Formation of Contracts
Can a contract be legally created by electronic communications between two parties' computers? The answer is probably yes, even if there is only an offer sent by email and an acceptance of that offer returned in the same manner. There is no reason to believe that the courts will not enforce such a contract unless the original offer stipulates that it cannot be accepted by electronic communication. There are, however, several important legal issues in this scenario.
When is a binding contract made?
When will an acceptance of an offer have been made if the acceptance is sent by email? This is critical because an offer can be revoked only until the point at which it has been accepted (i.e., until the contract is formed). The courts have not yet stated a general rule as to when email acceptances are considered received. This illustrates the importance of specifying limits on how and when your offer can be accepted. These limits must be specified when you are initially making an offer. For example, if you are sending an offer by email, in the offer you should state if it can be accepted only by email to a specified email address, and by what date and time you must have received the acceptance for it to be effective. It is also important to know where the offer is made and what country's laws will apply (See Doing Business on the Internet by John Paul Janssens).
What about contracts that must be signed and in writing?
Some oral contracts can be legally valid. Actually proving the existence of the contract or its terms may be more difficult. It is therefore useful to have some permanent record of the contract and its terms. In addition, some contracts are not enforceable unless they are signed and in writing. In particular, the Statute of Frauds (an old English law from 1677 still in effect in Alberta and some other provinces) requires some contracts to be in writing. Such contracts include those which will take more than one year to complete, guarantees, and contracts relating to land. There are also writing requirements under most provincial Sale of Goods Acts. For example in Alberta, sales of goods for more than $50 must be in writing unless there has been a deposit paid or the buyer has accepted the goods.
But what do signed and in writing mean? The Alberta and federal Interpretation Acts state that "writing" includes words "represented or reproduced by any mode of representing or reproducing words in visible form". Computer communications are little more than electrons pulsing through conductive matter. However, when they are conducted through the appropriate circuitry, they are then reproduced in a visible form - on a computer screen or on a printer's paper. Accordingly, it would appear that such electronic communications are in writing for the purpose of the Statute of Frauds and the Sale of Goods Acts.
The Statute of Frauds and the Sale of Goods Acts also require that the contract be "signed by the party" to the contract. How can an email be "signed by the party" sending it? The technology exists for individuals to actually sign their signature with something akin to an electronic pen and the signature is then reproduced in the same form so as to appear on the receiving computer's screen looking like a true signature.
However, most computer communications do not use that technology. Usually only a typed name, not a signature, is possible. If the name of the signing party is only typed at the bottom of the communication is the contract signed for the purposes of the Statute of Frauds or the Sale of Goods Acts?
In order to guess how the courts will analyze this issue, one must understand the underlying reasons for the signature requirement. One purpose of the requirement for a signature on a contract is to establish that the party who signed the document was aware of its contents. Second, the signature itself is a personal mark, being somewhat difficult to imitate. It authenticates the document. A computer communication can similarly be personalized. The technology for authentication of computer messages is apparently developing rapidly. Email messages can be encrypted giving them a high degree of authenticity. There will always be a risk of inauthentic email communications. However, the lack of authenticity is also a risk with written signed paper documents (i.e. forgeries).
Furthermore, the courts have been very flexible in their approach to the signature requirement. The cases suggest that a typed name at the bottom of a paper contract will probably suffice. For these reasons, the courts may well accept a typed name on an email as a signature if the appropriate authentication safeguards can be shown. If a party wants to remove this doubt for computer generated contracts then the appropriate hardware and software can be purchased so that a true computer-displayed signature can be produced. The risk is that once such a signature is transmitted by computer communication without appropriate confidentiality safeguards, the signature is available to a large number of potential forgers. This emphasizes the importance of confidentiality.
Notices Under Contracts
What about notices given under an existing contract? Can these notices be given by email? The issue is really what the parties to that particular contract intended. Did they intend that an email communication would be sufficient notice? This has to be determined by looking at what the contract itself says, and if that is ambiguous, then looking at all of the surrounding circumstances. If the parties expressly provide for email communication of notices, then the courts should enforce that. If the parties expressly state that email communications will not suffice for notices, then the courts should enforce that choice.
