What is an Electronic Contract?

General issues regarding electronic contracts

Many transactions and other forms of trade are now conducted electronically.  For example, most people will at least be familiar with, if not frequent users of, ATMs situated outside or inside banks.  When a bank’s customer withdraws money or uses an ATM for other purposes, an electronic transaction takes place.  More and more business is now done electronically, often with the parties never physically meeting each other.  Online shops, for example, allow potential customers to browse, select and purchase goods without ever asking a salesperson for advice or assistance.  Negotiations, giving quotes or submitting tenders for work may all be done electronically and indeed are.  A great deal of information is now passed electronically within organisations and from one organisation to another.  This all raises a number of legal questions, specifically with regard to electronic contracts.  Some of the most important issues include whether an electronic contract is valid, that is, whether it must comply with certain formalities, whether electronic signatures are admissible as evidence of intent and agreement, and what law applies to an electronic contract (if it is between international parties).  These issues are addressed below.

Formalities of an electronic contract

Generally, contracts can take any number of forms.  They can be by deed, in writing, evidenced in writing, oral, or implied from the conduct of the parties.  Certain contracts, however, require a specific form, and will not be legal (though they may be equitable) if they fail to comply with the formalities.  For example, a conveyance of land or any interest in land must, under s52 of the Law of Property Act 1925, be by deed, save for the exceptions listed in that section.  Other contracts are required to be in writing.  So what form, if any, must an electronic contract take?  The answer depends on the nature of the contract.  If writing is a requirement, do documents which are stored digitally on a computer hard drive comply?  Schedule 1 to the Interpretation Act 1978 states: “‘Writing’ includes typing, printing, lithography, photography and other modes of representing or reproducing words in a visible form, and expressions referring to writing are construed accordingly.”  Since words stored digitally on a computer may be reproduced on a monitor or printed onto paper, it would appear that computer storage is covered by this definition.  Nevertheless, individual cases may still have to be decided by the courts.

Electronic signatures 

A signature is generally understood as evidence that the signatory approves of a document’s contents.  But does this ring true also for a person’s name printed on a telex or fax, or reproduced in electronic mail?  In Good Challenger Navegante SA v Metalexportimport SA (2004) the Court of Appeal held that for the purposes of s30 of the Limitation Act 1980 a typed name on a telex was a signature.  The Court held that “…the typed name of the sender at the end of the telex not only identified the maker but led to the inference that he had approved the contents.”  This does not apply to all instances of typed names, however, and a formal contract with typed names at the end with spaces underneath where the parties are expected to write their names would be unlikely to fall within the reasoning given in the Good Challenger case.   

Above all, the signature must be able to objectively show that the signatory, by signing or printing their name, approved of a document’s contents and intended to be bound by them.  It is irrelevant whether the contents have been read (unless there has been some misrepresentation).  The courts confirmed in Mehta v J Pereira Fernandes SA (2006) that a person’s name which is shown as part of an email address in the header of an email does not mean that the person intended to be legally bound by the contents of the email.  The automatic insertion of an email address could not be considered as a signature.

Under s7 of the Electronic Communications Act 2000 an electronic signature is anything in electronic form which: 

  • is incorporated into or otherwise logically associated with any electronic communication or electronic data, and

  • is certified as such by the signatory

Such a signature is admissible in evidence for the purpose of establishing the authenticity, the integrity, or both, of the electronic communication or data. 

Certification of the signature requires the signatory to make a statement that the signature, its production, communication or verification, or a procedure applied to it, is a valid means of establishing the authenticity, integrity or both of the electronic communication or data.

Governing law

Most contracts contain a clause which states which country’s law the contract is governed by.  Additionally, the 1980 Rome Convention contains rules on the applicable law which apply to all EU Member States.  Basically, the parties are free to choose which law will apply to their relations, as long as it is expressed with reasonable certainty.  In the absence of any choice of law, the contract will be governed by the law of the country with which it is most closely associated.  Additional rules are used to determine which country this is. 

Contracts concluded electronically

Article 9 of Directive 2000/31/EC, on electronic commerce, requires EU member states to ensure both that contracts can be concluded by electronic means and that the law does not create any barriers against using such contracts or which deprive such contracts of their validity.  In the UK, the Electronic Communications Act 2000 supports approved cryptography service providers and provides that electronic signatures are admissible in evidence.  Some contracts, though, such as those which transfer rights in real estate, are exempt from these general principles.  Article 10 of Directive 2000/31/EC requires certain information to be provided regarding electronic contracts, such as describing the technical steps to be followed to conclude the contract, and the technical means for identifying and correcting input errors before placing orders.