Contracts

Under construction…

CONTRACT FORMATION

One of the risks in engaging in online commerce is the risk that a contract may not be enforceable either because:-

1. there hasn’t been a valid offer
2. the offer hasn’t been properly accepted
3. the acceptance of the offer hasn’t been properly communicated to the offeror.

There are issues concerning where and when a contract is formed (see jurisdiction).

There are also issues to consider relating to:-

* the validity and extent of operation of the terms of a contract regarding payment
*  details relating to the delivery of goods and/or the performance of services
* remedies available to a party should one party fail to honour their contractual
promises
* recourse a party may have in the event products sold are either not fit for
their purpose or through product defects cause injury.

ELEMENTS OF A VALID CONTRACT

Although Australian law may not necessarily govern a contract entered into by an Australian internet user or e-commerce merchant, it is impractical to examine the law of contract applicable to all countries.

Therefore the focus in this section will be on  examining the requirements necessary to form a valid and legally enforceable contract under Australian law.

There are basic rules which  apply in contract law whether one is dealing with internet contracts or paper based contracts.

The following are the elements of a valid contract under Australian common law:-

1.  A valid contract requires an offer and acceptance
2. Two or more parties legally capable of entering into a contract
3. Certainty of  terms
4. Valuable consideration
5. An intention to create legal relations

When setting up an effective means of doing business and conducting transactions online, whether through email or through a website, the above elements of contract law should be addressed to ensure you are entering into a legally binding relationship.

Whilst some of the elements, such as consideration and an intention to create legally binding relationships apply irrespective of the medium in which a contract is formed, the issue of offer and acceptance need to be examined more closely when dealing in an online environment.

THE LEGAL REQUIREMENTS OF CONTRACT FORMATION

THERE MUST BE A VALID OFFER

You should review your web display of products and/or services to ensure there is a legally valid offer available which is capable of a valid acceptance under contract law. In determining whether a particular web display constitutes a valid legal offer, the display should be assessed against basic common law contract principles.  An offer is a clear statement by a person or entity to the effect that they wish to do business and are prepared to enter into a legally binding contract with another person/s, based on specific terms and conditions.

The offer is the starting point for determining what the terms and conditions of the contract will eventually be, even though it may not necessarily turn out to be the same in substance as the final contract entered into between two parties online.

It is important to ensure what you convey in a web display constitutes a valid offer in the online environment as distinguished from a mere invitation to treat. The offer may be conveyed through material that appears somewhere on your website inviting businesses or individuals, or alternatively through mass marketed emails to enter into a contract.

TERMS OF AN OFFER

Offers must contain a very clear statement as to what all the relevant terms and conditions  of a contract are.  Some online businesses are tempted to transact in very casual terms to make offers seem more attractive to the prospective buyer. The offeror doesn’t want to couch in legalese.

The substance of the offer, as conveyed by the information must be clear, accurate and easily accessible. It should be provided in a way that gives consumers an adequate opportunity to review it fully prior to entering into a transaction. A consumer should also be able to retain a copy of the information conveyed by the offer.

The information should include a prominently displayed single-figure total minimum price for the product and/or service offered.  All compulsory charges such as delivery, postage and handling charges should be included in this price. This does not preclude a business itemising the total costs to the consumer collected by the business. However it is important to disclose the total cost of the purchase to the offeree.

Where the total cost of a transaction can’t be worked out with precision in advance, the information supplied should state this. You should then provide an explanation of the method by which you have calculated the total cost, including any recurring costs.

Where applicable, the information provided to consumers should also include disclosure of any optional ongoing costs, fees and charges. Where an offer is limited, the period for which the offer is limited to, time zone information, and any other restrictions, limitations or conditions of purchase. Some of these limitations might be geographical limitations or parental/guidance approval requirements for sales to minors.

Other details which should be displayed clearly  include:-

* terms of delivery
* any mandatory health and safety warnings
* conditions surrounding terminations of contract
* conditions relating to returns, exchanges, cancellations and refunds
* any relevant cooling off periods
* explicit warranty provisions and;
* provisions regarding after sales service.

Whilst the above may not necessarily be required by law, it is considered best practice in e-commerce, and the greater transparency, the more likely you are to promote user confidence and trust in purchasing online.

OFFERS CONTAINED WITHIN AN EMAIL

Where an offer is contained within an email, the email should state  all  terms and conditions, or if appearing on a website, a statement of all terms and conditions applicable. Alternatively, instead of including all terms and conditions within an email, you could include a facility such that the user can click on a hyperlink which generates a dialogue box containing the terms and conditions.

The user should be forced to read through those terms and conditions or at least pretend they did.  Sometimes website owners will ensure there is a time delay  placed on the acceptance of the offer to afford the user the opportunity to peruse all terms and conditions, followed by an opportunity to either accept or ‘decline‘ the offer.   It is critical to make it very clear to the user that there are two options available.

