An Introduction to the Uniform Electronic Transactions Act

by

Richard J. Greenstone*

Introduction

        Prior to the infiltration of the Internet, and more particularly, the World Wide Web into daily life, it seemed that the act of entering into an agreement was present in one's life, but fairly rare. Some may argue that we enter into contracts each day just by going to the store or using a credit card; life is a series of small contracts. But a person did not come across the words "I Accept" outside of such major events as executing a deed of trust or purchasing an automobile. But now, each day a person is presented with a variety of contracts as one surfs the World Wide Web. Just today, my Real Audio Player "expired" (which has much less consequence in my life than if a person I know expires but which nevertheless came at a time of a crucial election announcement, something an ordinary television would never do) requiring reinstallation of new elements and the acceptance of an agreement for the use of their software and services. Any moderately inquisitive attorney would automatically wonder whether such acceptance creates a valid contract. Let's find out.

Fundamentals and Issues

        Parties form a legally enforceable agreement only where they can clearly demonstrate assent to the terms and conditions of that agreement. See Calamari and Perillo, The Law of Contracts, § 2-1 (1977); Restatement (Second) of Contracts, §§ 1, 2, 22(1) (1979). In electronic contracting, the issue of whether mutual as-sent has occurred becomes the paramount concern. On-line contracting, while not anonymous, is faceless; there is a risk that the party contracting may not be who they claim or that the substance of the commu-nications used to form an agreement may be subject to tampering. Authentication issues, while rare in the real world become increas-ingly important in the virtual world. Ad-vances in technology such as online security through Secure Socket Layer (SSL) technol-ogy now assure buyers and sellers that their online transactions are as secure as two per-sons sitting across from each other-each knows who they are dealing with. In short or-der, courts have found valid the formation of electronic contracts. See Hotmail Corp. v. Van$ Money Pie Inc., 47 U.S.P.Q.2d 1020, 1998 WL 388389 (N.D. Cal. 1998).

Statute of Frauds

        While many online agreements may not fall within the Statute of Frauds, it may be worth taking a momentary detour through the concept to establish that an electronic contract does not violate it. The Restatement (Second) of Contracts provides a clear recital:

(1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception:

(a) a contract of an executor or administrator to answer for a duty of his decedent (the executor-administrator provision);

(b) a contract to answer for the duty of another (the suretyship provision);

(c) a contract made upon consideration of marriage (the marriage provision);

(d) a contract for the sale of an interest in land (the land contract provision);

(e) a contract that is not to be performed within one year from the making thereof (the one-year provision).

(2) . . .

(3) . . .

(4) In addition the Uniform Commercial Code requires a writing signed by the debtor for an agreement which creates or provides for a security interest in personal property or fixtures not in the possession of the secured party.

(5) In many states other classes of contracts are subject to a requirement of a writing.

Restatement (Second) of Contracts § 110 (1979). The Statute of Frauds pri-mary function is to prevent fraud in contracts, which by their very nature have been sub-ject to such wrongdoing. While electronic contracting does not involve a writing or a signature in the classical sense of ink and paper, leading commentators to question whether electronic contracting violates the Statute of Frauds, there is authority that elec-tronic contracts can satisfy it. The requirements of a "writing" and a "signature" can be found although their virtual world counterparts do not, in the traditional sense, exist. The record of the agree-ment will be found either in the computer's memory, or on it's internal storage (hard disk drive or, for longer term storage, tape). Information stored in a com-puter's memory con-stitutes a "writing" where that information is capable of being repro-duced in tangible form such as on a printer. See e.g., Smith v. International Paper Co., 87 F.3d 245 (8th Cir. 1996); Armstrong v. Executive Office of the President, 877 F. Supp. 690 (D.D.C. 1995); Clyburn v. Allstate Ins. Co., 826 F. Supp. 955 (D.S.C. 1993). Simi-larly, the signa-ture requirement has been found to be met by a long line of cases which argue that any symbol, meant as a signature satisfies the Statute of Frauds. See e.g., Mat-ter of Save-on-Carpets of Arizona, Inc., 545 F.2d 1239 (9th Cir. 1976) (typed name on UCC financing statement); Associated Hardware Supply Co. v. Big Wheel Distrib. Co., 355 F.2d 114 (3d Cir. 1966). Such symbols should include digital signatures or other re-liable computer generated identification techniques.

        We may think that the Internet, e-mail and the World Wide Web provide this novel form of entering into contracts. But let's not forget that telegrams, telexes, and telecopying-all involving communication through machines-have for years now, presented a means of remote contracting which the courts have found satisfying Statute of Frauds requirements provided that the messages (i) identify the parties, (ii) set forth terms of agreement, and (iii) indicate the parties intent to be bound. See e.g., Hawley Fuel Coalmart, Inc. v. Steag Handel GmbH, 796 F.2d 29 (2d Cir. 1986) (telex); Petroleum, Inc. v. Liberty Petroleum Corp., 505 F.2d 1384 (6th Cir. 1974) (combination of correspondence, cablegrams and telegrams); Miller v. Wells Fargo Bank Intern. Corp., 406 F. Supp. 452 (D.C.N.Y. 1975), aff'd, 540 F.2d 548 (2d Cir. 1976) (teletype machine answer-back).

