CONTRACT FORMATION OVER THE INTERNET
With the flush of closing a sale, it is easy for a vendor to neglect the need for those additional terms of sale that protect property rights, apportion or limit liability and provide for a forum for resolving disputes. This paper is intended to raise and briefly discuss these and other current issues relating to forming contracts over the Internet, particularly with respect to matters involving e-commerce.
II. Society’s Comfort Level
Professor Amelia Boss makes the point in her paper entitled “Security: It Ain’t Just a Matter of Encryption” that the security people expect when using electronic commerce is not just against theft or alteration, but also against the uncertainty of new legal and social structures. To quote Professor Boss:
"Indeed, if there were not both social and legal consequences which flowed from a business’ failure to live up to its contractual obligations, I submit that we would find far fewer people following through on their contractual obligations."
The first step to achieving predictable social and legal consequences is the formation of a legally binding contract.
III. Contract Formalities
A. No Necessity for Writing
In Canada, it is not generally required that a contract be evidenced in writing. This is specifically confirmed with respect to sales of goods by s. 8 of the Sale of Goods Act (B.C.).
Limited exceptions, primarily with respect to the sale of land, guarantees and indemnities, must be in writing in B.C. (see, for example, s. 54 of the Law and Equity Act (B.C.)). Additionally, Federal legislation may also require writing, for example to transfer certain intellectual property rights.
The Statutes of Frauds is in force in every province except Ontario and B.C. Guarantees, declarations of trust, and agreements that are not to be performed within the year are some of the activities that must be recorded in writing.
Various provincial statutes (for example, Sale of Goods Acts and Consumer Protection Acts) may require that consumer contracts having more than a nominal value or made under certain circumstances be in writing and signed by the consumer.
Even if writing is required, legislation usually does not contemplate the issues of authenticating who the parties are, their signatures, the originality and permanence of the physical agreement, etc.
For the majority of contractual activities, however, there is no need to reduce a contract to writing other than to improve certainty of terms.
B. Capacity of Minors
As in many foreign jurisdictions, minors cannot generally be bound by contracts for goods that are not considered necessities of life. The age of majority in Canada varies from province to province, and is either 18 or 19. Specific product acquisitions or activities unrelated to necessities of life may also have different age requirements.
The age of majority in B.C. is 19-the Infants Act. Contracts made with infants are not enforceable, although the “infant” can ratify the contract after reaching the age of majority.
Present technology does not permit one to verify the age of the contracting parties.
The question of whether a contract with a minor comes into existence is likely a matter of local interest. However, capacity to contract is usually considered to be an issue to be decided by the jurisdiction where the contract was made. It remains to be seen how the courts will deal with this now that minors can easily interact with others in foreign legal systems.
C. Offer and Acceptance
In Canada, in order to create a contract, notice of acceptance must be conveyed to the party offering. Judicial interpretation has been steadfast in requiring that notice of acceptance be given, particularly in cases where methods of instantaneous communication have been used to convey the offer.
What differentiates an offer from the act of acceptance is not as certain. A prudent vendor will always provide for notice of acceptance to be given to its customers.
Generally, an advertisement to sell goods or services will be considered an invitation to treat-in other words, the solicitation of an offer. This is the case even though goods are priced and available for selection and delivery. See, for example, R. v. Bermuda Holdings. A vendor will, therefore, have to convey notice to the purchaser that it has accepted an offer in order to bring a contract into existence, subject to exceptions usually based on performance.
Judicial interpretation is unlikely to change this for Internet-made contracts. This conclusion is based on the belief that, at least initially, the majority in number of contracts made will either be consumer-based or will contemplate the delivery of goods at a later date, and will, therefore, attract judicial protection.
Having said this, nothing prevents persons from entering into agreements governing how their relationship will be governed in the future, including how contracts will be formed between them.
D. Digital Signatures and Other Contractual Formalities
Digital signatures, in their most basic form, are encryption-based devices created for the purpose of identifying the person one is corresponding with. Having identified a correspondent, one can then in theory rely on the attributes associated with the particular digital signature. Attributes may include specific identifiers such as age (going to capacity) and residency, assurance about authenticity and non-repudiation. However, technology has not reached the stage where it can provide a functional equivalent of paper-based systems.
