Integrating Electronic Contracts into Negotiated Deals

Courtney StoppMay 29, 2007

University of Connecticut School of Law

Integrating Electronic Contracts into Negotiated Deals

Introduction

Internet Business

Legal Regimes

Putting it into Practice

Conclusion

Doing Business on the Internet

Internet Transactions• The Appeal: Powerful & Efficient

–Communication, Speed, Knowledge, Accuracy, Globalized

• Consumers have been experiencing the benefits of the internet for over a decade

• Large scale corporations are building strategies around a new way of doing business

Doing Business on the Internet

Economics of the Internet• Traditional notions of internet

business account for only 9.6% of the total revenue generated on the internet

• Predicted by 2010 – 10 Trillion Dollars flowing through the internet economy

– What will be driving the internet economy?

• Business to Business (B2B) Transactions – eBusiness

What is eBusiness?

“Electronic Business

(eBusiness) involves the total

digitalization of value chains

and business processes, and

holds the promise of helping

traditional organizations

create new value and reach

previously unattainable

height of operational

excellence.”

Internal Value Chain

External Value Chain

Source: “Managing E-Business Transformation: Opportunities and Value Assessment* Revised and forthcoming in Sloan Management Review”; Barua, Anitesh, Konana Prabhudev, Whinston, Andrew, Yin, Fang; Center for Research in Electronic Commerce McCombs School of Business The University of Texas at Austin 2001. Source: www.themanager.org

Creating an eBusiness

Value Chain Alignment• Electronic alignment from the

Raw material supplier to end user

• Compatible internet based software throughout all organizations–Customized purchases, placing

and filling purchase orders, tracking, shipping, financing, etc

• Automated transactions launched with a push of a button

Transitioning to an eBusiness Model

Complete eBusiness transformation is not for everyone

• Ideal circumstance where transactions are:

– Highly standardized

– Low cost

– Readily available materials

– Minimal personal collaboration required

• Challenging circumstances where transactions contain:

– Complex supply chains

– High costs and high dollar products

– Personal collaboration and trust requirements

– Raw material shortages

Transitioning to an eBusiness Model

Essentially, the difference between the Ideal Circumstance and the Challenging Circumstance is Risk

• Ideal Circumstances for eBusiness – known, predictable, low risk exposure

• Challenging Circumstances for eBusiness

– Usually found in industries with few competitors and intense competition

• Unpredictable, high dollar, high risk exposure

– Must find the nexus between traditional operational modes and eBusiness models

Managing eBusiness Risk

Business Risk is mitigated through Legal Contracts.

• Creating the nexus between eBusiness and traditional

business requires the interplay of two separate

contracts and an understanding of how they interact

• Traditional business practices capture risk in the form

of a negotiated contract

– Complexity will drive the need for continued use of

long term, highly concessionary, negotiated deals

• eBusiness provides a new set of rules

– Competition and efficiency will drive the need for

internet transactions governed by electronic

contracts

Understanding Electronic Contracting in the United States

The United States has validated the use of electronic

contracts in both the court system as well as through

Federal and State Legislation

• Doctrines of electronic contracting were derived from areas such as:

– Licensing and Contracts

– Uniform Commercial Code (“UCC”)

• Legislation developed to validate electronic contracts

– Uniform Electronic Transaction Act (“U.E.T.A”)

– Electronic Signatures in Global and National Commerce Act (“E-Sign”)

Understanding Electronic Contracting in the United States

Legal concepts and practices:

• Electronic contracts are valid and may modify existing agreements as long as:

– Each party has adequate notice of the additional terms

– Each party has unambiguously assented to the additional terms

• Electronic contracts can be non negotiable

– Legal precedent in US has established that the fact that a contract is non negotiable does not prohibit the use of such instrument

• The terms of electronic contracts cannot be unconscionable

Understanding Electronic Contracting in the United States

Federal and State Statutes:

• Uniform Electronic Transaction Act (“U.E.T.A”) & Electronic Signatures in Global and National Commerce Act (“E-Sign”)

– Codify that electronic contracts are valid and that assent to a contract may be provided by “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record”

• This has been interpreted to include clicking certain links and specific buttons as well as signing emails

Understanding Electronic Contracting in the European Union

Statutory Doctrines:

• EU Directive 2000/31/EC passed in 2000 established the framework for conducting eBusiness within the community

– Article 9: Allows contracts to be included by

electronic means by systematically eliminating any

legal requirements imposed on the contracting

process that would impede the conclusion of

binding electronic contracts or that would deny

such contracts legal effectiveness or validity on

account of the electronic method or creation

Understanding Electronic Contracting in the European Union

2006 the EU developed a commission to report out on the “legal

barriers to the use of electronic documents in eCommerce

transactions, and to identify potential solutions to any such

barriers, particularly on the cross border level, where the

validity and acceptability of electronic documents generally

possess the greatest difficulties.”

• Results of study:

– Many similarities between the Member States treatment of electronic contracts

• General acceptance of electronic contracting means

• General emphasis on the expressed will of the parties

as opposed to the official form taken

– Major Challenge

• Electronic Signatures

Source: “ Legal Study and Administrative Practices Regarding the Validity and Mutual Recognition of Electronic Documents”

http://ec.europa.eu/enterprise/ict/policy/legal/index.htm

Understanding Electronic Contracting in the European Union

Electronic Signatures

• EU has established a qualifying system for electronic

signatures that has not proven convenient for

transactions:

– The technology to support the most secure signatures is not readily available and not used

• This leaves the “will of the parties” subject to

interpretation and legal ambiguity

• Member States will defer to established framework

agreements

• Paper document between the parties establishing how

they will interact electronically

– Validates Signatures

– Determines if/when an electronic file is meant to be a

binding contract

What is an Electronic Contract?

Any electronic file, communication, email may be used as a

binding agreement if it is intended by the parties. Most

common however because of their ease of application are:

• Clickwrap Agreements

– Standard terms and conditions are presented through a pop up box that requires an acceptance prior to the completion of the transaction

• Browsewrap Agreements

– Alternatively there may be a link to the terms and

conditions on the website that dictates that the

use of the site and completion of any transaction

will be deemed acceptance of the terms and

conditions

Correlating the Negotiated Deal with the Electronic Contract

In order for a corporation to realize the benefits of an

efficient eBusiness, it must be able adeptly correlate the

electronic contract with the negotiated contract and

mitigate the risk exposure of both worlds.

• As a corporation transitions to an eBusiness

operational model - the risks must be mitigated

– Corporations must acknowledge and prepare for

electronic contracts to govern transactions

– Use negotiation opportunities to address

electronic contracting issues and develop

framework agreements

– Establish internal mechanisms for handling the

correlation.

Correlating the Negotiated Deal with the Electronic Contract

Legal mechanisms for integrating electronic

contracts include elements such as:

• Creating, incorporating, and coordinating electronic

contracts/Clickwrap Agreements into paper

contracts

• Acknowledging others’ electronic contracts and their

applicability

• Understanding the business and the terms of the

transactions will take place on the internet

Conclusion

The bottom-line is dictating that business transforms into eBusiness

• B2B eCommerce is a multi-trillion dollar

enterprise because it creates efficiency in

transactions and resources

• Without sufficient understanding of electronic

transactions corporations may be exposed to unpredictable risk

• Attorneys traditionally charged with risk mitigation must understand how and when negotiated deals will interact with electronic contracts in order to provide adequate protection for the corporation