1. What is a Contract?
A contract is a legally binding agreement between two or more people or organisations.
The terms of a contract may be expressed in writing or orally, implied by conduct, industry custom, and law, or by a combination of these.
2. Form and execution of contract
There is no legal restriction on the form and execution of contracts except for those involving the conveyance of land, consumer credit and certain other transactions requiring particular formality.
Contracts may be formed by email exchanges or "clickthru" agreements and executed using digital signatures.
3. Contracting on the Internet
The parties to an electronic contract must:
(a) determine when a binding contract is formed;
(b) determine the governing law of the contract;
(c) agree on the electronic payment system to be used;
(d) ensure information exchanges leading up to and including the formation of the contract are secure to prevent later repudiation;
(e) determine the consequences on breach, frustration or mistake of contract when the seller resides in a foreign jurisdiction (eg charge back);
(f) verify the identity and capacity of the parties to the contract;
(g) store electronic contract data in a manner that prevents alteration by any agent without detection;
(h) be aware of any terms implied into the contract under trade practices legislation; and
(i) implement contract management procedures to minimise the legal risk of contracting online.
4. When is a binding electronic contract formed?
Acceptance of an offer must be communicated to the offeror before a contract will come into existence. Unless the contract specifies otherwise, a contract is formed in the jurisdiction where the acceptance is received.
A product offering on a website may be construed as a binding offer or a mere "invitation to treat". A court will interpret a website by reference to the intention of the alleged offeror, to be gathered from all the circumstances. The product offering is likely to be interpreted as a binding offer if the seller's intention manifests a willingness to be contractually bound without any further negotiations. If the seller's intention falls short of this, the website is likely to be interpreted as a mere "invitation to treat". An "invitation to treat" is an invitation to the website visitor to make an offer that the seller may accept or reject.
When a website visitor makes an offer in relation to an invitation on a website and the seller notifies acceptance of the offer to the website visitor, the contract forms in the jurisdiction of the seller. A jurisdiction clause may be inserted into the contract of sale to affirm or alter this outcome. Despite a jurisdiction clause in a contract, a court always has jurisdiction to decide the issue.
The timing of acceptance becomes critical when an offer is revoked before it is accepted. Legislation determines when and where communication of acceptance occurs in the context of internet contracting. Generally, in the absence of agreement to the contrary, an electronic communication is deemed to be received when it enters the recipient's information system. It is taken to be received at the recipient's place of business having the closest relationship to the transaction.
See Electronic Transactions Act fact sheet for more information.
Small value contracts are usually standard form contracts to which a buyer on the internet clicks an "accept" button in respect of the terms before the sale is executed. Provided a reasonable attempt is made to bring the terms to the customer's attention or the customer has a reasonable opportunity to read them, the agreement will be valid despite the absence of negotiation.
Mechanisms should be in place to provide consumers with a confirmation procedure for concluding contracts online and allow:
(a) the consumer to indicate his or her intention to buy;
(b) the consumer an opportunity to review and accept or reject the terms and conditions of the contract;
(c) the consumer to identify and correct any errors;
(d) the consumer to confirm and accept or reject the offer; and
(e) the business to acknowledge receipt of the order.
5. Governing law of the contract
Trading over the internet may involve forming contracts with people in countries or states with different laws. A company can become legally liable to any person or government in any territory, state or country which can access the website. In practical terms, this may mean complying with a range of legislation for different states, territories and countries.
As with all offline transactions in goods and services, it is crucial to establish the terms and conditions of a particular sale of goods or services on the internet.
Unless the terms and conditions of the contract have been brought to the attention of potential customers and they have signified their acceptance in some form there is a risk the customer will not be bound by the standard conditions of the contract. As these conditions are generally included to limit potential liability this can have severe consequences. For example, where the terms of the contract are altered by faulty transmission.
Terms and conditions should be included to reduce the chance that a business will become contractually bound unintentionally or the contract rendered unenforceable.
The governing law of an online contract will generally be the jurisdiction where acceptance of the offer is received, unless otherwise agreed by the parties to the contract.
Several international conventions and treaties allow traders to select the law of a particular jurisdiction as the governing law, although this does not deprive consumers of protections given by their country of residence.
Various jurisdictions apply different laws and approaches to the issue of computer-generated evidence. A jurisdiction clause in an online contract should specify a jurisdiction whose laws of evidence do not prefer conventional printed evidence over electronic evidence.
The United Nations Convention on Contracts for the International Sale of Goods (Convention) may imply terms into a contract concerning the sale of goods between parties in different signatory states. The Convention does not apply to transactions concerning sale by auction, execution or by authority of law, sale of stocks, shares, investment securities, negotiable instruments, money, ships, vessels, hovercraft, aircraft or electricity.
6. Secure contract formation in a digital environment
The following steps may be used to ensure security in contract formation:
(a) Seller creates and digitally signs the terms and conditions page using the seller's private key.
(b) Buyer uses the corresponding public key to verify the digital signature.
(c) Seller requests and buyer gives evidence indicating acceptance of the seller's terms and conditions (an order or acceptance form digitally signed by the buyer using the buyer's private key).
(d) Seller has the terms and conditions page digitally time stamped to set the date at which the terms and conditions are effective (and prevent later repudiation by either party).
