Forming legally binding contracts can be more complex than you might think. Particular issues associated with the electronic world can add to that complexity. Creating contracts electronically has become significantly more common in recent years. In this article, we highlight just some of the issues which businesses should bear in mind.
In New Zealand, contracts may be formed verbally, in writing or by electronic means (for example by email or through business websites). Regardless of the method of contracting, the same legal requirements for forming a binding contract apply:
- The parties must have an intention to create legal relations;
- There must be an offer;
- There must be acceptance of that offer;
- Some valuable consideration must be given in exchange for promises under the contract; and
- The terms of the contract must be certain.
Just one area of uncertainty when forming contracts (and particularly when forming contracts electronically) is knowing when agreement has been reached. Understanding at what point a contract is made can be very important, especially when certain contractual obligations and payments may be due within a specific time period following entering into a contract.
A contract is complete upon acceptance, which is generally the time the acceptance is received by the offeror, unless the postal acceptance rule applies. The postal acceptance rule is an exception to the general rule that acceptance of a contract must be communicated to the offeror before a contract can be in existence. Under the rule, acceptance of a contract is said to occur at the time the acceptance is posted.
But when is acceptance received by the offeror when dealing electronically? Is it, for example, when an email is sent to the offeror, when the email is delivered to the inbox of the offeror, when the email is opened by the offeror or perhaps when receipt of the email is acknowledged by the offeror? Parliament has recently passed an amendment to the Electronic Transactions Act 2002 to clarify the position around timing of acceptance of an offer by electronic communication.
The newly inserted section 13A provides that for the purpose of the formation of a contract, an acceptance by electronic communication of an offer is taken to be communicated to the offeror at the time determined by section 11 to be the time of receipt for that electronic communication.
Section 11 provides that an electronic communication is taken to be received:
(a) in the case of an addressee who has designated an information system for the purpose of receiving electronic communications, at the time the electronic communication enters that information system; or
(b) in any other case, at the time the electronic communication comes to the attention of the addressee.
The provisions of section 13A do not apply if the parties to the contract agree otherwise or an enactment provides otherwise.
So to answer the question posed above, acceptance of an offer is received by the offeror at the time the electronic communication (email) enters the designated information system of the offeror, unless agreed otherwise by the parties.
The acceptance of an offer electronically could pose other issues worth bearing in mind. Who actually accepted the offer? Did that person have authority to bind the contracting party? Did that person have capacity to enter into a contract at all (for example, a child)?
When dealing with business websites, it is important to establish whether the content of that business website amounts to an “offer” or merely an “invitation to treat”. An invitation to treat is not capable of being turned into a binding contract by simply accepting its terms. Rather, it is an invitation to others to make an offer of their own. By contrast, an offer is an expression of willingness to enter into a binding contract with another party. Upon acceptance of an offer, a contract is formed.
A shop owner displaying their goods for sale is generally making an invitation to treat. They are not obliged to sell the goods to anyone who is willing to pay for them. When a customer presents some of those goods at the checkout, the customer is usually making an offer to purchase those goods, which the shop owner will usually accept.
Similarly, a business website may advertise goods for sale. Depending on the sale process and the ability for a customer to negotiate price or terms of sale for those goods, this could be either an invitation to treat or an offer. Has the website owner made an offer which a customer has accepted? Or has the website owner merely presented an invitation to treat, in response to which a customer has then made an offer which the website owner has accepted?
In some situations, for example where two businesses are contracting for goods or services electronically, establishing which party has made the offer could be very important in determining which party’s terms and conditions will apply and potentially even which country’s law will apply if the parties are based in different countries. It could also impact on the timing that the contract was formed, as explained above.
Certainty of terms
Keeping a record of the contract as agreed is vital. This can be difficult if there have been several email exchanges (perhaps each attaching documents intended to form part of the terms of the contract) including counter offers and negotiations between the contracting parties. As noted above, it may be difficult in such a scenario to determine who is the offeror and who has accepted the final offer, which may determine which party’s terms and conditions apply. In any event, it is important to ensure that the parties are clear on the content of the final contractual terms.
Forming contracts can be far from straight forward. Forming contracts electronically can be even more complex. The issues touched on above are just some of those to be considered when forming a contract electronically. For further information, please contact a member of our Business Team at Cavell Leitch. Our Business Team members are experts in all aspects of legal business advice and are more than happy to discuss any questions you may have.
Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.