Contracting Online
The rise of the internet and e-commerce has made online contracts very common. They are used every day. People enter into a contract when buying goods through online retailers, such as Amazon.com. They enter into auction contracts on eBay. A person agrees to terms-of-use contracts when using free wireless internet at a local coffee shop. In many instances, you might not even be aware that you are entering into valid, enforceable contracts.
Online contracts are contracts that are entered into over the internet or through a technological medium. There is nothing particularly special about these contracts other than the medium used to form the contract. The underlying transactions are the same for online contracts and traditional contracts.
NOTE
E-commerce sales in the United States are expected to exceed $740 billion by 2023.14
Although online contracts can make transacting business easier, they also present some unique challenges for the contracting parties and for the law. The law generally presumes that contracting parties at least know of one another before entering into a contract. That is not necessarily true for online contracts. When people contract over the internet (generally through a web-based service provider), it is unlikely that they are in the same state, geographical region, or even country. Parties that contract electronically give up certain rights when they contract online. They include:
NOTE
In this chapter, the term traditional contracts refers to written and oral contracts. Online contracts refers to contracts that are created through a technological communication process, such as via email, text message, or the internet.
- The contracting parties may not know the identities of one another.
- The contracting parties may have no real opportunity to bargain for the terms of their agreements.
- It may be difficult to determine the material terms of the contract if the parties exchanged multiple electronic communications.
It is obvious today that people can indeed contract through online processes, but that was not always the case. The U.S. federal government has created legislation that states, for interstate commerce, that online or electronic contracts are just as valid as traditional, paper-based contracts.15 States also have created their own laws. The Uniform Electronic Transactions Act (UETA) specifically states that its purpose is to “remove barriers to electronic commerce by validating” electronic contracts.16 Forty-seven states have adopted the UETA,17 whereas the states that have not adopted the UETA have adopted similar laws allowing electronic contracts.
NOTE
Jurisdiction is an important issue for online contracts. A complete discussion of jurisdiction is out of scope for this chapter. It is important to be aware that many online contracts contain clauses that require lawsuits about the contract to be litigated in certain places. This is an attempt by at least one party to control jurisdiction issues.
For the most part, the rise in the use of online contracts has not changed fundamental contract law principles. There still must be offer, acceptance, and consideration. The parties still must reach a meeting of the minds. The E-SIGN Act and UETA recognize that basic contracting principles apply to all contracts, even online ones.
Courts have acknowledged this in case law as well. The Second Circuit Court of Appeals has said, “[While] new commerce on the Internet has exposed courts to many new situations, it has not fundamentally changed the principles of contract.”19 Even though courts apply the same basic contracting principles to online contracts, they sometimes reach inconsistent results. This is particularly noticeable in early cases reviewing clickwrap contracts and current cases reviewing browsewrap contracts. How courts treat these types of cases is still evolving. They are discussed later in this chapter.
The Validity of Online Contracts: The UETA and E-SIGN Acts
The NCCUSL created the UETA in July 1999. The UETA covers business and commercial transactions. However, it does not cover transactions between private parties.
The NCCUSL created the UETA for several purposes. One of them was to legitimize electronic contracts. The UETA recognizes that parties contract electronically because of speed and other economic efficiencies. It also recognizes that some rules, such as the common law Statute of Frauds, can be a barrier to electronic contracts in some circumstances. The comments to the UETA make it clear that it does not create new rules for online contracting. Instead, it recognizes that general contract law rules and principles apply to transactions that are conducted electronically.
The main benefit of the UETA is that it specifically states that electronic contracts are enforceable. It also states that an “electronic record” satisfies any common law requirements that a contract be in writing. This helps to soften the application of a rule such as the Statute of Frauds for records that might exist only in electronic form in an information system. Under the UETA, an electronic record is any record that is stored in the memory of an information system.
The UETA also requires that courts and contracting parties give an electronic signature the same effect as a handwritten signature. Under the UETA, an electronic signature is “an electronic sound, symbol, or process attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the electronic record.”18 Clicking on an “I agree” button on a web page is an electronic signature under the UETA definition. Typing your name at the bottom of an email also can be a valid, legal signature under the UETA as long as you intend it to serve as your electronic signature.
