On-line Contracts: Electronic Creation of Effective Contracts

© 2001, 1997, Deeth Williams Wall LLP. All Rights Reserved. By: Michael Erdle

Table of Contents

Generally speaking, there are no formal requirements under Canadian law for the formation of a contract. Contracts may be formed by oral or written agreement or by the conduct of the parties. However, some statutes and regulations impose specific writing or signature requirements for the contract to be enforceable in a court of law.

Electronic commerce presents new challenges to existing contract principles in several areas. Issues such as offer and acceptance, the location of the contract, and implied terms and conditions offer new scope for disputes between contracting parties. As yet, there is little or no case law in Canada with respect to electronic contracts and it is impossible to know how the courts will resolve these issues. However, one may make some educated guesses on the strength of past responses to new technology such as the public postal service, telegraph, telex and facsimiles.

Offer and Acceptance

In Canada, a contract is formed through the exchange between the parties to the contract of an offer and an acceptance of that offer¹. In electronic transactions, it may not always be clear which party is making an offer, in the contract sense, and which one is accepting. For example, an advertisement is generally not viewed as an offer to sell but as an "invitation to treat" or a willingness to consider offers to purchase. The prospective buyer makes the offer when he or she offers to buy the advertised goods or services. This may be done in person, for example in a retail store, or remotely, when a person fills in the order form in a mail-order catalogue. Or it may be made when someone enters their name in an electronic order form on a computer network.

In each of those instances, acceptance of the offer occurs when the retail merchant, mail-order house or on-line service provider receives the offer and processes the order. If the customer is offering to pay with a credit card, for example, acceptance of the offer may be given only when the credit card company has authorized the transaction.

The contract is completed when confirmation of acceptance is communicated to the offeror. Until that time, the offer may be withdrawn. In face-to-face transactions, acceptance may be communicated instantly by receiving payment and handing over the goods.

However, various forms of communication have given rise to problems determining when and where acceptance has been communicated to the offering party. The rules governing communication of acceptance, first adopted in the United Kingdom, have been widely followed in Canada over the years. The general rule is that the contract is not complete until the acceptance has been received by the offeror. The principle exception to the rule arises in the postal acceptance or "mailbox" cases, in which acceptance has been held to be complete upon posting a letter or dispatching a telegram, even if the letter or telegram is delayed or lost². However, the courts have held that with modern forms of instantaneous communication, the rationale behind the "mailbox rule" does not apply. Therefore, acceptance by telephone, telex and facsimile is effective only when it is received.³

According to one view, the mailbox rule is a limited exception, based on the practical limitations and delays inherent in conducting commercial transactions by mail. It was introduced to accommodate the new postal and telegraph technologies of the 19th century and should not be extended further than necessary. However, the view has also been expressed that the general rule requiring actual receipt of notice of acceptance should apply where the means of communication is instantaneous and bi-directional (for example, by telephone), but that the postal exception should apply where communication is time-delayed and unidirectional (which would include facsimile and telex, as well as mail and telegram).⁴

If this understanding of the rationale behind the rule is correct, Canadian courts may apply the general rule to situations where acceptance is communicated instantaneously, such as Internet transactions, but adopt the mailbox rule, perhaps in some modified form to adapt it to the new technology, where acceptance is communicated by electronic mail or via a third-party EDI network.

Issues may also arise when use of electronic commerce results in situations where acceptance is communicated and received by a computer, rather than a person. When the exchange of messages making up the offer and acceptance have been made entirely automatically, have the parties really agreed? Who bears the risk of communication errors? These questions have not yet been answered in Canada.

The United States case Corinthian Pharmaceutical Systems Inc. v. Lederle Laboratories⁵ serves as a guide. In that case, an "order tracking number" issued by an automated telephone ordering system was found to be merely an acknowledgment of the order, rather than an acceptance which formed a binding contract. Applying the same reasoning to common electronic commerce practices, this could mean that a computer-generated message acknowledging receipt of an electronic order may not be sufficient to create a binding contract. The purpose of the message may be solely to confirm receipt of the order. It does not necessarily signify acceptance.