Initially, the quality of a digital signature is dependent on the procedures used by the certification authority to verify the identity and other information provided by an applicant for a digital signature. The long-term quality of a digital signature is dependent on the level of security employed by both the certification authority and the user to prevent unauthorized third parties from being able to use the digital signature.
For an expanded discussion of the technology surrounding digital signatures, reference is made to the American Bar Association publication entitled Digital Signature Guidelines Tutorial, a copy of which is available on-line.
Reference is made to the companion paper to this paper entitled The New Canadian E-Commerce Statutes for a general discussion of local Canadian contractual requirements in e-commerce transactions, and how provincial legislation is modifying generally accepted contractual formalities. One can expect that local consumer protection statutes will be modified to reflect the impact of this legislation and changing circumstances in order to maintain levels of consumer protection while facilitating electronic commerce.
Many jurisdictions do not have laws that confirm whether electronic signatures and electronic contracts meet local contract formalities. Prudence dictates that web sites do business in a way that mirrors traditional local contractual analysis, with the mechanics of the website mimicking the process of offer, acceptance, and conveyance of notice of acceptance of the offer that the local legal system expects.
A thorough discussion of contract formalities is beyond the scope of this paper. The Model Law on Electronic Commerce proposed by the United Nations Commission on International Trade (“UNCITRAL”) is a useful starting point to an in-depth examination of the issues surrounding on-line contract formation.
E. International Sale of Goods Act (B.C.)
The International Sale of Goods Act, R.S.B.C. 1996, c. 236 has enacted the UN Convention on the International Sale of Goods into B.C. law. Constitutional jurisdiction in Canada with respect to property rights rests at the provincial level, hence the need for provincial approval after national adoption.
Unless there is an express and clear exclusion of its application, the Act will apply in many situations to govern e-commerce transactions over the Internet. A copy of the Convention is available on-line, and is recommended reading for commercial lawyers.
With the expansion of global commerce the likelihood of it being raised against a party in a dispute over contract formation or interpretation continues to grow. This Act continues to be ignored by the majority of practitioners.
The Act does not apply to sales of consumer goods, sales by auction, sales on execution or otherwise by authority of law, sales of shares, negotiable instruments, ships, vessels, aircraft or electricity.
In addition to providing specific rules for the creation of contracts, the Convention also addresses delivery, conformity of the goods, and remedies for breach of contract. Among other things, the Convention provides that:
(1) no writing is required for a contract to be enforceable. While it is possible for a state to derogate from the provisions of the Convention permitting a contract to come into existence that is not in writing, Canada has not exercised this right;
(2) an irrevocable offer is binding whether or not supported by consideration;
(3) acceptance must be received by the offeror to complete formation of the contract;
(4) agreements to change the agreement are binding even if not supported by consideration.
The Convention also provides different rules than domestic law relating to transfer of risk, loss or damage to the goods, frustration, and it permits an innocent party to claim broader damages for consequential loss.
The application of the Convention may be excluded pursuant to Article 6 of the Convention. It has not been decided if merely specifying the choice of law is sufficient to do so. In situations where the parties do not want the Convention to apply, specific language should be used. It is doubtful that merely designating another law will be sufficient. In extreme cases, the parties may wish to specifically refer to those portions of the Convention that they intend to opt out of.
An analysis of the Convention by a UNCITRAL working group, in the context of electronic commerce, is also available on-line.
F. Internet Sales Contract Harmonization Template
The Federal-Provincial-Territorial Consumer Measures Committee is currently seeking comments on a template for a draft Internet sales contract. The template is available on-line.
The draft is aimed at Internet-based consumer contracts, but is struggling with how to define the application of the Act in light of technology.
Ignoring for the moment the significant issue of what activities the draft will catch, the draft contemplates a requirement to provide prescribed information, pre-contract formation and an obligation to deliver a copy of the contract to the purchaser after its formation. A failure to do so would trigger a right of cancellation. All but the most incompetent vendors will find that these requirements are easy to satisfy.
More significantly, the draft triggers a right to cancel for executory contracts (contracts where the goods or services are not delivered within 30 days of the agreed delivery date).
