Patrick McGrath

BA,LLB(Hons) MComLaw(Hons)
Patrick McGrath

Phone +64 9 300 1257
Mobile +64 21 619 540
patrick@mcgrathlaw.co.nz

Vulcan Building Chambers
Level 4 Vulcan Buildings
Cnr Vulcan Lane and
Queen St

PO Box 3320
Auckland 1140
New Zealand

Online contracting and the impact of the electronic transactions act

Paper presented for the Auckland District Law Society, March 2003

1. ONLINE CONTRACT FORMATION

Online contracting refers to any situation where electronic methods are used in the course of reaching an enforceable agreement. For example, a purchaser goes on to the amazon.com website and purchases a book or music CD; a prospective client logs on to a law firm's website then contacts a member of the firm by email and an exchange of emails follows covering the terms upon which advice will be provided; shares are bought and sold using computers which are programmed to respond automatically to market events by placing by or sell orders; buyers and sellers go on to an auction site, such as ebay.com where they buy and sell goods via auction conducted online.

A contract is formed at the time and place of acceptance. Establishing the time and place of acceptance may be crucial. For instance, if parties agree to buy goods at market price "as at the formation of this contract" determining the time of contract formation will be necessary. As a further example, consider a purchase of shares by email. The price paid for shares is normally set at the time of formation of the contract. The price of the shares may change dramatically between the time the seller emails his or her acceptance of the buyer's offer and actual receipt by the buyer. Unfortunately, the ETA does not clarify at which point the contract was formed. The default rules in ss9-13 do, however, clarify when and where electronic communications are dispatched and received, making it easier to apply the rules as to contract formation discussed below.

Deciding where acceptance takes place and, therefore, where the contract is formed, may be an important factor in deciding which country's courts will have jurisdiction over a dispute, and whose law will apply, where the parties are based in different countries. Rule 219(b) of the High Court Rules allows New Zealand proceedings to be served on a defendant overseas if the action is based on a contract made in New Zealand. Whose law is to apply will be an important factor in deciding whether or not the New Zealand courts will be the proper forum for resolving the dispute. In contractual disputes, the law to be applied will be the law of the country which has the most real connection to the transaction, normally the country where the contract was formed, provided the contract does not specify another country's laws.

Online contracts are subject to the same rules as to contract formation as contracts made orally or in writing (on paper). There must be:

· Intention to create legal relations;

· Offer and acceptance;

· Valuable consideration (unless the agreement is in the form of a deed or is one for the international sale of goods governed by the Vienna Convention ;

· Certainty of terms.

The contract will be unenforceable or invalid if it is:

· Illegal;

· Made under duress; or

· Entered into by one or more parties with insufficient legal capacity, such as a minor.

2. INTENTION TO CREATE LEGAL RELATIONS

With the exception of autonomous contracts (such as the share trading example referred to above) electronic contracting presents no special problems. In the case of autonomous transactions the question is, how can the requirement for intention be satisfied where automated bargaining software concludes contracts on behalf of buyer and seller without either of them having actual knowledge of the terms of the contract at the time? Could a party dissatisfied with the bargain avoid liability on that basis?

The ETA does not assist with this issue and this is one point of difference with the UNCITRAL Model Law, which contains provisions to the effect that a data message is deemed to be that of the originator if it was sent by an information system programmed by, or on behalf of, the originator to operate automatically, and in those circumstances the addressee is entitled to regard the data message received as being what the originator intended to send, and to act on that assumption. Without provisions in the ETA dealing with this issue, parties need to have agreements in place specifying the circumstances in which a party will be bound. Otherwise, they will be subject to the uncertainty of the common law in the event of a dispute.