In some circumstances, the requirement for communication of acceptance may be waived, expressly or by implication. For example, conduct such as delivery of goods or services or payment of money have been held to constitute acceptance. Similarly, a course of dealing between the parties over time may lead one party to reasonably expect that an order has been accepted unless it is expressly rejected. Electronic trading partner agreements typically contain provisions that sending a specific message -- or the failure to send a specific message within a stated period of time -- constitutes acceptance of the proposed contract.

Location of the Contract

Offer and acceptance is important, not only to determine when a contract has been completed, but also to determine where it is made. In the absence of an agreement to the contrary, the law of the jurisdiction where the contract is concluded (the location of the accepting party) will govern the contract. In an electronic commerce environment, where a seller may be dealing with potential buyers from around the world, it may be advantageous for the seller to control the jurisdiction of the contract. By selecting a favorable jurisdiction, the seller may be able to exclude or limit implied warranties and to limit its liability.

When the transaction takes place over an international computer network, neither party may know where the other is located. The potential for legal uncertainty increases when one considers that either or both of the contracting parties may be using an independent service provider to deliver and process the electronic message.

Writing Requirements

The word "writing" appears more than 4,000 times in the federal statutes and regulations of Canada. The word "record" appears almost 2,800 times; "document" appears almost 3,000 times.⁶ In Ontario statutes and regulations, the word "writing" appears almost 4,000 times, "record" appears over 2,700 times and "document" appears more than 2,000 times.⁷ These words are similarly used in numerous statutes and regulations in other provinces. Therefore, it is a monumental task simply to determine when writing is required, and what the writing requirement really means. As far as the author is aware, no jurisdiction in Canada has even attempted such an inventory.

Writing is defined in a number of federal and provincial statutes. The federal Interpretation Act, states: "writing", or any term of like import, includes words printed, typewritten, painted, engraved, lithographed, photographed or represented or reproduced by any mode of representing or reproducing words in visible form."⁸ In the Ontario Interpretation Act section 29(1)) "writing", "written", or any term of like import, includes words printed, painted, engraved, lithographed, photographed, or represented or reproduced by any other mode in a visible form. The wording is slightly different from the federal Act, but the effect is the same. There is no definition of the terms "document," "record," "signed" or "signature" in either statute.

It is interesting to note that both statutes refer to "words" but not to numbers or other recorded symbols. It is also worth noting that the federal Act expressly includes typewriting, but the Ontario Act does not. Neither Act makes express reference to data recorded digitally or electronically.

The federal Criminal Code defines writing to include "a document of any kind and any mode in which...words or figures...are written, printed or otherwise expressed."⁹ The Criminal Code defines document as anything capable of being read or understood by a person, computer system or other device.¹⁰

A "record" is defined in the Canada Evidence Act as any part of a document or other thing on or in which information is written, recorded, stored or reproduced.¹¹ The courts have interpreted this to include information stored on and reproduced by computer. The Access to Information Act definition of record expressly includes "any machine readable record, and any other documentary material, regardless of physical form or characteristics, and any copy thereof."¹²

Article 2837 of the Civil Code of Quebec states that "where the data respecting a juridical act are entered on a computer system, the document reproducing them makes proof of the content of the act if it is intelligible and if the reliability is sufficiently guaranteed. To assess the quality of the document, the court shall take into account the circumstances under which the data were entered and the document was reproduced." The Civil Code, therefore, makes it clear that it is the reliability of the writing, and not its physical character, which makes the writing legally effective.

Nevertheless, there are numerous federal and provincial statutes which have very specific writing and signature requirements and which may be considered to act as an impediment to electronic commerce to a greater or lesser degree. Governments have begun to update these statutes on an ad hoc basis. To date, however, no government in Canada has completed a systematic review and amendment of all of the relevant statutes.

Writing and signature requirements have not prevented governments from adopting electronic commerce, however. Examples include electronic filing of tax returns, which cannot be signed in the conventional sense, and the introduction of electronic kiosks by the Ontario government. Motor vehicle license renewals at the Ontario government kiosks include a "declaration" which the individual must make, attesting to the truthfulness of certain statements by touching an icon on the screen. The legal effect of such a declaration is uncertain at best. Governments do have an advantage over private business, however. If governments really want to adopt new electronic technology, they can simply enact a law or regulation to make it work.