The draft also contemplates a right to obtain a credit for credit card charges incurred, as well as a mechanism to facilitate this. In the face of current (and more generous) credit card issuer policies that permit returns for unsigned credit card transactions, one wonders if this portion is really required.
G. French Language Charter
The French Language Charter, commonly referred to as Bill 101, has onerous French language requirements for product advertising and distribution within Quebec. If a foreign supplier has any type of physical presence in Quebec, whether involving distribution, maintenance, or a sales branch or subsidiary office, there is a significant prospect that Bill 101 may apply to the supplier’s website, even if the web site is situated outside of Quebec. For example, the Office de la langue française, the administrative body charged with enforcing Bill 101, prosecuted an Anglophone business operation in Montreal on the basis that its English language website was in violation of Article 52 of the French Language Charter. That matter remains unresolved pending a resolution of the fate of Bill 101.
IV. Proper Law of the Contract
In determining what the proper law of a contract is, the courts traditionally look first for an express declaration, and secondly for factors that would infer what the proper law is, such as submission to a particular law, the existence of an arbitration clause, and the wording of the contract itself. If neither approach is determinative, the courts fall back on specific presumptions. These presumptions are as difficult to apply in the Information Age as they were in the past when dealing with international transactions. The presumptions are:
(1) Lex loci contractus - the proper law of a contract is the law where the contract was made;
(2) Lex loci - a contract is made in one country with a view to performance taking place in another country, the law of the other country is presumed to be the law of the contract; and
(3) Lex situs - where a contract relates to immovables, the law presumes local law to apply.
The proper law may not govern all incidents of a contract.
(1) formal validity is likely sufficient if it conforms to the law of the place of contracting. Implicit in this is a presumption of face-to-face contracting. Whether this principle will hold up in the face of on-line contracting remains to be seen;
(2) illegal contracts, and also contracts that may be unenforceable for public policy reasons, may not be enforceable if they offend any of the proper law, the law where the contract was made, or the forum where one seeks to enforce it, regardless of the applicable proper law.
V. Personal Jurisdiction and Dispute Resolution
Braintech, Inc. v. Kostiuk involved a claim of defamation by Braintech, Inc., a Nevada corporation carrying on business in B.C. The defendant, Kostiuk, was a resident of B.C. and was alleged to have made defamatory statements about the plaintiff in a posting on an Internet bulletin board.
Kostiuk did not defend the action commenced by the plaintiff in Texas, and the plaintiff obtained a default judgment. The plaintiff then sought to enforce the Texas judgment in B.C.. Kostiuk defended this action. Among other things, he argued that the judgment should not be enforced because the Texas court did not have jurisdiction over him. The plaintiff obtained summary judgment in its favour and Kostiuk appealed.
In deciding whether to recognize the judgment of the Texas court, the B.C. Court of Appeal applied three tests in order to arrive at its conclusion:
(1) First, it recognized the test set out in Morguard v. De Savoye which requires a “real and substantial connection” between the forum and the action;
(2) Second, it noted that the Supreme Court of Canada in Amchem Products Ltd. v. British Columbia (W.C.B.) established that satisfaction of the principles of constitutional due process as set out in the Fourteenth Amendment to the Constitution of the United States amounts to a finding of “real and substantial connection”; and
(3) Third, the Court then went on to decide that because the Texas court had not addressed itself to the issue of whether there had been compliance with the requisites of constitutional due process, it would do so. It concluded that the U.S. constitutional standard for the assertion of personal jurisdiction had not been met.
Accordingly, the Court declined to enforce the Texas judgment in B.C. Braintech sought leave to appeal to the Supreme Court of Canada, but leave was refused without reasons.
Quoting from a paper written by Simon Johnson in 1999 entitled “Internet Activity and Jurisdiction over Foreign Defendants,”:
"The decision in Braintech is particularly significant because it introduces into Canadian law the U.S. analysis as to when an Internet presence can be used as a basis for asserting jurisdiction over a foreign defendant. There are problems with the U.S. approach, most notably in predicting the results in the middle category where there is some interaction falling short of full commercial activity. Nevertheless, its flexibility has the potential for real fairness to both potential plaintiffs and potential defendants. As well, the open-ended list of factors to be taken into account will allow the test to evolve with technology and new forms of Internet interaction as these develop.
