(c) 2004 west legal studies in business a division of thomson learning 1 online contracting 1-2% of...

(c) 2004 West Legal Studies in Business A Division of Thomson Learning

1

Online Contracting

• 1-2% of all sales

• Business to Consumer ( B2C) in 2000 $25.8 billion

• Business to Business (B2B) projected in 2003 $1.2 to $10 trillion

• Growing rapidly


2

Online Contracting

• B2B e-commerce takes variety of forms– Vertical porta model

• Collection of information, services, and goods to a particular industry

– Supply chain model• Single web site can find parts, identify suppliers,

and order parts for a business


3

Online Contracting

• B2B e-commerce takes variety of forms– Vertical porta model

• Collection of information, services, and goods to a particular industry

– Supply chain model• Single web site can find parts, identify suppliers,

and order parts for a business


4

Online Contracting cont.

• B2B2C – Involves Internet-enabling and streamlining an

entire business value chain, from its initial supplier to the finished product that is delivered to a consumer

• Customer orders a car on the Internet


5

E-Commerce Business Models

• Traditional commerce models– Mail-order model– Subscription-based model – direct access for

a limited period of time– Direct marketing model -Spam to mass

market– Real estate model – rent or sell web space or

domain names– Free trial model – free use of software for a

limited time, then pay


6

E-Commerce Models

• Information barter model – consumers and businesses can exchange goods and services

• Digital delivery model – download product

• Access-provision model – sells access to the internet in exchange for a fee (Earthlink)


7

Contract Defined

• A Contract is an agreement to exchange property or services that is legally enforceable in a court of law


8

Source of Contract Law

• Is Mostly State Law – States are authorized to make their own contract law in the U.S.

Constitution– Contract law is very similar state-to-state because it derives

from the same historical background

• Different Kinds of State Contract Laws– Common Law Contract Law, updated with state states– Uniform Commercial Code (UCC)– Uniform Computer Information Transactions Act (UCITA)– Uniform Electronic Transactions Act (UETA)

• Some Federal Contract Law– Electronic Signature Act (E-Sign Act)


9

How Do We Know When to Use Which Contract Law to Use?

• It depends on the kind of property that is the subject of the contract– Real property contracts and service contracts

use - the “common law contract law” as summarized in the Restatement of Contracts

– Personal property contracts - use the UCC or UCITA, etc.


10

Property

• In every state property is divided into these two categories:

• Real

• Personal


11

Real Property

– Tangible: Land and all its component parts: surface, subsurface, airspace, any other property growing on the land or affixed to the land such as: growing crops, timber, structures, houses, buildings, etc.\

– Intangible: easements such as right of ways or profits such as mineral rights; mortgages, leases, etc.


12

Personal Property

– Tangible: Anything that is not real property: refrigerators, clothes, everything in Walmart or Kmart or Sears…

– Intangible: Money, Investment Securities (Stocks and Bonds, Limited Partnerships, etc.), Documents of Title (warehouse receipts, bills of lading), Goodwill, Instruments (drafts (checks), promissory notes, certificates of deposit), Patents, Trademarks, Copyrights, accounts receivable, etc.


13

State Common Law Contract Law

• Most states adopted their common law contract law, amended and supplemented by state legislatures by statutes through the years

– Summary of most states’ common law contract law can be found in the Restatement Second of the Law of Contract


14

Uniform Commercial Code (UCC)

• A special subset of state contract law for commercial transactions involving personal property as opposed to service contracts or real estate contracts

• UCC written by National Commissioners on Uniform State Laws (NCCUSL), adopted by most state legislatures


15

UCC Governs Commercial Transactions in

Personal Property Only

• Article 1 Introduction• Article 2 Sales of goods (tangible personal property)• Article 2A Lease of goods• Article 3 Commercial Paper (some intangible personal property:

notes, drafts, certificates of deposit)• Article 4 Banking (checks)• Article 5 Letters of Credit• Article 6 Bulk Sales (buying inventory in bulk from another merchant

who is going-out-of business)• Article 7 Documents of Title (warehouse receipts and bills of lading)• Article 8 Investment Securities (stocks, bonds)• Article 9 Secured Transactions (putting personal property up as

collateral)


16

Requirements of a Valid Contract (Restatement)

