ELECTRONIC CONTRACTS

6th Edition Negotiating and Drafting Major Business Agreements November 5, 2007 Toronto, Ontario Richard F.D. Corley

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Overview
The Law Governing Electronic Contracting:
Legislation Case Law

Practical Suggestions for Creating Enforceable Electronic Contracts

Elements of E-Contract Formation

Offer/Acceptance (a.k.a. Enforceability) Time and Location of Formation Electronic Signatures Legal requirements for written documents

An Equal Playing Field Electronic Commerce Acts

Common law continues to apply supplemented by Electronic Commerce Acts All of the provinces, two territories, and the federal government have enacted legislation regarding electronic commerce and contracting. But for Qubec, these statutes are substantially similar and are based on the Uniform Electronic Commerce Act (UECA) which was adopted by the Uniform Law Conference of Canada as of September 30, 1999. The UECA is influenced by the United Nations Model Law on Electronic Commerce adopted by the United Nations Commission On International Trade Law.
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Main Principles of UECA Based Acts

Functional Equivalence: Establishing rules for electronic information and documents to satisfy legal requirements such as those for written documents, signatures and the provision or retention of originals of documents. Electronic Communications and Contracting: Establishing rules for the formation and operation of electronic contracts (e.g., time and place of sending and receiving) and the use or involvement of electronic agents. Public Bodies: Establishing rules by which government bodies and organizations may communicate and transact with the public.
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Ontarios Electronic Commerce Act

Ontarios Electronic Commerce Act, 2000 (the Ontario ECA) is typical of the provincial/territorial UECA legislation, but there are a number of variations in the e-commerce laws enacted across the country. It is important to carefully review the applicable legislation in the jurisdiction of interest.

Application: Ontario ECA

The Ontario ECA applies generally to all legal relationships governed by Ontario law. The Ontario ECA applies to all legal documents except for specific identified documents such as:
Wills and codicils Trusts created by wills and codicils Powers of attorney in respect of financial affairs or personal care Documents that transfer interests in land Negotiable instruments

Consent and Contracting Out: Ontario ECA

Important principle: Section 3 states that nothing in the Ontario ECA requires a person to use electronic means without that persons consent. However, consent can be inferred from a persons conduct where there are reasonable grounds to believe it is genuine and relevant. The ability to contract out of the provisions regarding electronic transactions and electronic agents.

Enforceability
A major issue in online or electronic contracting is the method or arrangement used to enter into an agreement. General categories of contract formation in an electronic world:
Shrink-Wrap; Click-Wrap; and Browse-Wrap.

Enforceability: Ontario ECA

An offer, the acceptance of an offer, or any other matter that is material to the formation or operation of a contract may be expressed,
(a) (b) by means of electronic information or an electronic document; or by an act that is intended to result in electronic communication, such as, (i) touching or clicking on an appropriate icon or other place on a computer screen, or (ii) speaking. (Section 19).

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Enforceability: Ontario ECA

Section 20 of the Ontario ECA: A contract may be formed by the interaction of an electronic agent and an individual or by the interaction of electronic agents.

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Enforceability: Shrink-Wrap
Theories underlying the enforceability of electronic contracts are based on the physical (i.e., in a box or package) sale of software pursuant to shrink-wrap printed license conditions. Cases in the Canada and the U.S. have generally held that such licences are enforceable where the customer (or licensee) is given proper notice of the terms and those terms are not unconscionable.

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Enforceability: Click-Wrap
Click-Wrap licences are those where the terms are displayed on the screen for the user to accept before the software or web-site can be installed or used. In Rudder v. Microsoft (1999), 2 C.P.R. (4th) 474, the plaintiffs were presented with a Member Agreement upon loading the software from disk onto their computers and again when going online to access the MSN website.

