Electronic Commerce: Statutory Formalities

Issue
Legal Response

Issue Over three hundred years ago, the Statute of Frauds was introduced in England to introduce formal requirements into contractual relations. The Statute required certain classes of contracts to be signed and in writing to be legally enforceable. Throughout the years, these formal requirements have found their way into a wide variety of legislation. In Ontario statutes alone, there are more than 4,000 occurrences of the terms "writing" and "written" and more than 1,200 occurrences of the terms "signature" and "signed". The main issues raised by electronic commerce is whether an electronic message is "written" and whether it is capable of being "signed".

The Interpretation Act definition of `writing' refers to words "represented or reproduced by any mode in a visible form."[4] While electronic messages are capable of being made visible using computer displays and printers, they are not themselves visible. As a result, there is no consensus on whether electronic messages come within this definition.[5]

A related, often overlooked issue, is whether courts are bound by the Interpretation Act's definition to electronic messages. Some Interpretation Acts, such as Ontario's, provide that every definition is subject to the intent of the Act being examined and the context. Therefore, the court could simply conclude that the intent or context allows for electronic messaging without entering a metaphysical debate over whether the message is "visible". The Interpretation Acts of other provinces, such as British Columbia and Alberta, are not so flexible. These Acts do not have a contextual qualification and state that the definition applies "unless a contrary intention appears" in the Act. However, the B.C. Court of Appeal has read in the Ontario Act's flexibility:

The contrary intention need not be found in express words, but may be inferred from the scheme of the enactment, its legislative history and other circumstances which surround the use of the word in question. Although the Interpretation Act does not use the words "the context otherwise requires", the conclusion that a contrary intention appears may be based on the fact that the context otherwise requires.[6]

In any event, no court has ever dealt with the issue of applying the Interpretation Act definition of `writing' to electronic messages.

In contrast to `writing', there is no definition of `signature' in the Interpretation Act. A common source for debate is whether a plaintext name appearing at the end of an electronic message is a legally binding signature.[7] While the courts have never dealt with this specific issue, there have been many cases on the meaning of `signature'. Case law has been clear that `signature' does not always require a handwritten name. Instead, courts generally look for the intent to authenticate the document as being that of, or as legally binding on, the signer.[8] The signature should also establish an evidentiary connection to the signatory.[9] Without intent or evidentiary connection, a contract dispute could regress to a credibility battle. A party may try to avoid legal obligation by claiming either not to have intended the document to be legally binding or not to be the source of the document.

Some lawyers are of the opinion that a plaintext name would not be considered a `signature' and more sophisticated digital signature technology is required.[10] Since plaintext names are often appended to electronic messages automatically by the `signature' feature of e-mail programs, a plaintext name, by itself, only tenuously demonstrates intent. The evidential link to the author is also limited. The origin of an electronic message sent over the Internet can be forged with ease. A hundred years ago the word "phoney" came into use to describe orders received by telephone.[11] Today, with features such as call display, it is easier to link telephone calls to a source than e-mail messages. E-mail forgery was recently demonstrated in the Ontario government. Not long after the Premier of Ontario announced his address on the Internet[12] an e-mail message made to look like it came from the Premier's account caused an uproar in the legislature.[13]

Others believe that if plaintext names are accompanied by common sense precautions, they should accommodated.[14] Uncertainty surrounding intent can be eliminated by using express statements such as "Signed: John Doe" or "My name appearing at the end of this message is my signature."[15] Even if the plaintext name provides little evidential value, evidence linking the message to its author may be found in the circumstances surrounding the transmission of the message. Private EDI network services have standard features such as message tracing, tracking, delivery receipts and acknowledgements. Lessor features on telex transmissions have been held in some circumstances to satisfy the signature requirement.[16] Although the Internet has no equivalent features, other circumstantial evidence may provide the requisite link. A simple example would be that shortly after the person told you he would send you an e-mail, one arrived with his name on it, containing the information he said it would contain.[17]

A survey of the mostly U.S. case law dealing with telegrams and telexes appears to validate the circumstantial view of `signature'. On its surface, the case law is inconsistent about whether a typed signature is a signature. But, looking deeper reveals that it was the difference in surrounding circumstances that led to differing results.