• Mutual Assent

• Consideration

• Capacity

• Legality

• Form


17

Mutual Assent

• Agreement: one party makes an offer and the other party accepts– Objective standard = must be an outward indication of

assent

– Can be express (oral or written) or implied by actions

– Either a promise for the other to give a promise = bilateral contract

– Or one promise for the other to give performance = unilateral contract


18

Offer Requirements

• Intended to be an offer

• Made from offeror to offeree

• Definite and certain

• Communicated to the offeree


19

Intent

• Not a joke

• Not an advertisement (usually)

• Not an auction with reserve


20

Communicated to This Particular Offeree

• One offeree cannot give the offer to another offeree

• Rewards


21

Definiteness

• Reasonable certain and complete– Subject matter, quantity, quality, price,

payment terms, duration

• Article 2 does not require so much definiteness


22

Duration of Offers

• Term• No Term• Can usually be revoked at any time before

acceptance, even if person says he will keep it open– Exception:Cannot revoke for stated period of time if:

• Option contract• Promissory Estoppel• Art. 2 of UCC “firm offer by a merchant rule”

– Merchant makes an offer to keep an offer open for less than 3 months in writing and signed – he is bound to do this


23

Acceptance

• Unilateral- wants performance to be completed

• Bilateral – wants a promise


24

Is Silence an Acceptance?

– Common Law says: agree before hand that silence will be an acceptance, then it is

– UCC says: silence can serve as acceptance only where a single contract involves “repeated occasions for performance.” (Book of the month club)


25

When is Acceptance Effective?

• “Mailbox Rule” When the acceptance is dispatched by proper means– Unless

• Offeror has said otherwise – “won’t be accepted until I receive it.”

• Unauthorized means of communication is used• Acceptance is sent after a rejection is sent

(rejections are not effective until received) – first one to be received is effective


26

Acceptance with Modifications

• Restatement: Mirror Image Rule: Acceptance must be exactly the same as the offer, or there is not a contract

• UCC: Acceptance that says unconditional “Yes” can form a contract even if terms are added or changed


27

Consideration

• Each party to the contract must be bound to give consideration

• Consideration is recognized by the law if it is – A Legal Detriment to the party

• Doing something or giving something I do not have to do or give or• Giving up something I have the right to do or have

• “Bargained for” what the other person wants– Not past consideration

• Not consideration that is already owed “preexisting obligation”• Modifying a contract requires new consideration on both sides, or

one is just doing what he/she already had to do and this is not consideration because it is already owed for another promise


28

Exception to the Rule that Each Party Must Give Consideration

• UCC Art. 2: an agreement modifying a contract does not have to have new consideration from both sides to be binding

• UCC Art. 2: firm offers by a merchant cannot be revoked even though no extra consideration is given to keep the offer open

• Promissory Estoppel: equitable principle that once you make an offer for unilateral performance, you cannot revoke once the other person has substantially begun performance even if they have not given any consideration to keep the offer open because it is just not fair.


29

Acceptance Problems That Result in Contract Being Voidable (by the

one “taken advantage of”)

• “No meeting of the minds”• Mistake• Misrepresentation or Fraud• Duress• Undue Influence• Lack of Capacity


30

No Meeting of the Minds

• UCITA: Click Wrap and Shrink Wrap Contracts– At first ruled not binding because purchaser did

not know what he/she was getting until after the contract was entered into – no meeting of the minds7th Cir: Yes, we need to do this in society today to mass-market the software, so it is a binding contract.

• ALI said “no” – can’t have agreement before you know what you are clicking “yes” to


31

Mistake

– Must be mutual mistake of fact of the identity or existence of the subject matter

• Two software programs with the same name, each thinking of a different one

• Not a mistake by one side• Not a mistake of value


32

Misrepresentation or Fraud

• Misrepresentation of a material fact – no value, not opinion, not law

• Justifiably relied upon by the other party

• Intent (Scienter) only needed for fraud

• Damages (hurt economically or physically)


33

Duress

• Contract if voidable if entered into under an– Improper threat– There is no alternative


34

Undue Influence

• Contract is voidable if entered into under– Persuasion– By a dominant person over a subordinate

person– That ends in the subordinate person not

getting a fair deal


35

Lack of Capacity

• Minority

• Intoxication

• Mental Illness

• Non citizen? – No – alien has all rights to contract as citizens


36

Capacity

• Minors– Can disaffirm any time until they are 18 and

for a short time after• Even if they cannot return the consideration

– Can’t disaffirm for necessaries– In some states, can’t disaffirm if

misrepresented age• Easier to misrepresent online


37

Intoxicated

• Under old law – other party has to know– Can’t tell online is the other person is drunk or

drugged

• Not alcoholics or drug addicts, if they are sober at the time of contracting


38

Mentally Incompetent

• Have the right to disaffirm, even if the other party does not know they are mentally incompetent

