An introduction to contractual formation

Technological developments and the advent of the Internet, and now electronic peer to peer cash have led to new paradigms in international as well as local commercial activity. These developments have reduced the certainty of contractual negotiations leaving a commonly held belief that the law of offer and acceptance does not readily apply to such transactions when conducted online (Rasch, 2006). Some in the Digital currency world go as far as to exclaim, “crypto is law” or even “code is law” and forget [1] that the law does not end at the border of an electronic contract [2].

Dealings and transactions that formulate or initiate contractual negotiations are not restricted to the written word. The law of offer and acceptance applies to new technology in the same way that it applied to technological advances of the past. This series of posts explores the issues that have created uncertainty around contractual dealings with the advent of Bitcoin. It is necessary both to consider the origins of contractual law and to investigate cases that will apply too and formulate the conditions necessary to create contractual certainty in commerce when answering this dilemma.

The increased use of international commercial transactions using the Internet has been enhanced using technologies such as Bitcoin, but this also creates another concern. In the past, international commercial transactions were generally restricted to negotiations between commercial entities. The Internet and digital currency use has increased the scope of business to consumer dealings, and even consumer-to-consumer transactions across jurisdictional borders. The result is that, the formation of contract using the Internet for digital currency and electronic contracts segregates the law into two distinct categories. These categories include both those negotiations that occur strictly within a single jurisdiction, and next, those negotiations that involve multiple legal jurisdictions.

Further concerns extend the focus to the relationship of parties. Case law has grown to encompass Web based transaction engines that act as third parties during the process of offer and acceptance. This interaction can complicate the formation of contract. The integration of electronic contracts and digital cash only extends this. The result (Debenhams Retail Plc v Customs and Excise Commissioners [2004]) is that it is necessary to determine the legal standing of the third party when the court seeks to answer questions of contract law. The third party could be a party to the contract, an agent or one of the two contracting parties, or may just be an ancillary facilitator or medium, across which, and through whom the contractual bargaining occurs (McKendrick [1], 2005, Pp163–164).

Lord Steyn (Butterworths; The Law of Contract, 1999, Forward) reminds us “. . . it is wise for practitioners to bear in mind that the higher you go in the legal system the more important it is to concentrate on the footholds of the secure theoretical foundations.”

Without legislation detailing the legal position of electronic contracts, the process of offer, acceptance and the terms of a contract created using the digital currency (as with Bitcoin incorporated smart contracts) will establish itself by means of the general law of contract. This will happen for the most part in the same manner as for the negotiation of terms of a contract in the physical world (Lee, 2002, Pp 62–100). Thus, establishing offer, acceptance and the terms of a contract remains the same whether the form is in writing, orally, or implied though the conduct of the parties in the same manner as existed prior to the rise of ecommerce over the Internet through Bitcoin.

The Electronic Communications Act 2000 [ECA] (Statutory Instrument 2000 №1798) had alleviated much of the uncertainty in the formation of an electronic contract. We shall investigate both the definition of an electronic contract and consider other supporting legislation in this series of posts looking at the foundations of digital contract law. The ECA cannot ensure that there are no areas of uncertainty in the formation of an electronic contract, this remains especially true when new technologies such as Bitcoin are involved. It will aid our investigation to explore the effects of the ECA on contract formation within the UK, looking in particular at its effect on contract formation and certainty.

In stating that the ECA has not removed all uncertainty from electronic contract formation when allied to contracts formed using to Bitcoin, we need to explore two key arguments. Firstly, legislation such as the Electronic Signatures Regulations 2002 [ESR] (Statutory Instrument 2002 №318) is well understood now following its introduction. This legislation went a long way in assuaging the uncertainty surrounding technologies such as digital signatures and as a consequence set the foundations for the legislative acceptance of Bitcoin. Logically, it must follow that if additional legislation was needed to improve on the ECA, that the law could buy itself not remove all uncertainty in electronic contract formation nor was it the “final piece of the jigsaw in creating an enforceable electronic contract”. An attached digital signature is hence clearing defined within the law and the foundation of digital Bitcoin contracts that are based on the exchange of value using digital signatures has been set.

The alternative argument reminds us that contractual formation is inherently uncertain in and of itself (Gamage & Kedem, 2006). Being that electronic contracts form a logical subset of the contractual superset and that there is uncertainty within contract formation in general; it must naturally follow that there are areas of uncertainty, which will remain in the formation of electronic contracts, subsequent to the introduction of the ECA and with the introduction of new technologies (such as Bitcoin). The ECA, though having alleviated many difficulties facing the formation of electronic contracts, cannot remove contractual uncertainty. The result is, we cannot see that “code is law”, but rather, code is evidence in the creation and defense of an electronic contract.

[1] http://blog.cryptoiq.ca/?=534

[2] http://www.coindesk.com/code-is-law-not-quite-yet/