Statute of Frauds

The Statute of Frauds dates back to 1677 in England and is one of the oldest laws on the Canadian statute books. It provides that certain kinds of contracts are not enforceable, unless there is a written note or memorandum of the agreement. The Statute does not render the contract void or invalid, it provides only that the contract may not be enforced in court.

The Statute of Frauds has been adopted by legislation or judicial decision in most provinces.¹³ It requires a written note or memorandum of any contract relating to land, any contract of guarantee and any contract which is not fully performed within one year.

The requirement of the Statute of Frauds relating to contracts which are not fully performed within a year has been repealed in Ontario,¹⁴ but remain in force in other provinces. Its effect has been constrained by case law which has established that, if no fixed time for performance is specified in the contract, the Statute will not apply unless the contract, by its own terms, is incapable of being performed within a year. If all of the obligations of one of the parties may possibly be performed within the year, the Statute does not apply.¹⁵

The Statute of Frauds does not specify the form of writing required in order to make a contract enforceable. Over the years, courts have concluded that the note or memorandum need not be made contemporaneously with the formation of the contract, as long as it exists prior to the commencement of the legal action to enforce the bargain. It has also been held that the writing need not be any particular form to satisfy the Statute.¹⁶

Nevertheless, there remains a great deal of conflicting judicial opinion on the question of whether the Statute of Frauds applies to various types of contracts and what formal requirements must be met to satisfy the Statute. Courts are often reluctant to apply the Statute, particularly if it is invoked by a party seeking to escape an unfavourable bargain. On the other hand, the courts do not seem willing to ignore the Statute completely, so participants in electronic commerce transactions must keep it in mind.

Sale of Goods Act

The Sale of Goods Act¹⁷ provides that a contract of sale may be made in writing, either with or without seal, or by word of mouth, or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties.

Until recently, the Act also provided that no contract for the sale of goods valued at $50 or more, including contracts for the future delivery of goods, was enforceable unless the buyer: actually received and accepted part of the goods; gives a deposit to bind the contract or makes part payment; or unless some note or memorandum in writing was made and signed by the party to be charged with the contract.¹⁸ This section was repealed in Ontario in 1995, however similar provisions remain in force in most other provinces.¹⁹ The explanatory notes to the amending legislation in Ontario state that the change "will reduce the uncertainty of contracts made by electronic data interchange and will allow the public and private sectors to dispense with costly paper backup of these contracts."²⁰

In jurisdictions where the writing requirement still applies, issues may arise as to its applicability to electronic commerce. Courts have struggled with the problem of determining whether a contract is for the sale of goods or for the provision of services. Where goods are ordered "off the shelf," this is generally not a problem. But when the goods must be customized to meet the buyer's requirements or when the contract involves a combination of goods and services, the issue becomes more difficult to resolve. Although courts are inclined to decide each case upon its own particular facts, the general rule is that if the substance of the contract is the provision of skill and labour, and the materials are simply an ancillary part of the services, the Sale of Goods Act will not apply.²¹

Consumer Protection Laws

The Consumer Protection Act²² requires that all "executory contracts" contain specified information and be in writing. An executory contract is defined as "a contract between a buyer and a seller for the purchase and sale of goods or services in respect of which delivery of the goods or services or payment in full of the consideration is not made at the time the contract is entered into."²³ This would include many electronic commerce transactions.

Section 19 of the Ontario Consumer Protection Act provides that:

Many on-line transactions are clearly executory contracts. For example, when a consumer subscribes to an information service, payment may be made in monthly installments over a period of time. Any transaction involving the future delivery of products or services is also an executory contract. It is clearly impractical - maybe even impossible - for contracts of this kind to comply with the requirements of section 19 of the Consumer Protection Act.

The Consumer Protection Act also provides rights for individuals when contracts are signed outside the seller's usual place of business and where unsolicited goods or credit are provided. Section 21 provides that:

Where a seller solicits, negotiates or arranges for the signing by a buyer of an executory contract at a place other than the seller's permanent place of business, the buyer may rescind the contract by delivering a notice of rescission in writing to the seller within two days after the duplicate original copy of the contract first comes into the possession of the buyer, and the buyer is not liable for any damages in respect of such rescission.

