Contracts in the digital age
March 9, 2015
Contracts are the bedrock of commerce. Our modern civil legal system has evolved largely around the concept that agreements between willing parties will be enforced according to their terms. While the enforceability of a signed paper contract is straightforward, the law is also stretching to keep up with electronic methods of contracting, like PDFs, email and, yes, even instant messaging.
Before analyzing how the law treats electronic contracting issues, a quick review of the elements of a contract is in order. There are four essential elements to a contract. They are: (1) an offer by one party to make an exchange; (2) acceptance of the offer by the other party; (3) an exchange of value between the parties, also known as "consideration;" and (4) capacity of each party to commit. In addition, some contracts are required to be in writing, including contracts for the sale of land, contracts where the performance of the contract will not be complete within one year, certain lending transactions and contracts for the sale of goods in excess of $500. Whew, that was a lot of ground to cover in just one paragraph, and of course there are exceptions, caveats and caveats to exceptions. But those are the basics.
Nevada law expressly allows parties to contract electronically. Nevada had adopted the Uniform Electronic Transactions Act. UETA says that it only applies if the parties agree to contract by electronic means. But that "agreement" does not need to be formal and can be inferred from the facts and circumstances, including the parties' conduct. The parties do not need to formally sign a piece of paper consenting to future electronic contracting. Consent to transact business electronically is determined "from the context and surrounding circumstances, including the parties' conduct." The drafters of the uniform act wanted consent to electronic contracting to be determined "with a view toward broad validation of electronic transactions."
While not decided strictly on UETA grounds, a fairly recent case from Florida is instructive. In that case, Smoking Everywhere , an e-cigarette seller, contracted with CX Digital Media, Inc. to assist with Internet advertising. The parties entered into an initial formal written agreement and CX began to drive consumers to SE's Web site. The latter agreed to pay CX $45 per completed sale for every consumer that CX drove to SE's website, but the initial agreement limited CX to 200 completed sales per day. During the first month, CX drove 670 sales to SE's Web site.
Apparently not satisfied with the initial volume of sales generated, SE's vice president for advertising and a CX account manager entered into a "day long instant message conversation." SE'S vice president sought an increase in daily CX sales to 2,000 per day (remember, CX would be paid $45 per sale, so 2,000 sales per day translates to $90,000 per day). The court cited a lengthy instant message transcript, which concluded with the following discussion of the 200 completed sales per day limit in the original contract:
SE VP: NO LIMIT
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CX ACCT MANAGER: awesome!
CX subsequently increased its SE completed sales and within a month SE's bill ballooned to $1.2 million. SE never paid its bill and CX sued. Among other arguments, SE asserted that the initial agreement, by its terms, could only be modified in writing and that the instant message transcript was insufficient. The trial court disagreed, finding that the instant-message exchange was sufficient to modify the written agreement.
Although the SE case didn't address electronic signatures under the UTEA (the court found that the particular contract wasn't the sort that needed to be signed), the UETA does anticipate that contracts may even be signed electronically. An electronic signature is "an electronic sound, symbol or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record." Significantly, electronic signatures don't even need to be expressed in "writing." The drafters of the UETA gave the examples of a voice on an answering machine or including a name with an email as signatures. The critical issue is whether the "signer" intended to "sign" the contract.
The implications of the UETA and the SE case on contract negotiations in the digital age are complex, but a few rules of thumb emerge. First and foremost, if you don't want to engage in electronic contracting, you don't have to. There is no obligation to transact business electronically, and if you are worried about it, it is permissible (and even a good idea) to specifically state in a hard copy written agreement that you will not engage in electronic transactions without specific paper consent.
Nonetheless, the UETA is broad and its drafters intended to give effect to electronic transactions wherever possible. Even if you agree that all contracts and contract modifications will be in writing, if you later make a written record, that record may be used against you. Most business people are cognizant of the power of the written record when negotiating via e-mail, the same rule holds true for less formal means of written communication. Text messages, like the instant message conversation cited in the SE case, invite participants to engage in a level of informality that they might not share by e-mail. Nonetheless, even informal communications can create a written record that creates or modifies a contract. This leads to a second rule of thumb: if you are engaged in any form of written communication (especially text messaging) with a client, vendor, or other contract counter party, it is important to maintain formality and to remember that just because the communication channel may be less formal, it is still possible to make an offer or communicate an acceptance that could be binding on you or your company.
Finally, it's not all doom and gloom. Fact is, sometimes the swift nature of electronic communications makes contracting by electronic means desirable and necessary. And the fact that electronic communications (even text messages) preserve a written record is helpful in heading off subsequent misunderstandings later. Still, a few good practices will help electronic contracting transactions go more smoothly. First, as noted above, it's best to remember that the written record may be used against you, so maintain a "business formal" tone. Second, where the intent is to form a contract electronically, a clear expression of that intent is wise. Even something as simple as "this is a binding agreement," and an "I agree" response (or yes, even "awesome!") will help show later that a contract was formed. Third, it's always good to get each contracting party's electronic signature. This can be as simple as confirming with the other party that you will both use "/s/" before typing your name to indicate your signature. In this way, something as simple as a text message exchange can be used intentionally to form a simple, but enforceable, signed written contract.
The broader message, however, is this: Proceed cautiously when using electronic media. You may actually be entering into a binding contract when you had no intention of doing so. Make certain your electronic communications clearly reflect your intentions at all times. You may wish to use electronic media to form a contract because it is fast and efficient and that is fine, but if you do not want your electronic postings to result in a contract, clearly convey that message to the counter party.
Shawn Pearson is a shareholder with Woodburn and Wedge and practices corporate law, real property law and other commercial transactions.