Business Times - October 14, 1996

E-commerce : Technology can bypass the legal pitfalls

By Koh Su Haw

THE number of electronic cash transactions will reach nine billion by the year 2000, a study by Killen & Associates predicts. The temptation to jump on board the Internet business bandwagon is clearly great. In fact, last month AsiaOne and Contact Sembawang Media announced plans to introduce electronic commerce over the Internet next year.

But is the Internet ready for electronic commerce?

The concept of trade over the Internet is a relatively new phenomenon and possesses certain unique characteristics which are not found in normal trading activities. Some of these underlying assumptions have to be re-examined before they can be applied to Internet transactions. As it stands today, our laws are far from clear on the legal issues peculiar to doing business on the Internet. Until the ambiguities are resolved, the growth of electronic commerce is not likely to take off.

Business in the developed world relies on transparent laws and regulations to preserve the sanctity of contracts and ensure the fulfilment of contractual obligations between parties. Rules that people take for granted in everyday business dealings sometimes do not sit well in the less familiar Internet environment.

Despite the tremendous surge of users in recent years, the Internet is still very much a lawless environment bordering on anarchy. Just as it has transcended geographical constraints with impunity, the Internet threatens to defy societal laws normally enforceable outside cyberspace. An inkling of this can be gathered from a casual perusal of the many usenet newsgroups where numerous blatant breaches of defamatory and copyright laws, public morals and common decency standards apparently go unchecked.

As there are very few legal precedents addressing Internet-related issues, the applicable laws have to be imported and adapted from established legal principles dealing with the more traditional media available before the Internet.

However, the existing laws were simply not designed for, nor are they equipped to handle, the vastly different Internet communication medium. Attempts to apply some of these rules have led to ludicrous conclusions.

Even the law of contracts is not immune. The question of precisely when a contract is formed is pivotal to the law of contracts. To determine this, the complementary 'postal delivery' and 'instantaneous communications' rules place the formation of contract at the points of offer and acceptance respectively.

However, neither rule appears applicable in the Internet scenario. The postal rule presupposes the reliability and authority of the postal service as a delivery agent, but the Internet can hardly be considered a reliable information delivery mechanism. On the other hand, the instantaneous rule is a non-starter, considering the numerous server nodes which electronic messages have to pass through before arriving at its final destination.

The fast-paced nature of the Internet allows much more and speedier interactions between parties and often also means that contractual agreements are concluded with greater urgency. Unlike contracts in normal everyday trades, electronic commerce is still in its infancy and the precise terms and conditions governing commercial transactions on the Internet are far from certain. To avoid misunderstandings, many terms and conditions have to be explicitly spelt out.

Towards that end, many software publishers have adopted what is termed a 'click-wrap' method of alerting the user to the terms and conditions of software contracts. Before installing the software, a notice appears on the user's screen, complete with all the legalese insisted upon by their over-eager lawyers. Few ever read through or comprehend such notices in their entirety. The validity and enforeability of such notices is still hotly debated amongst academics and legal practitioners alike.

Given the dearth of case law on Internet-related issues, it is only natural to turn to the legislators for a possible solution. Unfortunately, existing legislations are just as obscure.

So, how does one overcome the ambiguity surrounding rules governing Internet business transactions? One view is that technology has to lead the way.

While legal minds wrangle over the precise point at which a contract is formed, programs sold over the Internet can be password-protected such that they remain "crippled", in features or usage time, until both parties have fulfilled their ends of the bargain.

Instead of waiting for the courts to lay down the law on the rights of e-mail privacy, encryption technologies can help prevent unwanted intrusions.

While no technology is fool-proof and conclusive, many technological solutions are commercially available to meet all except the most stringent of needs.

Internet entrepreneurs have also exhibited novel and ingenuous ways of circumventing the problems. Netscape has been freely distributing its Navigator software under a shareware arrangement whereby users pay only after a three-month evaluation period. Although the majority of users may avoid paying for the use of the software, the small proportion that do pay for registration is sufficient to make the company financially successful, simply because of the sheer number of users involved.

A similar marketing strategy employed by Sun Microsystems involves allowing free usage, and nominally charging for distribution, of its Java language for use on the Internet. This shrewd move has generated unforeseen goodwill and publicity for the company in its core profit-making business of selling computer servers.

There are handsome profits to be made out there in the Internet. The legal fraternity will continue to debate the legal issues until they no longer matter. But that should not deter the entrepreneur from using other means to overcome the difficulties and succeed in tapping on the opportunities presented by electronic commerce. The potential rewards are simply too great to miss out.