing a machine called “Analytical Engine” in 1883 by Charles Babbage, a concept which is commonly regarded as the primary basis of the logical structure of modern day computers.¹⁰

This invention has given the opportunity to create new kinds of networks to transfer either information or even to do business. For instance Business-to- Business (B2B) e-commerce was characterised by closed networks for fund transfers via interbank networks like STAR in the United States since 1981 and the more famous ELECTRONIC DATA INTERCHANGE for exchanging structured information since the 1980s.¹¹ But due to the inexorable rise of open networks as the Internet, the obsolete closed networks are likely to fall into disuse and the World Wide Web is becoming the communication medium of choice for business due to steady growth in access and usage.¹²

Hence, the computer is nowadays an integral part to all imaginable aspects of e-commercial activities and is responsible for the development and immense push of online e-commerce.

1.4 SIGNIFICANCE OF E-COMMERCE VIA INTERNET

The opening of the Internet in the mid-1990’s for public use was a groundbreaking moment for e-commerce due to the fact that it is an open network which permits communication and trade without need for business and private users to subscribe the same closed network.¹³

At the end of June 2008 the estimated number of Internet users worldwide has risen to 1,463,000,000¹⁴ and already more than 41,800,000 users were from the United Kingdom in June 2008¹⁵, which proves that the Internet has already pervaded UK businesses and households. The Internet is the fastest growing commercial market in the world, according to a report of the United Kingdom Department of Trade and Industry, which has estimated the year 2000 value of Internet commerce at $12 billion per annum and some projections of the United States have predicted global sales up to $3,2 trillion globally by 2003.¹⁶ Apparently the Internet provides an environment which is very profitable, though legal professionals always are concerned with the technology of communication means. It is the omnipresent legal challenge to readjust existing principles in regard of new forms of communication. Hence, the question comes up which methods of online contracting are generally used and how do these operate.

1.5 METHODS OF ONLINE CONTRACTING

The Internet provides the online user a variety of communication alternatives such as email and click-wrap to enter into online contracts.¹⁷ Due to the fact that these methods differ from each other, legal issues about the formation of contracts have evolved in theory and reality.

1.5.1 ELECTRONIC MAIL (E-MAIL)

The first way to enter into a contract over the Internet is email and is basically simply the digital equivalent of a letter, as it allows the parties to send electronic messages to each other.¹⁸ The sender of the email may attach things to it, it needs to be addressed with a valid email address, and it needs to be sent to the desired recipient via the sender’s computer network. It can be used to send advertisements as well as offers and acceptances. Besides, for authentication and verification purposes, the sender can digitally sign emails.¹⁹

However, due to the complex procedure of digital communication there are some technical difficulties that might complicate the comparison between traditional mail delivery systems and electronic mail delivery. After the email sender has created the message, the computer splits it into digital stream packets and forwards the signal to the modem.²⁰ The modem then converts the stream into analogue tones, which take individual paths to the recipient’s computer.²¹ The message is thus not sent as an uninterrupted whole, which might have influence whether it is regarded as instantaneous or not, as standard letters.

1.5.2 CLICK-WRAP AGREEMENTS

A further method to conclude a contract over the Internet is called click-wrap. The click-wrap method or web-contract is the most commonly and visible tool for concluding online agreements.²² Potential vendors establish websites for their purpose of selling goods and services through placing information about the product on the website. The product information could be provided in the form of an advertisement, an invitation to treat or an offer of a product for a specific sum of money and the purchase takes place by completing a hypertext order form. The form usually contains a button labelled “I accept”, “Submit”, “Purchase” or a similar phrase the buyer has to click on.

But according to the European Legislator it is necessary to differ between the three existing categories of websites established by operators, in order to determine the Jurisdiction concerned with the legal issue in question.

Basically, a website is called passive where the operator merely has posted information on the Internet available to those people who are interested in visiting the site, and do not allow the user to purchase or order goods or exchange information with the website host through the website.²³

Besides, there are active websites, which main features are that these are highly interactive enabling parties to enter into contracts, and created knowingly and repeatedly to transmit files and communicate over the Internet.²⁴

Between these two categories are those web pages characterised as interactive, which means websites that enable the user to exchange information with the host computer.²⁵ The exercise of rules is here determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web, according to the sliding scale test of the case Zippo Manufacturing Co v Zippo Dot Com, established by a Pennsylvania District Court . ²⁶

But despite the fact that the described methods of online contracting are well known and commonly used, there are many legal uncertainties to discuss.