• Have to have been in an non lucid interval when entered into the contract


39

Illegality Makes a Contract Void

• Except– If unaware of illegality; if one of group the law

was made to protect; if do not go through with the illegal deal

• Some illegal contracts:– Commit a crime, gambling, usurious, violating

a licensing statute– Exculpatory contracts– Unconscionable contracts


40

More Illegal Contracts

• Contracts in Restraint of trade– Price fixing– Non-competition agreements– Tying agreements– Grant back agreements


41

United States v. Microsoft Corp

• Antitrust violations = illegal


42

Form – What Contracts Must Be in Writing?

– Under the common law statute of frauds, contracts that

• Involve real property.• Cannot be performed in less than one year• Are collateral contracts to pay the debt of another

– estate executors or administrators

• In consideration of marriage


43

Form – What Has to be in Writing Under the UCC?

– Contracts for the sale of tangible goods $500 or greater

– Contracts for the lease of tangible goods $1000 or greater


44

What has to be in the writing?

• Common law:– parties– Subject matter and essential terms– Signed by the party against whom it is to be

enforced

• UCC Art. 2– All you need is quantity in writing


45

What constitutes a signature?

• Name, initials, or other symbol as long as the party intends for it to authenticate the writing


46

Exceptions to the Statute of Frauds

• Common Law exceptions: – part performance– admissions

• UCC exceptions: – specially manufactured goods– written confirmation by a merchant to another

merchant of an oral contract, the confirmation not objected to within 10 days


47

Parol Evidence Rule

• Common law, UCC alike:

– Parol Evidence rule excludes oral or other evidence of agreements made at the time of, or prior to, the making of the written contract

• Can admit: later modification, explanation of ambiguity


48

Part of the Contract: Warranties, Disclaimers and Terms of Use

• Terms of Use: payment methods, privacy statements, external linking permissions, web site rules

• Warranties– Express– Implied warranty of merchantability, title– Implied warranty for fitness for a particular

purpose

• Disclaimers


49

Examples

• Dell Computer Corporation’s 90-Day Limited Warranty

• PayPal, Inc.’s User Agreement– Comb v. PayPal, Inc., 2002


50

Need for New Law Regulating Sale & Licensing of Software

• In 1995 the NCCUSL and the ALI undertook a joint project to draft Art. 2B of the UCC to govern– contracts to license or purchase of software, – to create or modify a computer program, – for computer games, – online access to databases, – to distribute information on the Internet, – diskettes that contain computer programs, e-books,

and other similar contracts.


51

UCITA Would Not Apply to the Following:

• Computer programs embedded in goods ( TVs, stereos, etc.)

• Financial services transactions• Cable, satellite, or other broadcast media• Movies, sound recordings, or musical works• Compulsory licenses• Employment, except oif the individual is an

independent contractor providing computer information

• Subject matter within the scope of Article 3-8 of the UCC


52

NCCUSL and ALI Could Not Agree to make it UCC 2B

• Dispute concerning certain provisions

• 1999 the NCCUSL, satisfied with the draft, approved the act freestanding of the UCC

• It is called the Uniform Computer Information Transactions Act (UCITA)

• The NCCUSL offered it to the states for enactment in July 1999.


53

Objections of ALI and the Attorneys General of many States:

• Acceptance – Silence can be an acceptance

– UCITA says: silence can serve as acceptance by inaction in any “future transactions between the parties” – you may be agreeing to accept future software products by your silence – where does it end?

– Click on “I agree” courts have found this is NOT silence, this is acceptance by actions


54

Other Objections of ALI and Attorneys General

• It defined software as nongoods– This is important because, if software is not

“goods,” it is not subject to Art. 2 “Sales of Goods”

• Art. 2 contains a lot of old law and a lot of protection for the consumer!

• If software is nongoods, then this law may not be applicable


55

Other Objections of ALI and Attorneys General

• Mass Market Licensing– Allows a merchant to withhold almost all of the

contractual terms in its sale of software to a consumer until after the sale is completed

– This goes against age-old common law contract principles!


56

Only two states have adopted UCITA

• The states that have not adopted UCITA, still use the Art. 2 and 2A for selling and licensing software


57

UCITA: Warranties Like the UCC

• Warranties against infringement or misappropriation

• Warranty of merchantability

• Warranty of fitness for a particular purpose


58

UCITA: What Has to be In Writing?

