leg and comm model

01 January 2001

Mark O'Conor




E-commerce requires a new approach to the way in which we look at the law and IT. Despite the recent difficulties highlighted by the drop in techstocks, the new economy continues to thrive, now, perhaps more than ever, by working more closely with the old. It has been said that the twentysomethings have had their fingers burned and are now looking to the fortysomethings for help. Yet whether the new and old economy are on collision course, or heading for a healthy partnership, the question facing many organisations remains "can we compete in the information age?"

According to MIS magazine's recent survey, the top five challenges keeping heads of IT awake at night are knowledge management, outsourcing, mergers and acquisitions, customer relationship management and e-commerce.

One multinational we have spoken with, found that its market share was slipping due to the undercutting actions of its competitors. Early mapping and modelling by e-commerce consultants showed that if the company set up an Internet-based sales mechanism then it could claw back its market share and cut its operating costs by as much as 35%.

Some organisations have already embraced the opportunities of the new technology. Federal Express, renowned for its traditional business of parcel delivery found, (a few years ago) that it could help its survival by guaranteeing delivery in what is a particularly competitive market. A little while later they embraced the opportunities of new technology by offering a web-based service to track packages. Now FedEx are offering services to support companies starting business on the web, demonstrating their awareness of new business avenues, and moving away from their traditional industry sector (i.e. moving from order fulfillment to e-service provision).

E-commerce is obviously dependent upon the take up of Internet technology. In North America, the Internet penetration into households has grown to 40/45%. Figures vary and are practically obsolete as soon as they are published, but the upward trend is clear. However, looking at those figures another way, that penetration represents between 80 and 85% of US spending power. Indeed, it is interesting to note that as much as 18% of car sales last year were sales to individuals who had never stepped into a showroom - they were Internet sales. This shows a significant paradigm shift in consumer behaviour.

The Internet has allowed some organisations to prosper beyond their traditional expectations. Amazon.com, the Internet bookseller is a case in point. It is thought that for Amazon.com to be worthy of what their stock says they are worth (even given the current tech stock slump), they would have to be selling every single book in the world. They truly have a superb "price to yearning" ratio.

This article will look at the implications for business of the Internet and e-commerce, some of the legal threats concerning contracting, getting paid and dealing with consumers, and how these threats can be managed.

Business implications of the Internet

The potential for advantage is clear; but what about the downside? Having established a framework of identifiable opportunity, lets examine some of the business implications of the Internet.

Some would argue that on the Internet it is easier to find the best deal. Perhaps there is less brand loyalty, but loyalty depends upon the goods or services being offered and the individual's personal spending profile.

The Internet also allows organisations to map customer requirements with greater precision. For example in the retail market in the US, Safeway has found that it can actually make greater profit from its activities in researching and collating consumer spending habits, than from its traditional activities as a food retailer. Retail is detail, as has always been the case.

Another example of the strength of the Internet is its ability to allow both micro-transactions and micro-payments. For example in the retail banking sphere, one can trace the drop in the cost of transactions using technology. The following figures show the drop in the average cost of a transaction:

transactions at a branch

$1.07

transactions by telephone

$0.68

transactions by ATM

$0.27

transactions over the Internet

$0.02

Digitisation allows, "dematerialisation" - the separation of the "good" or "service" from the carrier to which it relates. i.e. stories no longer need a physical book, nor music a CD. Further, we will continue to see an increase in the phenomenon known as "disintermediation" - the removal of the "middle man" (the retailer in most instances) from the retail sales chain. The question is whether the retailer will truly disappear and whether large organisations will do business directly with the consumer. There are those that say that such a phenomenon will never occur; particularly in the West, shopping has become a leisure activity, and there are those who would suffer withdrawal symptoms if they could not do it.

So which organisations will win the race to harness the potential of the Internet? Arguably, those where IT is an integral part of their business strategy. Those where IT investment is high, those who do not invest in upgrades in a reactive way, but which invest in proactive research and development targeted to their existing and potential customer base, and those where the business people understand the IT and where the IT people understand the business. So whilst business has always driven the IT requirements, in a sense the model has reversed and IT can now drive the business opportunities. IT has become the enabling technology.

Legal and regulatory implications of the Internet

There are those (still) who claim that cyberspace is lawless, in fact the opposite is true - it is one of the most regulated media in the world (real or virtual). However, we cannot attempt in this article to discuss all the areas of laws which may potentially affect businesses which have an Internet presence. Instead, we have selected some of the more pertinent legal and regulatory issues for businesses seeking to trade globally, or as the figure below shows: to attract customers, transact with them and secure payment.

Legal Issues

Contract formation

A fundamental aspect of e-commerce trading is the ability to be able to conclude contracts over the internet. The question is, how to ensure that you have created a binding contract between the relevant parties. Under English law, there are four basic essentials to the creation of a contract:

  • offer,
  • acceptance,
  • consideration; and
  • intention to create legal relations.

