The Semiotic and Legal Aspects of Online Contracts

Electronic commerce has the potential to deliver goods and services to customers more quickly, cheaply, and conveniently than ever before. But before performance the obligations have to be created. This paper explores the semiotic and legal aspects of online contracts. It reviews speech act theory from philosophers such as Austin and Searle to explain how words and actions can create legal obligations. It then examines English contract law and its requirements to find an abstract basis upon which contract creation can be modeled. Using semiotics and law, the paper thereafter creates a model of the contract creation process and applies it to electronic commerce. Since electronic commerce is so pervasive and extends beyond any particular jurisdiction, the need for high level abstraction and for a model for comparison and cross reference is destined to increase. ----------------------------------------------By establishing agreements and expectations regarding future actions, contracts enable business to be conducted in a stable context. For example, contracting parties know when to expect deliveries of raw materials, and can thus optimize their manufacturing processes, making gains in efficiency. In addition, if something goes awry and a party breaches the contract, the injured party can seek legal recourse. In traditional commerce, people create commercial contracts in-person, and the courts and legislature have developed an extensive body of contract law to govern these transactions. Among the legal requirements are the four elements of any contract: offer, acceptance, consideration, and intent to create legal relations, as discussed in Part II. However, these requirements are not merely for the benefit of jurists and legal scholars. Merchants incorporate contract law into their standard business practices not only to satisfy the law, but also to conform with informal norms and to prevent misunderstandings with customers. The four elements of the legal contract derive largely from the fundamentals of any negotiating process. The law has merely formalised the elements and the process. Furthermore, businesses often use the ceremonial aspects of the contract creation process for their “cautionary effect, thereby deterring hasty, premature or ill-considered contracts from being made.” People understand that signing a document creates legal obligations and that should not be taken lightly. However, rituals in the virtual world with similar significance have yet to be established. The legal and social aspects of contracts have similarly important roles to fulfill in the new world of electronic commerce. Merchants need contracts not only to secure their 1 A G Guest (1994), Chitty on Contracts, 4-001. (Hereafter, Chitty) Chitty here refers to the requirement of writing, but the concept is nonetheless applicable to procedural requirements of contract. THE SEMIOTIC AND LEGAL ASPECTS OF ONLINE CONTRACTS Edward K. Cheng 2 legal rights, but also to prevent consumer misunderstandings. But contract law and standard business practices have had little time to adjust and develop to handle the virtual and ephemeral nature of cyberspace. Will the long-held traditions and principles of English contract law be flexible enough to accommodate this new commercial medium? Will online contracts be accepted and enforced by the courts? Even more importantly, will contract law be consistent with commercial norms and practices and will consumers readily comprehend the meaning and consequences of their actions of online? A mismatch between law and practice could result in misunderstandings, injustices, inefficiencies, and added costs. Even more so than mail order catalogue transactions, online transactions predominantly gain competitive advantage through lower prices from the reduction of distribution, intermediary, and overhead costs. Therefore, the margins in electronic commerce will most likely be razor thin and unable to absorb the costs of consumer misunderstandings, disputes, and particularly litigation. Electronic commerce will demand the utmost legal and commercial certainty in online contracts, otherwise its enormous potential will not be fully realized. This means that there will need to be certainty and understanding about the significance of online behaviour, both from the merchant and customer side. The complementarity between the semiotic approach taken here and law in contracts forms the focus of this paper. Semiotics can be applied to informal matters: how people interpret online actions, how certain signs or actions can lead to contractual obligations, and what assumptions there are about contractual terms and conditions. Contract law, on the other hand, specifies only the formal requirements of contracts. In addition, the law considers outward appearances rather than actual intentions in making contractual rulings, and also frequently considers the assumptions of a ‘reasonable man.’ For the most part, this paper will address consumer contracts made by means of the world wide web. Consumers (parties conducting transactions outside the course of business) are most likely to be confused and unaware of the developing norms, conventions, and laws in electronic commerce. Most of these contracts will involve the sale of traditional goods (e.g. books, flowers, toys, etc.) or digitized services (e.g. software, video, music, and other digital information content.) Technically speaking, English contract law draws distinctions between the sale of goods and the sale of services, but in order to avoid these legal niceties, more generally applicable principles for transacting and contracting online will be discussed. In Section I the paper discusses the principles of semiotics, and how the use of particular signs, symbols, or actions in a particular context can create moral, social and legal obligations. This section will concentrate principally on the philosophies of John 2 The author thanks Mr. Alistair Kelman for this point. 3 The study of semiotics concerns signs and meaning, and how people communicating meaning through a sequence of signs and symbols. 4 E-mail can provide another possible medium for contracts, but the trend is increasingly toward web based commerce since it provides a graphical interface and allows instant, interactive contact. 