The UETA is not a digital signature statute. It does not define cryptographic or technology standards for digital signatures. It does acknowledge that electronic signatures that have certain security protections may provide additional reliability about the identities of contracting parties.
Forty-seven states have enacted the UETA and codified it within their own laws. The states that have not enacted it have created their laws regarding electronic contracts instead.
Congress enacted the Electronic Signatures in Global and National Commerce (E-SIGN) Act in June 2000. The E-SIGN Act validates the use of electronic records and signatures in interstate commerce. Similar to the UETA, it is designed to facilitate and promote e-commerce. It also does not affect fundamental contract law principles. The E-SIGN Act contains provisions that are very similar to the UETA. The E-SIGN Act allows contracting parties to use electronic records to satisfy any laws that require a contract be written.
Similar to the UETA, E-SIGN is technology neutral. In fact, it forbids any state or federal statute from requiring that a specific technology be used for electronic transactions in interstate commerce. E-SIGN specifically states that it does not preempt state laws based on the UETA. It also does not preempt state laws that are similar to the UETA. State laws that are significantly different from the UETA and E-SIGN are preempted by E-SIGN.
This section describes some of the ways in which online contracting is different from traditional contracting. It is important to remember that this area of law is continuing to develop.
Legal Capacity Online
The rules for contractual capacity do not change in cyberspace. Unfortunately, in online contracting it can be very difficult for parties to determine whom they are doing business with. Courts do not enforce contracts against a person who lacks contractual capacity. Therefore, it is critical for organizations conducting business on the internet to know who their customers are.
Businesses must be concerned about children in particular. There are laws that protect children while they are on the internet. The Children’s Online Privacy Protection Act (COPPA) requires websites to get parental consent before collecting personal information from children. A business would need to collect personal information in order to enter into a contract with a consumer. Therefore, COPPA can potentially apply to any business that does business on the internet. The Federal Trade Commission (FTC) oversees COPPA and can bring enforcement actions and impose civil penalties for COPPA violations.
There are several ways that website operators can identify children. If a business website can properly identify children, then it can make sure that it does not enter into potentially unenforceable contracts with them.
Another issue in online contracts is verifying the identity and authenticity of the contracting parties. This is a separate issue from contracting with parties that have legal capacity. Digital signatures can be used to verify the identity of contracting parties. They are discussed later in this chapter.
Form of Offer and Acceptance
A person can enter into online contracts in several ways. Special types of contracts, such as clickwrap contracts, are discussed in a different section of this chapter. This section discusses contracts formed through direct electronic communications, including email, text messaging, and instant messaging.
In contract disputes, timing is everything. It is sometimes critical to know when a contract forms. This is usually because an offeror is arguing that he or she revoked an offer, whereas an offeree is arguing that he or she accepted the offer in a timely fashion. A court must determine which came first: revocation or acceptance. Electronic communications can complicate the analysis of these timing issues.
NOTE
Keep in mind that these discussions are academic. If all parties are performing their contractual duties without a problem, no one is concerned about when the contract was formed. Problems arise when a party claims that a contract did not exist or when the parties cannot agree on the terms of the contract. At that point, courts will analyze the entire contract formation process.
General contract law principles state that when parties are communicating instantaneously, a contract forms when the offeror receives an offeree’s acceptance. Communications are instantaneous when there is no break in communications between offer and acceptance. The parties are, for the most part, clear on the terms of the contract. There is no doubt about the status of the offer and acceptance. Oral communications are clearly instantaneous communications. Courts also have held that fax and telephone communications also are instantaneous.
These same general contract law principles say that where there is a delay in communication, the parties must follow the mailbox rule to determine when an acceptance is valid. In these situations, unless otherwise specified in an offer, acceptance is valid once it is mailed. This is so that parties can be clear on the status of a contract when communications are not instantaneous. Communications that take place through U.S. mail are delayed communications. These communications must follow the mailbox rule.
NOTE
This section assumes that electronic communications between parties have not been forged or intercepted.