3. OFFER AND ACCEPTANCE

The rules as to offer and acceptance are common law rules, except in the case of sales of goods covered by the Sale of Goods (United Nations Convention) Act 1994, which codifies the rules as to contract formation with regard to international sales of goods. The Act applies to international sales of non-consumer goods between parties based in countries which are parties to the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention). More than half of our trading partners are part of the Vienna Convention. In most respects, these rules are the same as the common law rules set out below.

a) Offer
In order to be binding, an offer made electronically (or otherwise) must be a definite undertaking by the offeror to the offeree setting out the terms on which the offeror is prepared to deal. An offer must be made with the intention that it will be binding as soon as it is accepted. Advertisements, tenders and the display of goods in shop windows are normally regarded as invitations to treat (invitations to the other party to make an offer) rather than offers. However, if an advertisement indicates that the advertiser agrees to be bound by its terms as soon as a customer shows willingness to deal on those terms, the advertisement will be regarded as an offer.

Where a consumer finds goods or services advertised for sale on a seller's website and the consumer goes through the seller's stipulated payment procedure, the web advertisement for the product is likely to be regarded as an offer, rather than an invitation to treat. Most e-tailers prefer not to leave the matter to be decided according to an analysis in each case of the parties' intentions inferred from conduct. Most websites include terms and conditions which state when the contract is formed. Normally, the purchaser's acts of filling out an order form and providing credit card details are described as an offer, which the seller accepts by email.

b) Revocation of Offer
An offer may be revoked at any time before it is accepted. The revocation must be communicated to the offeree before it is effective. However, the revocation need not be communicated directly to the offeree, it can be passed to an agent with authority to receive it. In the context of email, it is unlikely that the offeree's Internet Service Provider would be regarded as having actual, implied or ostensible authority as the offeree's agent.

c) Acceptance
Once an offer has been made, it may be accepted or rejected by the other party (assuming the offer is not revoked first). The contract is formed at the time and place of acceptance. The offer must be accepted in full or it will be treated as a rejection or counter-offer. Most purchases via website are structured in such a way that negotiation is not possible. In those cases, if a purchaser wishes to negotiate he or she will have to do so by email, phone or otherwise.

d) Battle of forms
Battle of forms cases can occur with electronic contracting, just as they can using traditional methods of contracting. Battle of forms cases typically involve customer and supplier sending each other documents in the course of a transaction, such as quotations, order forms, delivery notes and other acknowledgments, some with the purchaser's standard terms and conditions on the reverse and some with the supplier's standard terms and conditions. Often, the party who fires the last shot prevails in having that party's terms and conditions apply to the transaction. The Sale of Goods (UN Convention) Act 1994 provides to the effect that an "acceptance" containing additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, and the terms of the contract then become the terms of the offer with the modifications contained in the acceptance, unless the offeror objects to the modifications without undue delay.

With website sales there will not normally be a battle of forms problem, since the website will normally be structured without giving the purchaser the opportunity to proffer its standard terms of purchase to the seller. However, in contracts concluded by email, for instance, battle of forms problems could arise.

The parties can avoid battle of forms problems by entering into a prior contract specific to that issue, or as one of the terms of an overall trading partner agreement.

e) Communication of Acceptance
Subject to the following exceptions, an acceptance must be communicated to the offeror by either bringing it personally to the offeror's attention, making it available for the offeror to read in the ordinary course of business, or communicating it to an agent having authority to receive it. The exceptions are:

· Where the postal acceptance rule applies ie where it is appropriate to send an acceptance by post, acceptance is complete as soon as the letter is put into the postal system by either placing it in a mailbox or delivering it directly to a postal service employee or agent in the course of his or her duty or authority;

· In the case of contracts for the sale of goods which are governed by the Sale of Goods (United Nations Convention) Act 1994, a practice as to acceptance may have developed between the parties. A further indication of acceptance according to that practice will be effective, even if the acceptance is not received by the offeror. For example, if a practice develops whereby the supplier accepts the customer's terms by dispatching goods upon receipt of an order, the act of dispatching the goods is the acceptance and the contract is formed at that point;

· Where the offer stipulates that some act on the part of the offeree will amount to acceptance, as in the case of a unilateral contract.