TO WHOM IS THE OFFER MADE?

It is important to remember that the electronic display of an offer over the internet is actually made to the world at large given that the web is accessible to the world.

Unless you wish to deal with the world at large, you must state in the terms and conditions of your offer any geographic or demographic restrictions which restrict the acceptance of the offer by an offeree. Set out all conditions or restrictions applying to whom the offer is made and by home it may be accepted.  

If you don’t consider this in advance, you will be deemed to be making an offer to the world at large and will lose control over who you are liable to end up in a legally binding contract with.

There may be some types of transactions which are legal within some jurisdictions and illegal in others, including but not limited to laws which ensure that you take reasonable steps to ensure you avoid entering into transactions with minors.

OFFER DISTINGUISHED FROM AN INVITATION TO TREAT

There has been a lot of case law which has evolved distinguishing between what is legally an offer as distinct from a mere  invitation to treat, an issue which often arises in the context of advertisements.

Whether a web display is an offer to enter into a legally binding agreement or merely an invitation to treat or negotiate towards the making of a legally binding agreement is important. This is because of the potential breadth of the offer and  people who could accept your offers within a very short space of time and in very large numbers over a medium such as the internet.  You should therefore make it clear whether your web displays are intended to constitute legal offers or invitations to treat.

REVOCATION OF AN OFFER

A revocation of an offer is only effective when the offer which was made or potentially made has been effectively communicated to the offeree. In the online environment, when making offers through a website, you need to ensure any offers are not only actually revoked by removal of the offer from your website .  In addition, you also need to make sure there is a positive statement on the website  to the effect that the offer has been revoked if you wish to revoke it. 

You should indicate clearly what time this revocation takes effect so it is not  capable of being accepted from the time specified. Similarly with respect to offers which are made via email to a mass market or even a small number of emails, the revocation must be communicated to the offerees. This can be done by the sending of  a supplementary email.

A VALID ACCEPTANCE – CLICKWRAP AND BROWSEWRAP AGREEMENTS

Acceptance is an unqualified assent to the conditions of an offer. An acceptance can be contrasted with a counter-offer which is akin to a partial, conditional acceptance or a rejection of an offer.

This means there are further  terms and conditions which are put back to the offeror by the offeree for further negotiation prior to a contract being perfected.

Generally, acceptance of an offer is achieved within a web environment via a clickwrap or browsewrap acceptance, where there is either a set of terms and conditions either described directly within an email or on a website,  or access to which is granted through a link or dialogue box providing for an active acceptance of those conditions by the user.

It is very important to give the user the option not to accept the offer and by selecting this option ensure you transport the offeree to somewhere else on the website.   Having this facility will prevent disputes arising by users alleging they inadvertently accepted terms and conditions.

A poorly structured website  could lead to a purchaser entering an agreement without having the opportunity to see the terms before their purchase, which is why the customer is usually forced to view the terms before they can proceed with a purchase. Frequently questions will arise as to whether there is any scope for attacking a browsewrap agreement in the event of a subsequent dispute.

If terms are easy to skip over, for example if the ‘accept‘ button appears at the top of a long page of terms so the user can proceed with acceptance without reading them,  the buyer might argue that the seller did not take reasonable steps to ensure the terms were brought to the buyer’s attention. This argument may also be made where the terms are so long or so difficult to read, for instance in very small font, that a reasonable person couldn’t be expected to be aware of them.

When the buyer clicks on a button to submit an offer it should be clear that the contract will be subject to the displayed terms.  Therefore it is prudent to ensure the terms and conditions are viewed as close as possible to when the offer is made, reducing the chances of any argument as to whether it was no longer clear by the time the contract was entered into that the terms were supposed to apply.

Some countries recognise that contracts of adhesion , when a party has no choice but to enter into the contract on terms offered, should be strictly interpreted against the person trying to enforce them. This approach emerges from Australian law for example, where if there is any ambiguity inherent in a term of a contract it should be resolved against the party seeking to enforce the term.

LEGAL ENFORCEABILITY OF CLICKWRAP AGREEMENTS

Doubts about the enforceability of clickwrap agreements were discussed in the us case of  Hotmail Corporation v Van Money Pie. With reluctance the US Court recognised the validity of a clickwrap contract in giving rise to legal obligations. The take it or leave it nature of online contracts, particular consumer contracts, renders clickwrap contracts vulnerable to attack on the grounds or unreasonableness or unconscionability.

WHEN AN OFFER IS ACCEPTED

It needs to be clear not only how an offer is accepted but also which particular electronic system should be used for the acceptance of an offer. It is possible that where you have electronic systems or e-commerce systems, web servers can actually accept offers and transact business between themselves.

