NZLC - Report 50: Electronic Commerce - Part One

46 THE CONTRACT IS THE PRIMARY LEGAL MECHANISM by which businesses interact with each other. While authorities differ in their account of the nature of contracts, as a matter of New Zealand law it is probably adequate to define a contract as an agreement (enforceable by the court) under which each party assumes obligations to the other for valuable consideration.¹⁷

47 A contract will be governed either by the law agreed by the parties (expressly or impliedly) or by the law imposed by the court. Sometimes, parties to a contract between entities in different jurisdictions will not apply the law of any particular jurisdiction. An example of this is the use, in the context of a submission to arbitration, of phrases such as “internationally accepted principles of law governing contractual relations”,¹⁸ or “general principles of law recognised by civilised nations”,¹⁹ to denote the law by which a dispute is to be resolved (see generally Redfern and Hunter 1991 117–120). It is also open to parties to agree that different aspects of a contract, such as interpretation or damages, are to be governed by different laws. For the purposes of this chapter, unless the context otherwise requires, we assume that New Zealand law governs the contract in question. Issues of conflict of laws are addressed in chapter 6.

THE NATURE OF A CONTRACT

48 The law of contract has been developed over centuries through the practices of traders, court decisions, and statutory reform. It tends to reflect the needs and values of the people whom it serves. Further, because the law of contract is relatively settled and predictable, commercial decisions can be made in a legal environment which provides a high degree of certainty. This degree of certainty is essential for businesses committing their resources to transactions: for business to prosper parties must have confidence that the contracts they enter into will be binding. Any attempt

to dramatically reform the law reduces this degree of certainty, bringing added (avoidable) risks to business. Instead, adaptation of existing law to the electronic environment should preserve the underlying principles on which business is conducted.

49 Methods of proving a contract or debt (eg, proof by oral testimony, writing or mark; or signing, sealing and delivering a particular type of document) developed to meet the needs of a particular era (Holmes, The Common Law, 271–274). The advent of electronic media simply adds a modern dimension to this evolution. The challenge is to adapt the law to fit the electronic environment.

FUNDAMENTAL PRINCIPLES

50 To prove that a binding contract has been formed under New Zealand law, the parties must establish the following elements:

51 The common law does not usually impose limitations as to the mode of communication used to form contracts. Thus, oral contracts are as binding as written contracts at common law. Requirements that specific types of contract be in writing and signed under the hand of a party arise as a result of statutory overlay.²⁰ While statutory reform has displaced or supplemented the common law in a number of areas (eg, Illegal Contracts Act 1970, Contractual Mistakes Act 1977, Contractual Remedies Act 1979, and Contracts (Privity) Act 1982), the fundamental principles of contract law remain constant.²¹

52 The principles applicable to the making of a contract by electronic means should be no different to the principles applicable to contracts formed orally or in writing on paper. Indeed, the decided cases appear to have accepted that proposition as self evident.²²

53 The fact that a contract may be validly formed by electronic means does not, however, constitute the end of any inquiry into the relationship between the law of contract and electronic commerce. Rather, it leads to other questions which are less easily answered. For example:

54 We proceed to discuss the elements required to prove a valid contract under New Zealand law with reference, in particular, to specific issues thrown up by the use of electronic methods of communication.

Intention to create legal relations

55 Agreements may be declared unenforceable on the grounds that the parties did not intend to create legal relations (Chitty on Contracts paras 2-105–2-120; Cheshire and Fifoot’s Law of Contract chapter 5). However, there is a strong presumption that parties to an apparent commercial contract intend to create legal relations: for example, Edwards v Skyways Ltd [1964] 1 WLR 349, 355. It is unlikely that a court will hold a commercial agreement between businesses to be unenforceable on such grounds in the absence of special factors (eg, an express statement that an agreement is not binding until put into formal terms).

56 Do parties necessarily intend to create legal relations when the communication relied upon for evidence of that intention is generated automatically by a computer as a result of it being programmed in a particular way? This has been referred to as “programmed intention” (Gringras 1997 29). The computer is programmed to make or accept offers when certain circumstances occur. In our view, if a computer is programmed to make or accept offers in predetermined circumstances then, plainly, an intention to create legal relations exists on the part of the user of the computer.

58 While strictly speaking the intention to create legal relations arises from the decision to program a computer in a particular way (and the subsequent programming in accordance with that direction) it is convenient to regard a pre-programmed computer as a metaphorical “electronic agent” of the person making or accepting an offer. If that metaphor is drawn it is difficult to conceive of a case in which an offeror or an offeree would not be regarded as having intended to enter into legal relations. This remains the case even if the computer (owing to some malfunction or error in programming which meant that the program did not accurately reflect the human decision it was designed to implement) acted contrary to what the offeror or offeree later says they intended.²³ This is comparable to the contract formed when goods are purchased from a vending machine. If a human being had been the agent in such circumstances that person would be regarded as having ostensible authority to bind his or her principal even though they may have departed from the precise instructions given to them. If, however, the agent was acting in a manner clearly inconsistent with the scope of his or her agency the principal may not be bound.²⁴

59 Regarding a pre-programmed computer as if it were an “electronic agent” raises an analogy to normal principles of agency law. A decision has been made to respond in a particular way to a particular set of facts. If the computer is pre-programmed inadequately, so that it does not respond in terms of what was intended by the offeror or offeree, then third parties dealing with offeror or offeree should not be prejudiced. If the computer is wrongly programmed, the entity which employed the programmer will, of course, have a right of action against the programmer.