It would appear that this provision would apply to any on-line transaction, where the buyer may be at home or at work. The only place where the buyer most certainly is not, is the seller's place of business.

Section 36 governs the delivery of unsolicited goods or granting of unsolicited credit. It provides that:

(2) No action shall be brought by which to charge any person upon any arrangement for the extension of credit evidenced by a credit card unless the person to whom credit is to be extended requested or accepted the credit arrangement and card in writing, and the obtaining of credit by the person named in the credit card shall be deemed to constitute such written acceptance by the person.

(3) No action shall be brought by which to charge any person for payment in respect of unsolicited goods notwithstanding their use, misuse, loss, damage or theft.

(4) Except as provided in this section, the recipient of unsolicited goods or of a credit card that has not been requested or accepted in accordance with subsection (2) has no legal obligation in respect of their use or disposal.²⁴

Under the Act, "unsolicited goods" means personal property furnished to a person who did not request it. The Act further provides that a request shall not be inferred from inaction or the passage of time. However, an exception is made where the property is supplied under a contract in writing to which the recipient is a party, including a contract that provides for the periodic supply of property to the recipient without further solicitation.²⁵

None of these provisions of the Consumer Protection Act is affected by the repeal of the provisions of the Sale of Goods Act and the Statute of Frauds referred to above. Accordingly, most electronic transactions involving consumers will be subject to the Consumer Protection Act, and to similar statutes in other provinces, unless the products or services involved are delivered immediately and they are fully paid for when the contract is made.

Financial Administration Act

The Financial Administration Act²⁶ governs the finances and business practices of the Government of Canada. Similar statutes apply to the various provincial governments. Section 33(1) of the Act states that "no charge shall be made against an appropriation except on the requisition of the appropriate Minister... or of a person authorized in writing by that Minister." This gives rise to two possible issues. First, it is unclear what form the "requisition" must take. Second, it is unclear what form of writing is needed in order to give government employees the authority to enter into binding contracts. Government lawyers have concluded that the requirements of the Financial Administration Act do not preclude electronic contracting by the government, however, they have recommended legislative amendments to remove any uncertainty as to whether the government's internal systems of electronic communication are effective to create the required evidence of proper delegation of contracting authority.²⁷

Signature Requirements

In addition to the requirement of written documents, a number of statutes require that the document be signed in order to be enforceable. For example, the Statute of Frauds provides that, in those cases where a note or memorandum of agreement is required, it must be "signed by the party to be charged therewith or some other person thereunto by him lawfully authorized."²⁸ Similarly, the Sale of Goods Act requires that where writing is required, it must be signed.²⁹

The Ontario Consumer Protection Act provides that:

An executory contract is not binding on the buyer unless the contract is made in accordance with this Part and the regulations and is signed by the parties, and a duplicate original copy thereof is in the possession of each of the parties thereto.³⁰

The Civil Code of Quebec is the only Canadian statute which defines "signature." It explicitly states, in article 2827, that "a signature is the affixing by a person, on a writing, of his name or the distinctive mark which he regularly uses to signify his intention."

Unfortunately, as is the case with the writing requirement, none of the common law jurisdictions define what is meant by a signature. In most cases it is assumed that what is intended is an autograph, a handwritten rendition of the name of the contracting party, or in the case of a business entity, the name of an authorized representative or signing officer. This is not necessarily the case. The courts have found that any mark or symbol which shows that the party intended to be bound to the contract can be sufficient. In the days before widespread literacy, a person could signify that intent by making a mark on the paper. The use of seals was also an accepted method of signifying the intention to make a legal contract. According to Black's Law Dictionary, "a signature may be written by hand, printed, stamped, typewritten, engraved, photographed, or cut from one instrument and attached to another."³¹

Canadian case law has followed the precedents in the United Kingdom and United States in holding that a signature need not be a person's entire name, fully written out. Any mark or notation is acceptable, if it identifies the party and authenticates the document. A printed or typewritten name or initials may be sufficient to constitute a signature in some cases.³²

In the United Kingdom, a signature has been held by the courts to include a rubber stamp with a facsimile signature, a thumb print and, more simply, initials³³. Canadian courts have also held that a reproduction of a signature sent by facsimile satisfied the requirement of a signed document under corporation law.³⁴ However, all of the case law to date has focused on the meaning of various marks on paper. No Canadian court has yet considered the legal effect of an electronic or digital signature.