On the whole, case law dealing with prior communications technology has been generally accommodating. For example, in Beatty v. First Explor. Fund 1987 & Co.[18], the B.C. Supreme Court dealt with whether a proxy sent by fax was written and signed as required by a company's Charter. According to the court:

The conduct of business has for many years been enhanced by technological improvements in communication. Those improvements should not be rejected automatically when attempts are made to apply them to matters involving the law. They should be considered and, unless there are compelling reasons for rejection, they should be encouraged, applied and approved.[19]

The accommodation of business practices has been so prevalent in the U.S. case law on Statute of Frauds formalities that it has been suggested that the courts have effectively "read the statute off the books."[20] In the U.S. case of Apex Oil Co. v. Vanguard Oil & Service Co.[21] the court held that the only requirement is that a writing offer a basis for believing that the oral evidence rests on a real transaction, the court commented:

We recognize that we are permitting a substantial transaction to be consummated on fragmentary conversation and documentation. However, it is the practice in many fields to transact business quickly and with a minimum of documentation. ... Parties doing business with each other in such circumstances take the risk that their conflicting versions of conversations will be resolved to their disfavor by a fact-finder whose findings, even if incorrect, are immune from appellate revision.[22]

Given the trend of acceptance, it would be easy to conclude that electronic messages should not present a problem.[23]

Despite this accommodating trend, there is cause for concern. While EDI generally takes place between businesses, electronic commerce has a broader scope. The business efficacy argument of the court in Apex is clearly inappropriate for consumer transactions. In this context, consumer protection legislation exists, in part, to allocate the very risks the court in Apex is content to leave to the parties.

It has also been suggested that electronic messaging is inherently different from the telegraph, telex, and fax technologies previously considered by the court because new computer technologies are not just more efficient means of communicating paper.[24] In the oft quoted U.S. case of Howley v. Whipple[25], the court stated:

[W]hen a contract is made by telegraph...that constitutes a contract in writing under the statute of frauds;...it makes no difference whether [the telegraph] operator writes the offer or the acceptance...with a steel pen an inch long attached to an ordinary penholder, or whether his pen be a copper wire a thousand miles long. In either case the thought is communicated to the paper by the use of the finger resting upon the pen; nor does it make any difference that in one case common record ink is used, while in the other case more subtle fluid, known as electricity, performs the same office.[26]

When the message exists only briefly in a communications system that is centrally controlled and generally secure and reliable before being fixed on paper, the significance of the system can easily be overlooked. But, in contrast to previous technologies, electronic messages may never be fixed on paper. Since their existence within the system may not be as fleeting, the evidential value of messages are much more subject to the variabilities and vagaries of the system in which they reside. If `electricity' was the ink of the telegraph, networked computer systems are now the ink, the pen, and the paper. Whether these systems perform the `same office' as the real world counterparts is open to debate.

Legal Response

As one would expect, the uncertain situation created by a lack of case law has been met by some degree of legal response. This response has taken many forms, from contractual to legislative.

Trading Partner Agreements

Trading partners engaging in EDI are encouraged to enter a Trading Partner Agreement (TPA) with the aim of creating certainty.[27] Both the American Bar Association and the EDI Council of Canada have published model agreements.[28] Included in these agreements is a clause in which the parties deem properly constituted electronic messages to be signed writings in satisfaction of any legal requirement. For added protection, the parties also waive any right to raise a defence for lack of a signed writing.[29] However, the enforceability of these agreements, like the electronic transactions they govern, is uncertain and untested.

Law Reform

Fortunately for businesses engaging in EDI, the legislature has also responded. In 1992, Canadian provinces adopted the United Nations Convention on Contracts for the International Sale of Goods (International Sale of Goods Act).[30] This convention eliminates the formality requirements in international sales contracts.[31] However, this convention does not apply to consumer sales or sales of many financial instruments[32] and allows certain countries to retain formality requirements.[33] Furthermore, application of the International Sale of Goods Act is optional and is routinely excluded.