It is certainly possible from a technical point of view and quite possible that contracts formed will be legally effective.  Web server acceptance,  particularly in the context of electronic ordering systems, is  analogous to what happens in the offline environment in the ‘battle of the forms’ cases where there can often be an issue as to whose terms and conditions actually apply to a contract.

Therefore web server acceptance usually takes the form of an invitation to treat being made by the supplier representing  an invitation to transact on certain terms.  That invitation  is usually enacted by a purchase order, being in a prescribed form.

When that purchase order is sent electronically and automatically accepted by the suppliers web server, at that point there is an acceptance of that order by the supplier.  If you were the supplier it would be important to make it very clear  from the time the invitation to treat is issued that there are particular terms and conditions which will apply and be accepted in such a way that they will prevail over any other terms and conditions which the customer may purport to put forward.

WHERE IS A CONTRACT FORMED ON THE INTERNET

In general law a contract is formed not at the point at which the offer is accepted, but at the point at which the acceptance of the offer is communicated to the offeror. That is usually not difficult to ascertain in the offline environment, although there are a couple of exceptions such as the postal acceptance rule which can determine when acceptance takes place.

In the online environment it is often quite difficult to determine when the offeror obtains knowledge of the acceptance of the offer, particularly when acceptances  are made by electronic systems which may be remote from the parties.

They may be either physically remote from the parties or remote in time   so nobody is actually looking at a screen and monitoring an ordering system in order to monitor when an offer is actually accepted or the email is sent through communicating an  acceptance.

That will often be a critical issue where parties are in a dispute regarding when a contract is formed, particularly where a party is trying to get out of the contract or subsequently renege on it.

THE ELECTRONIC TRANSACTIONS ACT 1999

The legislation provides some answers to questions regarding when and where a contract is formed, provided a website operation’s systems are set up in the correct manner so that those systems are clearly designated.

Normally that is regulated by a jurisdictional clause but in the absence of such a clause the issue may have to be resolved by very complex conflict of law rules.

A good jurisdictional clause should designate in what jurisdiction the contract is formed in addition to specifying the electronic system by which the contract is actually formed, or by which the acceptance is actually communicated by the offeree. 

In the absence of a jurisdiction clause you then have to look at traditional contractual principles which hold that the time and place in which  acceptance is received is the law which will govern the contract.    It is necessary to either use  jurisdictional clauses and to a lesser extent the electronic transactions legislation principles to eliminate this possibility.

The Electronic Transactions Act 1999 was enacted to support and encourage the development of electronic commerce in Australia, containing rules which apply to the interpretation of other legislation.  The Act states that a transaction under a law of the Commonwealth won’t be invalid simply because it was conducted by the use of electronic communications. The Electronic Transactions Act allows any of the following requirements  to be fulfilled in electronic form:-

1.  Giving information in writing
2.  Providing a handwritten signature
3.  Producing a document in material form, and
4.  Recording or retaining information.

The rules provide for when a message is despatched, stating that it is despatched when it enters an electronic system outside the control of the originator. The time and place of the dispatch and receipt of electronic communications is governed by s14.  The legislation defines a time and place for both dispatch and receipt of electronic communications.

Therefore if you were to send an email to a person, as it soon as it leaves your web server you are deemed to have sent that email. There is a period between it being sent and being received when it is out in cyberspace. It is not deemed to have been received until it enters a system which is designated  by the addressee or which comes to the attention of the addressee.  A designated system, when dealing with contract formation, could be as simple as a web address or an email address or the method of simply scrolling through a set of terms and conditions and clicking on the ‘accept‘ button.

What is implied is that is there are web servers and email servers sitting behind the infrastructure which formulate or designate an electronic system. Provided it is clear as to what that methodology will be you, can then objectively determine when those electronic messages  entered the electronic system that has been designated. This will enable you to determine when they have been received.

However if you don’t designate a particular electronic system, and there is  no methodology designated for acceptance of an offer the following could occur.

A person may send you an email in which case you will  have to determine when that particular communication came to the attention of the addressee. This involves engaging in a  practical exercise of finding out when they actually turned on their computer and looked at their email or the  website. Receipt into a mailbox or a web server is generally sufficient provided you comply with these general principles.

There are also rules about the place of despatch and receipt which  recognises the fact that electronic systems are quite remote from the locations in which the parties either do business or reside. The rules state that the place where a particular message is  despatched or received is the place of business of the person who  either sent it or received it. Where a business has one place of business this is straightforward.

However where they have multiple places of business, it will be the place of business which is most closely connected with the particular transaction.  Where it is difficult to determine where that is,  it will be the principal place of business.  Where there is no place of business, it is their residence.  All of these kinds of  problems can easily be overcome if the documentation contains clear information as to what the relevant designated systems are.

One thought on “Contracts

  1. Pingback: Establishing Your Ecommerce Website | Pace Legal Intellectual Property

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>