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FAQ: Binding Nature of Electronic Contracts

Q: What is the legal position of a product advertisement posted by a merchant on an electronic storefront ?
A: It is usually regarded as an "invitation to treat", i.e. not as an offer. Thus, an on-line merchant is not bound to sell a buyer the merchandise unless he has accepted the buyer's order without reservation.

Q: How contract between a seller and buyer is made?

A: A contract for sale of a merchandise, for example a CD on the Internet is formed electronically. Either an on-line merchant makes an offer to sell or an on-line buyer makes an offer to buy the merchandise posted on the Internet storefront. A contract is formed upon acceptance of the offer. Depending on the terms of the on-line sales contract, acceptance can arise when an on-line merchant confirms the buyer's order without reservation. A prudent merchant may therefore confirm a buyer's order subject to the availability of the merchandise or until stocks last. That condition can be built in the sales contract and included in the merchant's automatic email confirmation.

Q: What governs the legal validity of an on-line contract?

A: The legal validity first depends on which territory of laws applies when considering the subject contract dispute. If the parties to an on-line sales contract are both in Hong Kong, their dispute will be decided according to Hong Kong laws. Two territories may have the jurisdiction on the same dispute if parties are located in different territories. A prudent on-line merchant may include a term defining what are the "applicable laws" and which courts ("jurisdiction") have the authority over the dispute.

Q: Is an on-line contract binding between the seller and a buyer?

A: Yes. An on-line sales contract is binding subject to very limited number of exceptions, for example real property. Therefore, the sale of chattels (for example, books) or services (for example subscription of information or data on-line) is binding on the parties if the elements of a contract exist: offer, acceptance, consideration and intention of legal relationship.

Q: Is there a legal liability if a party is in breach of a term in an on-line contract?

A: Yes. In B to C sales contract, the price on the merchandise can be of a few hundred dollars. An on-line merchant can sue a buyer at the Small Claims Tribunal (which handles claims not more than HK$50,000.00) for the unpaid price. An on-line merchant who has accepted an order from a buyer may also face a buyer's claim but the loss will be the price the buyer has to additionally pay for buying the same merchandise with another merchant.

Q: Is there any legal authority in Hong Kong having decided on the validity of an on-line contract?

A: No. The legal point of view taken by lawyers is based on case laws analogous to on-line sales contracts. Besides, the courts will throw the world into chaos if a sales contract cannot be binding simply because it is not paper-based. Therefore, it is logical to deduce that the court will not deny the validity of an electronic contract from a very practical point of view.
Lastly, the Electronic Transactions Ordinance has now provided that a contract cannot be denied its validity on the ground that it was made electronically. Thus, an on-line sales contract is a valid as a paper sales contract.

Q: Can electronic records and communications be used as evidence in Court?

A: Yes. According to the Electronic Transactions Ordinance, emails, their attachments and contents of electronic nature, whether they are images, sound files etc can all be admitted as evidence in Court actions.

Q: Will the absence of a written signature make an on-line contract not binding?

A: No. A sales contract of chattels as the merchandise does not necessarily require terms in writing. Nor a signature is required to make it binding. The Electronic Transaction Ordinance gives "digital signature" recognised by the Ordinance the benefit of attribution i.e. that the "digital signature" is presumed to have been used by the owner of the private key. But that does not mean that every electronic contract has to use "digital signature" in order to be valid.

Q: By what procedures I should follow if I want to sue a party in breach of an on-line contract?

A: If the claim is not more than HK$50,000.00, the legal action should be started in the Small Claim Tribunal. The claim form is provided by the Tribunal's Registry.


Electronic contracts are valid

This is under section 17 of the Ordinance.

In the context of the formation of contracts, unless otherwise agreed by the parties, an offer and the acceptance of an offer may be in whole or in part expressed by means of electronic records.

Where an electronic record is used in the formation of a contract, that contract shall not be denied validity or enforceability on the sole ground that an electronic record was used for that purpose.


Risks of Electronic Communication

The following are the most apparent risks or elements of concern when making electronic communications:

1. crimes

2. theft of valuable confidential information or trade secrets

3. unauthorised access and use of resources

4. fraud e.g. forged identity

5. trust

6. loss of customer confidence or respect to electronic communication loss

7. financial loss owing to fraud


Means of authentication

A party's identity is a critical element when contracting online.

In the context of digital means of identification, the following are the summarised manner. Online identification can be by one of the following methods or it can of a combination:

1. user name, password and PIN

2. biometrics: retina, palm, finger prints

3. Token: e.g. smart card


Mistake as a vitiating factor

If an online merchant make an offer by mistake on his web-site and a lot of orders are made by online customers amounting to acceptance.