Reform of the formality requirements for domestic sale of goods contracts followed soon after. In 1994, the Ontario government, under pressure from a government department that used EDI[34], repealed the two most problematic occurrences of Statutory formalities[35] -- the Sale of Goods Act's signed writing requirement for sales over $40[36], and the Statute of Frauds' application to contracts not to be performed within a year.[37]

The Ontario government's `law reform' was an easy `quick fix' that appeased businesses engaging in EDI. The change was uncontroversial since law reformers had long agreed that the repealed sections had outlived their usefulness in commercial transactions.[38] While two occurrences of statutory formalities were removed, there are thousands remaining which regulate many areas, including consumer transactions.

Consumer transactions pose a particular problem. Unlike business-centric EDI, most Internet transactions are consumer transactions.[39] Some suggest on-line shopping will ultimately have pervasive, long-term effects on commerce, tax systems and national economies.[40] But, as legal scholar Jacob Ziegel observes, "while the movement in commercial transactions has been away from formal requirements, the trend in consumer transactions has been strongly toward them."[41]

Consumer transactions are governed by provincial consumer protection legislation which is fraught with formalities.[42] The trading partner agreements that businesses employed to combat formalities are not practical in the consumer setting due to the lack of a prior relationship[43] and the `one-off' nature[44] of consumer transactions. In any event, such an agreement would be unenforceable since, unlike the Sale of Goods Act, the Consumer Protection Act "applies despite any agreement or waiver to the contrary."[45]

While formalities may inhibit Internet commerce, removing them may not be as uncontroversial as the previous legislative changes. Formalities play a significant role in consumer protection and there is no indication that consumers require less protection in the information age. According to consumer advocate David Horowitz, "Some things never change. Consumers ask the same questions in cyberspace they asked more than two decades ago when I began my career as a consumer reporter."[46]

For now, those selling their wares on the Internet to consumers should be aware that in some provinces, such as Ontario, a sale may not be a sale until the consumer receives and accepts the goods.[47]

Regulation Reform

An alternative to legislative reform is the accommodation of technology through regulation. Legislation often gives Ministers and Agencies the ability to pass regulations or rules governing how the laws they oversee are applied. These regulations provide a means for government officials to adapt the application of the law to new technology where to change the laws themselves would invoke the sometimes onerous legislative process.

For example, under the authority of the Public Hospitals Act, the Lieutenant Governor in Council passed regulations which expand the meaning of `writing' in that Act to include entries in a computer.[48] More recently the Ontario Securities Act was amended to give the Ontario Securities Commission the power to create rules regulating electronic filing.[49]

Digital Signature Legislation

An alternative to reforming legislation one Act at a time, is to pass a general statute deeming electronic messages to be signed writings. In Canada, the EDI Council of Canada's proposals for modifying the Interpretation Act to accomplish this result were rejected.[50] However, in the U.S. several State legislatures have introduced or are considering legislation explicitly granting electronic messages with digital signatures legal status.[51] A digital signature uses encryption technology to verify the identity of the signature's creator and to verify that a message has not been modified since being signed.

The U.S. trend started with the publication of Digital Signature Guidlines by the Information Security Committee of the American Bar Association's Section of Science and Technology.[52] Utah's Digital Signature Act[53], which is based on these guidelines, was the first digital signature legislation enacted in the U.S., taking effect on May 1, 1995. This Act recognizes and regulates Certification Authorities (CA) who independently certify digital signatures. More importantly, the Act deems messages with properly certified digital signatures to be signed and as valid as if written on paper.

This general deeming approach to settling the uncertainty surrounding electronic messages is not without its drawbacks. The digital signature legislation focuses solely on the evidential purpose of written documents. The evidential link between a digital signature and the signer is very strong. However, in some contexts, written documents, such as notices and disclosures, may be prescribed by law because of the superiority of written words over spoken words in conveying information. Deeming digitally signed documents to be as valid as if written on paper could defeat this purpose by allowing technology poor to be taken advantage of.[54]

Consider the application of Utah-like legislation to Ontario's Mortgages Act. Before exercising the power of sale, a mortgagor must give notice to the mortgagee specifying the time and terms by which the mortgagee can avoid the power of sale. A mortgagor seeking to militate against this avoidance, could surreptitiously send a computer disk containing a digitally signed notice to a technology-poor mortgagee. Unable to read its contents, the mortgagee would likely ignore this `Trojan' disk. With no response to the notice, the mortgagor can proceed with the sale, since the notice was "as valid, enforceable, and effective as if it were written on paper."