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Enforceability: Click-Wrap
Rudder, continued
Both presentations of the Member Agreement allowed the terms to be viewed by scrolling through the text and required the user to click on an I Agree button before proceeding. The Ontario court enforced the choice of law and forum selection clause (requiring that claims be brought in Washington) in the Member Agreement. Rudder has been followed recently by the Quebec Superior Court in Rogers Media Inc. v. Machesseault, [2006] J.Q. no 13107.

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Enforceability: Browse-Wrap
The enforceability of terms and conditions that are posted on a website (and accessible by hyperlink but not clickedthrough) was previously the subject of inconsistent Court decisions but has recently been affirmed, in certain circumstances, by the Supreme Court of Canada

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Enforceability: Browse-Wrap
In the brokerage cases, Zhu v. Merrill Lynch HSB, 2002 BCPC 535 (B.C.S.C.) and Robet v. Versus Brokerage Services Inc, [2001] O.J. No. 1341, the Superior Courts of B.C. and Ontario refused to enforce legal disclaimers (that virtually eliminated liability for errors) contained in terms of use accessible through various links on defendants website.

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Enforceability: Browse-Wrap
A series of Quebec cases had created confusion as to the enforceability of browse-wrap agreements In Canadian Real Estate Association v. Sutton, [2003] J.Q. no. 3606, the Quebec Superior Court suggested that a link to terms of use may be binding on a user of the site. In Aspencer1.com v. Paysystems Corporation, [2005] J.Q. no 1573, the Court of Quebec held that the addition of an exclusive arbitration clause was not enforceable for lack of consent. The defendant had posted notice of the amendment on the opening screen of its site.

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Enforceability: Browse-Wrap
In Dell Computer Corporation v. Union des consommateurs, 2007 SCC 34 the SCC overturned the decisions of the Quebec Court of Appeal and the trial judge found that an arbitration clause included in hyperlinked terms and conditions was enforceable because it was accessible through a link to Dells terms of sale at the bottom of each screen.

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Enforceability: Dell Computer

The Dell case dealt with a class action brought by consumers in Quebec who had ordered handheld computers on the Dell web site at prices which were displayed in error on the order page. (The order pages on Dells English-language Web site indicated prices of $89 rather than $379 and of $118 rather than $549 for two models of Axim handheld computers.) Once it learned of the errors, Dell blocked access, through the usual address, to the erroneous order pages. The plaintiff Dumoulin circumvented the measures taken by Dell, used a deep link that to access the order pages, and ordered a computer at the lower price.

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Enforceability: Dell Computer

Dell then posted a price correction notice and also announced that it would not process orders for computers at the prices of $89 and $118. The Union des consommateurs and Dumoulin filed a motion for authorization to institute a class action against Dell. Dell applied for referral of Ds claim to arbitration pursuant to an arbitration clause contained in the terms and conditions of sale, and dismissal of the motion for authorization to institute a class action. The Superior Court and the Court of Appeal held, for different reasons, that the arbitration clause could not be enforced against Dumoulin.

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Enforceability: Dell Computer

In Dell the Supreme Court held that arbitration clause in issue, which could be accessed by means of a hyperlink in a contract entered into via the Internet, was not an external clause within the meaning of art. 1435 C.C.Q. and was valid. Analogously to paper documents, some Web documents contain several pages that can be accessed only by means of hyperlinks, whereas others can be viewed by scrolling down them on the computers screen. The traditional test of physical separation, which is applied to determine whether contractual stipulations in paper documents are external, cannot be transposed without qualification to the context of electronic commerce. To determine whether clauses on the Internet are external clauses, therefore, it is necessary to consider the precondition of accessibility. A clause that requires operations of such complexity that its text is not reasonably accessible cannot be regarded as an integral part of the contract. Likewise, a clause contained in a document on the Internet to which a contract on the Internet refers, but for which no hyperlink is provided, will be an external clause.

