As more and more business is being done online, electronic contracts are increasingly being used in business transactions. As a result, new rules to handle the specific issues posed by online contracts, such as signatures, verification, etc. are evolving. Staying on top of developments in this field is important, especially if a significant portion of your business is done online.
What are electronic contracts?
Electronic contracts are agreements that are drafted and executed in an electronic form. No paper or hard copies are used in an electronic contract. In most cases, electronic contracts are created via e-mail or online by means of an interactive webpage. For online shopping and business, online contracts are essential as they provide the means businesses and customers to enter into sales, service, subscription or other agreements via the Internet. Without online contracts, customers would have to obtain paper copies of contracts and submit them to businesses via traditional mail, greatly slowing business and defeating the purpose of e-commerce.
Most online contracts will ask the signee to fill out fields inquiring about personal information, such as name, address, birthday, credit card number, etc. The online contract will also present the terms of the agreement and have a button for the user to click indicating their acceptance of the contract.
Not all electronic contracts follow this template, however, and some businesses or people may unwittingly enter into an electronic agreement simply by agreeing to a proposal via e-mail. For example, if you’re a business owner and a client e-mails you asking for a specific amount of your product at a specific price to be delivered at a specific date and you reply to the e-mail accepting the client’s offer, it may be determined in a court of law that you’ve entered into a legally binding electronic contract.
Why does it matter? How many times have you agreed to something (dinner dates, work assignments, favors) via email only to need to change the agreement later once you’ve thought about it more or as circumstances have changed? As a small business owner, you must exercise caution before entering into legally enforceable agreements that you may regret on a second look or more thorough review.
For contracts with customers, such as service agreements, most businesses use standard contracts that are closed to negotiation, meaning that the customer doesn’t get to haggle over the details with the business. For example a car rental agreement or a cell phone service agreement are typically standard, non-negotiable contracts. These courts have been challenged in courts from time to time as being unfair, but most courts have upheld these contracts so long as the courts have found them to be clear and unambiguous in their terms and are not grossly unreasonable.
Internet click-to-agree contracts, typically called clickwrap contracts, share many of the same legal issues as the traditional standard contracts offered by business. These contracts are agreements that customers must accept wholly by clicking to agree or decline. There’s no room for negotiation. Examples of non-negotiated online contracts include contracts for most online purchases and service agreements.
As with the traditional standard contract, most clickwrap contracts have withstood legal challenges, but in some cases courts have declined to enforce portions of contracts they deemed unfair. A 2002 case against Netscape established that users do not consent to a contract just by downloading software, instead they must explicitly agree to the terms. This is why online contracts now have an “I agree” box users must click before entering into a transaction.
The bottom line for your business: If you’re using online contracts, make sure you include a method in which the user clearly and unambiguously consents to the terms of the contract. Also, check your state’s laws concerning clickwrap agreements, as laws regarding these agreements may vary from state to state.
Signatures Online
Digital and electronic signatures have posed a difficult issue for courts. Traditional contracts were sealed with written signatures of the parties. This is not an option for electronic contracts presently. However, there are other methods for people to show that they have accepted the terms of an agreement, such as entering their names via keyboard into a signature field of an online agreement. The validity of these signatures has been an issue in courts, but recent federal legislation makes these forms of signatures as valid as traditional signatures.
If you’re concerned about identity theft and online security, you may want to use encryption technology to help secure your electronic contracts. Public Key Infrastructure is a popular cryptographic signature method among online businesses. PKI uses an algorithm to encrypt electronic contracts to ensure that only the parties involved with the contract are capable of modifying or signing the contract. PKI gives each party a digital key to the contract to ensure that no one else can fraudulently sign the contract. While no encryption method is 100 percent secure, PKI is accepted as one of the most secure methods of preserving the integrity of electronic contracts.
Tips For Safely Using Electronic Contracts
The following are a few guidelines small business owners should follow regarding electronic contracts to protect themselves from legal exposure and potential fraud:
- If you’re not tech savvy, avoid using electronic contracts. Using computers and e-mail may be new to some home business owners. If you’re not comfortable with e-mail and computers, you may want to avoid using electronic contracts until you’re more up to speed with electronic communications. If your area has a local community college or adult education center, you may want to consider taking a computer class there to learn the basics. Small business classes provided by local economic development organizations may also help teach small business owners the skills they need to do business online.
- If you do sign an electronic contract, print out and keep a hard copy of the document and keep a record of the date and time the contract is signed.
- Don’t agree to use electronic contracts or get electronic documents if you are unsure whether your computer can read and allow you to interact with any of the electronic materials presented.
- Let any business you have online contracts with know about any changes impacting your ability to receive e-mail and open and read attachments, such as changes to your hardware or software.
- Let any entity you’re doing business with online know immediately if you are unable to get their e-mails or receive their documents.
- Do not agree to anything via e-mail immediately! Remember that such an agreement could be considered to be a binding contract, leaving you open to legal exposure if you can’t deliver on the agreement. Think things over carefully before sending a reply.
- Read it! Before signing an electronic contract, take the time to at least scan the agreement, looking for any potential disadvantages the contract may present to you or your business.
Electronic contracts make e-commerce possible by allowing parties to enter into binding agreements via the Internet, much like traditional contracts paved the way for modern business by creating legally enforceable agreements. Much like traditional contracts, electronic contracts should be drafted carefully and examined thoroughly by the parties involved to ensure that they are beneficial to the parties. With online contracts, care should also be exercised to ensure that signatures are valid and the contract is secure. With an understanding of electronic contracts and prudent measures, business owners should have nothing to fear from doing business online using electronic contracts.