The analysis of jurisdiction based in whole or in part upon Internet activity imported in Braintech will be significant in at least three contexts in Canada:
• Where foreign judgments based upon Internet activity are sought to be enforced in Canada (the situation in Braintech);
• Where a plaintiff seeks to serve a defendant outside the forum and uses Internet activity as a basis for service (for example, by arguing that it amounts to “carrying on business” within a province, or by seeking to have a court exercise its residual discretion to permit service ex juris);
• Where there is a dispute between the plaintiff and the defendant as to the most appropriate forum for a trial when there is more than one forum that would be proper (i.e., the issue of forum non conveniens.
In each of these situations, one of the most valuable aspects of Braintech is the manner in which it explicitly recognizes the need to restrict the excessive exercise of jurisdiction based on Internet activity. After citing Zippo Manufacturing Company v. Zippo Dot Com, Inc., the Court stated:
"It would create a crippling effect on freedom of expression if, in every jurisdiction in the world over in which access to Internet could be achieved, a person who posts fair comment on a bulletin board could be hauled before the courts of each of those countries where access to this bulletin could be obtained."
Turning specifically to the issue of determining personal jurisdiction in contracts, a recent U.S. case points out the potential benefit that employing a conservative approach to on-line contract formation creates. In Mink v. AAAA Dev. LLC the defendant’s website allowed viewers to send e-mail but did not allow them to enter into contracts with the defendant on-line. Customers were directed to print order forms and mail or fax them to the defendant. The Court held that this was not sufficiently interactive to confer personal jurisdiction over the website operator. In Thompson v. Handa-Lopex, Inc., the Court considered whether the continuous formation of on-line contracts entered into between a site and the users of its casino games was sufficient to confer personal jurisdiction in Texas over the website. In this case, the Court decided that the level of interactivity was sufficient to permit the court to take jurisdiction.
Notwithstanding the finding of facts in Thompson, if the courts wish to enforce legislation addressing social issues such as consumer protection, pornography, and gambling, they may have to be more willing to support a finding of jurisdiction based on interactivity.
And lastly, when we thought that we had heard everything, a Virginia judge decided in January 2001 that his court constituted an appropriate forum to settle a dispute over a domain name between two parties resident in Quebec. The action was founded in part on the provisions of the Anticybersquatting Consumer Protection Act of 1999 (U.S. Federal legislation). The judge decided (incorrectly, I suggest) that he was more competent than a Canadian court to interpret U.S. federal legislation. Interestingly, the plaintiff in this case had significantly deeper pockets than the defendant, which allowed it the luxury of such a blatant case of forum shopping.
VI. Formation of On-Line Contracts
Contracts can be formed with the most minimal of terms. If necessary, the law may imply terms required to give effect to the basic objective of an agreement. The law will not usually imply terms beyond this.
For example, it is possible to purchase software and yet not be bound by the terms of the license contained in the packaging. Similarly, it may be possible to contract on-line without being subject to the detailed terms (of use) the vendor seeks to use.
A. Shrink-Wrap Agreements
Shrink-wrap agreements are used to license software use, most commonly in consumer retail transactions. The shrink-wrap license is commonly contained in the packaging for the software, and the terms of it are not made available to a purchaser at the time of purchase. If the internal packaging does not have the license printed on it, it will usually refer to the existence of a license contained elsewhere in the package. As a back up, the user must usually agree to the terms of the license at the beginning of the installation process in order to complete installation. These back up agreements are commonly referred to as click wrap agreements.
In deciding North American Systemshops Ltd. v. King in 1989, Madame Justice Viet of the Alberta Queen’s Bench decided that a purchaser of accounting software was not bound by the terms of a shrink-wrap license contained in the software package. After a detailed examination of patent cases relating to license restrictions contained on the packaging of patented goods, Madame Justice Viet confirmed that contractual terms must be brought to the attention of a purchaser before the contract is entered into if the terms are to form part of the agreement. Some commentators argue that this could be remedied by placing a statement on the packaging giving notice of the existence of a license. I do not agree.
