Guide to Computer Law—Number 279
Practitioner’s Perspective
by Holly K. Towle, J.D.
Getting to “YES” in an Electronic Age
Which of the following is sufficient to form a contract?
Holly K. Towle is a
partner with Kirpatrick &
Lockhart Preston Gates
Ellis LLP (K&L Gates), an international law firm,
and chair of the firm’s E-merging Commerce
group. Holly is located in the firm’s Seattle
office and is the coauthor of The Law of
Electronic Commercial Transactions (2003,
A.S. Pratt & Sons). Holly.Towle@KLgates.com,
206-623-7580.
1. Shaking hands with the other party.
2. Signing the party’s name with pen and ink, or electronically.
3. Including this statement on a website: “By using this website,
you agree to the Terms and Conditions (which are incorporated).”
Or this statement: “By breathing, you agree to _____.”
4. Incorporating by reference into a signed paper contract, 35 terms
sitting on a website.
The legal question is whether any of the above manifests assent to a contract
or particular terms, and if so, whether that contract includes all terms that the
parties think it includes. Some of the legal issues relevant in an electronic age
are the subject of this column.
Most companies are well-versed in rules regarding contract formation because
those rules have been around for years. What many do not realize is that
there are new statutory rules for transactions done electronically and courts
are also creating rules. More importantly, even traditional rules often need to
be applied differently in an electronic context. Here are some examples.
Statute of Frauds. Let’s start with the well known and exception-riddled
concept of a statute of frauds or the like. We refer to statutes that void all or
part of a contract if it is not “signed by the party to be bound.” Examples in
some states are contracts “not to be performed in one year,” contracts exceeding
a certain dollar amount (such as $500 for UCC Article 2 sales of goods),
guaranties, contracts to pay certain commissions, and my personal favorite, an
undertaking “made upon consideration of marriage, except mutual promises
to marry” (okay, maybe that one is a Washington quirk). There are lots more.
Now take No. 1 (regarding hand shake contracts) from the list in No. 1-4
above, and ask whether that contract is “signed” if a statute of frauds happens
to apply to it? The answer is no. There would be a contract but for the
statute of frauds, but there is no “signature.” There’s nothing new about
that, so let’s take No. 2, signing electronically. The fact that the signature
is electronic no longer matters in most (but not all) cases, given the federal
Electronic Signatures in Global and National Commerce Act, the Uniform
Electronic Transactions Act enacted in about 46 states, and other state eenabling legislation. But that just means the signature can be electronic. There
is still a question of whether there is a signature.
Practitioner’s Perspective appears periodically
in the monthly Report Letter of the CCH Guide to
Computer Law. Various practitioners provideindepth analyses of significant issues and trends.
Which brings us to No. 3. Is use or breathing a signature? They are both acts
and, indeed, at least usage is an act that can manifest assent to a contract. But
is either a “signature?” Arguments can be made under some of the new laws
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that use is a signature if coupled with an identifying process,
but it’s not yet a safe bet. In short, if a law requires a signature
it is best to get a clear one, electronically or otherwise. Does
that mean an encrypted “digital” signature? No, and a future
column will deal with pros and cons of digital signatures.
Manifestations of Assent. Putting aside statutes of frauds,
contract creation under U.S. law ordinarily entails one
person making a proposal to another whose acceptance can
be by words, actions, or otherwise. This is the traditional
offer–acceptance model. The contract exists when the parties
objectively manifest agreement to it.
Can they do that
electronically? Yes. This question has been the subject of case
law concluding that manifestations of assent include electronic
manifestations. But stating that conclusion is only half the story
and many other factors apply. For example, timing matters.
Thus, if damage occurs before there is a manifestation of assent
to a contract limiting damages or selecting a judicial or arbitral
forum, the contract can be irrelevant to the pre-contract harm.
Presentation also matters. If statement No. 3 regarding usage is
made in a way that an ordinary user might not notice it, some
courts find that no contract is formed.
To skip to the bottom line, courts are looking for knowledge
by the user that a contract is sought and for an intentional
act indicating consent to that contract. Thus, the breathing
example in No. 3 will not work: it is not really an intentional
act evidencing assent because whether or not the user desires
to make a contract, he or she must breathe! The choice of an
appropriate act can get tricky in business-to-business settings
where the act chosen to be consent is one that courts have
long ignored in, say, the traditional “battle of forms” setting.