Formation

        Several electronic methods may be used to communicate an offer and an acceptance and establish consideration. An exchange of E-mails, electronic data inter-change (EDI), a direct electronic link between vendor and purchaser, web site forms, and online mass market agreements where the act of downloading content or clicking an "I Accept" button obligates the recipient.

Legislative Recognition of Electronic Contracting

        One federal and two uniform acts have been enacted covering electronic contracting. The first, the federal Electronic Signatures in Global and National Commerce Act (Pub. L. 106-229, June 30, 2000, 114 Stat. 464, 15 U.S.C § 7001 et seq.) ("ESGNC") is a transitory act meant to be ultimately preempted by the Uniform Electronic Transactions Act (1999) ("UETA") ESGNC facilitates electronic contracting for most types of commercial transactions. ESGNC § 101(a) (15 U.S.C. § 7001) states that

(1) a "signature, contract, or other record relating to such transaction may not be denied legal effect validity, or enforceability solely because it is in electronic form; and (2) a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.

        Section 7 of UETA, parroting ESGNC § 101(a), indicates that elec-tronic contracts may satisfy Statute of Fraud Requirements. ESGNC § 102(a) (15 U.S.C. § 7002) specifically cites UETA and UETA's dominance over the federal enactment. The Uniform Computer Information Transactions Act ("UCITA") controls the licensing of computer software whether by means of traditional or electronic contracting.

        UETA legitimizes electronic contracting and "removes the barriers without affecting the underlying legal rules and requirements." UETA Prefatory Note. It is not a general contracting statute; traditional substantive rules of contracting remain unaffected by UETA and "subject to other applicable substantive law." UETA § 3(d). UETA's ultimate objective is to make electronic contracts as enforceable as contracts memorialized on pa-per; it does not set forth new standards for the formation or performance of contracts.

        UETA does not formally mandate electronic contracts, UETA § 5(a), but leaves it to the option of the parties involved whether or not to contract electronically or by traditional means. UETA expressly provides that it "applies only to transactions be-tween par-ties each of which has agreed to conduct transactions by electronic means." UETA § 5(b). The Act also makes it clear that "[a] party that agrees to conduct a transac-tion by electronic means may refuse to conduct other transactions by electronic means." Id. at § 5(c). Decisions to contract by electronic means may be made on a case-by-case basis.

        Section 3(b)(1) of UETA expressly recognizes that not all types of transactions are appropriate for electronic transactions:

(1) a law governing the creation and execution of wills, codicils, or testa-mentary trusts;

(2) [The Uniform Commercial Code other than Sections 1-107 and 1-206, Article 2, and Article 2A];

(3) [the Uniform Computer Information Transactions Act]; and

(4) [other laws, if any, identified by State].

The materials in square brackets may be filled in as appropriate by respective state legislatures with statutory schemes to be excluded from electronic contracting. For example, California's subsection (4) states "A law that requires that specifically identifiable text or disclosures in a record or a portion of a record be separately signed, including initialed, from the record. However, this paragraph does not apply to Section 1677 or 1678 [default on real property purchase contracts] of this code or Section 1298 of the Code of Civil Procedure [arbitration of disputes in real property contracts]."

        The substantive rules of contracts remain unaffected by UETA. UETA § 3(d) Prefatory Note. Offer, acceptance and consideration remain. And like traditional contract-ing, electronic contracts can be express or implied in fact through the online conduct of the parties.

        To date, twenty three states have adopted UETA with six states introducing the uniform act as legislation.

Conclusion

        To successfully implement UETA into an electronic contracting scheme, keep the following items in mind: First, use digital signatures and other reliable identification techniques to ensure the authenticity of the electronic document. To that end, the contract must be attributable to the specific parties involved, and it must represent the terms accu-rately and completely. Second, always confirm the terms of an electronic contract in a fi-nal electronic communication to ensure parol evidence rule protection. At this time, you rarely see E-mail confirmation of an agreement. The user sees the agreement in a pop-up box, clicks "I Accept" and then promptly forgets about the agreement. The better prac-tice is to send a final communication to which both parties should communicate their as-sent by exchanging digital signatures. Finally, include a merger clause in the confirm-ing electronic communication regarding the agreed to terms of an electronic contract so that a court or arbitrator will interpret the last communication as the entire and complete agree-ment between the parties.

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Copyright © 2001 Richard J. Greenstone. All rights reserved. The green diamond device is a registered trademark and Law Bytesis a trademark of Richard J. Greenstone.

This article was first published in The Licensing Journal,March 2001.