Difficulties will arise where the contract is silent on the point. To the extent that the court can reasonably interpret the parties' intention as being that email notices are acceptable, then the court will likely find those methods of communicating notices to be legally effective. As email communications become more a part of everyday commercial communications, the courts will likely find those communications to be effective as well. The most important thing you can do is to expressly address the issue in your contracts.
Electronic Data Interchange
The legal issues outlined above make it clear that if you want to conduct commerce electronically, you and your trading partners should put in place some rules for how it will work for you. This can be done in an agreement with each of those other parties with whom you want to do business in this manner. Most likely you will want to do this with your most frequent trading partners first. The agreement should deal with how and when orders will be taken or placed, and how orders will be acknowledged. It should include payment terms and all the other terms and conditions applying to the orders. It should provide for what laws will apply and what will be the mechanism for resolving disputes. This can all be done by the parties themselves.
Alternatively, Electronic Data Interchange (EDI) is an existing formalized structure that the parties can use to deal with many of these issues. It is essentially a set of mechanisms and rules for conducting business without using paper. Until recently, it required acquiring standardized software and establishing what was essentially an intra-net between participants. In October 1997, IBM announced that it is now offering EDI forms and access via the world wide web. There may be other services offering the same access. In short, EDI is becoming easier to use and more accessible for businesses of all sizes. It is probably a good time to look ahead to see how much of your business can and should be done electronically.
The foregoing highlights some of the legal issues surrounding electronic communications in the commercial context. The bigger issues will be practical business concerns. One concern is whether an electronic communication can provide as permanent a record of what was agreed to as paper does. There is no reason why it cannot. Paper can be shredded or burned. Electronic communications can be stored in magnetic form on disks. These can be easily destroyed as well, but as long as the communications are in fact stored in magnetic form, then electronic communications can provide as permanent a record as paper.
Another concern is how the authority of a person purporting to enter into a contract by electronic communication can be verified. Is the person typing the terms authorized to legally bind the company they work for, or is there a boss you need to be communicating with The recipient of the communication never knows for certain, but the same question arises with respect to paper communications. How can a recipient of a letter or agreement know that the person signing it is authorized to bind their company? The legal issues are really no different for electronic communications.
A third concern is forged communications. A rogue with some technical expertise can send an email message to a person via the internet and make it look like the message came from someone else. Yet this is also a concern with paper communications. How difficult would it be to obtain or create the letterhead of your company and then sign it to make it look like it came from your company? Fraud and forgery are a real concern in both cases. There is little to suggest that it is necessarily a larger problem with electronic communications.
A fourth concern is the confidentiality of computer communications. When messages are sent electronically, it is possible that unauthorized persons can intercept and even revise the messages. Messages sent on the internet can be relatively easily intercepted and reviewed by anyone. Accordingly, the internet may not be the best electronic medium for sending communications intended to create extremely confidential commercial agreements. This may be partly overcome by encryption of communications, but it is possible for a determined hacker to intercept and read even encrypted communications. There is no guarantee of confidentiality in such communications. However is that better or worse than other forms of communication? Faxes can go to the wrong number or be intercepted. Letters and paper documents can also be intercepted and copied before they reach their destination. It remains to be seen whether commercial contracts formed via email can be kept as confidential as paper documents.
A fifth concern is that if you already have standardized contract terms with your major business partners, will you now have to revisit all of those terms and the related issues if you want to set up an electronic contract structure? There are, of course, some new issues and concerns that will have to be addressed as discussed above. However, there is no reason why your basic contractual terms cannot still apply in your relationships with the same parties. On the other hand, if there is something about your existing standard terms that you find inadequate, the move to an electronic format may be an opportunity for you to rectify that.
The courts will likely adapt the law to accommodate the commercial reality of electronic contracts and communications. There remain some practical concerns in conducting business with other parties electronically. However, it is likely that in the near future, even the most significant and confidential of commercial arrangements will be concluded by electronic communications.
Rick Pabst is a lawyer with the firm of Field Atkinson Perraton in Edmonton, Alberta.
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|Date:||Apr 1, 1998|
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