• Does not change any common law or UCC substantive rules about what has to be in writing

• Adds these rules– Licensing of informational rights for more than

$5,000– Licensing of informational services that

cannot be performed in less than one year– AOL for 2 years


59

UCITA: Is Electronic Record a Writing?

• Electronic record is a writing


60

Is an Electronic Record Signed?

• Signature is – any name, initials, or other symbol as long as

the party intends for it to authenticate the writing Authentification of an electronic record both by human action and by means of an electronic agent OK

• Attribution – UCITA does not favor any encryption technology over another


61

UCITA: Electronic Self Help

• Allows self-help – includes cancellation, repossession, and

prevention of continued use

• Not available in mass market licensing

• Need express agreement to this effect


62

Uniform Electronic Transactions Act (UETA)

• Another less controversial uniform law

• Only approves electronic writing and signatures, does not change any substantive writing or signing requirements – Electronic record is a writing– Electronic signatures are legally effective


63

States’ Electronic Signature Acts (could be adopting UETA)

– Washington’s ESA: Use certifying authorities– California: unique, verified, under sole control

of person, linked to data in such a way that if the data is changed, the signature is invalidated, conforms to regulations adopted by the appropriate state agency


64

Federal E-Sign Act

• Federal law • Passed to recognize electronic writings and signatures

until the states passed their own laws • Does not change any substantive writing or signing

requirements• Preempts state law that is not technology neutral• Does not pertain to will, testamentary trusts or family

records, cancellation of health or life insurance benefits, hazardous product recalls, repossession and foreclosure, utility services

• As to UCC, only applies to Articles 2 and 2A• Special rules for consumer transactions


65

Federal E-Sign Act and UETA

• State adopts official version of UETA, overrides E-Sign Act

• Differences– UETA is more comprehensive– UETA addresses attribution– UETA allows parties to vary signature creation

and attribution formats by agreement– Electronic form is OK


66

What about Electronic Data Interchange (EDI)?

• Computer-to computer contracts

• American National Standards Institute developed national and international standards for the interindustry exchange of business data = established a common, uniform, business language

• UCITA specifically validates such contracts – but what about the form? Writing?

• Art. 2 Sales of UCC $500 or greater should be in writing

• Master Trading Partner Agreements are in writing and they say future communications between the contracting parties in a certain electronic form will be a “writing.”


67

Software Licensing

• Owner of software decides to transfer to another person the use and enjoyment of his creation, while still retaining the ownership of his creation– Software code is copyrighted and then

distributed under a license agreement• Restricts users to installation of only one copy of

their software• Only purchasers of license may use it


68

Key Terms/Components of a Software Licensing Agreement

• Define the Scope of the agreement– Physical territory– Purpose– Prohibited actions – cannot copy– Breach of license = breach of contract and/or

infringement of copyright– Access to software’s source code? Or in

escrow?– Permitted to transfer to third parties or not


69

Key Terms/ Components

• Delivery provisions– Download, CD-ROM

• Acceptance provisions– Shrink-wrap or Click-wrap acceptance

• Establish warranties– Only when properly installed by….– Qualified warranties if new or experimental software– Free from defects, viruses, infringement on another’s intellectual

property

• Limitation of Liability clauses– dollar amount– Disclaimers for consequential, incidental or punitive damages


70

Click Wrap, Shrink-Wrap, and Browse-Wrap Agreements

• ProCD, Inc. v. Zeidenberg

• Brower v. Gateway 200, Inc.

• Specht V. Netscape Communications Corp.


71

E-Commerce and Insurance: Insuring Online Contracting Risk

• Standard commercial general liability policy

• Does traditional insurance cover electronic commercial mishaps?– State Auto Property & Casualty Insurance Company

v. Midwest Computers & More

• What is physical property damage?– American Guarantee & Liability Insurance Company

v. Ingram Micro, Inc.


72

International Aspects of Electronic Contracting

• UN Convention on Contracts for the international Sale of Goods (UNICISG) – U.S. ratified– Like UCC

• Except: – no writing requirement– Mirror image rule


73

Other International Agreements

• United Nations Commission on International Trade Law (UNCITRAL)– Electronic documents are legally binding– Signatures must identify the originator and confirm the

originator’s approval, be reliable as appropriate

• EU Directive Concerning E-commerce• Harmonizing legislation in four areas

– Commercial communications– Online formation of contracts– Liability of intermediaries – Enforcement issues

• Limitations on online contracts to consumers

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