1.6 LEGAL CHALLENGE OF E-COMMERCE

The ability to enter into a valid and enforceable contract over e-commerce is decisive for the digital world to continue progress and for businesses and consumers involved alike to benefit from e-commerce.²⁷

As the dissertation basically is concerned with legal issues of the formation of electronic contracts, it must be kept in mind that the development of the Internet had a massive impetus for practicing business electronically worldwide. At the same time it is responsible for significant legal uncertainties that remain in relation to online contracting and thus, this is a very delicate area for legal practitioners. In the event of a contractual dispute, judges and other legal professionals are obliged to determine whether the contract in question was lawfully concluded according to the existing principles or not.

Due to the fact that e-commerce activities take place within a virtual world unlike a purchase in a high street shop²⁸, there are many aspects for which reason the investigation of the topic is of vital importance, as many of these answers or solutions are interwoven with the formation of online contracts:

- Lack of Confidence in Reliability of accurate transmission of crucial contractual elements during contract negotiations
- Lack of Confidence of Internet users in Validity of electronic contracts as to whether contracting online can be made with Legal Effect ²⁹
- Legal Uncertainty for consumers by not knowing what consumer rights apply to purchases over the Internet³⁰
- Legal Uncertainty for suppliers by not knowing what laws and regulations apply to their goods and services sold online³¹
- Distrust in digital environment about Enforcement of legal rights under existing contract laws³²
- Lack of Knowledge about matters of applicable law and jurisdiction³³

Hence, it is the goal of the dissertation to investigate some of these posed issues and reveal basic phenomena of the formation of e-commerce contracts in commercial matters in the United Kingdom. Therefore the dissertation assumes the existence of at least one commercial party on one contractual side of the transaction, while the other party may be a commercial party, or a consumer.

As the dissertation is concerned with the formation of electronic contracts under Common Law, it is to bear in mind that the jurisdiction of the United Kingdom is the initial point for all legal analyses and conclusions. Nevertheless, contract law principles of other jurisdictions and organisations will be consulted to provide helpful arguments and new perspectives in order to obtain a comprehensive quantity of information.

Consequently, the disclosed results are supposed to dispel justified uncertainties about the formation of electronic contracts in the minds of online users and legal practitioners. Moreover, it is a further goal to clarify approaches to be prepared to resolve legal issues which will certainly occur sooner or later.

[...]

¹ Carr, (2005), p.103.

² Takach, (2003), p.517.

³ Reed/Angel, (2007), p.197.

⁴ Bacchetta/Low/Mattoo/Schuknecht/Wager/Wehrens, (1998), p.5, quoted by Brownsword/Howells, (1999), p.288.

⁵ World Trade Organization Press Release 13.03.98: http://www.wto.org/english/news_e/pres98_e/pr96_e.htm (Last access on 08.07.08)

⁶ UNCITRAL Website 1996 Model Law on Electronic Commerce with Guide to Enactment:

http://www.uncitral.org/pdf/english/texts/electcom/05-89450_Ebook.pdf (Last access on 08.07.08)

⁷ Lodder & Kaspersen, (2002), p.3.

⁸ Todd, (2005), p.3.

⁹ Simpson Grierson’s x-tech group, (2002), p.3.

¹⁰ Simmons/Simmons, (2001), p.1; Todd, (2005), p.5.

¹¹ Todd, (2005), p.220-221.

¹² Clarke, (2005), p.xxvii.

¹³ Carr, (2005), p.103.

¹⁴ Internet World Stats – Usage and Population Statistics: http://www.internetworldstats.com/stats.htm (Last access on 21.11.08)

¹⁵ Internet World Stats – Usage and Population Statistics: http://www.internetworldstats.com/stats4.htm (Last access on 21.11.08)

¹⁶ Catchpole, (2001), p.2.

¹⁷ Spulber, (2008), p.216.

¹⁸ Lim, (2006), p.63.

¹⁹ Pitiyasak, (2003), p.17.

²⁰ Gooch, (1998), p.640.

²¹ Lim, (2006), p.63.

²² Walden/Hoernle, (2001), section 2 chapter 1.1.3.

²³ Zekos, (2007), p.27.

²⁴ Sachdeva, (2007), p.250.

²⁵ Oren, (2003), p.684.

²⁶ US decision at 952 F Supp, 1119 (W.D. Pa. 1997), at 1124; see Appendix.

²⁷ Tunkel/York – Mahony/Tunkel/Ball, (2000), p.74.

²⁸ Bainbridge, (2004), p.303.

²⁹ Hultmark Ramberg, (2001), p.429.

³⁰ European Commission’s Communication “A European Initiative in Electronic Commerce“, COM (1997) 157 – April 15, 1997, quoted by Michèle Rennie, (2000-2007), p.66.

³¹ European Commission’s Communication “A European Initiative in Electronic Commerce“, COM (1997) 157 – April 15, 1997, quoted by Michèle Rennie, (2000-2007), p.66.

³² Walden/Hoernle, (2001), chapter 1 number 7.

³³ Tunkel/York – Mahony/Tunkel/Ball, (2000), p.74.