As long as these elements are present, generally contracts do not need to be in writing and signed in order to come into being, although there are a few notable exceptions. However, the existence of written terms helps to clearly set out what has been agreed by the parties.

English law distinguishes between an offer and an invitation to treat (advertisements which promote the sale of products but which are not offers). There are a number of dangers in a seller making an offer to sell goods or services on a web site where a buyer anywhere in the world may accept that offer. For instance, a seller may simply not have enough stock, there may be geographical obstacles or there may be problems of local law compliance. A web based seller therefore needs to make it very clear that it is only making an invitation to treat. A statement could be included on the site stating that the seller will not be bound unless and until the seller accepts, by a specified means, communications from potential buyers. Argos would have had fewer problems when it inadvertently advertised £300 televisions for £3 had it made this clear.

Acceptance of the offer is what brings the contract into existence. As there is some legal uncertainty as to when exactly such acceptance is said to have been given, it is important that the supplier makes it very clear at what point a contract will be concluded. The E-Commerce Directive deals with some of these practical problems and requires member states, amongst other things, to describe the technical steps required to conclude a contract and to acknowledge receipt of the customer's order without undue delay and by electronic means. As will become apparent, e-commerce seems to be a regulatory trend at the moment, and many further directives intended to make the EU the e-commerce hub are expected to follow in the short term. Bookmark www.europa.eu.int to keep up to date.

Incorporation of terms - how do you make sure your beautifully drafted terms and conditions actually bite?

In order to ensure that the terms upon which the seller will agree to sell goods or services are clear to the buyer, it is advisable for companies trading over the Internet to include express terms and conditions of sale on their web sites. These terms should be brought to the express attention of the buyer and a mechanism should be put in place whereby it is clear that the buyer has indicated his consent to such terms. Ideally the buyer should be required to refer to the terms and then click "I accept" before it is allowed to proceed.

A company should also try to ensure that it keeps a record either electronic or paper of all the contracts which have been entered into by its customers, for contract management purposes.

Payment and security on the Internet

It has been widely recognised by businesses that strong security measures are essential for developing confidence in electronic transactions and for ensuring the secrecy and confidentiality of transactions. Encryption technologies are one way of providing such security measures and can be used to check and maintain the integrity, confidentiality and authentication of data.

Digital signatures are a way of proving the authenticity and integrity of the data and they are generally based on public key encryption systems. This essentially uses two keys to encrypt and decrypt messages. A message encrypted with one key can only be decrypted with the other key, and it is this feature which is used for signatures. Using this technique, a person will sign a document with their private key. Anyone can then use the corresponding public key to verify the identity of the signatory as only their private key will correspond. However, verification of the authenticity and integrity of the data does not necessarily prove the identity of the sender and a business may want to take further steps to identify the key owner. One such way is to have the identity confirmed by a third party who is mutually trusted by both parties to the transaction who can issue an electronic certificate certifying that to the best of its knowledge, the identity of the signature holder is as claimed.

Since 25 May 2000 and the coming into force of the Electronic Communications Act 2000, digital signatures have been formally admissible in evidence in relation to any question as to the authenticity or integrity of the communication or data. However, further UK legislation will be implemented on this topic shortly in order to properly meet the requirements of the Electronic Signatures Directive . (Funnily enough, electronic signatures always were admissible in the UK).

Another essential requirement for the development of e-commerce is to ensure that a supplier of goods and services on the Internet is paid. Whilst credit cards are widely accepted on the Internet, many customers may still be concerned about providing their credit card details online - they fear it is still not fully secure.

There is therefore clearly a need for a more innovative and appropriate method for moving money around. One such idea is that of electronic money tokens similar to the kind packed into pre-paid smart cards used for telephone calls. Again, this can be achieved through the use of powerful encryption technologies by which digital signatures can authorise and verify payments. The EU has recently adopted a Directive on the taking up, the pursuit and the prudential supervision of the business of electronic money which introduces a special supervisory regime for issuers of electronic money. However, under the Directive only regulated credit institutions can issue electronic money. This is still an area under development and it remains to be seen whether or not the use of electronic money will dominate e-commerce at the expense of existing payment methods.

Consumer Protection

The B2C market brings additional legal considerations. One of the problems facing businesses seeking to embrace global e-commerce is that local consumer protection laws may override or supplement stated contract terms. In particular, there are a number of consumer protection laws applicable to businesses operating within the EU which can not be excluded.

For instance, businesses selling to consumers in the EU ought to be familiar with the EU Directive on Unfair Terms in Consumer Contracts which was implemented into the UK in 1995, under which, terms found to be unfair are unenforceable.