Digital Signature

The use of encryption technology to create "digital signatures" makes it possible to verify that persons exchanging documents electronically are who they say they are, that the messages exchanged between them have not been altered, that the parties cannot deny having sent them, and that no one else can read them. Encryption, and in particular, "public key" encryption, therefore, provides electronic communication with authentication, integrity, non-repudiation, and confidentiality. Certification of public keys by a third party provides an additional level of reliability.

As far as the author has been able to determine, the validity of documents with digital signatures has never been challenged in court in Canada. Therefore, their legal status is not certain. However, one Canadian federal government lawyer has argued that "a common law court in Canada would not accept a digital signature as fulfilling the requirements of a "signed writing". The essence of a signature is the written name attached to a document."³⁵ He based this conclusion on the view that electronic communications lack the forensic qualities inherent in paper-based signatures which are needed to link the signature to the individual.³⁶

Other writers have taken the opposite position, arguing that any symbol, including a string of electronic impulses, is adequate to constitute a signature, if it satisfies the requirements of authenticating the message and identifying the maker.³⁷

According to the Final Report of the Legal Issues Working Group of the federal government's Information Technology Security Strategy Steering Committee:

In the absence of legislation, Canadian courts will probably accept the digital signature as evidence, provided the party introducing the digital signature into evidence can give "foundation evidence" as to the integrity and accuracy of the digital signature system and record- keeping procedures.³⁸

The Legal Issues Working Group has stated that the use of a digital signature algorithm and public key infrastructure which complies with an industry, national, or international standard will likely be an important factor in the acceptance of digital signatures by the Canadian courts. Evidence of proper security and audit procedures and the use of a certification authority which is a trusted entity will also be relevant factors.

According to a senior Canadian bank lawyer, the Personal Identification Number (PIN), used with debit and bank machine (ATM) cards may be considered a form of electronic signature, because it achieves the principle purposes of a signature: identification and authentication.³⁹

Canadian lawmakers have been involved in a number of international digital signature initiatives. Canada was represented on the EDI Working Group of the United Nations Commission on International Trade Law which, in 1994, approved a draft model electronic signature law. The United Nations model law states that electronic communications and contracts are to be as legally effective, valid and enforceable as written documents and signatures. However, laws for the protection of consumers are expressly excluded from the model law.

Public Key Infrastructure

In 1994 the federal Government began considering the implementation of a public key infrastructure to support electronic communication, both within government and with members of the public. The government has concluded that both digital signatures and confidentiality encryption can be supported by a public key infrastructure.

The government has also identified a number of legal issues associated with the implementation of a public key infrastructure, including the lack of express statutory authority for digital signature. Some recent federal and provincial legislation now specifically provides for the use of an electronic signature.⁴⁰ However, these have all been enacted on an ad hoc basis, to address specific legal issues relating to electronic commerce or communication. There has, to date, been no attempt at ensuring that all such enactments are consistent. There is also Canadian case law supporting the use of electronic communication technology (such as faxes, e-mail, and computerized records), the formal requirements for which are governed by statutes or common law; which do not specifically provide for such technology. There is no federal or provincial legislation of general application (such as the Canada Evidence Act or Interpretation Act) which specifically permits the use of a digital signature to replace a handwritten one.