Examples would be “if you pay my invoice, that will be your
consent to all of my terms;” or “if you ship in response to my
purchase order, that will be your consent to all of my terms.”
In that setting, it may be advisable to consider a different act.
Additional factors can affect manifestations of assent – the
point is that there are rules and not everyone is getting them
right. The easiest way to get at the rules is to look at the
Uniform Computer Information Transactions Act (enacted in
VA and MD), which codifies the basics but also goes beyond
them. The common law rule can be found in Section 19 of
the Restatement (Second) of Contracts – the principles are
the same but UCITA tends to contain the highest common
denominator. Also helpful are current cases in this area
– those are harder to find but for a good start, read Specht v.
Netscape Communications Corp., 306 F. 3d 17 (2d Cir. 2002) [10
CCH COMPUTER CASES ¶48,400].
Traditional Contract Rules. Various contract laws impose special
requirements on some terms such as by requiring a particular
term to be conspicuous (e.g., a disclaimer of a merchantability
warranty) or to be disclosed in a certain way. Thus, No. 1, an
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oral contract documented by a hand-shake, can lead to mischief
because no one can prove whether those laws were met.
How does one comply in an electronic realm? For consumer
disclosures traditionally required to be delivered on paper, federal
law (E-SIGN) now requires special disclosures to be made and
consumer consent obtained before that “paper” disclosure can
be delivered electronically. With respect to federal disclosures,
E-SIGN supersedes state law, even UETA (but note, UETA has
its own consumer rules that can apply to state disclosures). For
other consumer and commercial contracts, several laws require
certain terms to conspicuous. There are ways to do this and one
is to force the user to scroll by a term that is in conspicuous type.
But no law forces a party to leaf through every page of a contract
in order to see a bolded term on page 10, so why should a forced
scroll be required? It’s not.
The point is that contract law requires certain terms to be
conspicuous and one needs to consider how to do that
electronically. In example No. 4 (incorporation by reference
of 35 terms), if term No. 32 must be conspicuous, will a court
so deem it when a copy was not available at signing (assume
the parties are signing the paper in a coffee shop where neither
has access to a computer)? Example No. 3 assumes computer
usage and then links to the incorporated terms. Handled
appropriately, incorporation can work in both situations. Our
point is that new media creates a need for new thinking. There
are also new rules, e.g., the Federal Trade Commission staff
has a “guide” on its view of linking etc. in the context of FTC
advertising rules, and both UCITA and proposed revisions
to UCC Articles 1 and 2 include rules regarding what will
be conspicuous in an electronic realm. There are significant
problems with the proposed revisions to the UCC so this is not
an argument to adopt them – but looking at any of these laws,
proposed or otherwise, will illustrate some of the issues.
Attribution. Forming a contract correctly with all intended
terms won’t help much if the contract is made with the wrong
person. “Wrong” could include an agent without appropriate
authority, an identity thief, a minor, and so on. Accordingly,
it is critical to develop an attribution procedure and/or to
obtain an attribution agreement allowing you to “attribute”
the contract made to the person with whom you intended
to make it. There is no one-size-fits-all way to do this and
attribution procedures work best when tailored to supplement
procedures you are already using.
New laws reference the need for adequate attribution, but most
do not explain or dictate how to achieve it. To the contrary, some
simply require that it be achieved, such as by requiring you to have
a “high degree of confidence” that you are, indeed, dealing with
the right person, while at the same time failing to tell you how to
obtain that confidence. Other laws (e.g., one applicable to credit
reporting agencies) restrict collection of identifying information,
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such as to “only as much personally identifiable information as is
reasonably necessary to properly identify the consumer.” Those
kinds of constructs, of course, beg the question. The tension
here is created by privacy/data protection laws. Between the
two types of laws, i.e., attribution and privacy/data protection,
there is a collision waiting to happen. The more data that is
collected to achieve the necessary or advisable level of certainty
and/or to avoid identity theft, the more likely customers will
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perceive or claim an invasion of privacy, or the more likely that
data requiring special handling will be collected. This is a new
tension in the law that is only beginning to be identified and is a
long way from being resolved.
There are many rules relating to getting to “yes” in
an electronic age and this column is intended to help
you get there.