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Electronic
Contract Formation
In the traditional notion of contract formation, negotiating parties
must come to a "meeting of the minds" on the terms of an agreement. In
the course of negotiation, there may be invitations to make offers
(e.g., price lists are generally not offers, but invitations) and
counter-offers, but the general rule is that formation requires an offer
and acceptance to be communicated between the parties.
Communication of Acceptance
Issue
Generally, a contract is formed when acceptance is communicated to the
offeree. In face-to-face negotiation, this rule provided few problems.
However, the development of methods of communicating over distances, and
the associated reliability problems, the case often arises when the
offeree has dispatched an acceptance which either is never received by
the offeror or arrives after the expiry of the offer. The issue to be
resolved in each case is whether the acceptance is communicated to the
offeree when it was sent or when it arrives. Case law tends to
distinguish between delayed forms of communication, such as mail and
telegrams, and virtually instantaneous forms of communication, such as
the telephone, telex and fax machine. The courts have yet to consider
the electronic message.
Early case law saw the development
of the "mailbox rule" for ordinary mail, wherein acceptance is deemed to
be communicated to the offeree when it enters the postal system. This
rule has been extended to telegrams and even couriers. The offeror,
however, is free to put conditions on the communication of the
acceptance (e.g., offer must be received; must be by telephone). In
contrast to the "mailbox rule", acceptances communicated using
instantaneous or virtually instantaneous means, such as the telephone ,
telex , and fax, are formed when the offeror receives the acceptance.
These means are analogous to face-to-face communications; presumably
both parties will be aware of any break in the connection and be able to
take corrective action.
There is little case law on
acceptance by electronic message. On the one hand, some cases suggest
the general rule is that the acceptance must be received by the offeror
and that the mailbox rule is only a narrow exception. On the other hand,
receipt of electronic messages may not be instantaneous and since the
mailbox rule has been extended to telegrams, it could be argued that it
should be extended to electronic mail. Although some electronic message
systems, such as private EDI networks, provide almost immediate
transmission, anecdotal evidence suggests that Internet e-mail is
inconsistent and could take minutes, hours or even days to reach its
destination.
Another justification for a
mailbox-like rule for electronic mail is the offeror's role in delivery.
While telexes and faxes are received at the recipient's location almost
immediately after they are sent, some electronic mail systems use mail
servers operated by third parties that are not located at the
recipient's location. Even after receipt by the mail server, the
recipient has to take steps to connect to their `mailbox' on the mail
server before the communication is complete. Since the offeror is
partially responsible for ensuring delivery, it may not be appropriate
to allocate the entire risk in the delivery of electronic mail to the
offeree.
It is also quite possible that no
simple rule will govern electronic messages. In a recent case involving
telex communication, England's House of Lords seemed to be backing away
from the application of a general rule:
The message may not reach, or be intended to reach, the designated
recipient immediately: messages may be sent out of office hours, or at
night, with the intention, or on the assumption, that they will be read
at a later time. There may be some error or default at the recipient's
end which prevents receipt at the time contemplated and believed in by
the sender. The message may have been sent and/or received through
machines operated by third persons. And many other variations may occur.
No universal rule can cover all such cases; they must be resolved by
reference to the intentions of the parties, by sound business practice
and in some cases by a judgment where the risks should lie.
Legal
Response
Trading Partner Agreement
As with the contract formality issue, EDI trading partners try to
resolve the communication of acceptance rule in their trading partner
agreement. The standard TPA has an interesting way of balancing the
risk. The TPA states that no document is legally binding until received,
thereby eliminating the possibility of the "mailbox rule" being applied.
The sender, therefore, bears the risk of transmission failure. However,
this risk is reduced by provisions requiring recipients to promptly
acknowledge receipt of any message as well as notify the sender of any
communication it reasonably suspects is incomplete, inaccurate,
corrupted in transmission, or not intended for him.
Law Reform
For transactions caught by the International Sale of Goods Act, the
"mailbox rule" does not apply. Instead, the Act sets out that the
acceptance of an offer becomes effective at the moment the indication of
assent reaches the offeror.