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Enforceability: Dell Computer

It is clear from the interpretation of art. 1435 C.C.Q. and from the principle of functional equivalence that underlies the Act to establish a legal framework for information technology that access to the clause in electronic format must be no more difficult than access to its equivalent on paper. In the instant case, the evidence shows that the consumer could access the page of Dells Web site containing the arbitration clause directly by clicking on the highlighted hyperlink entitled Terms and Conditions of Sale. This link reappeared on every page the consumer accessed. When the consumer clicked on the link, a page containing the terms and conditions of sale, including the arbitration clause, appeared on the screen. From this point of view, the clause was no more difficult for the consumer to access than would have been the case had he or she been given a paper copy of the entire contract on which the terms and conditions of sale appeared on the back of the first page.

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Amendments to Electronic Contracts

In Kanitz v. Rogers Cable Inc., [2002] O.J. No. 665, the court considered a provision in a user agreement (signed in writing by the users) that allowed Rogers to amend the user agreement by posting notices of such amendment on the Rogers website, or sending notice via e-mail or postal mail. The continued use of the service following notice of such change deemed the user to have agreed to the amendment.

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Amendments to Electronic Contracts

Kanitz, continued... The court found that posting a revised user agreement on the website and noting on the main page of Rogers Customer Support Site in the News and Highlights section that the agreement had been amended constituted reasonable notice under the user agreement. The court noted that the terms of the user agreement placed an obligation on the user to check the website from time to time to determine if amendments had been made.

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Amendments to Electronic Contracts

Kanitz, continued... The court also noted that persons who wish to avail themselves of an electronic environment should have their relationship with an entity in such environment defined in relation to that environment. Despite Kanitz, query whether onerous terms, including power to amend contract unilaterally and practical effect of arbitration clause, may give rise to unconscionability concerns.

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When and Where of Contract Formation: Ontario ECA

Section 22(3): Creates a presumption that where an addressee has designated or uses an information system designed to receive the type of information or document sent, the information is received when it enters that information system and becomes capable of being retrieved or processed; where no such system has been designated or is used as such, the information is presumed to be received when it becomes capable of being retrieved and processed.
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When and Where of Contract Formation: Ontario ECA

Section 22(4) and (6): Electronic information or documents are deemed to be received at the addressees place of business:
If the addressee has more than one place of business, it is deemed to be the location of the one with the closest relationship to the underlying transaction or, if there is no such transaction, the persons principal place of business If the addressee does not have a place of business, the place of business is deemed to be that persons habitual residence.
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When and Where of Contract Formation: Common Law

Ontario Court of Appeal has applied the instantaneous communications rule to contracts completed via facsimile (Eastern Power Ltd. v. Azienda Comunale Energia & Ambiente (1999), 178 D.L.R. (4th) 409). Instantaneous communications rule states that acceptance is communicated (and thus the contract is formed) when and where the offeror receives notice of the acceptance.

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Example
B.C. company advertises goods on a website that can be purchased by filling out an online purchase form. Purchaser is in Ontario. The location of the contract is in B.C., and it is formed when the B.C. companys website server receives the request and makes it available to be processed by someone at the company. What if the B.C. company has an office in Ontario that ships the product to the purchaser? Is the contract now made in Ontario? Important Note: The parties can specify the location of the contract in the contract itself.
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Signature Requirements
No general requirement in contract law that an agreement be signed in order to be enforceable. However, three major reasons why agreements are signed:
Specific legislative or common law requirements Evidence of assent to the terms and conditions of an agreement Form of identity that ensures the parties know who they are contracting with

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Signature Requirements
Electronic world presents new proxies for a written signature, e.g.,:
Sending an e-mail to the other party; Clicking on an I Agree button or check box; Digital signatures using encryption and certification authorities.

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Signature Requirements: Ontario ECA

Section 11: a legal requirement that a document be signed is satisfied by an electronic signature. electronic signature means electronic information that a person creates or adopts in order to sign a document that is in, attached to, or associated with the document.

