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E-Commerce: The Legal Building Blocks Printable Version

E-commerce - The Simple Secret of Success

The Digital Revolution seems to be changing the business environment almost at the speed of light. Only a few years ago many of us had never heard of the Internet. Today none of us can afford to ignore the challenge of e-commerce and doing business on the Internet. We know that we must prepare for intense competition in a global and virtual marketplace where time and distance have almost disappeared as competitive factors.

Facing fundamental and rapid change, it is all too easy to become paralyzed. We may simply despair in the face of the coming competitive onslaught. Or we can presume that something about our business is unique and will make us impervious to the effects of changes in the marketplace.

However, an ostrich-like defensive posture will not protect us from the effects of today's Digital Revolution any better than it protected those who clung to the old ways in the face of the changes wrought by the Agricultural and Industrial Revolutions. We can be as nostalgic as we like about "the good old days" but we must be hard-nosed in our determination to prepare our companies for the new competitive environment. Standing still is not an option. To survive and to succeed, we must learn to swim with the sharks.

The good news is that we each already know a great deal about what is really important in order to succeed in the face of the e-commerce challenge. The secret is simply to know that we know it. And, of course, to put our knowledge into action! One key to doing so involves what I describe as "constantly stripping back to first principles".

Whether business is conducted in a store, at the office or on the Internet (or even on the golf course) many of the most important factors remain constant. For example, to do business on the Internet as elsewhere, we must know our market intimately and build our brand by providing our customers with efficient and friendly service, a quality product and value for money. If we concentrate on the underlying principles involved in the particular commerce that we are proposing to conduct on the Internet, we can tap into our accumulated wisdom and experience to find solutions to many of the issues that arise. In fact, you may find that many features of doing business in cyberspace can be demystified by constantly stripping everything back to first principles.

This approach also applies to the law generally and to the legal and regulatory framework for e-commerce in particular. Many of the legal issues that affect business on the Internet can be resolved by learning how to peel the technological skin off of the relevant business model, transaction or problem being examined. The objective is to expose the underlying legal structures and principles. Once this is done, in most commercial situations the relevant issues -particularly the crucial risk allocation issues- can be identified and addressed using established legal techniques.

Another important benefit of taking this approach is that it helps us to unearth shifts in the established ways of allocating commercial risk that may otherwise slip through unobserved. Generally, we should be wary of attempts to alter rules about risk allocation in commerce because of the use of technology to support a business model or transaction. It will frequently be the underlying principles of the model or transaction, and not the technology, which drive the established position.

This does not mean that the effects of new technology will never justify altering risk allocation. Indeed, in some cases, the introduction of technology may even make it advantageous to do so. However, we should check that this is the case by reference to the principles involved. We ought not to presume that a change in risk allocation should be accepted simply because it is put forward in the context of the introduction of new technology.

As we learn how to engage in e-commerce, the commercial community can use the basic approach of stripping back to first principles in a number of important ways. For example, we can:

  • Analyze existing and proposed legal structures for conducting e-commerce in order to modify such structures, or even create entirely new ones, that add value in the new business context;
  • Manage many of the legal risks posed by the existing and proposed legal structures used to conduct e-commerce; and
  • Identify areas where legislation may be needed to facilitate e-commerce and develop proposals for such legislation that are in the interest of the business community.

As we prepare to do business in a digital marketplace -characterised by global competition, perplexing uncertainty and rapid change- the first principle of leadership is to strip back to first principles. In this way we can identify and orient ourselves by reference to what represents "True North" in relation to our ways of conducting business, our particular business situation and the relevant transactions. This can provide our business community with a simple, yet powerful, technique to lead the way on the exciting journey in search of markets in cyberspace.

E-Commerce - The Legal Building Blocks

Contracts are the basic legal building blocks for all commerce. They are essential to business. Like building blocks, contracts can be assembled into structures that range from the very simple to the most sophisticated. They provide businesses with great flexibility to allocate commercial risks and to select and adapt established legal structures, or to design new ones, according to their particular commercial needs. This is as true of e-commerce as it is of traditional business.