In the U.S., reformers have proposed changes to the U.C.C. to deal with
the formation issue specifically for electronic transactions. The
proposal differs from the International Sale of Goods Act by
acknowledging the offeror's role in the delivery process. While the
proposal states the contract is created when the acceptance is received
by the initiating party, it goes on to provide rules for determining
when an electronic message is received. When the message reaches the
electronic mail system used by the recipient, it is deemed to be
received. Therefore, the offeree does not bear the risk for the time
between the message reaching the mail system and the offeror retrieving
the message from the system.
Meeting of
the Minds and Humanless Contracting
Issue
While much of the contract formation discussion revolves around the use
of computer technology as a means of communication by contracting
parties, a far more difficult issue is beginning to emerge with the
automation of the contracting process itself. Traditional contract
doctrine centres around the requirement of a `meeting of the minds'. The
involvement of two or more people, negotiating either face-to-face or
through some means of communication is an underlying assumption.
However, modern technology is evolving with a goal of eliminating human
involvement in transactions. How traditional contract doctrine will
accommodate situations where the only `minds' that meet are programmed
computer systems is uncertain.
Interactive EDI is already beginning
to emerge in business transactions. The following describes a possible
interaction:
...a sending computer, on its own initiative, will make an offer to a
recipient computer for the purchase of goods based on the sender's
inventory needs. The recipient computer will accept the offer if the
recipient has the quantity of product in stock. This two-way
conversation between computers will further culminate in negotiations.
One computer will make an offer to buy 100 widgets, and the other will
respond with a counteroffer of 50 widgets due to a shortage in stock.
The computer that made the original offer will thereafter decide on its
own whether to accept the 50 widgets or reject the counteroffer and
search for another vendor.
Automated transactions will not be
limited to business-to-business transactions. According to Colin Crook,
head of technology at Citibank, in the future "You're going to hand off
your personal affairs in cyberspace to automatic agents who represent
you."
In a fully automated system, human decisions are involved in creating
the system and making it accessible; humans assent to the system, not
specific transactions. Traditional contract doctrine looks at the
intention of the parties surrounding the offer and acceptance of the
specific agreement in dispute. As such, it is not clear whether people
can be bound by offers or acceptances made by their computer on their
behalf. They may have had no knowledge of, let alone intention to enter,
a given transaction.
The main issue is one of attribution
-- when do the actions of an agent become attributed to the principal.
While agency law plays a role in attribution when using human agents,
human judgements, such as voluntary assent and reliance, are major
themes in this area of law. Therefore, the existing law of agency may
not be very helpful in determining attribution with automated agents.
With automated transactions, another
challenge for the courts is determining where the communication system
ends and the legal agent begins. The challenge is separating responses
that are part of the functional communication process, such as those
acknowledging receipt of a message, from responses that are part of the
contract formation process, such as an acceptance of an offer.
In a recent U.S. case, the court
dealt with an automated order taking system. In holding that the order
tracking was merely a functional acknowledgement of the order, the court
stated "Such an automated, ministerial act cannot constitute an
acceptance." However, one can envision a more sophisticated system that
verifies the identity of the orderer, checks the inventory level,
allocates a portion of the inventory to fulfilling the order, then
issues the order tracking number. This is no less automated or
ministerial, yet it may be in both parties' interests to consider it a
legal acceptance.
Legal
Response
As this is an emerging issue, legal response has been limited. Standard
trading partner agreements still assume human involvement in the
process. The UN's Draft Model Law on Legal Aspects of EDI includes a
similar assumption. In the U.S., law reformers have begun to address
this issue, but the UCC proposal was admittedly only a first-step to
promote policy discussion of many unresolved issues.
In addressing the attribution issue
in electronic contracting, the proposal focuses not on humans who make
decisions on specific transactions, but on how risk should be structured
in an automated environment. The object is to create default rules for
attributing a message to a party. The party described in the message as
the originator will be bound by the terms of the message if the message
was authenticated using a procedure previously agreed to by the parties.
This provision gives primacy to authentication procedures in trading
partner agreements. In addition, a fault provision attributes the
message to a party if the relationship between the wrongdoer and that
party enabled the wrongdoer to gain access to and use the authenticating
method.
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