(e) Buyer downloads a copy of the terms and conditions page as a record of the terms governing the contract.
See Secure Electronic Transactions fact sheet for more information.
7. Consequences on breach, frustration or mistake of contract
The parties should identify the circumstances in which a party will be liable for a mistake arising from physical problems with the network, programming errors or human errors. For example, a party failing to comply with agreed security procedures might be liable for errors arising from that failure. In relation to intermediary errors, the sender may agree to be liable unless the recipient ought to have been aware of the mistake.
8. Identity and capacity to contract
Electronic agents may be used by a person:
(a) to initiate or respond on their behalf to electronic messages without review by the person;
(b) as an online shopping agent programmed to surf the Internet and make purchases; or
(c) as an inventory control system programmed to place orders when stocks reach a particular level.
Although it is uncertain whether electronic agents can form binding contracts, the likely view is that a computer tool programmed to implement a person's intention can make and accept contractual offers on a person's behalf.
Minors (under the age of 16 years) may not have legal capacity to enter into a binding contract. An online business should implement procedures for verifying the age of parties to any online contract to minimise the risk that a contract will not be enforced due to the legal incapacity of a party.
9. Terms implied by trade practices legislation protecting consumers
Trade practices legislation makes misleading or deceptive conduct illegal and implies warranties and conditions into any contract for the provision of goods or services in trade or commerce.
In the Internet environment, conduct may be misleading or deceptive where:
(a) a consumer is, or is likely to be, misled or deceived by a statement on the website; or
(b) it is unclear when connecting from one website to another whether the linked website is owned or operated by the operator of the former.
Online statements or implications about a product or service must be accurate and honest. Certain provisions of the trade practices legislation apply regardless of a jurisdiction clause in a contract, provided there is some connection with Australia.
Bait advertising (falsely offering discounted prices) and referral selling are prohibited.
The following non-excludable terms may be implied into a contract:
* a warranty of good title;
* compliance with description, merchantability and fitness for purpose; and
* that services be rendered with due care and skill.
A contract term will not be enforced if a Court deems it unconscionable (ie against conscience) to do so. A contract will not be enforced if entered into through unconscionable means or processes.
"Consumer" is defined by reference to the type or value of the goods or services acquired. In certain cases, it may confer consumer protections to business purchasers.
See Consumer Protection fact sheet for more information.
10. Managing online contract legal risk
When entering into online contracts you should:
(a) Design the website so it is impossible for an internet customer to order goods or services without first invoking a webpage containing terms and conditions which must be accepted or rejected by a further click.
(b) Include a jurisdiction clause specifying the jurisdiction which applies to the contract and the courts which have jurisdiction to adjudicate any disputes between the parties.
(c) Use a computing system that time stamps and digitally signs the communication when the accept button on the screen is pressed (and logs an audit trail of acceptances).
(d) Obtain a warranty from customers that they are of age and have authority to enter into a binding contract (followed by offline verification of identity processes).
(e) Ensure any offer or advertisement on your website would be interpreted by a website visitor as an "invitation to treat" and not a binding legal offer. You can then check if stock shortages, lack of distribution rights or prohibitions on the sale of certain goods in a jurisdiction prevent the seller from accepting the offer. An "invitation to treat" may still give rise to a liability if an exclusive distribution agreement applies to you and your website fails to specify the particular area to which the products listed in the website apply.
(f) Ensure all information referring to costs indicates the applicable currency.
(g) Ensure they provide online all information they are required to provide by law or any applicable code of practice.
(h) Ensure the terms and conditions of a transaction are presented separately from advertising and marketing.
(i) Include in the terms and conditions (where applicable) the following:
* an itemisation of costs to the buyer;
* where the total cost of a transaction cannot be ascertained in advance, a statement that a total cost cannot be provided and a description of the method that will be used to calculate it including any recurrent costs and the methods used to calculate them;
* notice of other costs the buyer may incur including delivery, postage and handling, insurance, taxes and duties;
* notice of ongoing costs, fees and charges and methods of notification for changes to those costs, fees and charges;
* the period for which the offer is valid;
* any restrictions, limitations or conditions of purchase such as geographic limitations or parental/guardian approval requirements for minors;
* details of methods of payment including credit options and finance rates;
* terms of delivery;
* instructions for proper use including safety and health care warnings;
* conditions related to termination, return, exchange, cancellation and refunds;
* details of any applicable cooling-off period or right of withdrawal;
* conditions related to contract renewal or extension;
* details of warranty provisions; and
* details of after-sales service.
(j) Include warranties and indemnities to reduce your potential liability. This is an important risk management strategy if you are selling goods or services from your website.
(k) Include a provision stating that the contract terms cannot be varied by the customer unless you have accepted the variations in follow up communication.
(l) Before you enter into an agreement concerning goods or services, agree on the "point of no return" for ordering and cancellation and on how this will be signalled during the transaction.
Other relevant Articles on this site:
Best practice model
Terms and conditions of website
Encryption of data
Digital signatures
Other relevant Fact Sheets:
Consumer Protection
Electronic Transactions Act
Jurisdiction
Keeping Electronic Records
Online Contracts
Privacy
End Notes