It is likely that a court would find a digital signature to meet the requirements that something be "signed" or "in writing." It is less certain whether the courts will conclude that a digital signature meets statutory requirements that documents be "certified," "commissioned," "notarized" or "in prescribed form," as required by a large number of federal and provincial statutes.⁴¹

The Public Key Infrastructure proposed by the federal government's Information Technology Security Strategy Steering Committee would:

Certification Authorities

The Government PKI Policy comprises the following hierarchy of authorities:

Identification of Key Holders

When a Certification Authority certifies a user's public key, it must make that party's public key known to the world. To do this, each user must have a unique name. Individual names are governed by statute, such as the Ontario Vital Statistics Act,⁴² and Change of Name Act,⁴³ and by the common law. There is no legal prohibition on two individuals having the same name, therefore, some other unique identifier must be used for individuals. Social Insurance Numbers could be used to identify individuals, however, the Income Tax Act makes it an offence to use a Social Insurance Number for any purpose other than that for which it was provided and federal government policy requires any use of a Social Insurance Number to be authorized by statute or regulation.

Corporate names are governed by corporate legislation. Both federal and provincial corporate statutes allow the use of number names, which are simply assigned in order, and are therefore guaranteed to be unique. All other names must be cleared through a name search process. The name must not be the same as the name of a known corporation, trust, association, partnership, sole proprietorship or individual, or similar to the name under which any of them carries on business or identifies itself, if the use of the name would be likely to deceive.⁴⁴ The use of confusingly similar names is also prohibited by trade-mark law⁴⁵ and by the laws relating to passing off. Nevertheless, there is nothing to prevent an Ontario corporation from having a name that is identical to a corporation incorporated in another province.

Both the Ontario Business Corporations Act and the Canada Business Corporations Act require that "a corporation shall set out its name in legible characters in all contracts, invoices... and orders for goods or services issued or made by or on behalf of the corporation..."⁴⁶ Corporations engaged in electronic transactions must ensure that this requirement is complied with.

Contract Terms

When an electronic contract is formed, issues may arise with respect to the precise terms and conditions of the agreement. In typical paper-based commercial transactions, standard terms are printed on the contract documents -- quotations, purchase orders, invoices, shipping notices and the like. When these documents are replaced with electronic orders, there is a natural tendency to do away with "unnecessary boilerplate." In addition, electronic communications are by necessity rigidly structured, so that they can be received and processed automatically. Any attempt to deviate from the required form will likely result in an unsuccessful exchange of messages. The resulting lack of detail with respect to many standard contract terms will normally not invalidate a contract, but it may result in the imposition of terms which neither party contemplated.

In most provinces, the Sale of Goods Act provides implied warranties that goods are of merchantable quality and that they are fit for their intended purpose.⁴⁷ It also imposes an implied condition that goods sold by description will correspond to the description.⁴⁸ These implied warranties may be disclaimed, but to be effective the disclaimer must be expressly set out in the agreement between the parties.

In consumer transactions, consumer protection laws in most provinces may impose further implied terms in certain types of contracts.⁴⁹ In most cases, consumer protection provisions cannot be waived.

The EDI Council of Canada Model Trading Partner Agreement attempts to overcome the legal impediments to contracting through EDI by means of agreement by the parties concerning security, allocation of liability for breaches of security, confidentiality, authenticity, integrity and non-repudiation. It does not contemplate the use of digital signature, but requires confidentiality of information and obliges the parties to exact similar undertakings from personnel.

Authorization is achieved by placing the onus on each party to establish proper security and access controls, and by a warranty by the sender that the document is duly authorized and is binding on it. Liability for unauthorized transactions is allocated by agreement between the parties. The sender has the ability to control access, and thus bears the risk of unauthorized access. The receiver is entitled to rely on the transmission as having been authorized.

The trading partner agreement establishes the legal relationship between the parties and the intent by parties to be bound by the electronic messages. The agreement normally establishes an obligation to keep transaction logs for evidentiary purposes. It may determine where the contract is made: at buyer's location, seller's or neither. The agreement may allocate risk of non-performance or non-delivery of the goods and services and establish legal remedies. Trading partner agreements normally also include dispute resolution mechanisms and other miscellaneous contractual details. Trading partners agreements can be as brief as two pages, or as detailed as sixty pages.⁵⁰

Trading partner agreements can be a practical solution to the current uncertainty surrounding purely electronic agreements. However, they have many limitations. EDI works well when it takes place between major trading partners. They are less useful in a consumer context.

Civil Code of Quebec

Article 1387 of the Civil Code provides that "a contract is formed when and where acceptance is received by the offeror, regardless of the method of communication used, and even though the parties have agreed to reserve agreement as to secondary terms." There is no "mailbox" rule under the Civil Code.

