The New York Times MONDAY, JULY 7, 1997 Lack Of Contracts Undermine Internet Transactions By GEANNE ROSENBERG Beyond the violets and refrigerated roses, in the back room of the Southern Sun flower shop in Tallahassee, Fla., the florist, Bob Deak, also deals in trading cards. With three computers and links to the Internet, Deak bargains with collectable card buyers and sellers from as far away as Italy, Australia and Singapore. He does not worry about the lack of paper contracts to document the deals he strikes, even though the transactions can run as high as $20,000 apiece. His profits, he said, far outweigh the risks that a deal might go sour. One deal in particular led to a dispute - a $1,020 purchase of a card collection last year from a 14-year-old, Ted Clark of Haddonfield, N.J. Deak said ``youngsters'' selling cards sometimes do not understand the meaning of ``near mint.'' So, after examining the cards he had agreed to purchase in several installments, Deak decided they were not in near-mint condition and canceled a couple of checks he had written to Ted Clark and sold the cards for less than the original purchase price. But Deak's actions did not sit well with Ted, now 16, especially since Deak had made an electronic agreement. Ted thought he had been ``rooked'' because he did not receive the full amount, said his mother, Amelia H. Boss, a law professor at Temple University School of Law and an expert on Internet commerce. She took Ted's case and, with the assistance of a Florida colleague who served as local counsel, contacted Deak and eventually persuaded him to pay the balance of the money. Boss said these sorts of disputes are commonplace on the Net. But, she said, the high cost of suing, especially across state and national borders, prevent most such squabbles from making it to court. The resulting dearth of test cases on digital contracts has left many business managers, corporate lawyers and legal scholars uncertain about the enforceability of electronic agreements. The uncertainty has had a chilling effect, even at computer-astute places like General Electric Co.'s GE Information Services unit and the TPN Register Co. - GE's joint venture with Thomas Publishing Co. The companies solicit suppliers and hammer out details of procurement contracts for GE's affiliates and other companies via the Internet. But when it comes time to execute a contract, the companies resort to pen and paper. ``I think ideally you'd love to be 100 percent electronic,'' said Orville A. Bailey, vice president of marketing and business development at TPN, because adding paperwork is not as efficient. But, he said, his company is more ``comfortable'' having signed paper contracts on hand. Bailey is not alone. E. Allan Farnsworth, a leading contract law professor at Columbia University, said that when a contract was substantial and complex, ``I think the safe thing to do is to do it in the old-fashioned way.'' The reason in part, according to Raymond T. Nimmer, professor of law at the Houston Law Center, is the Statute of Frauds - which traces its origins to early English law - requiring that many contracts be written and signed by the parties against whom enforcement is sought. While some states, including California, Minnesota, Texas, Utah and Washington, have recently passed laws permitting digital signatures to satisfy the Statute of Frauds, Professor Nimmer said, most states - including New York - have not. In addition to the Statute of Frauds problem, electronic contracts can give rise to questions of authenticity and authority of the parties involved, Nimmer said. Even in states with no laws addressing enforceability of electronic contracts, many legal experts are confident such agreements will hold up in court. Arthur Rosett, a law professor at the University of California, Los Angeles, said, ``It's hard for me to imagine a court finding that an electronic communication that has been proven does not satisfy the Statute.'' Moreover, some computer experts contend, electronic contracts are in some respects better than paper ones. Vincent I. Polley, general counsel at Omnes Co., a network services concern, said software should render electronic contracts tamper- and forgery-proof. But others were guarded in their endorsement of electronic contracts. ``The judicial system - the lawyers, judges and juries - are not populated by hackers,'' said Jonathan J. Lerner, a partner at Skadden, Arps, Slate, Meagher & Flom. ``If you're talking about a very large and important contract, you need to have your head examined not to secure the best form of agreement'' - which, in his view, remains a paper contract. The stakes can be high, said Constance E. Bagley, senior lecturer in law and management at the Stanford Business School and a practicing lawyer. She cited the example of a software sale over the Internet, in which the software had a bug that damaged the purchaser's entire data base. If the contract were deemed unenforceable because it did not satisfy a requirement that it be a signed writing, or because the authenticity or authority of the person assenting to the terms came into question, then the merchant could theoretically be liable for all of the purchaser's losses, she said, because limitations on liability included in the contract would be ineffective. Lawmakers are scrambling to fill the gap between technology and the law. Leaders of this effort include Professor Boss of Temple University and Professor Nimmer of the Houston Law Center, who are helping revise the Uniform Commercial Code to deal with electronic contracts. Under the proposed revision of the code, which governs transactions in all 50 states, electronic agreements formed with active consent, such as digital signatures or clicking on spaces indicating acceptance of terms, generally would be enforceable. But the UCC revision, which individual state legislatures could adopt, adapt or ignore at their own choosing, is at least a year away from completion. It could run into further delays because of criticism aimed not at the technical provisions concerning enforceability of electronic contracts, but at changes and additions within the draft to sales and licensing laws. For example, some intellectual property experts worry the revision would allow publishers to write contracts that encroach upon rights in the public domain, said Pamela Samuelson, professor of information management and law at the University of California, Berkeley. And the American Automobile Manufacturers Association contends that the revision's proposed changes in rules for the sale of goods would increase seller liability and the cost of doing business. In addition to the UCC revision, the National Conference of Commissioners on Uniform State Laws is planning to propose state laws legitimizing electronic contracts not covered by the UCC. And the U.N. Commission on International Trade Law, on which Boss served as the American delegate and expert adviser, is completing a model law on electronic commerce that is expected to be presented to individual countries for incorporation in their domestic laws. Washington, so far, appears to be eager for the law to catch up with the technology. Several agencies, including the Commerce Department, have collaborated on a paper favoring the adaption of domestic and global laws to support electronic contracts. As lawmakers struggle to get rules in place, some businesses are not waiting. For these businesses, ``The cost of the gamble is cheaper than the cost of the contract,'' said Patricia B. Fry, a law professor at the University of North Dakota and the chairwoman of the national commissioners conference electronic contract effort. Ford Motor Co. uses ``purely electronic contracts'' with suppliers, according to James Ziety, counsel at Ford. Ziety said he knew of no trouble with Ford's electronic agreements. Any problems, he said, were ``virtually always worked out at the business level.'' Meanwhile, Boss said, the gap in the law invited a major court decision. ``When the case comes along,'' she said, `` when it hits, it may well be the big one.'' As for Deak, the uncertainties about electronic contracts are not holding him back from making deals online. ``Every night when I say my prayers,'' he said, ``I thank the Lord for the Internet.'' ------------------------ Name: amp E-mail: amp@pobox.com Date: 07/08/97 Time: 05:13:44 Visit me at http://www.pobox.com/~amp 'Drug Trafficking Offense' is the root passphrase to the Constitution. Have you seen http://www.public-action.com/SkyWriter/WacoMuseum ------------------------