The EDI Council of Canada recognized the consumer-context issue when it proposed changes to the Interpretation Act. As a result, it admitted that its proposed amendment would have to be restricted in scope because "few consumers are capable of receiving EDI messages."[55]

4For Ontario, see Interpretation Act, R.S.O. 1990, c. I-11, s.29. The Interpretation Act of other provinces are similar. See S.A. 1990, c.I-7, s.25; R.S.B.C. 1979, c.206, s.29; Federally, see R.S.C. 1985, c. I-23, s.28. In the UK, see Interpretation Act 1978 (U.K.), 1978, c.30; In Australia, see Acts Interpretation Act 1901 (Cth).

⁵For a more thorough discussion of this issue see Grayton, supra at 269.

⁶Bank of Montreal v. Gratton, [1987] B.C.J. No. 1887, Esson J.A. (per curiam).

⁷See both sides of the argument in "Virtual Conversation on Virtual Legality" (June 1994) 19 Byte 18.

⁸Stroud's Judicial Dictionary which has been quoted in several English and Canadian cases, states: "(1) Speaking generally, a signature is the writing, or otherwise affixing, a person's name, or a mark to represent his name, by himself or by his authority ... with the intention of authenticating a document as being that of, or as binding on, the person whose name or mark is so written or affixed ..."

⁹UCC SS 1-201(39)

¹⁰See Victor Cosentino, Virtual Legality, Byte v.19, p. 278 (March 1994).

¹¹E. Arnum, "Doing business on the Internet - a question of balance" (August 1995) 25 Business Communications Review 35.

¹²J. Rusk, "Premier gives out Internet address -- Touch-typing Rae ready for e-mail" The Globe and Mail (26 November 1994) A6. The address is premier@gov.on.ca

¹³J. Rusk, M. Mittelstaedt, "Tories cause uproar in legislature -- Rae furious after Harris distributes prank letter circulating on Internet" The Global and Mail (9 December 1994) A6.

¹⁴See Benjamin Wright's comments in "Virtual Conversation on Virtual Legality", supra.

¹⁵Benjamin Wright, The Law of Electronic Commerce: EDI, E-Mail, and Internet, 2nd Ed. (1996), s. 16.3.2 at 16:8.

¹⁶For the acceptance of a teletype terminal's answerback as a signature see Clipper Maritime Ltd. v. Shirlstar Container Transp. Ltd., 1 Lloyd's Rep. 546, 554 (1987); Miller v. Wells Fargo Bank Intl. Corp., 406 F. Supp. 456 (S.D.N.Y. 1975), affd., 540 F.2d 548 (2d Cir. 1976). For a report of a case in which the authenticity of a telex was rejected, see van Dort, Netherlands: Bank Guarantee by Telex, 14 Intl. Bus. Law. 173 (June 1986)

¹⁷This is similar to People v. Hagan, 145 Ill. 2d 287, 164 Ill. Dec. 578, 583 N.E.2d 494 (1991) which involved a fax and is described in Wright, supra, s. 8.7. In this case, the issue was whether an unsigned fax could be linked to Hagan. In the end, the fax was authenticated based circumstantial evidence. As described by Wright at s. 8.7.4: "Hagan had told the leasing agent that Hagan would send him a fax. A Mailboxes, Etc. employee testified that she had helped Hagan send a fax. The leasing agent received a fax, containing the type of information he expected from Hagan, and the cover sheet with the fax indicated it came from Hagan and Mailboxes, Etc."

¹⁸Beatty v. First Explor. Fund 1987 & Co. (1988), 25 B.C.L.R. (2d) 377 (B.C.S.C.), Hinds J.

