In
the last issue of News and Views I outlined a number of problems and issues
which arise in relation to making offers by electronic means. In this article I
will concentrate on how acceptance can be achieved electronically and what
problems may arise as a result.
To form a binding contract acceptance must be given unequivocally and it
must be communicated to the person making the offer. In establishing whether
electronic ―acceptance has been communicated unequivocally it is important to
understand when acceptance will take place, the method of communication of
acceptance, and what happens when electronic messages are sent. I have
concentrated here on ―acceptance by email, but other electronic messages (such
as filling in an on line form) will raise the same issues.
Unequivocal Acceptance
It
is important to distinguish an acceptance from a counter-offer. Where terms are
re-jected outright (“we do not accept payment is to be made within 7 days of
receipt of an invoice”?) there is little difficulty is seeing that there is no
agreement reached. It is a little more complicated where there is a
counter-offer (“invoices shall be paid within 14 days of receipt”). However, in
both of these cases a contract will not be formed as the offer has not been
accepted. The application of this principle will be the same for paper and
electronic acceptance.
A further complication concerns whether the acceptance message can be
read by the recipient in the same way as it was sent (a problem which applies
equally to communicating acceptance and which I shall consider below).
Take, for example, a party to a dispute who sends an email to the
claimant intending to make a counter-offer for £10,000 but the message is
corrupted and states instead that he will settle for £1,000. Is the email in
fact a counter-offer, as it was intended to be, or an acceptance giving rise to
an enforceable agreement? The case of Henkel -v- Pape
in 1870 offers some guidance. This case dealt with a garbled telegram message
where a seller had offered 50 rifles and the buyer sent a telegram saying “send
three rifles”. This arrived at the seller as “send the rifles”. The
court held that the buyer was only liable to buy three rifles and that the risk
of garbled messages lay with the seller as he had the risk of a lost
acceptance. The principle should be the same for electronic communications but
may be different if the party making the offer does not take the risk of
communication by, for example, specifying when acceptance is communicated. In
which case the respondent may be forced to take the risk in communication
reversing the outcome in Henkel -v- Pape.
Communicating Acceptance
Acceptance
is not communicated until such time as the acceptance actually comes to the
attention of the party to whom it is directed. In Entores
Ltd -v- Miles Far East Corp acceptance was attempted by telephone but the
line was very poor and the acceptance was not heard, was therefore not
communicated, and no enforceable agreement came into being.
From the perspective of electronic acceptance examples of failed communication may include email messages which have been corrupted, electronic documents which cannot be opened without specific software, and failure of an internet service provider (“ISP”) to deal properly with and route an electronic message.
The courts have developed various strategies to allocate to the
recipient the risk as to whether an acceptance is actually received (in
relation to paper contracts), in order to give some protection to the sending
party who will not be aware there is a problem with his message until it is too
late.
Perhaps the best known of these strategies is the “postal rule” whereby
a posted acceptance will be deemed to have been communicated when it has been
posted rather than when it is received. A variant on this has been adopted by
the courts and Part 6.7 of the Civil Procedure Rules sets out
that service will take place on the second day after posting where first class
post is used. (Interestingly, the Arbitration Act 1996 at
Section 76(4) adopts the opposite approach and still requires actual delivery
to take place.)
However, these strategies were developed in a world where instantaneous
communication was not possible. As faster communication becomes the norm, the
protection offered by the postal rules has been reduced for others forms of
communication. For example, faxes are communicated when received rather than
when sent, although they need not have been read, or even printed if the fax
machine can save faxes to its memory (Anson -v- Trump).
Equally as important as whether acceptance has been communicated at all
is the question as to when it was communicated. The importance of this point
arises from the principle that an offer can only be revoked before it is
accepted. Therefore, understanding when acceptance has been communicated is ―vitally
important.
Take for example the situation where A wishes to resolve a dispute and
proposes arbitration to B by email on Monday. On Tuesday it is advised that
resolution may be achieved more quickly and more cheaply through adjudication
under the Construction Act. Therefore, on Wednesday A withdraws its offer of
arbitration and initiates an adjudication instead. On Thursday A receives an
email dated Tuesday (and received by A’s ISP on Tuesday) but which was not
posted to his mailbox by his service provider until Thursday, in which B
accepts arbitration. B loses the adjudication and seeks to have the matter
finally determined in arbitration. A denies any binding agreement to use
arbitration as the offer was revoked before acceptance was received. The
question then is when was acceptance received: when the email was sent, when it
was delivered to the ISP, or when it was eventually accessible by A?
Chitty on Contracts suggest that emails should be dealt with in the same
way as faxes as, like faxes, emails are a form of instantaneous communication.
Therefore, in the above example, the offer was revoked before it was accepted
and there was no arbitration agreement in place. However, in an advice on
electronic commerce produced by the Law Commission in December 2001 a different
view is taken. The Law Commission consider that an email message is
communicated when it is available to be read. In my experience this would be
from the time it was transferred to the recipient’s ISP. On the basis of the
Law Commission’s view it is likely that the revocation was out of time and the
arbitration clause would be valid and enforceable.
Unfortunately, there is not yet any case law on this issue and therefore
this is a matter of interpretation only. Perhaps the simplest solution to this
potential problem is to set out clearly the manner in which acceptance is to be
made.
Automated Responses
In
the first part of this article I outlined Kodak’s recent internet sales
problems. The cause of those problems was an automated reply to orders placed
on their website which acted as acceptance. The information on the website was
incorrect and the automated response accepted an offer to sell goods at far
below the intended price. This is one of two problems raised by electronic
acceptance which could come under the generic heading “computers being too
clever for their own good”.
The second problem is another form of automatic reply. Some email system
are set up such that they automatically return emails if they detect what they
believe to be a virus. The question (in cases when the returned email was an
acceptance) is whether that acceptance been communicated or not?
This will rather depend on your view with regard to whether email is an instantaneous
method of communication or not. If it is instantaneous then the likely analogy
will be to a fax machine that has run out of paper and cannot store messages
and the acceptance will not have been communicated. However, if email is not
instantaneous and is found to be covered by the same rules that apply to normal
post, then the act of sending the email to the correct address will be
sufficient to communicate acceptance. It is difficult to suggest which route
the courts might take if faced with this problem. My own view is that email is
not instantaneous as, at the very least, it requires the recipient to check
their mailbox. Therefore, acceptance will be valid when sent. Further, I
consider that the court will be reluctant to allow acceptance to be prevented
by a computer which is only intended to be acting as a storage device for
communications. This being said, it is also possible to envisage circumstances
where the courts would not hold such returned acceptance to have been
communicated - for example, where the sender received notification which
explicitly stated that the message had not been delivered.
Although electronic offer and acceptance produce numerous issues this is
by no means the end of the story. Further questions arise such as whether
electronic contracts are in writing (vital for all arbitration agreements and
any construction dispute which may otherwise fall under the Construction Act),
what is an electronic signature and what is its effect (particularly with
regard to the requirement of Section 52 of the 1996
Arbitration Act for awards to be signed). I will be dealing with these issues
in the next part of this article in the next issue of News and Views.