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Signature Requirements: Common Law

A facsimile of a signature or another representation of a persons name can be accepted as a signature if there is evidence to prove that it is the customary way of identification of the person (Milliken & Co. v. Interface Flooring Systems (Canada) Inc. [1998] 3 F.C. 103 (F.C.T.D.), affirmed (2000) 5 C.P.R. (4th) 209 (F.C.A.)).

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Formal Requirements: Ontario ECA

Many statutes have express requirements that certain agreements or documents be in writing (e.g., the Ontario Statute of Frauds). Important that the Ontario ECA be read in conjunction with all other relevant legislation. Section 5: A legal requirement that a document be in writing is satisfied where the electronic document is accessible so as to be usable for subsequent reference.

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Formal Requirements: Ontario ECA

Section 6: A legal requirement that someone provide a document in writing is satisfied where it is
(a) accessible so as to be usable for subsequent Ontario ECA reference; and (b) capable of being retained.

The Ontario ECA contains other rules for the provision of documents in specified non-electronic form and the provision, retention or examination of original documents.

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Formal Requirements: Ontario ECA

Section 9: A document is not capable of being retained where the person providing it prevents or hinders its printing or storage. Section 10: Electronic information is not provided if it is merely made available for access by the person, e.g., on a website. However, sending electronic information by e-mail or displaying it to the person in the course of a transaction that is being conducted electronically are examples of actions that constitute providing such information (Section 10).
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Other Applicable Legislation

Consumer Protection Legislation Competition Act Privacy Legislation

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Consumer Protection Legislation

Most provinces and territories have general application consumer protection legislation. In 2001, federal, provincial and territorial ministers endorsed the Internet Sales Harmonization Template (the Template) which provides for a harmonized set of rules for consumer protection across the country covering topics such as contract formation, disclosure requirements and cancellation rights and credit card charge-backs Template has been adopted in several Canadian provinces

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Ontario Consumer Protection Act

The Template was adopted in Ontario as part of the Consumer Protection Act, 2002 (the CPA) The CPA applies to all consumer transactions where, the consumer or the person with whom the consumer is engaging in the transaction is located in Ontario
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Ontario Consumer Protection Act

Some highlights of the rights granted to consumers:
Suppliers are deemed to warrant that services are of a reasonably acceptable quality Cant contract out of the implied warranties and conditions under the Sale of Goods Act or any deemed condition or warranty under the CPA
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Ontario Consumer Protection Act

CPA does not limit any right or remedy that a consumer may have in law Substantive and procedural rights given under the CPA apply despite any agreement or waiver to the contrary Class proceedings permitted despite agreement to the contrary And many other specific consumer rights.
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Ontario Consumer Protection Act

Rigorous requirements for specific classes of agreements:
direct agreements future performance agreements time share agreements personal development services agreements Internet agreements remote agreements
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Ontario Consumer Protection Act

Generally, each type of agreement has:
minimum potential payment obligation disclosure requirements delivery requirements cancellation rights

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Competition Bureau Guidelines

Information Bulletin: Application of the Competition Act to Representations on the Internet, February 18, 2003.
Clarifies Bureau's position that misleading representation and deceptive marketing provisions in the Competition Act, Consumer Packaging and Labeling Act applies to the online context - commercial websites, marketing e-mails, communications in chat rooms, newsgroups and message boards. General impression of a representation: evaluated in the context of the medium used. Businesses should not assume that consumers read an entire website, just as they do not read every word on a printed page.

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Competition Bureau Guidelines

As in the offline world, disclaimers can clarify or add information, but cannot contradict the main representation. Disclaimers should be presented clearly and conspicuously, and the following factors should be taken into account:
Disclaimers should be on the same screen and close to the representation, although this is not always possible. Hyperlinks may be used, but may not be sufficient where the information is critical and the disclaimer is on a separate linked page. Hyperlinks to disclaimers should be clearly labelled.

