E-Commerce: The Legal Building Blocks

E-commerce - The Simple Secret of Success

The Digital Revolution seems to be changing the business environment almost at the
speed of light. Only a few years ago many of us had never heard of the Internet. Today
none of us can afford to ignore the challenge of e-commerce and doing business on the
Internet. We know that we must prepare for intense competition in a global and virtual
marketplace where time and distance have almost disappeared as competitive factors.
Facing fundamental and rapid change, it is all too easy to become paralyzed. We may
simply despair in the face of the coming competitive onslaught. Or we can presume that
something about our business is unique and will make us impervious to the effects of
changes in the marketplace.
However, an ostrich-like defensive posture will not protect us from the effects of today's
Digital Revolution any better than it protected those who clung to the old ways in the face
of the changes wrought by the Agricultural and Industrial Revolutions. We can be as
nostalgic as we like about "the good old days" but we must be hard-nosed in our
determination to prepare our companies for the new competitive environment. Standing
still is not an option. To survive and to succeed, we must learn to swim with the sharks.
The good news is that we each already know a great deal about what is really important
in order to succeed in the face of the e-commerce challenge. The secret is simply to know
that we know it. And, of course, to put our knowledge into action! One key to doing so
involves what I describe as "constantly stripping back to first principles".
Whether business is conducted in a store, at the office or on the Internet (or even on the
golf course) many of the most important factors remain constant. For example, to do
business on the Internet as elsewhere, we must know our market intimately and build our
brand by providing our customers with efficient and friendly service, a quality product
and value for money. If we concentrate on the underlying principles involved in the
particular commerce that we are proposing to conduct on the Internet, we can tap into our
accumulated wisdom and experience to find solutions to many of the issues that arise. In
fact, you may find that many features of doing business in cyberspace can be demystified
by constantly stripping everything back to first principles.
This approach also applies to the law generally and to the legal and regulatory framework
for e-commerce in particular. Many of the legal issues that affect business on the Internet
can be resolved by learning how to peel the technological skin off of the relevant
business model, transaction or problem being examined. The objective is to expose the
underlying legal structures and principles. Once this is done, in most commercial
situations the relevant issues -particularly the crucial risk allocation issues- can be
identified and addressed using established legal techniques.
Another important benefit of taking this approach is that it helps us to unearth shifts in
the established ways of allocating commercial risk that may otherwise slip through
unobserved. Generally, we should be wary of attempts to alter rules about risk allocation
in commerce because of the use of technology to support a business model or transaction.
It will frequently be the underlying principles of the model or transaction, and not the
technology, which drive the established position.
This does not mean that the effects of new technology will never justify altering risk
allocation. Indeed, in some cases, the introduction of technology may even make it
advantageous to do so. However, we should check that this is the case by reference to the
principles involved. We ought not to presume that a change in risk allocation should be
accepted simply because it is put forward in the context of the introduction of new
technology.
As we learn how to engage in e-commerce, the commercial community can use the basic
approach of stripping back to first principles in a number of important ways. For
example, we can:

• Analyze existing and proposed legal structures for conducting e-commerce in

order to modify such structures, or even create entirely new ones, that add value
in the new business context;

• Manage many of the legal risks posed by the existing and proposed legal
structures used to conduct e-commerce; and