For instances, the sale of vehicles at the mistakenly posted price of $1,000.00 in stead of $100,000.00. He can only rely on the doctrine of mistake to vitiate the contract. Mistake as a vitiating factor under the law of contract is provided by the common law whether the defence can be established depends on the court's find that the online customer knew that a mistake had occurred.

However, case laws are not definite as to whether the mistake must actually be known to the customer or whether it is enough if it is proven that the mistake ought to have been apparent to any reasonable man Centrovincial Estates plc v Merchant Investors Assurance Co. Ltd [1983] Com LR 158 held that the objective test of “reasonable man should apply. However, Agip SpA v Navigazine Italia SpA [1984] 1 L’Loyd's Rep 353 held that equity would require actual knowledge for rectification.


Binding and Enforceable Nature of a Contract

A contract is an agreement binding on the parties. It creates a legal obligation on the parties to perform their obligation.

The law of contract bases itself on the common law. Case laws differ how a contract is formed and become legally binding on the parties.

An contract is enforceable against the party at fault or party in breach. Enforceability means that the innocent or injured party can sue the party at fault for legal remedies such as damages and specific performance.

There are 4 elements to contract formation. They are offer, acceptance, consideration and intention to create legal relation, capacity of the parties to contract and legality of the contract are also frequent concerns.

Only a very few types of contract regime writing e.g. sale of real properties, contracts can generally be made orally. However, whether writing is required or not, if there is a written contract, the parol evidence rule operates to exclude outside or extrinsic evidence.


Oral and Written Contracts

A contract except a few can be made orally. Writing is not the essential element. A web-site offering sale of chattels such as books, ornaments, computers etc need not concern about the requirement of writing and signature. However, in the eyes of common law signature is by nature a means to authenticate a person's identity and hence ensuring that the party's identity is not easily denied. In Goodman v J Eban Ltd [1954] 1 All ER 763, it was held that “The essential requirement of signing is the affixing, either by writing with a pen or pencil or by otherwise impressing on the document, one's name or “signature” so as to personally authenticate the document”.

There exists no decided cases in common law that the typed signature or scanned signature contained in an email is legally equivalent to a hard-written signature. However, Goodman seems to suggest that in so far as a “thing” is sufficient for the sake of authenticating a person, it amounts to “signature”. Digital signatures have formally ascribed through the Electronic Transactions Ordinance to become a “signature”. Therefore, digital signatures are given their “signature” status by legislative intervention and hence the function of authenticating a person. However, it must be noted that digital signature having the effect equal to manual signature must a recognized one issued by a certification authority recognized under the Electronic Transaction Ordinance. These include the Postmaster General of HKSAR Government and Digi-Sign. Widely known certification authorities such as Verisign may not have been recognized under the Ordinance and hence the status of digital signatures issued by them are still governed by the common law.


Sufficient Consideration

A party who wish to enforce a broken contract must show that he has parted with a consideration in the bargain. The usual forms of consideration is the price paid and the goods delivered. Therefore, a gratuitous promise or “agreement” cannot enforceable as a contract. A consideration has to be sufficient and need not be adequate.


Acceptance must be communicated

Acceptance must be communicated to the offeror for having a legal effect.

However, this is subject to the exception under the “postal rule” held by Adam's v Lindsell [1818] 1B & Ald 681. Under the postal rule, if a communication is by letter or telegram, the party trying to prove communication does not usually have to show that the recipient has actually receive it. The postal rule only requires the acceptance to be delivered only. The underlying reason is that business deals will become uncertain as nobody would know whether their acceptance had worked or not to make a contract. In Byrne v Van Tienhoven [1880] 5 CPD 344, the English court held that a contract was under by an effective acceptance when on that day and the plaintiff receive offer and send acceptance by telegram “upon the principle that the written of the offer has expressly or impliedly assented to treat an answer to him by a letter duly posted as a sufficient acceptance and notification to himself”. However, if the acceptance communicated by electronic means other than by post or telegram, the “postal rule” does not apply. Electronic communication can be in the form of telephone, telex or in the Internet environment emails or online form, transmissions. In Brinkibon v Stahag Stahl [1983] 2 AC 34, the House of Lords held that a telexed acceptance is effective when and therefore where it is received unless the parties could be held to have intended otherwise. The proposition equally applies to fax messages even though the acceptance is in the facsimile is received from the machine rather than being a physical document forwarded by the offeree (Susanto-Wing Sun v Yung Chi [1988] No.A8177. The emergence of emails, fax and other forms of electronic communication have rapidly eroded the importance of the postal rule. Online auction is a popular form of e-commerce activity. The leading web-site platform is of course eBay.com. However, it must be noted eBay does not put goods for sale at eBay.com and hence it is not an auctioneer in capacity. eBay only provides a platform to its members to put goods for sale through auction and for members to offer bids.

