Contracts on the Net (NYT)

[amp@pobox.com]

The New York Times      MONDAY, JULY 7, 1997


Lack Of Contracts Undermine Internet Transactions

By GEANNE ROSENBERG


Beyond the violets and refrigerated roses, in the back room of the
Southern Sun flower shop in Tallahassee, Fla., the florist, Bob Deak,
also deals in trading cards. 

With three computers and links to the Internet, Deak bargains with
collectable card buyers and sellers from as far away as Italy,
Australia and Singapore. He does not worry about the lack of paper
contracts to document the deals he strikes, even though the
transactions can run as high as $20,000 apiece. His profits, he said,
far outweigh the risks that a deal might go sour. 

One deal in particular led to a dispute - a $1,020 purchase of a card
collection last year from a 14-year-old, Ted Clark of Haddonfield,
N.J. 

Deak said ``youngsters'' selling cards sometimes do not understand
the meaning of ``near mint.'' So, after examining the cards he had
agreed to purchase in several installments, Deak decided they were
not in near-mint condition and canceled a couple of checks he had
written to Ted Clark and sold the cards for less than the original
purchase price. 

But Deak's actions did not sit well with Ted, now 16, especially
since Deak had made an electronic agreement.  Ted thought he had been
``rooked'' because he did not receive the full amount, said his
mother, Amelia H. Boss, a law professor at Temple University School
of Law and an expert on Internet commerce. She took Ted's case and,
with the assistance of a Florida colleague who served as local
counsel, contacted Deak and eventually persuaded him to pay the
balance of the money. 

Boss said these sorts of disputes are commonplace on the Net. But,
she said, the high cost of suing, especially across state and
national borders, prevent most such squabbles from making it to
court. The resulting dearth of test cases on digital contracts has
left many business managers, corporate lawyers and legal scholars
uncertain about the enforceability of electronic agreements. 

The uncertainty has had a chilling effect, even at computer-astute
places like General Electric Co.'s GE Information Services unit and
the TPN Register Co. - GE's joint venture with Thomas Publishing Co. 

The companies solicit suppliers and hammer out details of procurement
contracts for GE's affiliates and other companies via the Internet.
But when it comes time to execute a contract, the companies resort to
pen and paper. 

``I think ideally you'd love to be 100 percent electronic,'' said
Orville A. Bailey, vice president of marketing and business
development at TPN, because adding paperwork is not as efficient.
But, he said, his company is more ``comfortable'' having signed paper
contracts on hand. 

Bailey is not alone. 

E. Allan Farnsworth, a leading contract law professor at Columbia
University, said that when a contract was substantial and complex,
``I think the safe thing to do is to do it in the old-fashioned
way.'' 

The reason in part, according to Raymond T. Nimmer, professor of law
at the Houston Law Center, is the Statute of Frauds - which traces
its origins to early English law - requiring that many contracts be
written and signed by the parties against whom enforcement is sought.
While some states, including California, Minnesota, Texas, Utah and
Washington, have recently passed laws permitting digital signatures
to satisfy the Statute of Frauds, Professor Nimmer said, most states
- including New York - have not. In addition to the Statute of Frauds
problem, electronic contracts can give rise to questions of
authenticity and authority of the parties involved, Nimmer said. 

Even in states with no laws addressing enforceability of electronic
contracts, many legal experts are confident such agreements will hold
up in court. Arthur Rosett, a law professor at the University of
California, Los Angeles, said, ``It's hard for me to imagine a court
finding that an electronic communication that has been proven does
not satisfy the Statute.'' 

Moreover, some computer experts contend, electronic contracts are in
some respects better than paper ones.  Vincent I. Polley, general
counsel at Omnes Co., a network services concern, said software
should render electronic contracts tamper- and forgery-proof. 

But others were guarded in their endorsement of electronic contracts.
``The judicial system - the lawyers, judges and juries - are not
populated by hackers,'' said Jonathan J. Lerner, a partner at
Skadden, Arps, Slate, Meagher & Flom. ``If you're talking about a
very large and important contract, you need to have your head
examined not to secure the best form of agreement'' - which, in his
view, remains a paper contract. 

The stakes can be high, said Constance E. Bagley, senior lecturer in
law and management at the Stanford Business School and a practicing
lawyer. She cited the example of a software sale over the Internet,
in which the software had a bug that damaged the purchaser's entire
data base. 

If the contract were deemed unenforceable because it did not satisfy
a requirement that it be a signed writing, or because the
authenticity or authority of the person assenting to the terms came
into question, then the merchant could theoretically be liable for
all of the purchaser's losses, she said, because limitations on
liability included in the contract would be ineffective. 

Lawmakers are scrambling to fill the gap between technology and the
law. Leaders of this effort include Professor Boss of Temple
University and Professor Nimmer of the Houston Law Center, who are
helping revise the Uniform Commercial Code to deal with electronic
contracts. Under the proposed revision of the code, which governs
transactions in all 50 states, electronic agreements formed with
active consent, such as digital signatures or clicking on spaces
indicating acceptance of terms, generally would be enforceable. 

But the UCC revision, which individual state legislatures could
adopt, adapt or ignore at their own choosing, is at least a year away
from completion. 

It could run into further delays because of criticism aimed not at
the technical provisions concerning enforceability of electronic
contracts, but at changes and additions within the draft to sales and
licensing laws. For example, some intellectual property experts worry
the revision would allow publishers to write contracts that encroach
upon rights in the public domain, said Pamela Samuelson, professor of
information management and law at the University of California,
Berkeley. And the American Automobile Manufacturers Association
contends that the revision's proposed changes in rules for the sale
of goods would increase seller liability and the cost of doing
business. 

In addition to the UCC revision, the National Conference of
Commissioners on Uniform State Laws is planning to propose state laws
legitimizing electronic contracts not covered by the UCC. And the
U.N. Commission on International Trade Law, on which Boss served as
the American delegate and expert adviser, is completing a model law
on electronic commerce that is expected to be presented to individual
countries for incorporation in their domestic laws. 

Washington, so far, appears to be eager for the law to catch up with
the technology. Several agencies, including the Commerce Department,
have collaborated on a paper favoring the adaption of domestic and
global laws to support electronic contracts. 

As lawmakers struggle to get rules in place, some businesses are not
waiting. For these businesses, ``The cost of the gamble is cheaper
than the cost of the contract,'' said Patricia B. Fry, a law
professor at the University of North Dakota and the chairwoman of the
national commissioners conference electronic contract effort. 

Ford Motor Co. uses ``purely electronic contracts'' with suppliers,
according to James Ziety, counsel at Ford. Ziety said he knew of no
trouble with Ford's electronic agreements. Any problems, he said,
were ``virtually always worked out at the business level.'' 

Meanwhile, Boss said, the gap in the law invited a major court
decision. ``When the case comes along,'' she said, `` when it hits,
it may well be the big one.'' 

As for Deak, the uncertainties about electronic contracts are not
holding him back from making deals online.  ``Every night when I say
my prayers,'' he said, ``I thank the Lord for the Internet.'' 



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Name: amp
E-mail: amp@pobox.com
Date: 07/08/97
Time: 05:13:44
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