• Identify areas where legislation may be needed to facilitate e-commerce and

develop proposals for such legislation that are in the interest of the business
community.
As we prepare to do business in a digital marketplace -characterised by global
competition, perplexing uncertainty and rapid change- the first principle of leadership is
to strip back to first principles. In this way we can identify and orient ourselves by
reference to what represents "True North" in relation to our ways of conducting business,
our particular business situation and the relevant transactions. This can provide our
business community with a simple, yet powerful, technique to lead the way on the
exciting journey in search of markets in cyberspace.
E-Commerce - The Legal Building Blocks
Contracts are the basic legal building blocks for all commerce. They are essential to
business. Like building blocks, contracts can be assembled into structures that range from
the very simple to the most sophisticated. They provide businesses with great flexibility
to allocate commercial risks and to select and adapt established legal structures, or to
design new ones, according to their particular commercial needs. This is as true of e-
commerce as it is of traditional business.
As we begin to engage in e-commerce, we need to understand the various legal structures
that may be used for this purpose. In this way, we can adapt those legal structures, or
even create entirely new ones, to add value and manage risks in the context of the
particular types of e-commerce that we propose to transact. For this reason, our first step
will be to examine the principles that apply to these basic legal building blocks for e-
commerce i.e. the law of contract as it applies in cyberspace. On this journey, we shall
confront many of the practical legal issues that arise when we transact business and enter
into commercial relationships over the Internet.
Creating On-Line Contracts
At the most basic level, a contract is simply a promise that is legally enforceable. It is
formed when two or more persons reach an agreement that the law recognizes as binding.
Contracts are traditionally analyzed in terms of an "offer" and "acceptance". For example,
we usually will have entered into a legally binding contract when I "offer" to buy a
particular book from you at a price that you "accept". If either of us attempts to avoid our
obligations, the law will compel compliance or award compensation.
This is so whether we have arrived at this agreement in a face-to-face meeting, on the
telephone or in correspondence. It is also the case if we reach agreement on-line, for
example by exchanging e-mail messages. Similarly, contracts can be formed via Web
sites, through automated touch-tone telephone systems and in any number of other ways,
such as via interactive television or the wide range of so-called "digital appliances" which
are becoming widely available.
Generally, the applicable legal principles are not affected by the medium through which
we conduct our communications leading up to an agreement. For example, when a
company advertises products for sale to the public, this is not considered to be an "offer"
but merely an invitation to submit "offers". A person who orders the product in response
to the advertisement is considered to be the party making the "offer" and until the
company "accepts" that offer there is no contract. If it were otherwise, the company
would be legally obliged to fulfill all orders received even if these exceeded supply.
Obviously, the same principles will apply where goods are offered on a Website, so that
when a person transmits an electronic order, by filling out a form at the Website, it must
first be "accepted" before there will be a binding contract.
However, challenging issues can arise. For example, some systems may automatically
produce a computer-generated response to an order received via the Internet. Will this be
considered to be an "acceptance" resulting in the formation of a binding contract? The
answer will probably depend on the form and content of the response generated. And the
test will probably be an objective one, i.e. whether a notional "reasonable person"
receiving that particular response would have considered it to be an "acceptance" so as to
immediately produce a binding contract.
There are, of course, many other legal issues that can arise in relation to the formation of
on-line contracts. These include whether an automatic computer-generated
communication can constitute an "offer" which, if accepted, immediately results in a
binding contract. This could be an issue, for example, where an insurance company's
computer automatically generates a renewal notice. Will an "acceptance" by the
policyholder immediately create a binding contract? And what if the renewal notice was
generated in error or contains a mistake?
Also, while using the mouse to click on a button on a Website would normally constitute
an "acceptance" resulting in a binding contract, this may not always be the case.
Certainly, there must be more doubt about whether the act of simply downloading a file
from a Website would itself constitute an "acceptance" binding the person doing so to
terms sought to be imposed on a notice at that Website.
Under Trinidadian law, very few categories of contracts require to be in writing or signed
in order to be legally enforceable. The main exceptions include contracts involving the
transfer of an interest in land, contracts of guarantee and hire-purchase contracts. These
do not pose a major obstacle to e-commerce between parties who are all located in
Trinidad and Tobago.
However, the same is not true for all jurisdictions. Some jurisdictions (including US
jurisdictions) have more general requirements that may apply, for example, to all
contracts for the supply of goods over a defined dollar value. Careful consideration needs
to be given to such requirements, if you contemplate conducting e-commerce across
national boundaries. In subsequent articles we shall therefore examine some of the
possible solutions to the problems raised by these requirements.
Clearly, companies need to understand and to factor these types of legal considerations