There was a regrettable tendency with some Canadian commentators to base their analysis of the enforceability of shrink-wrap licenses on whether “acceptance” of the contract has taken place. In Canada, the issue is simply whether the terms were brought to the attention of the purchaser.
Cases involving the enforceability of disclaimers of liability (parking lots, dangerous sports, etc.) are often decided on similar principles and give some comfort that Madame Justice Viet was correct in her decision.
The U.S. judicial experience has differed from Canada, not surprisingly in light of the U.S. judicial willingness to bend legal principles in the name of protecting economic interests. By way of example, in ProCD, Inc. v. Zeidenberg, the U.S. 7th Circuit Court of Appeal overturned the trial decision and decided in favour of enforcing a shrink-wrap license.
Briefly, the trial court found that the shrink-wrap license was not available at the time the contract was entered into. The trial court then went on to decline to enforce the shrink-wrap license, even though the purchaser was aware of the existence of it before installing the software and was given an opportunity to return the software for a full refund if he was not in agreement.
In overturning the trial decision, the appellate court decided that an offer to license had been made at the time of purchase, and the purchaser had accepted it by using the software. In effect, the Court decided that a contract subject to conditions that would only be available at a later date could be entered into provided that the purchaser had a contractual right to rescind it.
Most significantly, the Appeal Court rejected the trial court’s decision that the terms of the license must be disclosed to a party prior to payment in order to form part of the contract.
The appellate court did indicate a willingness to refuse to enforce conditions that would be objectionable had they been included in a conventionally agreed-to contract, although this does not come as a surprise.
Subsequent cases in other states have adopted the reasoning in this case. In Hill v. Gateway 2000 Inc., it was decided that a shrink-wrap license provision requiring that disputes be submitted to arbitration was enforceable. In reaching its decision, the Court enunciated three principles:
(1) the practice of putting a license in a box (and, therefore, unavailable to a consumer) was preferable to having it provided to the purchaser by the salesclerk at the time of purchase;
(2) the practice of enclosing a shrink-wrap license was consistent with consumer expectations and industry practices; and
(3) by allowing a consumer to return the product if he did not agree to the license, the rights of the consumer were balanced against the commercial convenience of enforcing the license.
By adding two additional principles to the previous three, software vendors can take some comfort that, at least when dealing with U.S. purchasers, shrink-wrap licenses are enforceable:
(4) the purchaser must indicate acceptance of the shrink-wrap license terms by performing some positive, unambiguous act. This might take the form of removing the packaging containing the license from the software before installation, or agreeing to the license during the installation process.
(5) The purchaser and vendor must not have reached an agreement that, by its terms, would exclude any further conditions forming part of the license contract.
B. Click Wrap Agreements
Click wrap agreements, like shrink-wrap licenses, are also commonly brought to the attention of a purchaser after the contract has been entered into, generally after consideration has passed and, in the case of a sale of goods, after their delivery.
Most commonly, the mechanism used to indicate acceptance takes the form of choices presented to the user to “Agree” or “Disagree.” Typically, this will be facilitated by the use of “radio” buttons or dialogue boxes offering options to select from. In the past, default choices indicating acceptance were commonly provided. The advantage from a technical point of view of providing default choices is that a sophisticated user could move through the installation process by merely hitting “enter” on the keyboard without any other conscious thought.
Industry practice has evolved to where default choices are not usually provided, or if they are, the default choice is “Don’t Agree.” By choosing “Don’t Agree,” whether intentionally or not, a user typically terminates the installation process.
The objective of any acceptance process is to compel the user to actively take part in the acceptance process before payment takes place. The reason for this is to make it more difficult for a user to say that he did not agree. As a result, best practice is to require a user to actively be part of the acceptance process by imposing a positive physical act such as having to choose “I Agree” before the installation can be proceeded with.
C. Web Wrap Agreements
Taking its name, somewhat misleadingly, from shrink-wrap licenses, a web wrap agreement is a collection of terms presented electronically via the web by the vendor of goods or services to the other contracting party at some point during the contractual process. The purchasing party must signify its approval to the terms before proceeding with the next step in the web based “process” established by the vendor. Most commonly this takes the form of the purchaser signifying in some way, passively or actively, “I Agree.” The procedural aspects of web wrap agreements are a variation of click wrap procedures.
