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Terms and Conditions for Electronic Commerce

Author(s):

Ernest Gabbard, J.D., C.P.M., CPCM
Ernest Gabbard, J.D., C.P.M., CPCM, Director, Corporate Procurement, Allegheny Teledyne, Inc., Pittsburgh, PA 15222, 412-394-2968, or Fax 412-394-3087.

83rd Annual International Conference Proceedings - 1998 

Summary: The use of electronic commerce for the purchase of goods and/or services is growing exponentially. Unfortunately, contract (procurement) law has not kept pace with the speed of this growth. Therefore, the procurement and contracting professional must be aware of what laws apply, and how terms and conditions are established in this electronic environment.

Definition: In the interest of clarity, we should first agree on what constitutes "electronic commerce" for purposes of this paper. The term as discussed herein, does not refer only to EDI, but rather refers to all transactions for which there has been no exchange of contractual documents, i.e., EDI, electronic mail, facsimile transmissions, telephone orders, etc. The reason for such a broad application in this context is that all such orders have a common denominator - they all lack the normal, written exchange which clearly establishes the terms and conditions which will govern the resulting transaction(s).

What Laws? There is not yet a body of law which applies specifically or exclusively to electronic commerce. Therefore, we must look to the existing body of contract law which governs all other contracts (purchase orders). These laws are the state commercial codes, most of which were patterned after the Uniform Commercial Code (UCC), and the court interpretations of those codes.

The Issues: While these codes/laws vary from state-to-state, they all have some common denominators. Some of these common denominators are what create issues in the area of electronic commerce. The most problematic of these is the requirement for a "writing" (UCC 2-201, or your state's equivalent). Since commercial law does not yet recognize electronic "bits and bytes" as a "writing", or as evidence of the existence of a contract, how can the contracting or procurement professional establish a contract in this electronic environment? An ancillary question is how do we establish terms and conditions in this environment?

Solution: While there are many creative electronic solutions being developed, they are not yet established and proven. Therefore, the most practical solution for the interim is to pre-establish the terms and conditions to govern your electronic commerce. This is accomplished by the utilization of an agreement between the parties, such as the "EDI Agreement", provided as Exhibit A. While the agreement provided herewith, is intended specifically for EDI transactions, it can be modified to work for any type of "electronic commerce." Certain issues must be addressed for all electronic transactions, and these are covered in this document. Other language therein will need to be revised and custom-tailored to reflect the specific application for which it is to be utilized.

This agreement provides overriding and supplemental terms and conditions to govern our transactions in this electronic environment. It clearly addresses the issue of the state (or UCC) requirement for a "writing", as well as the requirement in some commercial codes for a "signature." The generally problematic issues inherent in this electronic environment are addressed.

As may also be noted, it refers to another set of contractual terms and conditions. This is intended to provide the terms and conditions not specific to the electronic environment to govern all such transactions, e.g., warranty. Such an approach will avoid the uncertainty created by the classic "battle of the forms" with which we must frequently deal, even in traditional transactions. We will review this EDI agreement, and the appropriate traditional terms and conditions during our seminar.

Record Keeping: An ancillary issue which is somewhat unique in this electronic environment is that of satisfying the legal requirement of state and federal law for "records" of commercial transactions. The critical issue here is that the legal requirement for a "record" is not generally satisfied by an electronic format (disc, tape, hard drive, etc.). The requirement varies considerably by statute/regulation; therefore, the procurement and contracting professional must become more aware of the specific requirements. This can be particularly problematic, since most of us are not normally aware of what form of storage a "record" must take - even in the traditional procurement transaction. We will discuss some of the common elements of such "electronic records" during our seminar.

International Transactions: While even traditional procurement transactions can be considerably more complex than the domestic counterpart, this complexity becomes quite critical for any electronic transactions conducted in such an environment. This is a complicated subject, and we will touch on it during the seminar. However, it is appropriate to point out for this paper that standard domestic P.O./contract terms and conditions should not be utilized in such an environment. My personal recommendation is to utilize the United Nations Convention for International Sale of Goods (UNCISG) for "governing law" or "applicable law"; however, this solution contains all of the problems you must still be aware of in satisfying the requirement for a "writing", just as with utilizing the UCC. Therefore, an even more elaborate form of the "EDI Agreement" is necessary to satisfy these requirements, and protect our employers.

