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What is a contract? Are you really in contract? Considerations in the context of electronic transactions...

Posted by Giselle Ayala Mateus | Aug 06, 2021 | 0 Comments

A contract is the result of offer, acceptance, and consideration. An offer is an unequivocal invitation to enter into a contract, which may be accepted by a return promise or performance. The offer, to be effective, must be communicated and received. Once accepted, the offer is irrevocable, and the contract is formed. An acceptance is a clear manifestation of acquiescence to the terms of the offer. These concepts appear simple and clear. However, nowadays, distinguishing a real offer from an invitation to negotiate or a mere proposal is not as easy as it used to be. The Internet has changed the way we interact to do business. Email, emojis, instant messaging, and even the use of acronyms to "text" have made communication somewhat less effective. In this context, understanding whether a binding agreement has been created is crucial. 

There is no much difference between a written contract in physical form and an electronic agreement in general terms. The main difference between an online contract and a contract executed in a more traditional setting is the manner in which the parties interact to manifest their consent. In the context of digital communications, the main problem that the parties face is the potential of misunderstandings as to whether a contract has been formed.

How can we avoid misunderstandings?

The main concern is to end up tied to an agreement unintentionally, or agreeing to a contract that does not reflect the intent of the parties. To avoid misunderstandings, the parties may agree upfront that there is no contract until a formal agreement in writing has been executed and signed be signed by the parties. Additionally, parties should be clear as to who has the authority to agree to the contract. If the transaction is between two individuals, there is not much room for discussion. However, if the transaction is between businesses, clarity as to the authority of the agents for the business is crucial. Finally, the parties should create some procedure that allows them to confirm that a contract has been formed, that the parties have agreed to all material terms, and that both parties have the same understanding of the meaning of the terms.

Offer and acceptance by means of electronic communications 

To form an enforceable contract offer and acceptance must be clear and unequivocal. This means that the parties must be unambiguous in terms of their conduct and their manifestations. Additionally, even if the parties do not expressly agree to bound by an agreement, the existence of a binding agreement may be presumed considering the circumstances of the parties' relationship. 

In Stonehill Capital Management, LLC v. Bank of the West, 2016 NY Slip Op. 08481 (N.Y. Dec. 20, 2016), the New York Court of Appeals considered whether the exchange of emails and text messages could constitute a binding contract. The court explained that such communications result in an enforceable agreement when, considering the totality of the circumstances, the parties' conduct and the objective interpretation of their manifestations, is sufficient to demonstrate the presence of a contract, i.e., that there is (1) an offer, (2) that is accepted, (3) for which there is the exchange of consideration, and (4) an agreement on material terms.

To form a binding contract there must be a "meeting of the minds" such that there is a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms. In determining whether the parties intended to enter a contract, and the nature of the contract's material terms, courts look to the objective manifestations of the intent of the parties as gathered by their expressed words and deeds. Disproportionate emphasis is not to be put on any single act, phrase, or other expression, but, instead on the totality of all of these, given the attendant circumstances, the situation of the parties, and the objectives they were striving to attain. 

In this case, the court also considered that language used by the parties in their communications and the expression "subject to." The court distinguished the existence of a condition precedent from a mere formality. A condition precedent is an act or event that must occur before the parties' performance becomes due. A mere formality is just a requisite for the proper execution of an already existing agreement. 

There is a difference between conditions precedent to performance and those prefatory to the formation of a binding agreement. A condition precedent is an act or event, other than a lapse of time, which unless the condition is excused, must occur before a duty to perform a promise in the agreement arises. Most conditions precedent describe acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract, a situation to be distinguished conceptually from a condition precedent to the formation or existence of the contract itself.

The statute of frauds 

Electronic contracts or transactions must be clear and definite. Additionally, they must be supported by proper execution of the agreement so that there is no doubt that the parties intended to create a binding agreement. Additionally, under the statute of frauds, certain agreements must be in writing to be enforceable. Indeed, an agreement is only enforceable if it is (1) made in writing and (2) signed by the party or parties to be bound. The rationality behind the requirements of the statute of frauds is to deter fraudulent behavior by one or both of the parties.

The following types of contracts are generally covered by the statute of frauds and must be made pursuant to a signed writing:

  • An agreement of an executor or administrator to answer for a duty of his decedent.
  • Agreements that are made in contemplation of marriage.
  • Suretyship agreements (i.e., contracts to answer for the duty of another).
  • Agreements for the sale of an interest in land.
  • Contracts that are not to be performed within one year from the making thereof.
  • Contracts for the sale of goods equal to or greater than $500
  • Lease contracts where the total payments due are over $1,000.