¹⁹Ibid. at 385; A similar attitude was shown by the Ontario Court of Appeal in Re Rolling and Willann Investments Ltd. (1989), 70 O.R. (2d) 578 at 581 (Ont. C.A.), Robins J.A.:

Where technological advances have been made which facilitate communications and expedite the transmission of documents we see no reason why they should not be utilized. Indeed, they should be encouraged and approved.

²⁰B. Wright, "Contracts without paper..." (1992) 95 Technology Review 57.

²¹760 F.2d 417 (2d Cir. 1985).

²²Ibid. at 423.

²³See J.R. Thomas, "NOTE: Legal Responses to Commercial Transactions Employing Novel Communications Media", (1992) 90 Michigan L. Rev. 1145; D.L. Wilkerson, "Electronic Commerce Under the U.C.C. Section 2-201 Statute of Frauds: Are Electronic Messages Enforceable?" (1992) 41 Kan. L. Rev. 403; H.S. Dziewitt, J.M. Graziano, C.J. Daley, "The Quest for the Paperless Office - Electronic Contracting: State of the Art Possibility But Legal Impossibility?" (1989) 5 Santa Clara Computer & High Technology Law Journal 75.

²⁴J.B. Kennedy, S.R. Davids, "The Paper Paradigm Becomes Obsolete; Electronics Surrogates Require New Standards" New York Law Journal (23 January 1995) S1.

²⁵48 N.H. 487 (1869).

²⁶Ibid. at 488.

²⁷Bradley Crawford, "Strategic Legal Planning for EDI" (1989) 16 C.B.L. J. 66.

²⁸American Bar Association, "The Commercial Use of Electronic Data Interchange - A Report" (1990) 45 Business Lawyer 1645 at 1861; P. Jones, Essentials of EDI Law (Toronto: Electronic Data Interchange Council of Canada, 1992) at 127 [hereinafter EDI Law].

²⁹Clause 6.04 of the EDI Council of Canada (EDICC) model agreement:

The parties agree that as between them each Document that is received by the Receiver shall be deemed to constitute a memorandum in writing signed and delivered by or on behalf of the Sender thereof for the purposes of any statute or rule of law that requires a Contract to be evidenced by a written memorandum or be in writing, or requires any such written memorandum to be signed and/or delivered. Each party acknowledges that in any legal proceedings between them respecting or in any way related to a Contract it hereby expressly waives any right to raise any defence or waiver of liability based upon the absence of a memorandum in writing or of a signature.

³⁰International Sale of Goods Act, R.S.O. 1990, c. I.10. Came into force in May 1992.

³¹Ibid., Article 11 states "A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, included witnesses."

³²Ibid., Article 2, This Convention does not apply to sales: (d) of stocks, shares, investment securities, negotiable instruments or money;

³³Christopher Nicoll, "E.D.I. Evidence and the Vienna Convention", (1995) Journal of Business Law 21; countries include Argentina, Chile, China and some former Eastern Bloc countries (Byleorussia, Hungary, the Russian Federation, and the Ukraine).

³⁴J. Ziegel, "Ontario Repeals Section 5 of the Sale of Goods Act" (1994) 25 C.B.L.J. 478 [hereinafter Ziegel].

³⁵Statute Law Amendment (Government Management and Services) Act 1994, S.O. 1994, c. 27, s.54.

³⁶Ibid., s. 54: Section 5 of the Sale of Goods Act is repealed. Sale of Goods Act, R.S.O. 1990, c. S.1, s.5(1) read "A contract for the sale of goods of the value of $40 or more is not enforceable by action unless...some note or memorandum in writing of the contract is made and signed by the party to be charged..."

³⁷Ibid., s. 55: Section 4 of the Statute of Frauds is amended by string out "or upon any agreement that is not to be performed within the space of one year from the making thereof" in the tenth, eleventh and twelfth lines.

³⁸See Ziegel, supra. A repeal of the Ontario SGA's s.5 was recommended in a 1979 report by the Ontario Law Reform Commission. The United Kingdom repealed its s.4 in 1954; British Columbia followed in 1958.