60 Another circumstance which may arise is where an offer is sent incorrectly or is corrupted in such a way as to remain apparently correct (eg, by currency symbols being confused). Unless what is written is so obviously wrong that the recipient must be aware of the mistake, the offeror will be bound by the resulting contract. This disregards the offeror’s lack of intention to enter into a contract of that type simply because a reasonable person would interpret the message as demonstrating an intention to create legal relations (Nicoll 1998 48–49; Myburg 1993 327). Unless the parties subject themselves to an underlying protocol requiring messages to be verified it is unlikely that any relief would be granted under the Contractual Mistakes Act 1977 as the mistake in question would be purely unilateral. Myburg argues that s 6(1)(c) of that Act would apply if an offeree failed to use an agreed verification protocol and accepted an erroneously sent offer; the offeree has impliedly assumed the risk of mistakes (1993, 327).

61 The concept of an “electronic agent” has received approval in the United States, where s 2-102(a)(12) of the draft Uniform Commercial Code (UCC) refers to “electronic agents” in the following terms:

62 Under s 2-211(a)(1) of the UCC, an electronic record, message or performance is attributable to a party if it was sent by that party, its agent, or its electronic agent. Until it was technically possible for machines to make or to respond to offers in terms of pre-programmed commands it was unnecessary for the law of agency to deal with the concept of electronic agents. Similarly, but perhaps more accurately, article 13(2) of the UNCITRAL Model Law on Electronic Commerce provides that a data message is attributable to a party if it was sent by an authorised agent of the party, or by an information system programmed by, or on behalf of, that party to operate automatically.

63 These provisions are intended to resolve issues arising from the need to attribute an electronic message to a party for evidential purposes, and to protect those who act in reliance upon such messages.²⁵ However, in attributing the act of the electronic agent (to adopt the expression of the UCC) to the person who uses that agent or, in attributing the act of an information system programmed by or on behalf of a party (to use the Model Law’s expression), they also serve to prevent any disavowal of intention to create legal relations by that person.

64 The Commission seeks submissions as to whether it is necessary to reform the law specifically to ensure that a business entity be bound by what is done on its behalf by a pre-programmed computer.

We are particularly interested in the situation where a computer is programmed incorrectly; should the business entity still be bound to the contract? At this stage we are of the view that it would be wrong to put third parties at risk in situations where a business could rely on inadequate programming to avoid contractual commitments on the grounds of a lack of intention to create legal relations in that particular form.

Is it necessary for the law to state expressly that parties to an agreement are bound by the acts of an electronic system under their control and may not deny liability purely on the grounds that the electronic system acted without direct human input?

Offer

65 The offer is the first legal step to contract formation. It has been described as an expression of willingness to contract made with the intention that it will become binding on the party making the offer (the offeror) when it is accepted by the person or persons to whom it is made (the offeree or offerees) (see Chitty on Contracts para 2-002). The important elements of an offer are that its terms are sufficiently clear to allow a contract to be formed merely by acceptance without further negotiation (although such negotiation may still occur); and that the intention of the offeror to be bound may be inferred from his or her words or conduct.²⁶ Statements which lack one or both of these elements (for example, a simple statement as to price: Harvey v Facey [1893] AC 552) are invitations to treat. An invitation to treat cannot be turned into a binding contract by acceptance of its terms.

66 The distinction between offers and invitations to treat is important for businesses which choose to sell or advertise products on the internet. It is well established that displaying goods in a shop constitutes an invitation to treat: that is, something falling short of an offer which, if accepted, will result in a concluded contract: Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 410. The consequence is that the shopper makes an offer to buy the product; the retailer retains control over the transaction because he or she can choose whether or not to accept the offer and thereby form the contract. However, it is equally well settled that advertising goods for sale can constitute an offer if the advertiser gives sufficient detail and demonstrates an intention to be bound. (The resulting contract is known as a unilateral contract: see Carlill v Carbolic Smoke Ball Co. Ltd [1893] 1 QB 256.) In such cases the advertiser may have no control over who accepts the offer, or how many people accept the offer. A website communication could therefore be considered either as an invitation to treat or as an offer, depending on the words used.²⁷

67 A business offering goods or services for sale over the internet will generally want to retain control over the identity and location of its trading partners, and the quantity of goods or services it sells. It is therefore likely to prefer that its website be considered as an invitation to treat rather than an offer. This may be done by taking basic precautions, such as advising visitors to the site that the owner will not be bound by any communication from a third party, but will inform that party if it accepts the communication (Gringras 1997 14).²⁸

Acceptance

68 Acceptance is the final and unqualified expression of assent by the offeree to the terms of the offer (Chitty on Contracts para 2-016). To be effective, acceptance must be communicated unequivocally to the offeror.²⁹ Provided the requirements of consideration, intention to create legal relations, and certainty are also present, the contract is binding at common law at the time the offeror receives the acceptance. The offeror is therefore free to revoke the offer at any time prior to receiving acceptance.

69 The postal acceptance rule was developed to avoid the “extraordinary and mischievous consequences which would follow if it were held that an offer might be revoked at any time until the letter accepting it had been actually received”.³⁰ Unless the parties intended otherwise the rule required the court to hold that acceptance of an offer concluding a contract was completed upon the letter recording the acceptance being placed in the charge of the post office. On the other hand, if there had been an instantaneous communication between the parties (whether in person or by telephone) the contract would be completed at the time that acceptance was heard by the offeror: this class of case being extended to a telex communication in Entores Limited v Miles Far East Corporation [1955] 2 QB 327.