Under the statute of frauds, a party may void a contract that is not in writing and signed by the party against whom enforcement is sought. Accordingly, a party must ensure that all agreements covered by the statute of frauds are memorialized in a signed writing. Additionally, if the agreement between the parties is not consigned in one single document, but in several documents or communications, the requirements of the statute of frauds may also be complied with. When a series of writings clearly reference the same transaction or subject matter, the documents will usually satisfy the statute of frauds. However, in the case of an agreement expressed in multiple documents that must be considered together, the parties should ensure that the multiple documents intended to be considered as one enforceable contract clearly refer to each other and that there are not contradictory terms in the different writings.

The requirement of proper signature 

To advance interstate commerce, facilitate the use of electronic records and e-signatures, and promote e-commerce, the Federal government enacted the Federal Electronic Signatures in Global and National Commerce Act (ESIGN) in 2000. Under the Act, for any transaction in or affecting interstate or foreign commerce, signatures made via electronic means with respect to the applicable contracts are legally binding. According to the E-SIGN Act, electronic signatures can be a sound, symbol, or process if attached or logically associated with a contract and are executed or adopted with the requisite intent to sign the agreement in question. The E-SIGN Act covers a variety of transactions.

The Act does not cover the following agreements: 

  • Agreements governed by laws respecting the creation and execution of wills, testamentary trusts, or codicils.
  • Agreements governed by laws respecting adoption, divorce, or other family law matters. 

After the E-SIGN Act was enacted, the National Conference of Commissioners on Uniform State Laws published the Uniform Electronic Transactions Act (UETA). Although both acts contain similar language, the terms of the UETA are broader than those under ESIGN. At this moment, 48 states have adopted the UETA. However, New York, Washington, and Illinois haven't. For purposes of the electronic signature of contracts, these three states have adopted independent statutes. 

New York's Electronic Signatures and Records Act

New York is one of the few states that have not adopted the UETA. In New York, electronic signatures are governed by New York's Electronic Signatures and Records Act and the E-SIGN Act in any areas not covered by the New York regulations. The Electronic Signatures and Records Act (ESRA) provides that signatures made via electronic means are legally binding. An “electronic signature” is defined as “an electronic sound, symbol, or process, attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the record.” 

Under New York Law, the following documents may be e-signed:

  • Contracts, leases, and other transactional real estate documents.
  • Formal documents to be used in legal proceedings. 

The intention of the New York statute was to be broad enough and to cover as many documents and transactions as possible. However, the are certain notable exceptions, documents that may not be signed with an electronic signature:

  • Estate Planning Documents such as appointments of fiduciaries and certain health-care-related consents.
  • Certain Negotiable Instruments.
  • Immigration Documents. 

Attribution of a signature 

Another important issue is the attribution of the signature to a party. In other words, establishing to a degree of certainty the identity of the signatory party to who the contract will bind. In the context of face-to-face negotiations establishing the identity of the parties was pretty straightforward. However, e-commerce transactions usually take place using impersonal mediums involving nonhuman actors. This is a significant point because, under specific circumstances, courts may attribute a facsimile transmission to an individual based on the information or signature contained in the document indicating its sender. 

For security and contractual clarity purposes, establishing security procedures to determine attribution of an electronic record to a party is fundamental. This includes determining what security procedure was applied to establish to whom an electronic record or signature is attributable. This may also help to overcome claims of hacker intervention. Attribution to a person usually requires a showing by any manner that some action was the action of that person. Additionally, the effect of an electronic record depends upon the facts and circumstances. Accordingly, security procedures may include the implementation of electronic contracting systems. These systems should incorporate appropriate technology and processes to verify the parties' identities and attribution. Additionally, these systems must be supported by a clear understanding of privacy policies and terms of use regarding the handling of consumer data. 

Merchants or Consumers 

Finally, it is worth noting that issues related to electronic contracts may come up in relationships between merchants (professionals of the industry or sophisticated parties) or between merchants and consumers. This point is of no minor importance. Electronic contracting was traditionally the province of transactions between merchants. However, nowadays, consumer participation in e-commerce has taken the lead. As technology has developed and become more accessible, consumers participation in electronic contracting has grown too. 

As between merchants, contractual disputes around the existence of an agreement are less frequent than those involving consumers. In the context of transactions involving consumers, many issues are related to whether the consumer has agreed to use electronic contracting to manifest consent and whether the consumer is responsible for the signature. 

It is important to consider that consumers usually do not read electronic contracts and that reading a contract is not required. However, the law protects consumers and is concerned about the fairness of practices implemented to contract with consumers. Binding a party does not require that a party read the contract terms. It requires only that the parties have notice of the existence of the terms, in some way, and that they manifest their assent to abide by it even without reading. Proper notice can be achieved by using conspicuous statements and using systems that require consumers to execute some affirmative act to express consent. 

About the Author

Giselle Ayala Mateus

Giselle Ayala Mateus is a NY attorney with comprehensive experience in transactional law, creative agreements, business formation, and immigration law. She is also the founder of FOCUS a not-for-profit project focused on supporting entrepreneurs and artists.

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