into the design of their e-commerce systems. By doing so, they can make use of
established principles of contract law to design technical solutions and user-interfaces
that achieve their business objectives while mitigating their risks. An ounce of protection
is always worth a pound of cure, particularly in situations where the alternative to careful
planning is the possibility of becoming involved in expensive litigation to resolve novel
and difficult legal issues.
Creating Certainty in E-Commerce
As companies begin to engage in e-commerce, we need to create as much certainty as
possible about how the commercial risks are to be allocated between the parties involved.
To achieve this, we must reduce ambiguity about the rules that apply to each electronic
transaction. One important way to achieve greater certainty is to make sure that we
effectively incorporate suitable terms and conditions into contracts that we make over the
Internet.
For example, a company offering products over the Internet will want to consider the
terms and conditions that relate to the extent of the warranties it provides. Of course,
there are many other kinds of matters that may be covered by such terms and conditions.
Other common examples include terms and conditions that impose limitations on the
supplier's liability, specify its policy on refunds and returns and identify dispute
resolution mechanisms.
While one has to ensure that the substantive content of these terms and conditions are
properly drafted to achieve the parties' commercial objectives, this generally raises the
same issues as when one is conducting business through traditional channels. However,
when preparing to conduct e-commerce, there are also particular issues to be considered
in order to ensure that such terms and conditions are effectively incorporated into
contracts that are made over the Internet.
Companies that are in the process of choosing business models and developing systems
for e-commerce need to understand these legal issues and how they can affect the choices
they make. In particular, when developing a Website for e-commerce, these legal issues
need to be factored into the design of its structure and user-interface.
Avoiding E-Fine Print
At the most basic level, a party cannot be said to have agreed to terms and conditions
unless he knew what these were before entering into the contract. Consideration must be
given to the manner in which information about proposed terms and conditions is
presented to users. Fortunately, one will normally only have to prove that a user was
given sufficient opportunity to read and consider whether to accept the proposed terms
and conditions and not that he actually did so.
If proposed terms and conditions are buried deep in the structure of your Website ("e-fine
print", as it were) there is a danger that they will not be incorporated into any contract
formed with a user. This means that these terms and conditions -no matter how well
drafted they may be- will be of no legal effect.
Depending on the size and value of the e-commerce transaction involved, the criticality
of the particular terms and conditions sought to be incorporated and the extent of any
risks involved, a prominent link to the proposed terms and conditions may be acceptable.
However, in most cases the better practice will be to design the structure and interface of
the Website so as to ensure that the proposed terms and conditions are displayed to the
user and to require him to acknowledge that he has read them before he can proceed. This
can be achieved by designing the Website so that whenever the user clicks on a button
saying "Submit Order" a page is automatically presented containing the relevant terms
and conditions as well as another button saying something like "I Accept These Terms".
Implied Terms and Legal Restrictions
Apart from terms and conditions expressly incorporated into a contract made over the
Internet, using one or more of the techniques discussed above, certain other terms and
conditions may be implied into such contracts as a matter of law. For example, under
Trinidadian law (as is the case in many other jurisdictions) certain warranties relating to a
product's fitness for its purpose and its quality will be implied by law.
In order to protect consumers and others from the potential abuse of inequality in
bargaining power, the law may also impose restrictions on the extent to which parties can
agree to restrict their obligations under any such implied warranties or to limit their
liabilities. For example, under Trinidadian law, it is not possible to use terms and
conditions of a contract to exclude liability for death or personal injury resulting from
negligence. And, in relation to other types of loss or damage, terms and conditions that
seek to restrict or exclude liability for negligence are usually ineffective unless a Court
considers them to be reasonable.
Beyond the Boundary
Of course, the extent of which the laws of different countries imply terms and conditions
into contracts and also restrict the freedom of the parties to agree other terms and
conditions - such as those excluding liability - varies from country to country. It therefore
can be a matter of significance to ascertain which country's laws govern a particular
transaction as this may affect how the commercial risks are allocated between the parties
involved.
In the context of e-commerce - which will frequently be conducted between parties who
are located in different countries - one category of terms and conditions that should never
be overlooked are those that specify how disputes are to be resolved. These terms and
conditions should identify which country's laws apply. And, they should also address the
related question of which country's courts will have the authority to adjudicate on
disputes. They may also provide for arbitration or other forms of alternative dispute
resolution.
This whole subject of managing the international dimension of e-commerce, and the legal
uncertainties and risks associated with it, is so critical that it will be separately examined
in the next article in this series.