70 The House of Lords was asked to review Entores Limited v Miles Far East Corporation in 1981 when the appeal in Brinkibon came before the House of Lords. In Brinkibon Lord Wilberforce said:

The House of Lords held that it should not depart from the principle laid down in the Entores case. Their Lordships emphasised in Brinkibon the point made by Lord Wilberforce that the Entores case was concerned only with instantaneous communication by telex between the principals on either side and that there may be other cases which would provide a number of variations on that simple theme. In concluding his judgment Lord Brandon of Oakbrook referred to these variations and expressed agreement with Lord Wilberforce’s view that

71 The first question is whether it is appropriate to classify acceptance of an offer using electronic communications as one which falls within the general ambit of an instantaneous communication to which the postal acceptance rule applies. In cases involving a facsimile transmission it is likely that the court will hold that there has been an instantaneous communication to the machine of the offeror in the same way that a telex communication was viewed as an instantaneous communication in both Entores and Brinkibon. If the communication was made by email the answer depends on whether the email user had direct and immediate access to the person to whom the email is sent or whether the email was sent through the electronic equivalent of the postal service, an internet service provider (ISP), which collected the mail.³¹ Users in the former category have a mode of communication which is close to instantaneous while those using an ISP may only communicate as quickly as their telephone access, service provider and personal inclination dictate.

72 In determining whether it is appropriate to clarify the law as to the circumstances in which a person will be held to have accepted an offer by electronic communication it is also necessary to have regard to the terms of the Vienna Sales Convention (applied to New Zealand by the Sale of Goods (United Nations Convention) Act 1994; see para 112). There is no scope under the Vienna Sales Convention for the operation of the postal acceptance rule, unless the parties themselves agree otherwise or there is a usage or custom to that effect. Both offers and acceptances are effected when they “reach” the intended recipient.³²

Thus, it would appear that an offer made by email would “reach” the offeree at the time it entered his or her mail box and became available to read, although there do not appear to have been any cases which either support or contradict this interpretation. There is no requirement under the Vienna Sales Convention that the intended recipient be subjectively aware of the existence of a message. This approach is consistent with that taken in article 15 of the UNCITRAL Model Law on Electronic Commerce.

74 As most of New Zealand’s major trading partners are parties to the Vienna Sales Convention,³³ the provisions of articles 18(2) and 24 of the Convention will apply so that acceptance will only be completed upon the communication reaching the offeror. An issue arises as to whether in the domestic context the same result should pertain. Certainly it seems illogical that different results flow depending upon whether the contract is international or domestic in nature.

Consideration

75 In common law jurisdictions (including New Zealand), a contract is not binding unless supported by consideration (although an exception exists where a contract is made by deed; see paras 100–105). The definition of “consideration” is something which has exercised the minds of contract lawyers, academics and judges alike (see Chitty on Contract chapter 3; Burrows et al 1992 chapter 4). However, as this chapter is concerned with commercial contracts between businesses, it is probably sufficient to say that the contract must be supported by something of value, such as the promise of a party to provide goods or services, a promise to pay for goods or services, or the foregoing of a benefit (eg, forbearance to sue).

76 The need to prove the existence of consideration is essentially unaffected by the advent of electronic communication technology, since the latter represents a revolution in how contracts are formed, rather than the substance of contracts. In the Commission’s view, the law relating to consideration does not require any reform in order to respond to the challenges posed by electronic commerce.

77 It is beyond the scope of this report to consider whether it is right to require consideration as an element to be proved in a cause of action based on contract. Given that the need for consideration may easily be circumvented by the use of deeds, and that consideration is not required as an essential element of a cause of action in contract in civil law countries,³⁴ there may be some justification to reconsider whether consideration should continue to be an essential element of a cause of action based in contract in New Zealand. We leave this point open for submissions. Our current view, however, is that if there is sufficient support to abolish consideration as an element of a cause of action in contract, then that should be considered separately rather than in passing in this report.

Should the doctrine of consideration continue to be an essential element of binding contracts?

Certainty

78 Certainty as to the terms of a contract is an element of formation. Simply put, an “agreement may be so vague or uncertain that it cannot give rise to a binding contract” (Chitty on Contract para 2-099). Thus, for example, a contract may be unenforceable if important terms are not settled at the time of offer and acceptance, but left for future discussion without any means of ensuring agreement. A contract which does not state the price may yet be sufficiently certain if goods are to be supplied at a reasonable price, because a court could make an objective finding as to what constitutes a reasonable price for the goods. But if the contract merely stated that the parties must agree on the price, then there would be no such certainty, and the contract would probably not be enforceable (Burrows et al 1992 53).

79 In Attorney-General v Barker Bros Ltd [1976] 2 NZLR 495 (CA), Richmond P set out three principles for determining whether a court should find that a contract is sufficiently certain to be enforceable:

80 Lack of certainty as to the terms of a contract can result from the use of standard forms in contracting, where each party insists that the contract is to be governed by the terms and conditions of that party’s standard form. This is known as the “battle of the forms”, and can ultimately lead to stalemate if the parties are unwilling to compromise and each form purports to prevail over the other.

81 The Commission does not consider that the requirement of certainty as an element of contract formation causes any particular difficulties in the context of electronic commerce, but we invite comments on this subject.

Does the requirement that the terms of a contract be sufficiently certain pose any particular problem when contracts are formed electronically?

TIMING

Revocation of offer

82 An offer may in general be revoked by the offeror at any time before it is accepted, provided the offeror gives notice to the offeree (Chitty on Contracts paras 2-059–2-060). The offer is revoked at the time the offeree receives the notice of revocation: Byrne & Co Ltd v Van Tienhoven (1880) 5 CPD 44. Where such notice is given electronically, a question arises as to when precisely the offer is revoked. Is the offer revoked when a message arrives at the offeree’s ISP; or when the offeree collects his or her mail from the ISP; or when the offeree actually reads the notice? This question is not of mere academic interest, as the offeree may choose to accept and bind the offeror to the terms of the offer at any time until the revocation is effective, regardless of whether the offeror still wishes to enter into the contract.