As we begin to engage in e-commerce, we need to understand the various legal structures that may be used for this purpose. In this way, we can adapt those legal structures, or even create entirely new ones, to add value and manage risks in the context of the particular types of e-commerce that we propose to transact. For this reason, our first step will be to examine the principles that apply to these basic legal building blocks for e-commerce i.e. the law of contract as it applies in cyberspace. On this journey, we shall confront many of the practical legal issues that arise when we transact business and enter into commercial relationships over the Internet.

Creating On-Line Contracts

At the most basic level, a contract is simply a promise that is legally enforceable. It is formed when two or more persons reach an agreement that the law recognizes as binding. Contracts are traditionally analyzed in terms of an "offer" and "acceptance". For example, we usually will have entered into a legally binding contract when I "offer" to buy a particular book from you at a price that you "accept". If either of us attempts to avoid our obligations, the law will compel compliance or award compensation.

This is so whether we have arrived at this agreement in a face-to-face meeting, on the telephone or in correspondence. It is also the case if we reach agreement on-line, for example by exchanging e-mail messages. Similarly, contracts can be formed via Web sites, through automated touch-tone telephone systems and in any number of other ways, such as via interactive television or the wide range of so-called "digital appliances" which are becoming widely available.

Generally, the applicable legal principles are not affected by the medium through which we conduct our communications leading up to an agreement. For example, when a company advertises products for sale to the public, this is not considered to be an "offer" but merely an invitation to submit "offers". A person who orders the product in response to the advertisement is considered to be the party making the "offer" and until the company "accepts" that offer there is no contract. If it were otherwise, the company would be legally obliged to fulfill all orders received even if these exceeded supply. Obviously, the same principles will apply where goods are offered on a Website, so that when a person transmits an electronic order, by filling out a form at the Website, it must first be "accepted" before there will be a binding contract.

However, challenging issues can arise. For example, some systems may automatically produce a computer-generated response to an order received via the Internet. Will this be considered to be an "acceptance" resulting in the formation of a binding contract? The answer will probably depend on the form and content of the response generated. And the test will probably be an objective one, i.e. whether a notional "reasonable person" receiving that particular response would have considered it to be an "acceptance" so as to immediately produce a binding contract.

There are, of course, many other legal issues that can arise in relation to the formation of on-line contracts. These include whether an automatic computer-generated communication can constitute an "offer" which, if accepted, immediately results in a binding contract. This could be an issue, for example, where an insurance company's computer automatically generates a renewal notice. Will an "acceptance" by the policyholder immediately create a binding contract? And what if the renewal notice was generated in error or contains a mistake?

Also, while using the mouse to click on a button on a Website would normally constitute an "acceptance" resulting in a binding contract, this may not always be the case. Certainly, there must be more doubt about whether the act of simply downloading a file from a Website would itself constitute an "acceptance" binding the person doing so to terms sought to be imposed on a notice at that Website.

Under Trinidadian law, very few categories of contracts require to be in writing or signed in order to be legally enforceable. The main exceptions include contracts involving the transfer of an interest in land, contracts of guarantee and hire-purchase contracts. These do not pose a major obstacle to e-commerce between parties who are all located in Trinidad and Tobago.

However, the same is not true for all jurisdictions. Some jurisdictions (including US jurisdictions) have more general requirements that may apply, for example, to all contracts for the supply of goods over a defined dollar value. Careful consideration needs to be given to such requirements, if you contemplate conducting e-commerce across national boundaries. In subsequent articles we shall therefore examine some of the possible solutions to the problems raised by these requirements.

Clearly, companies need to understand and to factor these types of legal considerations into the design of their e-commerce systems. By doing so, they can make use of established principles of contract law to design technical solutions and user-interfaces that achieve their business objectives while mitigating their risks. An ounce of protection is always worth a pound of cure, particularly in situations where the alternative to careful planning is the possibility of becoming involved in expensive litigation to resolve novel and difficult legal issues.

