Law often takes decades to develop appropriate legal structures to adjust to technology and the alteration in business and personal transactions that technology can allow. What used to be required to make binding Contracts can alter based on the availability of faster and less expensive methods. That does not mean the law quickly notes the changes and enacts new and appropriate laws.
Thus, the telephone and the telegram allowed rapid transactions in the late 19th Century and the prior method of sealed (with wax) legal documents created by specially licensed authenticators (notaries) gave way to the law allowing confirmation by wireless or even orally in commercial transactions…but that “new law” required decades to be created.
All of us know that the latest major alteration in commercial and consumer transactions on an increasingly global basis involves use of the internet for transactions and our companion article, Laws Pertaining to Commerce on the Internet should be reviewed by the reader before reading this particular article further.
Due to the state of flux in the law and the conflicting provisions that certain jurisdictions impose for local commerce, many persons engaged in internet transactions are creating special agreements with commercial partners, called colloquially “Trading Partner” agreements, in an effort to avoid both confusion and claims of invalid contracts while the various jurisdictions slowly create a uniform set of rules. This article shall discuss the basics of such Trading Partner Agreements.
The Basic Problem:
As described in detail in the above articles, the Statute of Frauds requires certain types of agreements to be in writing or said agreements are not enforceable. While many laws are in process of enactment attempting to define and limit the power of the Statue of Frauds as it relates to internet commerce, those laws are both contradictory and not adopted by many jurisdictions as of 2011…and likely to not be uniformly adopted for many more years.
Largely because of the uncertain state of the statute of frauds in the online environment, there is a growing trend for parties to enter into written trading partner agreements before they engage in electronic transactions. Trading partner agreements attempt to resolve unsettled legal issues, such as the application of the statute of frauds, through written contractual provisions.
Some trading partner agreements include waiver clauses in which the parties expressly agree not to raise the statute of frauds as a defense in a dispute over the enforceability of subsequent electronic transactions. Other agreements include definitions of writings and signatures specifically directed to the type of electronic communications the parties will use in forming their online agreements.
Proposed Article 2B of the Uniform Commercial Code, discussed in detail in the Laws Pertaining to Commerce on the Internet, will likely resolve many of the issues surrounding the statute of frauds in online contracts. Originally designed to address only software licenses, Article 2B has grown to include online licenses, subscription agreements, and other forms of electronic contracts.
However, while commercial contracts are usually allowed to be relatively flexible between merchants, reflecting the realistic concept that merchants are sophisticated buyers and sellers and capable of devising contracts to protect themselves, many of the transactions conducted online relate to the sale or lease of consumer goods. State and federal consumer protection laws (e.g., Magnuson-Moss Warranty Act) govern these transactions, which regulate advertising, warranties, and disclaimers. These laws also provide consumers with remedies not normally available under common law or the UCC. In addition to general consumer protection laws, many states have adopted or are in the process of adopting specific laws directed at electronic transactions to protect consumers.
When one reviews the latest development of consumer protection law intended to cover Internet transactions, one quickly discovers a wide range of laws, often contradictory, which related to such transactions simply because thousands of legislators in hundreds of jurisdictions are likely to come up with different approaches to what is, after all, a worldwide question.
The Electronic Signatures in Global and National Commerce Act validates contracts executed by electronic signature and serves to protect consumers by requiring consumers to provide adequate consent to an electronic transaction. The Act establishes the validity of certain transactions in or affecting interstate or foreign commerce. Specifically, it provides that a signature, contract, or other record relating to such transactions may not be denied legal effect, validity or enforceability solely because it is in electronic form. A contract relating to interstate or foreign transactions may not be denied legal effect, validity or enforceability solely because an electronic signature or electronic record was used in its formation. The Act defines an electronic record as a contract or other record created, generated, sent, communicated, received, or stored by electronic means. An electronic signature means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed by or adopted with the intent to sign the record. However, this act only applies to interstate and international commerce. It would therefore only affect transactions between buyers & sellers in different states, or in different countries.
The Uniform Computer Information Transactions Act (UCITA) was proposed for state adoption to eliminate the requirement for tangible writings and signatures in the purchase of “computer information”. Unfortunately, only about 2 states have actually enacted a version of this proposed act. Most state legislatures are not expected to create or adopt a version of that law; therefore, it is not likely to provide much of a uniform solution.
The Uniform Electronic Transactions Act (UETA) was proposed for amendment of state commercial codes to eliminate the requirement for tangible writings and signatures in the purchase and sale of “goods”. Some version of this legislation has been adopted in 47 states and the US Virgin Islands. Even if it is adopted in all 50 states, it will only govern transactions for procurement of goods, and not services or computer information.
UCC Article 2B revisions, as proposed for adoption by National Conference of Commissioners for Uniform State Law, would change some of the requirements for a writing and a signature. Contracts formed electronically would therefore be enforceable. It will be years before that recommendation is universally adopted and incorporated into state commercial codes. There is also little case law interpreting such legislation. Therefore, it may be some time before this UCC revision provides a viable solution to address the requirements for a writing and for a signature.
It should also be reiterated that UCC and state commercial code requirements are not applicable to services. Therefore, an electronic contract may be binding to a services transaction, even though it might not have been enforceable for a commodity purchase.
Faced with the confused situation above, many businesses have simply opted to create terms and conditions for their sales that seek by contractual terms, to impose reasonable and clearly defined requirements and definitions for their transactions. This requires effort and time on the part of the businesses, but the alternative is to have what was thought to be a valid electronic agreement be voided by a particular jurisdiction.
The Terms and Conditions.
The reader should review our article on Commercial Transactions in the United States to review many of the usual terms and conditions that a typical business contract must encounter. The question is whether all of the terms should be reduced to a writing executed by the parties even in a web transaction.
Certainly the terms as to Statute of Frauds, Warranty, and conditions of payment should be confirmed in a writing executed by the parties in this period of developing law, and that can be achieved via e mail confirmation to the other party which is agreed upon by return e mail. (Careful…read the responsive e mail closely since any change makes it into a counter offer.)
Many of our clients have a set of written documents that are sent out (trading agreements, though not called that) to “confirm” orders on the web and the transaction is not concluded until the confirmation is reduced to a writing agreed upon by all parties. Clicking a confirmation box is simply not enough of an agreement for sizable transactions.
Other clients, who have a very high volume of business, decide to allow click transactions, though they spend much time on the on web site disclaimers, terms and conditions. They presume that in certain cases the agreements may be voided but conclude that the high volume of otherwise completed transactions will make the losses acceptable. Other articles on this website describe the typical terms that we recommend.
But the key issue to confront is that given the multi jurisdictional nature of the changing law, the ease and convenience of the web transaction may facilitate agreements that appear fully binding on the web screen, but which many jurisdictions will not enforce absent an executed writing or at least an exchange of confirmations that are more than a click of a box.
The wise business will develop a simple trading agreement which is used to confirm any sizable transaction and all transactions that are international in scope or which are capable of exposing the business to sizable loss or liability.
One of our favorite clients has engaged in multi jurisdictional sales for his business on the web for over a decade and has watched the glacial progress of the law to adjust to the new realities of business on the web. He has also insisted upon trade agreements being used for all large transactions. When his computer raised engineering son came into the business in 2003, he immediately wished to stop that methodology, calling it prehistoric and wished to only rely on click acceptance of contracts.
His father had a great response in an e mail he copied to me: “You engineers may be creating the new technology and fancy contracts but my congressman makes the laws that allow me to collect the money. And my congressman thinks webs are for spiders. Give him a chance to get into the twenty first century. Meanwhile, we stick with the basics.”
He was right then.
He still is.