Another critical regulation is the EU Distance Selling Directive which was implemented in the UK on the 31 October 2000 through the Consumer Protection (Distance Selling) Regulations 2000. In brief, these Regulations may apply to any business which sells goods or services to consumers ether on the Internet or digital television, by mail order or by phone or fax. The directive has its roots in the early 90's, predating mass internet take up. Back then, the need was to address the increasing prevalence of door-to-door sales; to stop the little old lady being duped into buying expensive and unnecessary double-glazing.

But, as internet transactions are transactions concluded away from business premises, the provisions of the directive apply. The main provisions to note include:

  • The right to prior information. Under the Regulations, the seller must provide clear and comprehensible information to the consumer to enable the consumer to decide whether to buy. This includes providing the identity of the seller, its address, a description of the goods or services, the price, cost of delivery, payment profile, right of withdrawal and the period of the offer. This information must be provided at the time of the contract in order to be incorporated into the contract and available to the consumer prior to the completion of the contract.
  • The right of withdrawal. The consumer is allowed a seven working day period during which to withdraw from the contract (a cooling off period). This withdrawal may be made by the consumer without reason, and the consumer is not to be subject to any penalty for making a withdrawal. Contracts where performance has occurred or begun cannot be withdrawn.
  • Anti-avoidance. The seller cannot seek to avoid the provisions of the Regulations by stating in the relevant contract terms that the contract is subject to the laws of a country to which the Directive does not apply.

Further details of these Regulations can be found at www.dti.gov.uk/CAC/ca/policy/distanceselling/newregs.htm. These principles must be reflected in your online terms and conditions.

UK businesses also need to be aware of the provisions of the Unfair Contract Terms Act 1977 which seeks to ensure that sellers do not unfairly or unreasonably exclude their liability towards consumers in certain situations as well the terms which may be implied by the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982.

Looking to the future, it is worth noting the European Commission's proposed amendment to the 1968 Brussels Convention known as the Brussels Regulation. The Convention deals with determining international jurisdiction in the case of disputes between parties from different countries and if this Regulation is adopted, it will mean that where a consumer can access a web site from its own country and enter into a contract with a supplier from another country, the consumer may be able to sue the supplier either in its own country or that of the supplier. The supplier on the other hand can only sue the consumer in the consumer's own country. Will this really mean that we all must suddenly become conversant with the laws of each member state?

Regulation - a further layer of quasi-legal sanction

Advertising

Many businesses have recognised the enormous exposure that they can gain by advertising widely on the Internet. Indeed web sites themselves are a form of advertising and marketing as they can be accessed around the world. Companies will often allow others to sell advertising space on their web sites, sometimes at a very high price. Some of the more popular sites have been known to charge up to £50,000 for a small strapline per month. Price will depend upon whether the advert is "above the fold" (not requiring the user to scroll down), on the home page or embedded within a site. It is becoming normal for organisations to enter into co-branding arrangements; providing a kick-back in revenue terms for sales prompted by a linked site.

Advertising is an area (however), which is heavily regulated. Currently the Advertising Standards Authority has stated that its rules and codes of practice will equally apply to web sites on the Internet. Although these codes and rules do not have the force of law they are persuasive in consumer protection cases and if an advertisement breaks the rules, the ASA may ask the advertiser to withdraw it and may even refer the matter to the Office of Fair Trading. The rules, which include the British Code of Sales Promotion and the British Code of Advertising can be found on the ASA's web site at www.asa.org.uk. and generally state that adverts should be legal, decent, honest and truthful.

A number of UK statutes may also impact upon advertising on the Internet. These include the Trade Descriptions Act 1968 which makes it a criminal offence to apply a false trade description to goods and the Control of Misleading Advertisements Regulations 1988 which enables the OFT to control advertisements which "deceive or are likely to deceive". Sales promotion schemes, including free prize draws and prize competitions are also regulated in the UK under the Lotteries & Amusements Act 1976. It is also worth considering the codes and guidelines issued by Independent Television Commission and OFTEL (or the newly announced OFCOM) as in some situations these may also be of some relevance.

Essentially, many of the rules are the same as for offline media, but it is becoming clear that they apply equally to the online world.

To round up

It will be interesting to watch the development of Internet Web sites and advertisements upon those sites; clearly as the potential for making money increases, the urge to make more and more outlandish adverts will increase, and as the bulk of information increases, the need to make one's adverts stand out from the rest will be key.

Sure, there is plenty of regulation and potentially applicable law, but if considered at an early stage, such issues can be reduced to an appropriate size; the risks can be covered off. So with a clear contract for your system, a clear set of terms governing your online transactions and goods or services advertised in a lawful way, the door to the new economy is open.

One final thought, whilst the jury might be out as regards spamming or unsolicited email in this country, beware Germany, Austria and certain parts of the US where such activity is prohibited.

Written by Mark O'Conor and Elizabeth Brownsdon.