Both of these principles can be implicated in electronic communications. Electronic communications processes blur the line between sending and receiving communications. They can make it hard for the parties, and courts, to determine when offer and acceptance occurred.
Email Communications
Email communications contain both instantaneous and delayed communication elements. Depending upon the nature of the email transmission, there may be a delay from when the message is sent to when it is received. There also may be a delay in the receiving party’s actual receipt of the email if the party does not read the email at the moment when it is received.
NOTE
Email can be nearly instantaneous if the parties are reading and responding to emails as they are received.
A contracting party has the option of printing the emails and storing them. A chain of email messages, assuming that they are not altered, can be used to demonstrate that the contracting parties achieved a meeting of the minds. Parties also can use the email chain to help determine the material terms of an offer and an acceptance.
NOTE
Keep in mind that the rules of evidence govern how parties use records as proof in a lawsuit. A discussion of the rules of evidence is outside of the scope of this chapter.
Questions about email communications and timing arise if the status of the offer is called into question. Most commentators argue, and many cases have agreed, that the mailbox rule should apply to email communications. That is, an acceptance is valid as soon as an offeree clicks on the “Send” button to email their acceptance to the offeror. If an offeree receives the offeror’s revocation after sending his or her acceptance, the revocation has no effect and the contract is formed.20
Text and Instant Messages
Sometimes electronic communications do look more similar to face-to-face communications. For example, text messaging and instant messaging (IM) communications tend to occur in real-time. In this way, these communications parallel oral conversations, which are considered instantaneous. It can be argued that the common rules regarding instantaneous communications should apply here. That means that contracting parties can enter into enforceable contracts through text and instant messaging. The mailbox rule would not apply.
Contracts made through text and instant messages suffer the same problems as oral contracts. Similar to oral contracts, the parties might agree to terms too quickly and then have second thoughts. The parties can easily repudiate such contracts, especially if there is no log of the conversation. It can be hard for parties to prove the existence of these contracts and their terms later when the contract is disputed. Unless a contracting party saves these messages or prints them out, or asks his or her cellular or internet provider for records, it can be difficult for courts to determine the contractual terms.
NOTE
By their very name, instant messages are instantaneous communications.
Twitter and Other Social Networking Sites
Consumer use of social networking sites is growing. Twitter reported 330 million monthly active users in 2019.21 Facebook reported 2.45 billion global monthly active users during the same time.22 Most social networking sites, including Facebook and Twitter, allow users to give periodic updates on what they are doing. The user’s friends and followers can respond to the user’s posts. These sites exist to facilitate online communication between parties.
NOTE
Twitter limits updates to 280 characters. It calls these updates Tweets.
FYI
It is clear that agreements can be violated via Facebook communications. In 2014, a Florida appellate court held that a court-approved confidentiality agreement was violated by a post on Facebook. In that case, two parties entered into a confidentiality agreement that protected the terms of a settlement agreement between the parties. The daughter of one of the parties posted a derogatory term about the other party immediately after the settlement was reached. The posting also included confidential information about the settlement agreement. The appellate court held that the posting violated the terms of the settlement agreement. It also held that the settlement agreement did not have to be honored.23
Because Facebook and Twitter both contain mechanisms for conversation exchange, it is entirely possible that parties can enter into a contract using these mechanisms. It will be interesting to see how courts review offer, acceptance, and mutual assent criteria using social network site postings. It might be easier to prove that a contract exists with Facebook, as Facebook pages can contain the contents of the parties’ contract negotiations. This is especially true if parties are communicating through the Facebook Marketplace function to buy and sell goods. It might be more difficult to prove the existence of a contract, and the contract’s material terms, when it is made through a service such as Twitter.
Courts sometimes skirt around the issue of the exact moment that a contract forms in electronic transactions. They routinely recognize that electronic communications do create valid contracts. To do this, they review the conduct of the parties to determine if the communications and the parties’ actions show an offer, acceptance, or meeting of the minds.
To ensure that online contracts are enforceable, the best course of action is for contracting parties to state when acceptance takes place. Language such as “a contract is formed when I confirm that I have received your reply” can be added to email negotiations to make sure that parties understand when an enforceable contract is formed.