An interesting side note is that, in the U.S., the initial proposal from the UCC Drafting Committee of Article 2 to repeal the statute of frauds entirely was strenuously objected by software and information industries. In these industries, the intangible subject matter of the transaction is less definable and subject to appropriation without contractual permission so there is a need for stronger fraud protection; R. Nimmer, "Electronic Contracting: Legal Issues" (1996) 14 J. Marshall J. Computer & Info. L. 211 at 229. This concern did not apply to the Canadian and English Sale of Goods Acts since sale of intangible goods are not covered.

³⁹F.M. Greguras, T.A. Golobic, R.A. Mesa, R. Duncan, "Doing Business On-line" (Updated version of a presentation made at Law Seminars International Electronic Commerce, 21 September 1995) [available at http:// www.batnet.com/oikoumene/ec_contracts.html].

⁴⁰J. Michalski, "Electronic commerce" RELease 1.0 (24 January 1995) 1.

⁴¹J. Ziegel, Commercial and Consumer Transactions, vol. 1, 3d ed. (Toronto: Emond Montgomery, 1995) at 46.

⁴²Consumer Protection Act, R.S.O. 1990, c. C.31, s.19(1) requires executory contracts with a price exceeding $50 to be in writing and contain certain contents; s.19(2) requires these contracts to be signed by both parties to be binding.

⁴³D. McKenzie, "Commerce on the Net: Surfing Through Cyberspace Without Getting Wet" (1996) 14 J. Marshall J. Computer & Info. L. 247 at 254 states:

With the recent move towards the consumerization of on-line transactions, enforceability becomes a complex question. In the past, businesses have negotiated `electronic trading partner' agreements, which posed fewer problems because parties initially executed a written paper agreement establishing protocols for electronic authentication and digital signatures. But now, on-line contracting is moving toward a system where users simply log on, point, and click -- and a contract is formed.

⁴⁴According to Peter Jones (author of EDI Law, supra):

Although the standard form agreements proposed by the EDI Associations do reduce the commitment required, parties who are contemplating "one-off" transactions are reluctant to make the effort to put an agreement in place. As a result, these "one-off" transactions take place in a legal vacuum. Further development of legal techniques, offering simple solutions, is necessary to meet the needs of these the small and medium enterprises who engage in isolated transactions.

[comment from http://www.webcom.com/~pjones/legalalt.html].

⁴⁵Consumer Protection Act, R.S.O. 1990, c. C.31, s.33.

⁴⁶D. Horowitz, "Consumers are having a field day in cyberspace and so are scam artists" Windows Magazine (August 1995) 63.

⁴⁷Section 19(2) of the Consumer Protection Act states that "An executory contract is not binding on the buyer unless the contract is made in accordance with [the requirements of the Act]." Notwithstanding this section, in J. Schofield Manuel Ltd. v. Rose (1975), 9 OR(2d) 404 (Co. Ct.), the court stated that "once the contract becomes partly executed, the requirements of [s. 19] are waived."

⁴⁸O. Reg. 518/88

⁴⁹Securities Act, R.S.O. 1990, Chap. S.5, s. 44 - 46.

44. Varying the application of this Act to permit or require the use of an electronic or computer-based system for filing, delivery or deposit of ... [various documents]

45. Establishing requirements for and procedures in respect of the use of an electronic or computer-based system for the filing, delivery or deposit of documents or information.

46. Prescribing the circumstances in which persons or companies shall be deemed to have signed or certified documents on an electronic or computer-based system for any purpose of this Act.

50See EDI Law, supra at 36 for details on proposals.

⁵¹States with legislation in place include Utah and California. New York, Florida, Oregon, Washington, and Texas are among the states considering digital signature legislation. A. Knowles, "Legislatures pen proposals targeting digital signatures" PC Week (17 July 1995) 39.

⁵²Archived at http://www.state.ut.us/ccjj/digsig/dsut-gl.htm

⁵³Utah Code SS 46-3 (1996).

⁵⁴"Introduction to the Utah Act -- Introductory Comment", archived at http://www.state.ut.us/ccjj/digsig/dsut-int.htm, states:

Not every person receiving signatures welcomes computer-based technology; however, by clearly providing that digital signatures satisfy authentication and signature requirements, the Utah Act in effect requires the technologically reluctant to accept digital signatures...

⁵⁵EDI Law, supra at 37.

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