Electronic Contracts: Formalities – part I

Rob Horne LLB LLM MCIArb FSALS

A Solicitor with the City law firm Theodore Goddard, Rob specialises in resolving ―disputes on construction projects and ―frequently conducts adjudications, mediations, arbitrations, court actions and other processes. In addition, Rob is also involved in the E-Commerce group at the firm and has advised and lectured upon ―E-Commerce issues relating to construction projects. He is the current editor of the disputes and dispute resolution section of Law for ―Construction Professionals and can  be  contacted  on: robert.horne@theodoregoddard.co.uk.

This is the third article in this series reviewing basic principles of contracting and applying those principles to electronic communication and documents. Previous articles have covered electronic offers and electronic acceptance.

This article was originally intended to cover all types of contract formalities. However, due to the complexity of this area the editors have kindly allowed me to cover this area in two parts. In this first part I shall consider whether electronic contracts are in writing and why that might be important. The second part, to appear in the next edition of News and Views, will deal with electronic signatures and other special requirements of electronic contracts.

Written contracts – the requirement

There is no general requirement for a contract to be in writing or have any written element. A valid contract can be formed just as well orally as in writing. Difficulties can arise however in oral contracts, or part-oral contracts, as to what was agreed between the parties.

Certain contracts are required by statute to be in writing, in order to minimise any dispute as to their scope. The reason for this requirement is that these types of contract provide for additional rights, as in the Housing Grants, Construction and Regeneration Act 1996 (HGCRA).

The HGCRA provides at section 107 that in order for contracts to be caught by the Act they must be in writing, which provision is repeated, in the same terms, at section 5 of the Arbitration Act 1996 (AA). These sections provide for an expansive definition of what is "in writing" for the purpose of these Acts. "In writing" includes a non-written agreement referring to written terms; one party writing down a non-written agreement; and even, an exchange of submission in which a non-written contract is alleged to exist by one party and that existence is not denied by the other party. Unfortunately, for all of their breadth, none of the provisions of either section 107 of the HGCRA or section 5 of the AA provides any assistance in determining whether an electronic document is in writing.

Are electronic contracts in writing?

Whether or not electronic documents satisfy the statutory requirements of "in writing" is by no means clear and there are arguments for and against the proposition. Those arguments can be summarised in the following terms:

The argument against

The purpose of the requirement for certain contracts to be in writing is to reduce disputes as to what is agreed. Therefore, permanency is an essential ingredient if a contract is to be in writing, as is found with pen and ink contracts.

Electronic documents, it is argued, must fail this permanency test as they can only be viewed when a computer is on and has appropriate software to translate the electronic message into something intelligible to the human reader. If the computer is switched off or there is some sort of electronic failure the electronic document could be lost and therefore should not be considered to be writing.

In support of this argument reference can be made to a Norwegian court refusing to enforce an international arbitration agreement, under the terms of the New York Convention, which arbitration agreement was entered into electronically.

The argument for

The argument for electronic documents being in writing has its root in the Interpretation Act 1978, which provides at Schedule 1 that "writing" includes any of the following.

typing, printing, lithography, photography and other modes of representing or reproducing words in a visible form, and expressions referring to writing are construed accordingly.

It is argued that, given the wide scope of the description of "in writing" in the Interpretation Act electronic documents must fall within that definition. It can further be argued that the Interpretation Act neither identifies nor suggests that there is any need for a degree of permanency in order for a document to be "in writing".

The argument for electronic documents being in writing is supported in Commercial Arbitration by Mustill & Boyd which states, at page 263 of the 2001 Companion, that the definition of "in writing" from the Interpretation Act

would certainly also include any means of reproducing words visibly by electronic means, such as e-mail, or words reproducible from electronic storage, such as a word- processing file recorded on a ―magnetic disk.

In addition to Mustill & Boyd, further weight is lent to this argument by the finding of a Law Commission Advice on Electronic Commerce: Formal Requirements in Commercial Transactions. Within that Advice the Law Commission identified the alternative arguments set out above but found that

Our view is that, in such a case [of exchange of e-mail or attachments], the Interpretation Act definition is satisfied and the e-mail (and any attachment) will satisfy a statutory requirement, at least if they are visible.

The Advice does, however, go on to concede that the conclusion they have reached in this regard is not universally accepted. Although the Law Commission's Advice is not binding, it is persuasive. In any event, as a matter of public policy, conducting business by electronic means is to be encouraged; and, under the EU Directive on Electronic Commerce 2000/31 at Article 9, domestic law must not stand in the way of the proper development of e-commerce. In addition the same Directive provides for member states to ensure that their legislation does not deprive contracts "of legal effectiveness and validity on account of them being made by electronic means".

Conclusion

I do not consider that the argument against electronic documents being "in writing" is particularly strong. The arguments suggested all have analogous situations in more traditional contracts, for example being written in a foreign language (data translation problems); the contract document being closed (the computer not being turned on); or the paper upon which the contract is written being burnt (electronic document lost). None of these arguments would hold much water if one tried to apply them to pen and ink contracts, so why should they gain veracity when applied to electronic contracts?

The likelihood is that the Law Commission’s Advice will be followed, if not for the weight of the Advice itself then for the effect of Article 9 of the EU Directive on E-Commerce. If neither of these documents find favour, then, given the breadth of the definition of what is "in writing", an expansive approach should be taken, as that would appear to have been the intention of Parliament in enacting section 107 of the HGCRA and section 5 of the AA.

What if an electronic contract is not in writing?

In the two examples used above, the AA and the HGCRA, if an electronic contract were to fail the test of being in writing it would not be fundamental to the existence of that contract – that is, the contract itself would continue to exist. In failing the test for "in writing" the contract would lose its special status under the statute requiring it to be "in writing".

Therefore, an arbitration agreement would continue to have effect but would not be subject to the requirements, nor receive the benefits of, being an arbitration under the AA. Likewise for a contract under the HGCRA, failure will not allow one party to escape from its obligations, but will simply prevent the parties relying on the special rules which apply to contracts caught by the HGCRA.

The next part of this article will highlight the use of, and need for, signatures on contracts. Additionally, in a departure from the original intention of this series, the next edition will also consider the question of signing arbitration awards electronically. Finally, the next edition will review and highlight the impact of certain requirements that exist in relation