83 In general, the most likely time for revocation to be effective is probably when the message “was opened in the ordinary course of business or would have been so opened if the ordinary course of business was followed”: Ealehill Ltd v J Needham (Builders) Ltd [1973] AC 992, 1011 (note that this depends on the analogy between electronic communication and conventional mail). The fact that the offeree does not actually read the message at the time it arrives will not prevent the revocation from being effective: The Brimnes [1975] 1 QB 929. However, there are a number of factual issues which could potentially complicate matters, for example:

84 Many communications software packages allow the sender of a message to check whether a message has been received or read. Although the legal effect of such features is as yet untested, they may at least provide evidence that the offeree has had access to a message.

Lapse of time

85 Offers may be subject to a time limit within which acceptance must occur. In the absence of an express limit, offers are regarded as open for a reasonable period of time (Chitty on Contracts paras 2-066–2-067).³⁵ The definition of a reasonable period of time depends on the circumstances of the transaction, including the subject matter of the offer and the means of communication used. What is reasonable in the context of an offer made by email may be considerably shorter than when the offer is posted conventionally, because email is generally a much faster form of communication.

86 If a dispute arises whether an offer has been revoked because of lapse of time calculated from the time at which the offer was made, it becomes important to know exactly when that offer was made. This may be of particular importance when an offer is communicated by email, because of the potential for delays occurring between sender and recipient, and the inability of the sender to know whether the message has been read by the recipient. There is well-settled authority that delay caused by the offeror will not count against the offeree: Adams v Lindsell (1818) 1 B & Ald 681. But it appears to be open to argue that delays caused by circumstances outside the control of the offeror may be considered as running against the offeree (Gringras 1997 18; Chitty on Contracts para 2-015). For example, an offer which is delayed for hours or even days without fault on the part of either party could be considered as lapsed by the time it arrives.

87 There is currently uncertainty in the law regarding the time at which an electronic message is deemed to have reached a recipient when a delay has occurred between sender and recipient without fault on either part. Such uncertainty may have commercial significance when the message is an offer to enter into a contract, and the delay subsequently enables the offeror to either revoke the offer, or argue that it has lapsed. This could be resolved by deeming a message to have been received either at the time it was sent, or at the time it would ordinarily be received but for circumstances outside the control of the parties.

Should the law be reformed to allocate risk presumptively for electronic messages which are delayed or should parties be free to make their own arrangements?

Withdrawal of acceptance

88 In theory, acceptance of an offer can be withdrawn at any time before the acceptance is communicated. If it is assumed that the postal acceptance rule does not apply, it would be possible for an offeree to email his or her acceptance, then decide to withdraw acceptance in a separate email sent 5 minutes later, and for the offeror to receive both these messages at the same time. Common sense dictates that the earlier of these messages (ie, the message which was sent first) should prevail over the later, resulting in a binding contract, although there does not appear to be any authority which confirms this outcome (Gringras 1997 24).

89 Alternatively, if it is assumed that the postal acceptance rule does apply when acceptance is sent electronically, then it seems logical to suggest that the acceptance cannot be revoked once sent. Again, there is an absence of authority on the point. However, the authors of Chitty on Contracts suggest that such an outcome would not be inevitable, as the offeror must generally accept the risk that his or her offer will be rejected, and has no right to have the offer accepted. If so, an offeree could conceivably email acceptance, then revoke it by telephoning the offeror before the email arrives, although the opportunity to revoke such an acceptance would usually be brief.

Reform initiatives

90 The UNCITRAL Model Law on Electronic Commerce provides rules for timing and the place of dispatch and receipt of electronic messages:

(1) Unless otherwise agreed between the originator and the addressee, the dispatch of a data message occurs when it enters an information system outside the control of the originator or of the person who sent the data message on behalf of the originator.

(2) Unless otherwise agreed between the originator and the addressee, the time of receipt of a data message is determined as follows:

(a) if the addressee has designated an information system for the purpose of receiving data messages, receipt occurs:

(i) at the time when the data message enters the designated information system; or

(ii) if the data message is sent to an information system of the addressee that is not the designated information system, at the time when the data message is retrieved by the addressee;

(b) if the addressee has not designated an information system, receipt occurs when the data message enters an information system of the addressee.

(3) Paragraph (2) applies notwithstanding that the place where the information system is located may be different from the place where the data message is deemed to be received under paragraph (4).

(4) Unless otherwise agreed between the originator and the addressee, a data message is deemed to be dispatched at the place where the originator has its place of business, and is deemed to be received at the place where the addressee has its place of business. For the purposes of this paragraph:

(a) if the originator or the addressee has more than one place of business, the place of business is that which has the closest relationship to the underlying transaction or, where there is no underlying transaction, the principal place of business;

(b) if the originator or the addressee does not have a place of business, reference is to be made to its habitual residence.

91 This provision eliminates the confusion caused by the possible application of the postal acceptance rule by deeming messages to be received when they enter the addressee’s designated information system. There is no allocation of risk for messages which are illegible; nor is there any provision for situations where the addressee is for any reason unable to retrieve his or her mail. This is consistent with the principle of technological neutrality; the law does not currently allocate risks for such events when communications are recorded and sent using paper, and should not therefore do so when electronic media are used.

92 The 1998 report of the Australian Electronic Commerce Export Group, Electronic Commerce: Building the Legal Framework, accepts that rules on the timing of messages may help to avoid confusion, but prefers to define receipt as occurring when the recipient is able to retrieve the message in a form which his or her system is capable of processing, unless otherwise agreed. It also recommends a fall-back position under which the message would be received at the time when it comes to the attention of the addressee (paras 4.5.8–90).