In law, the putting up of goods for sale by auction is not an offer. The person who bids makes an offer (and hence be the offeror) which the auctioneers can either accept or reject. In a typical online auction, a number of people offer bids which are openly displayed on the web-site. Section 60 of The Sale of Goods Ordinance provides that each higher bid destroys all earlier bids. The legal principle in auction is that the auctioneer's final determination of the successful bid is the only acceptance. However, online auction platform providers have strict requirements on members who put their goods for bid on their web-site. A good placed for auction with conditions fulfilled by bidder ought to be sold and delivered. Auction participants are encouraged to grade their counter-parties in each transaction for subsequent participants to refer. Delinquent participates may cause their membership qualified.


Offer and Acceptance

An offer is made by a party either being a buyer or seller to the other party with the intent in definite terms to be accepted by the other party. An offer must be communicated to the other contracting party. An online advertisement made by a seller is in law and invitation to treat an not an offer. Therefore, in such context, an offer is usually made by a buyer who communicates with the seller his intention to buy a certain good from him. For instance, a buyer received an email newsletter from an e-commence merchant. He than clicks to response to it by filling an online form indicating his intention to buy a certain good. This is an offer. The online merchant on receipt of the online form may then response by agreeing to it. This response is called acceptance. The person who makes the offer is called the offeror and the person who accept the offer is called the offeree.

Contracts are normally arrived and become legally enforceable upon acceptance. Therefore, it is important to find out when an acceptance takes place. The traditional view considers an advertisement as an invitation to treat. An advertisement can be in the form of an online catalogue bulk email messages (whether unsolicited or not). However, if an advertisement is communicated in clear terms. For instance, with the produce clearly described, the price and availability clearly made known to online visitors without any reservations, it can be easily considered by the law as an offer. Therefore, an online customer clicking on the “yes” or “buy” button on a virtual shopping cart will be treated as an acceptance. An online merchant making definitive advertisement may easily become liable for breach of contract if no available stock can be found after receiving a customer's order. Prudent online merchant should conspicuously make known to the online buyers that placing of orders is subject to availability of the stocks, thereby having the effect of making the ordering an offer binding only upon a definitive acceptance by the online merchant. Although the order is subject to a subsequent condition i.e. that the stock is available. If the buyer's response towards an online advertisement is an offer, an offer can be withdrawn by the offeree (i.e. the online merchant) has communicated its acceptance may reputation web-sites such as Amazon.com in fact permits customers to cancel their orders before shipments made by the merchant. Alternatively, goods can be returned to the seller without liability within 30 days of the purchase goods returned are only required to pay the shipment costs.

An offer made online over the Internet must be carefully handled. An offer made to the entire would is one which the offeror (an online merchant) is glad, to be accepted by any offeree (an online customer). Offer must therefore be carefully controlled by the offeror. For instance, an online offer posed with wrong price tag can have a disastrous effect on the online merchant if it is accepted by a large number of if online customers. The advertisement in Carlill v Carbonic Smoke Ball Co. [1893] 1QB 256 offered £100 to anyone who used a medicine and still caught influenza. That offer was accepted whenever anyone used the smoke ball according to the product instructions.


Elements of Contract

How does an online seller ensure that contract is enforceable and he can get pay?

To achieve that, he must set up a platform capable of agreeing with his customers. As to payment, it can be made outline by the customer after ordering.

Alternatively, it can be paid through post e.g. cheque, money transfer or face-to-face. Payments being made immediate to ordering of the purchase can reduce the risk of repudiation is denial of the contract or fraud and hence is preferred whether an online contract is legally enforceable depends on the valid application of the laws on electronic transactions.

A contract must consist of the following 4 elements :

  • offer,
  • acceptance,
  • consideration,
  • intention to enter into legal relation.
  • Of course, the parties entering into the contract must have the legal capacity to do so e.g. business contracts made by minors (i.e. person under 18) is not enforceable against the minor. Besides, the contract must be legal which means that for instance, a person in Hong Kong betting online on a virtual casino situates outside Hong Kong is no enforceable through the Hong Kong courts based on Hong Kong laws. A person in Hong Kong gambles online will also attract criminal liability under the Gambling Ordinance.