The Civil Code provides, in Article 1393, that "acceptance which does not correspond substantially to the offer or which is received by the offeror after the offer has lapsed does not constitute acceptance. It may, however, constitute a new offer." This is consistent with the common law in the rest of Canada.

Article 1395 of the Civil Code also provides that where there is an offer of a reward made to a person who performs a particular act, the offer is deemed to be accepted and becomes binding when the act is performed. This is analogous to, but somewhat narrower than, the common law doctrine of acceptance by performance.

On-line Contracts

It is becoming increasingly common for companies to sell products and services directly to the public over the Internet. Many commercial web sites are restricted to subscribers, who typically pay by credit card and must agree to subscription terms as a condition of access. Other web sites offer software to those who electronically agree to on-line license terms.

Apart from the issues affecting the validity of electronic contracts generally, questions inevitably arise as to the enforceability of these agreements, which are often referred to as "click-through" or "click-wrap" agreements. There are obvious parallels to the shrink-wrap licenses which are widely used for the distribution of consumer software.

Commentators have had doubts on the validity of shrink-wrap licenses ever since they were first introduced. The usual objection to these contracts is that they impose restrictions or limit the legal rights of the purchaser, without giving the purchaser an opportunity to negotiate those terms. In fact in many cases, the purchaser is not even aware of the terms of the license until the package has been opened. Courts are reluctant to enforce contracts of adhesion, where the buyer is forced to accept terms imposed unilaterally by the vendor. However, the law recognizes that in certain types of transactions, it is unrealistic to expect contracts to be negotiable. As long as the terms of the agreement are not unconscionable, and all of the relevant terms are known in advance, such contracts will generally be enforced.⁵¹

In the United States, the courts have recently upheld the validity of shrink-wrap license terms which restrict copying.⁵²

In the only Canadian court to have considered the validity of shrink-wrap licenses to date, the court refused to enforce license restrictions which were enclosed within a sealed package and, therefore, not known to the purchaser at the time the software was purchased. The court concluded that:

"the plaintiff manifestly did not bring home to the defendants... that there were restrictions on the purchase. None of the simple, cheap and obvious methods to do this were used by the plaintiff. No implied restrictions were necessary to the sale; therefore the court should not, in the absence of explicit instructions brought to the notice of the purchaser, introduce any implied restrictions into the contract of sale."⁵³

The reasoning adopted by the court would appear to support the validity and enforceability of on-line agreements in Canada, as long as there is clear and express notice of the contract terms, and the contracting party has an opportunity to make an informed decision whether to accept or reject the offered terms.

The court noted that it is now common practice for software vendors to display a prominent notice of license terms -- and sometimes the license itself -- on the outside of the software package, so the terms and restrictions are known to the purchaser at the point of sale. The court implied that such license terms would be enforceable, although it was not required to decide that issue.

In addition, the court found that copyrighted and patented products "are different from normal goods in that restrictions not only may be imposed on the sale, but the restrictions will run with the goods."⁵⁴ This is a relevant consideration for anyone selling or licensing software or information products over the Internet.

Conclusion

Despite the uncertainties and limitations discussed in this paper, it is clear even from a quick tour of new web sites that electronic entrepreneurs are not letting legal impediments stop them from offering their wares in the cyber marketplace. Some sites pay more attention to legal issues than others -- testament to the never-ending struggle between the marketers who want to see only flashy sales pitches and the lawyers who insist on coating everything with layers of disclaimers. Many require some sort of positive acknowledgement from customers, through the use of an "accept" icon, or by requiring customers to fill out a statement of their acceptance of the legal terms. Others are simply content to take the customer's money and do not seem to care about anything else.

The only thing that seems certain is that consumer-oriented electronic commerce on the Internet will continue to increase. As on-line vendors become better established, and develop substantial business interests which must be protected, one can expect more attention to be focused on the enforceability of electronic contracts. One can also expect more innovative ways of presenting and documenting on-line agreements, so that the legal requirements do not get in the way of commercial transactions.

Endnotes

Contact Michael Erdle for more information on Online Contracts in Canada.