(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.

(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

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

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

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

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

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

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

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

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

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

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

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

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

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

(c) 2004 West Legal Studies in Business A Division of Thomson Learning 21 Definiteness Reasonable certain and complete –Subject matter, quantity, quality, price, payment terms, duration Article 2 does not require so much definiteness

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

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

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

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

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

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

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

(c) 2004 West Legal Studies in Business A Division of Thomson Learning 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 minds 7th 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

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

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

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

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

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

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

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

(c) 2004 West Legal Studies in Business A Division of Thomson Learning 40 More Illegal Contracts Contracts in Restraint of trade –Price fixing –Non-competition agreements –Tying agreements –Grant back agreements

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

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

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

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

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

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

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

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

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

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

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

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

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

(c) 2004 West Legal Studies in Business A Division of Thomson Learning 57 UCITA: Warranties Like the UCC Warranties against infringement or misappropriation Warranty of merchantability Warranty of fitness for a particular purpose

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

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

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

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

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

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

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

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

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

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

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

(c) 2004 West Legal Studies in Business A Division of Thomson Learning 70 Click Wrap, Shrink-Wrap, and Browse-Wrap Agreements ProCD, Inc. v. Zeidenberg Brower v. Gateway 200, Inc. Specht V. Netscape Communications Corp.

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

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

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

(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.

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(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.

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