The offeror can specify that only a particular mode of acceptance may be used. If so, the offeree must use that mode of acceptance, even if some other mode would be more advantageous to the offeror. If, however, the offeror does not make it clear that the specified mode of acceptance is the only one which will be recognised, the offeree can use some other mode provided it is no less advantageous to the offeror. Further, if a mode of acceptance is stipulated that that is clearly for the benefit of the offeree, another mode may be adopted provided this does not act to the detriment of the offeror.

4. IMPACT OF THE ETA ON ONLINE CONTRACTING

a) Section 8 - Validity of Information
Section 8 confirms that contracts can be made electronically, just as they can orally, in person or over the telephone, and on paper. Section 8 provides:

"To avoid doubt, information is not denied legal effect solely because it is -

(a) in electronic form or is in an electronic communication;

(b) referred to in an electronic communication that is intended to give rise to that legal effect."

Although it has been assumed in several New Zealand cases that contracts can be made electronically , and although business people and consumers have gone ahead and used electronic contracting widely, the validity of such contracts has not previously been confirmed.

Section 8(b) refers to the situation where information, such as terms and conditions, is not displayed on a web page but is referred to on the web page and is available by clicking on the reference and moving by way of hyperlink to the full "terms and conditions" web page. Although s8(b) confirms that terms and conditions referenced in this way are not denied legal effect solely because this method is used, the party seeking to rely on the terms and conditions will need to show that they have been adequately brought to the attention of the other party.

b) Contract formation and the default rules
The rules as to contract formation referred to above are unaffected by the ETA. They are, however, made easier to apply by virtue of the default rules as to dispatch and receipt of electronic communications contained in ss9-13.

Take, for example, the postal acceptance rule. The ETA does not decide whether or not the postal acceptance rule applies to email. If it does, acceptance takes place at the time and place where the offeree's email is dispatched. Under s10, that is when the email first enters an information system outside the control of the originator. This will normally be when the email is sent from the user's computer to the server of the Internet service provider. Under s12, the place of dispatch and, therefore, the place of formation of the contract, will be the offeree's place of business.

If the postal rule does not apply, in which case the contract is formed where and when the acceptance is received by the offeror, under s11 this is when the email reaches the offeror's designated information system or, if there has been no such designation, when the email comes to the attention of the offeror. Under s13, the offeree's email will be received, and the contract formed, at the offeror's place of business.

The postal rule does not apply to sales covered by the Sale of Goods (UN Convention) Act 1994, which provides that acceptance is effective at the moment the indication of assent reaches the offeror.

c) Legal requirements that contracts be in writing and signed
The ETA's provisions enabling legal requirements for writing and signatures to be met electronically do not apply to the majority of contracts. They only apply to those contracts where a statute provides that the contract must be in writing or signed. Examples are:

· Section 2 of the Contracts Enforcement Act 1956 which provides that contracts for the sale of land and guarantees are unenforceable unless they are in writing and signed; and

· Section 4 of the Property Law Act 1952 which requires that deeds be signed and witnessed.

However, instruments in relation to land transactions which are required to be registered with the Registrar-General of Land are excluded from the ETA. This is because these are dealt with separately under legislation establishing the Landonline electronic lodgement system for land title transactions (discussed below).

Contracts required to be in writing can now be made in electronic form provided the information in the contract is "readily accessible so as to be useable for subsequent reference" as required by s18. This is subject to s16 which provides that the ETA's provisions as to writing and signatures do not require any person to use or accept information in electronic form without consent.

As to the meaning of the words "readily accessible so as to be useable for subsequent reference", the Guide to the Model Law states that "accessible" is meant to imply that information in the form of computer data should be readable and interpretable, and that the software that might be necessary to render such information readable should be retained. The word "useable" is not intended to cover only human use but also computer processing, and the words "subsequent reference" were preferred to notions such as "durability" or "non-alterability", which it was thought would create too harsh standards.

d) Electronic signatures
The ETA allows legal requirements that contracts be signed to be met using electronic signatures provided the electronic signature:

· Adequately identifies the signatory and adequately indicates the signatory's approval of the information to which the signature relates; and

· Is as reliable as is appropriate given the purpose for which, and the circumstances in which the signature is required.

Again, this is subject to the proviso that nobody who is entitled to receive signed information is required to accept an electronic signature unless they consent.