Conclusion: The electronic environment offers many benefits to commercial business, and it will undoubtedly increase significantly in the future. However, procurement and contracting professionals must become familiar with very diverse state and federal requirements for creating a "writing", authenticating a "signature", and keeping appropriate "records" to satisfy many laws and regulations.

EXHIBIT A

ELECTRONIC DATA INTERCHANGE (EDI)AGREEMENT - EXAMPLE

This Electronic Data Interchange Agreement is made by and between the following parties in order to facilitate their transacting business via electronic data interchange (EDI).

Purchaser:_______________________________________
_______________________________________
_______________________________________

Seller: _______________________________________
_______________________________________
_______________________________________

1. Parties Intend to be Bound by Electronic Data Interchanges
Both parties to this agreement hereby evidence their intention to be bound by the electronic data interchanges as described herein and specifically agree as follows:

  1. The parties agree that no writing shall be required in order to make their EDI transactions legally binding, notwithstanding any contrary requirement in any law.
  2. To the maximum extent permitted by law, the parties hereby agree that the electronic data interchange procedures will be adequate to satisfy the requirement of any writing which may be imposed by any law.
  3. The parties agree that no signature shall be required in order to have legally enforceable EDI transactions between them.
  4. To the maximum extent permitted by law, the parties hereby agree that the confidential codes that they will be using in order to transmit information to each other will be adequate as any necessary "signature" which may be required by any law.
  5. The parties hereby agree that neither will raise any defense of lack of writing or lack of signature or any other similar defense based upon a "Statute of Frauds" or similar rule in any dispute which may arise between them for any transaction entered into through electronic data interchange.

2. Offer and Acceptance
Electronic transmission of an order by Purchaser to Seller shall be effective as an offer when it is received on the Seller's terminal. Said offer shall be accepted by Seller in any one of the following ways:

  1. Via electronic transmission of an acknowledgment, acceptance or receipt of the offer; or
  2. The shipment of the goods called for in the offer.

3. Terms of the Transaction(s)
The terms of any electronic transaction shall be those terms and conditions which may be contained in the electronic data transmissions, plus the terms and conditions attached hereto as Exhibit A.

4. Miscellaneous

  1. The parties of this agreement may send and receive purchase and sale documents electronically themselves through direct interchange or through a third party network (TPN). If one party to this agreement selects a TPN to facilitate the electronic interchange, the party selecting that TPN shall bear responsibility for any mistakes of the TPN. If both parties jointly select a single TPN to facilitate their interchanges, responsibility for any mistakes or negligence of the TPN shall be borne equally.
  2. Nothing in this agreement shall be deemed to create any responsibility of either party to buy or sell any specific goods. This agreement is solely intended to facilitate the handling of electronic transactions between the parties. Neither party shall be entitled to, or required to do any certain amount of business with the other, nor shall either party be required to do business with the other for any certain period of time.
  3. This agreement may be terminated by either party by giving _____ days written notice to the other. Such termination of this agreement shall not affect any transactions entered into before the effective date of the termination, even if the performance of such transactions is to take place after the effective date of termination.
  4. The parties agree that the documents to be exchanged electronically, the format to be used, and the products covered are those identified and mutually agreed upon by both parties. While it is the intent of both parties to use electronic transmission to the extent practical, this agreement does not preclude the exchange of documents by other methods when required by special circumstance.
  5. Each party shall adopt and maintain reasonable security procedures to ensure (1) that documents transmitted electronically are authorized, (2) that its business records and data are protected from improper use, and (3) that the security of access codes and electronic identification codes is maintained.
  6. Upon receipt of an electronic document, the receiving party shall promptly issue an acknowledgment to the sending party. Such acknowledgment is solely for the purpose of acknowledging receipt of electronic documents.
  7. In the event either party receives an electronically exchanged document that is obviously garbled in transmission or improperly formatted, that party shall immediately notify the TPN and the other party for retransmission. If this does not remedy the situation, the receiving party shall contact the sending party for joint resolution of the transmission.
  8. This agreement shall be governed by the laws of the State of ______________________.

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