93 Similarly, the proposed article 2B section 2-213(b) of the Uniform Commercial Code provides that electronic messages are effective on receipt, regardless of whether any individual is aware of receipt. “Receipt” is defined in the proposed article 2B, section 2-102 (a)(25)(B) thus:

Should a general statutory provision on timing of electronic messages similar to article 15 of the UNCITRAL Model Law on Electronic Commerce be adopted in New Zealand?

ISSUES OF ATTRIBUTION

94 The scheme of the UNCITRAL Model Law on Electronic Commerce is to provide a legal framework which can be supplemented by technical regulations where necessary. The Guide to Enactment states:

Accordingly, the Model Law cannot be regarded as a code to deal with all questions of law arising in a commercial context when business is being done electronically.

95 Similarly, the draft papers prepared for the revision of the United States’ Uniform Commercial Code (UCC) also approach the issues by seeking to provide certainty on specific issues arising out of the use of electronic commerce while not purporting to create a code dealing distinctly with electronic commerce issues.³⁶ In particular, the proposed American changes deal with statute of frauds issues by substituting the concept of a “record” for the concept of “writing”. The term “record” is defined in para 2B-102(a)(31) as “information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in a perceivable form”. Also, the proposed UCC substitutes the concept of “signing” or a “signature” with the term “authenticate” which, under the draft para 2B-102(a)(2), means

96 We explore further the way in which New Zealand law should deal with the concept of an electronic signature in chapter 7. So far as questions of attribution are concerned the most significant arguments in its favour are those adopted by the Australian Electronic Commerce Expert Group in Electronic Commerce: Building The Legal Framework. Chapter 2 of that report identified three methods of dealing with legal issues; being the issues identified in the UNCITRAL Model Law on Electronic Commerce. They were:

We generally agree with the approach of the Australian report which also stated:

97 We are not persuaded at this stage that it is necessary to enact a statute dealing specifically with the electronic commerce issues identified in the Model Law on Electronic Commerce. If, however, our major trading partners decide to enact legislation which is specific to the needs of electronic commerce (contrary to the New Zealand approach of legislation covering the general rather than the specific) it will be necessary to consider whether we should follow their lead to ensure uniformity of approach. In those circumstances the question is whether our guiding principle 4 should be given more weight in this context than our guiding principle 2.

98 Reverting to specific questions of attribution, article 13 of the Model Law sets out the circumstances in which an electronic message is attributed to a person or company. In the Commission’s opinion, article 13 reflects the likely approach of the common law. To the extent that there is uncertainty, codification along the lines of article 13 could be useful for the avoidance of doubt. On the other hand, the Electronic Commerce Expert Group notes in its report that legislating rules on attribution of electronic messages would not remove any existing obstacle to electronic commerce (para 4.5.75). Rather, such rules would be unique to electronic communications, contrary to our guiding principle 3 (there being no statutory rules for the attribution of paper messages). However, we recognise that the potential for electronic messages to be forged (without forensic means of establishing this) may ultimately be a factor in favour of statutory attribution rules.

99 Electronic signature technology provides an obvious solution to problems of attributing electronic messages to a person or company. In chapter 7 we address the issue of electronic signatures, and draw the provisional conclusion that detailed rules for the use of electronic signatures are unnecessary at this time. Accordingly, we do not recommend that rules for the attribution of electronic messages should be enacted at this time. We feel that to do so would be unnecessary and inconsistent with our own guiding principles. However, we welcome submissions as to whether statutory rules on the attribution of electronic messages would promote electronic commerce by eliminating uncertainty.

Should there be special statutory rules which attribute liability for electronic messages?

PROPERTY LAW ACT ISSUES

Deeds

100 Deeds (also known as contracts made under seal) are similar to contracts in that they are promises which are legally enforceable. Unlike contracts they do not require consideration to be proved. Many commercial lawyers draft contracts in the form of deeds in order to prevent any future argument that the contract is unenforceable for want of consideration.

101 The form which deeds must take in order to be enforceable is set out in s 4 of the Property Law Act 1952:

102 The requirement that deeds be signed and attested by a witness poses problems for those who wish to continue to draft commercial contracts in the form of deeds in an electronic environment (see chapter 7). Further, under s 5 of the Property Law Act, there remains a requirement that corporations (excluding companies and building societies under the Companies Act 1993 and the Building Societies Act 1965 respectively) affix a seal to deeds. Although the Interpretation Bill cl 28 currently before Parliament includes a definition of “writing” which is intended to allow written documents to be created and stored in any medium, there is no equivalent provision allowing signatures to be appended electronically.³⁷ Thus, it is not currently possible to create a deed in a purely electronic format.

103 In A New Property Law Act the Law Commission recommended the retention of requirements of writing, signature and attestation by a witness, but that the requirement that deeds by corporations must be sealed be abolished (paras 35–39; draft Act s 9). This recommendation was based on the need to maintain some way of distinguishing legally enforceable documents from those which are not so enforceable; and because abolition of formalities in deeds would do irrevocable violence to the doctrine of consideration (see also the Commission’s discussion paper, The Property Law Act 1952, paras 44–64). Formalities also encourage caution because of the likelihood that a person making a deed will obtain legal advice.

104 We remain convinced that the observation of formalities in signing deeds is useful for these reasons; although the conclusion may need to be revisited if submissions on this report favour the notion of abolition of the deoctrine of consideration. The conclusion is consistent with the second of our principles for reform – that the principles underlying the law of contract should not be changed except to the minimum necessary extent. However, this does not mean it should remain impossible for deeds to be created electronically; it is both possible and feasible for the same formalities to be observed by means of electronic signatures if a “functional equivalent” approach is taken.

