Subramaniam Vutha*

The second in the series of articles by Subramaniam Vutha discusses online contracting, online transactions, the issue of valid contracts, websites versus shops, and other related issues. We welcome readers' participation in this forum

Contracts are central to business and commerce. In the world of electronic commerce the elements and principles of contract formation would remain largely the same. However, applying these to the world of e-commerce would need an understanding of both contract laws and of electronic transacting.

In any contracting situation, electronic or otherwise, the elements necessary for a valid contract would be :

On-line transactions: some special issues

EDI vs. the web
For several years now, businesses have been using electronic data interchange (EDI), working seamlessly with suppliers, distributors and partners to achieve just-in-time deliveries, lowered working capital requirements, improved cash flows and so on. The world wide web has added new dimensions to such on-line contracting. For example, the web facilitates one-off transactions between total strangers as distinct from the stream of EDI transactions, using dedicated links, between long term partners. Similarly, the web allows businesses to reach out to clients and customers, regardless of the distance and at low costs, making electronic business-to-consumer commerce (B2C) possible on a major scale.

Costs lower, risks higher
Even as the costs of transactions are falling, resulting in new business ideas, business models and business structures, destroying traditional advantages and creating new ones, electronic transacting raises new risks by virtue of the anonymity of dealings, distance, speed, automation, non-harmonization of laws across states and countries, unpredictable tax implications and so on. However, despite all this, the greatest risk appears to be not joining the e-commerce revolution and being left out of a huge new business universe.

Existing legal principles still useful
As you will see in this and succeeding articles, existing principles of law will remain applicable and useful in on-line transacting. In fact, some of the principles applicable to transacting by phone, post, mail order and fax will continue to provide a useful legal framework on the web.

Intermediaries
Commensurate with the size and complexity of the transaction and the specialised needs of each type of transaction, new intermediaries and agencies will spring up.

After all, long distance contracting is not new. Banks, financial intermediaries, local agents, credit rating agencies, accreditation agencies, notaries, escrow agents and others have been facilitating long distance transacting and lowering risks, spurring global trade for several decades now. The advent of their cyber counterparts is not only inevitable, but also vital for online transactions.

Digitalisation and delivery mechanisms
While information based products and services such as music, video, books and the like can be delivered online in a digital form, new delivery mechanisms will spring up to support electronic commerce. Already, there are reports about online delivery of perfumes, combining digital technology with encapsulation technologies.

In short, e-commerce will challenge, stimulate, and extend traditional, legal and economic policies and theories. For an interesting insight into such issues please see "A Framework for Global Electronic Commerce", a white paper available on www.iitf.nist.gov/elecomm/ecomm.htm. (Intended to stimulate thought and debate. Not intended as legal or other advice)

Let us now look at some elements of valid contracts and online contract issues related to these offers:
In the real world, as in e-commerce, every contract begins with an offer by one party to another. When such an offer is accepted unconditionally, we have a valid contract binding under the law. Only agreements that are binding under the law are contracts. Every business deal is in fact a contract whether formally executed or otherwise. Contracts can be in various forms -- oral, in writing, registered, notarised and so on. Nevertheless, the basic elements remain the same.

Online contracts raise some interesting issues. A website acts as an advertisement, a display and a shop for sales. Bearing in mind that an offer when accepted results in a binding contract, it is advisable to design and arrange a website in such a manner as to avoid making an offer. On the other hand, it is advisable to so arrange matters that it is the consumer or visitor to the website who makes an offer to the website owner. This obviates several risks and unintended consequences, as we shall presently see.

When a shop displays goods with prices, the shop owner is not making an offer. Therefore, when a consumer walks in and picks up a product and offers the price displayed, the shop owner is not bound to part with the product. In fact, it is the consumer who makes the offer that the shop owner may accept or reject. This principle is extremely useful on a website because it allows the website owner to select the territories he wants to serve, the customers he wants to select and to avoid stock depletion and the risk of being sued for failure to deliver.