Existence and Enforcement
As with traditional contracts, parties to an online contract must perform their obligations to be discharged. If a party does not fulfill his or her contractual obligations, that party is in breach of contract and can be sued by the non-breaching party.
In the online environment, it can be difficult for a party to prove the existence of a contract. This is because there is often no hard copy of the contract in existence, such as a contract agreed to via text or instant message. It also can be difficult to prove the terms of the contract because they may have changed over time, such as through a long-running email conversation. In some ways, online communications and contracts present some of the same proof problems as oral contracts.
Contracting parties must keep a paper or electronic record of the transactions that they enter into. These records are necessary to prove the existence of a contract. They also prove its material terms and conditions, such as the date the parties entered into the contract. It is important to save these records in case one party argues that the contract was improperly modified.
NOTE
Sometimes the law comes down to common sense. Contracting parties should take steps to preserve the electronic communications that show a contract’s material terms.
A party can save hard copies of contract terms by printing screen shots or email confirmations. They also can save an electronic record of the transaction. Under the UETA, information stored in information processing systems is an electronic record. It is a valid way to memorialize a contract.
NOTE
The UETA specifically recognizes that agreements can be found through the actions of parties to a contract. This codifies the common law rule.
Online contracts are enforced the same way as traditional contracts. If a court hears a case about a contract dispute, it must be able to determine if there has been a valid offer, acceptance, and mutual agreement. It will review the actions of the parties in order to make this determination.
Authenticity and Nonrepudiation
There is generally no real difference between traditional contracts and online ones other than the method of entering into the contracts. The traditional legal principles and methods that courts use to resolve contract disputes can be applied to online contracts in most instances with few modifications.
One area in which there is a notable difference, however, between traditional contracts and online ones are the issues of authenticity and nonrepudiation. Authenticity refers to the problem of attributing an electronic message to the person who allegedly sent it. Nonrepudiation ensures that a party cannot dispute the validity of the message. In the online environment, authenticity and nonrepudiation can be assured with technology processes.
It is important to distinguish between repudiation and nonrepudiation.
- Repudiation is a legal term. It refers to a party’s ability to deny the existence of a contract.
- Nonrepudiation is a technical term. It refers to a process that is used to make sure that a party cannot repudiate, or deny the existence of, a contract.
Even though nonrepudiation is a technical term, it can be demonstrated in nontechnical ways. Assume that a traditional written contract is signed in front of witnesses. By signing the document in front of witnesses, the parties are taking steps to make sure that neither party can repudiate, or deny, his or her signatures. The use of witnesses is a nontechnical nonrepudiation process.
Nonrepudiation becomes an important issue in online contracts. Without a way to demonstrate nonrepudiation, parties that contract electronically might be able to deny that a valid contract exists. Cryptography can be used to make sure that parties cannot repudiate the contracts that they enter into. Contracting parties can use digital signature technology, which uses a cryptographic process to create and verify electronic communications, to provide assurance of their identities. Digital signature technology also can be used to verify that the contract exists and that it is unmodified.
NOTE
Digital signatures, digitized signatures, and electronic signatures are all different. A digital signature uses a cryptographic process to ensure authenticity and nonrepudiation. A digitized signature is a digital version of a handwritten signature. An electronic signature is any mark that a person uses with the intent to sign an electronic record.
The law recognizes that the use of digital signature technology adds a new element to contract law analysis. Under the UETA, digital signature technology is considered a security procedure.24 A security procedure is a procedure or process used to:
- Verify that an electronic signature belongs to a specific person
- Detect changes or errors in the information in an electronic record
The use of a security procedure such as a digital signature strengthens reliance on an electronic communication. For information security purposes, use of a digital signature creates a presumption that the signature is valid. The party that wants to argue that the signature is invalid bears the burden of proving that it is invalid. This is different from the burden of proof for signature repudiation in traditional contracts.
In traditional contract law, the party that relies on a contract has the burden of proving that a handwritten signature is authentic. In the electronic realm, the party that wants out of a contract has the burden of proving that a digital signature is invalid. This shifting burden of proof illustrates one way in which traditional contract law principles must adjust for online contracts.