105 Courts have decided that the requirement of a signature may be met where there is evidence of a person’s intention to authenticate or be bound by a document. A hand-written autograph may not be necessary. We take the view that it should be possible to make a deed in electronic form provided there is a sufficient evidentiary link between the maker of the document and his or her expression of intention to be bound by its content. These issues are addressed more fully in chapter 7.

Assignments – Property Law Act 1952 s 130

106 In addition to the provisions of the Property Law Act relating to deeds, s 130 of that Act requires assignments of debts and things in action to be “by writing under the hand of the assignor”.

107 The Commission recommended in A New Property Law Act that the safeguards inherent in s 130 of the Property Law Act 1952 be retained. For the reasons given in paras 104–105, we are of the view that, provided there is an adequate intention to be bound by the document, there is no reason why an assignment should not be made electronically. Again, we address this issue more fully in chapter 7.

THE STATUTORY OVERLAY

Statutory regimes

108 Although the law of contract is fundamentally derived from common law, there are a wide variety of statutes which regulate commercial contracts. Some of these statutes predate the advent of electronic commerce by decades, or even centuries.³⁸ It is to be expected that these statutes will not easily accommodate changes in business practice. In this part of the paper we examine the effect of those statutes which most influence the conduct of international electronic commerce.

The Contracts Enforcement Act 1956

109 The Contracts Enforcement Act 1956 poses potential problems for the development of electronic commerce. Section 2 requires contracts for the sale or disposition of land, mortgages on land, or guarantees to be written and signed:

(b) Every contract to enter into any disposition of land, being a disposition that is required by any enactment to be made by deed or instrument or in writing or to be proved by writing:

(d) Every contract by any person to answer to another person for the debt, default, or liability of a third person.

(2) No contract to which this section applies shall be enforceable by action unless the contract or some memorandum or note thereof is in writing and is signed by the party to be charged therewith or by some other person lawfully authorised by him.

110 Thus, the law currently prevents those dealing with land, mortgages on land, or guarantees from doing so electronically. If businesses are to enjoy a freedom of choice in the type of documentation used to effect such transactions, reform will be necessary. However, if the safeguards currently inherent in these provisions are to remain then it will be necessary to find a mechanism by which they can be carried out electronically.

111 The Commission provisionally recommended in its 1997 discussion paper Repeal of the Contracts Enforcement Act 1956 that the Contracts Enforcement Act be repealed without replacement. We remain of that view. However, this may not be necessary for the purposes of facilitating electronic commerce in accordance with the first of the Commission’s principles for reform. Adopting a functional equivalent approach to the requirements of writing, as defined in the Interpretation Bill cl 28, and signature would allow compliance with the Act, subject to one qualification. In cases dealing with land (including mortgages or charges over land) it will be necessary for the registration requirements of the Land Transfer Act 1952 to be met also. It is beyond the scope of this report to consider what, if any, changes to that Act should be made to bring about, in essence, an electronic register which would preserve the integrity of the Torrens System. Comment is sought on these issues as they may need to be addressed more fully in the future.

Should the Land Transfer Act 1952 be amended to allow the register itself and registrable instruments to be in electronic form?

The Sale of Goods (United Nations Convention) Act 1994

112 Section 4 of the Sale of Goods (United Nations Convention) Act 1994 enacts the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Sales Convention), giving it force of law in New Zealand.³⁹ Section 5 of the Act provides that the Vienna Convention shall have effect in place of any other law of New Zealand to the extent that the law is concerned with matters covered by the Convention, and that the application of a contrary New Zealand law is not expressly permitted by the Convention. All international contracts for the sale of goods involving parties based within contracting states to the Vienna Sales Convention will have their contracts governed by the Convention unless they provide to the contrary.

113 Under article 1(1) and 1(2), the Vienna Sales Convention presumptively applies to most contracts for the sale of goods between parties whose respective places of business are located in different states, and those states are parties to the Convention (contracting states). It also applies where the rules of private international law apply the law of a contracting state.⁴⁰ The Convention does not apply to the following contracts:

Although not expressly excluded under the Convention, sales of land are presumably also excluded by definition.

It is therefore clear that the Convention applies to contracts formed partially or wholly electronically (Nicoll 1995). Article 13 defines “writing” as including telegram and telex, and makes no mention of other means of electronic communication. Article 96 allows a contracting state to make a declaration that offers, acceptances, modifications or terminations must be made in writing where one party to the contract has its place of business in that state. The definition of writing, however, is sufficiently broad to ensure that this requirement will be met when electronic media are used to conclude a contract.

115 The rules for the formation of contracts under Part II of the Vienna Sales Convention are broadly similar to the common law.⁴¹ The one significant point of difference from an electronic commerce perspective, the position with regard to the postal acceptance rule, has been discussed previously (see paras 69–74).

116 An aspect which has not been widely considered is whether an electronic message has reached its recipient if the message is for any reason illegible or unavailable to the recipient. This could occur if, for example, the recipient is unable to open attachments because he or she lacks the necessary software, or because access to electronic messages has been interrupted for reasons outside his or her control. The latter question is problematic for the reason that a message may reach the mail box of the intended recipient but remain unread for a considerable period of time, during which an offer or acceptance could be withdrawn. The sender of a message has no means of knowing when the recipient is unable to retrieve his or her mail, short of establishing contact by other means. Bianca and Bonell suggest that analogous problems (delivery at a time when the recipient’s business is closed) “must be dealt with on a case by case basis” and that the reference to “good faith” in article 7(1) of the Convention may be relevant to the interpretation of “reach” (Bianca and Bonell 1987 204).