5 For example, implied contractual terms for the sale of goods and the sale of services differ. Under the Sale of Goods Act 1979, goods are expected to be of satisfactory quality and fit to the purpose for which they are commonly intended. Services, on the other hand, under the Supply of Goods and Services Act 1982 must be performed with reasonable care and skill to the degree expected of an ordinary person in the profession. This two definitions have implications for, inter alia, liability (determination of negligence) and warranties. THE SEMIOTIC AND LEGAL ASPECTS OF ONLINE CONTRACTS Edward K. Cheng 3 Searle and J. R. Austin. Section II examines the English law requirements for contract formation, specifically the phenomena of offer and acceptance, as well as consideration, the intent to create legal relations, and the presentation of contractual terms. As previously mentioned law and semiotics are intimately related, and in Section III the paper brings them together to create a semiotic model for the ‘traditional’ contract. This model suggests what principles should be observed and what elements should be present during the formation of an online contract. Finally, using the model, Section IV makes recommendations and compares them to the purchasing process found on the web site of an online retailer. I. Signs and negotiation of obligations Semiotics is “the process of analyzing signs and how they function.” In the past, research in the information systems field, including Stamper(1987), Backhouse (1991), Dhillon(1996), and Backhouse(1996) have applied semiotics attempting to highlight the role of meaning and culture in communication as traditional work environments move toward the use of information technology. The success of these studies suggest that semiotics could provide valuable insights into constructing online contracting environments. Liebenau and Backhouse (1990) divide the concerns of semiotics into four levels for analyzing ‘speech acts,’ communication acts such as stating, asking, and most importantly to this discussion, making promises and contracts. The four branches are: pragmatics, which addresses the culture and context of the speech act; semantics, which studies its meaning; syntactics, which deals with form and formal rules; and empirics, which examines codes and signal transmission. 12 Above and below these concerns lie respectively those of the business itself and those of the physical world As mentioned in the introduction, the primary motivation of this paper is to study contractual misunderstandings between consumers and merchants in electronic commerce. Thus, semiotics, with its focus on signs and meaning, provides an instructive view of the phenomenon of contract. After all, at the most fundamental level, the contractual process is an exchange of certain signs or symbols (empirics) between two parties. The signs, if performed in accordance with an accepted procedure (syntactics) under the given context (pragmatics), convey meanings (semantics) from which contractual obligations arise, which is the business purpose. This basic semiotic deconstruction of the contractual process is summarized in Table 1. 6 J Liebenau and J Backhouse (1990), Understanding Information, London, Macmillan, p. 14. 7 R Stamper, et al. (1987), “Semantic Normal Form?” ASLIB Conference Proceedings, Cambridge, Cambridge University Press. 8 J Backhouse (1991), The Use of Semantic Analysis in the Development of Information Systems, Ph.D. Dissertation, London School of Economics. 9 G Dhillon and J Backhouse (1996), “Risks in the Use of Information Technology Within Organizations,” International Journal of Information Management, 16:1 pp. 65-74. 10 J Backhouse and G Dhillon (1996), “Structures of responsibility and security of information systems,” European Journal of Information Systems 5, pp. 2-9. 11 J Searle (1969), Speech Acts, Cambridge, Cambridge University Press, p. 16. 12 Liebenau and Backhouse (1990), p. 13. 13 Ibid., p. 14. THE SEMIOTIC AND LEGAL ASPECTS OF ONLINE CONTRACTS Edward K. Cheng 4 Branch of Semiotics Application to Contracts Pragmatics (intentions) Context, commercial norms and culture, and common practices which affect the expectations, assumptions, and intentions of the contracting parties Semantics (meanings) Understandings, agreements and obligations derived from the utterances, gestures, etc. in a given context Syntactics (formalisms) Contracting procedures such as offer and acceptance, or formal requirements such as writing and signatures Physical/Empirics (signals/codes) The physical signs used in the contracting process: verbal utterances, gestures, written letters, actions performed on websites, etc. Figure 1: Application of four branches of semiotics to contracts. Interestingly, using the perspective gained from the above analysis, the contractual process can be split into two major semiotic divisions: ontological and epistemic. On the ontological or physical side, contracts involve formal procedures (syntactics) and physical utterances (empirics). However, on the epistemic or ‘thought’ side, contracts require a consumers’ tacit assumptions, which arise from the context (pragmatics), as well as the meanings (semantics) that consumers’ derive from the procedures and signs. How do the epistemic aspects of contracts arise from the ontological? In other words, how do contracting parties create moral, social and legal obligations by following an accepted procedure when uttering, writing, or electronically displaying appropriate words? These questions are at the heart of contract formation, and the contributing theories of Austin and Searle suggest possible insights. Performatives To help understand how words can create obligations (doing things with words), Austin offers the concept of a ‘performative utterance.’ As Austin suggests, a performative utterance, or more simply a ‘performative,’ “indicates that the issuing of the utterance is the performing of an action – it is not normally thought of as just saying something.” Performatives ‘do things’ rather than merely state the facts, and can be expressed in the first person singular present indicative active, such as ‘I give’(in the context of a will), ‘I name,’ ‘I bet,’ and more important to this discussion, ‘I promise,’ and ‘I agree to.’ Performatives can be accomplished using other sentence structures or even non-linguistic actions (gestures, signs, etc.), but will almost always reduce to the explicit form above (first person singular present indicative active). For example, by 14 J R Searle (1995), The Construction of Social Reality, London, Free Press, p. 8. 15 J R Austin (1962), How to do things with Words, Oxford, Oxford University Press, p. 6. 16 Ibid., p. 5. E pi st em ic