The definition of "electronic signature" is wide. Section 5 provides:

"electronic signature, in relation to information in electronic form, means a method used to identify a person and to indicate that person's approval of that information".

This definition could include anything from an electronic facsimile of a hand-written signature through to an electronic signature provided by a certification authority using encryption technology, or a biometric method of confirming identity.

Section 24 creates a presumption that an electronic signature is as reliable as is appropriate if:

· The means of creating the electronic signature is linked to the signatory and to no other person; and

· The means of creating the electronic signature was under the control of the signatory and of no other person; and

· Any alteration to the electronic signature made after the time of signing is detectable; and

· Where the purpose of the legal requirement for a signature is to provide assurance as to the integrity of the information to which it relates, any alteration made to that information after the time of signing is detectable.

These requirements appear to have been drafted with digital signatures in mind and will encourage those tempted to sign contracts electronically to use digital certificates in order to have some assurance that the ETA's requirements will be met.

Digital certificates can be applied to email, Internet transactions, web pages and other on-line transactions. They are used to verify the senders of communications, verify that the message content has not been altered between the time it was sent and received, and make it difficult for the signatory to repudiate the content and authorship of the message. Digital signatures involve the use of cryptography - the process by which information written in plain text is turned into code (encryption) or code is turned back into plain text (decryption). The sender of a message holds a private key to sign and encrypt the message, which is then sent to a recipient holding a public key which corresponds to the sender's private key, which the recipient uses to decrypt the message into readable form. The fact that the public key is able to decrypt the message proves that it was signed by the person holding the private key and that the message has not been altered in the meantime. It is the function of certification authorities to confirm that the public key relevant to the digital certificate is associated with the sender. Certification authorities do this with identity checks (eg using passports or other photo identification) at the time public keys are issued to persons who then advertise the public key against their name and make it available to persons to whom they wish to send encrypted messages and digital certificates.

The digital certificate market is unregulated and the private companies which act as certification authorities may use agreements with subscribers for digital signatures which limit or exclude the certification authority's liability and some also try to create an on-line contract with the relying party when the relying party goes on to the certification authority's website to check that a certificate has not been revoked, which agreement also limits or excludes liability.

Ironically, around the time the ETA was passed, one of the two certification authorities in New Zealand, Baycorp Advantage, announced that it was exiting the digital certificate market in New Zealand. They were, unsurprisingly, not expecting the ETA to significantly increase the usage of digital certificates in New Zealand. Baycorp Advantage's customers were mainly government departments, who reportedly were looking into supplying digital certificates themselves, or using Australian suppliers.

The only other certification authority in New Zealand is the BeTRUSTed service run by PricewaterhouseCoopers. BeTRUSTed has only one customer in New Zealand, Land Information New Zealand, which requires the use of digital certificates as part of its Landonline project. Landonline involves conveyancers carrying out routine conveyancing transactions and carrying out registration on-line. Transfers, mortgages and discharges of mortgage can be prepared in an electronic workspace and electronically signed by the conveyancers and the "eDealing" can then be lodged with LINZ for registration which is almost instantaneous. Changes to the title can be searched immediately following registration. As part of the process, conveyancing practitioners are issued with digital certificates and accompanying passwords authorising them to access the system and sign the necessary instruments.

5. CONCLUSION

The ETA's lack of specific guidelines as to how the provisions for writing and signatures are to be fulfilled is likely to mean that parties will not rush to replace paper-based methods of contracting with electronic methods. There is no requirement to do so in those few cases where statutes require that contracts be in writing and signed. In the vast majority of situations where there is no statutory requirement for writing or signature, the ETA's provisions will not apply at all (other than the validity of information provision, s8, and the default rules as to dispatch and receipt, ss9-13), leaving parties to the uncertainty of case law to establish whether or not any electronic methods they choose as to writing and signatures are sufficient. In the meantime, they would be well advised to agree on any methods of electronic writing and signatures they wish to use, the technologies to be used and the rules around that.

Patrick McGrath, Auckland