Contracts for international shipment of goods

117 Contracts for international shipment of physical goods fall into two distinct categories: shipment by sea and shipment by air. In both cases, New Zealand is party to an international convention which has been given force of law by operation of statute.

Shipment by sea: sea waybills, bills of lading and the Hague–Visby Rules

118 Contracts for international shipment of goods by sea are regulated by the Protocol amending the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading of 24 August 1924 (Hague Rules) as amended by the Protocol of 23 February 1968 (Visby Rules). For convenience these are referred to as the Hague–Visby Rules. The Hague–Visby Rules have force of law in New Zealand by operation of s 209 of the Maritime Transport Act 1994. Parties may not exclude the Hague–Visby rules by consent.

119 The actual contract for carriage of goods by sea takes one of two forms: negotiable (a bill of lading) and non-negotiable (a sea waybill or non-negotiable bill of lading). Informal research conducted by Myburgh in 1993 indicated that “only around 8% of transactions are concluded using non-negotiable waybills” (1993 325). Unfortunately, this research has not been updated, as a result of which the proportion of exporters using negotiable instruments is currently unknown.

120 Sea waybills can be, and are, issued in the form of electronic documents; according to Myburgh electronic waybills have been in use since the early 1970s. Because they are not negotiable (ie, the bill itself is not a document of title; see para 122), the problems encountered in generating an electronic equivalent may not be high. However, the potential for growth in the use of sea waybills instead of bills of lading by New Zealand exporters may be limited because they do not allow goods to be traded in transit, and because they offer a lower degree of security to banks financing the transaction. Australian banks apparently advise against the use of sea waybills for this reason(Phillips 1997 9–12).

121 There is no express requirement in the Hague–Visby Rules that bills of lading be produced in paper form (Gliniecki and Ogada 1992 139; see also Faber 1996 239). This probably reflects the antiquity of the original Hague Rules more than a desire to allow for technological advances.⁴² Similarly, there is no requirement that the carrier issuing the bill of lading must sign it manually: article 3(3) merely requires the carrier to “issue” a bill (Richardson 1989 41).⁴³ Part II of the Mercantile Law Act 1908, which sets out the legal status of bills of lading, is similarly silent on the question of medium. It has been argued that references to “possession”, “delivery” and “endorsement” in s 13 of that Act effectively require the existence of a physical document (Myburgh 1993 329). Although, s 13 of 1908 Act was repealed and replaced with new ss 13A–13C by the Mercantile Law Amendment Act 1994, the issue of the medium was not directly addressed. Nor does there appear to have been any judicial consideration of whether an electronic bill of lading would be impliedly excluded by either the Hague–Visby Rules or the Mercantile Law Act.

122 Uncertainty as to the legal status of electronic bills of lading is compounded by practical difficulties. Bills of lading have historically served three functions: a receipt issued by the carrier to the shipper; evidence of the contract of carriage between the shipper and the carrier; and a document of title to the goods (Guest 1997 para 18-007). The latter function renders bills of lading negotiable in the sense that legal title to the goods may be passed between parties while the goods themselves are in transit by transferring possession of the bill of lading. Further, because the bill of lading is a document of title, it can be kept by the shipper (or more often his or her bank) as security, pending receipt of payment. Faber points out that if an electronic message is not a bill of lading or document of title as a matter of law, the Hague–Visby Rules will not apply unless they are expressly incorporated into the contract (Faber 1996 239).

123 The UNCITRAL Model Law on Electronic Commerce seems to promote a recognition of documents governing contracts for the carriage of goods and transport documentation (articles 16 and 17; see also the Guide to Enactment paras 108–122). There seems to remain, however, a perception that electronic equivalents of document of title (such as bills of lading) are less secure than paper-based systems. This perception creates a market-based problem rather than a legal problem.

124 Electronic messages raise problems because of the ease with which they can be duplicated or altered. Several attempts have been made to overcome this problem. A system known as the Sea Docs Registry was set up in 1986 which depended on electronic messages being authenticated by a central registry. However, it failed in its first year due to a combination of cost and lack of confidence in the registry (Faber 1996 242; Myburgh 1993 326). A current trial known as Bolero is based on the Comité Maritime International’s Rules for Electronic Bills of Lading. This system uses two registries: a title registry to keep a record of the holders of the bill of lading, and a second which provides security and authentication functions.⁴⁴ According to a press release issued by the Bolero Project on 20 January 1998, a company is currently being formed in order to trade using the Bolero system.

125 The practical barrier to the introduction of electronic bills of lading is the need for an infrastructure to enable the holder to verify the validity of a particular electronic bill, so that he or she can be confident that the electronic bill does in fact represent title to the goods. Paper bills do not require the same infrastructure. This infrastructure could be organised on a contractual basis, as under the Bolero system which requires all parties trading under it to be party to a contractual “rule book”. However, it would also be possible for the state to provide a registry of bills of lading similar to the register of motor vehicle security interests set up under the Motor Vehicle Securities Act 1989. Such a register would be purely facilitative in that it would be optional. But it would have the advantage of neutrality between parties and their banks, which might be of commercial benefit. We invite submissions as to whether this would be a useful or appropriate role for the state in promoting electronic commerce.

Should there be an optional statutory register to facilitate electronic bills of lading?

126 Other rules exist which contemplate the possibility of electronic bills of lading. Article 14(3) of the United Nations Convention on the Carriage of Goods by Sea 1978 (Hamburg Rules) makes provision for electronic bills of lading. The latest version of the International Chamber of Commerce Incoterms also makes provision for electronic equivalents, although it recognises the difficulty of creating an electronic document of title (Incoterms 1990, para 18). To date neither of these regimes appears to have been used in practice.