When used correctly, the web wrap agreement is more analogous to a sales clerk reading out the terms of the proposed license to a purchaser before the purchaser signifies his acceptance by paying for the goods.
Falling back on first principles, a web wrap agreement does correspond to the principles of offer and acceptance that are at the heart of the contractual process. In other words, one party makes an offer, and the second is free to accept it (assuming that the free choice exercised by the second party was not to reject the offer).
Web wrap agreements differ fundamentally from click wrap agreements. They share a mechanism but conceptually they are not the same. Unlike click wrap agreements, the terms of a web wrap agreement are agreed to during the contracting process, and not after the goods or services are paid for (which typically corresponds to the last point in time when the contract could have come into existence). A corollary to this is that payment should not be made until after the agreement is entered into.
Having said this, the mechanism employed to indicate acceptance could give rise to an argument that acceptance was not freely given to all of the terms of the license. Anything short of providing the entire contract to the purchaser of goods or user of services in a way that forces the party to look at the terms invites the argument that the terms were not made available to the purchaser at the time the agreement was entered into. For example, a brief reference to the terms appearing before the dialogue boxes or radio buttons inviting a choice to “Agree” or to “Disagree” may be insufficient notice of the terms to a purchaser. A process that requires a purchaser to scroll through the license terms before being faced with the choice to “Agree” or “Disagree” is at the other end of the spectrum of the likelihood of enforceability.
D. Unilateral Contracts
Interestingly, U.S. courts have been willing to hold web site operators to promises of privacy contained in on-line privacy policies. While the obvious social policy reason for doing so is clear, these cases also indicate, by implication, a willingness to enforce a unilateral promise made by website operators.
VII. Implied Terms
For the purposes of this section, “implied terms” mean those contractual terms included in a contract by operation of law or public policy, and not as a result of the express agreement of the parties. Most commonly, these arise from Sale of Goods legislation in the local jurisdiction or, in the United States of America, from the Uniform Commercial Code (“UCC”).
A sale of goods is distinguishable from other arrangements such as agency relationships and contracts for the provision of work and materials. In certain circumstances, transactions relating to services have been interpreted as sales of goods. For example, the provision and customization of a computer system was held to be a sale of goods.
To the extent that all or a portion of a contract is characterized as a contract for services, the vendor may be obligated to perform the work with reasonable skill and care, and in a good and workmanlike manner.
The most common Sale of Goods “implied” warranties arise when the goods are sold on description, or if the purchaser relies on the skill and knowledge of the vendor. For example, when goods are sold based on a description of them, there is an implied warranty that the goods will meet the description. Additionally, an implied condition that the goods will be of merchantable quality may also apply. To satisfy this condition, a reasonable person must still be willing to purchase the goods after examining them and knowing of the defects in the goods. If the purchaser can show that he relied on the skill and knowledge of the vendor, an implied warranty that the goods will be fit for the purpose they were purchased for will also apply.
In B.C., it is possible to waive these implied warranties provided that they do not relate to a retail sale or lease.
Other implied warranties that apply to retail sales may not be waived, and reference is made to the Sale of Goods Act (B.C.), s. 20 for particulars.
One commonly thinks of agreements in terms of protecting property rights and limiting or allocating liability. Notwithstanding the best practices referred to above, other departments, such as the marketing division of an organization, may have a different view of what is necessary to attract customers. Inevitably, this results in a process of identifying an acceptable level of risk (arising from the deliberate ignoring of legal principles that must otherwise be satisfied to create an agreement incorporating all desirable terms) and balancing it against the need to recruit customers.
At the positive end of the scale, the best legal practice is for a web site to require a user to enter into a web wrap agreement.
While it remains to be seen where technology will take the mechanics of on-line contracting, one thing is certain. On-line contracting is a reality in everyday contractual transactions. And we can be certain that the act of entering into contracts on-line will continue to expand in number and importance as technology improves and personal acceptance grows.
GARY DUNN, LAWYER & MEDIATOR
2768 WEST BROADWAY AVENUE, #568
VANCOUVER, BC V6K 4P4, CANADA