Creating Certainty in E-Commerce

As companies begin to engage in e-commerce, we need to create as much certainty as possible about how the commercial risks are to be allocated between the parties involved. To achieve this, we must reduce ambiguity about the rules that apply to each electronic transaction. One important way to achieve greater certainty is to make sure that we effectively incorporate suitable terms and conditions into contracts that we make over the Internet.

For example, a company offering products over the Internet will want to consider the terms and conditions that relate to the extent of the warranties it provides. Of course, there are many other kinds of matters that may be covered by such terms and conditions. Other common examples include terms and conditions that impose limitations on the supplier's liability, specify its policy on refunds and returns and identify dispute resolution mechanisms.

While one has to ensure that the substantive content of these terms and conditions are properly drafted to achieve the parties' commercial objectives, this generally raises the same issues as when one is conducting business through traditional channels. However, when preparing to conduct e-commerce, there are also particular issues to be considered in order to ensure that such terms and conditions are effectively incorporated into contracts that are made over the Internet.

Companies that are in the process of choosing business models and developing systems for e-commerce need to understand these legal issues and how they can affect the choices they make. In particular, when developing a Website for e-commerce, these legal issues need to be factored into the design of its structure and user-interface.

Avoiding E-Fine Print

At the most basic level, a party cannot be said to have agreed to terms and conditions unless he knew what these were before entering into the contract. Consideration must be given to the manner in which information about proposed terms and conditions is presented to users. Fortunately, one will normally only have to prove that a user was given sufficient opportunity to read and consider whether to accept the proposed terms and conditions and not that he actually did so.

If proposed terms and conditions are buried deep in the structure of your Website ("e-fine print", as it were) there is a danger that they will not be incorporated into any contract formed with a user. This means that these terms and conditions -no matter how well drafted they may be- will be of no legal effect.

Depending on the size and value of the e-commerce transaction involved, the criticality of the particular terms and conditions sought to be incorporated and the extent of any risks involved, a prominent link to the proposed terms and conditions may be acceptable.

However, in most cases the better practice will be to design the structure and interface of the Website so as to ensure that the proposed terms and conditions are displayed to the user and to require him to acknowledge that he has read them before he can proceed. This can be achieved by designing the Website so that whenever the user clicks on a button saying "Submit Order" a page is automatically presented containing the relevant terms and conditions as well as another button saying something like "I Accept These Terms".

Implied Terms and Legal Restrictions

Apart from terms and conditions expressly incorporated into a contract made over the Internet, using one or more of the techniques discussed above, certain other terms and conditions may be implied into such contracts as a matter of law. For example, under Trinidadian law (as is the case in many other jurisdictions) certain warranties relating to a product's fitness for its purpose and its quality will be implied by law.

In order to protect consumers and others from the potential abuse of inequality in bargaining power, the law may also impose restrictions on the extent to which parties can agree to restrict their obligations under any such implied warranties or to limit their liabilities. For example, under Trinidadian law, it is not possible to use terms and conditions of a contract to exclude liability for death or personal injury resulting from negligence. And, in relation to other types of loss or damage, terms and conditions that seek to restrict or exclude liability for negligence are usually ineffective unless a Court considers them to be reasonable.

Beyond the Boundary

Of course, the extent of which the laws of different countries imply terms and conditions into contracts and also restrict the freedom of the parties to agree other terms and conditions - such as those excluding liability - varies from country to country. It therefore can be a matter of significance to ascertain which country's laws govern a particular transaction as this may affect how the commercial risks are allocated between the parties involved.

In the context of e-commerce - which will frequently be conducted between parties who are located in different countries - one category of terms and conditions that should never be overlooked are those that specify how disputes are to be resolved. These terms and conditions should identify which country's laws apply. And, they should also address the related question of which country's courts will have the authority to adjudicate on disputes. They may also provide for arbitration or other forms of alternative dispute resolution.

This whole subject of managing the international dimension of e-commerce, and the legal uncertainties and risks associated with it, is so critical that it will be separately examined in the next article in this series.

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