127 The Commission takes the view that the major legal impediments to the use of electronic bills of lading are statutory requirements of writing and signature. Other impediments are essentially market based. Such problems are invariably best resolved by the market. For this reason we do not recommend that New Zealand adopt articles 16 and 17 of the Model Law on Electronic Commerce at this time. However, we invite submissions on this issue.

Is special legislation necessary to facilitate the use of electronic bills of lading or is it sufficient to allow for electronic equivalents of “writing” and “signature” and leave other impediments for the market to resolve?

Contracts for shipment of goods by air

128 Contracts for the shipment of goods by air are currently governed by the Carriage by Air Act 1967. Under s 7 of that Act the Convention for the Unification of Certain Rules Relating to International Carriage by Air as amended by the Hague Protocol of 1955 (the Warsaw Convention) and the Supplementary to that Convention (the Guadalajara Convention) have force of law in New Zealand. Article 1(2) of the Warsaw Convention provides that the Convention applies to all international carriage of cargo between contracting states.

129 The primary document associated with contracts for carriage of goods under the Warsaw Convention is the air waybill. Article 15(3) effectively provides that air waybills under the Warsaw Convention may be either negotiable or non-negotiable. However, Glass and Cashmore state in Introduction to the Law of Carriage of Goods that “in England the business community do not recognise an air waybill as ‘negotiable’” (1989 para 6.28); Benjamin’s Sale of Goods states that an air waybill “is not a document of title in the common law sense” (1997 para 21-052). It therefore seems likely that air waybills are used in practice as non-negotiable instruments. Indeed, given the speed of air transport there would seem to be little reason to issue a negotiable air waybill.

130 Air waybills function as prima facie receipts and evidence of the contract of carriage: article 11(1). They are therefore the functional equivalent of sea waybills. Under article 5(2) the loss or absence of an air waybill does not affect the existence or validity of the contract of carriage, although article 9 provides that failure to complete an air waybill means the carrier loses the limitation of liability under article 22(2).

131 The Warsaw Convention as it applies in New Zealand does not appear to permit air waybills to be issued electronically. Article 5(1) gives the carrier the right to require the consignor to “make out and hand over” an air waybill. Under article 6(1), the waybill must be “made out by the consignor in three original parts and be handed over with the cargo”.⁴⁵ This requirement appears on its face to require a physical document to be completed and delivered to the carrier. Each of the original parts must be signed by one or both of the parties. Article 6(4) provides that “the signature of the carrier may be stamped; that of the consignor may be printed or stamped”. There seems to be nothing in the Warsaw Convention to preclude an electronic signature.

132 A subsequent amendment to the Warsaw Convention, the Montreal Protocol No 3 (which has not been enacted in New Zealand) removes this problem by amending article 5 as follows:

The requirement that the air waybill be signed is unchanged under article 6(3). Article 9 is also amended so that failure to issue an air waybill does not result in the carrier losing its limited liability in respect of damage to the cargo under the Convention. This begs the question whether the availability of an electronic substitute for a paper air waybill has any real meaning, as there is effectively no penalty for failure to issue a waybill at all.

133 The Montreal Protocol No 3 was originally intended to be incorporated into the law of New Zealand by the Carriage by Air Amendment Act 1990. However, this has not occurred; the Order in Council required under s 1(2) of that Act to bring it into force has not been made.

134 We believe that the Montreal Protocol No 3 should be brought into effect in New Zealand in order to remove an unnecessary impediment to electronic commerce. But we invite comments on this matter.

Is there any justification for continuing the existing requirement that air waybills be printed on paper?

Marine Insurance Act 1908

135 Contracts for marine insurance in New Zealand must be in writing and signed by the insurer under s 24 of the Marine Insurance Act.

136 As with issues arising under the Property Law Act 1952 and the Contracts Enforcement Act 1956, the issue is whether the requirement for a signature by the insurer under s 24 of the Marine Insurance Act can be met by an intention to authenticate the document and be bound thereby (see chapter 7). Again, the requirement that the policy of insurance be “in writing” will be resolved if cl 28 of the Interpretation Bill currently before Parliament is enacted.

CONCLUSION

137 Generally, we consider the common law of contract to be well-suited to the electronic environment, and not in need of reform. Specific issues such as the time and place of contract formation may need some clarification, and we invite comment on these matters. We regard these as matters of refinement more than reform. However, there are issues relating to the application of a variety of statutes which have supplanted the common law and which are not so easily dealt with. Where statutes do present an impediment to electronic commerce, as in the case of the Contracts Enforcement Act 1956 and the Mercantile Law Act 1908, statutory reform is the only remedy. In many cases this may be addressed simply be deeming electronic documents to be “in writing”. But we welcome submissions as to whether and how statutory reform should be effected in respect of the statutes discussed above and any others we have not identified.

Are there any statutes which cannot be reformed to permit electronic transactions merely by redifining “writing” and “signature” to include electronic equivalents?

New Zealand Law Commission

3 The law of contract

THE NATURE OF A CONTRACT

FUNDAMENTAL PRINCIPLES

Intention to create legal relations

Offer

Acceptance

Consideration

Certainty

TIMING

Revocation of offer

Lapse of time

Withdrawal of acceptance

Reform initiatives

ISSUES OF ATTRIBUTION

PROPERTY LAW ACT ISSUES

Deeds

Assignments – Property Law Act 1952 s 130

THE STATUTORY OVERLAY

Statutory regimes

The Contracts Enforcement Act 1956

The Sale of Goods (United Nations Convention) Act 1994

Contracts for international shipment of goods

Shipment by sea: sea waybills, bills of lading and the Hague–Visby Rules

Contracts for shipment of goods by air

Marine Insurance Act 1908

CONCLUSION