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Competition Bureau Guidelines

- When using attention-grabbing graphics, sounds or images, these should not distract attention from a disclaimer; - Attention should be given to font size and colour; disclaimer should not be buried or hidden; - Disclaimers should be displayed for sufficient time to be read and understood, and may need to be printable; - Consider how consumers navigate through a website and whether multiple disclaimers or links are required.

Where there are specific disclosure requirements, consumers should not have to take an active step (e.g., send an e-mail) to get the required information, although a hyperlink is not an "active step" in this context.

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Privacy Legislation
The Federal Personal Information Protection and Electronic Documents Act:
Applies to all commercial activities of organizations. Gives individuals positive rights in respect of collection, use and disclosure of their personal information by organizations. When collecting personal information of an online customer, an organization must identify the purposes of collecting that information at or prior to the time of collection. Collection must be limited to the identified purposes. Consent is required for collection, use and disclosure of personal information, subject to limited exceptions.

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Privacy Legislation
Form of consent depends on the sensitivity of the information. Consent may be implied, but express consent may be required where information is sensitive (e.g., financial, health information). Organizations cannot require consent to the collection, use or disclosure of personal information as a condition of the supply of a product or service, beyond that required to fulfill specified and legitimate purposes. "Opt out" must be given for all secondary uses of collected information (e.g., marketing). On-line forms and contracts should identify the purpose for which personal information is being collected, identify all uses and disclosures of that information, and expressly seek consent of the customer for those uses and disclosures.

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Privacy Legislation
PIPEDA also requires organizations to use security safeguards appropriate to the sensitivity of the information, which may include technological measures including passwords and encryption. More sensitive information will require a higher level of security.

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Practical Suggestions for Creating Enforceable Electronic Contracts

Statutory Analysis Methods for Creating Enforceable Contracts

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Suggested Analysis for Statutory Requirements

Use a careful case-by-case analysis of relevant legislation (e.g., consumer protection, privacy, etc.) in each jurisdiction that may apply to the business in question. Consider whether there has been consent to use information in electronic form (e.g., see Section 3 of the Ontario ECA)? Identification of the specific requirements of the legislation (e.g., writing, signatures, original copies, place of contract).
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Suggested Analysis for Statutory Requirements

Apply the tests set out in the legislation to see if the requirements can be met and how they should be met. Also important to consider record keeping and storage practices that accord with the Ontario ECA (i.e., accessibility, ability to retain and integrity). As a general rule of thumb: When in doubt, use paper and obtain the express agreement of the other party to the use of electronic communications to provide greater certainty.

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Suggestions for Creating Electronic Contracts

Consider the structure of the transaction, e.g., what constitutes offer and acceptance? Is placing goods for sale on a website an offer that can be accepted by a customer or is it merely an invitation in response to which the customer makes an offer? Make sure the customer is aware of and understands this structure (e.g., include it in the terms and conditions of use of the website). Electronic agreements should be clearly readable on the screen and written in plain English; bold fonts should be used for important clauses.

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Suggestions for Creating Electronic Contracts

Recommendations for enhancing the enforceability of electronic contracts:
Present the user with the license terms, website use terms or contract before the user is allowed to interact (i.e., download software, use a websites services, purchase a product, etc.) online; Make the user scroll through the terms or agreement in order to get to an I Accept button; Particularly in the case of the purchase of goods or services, use a second verification button to guard against accidental acceptances and provide opportunities for the user to terminate the transaction.
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Suggestions for Creating Electronic Contracts

Recommendations, continued...
Have the user click on an I Accept button or icon next to particularly important, onerous or sensitive clauses. Maintain secure, date stamped records or logs that store the information relating to the identity of the user, the version of the agreement, date and time of the transaction.

Notwithstanding Kanitz, it is preferable that users be given notice of amendments to an agreement they have entered into made by e-mail or postal mail.
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THE END
Questions? Richard Corley richard.corley@blakes.com 416-863-2183

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