In the real world shops are given such legal latitude because of the possibility of depletion or exhaustion of stocks in the face of unpredictable demand. Websites can, and should, avail of the same principle. However, in the case of digital products, theoretically, there can be no depletion of stocks because these can be replicated easily, subject of course, to licensing restrictions. Therefore, with a combination of disclaimers and appropriate design of the website and its verbiage, it is possible to protect the website owner from unintended consequences.

Errors
Both email and web-based transactions can be prone to errors. Transmission errors, non-delivery, misdirection of messages and garbling or distortion of messages is not uncommon. Where such distortion or mutilation is manifest in an offer or acceptance and is noticeable, it could be argued that the recipient is put upon enquiry. On the other hand, if the changes are small, yet significant, the website owner or email sender may find himself bound by the message.

Acceptance
Acceptance of an offer on the internet or the web has its own interesting features. For example: an email acknowledgement or a "read and received" receipt will not constitute, by itself, an acceptance of an offer, thereby binding the person making the offer [unless, of course, such receipt or acknowledgement conveys an acceptance explicitly or otherwise].

Acceptance of an offer has to be unconditional. In other words, if any additional or different terms (from those in the offer) are appended to the acceptance we would have a counter-offer rather an acceptance. In online transacting it is, therefore, appropriate for the website owner or electronic business to arrange its offer or invitation in such a way that the visitor to the site or the buyer can either accept or ignore the opportunity provided by the website to enter into the transaction with him (but not make a counter offer). On a website this is typically handled by allowing a simple type of positive response, namely the pressing of a button stating "I agree" or a similar signal. In the case of email transactions, email offers or acceptance, there is greater scope for counter offers and therefore, reduced scope for automation of processes.

Automated offers and acceptances are valid
The law treats as an agent of a person, an automated machine or system programmed by such person or on his behalf. Therefore, an offer or acceptance made by such machine or system binds such person

Consideration
Any contract (except under exceptional circumstances as  permitted by law) is not valid, without valid consideration. Typically, consideration is the compensation or promise that is given in return for a promise (in most cases the money paid or promised for goods or services). In other words, consideration is the price or the return for a promise that turns that promise into a legally binding contract. In electronic commerce, consideration does not pose any special concern except, perhaps, for the risks associated with payment online or through electronic means.

Consent
There can be no contract without free consent of the contracting parties. If the parties do not understand the same thing in the same sense, there can no agreement or contract. In website transactions it is very important for a website owner to ensure that the consumer scrolls through the appropriate terms and conditions before clicking the button for the purchase of goods or services. This could help preclude any claim that there was no consent or that there was no intent to be legally bound. [This is analogous to a situation where a passenger is bound by the terms and conditions on the reverse of a ticket where his attention is drawn to such terms by an indication on the face of the ticket.]

In a business to business (B2B) situation there is usually a presumption that the parties intended to be legally bound. However, while dealing with consumers, such a presumption may not hold good. Therefore, it is important for the website to provide an opportunity for the buyer to read and understand the terms and conditions on which the goods and services are made available for an offer. In fact, lawyers and website designers should work together to make sure that the website invites offers rather than makes an offer. Also, that the buyer is guided through the terms and conditions through a review, appropriate scrolling or a dialogue box to foreclose a challenge on the basis of lack of intent to be legally bound or lack of consent.

In the next article we shall examine how the Information Technology Act 2000 facilitates electronic commerce.

Subramaniam Vutha is senior vice president (secretarial and legal) with Tata Infotech Ltd, Mumbai. A graduate in commerce and postgraduate in law, Subramaniam is a member and Indian correspondent for the International Bulletin of the Computer Law Association's magazine, and a contributor to the World Internet Law Report, a publication of BNA International Inc., London. He was recently invited to join their advisory board.

He is also a speaker and contributor on intellectual property rights, e-commerce and information technology law issues, and a member of the Confederation of Indian Industries’ working group on TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights).