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					         Online Contracting
• 1-2% of all sales
• Business to Consumer ( B2C) in 2000
  $25.8 billion
• Business to Business (B2B) projected in
  2003 $1.2 to $10 trillion
• Growing rapidly



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          Online Contracting
• B2B e-commerce takes variety of forms
  – Vertical porta model
    • Collection of information, services, and goods to a
      particular industry
  – Supply chain model
    • Single web site can find parts, identify suppliers,
      and order parts for a business




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          Online Contracting
• B2B e-commerce takes variety of forms
  – Vertical porta model
    • Collection of information, services, and goods to a
      particular industry
  – Supply chain model
    • Single web site can find parts, identify suppliers,
      and order parts for a business




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    Online Contracting cont.
• B2B2C
 – Involves Internet-enabling and streamlining an
   entire business value chain, from its initial
   supplier to the finished product that is
   delivered to a consumer
   • Customer orders a car on the Internet




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E-Commerce Business Models
• Traditional commerce models
  – Mail-order model
  – Subscription-based model – direct access for
    a limited period of time
  – Direct marketing model -Spam to mass
    market
  – Real estate model – rent or sell web space or
    domain names
  – Free trial model – free use of software for a
    limited time, then pay
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       E-Commerce Models
• Information barter model – consumers and
  businesses can exchange goods and
  services
• Digital delivery model – download product
• Access-provision model – sells access to
  the internet in exchange for a fee
  (Earthlink)


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          Contract Defined
• A Contract is an agreement to exchange
  property or services that is legally
  enforceable in a court of law




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         Source of Contract Law
• Is Mostly State Law
   – States are authorized to make their own contract law in the U.S.
     Constitution
   – Contract law is very similar state-to-state because it derives
     from the same historical background
• Different Kinds of State Contract Laws
   –   Common Law Contract Law, updated with state states
   –   Uniform Commercial Code (UCC)
   –   Uniform Computer Information Transactions Act (UCITA)
   –   Uniform Electronic Transactions Act (UETA)
• Some Federal Contract Law
   – Electronic Signature Act (E-Sign Act)


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How Do We Know When to Use
 Which Contract Law to Use?

• It depends on the kind of property that is
  the subject of the contract
  – Real property contracts and service contracts
    use - the “common law contract law” as
    summarized in the Restatement of Contracts
  – Personal property contracts - use the UCC or
    UCITA, etc.

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                  Property
• In every state property is divided into
  these two categories:

• Real
• Personal




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            Real Property
– Tangible: Land and all its component parts:
  surface, subsurface, airspace, any other
  property growing on the land or affixed to the
  land such as: growing crops, timber,
  structures, houses, buildings, etc.\

– Intangible: easements such as right of ways
  or profits such as mineral rights; mortgages,
  leases, etc.

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        Personal Property
– Tangible: Anything that is not real property:
  refrigerators, clothes, everything in Walmart
  or Kmart or Sears…

– Intangible: Money, Investment Securities
  (Stocks and Bonds, Limited Partnerships,
  etc.), Documents of Title (warehouse receipts,
  bills of lading), Goodwill, Instruments (drafts
  (checks), promissory notes, certificates of
  deposit), Patents, Trademarks, Copyrights,
  accounts receivable, etc.
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 State Common Law Contract Law
• Most states adopted their common law
  contract law, amended and supplemented
  by state legislatures by statutes through
  the years

  – Summary of most states’ common law
    contract law can be found in the Restatement
    Second of the Law of Contract

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 Uniform Commercial Code (UCC)

• A special subset of state contract law for
  commercial transactions involving
  personal property as opposed to service
  contracts or real estate contracts

• UCC written by National Commissioners
  on Uniform State Laws (NCCUSL),
  adopted by most state legislatures
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              UCC Governs
        Commercial Transactions in
          Personal Property Only
•   Article 1 Introduction
•   Article 2 Sales of goods (tangible personal property)
•   Article 2A Lease of goods
•   Article 3 Commercial Paper (some intangible personal property:
    notes, drafts, certificates of deposit)
•   Article 4 Banking (checks)
•   Article 5 Letters of Credit
•   Article 6 Bulk Sales (buying inventory in bulk from another merchant
    who is going-out-of business)
•   Article 7 Documents of Title (warehouse receipts and bills of lading)
•   Article 8 Investment Securities (stocks, bonds)
•   Article 9 Secured Transactions (putting personal property up as
    collateral)

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    Requirements of a Valid Contract
            (Restatement)

•   Mutual Assent
•   Consideration
•   Capacity
•   Legality
•   Form


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               Mutual Assent
• Agreement: one party makes an offer and the
  other party accepts
  – Objective standard = must be an outward indication of
    assent

  – Can be express (oral or written) or implied by actions

  – Either a promise for the other to give a promise =
    bilateral contract

  – Or one promise for the other to give performance =
    unilateral contract

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          Offer Requirements

•   Intended to be an offer
•   Made from offeror to offeree
•   Definite and certain
•   Communicated to the offeree




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                     Intent

• Not a joke
• Not an advertisement (usually)
• Not an auction with reserve




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      Communicated to This
        Particular Offeree

• One offeree cannot give the offer to
  another offeree

• Rewards




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               Definiteness

• Reasonable certain and complete
  – Subject matter, quantity, quality, price,
    payment terms, duration


• Article 2 does not require so much
  definiteness


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             Duration of Offers
• Term
• No Term
• Can usually be revoked at any time before
  acceptance, even if person says he will keep it
  open
  – Exception:Cannot revoke for stated period of time if:
     • Option contract
     • Promissory Estoppel
     • Art. 2 of UCC “firm offer by a merchant rule”
         – Merchant makes an offer to keep an offer open for less than 3
           months in writing and signed – he is bound to do this


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             Acceptance

• Unilateral- wants performance to be
  completed
• Bilateral – wants a promise




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 Is Silence an Acceptance?
– Common Law says: agree before hand that
  silence will be an acceptance, then it is

– UCC says: silence can serve as acceptance
  only where a single contract involves
  “repeated occasions for performance.” (Book
  of the month club)



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When is Acceptance Effective?
• “Mailbox Rule” When the acceptance is
  dispatched by proper means
  – Unless
    • Offeror has said otherwise – “won’t be accepted
      until I receive it.”
    • Unauthorized means of communication is used
    • Acceptance is sent after a rejection is sent
      (rejections are not effective until received) – first
      one to be received is effective


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 Acceptance with Modifications
• Restatement: Mirror Image Rule:
  Acceptance must be exactly the same as
  the offer, or there is not a contract

• UCC: Acceptance that says unconditional
  “Yes” can form a contract even if terms are
  added or changed


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                    Consideration
• Each party to the contract must be bound to give
  consideration

• Consideration is recognized by the law if it is
   – A Legal Detriment to the party
       • Doing something or giving something I do not have to do or give or
       • Giving up something I have the right to do or have

• “Bargained for” what the other person wants
   – Not past consideration
       • Not consideration that is already owed “preexisting obligation”
       • Modifying a contract requires new consideration on both sides, or
         one is just doing what he/she already had to do and this is not
         consideration because it is already owed for another promise


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Exception to the Rule that Each
Party Must Give Consideration
• UCC Art. 2: an agreement modifying a contract does not
  have to have new consideration from both sides to be
  binding

• UCC Art. 2: firm offers by a merchant cannot be revoked
  even though no extra consideration is given to keep the
  offer open

• Promissory Estoppel: equitable principle that once you
  make an offer for unilateral performance, you cannot
  revoke once the other person has substantially begun
  performance even if they have not given any
  consideration to keep the offer open because it is just
  not fair.
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    Acceptance Problems That Result
    in Contract Being Voidable (by the
        one “taken advantage of”)

•   “No meeting of the minds”
•   Mistake
•   Misrepresentation or Fraud
•   Duress
•   Undue Influence
•   Lack of Capacity
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      No Meeting of the Minds
• UCITA: Click Wrap and Shrink Wrap Contracts
  – At first ruled not binding because purchaser did not
   know what he/she was getting until after the contract
   was entered into – no meeting of the minds
   7th Cir: Yes, we need to do this in society today to
   mass-market the software, so it is a binding contract.

• ALI said “no” – can’t have agreement before you
  know what you are clicking “yes” to


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                  Mistake

– Must be mutual mistake of fact of the identity
  or existence of the subject matter
  • Two software programs with the same name, each
    thinking of a different one

  • Not a mistake by one side
  • Not a mistake of value



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   Misrepresentation or Fraud
• Misrepresentation of a material fact – no
  value, not opinion, not law
• Justifiably relied upon by the other party
• Intent (Scienter) only needed for fraud
• Damages (hurt economically or physically)




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                     Duress
• Contract if voidable if entered into under
  an
  – Improper threat
  – There is no alternative




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           Undue Influence
• Contract is voidable if entered into under
  – Persuasion
  – By a dominant person over a subordinate
    person
  – That ends in the subordinate person not
    getting a fair deal




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              Lack of Capacity
•   Minority
•   Intoxication
•   Mental Illness
•   Non citizen?
    – No – alien has all rights to contract as citizens




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                    Capacity
• Minors
  – Can disaffirm any time until they are 18 and
    for a short time after
     • Even if they cannot return the consideration
  – Can’t disaffirm for necessaries
  – In some states, can’t disaffirm if
    misrepresented age
     • Easier to misrepresent online


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                Intoxicated
• Under old law – other party has to know
  – Can’t tell online is the other person is drunk or
    drugged
• Not alcoholics or drug addicts, if they are
  sober at the time of contracting




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       Mentally Incompetent
• Have the right to disaffirm, even if the
  other party does not know they are
  mentally incompetent
• Have to have been in an non lucid interval
  when entered into the contract




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Illegality Makes a Contract Void
• Except
  – If unaware of illegality; if one of group the law
    was made to protect; if do not go through with
    the illegal deal
• Some illegal contracts:
  – Commit a crime, gambling, usurious, violating
    a licensing statute
  – Exculpatory contracts
  – Unconscionable contracts
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       More Illegal Contracts
• Contracts in Restraint of trade
       –   Price fixing
       –   Non-competition agreements
       –   Tying agreements
       –   Grant back agreements




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United States v. Microsoft Corp
• Antitrust violations = illegal




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    Form – What Contracts
     Must Be in Writing?
– Under the common law statute of frauds,
  contracts that
  • Involve real property.
  • Cannot be performed in less than one year
  • Are collateral contracts to pay the debt of another
     – estate executors or administrators
  • In consideration of marriage



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  Form – What Has to be in
   Writing Under the UCC?
– Contracts for the sale of tangible goods $500
  or greater
– Contracts for the lease of tangible goods
  $1000 or greater




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 What has to be in the writing?
• Common law:
  – parties
  – Subject matter and essential terms
  – Signed by the party against whom it is to be
    enforced
• UCC Art. 2
  – All you need is quantity in writing


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  What constitutes a signature?
• Name, initials, or other symbol as long as
  the party intends for it to authenticate the
  writing




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Exceptions to the Statute of Frauds
• Common Law exceptions:
  – part performance
  – admissions
• UCC exceptions:
  – specially manufactured goods
  – written confirmation by a merchant to another
    merchant of an oral contract, the confirmation
    not objected to within 10 days

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         Parol Evidence Rule
• Common law, UCC alike:

  – Parol Evidence rule excludes oral or other
    evidence of agreements made at the time of,
    or prior to, the making of the written contract

     • Can admit: later modification, explanation of
       ambiguity



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  Part of the Contract: Warranties,
   Disclaimers and Terms of Use
• Terms of Use: payment methods, privacy
  statements, external linking permissions,
  web site rules
• Warranties
  – Express
  – Implied warranty of merchantability, title
  – Implied warranty for fitness for a particular
    purpose
• Disclaimers
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                Examples
• Dell Computer Corporation’s 90-Day
  Limited Warranty

• PayPal, Inc.’s User Agreement
  – Comb v. PayPal, Inc., 2002




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Need for New Law Regulating Sale
     & Licensing of Software

• In 1995 the NCCUSL and the ALI undertook a
  joint project to draft Art. 2B of the UCC to govern
   –    contracts to license or purchase of software,
   –   to create or modify a computer program,
   –   for computer games,
   –   online access to databases,
   –   to distribute information on the Internet,
   –   diskettes that contain computer programs, e-books,
       and other similar contracts.
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   UCITA Would Not Apply to the
           Following:
• Computer programs embedded in goods ( TVs,
  stereos, etc.)
• Financial services transactions
• Cable, satellite, or other broadcast media
• Movies, sound recordings, or musical works
• Compulsory licenses
• Employment, except oif the individual is an
  independent contractor providing computer
  information
• Subject matter within the scope of Article 3-8 of
  the UCC
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NCCUSL and ALI Could Not Agree
     to make it UCC 2B
• Dispute concerning certain provisions

• 1999 the NCCUSL, satisfied with the draft,
  approved the act freestanding of the UCC

• It is called the Uniform Computer Information
  Transactions Act (UCITA)

• The NCCUSL offered it to the states for
  enactment in July 1999.
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Objections of ALI and the Attorneys
     General of many States:
• Acceptance
  – Silence can be an acceptance
       – UCITA says: silence can serve as acceptance by
         inaction in any “future transactions between the parties” –
         you may be agreeing to accept future software products
         by your silence – where does it end?


  – Click on “I agree” courts have found this is
    NOT silence, this is acceptance by actions


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   Other Objections of ALI and
       Attorneys General

• It defined software as nongoods
  – This is important because, if software is not
    “goods,” it is not subject to Art. 2 “Sales of
    Goods”
     • Art. 2 contains a lot of old law and a lot of
       protection for the consumer!
     • If software is nongoods, then this law may not be
       applicable

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  Other Objections of ALI and
      Attorneys General

• Mass Market Licensing
  – Allows a merchant to withhold almost all of
    the contractual terms in its sale of software to
    a consumer until after the sale is completed
  – This goes against age-old common law
    contract principles!



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 Only two states have adopted
            UCITA

• The states that have not adopted UCITA,
  still use the Art. 2 and 2A for selling and
  licensing software




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 UCITA: Warranties Like the UCC
• Warranties against infringement or
  misappropriation
• Warranty of merchantability
• Warranty of fitness for a particular purpose




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UCITA: What Has to be In Writing?
• Does not change any common law or UCC
  substantive rules about what has to be in
  writing
• Adds these rules
  – Licensing of informational rights for more than
    $5,000
  – Licensing of informational services that
    cannot be performed in less than one year
  – AOL for 2 years

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 UCITA: Is Electronic Record a
           Writing?
• Electronic record is a writing




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Is an Electronic Record Signed?
• Signature is
  – any name, initials, or other symbol as long as
    the party intends for it to authenticate the
    writing Authentification of an electronic record
    both by human action and by means of an
    electronic agent OK


• Attribution – UCITA does not favor any
  encryption technology over another
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  UCITA: Electronic Self Help
• Allows self-help
  – includes cancellation, repossession, and
    prevention of continued use
• Not available in mass market licensing
• Need express agreement to this effect




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  Uniform Electronic Transactions
            Act (UETA)

• Another less controversial uniform law
• Only approves electronic writing and
  signatures, does not change any
  substantive writing or signing requirements
  – Electronic record is a writing
  – Electronic signatures are legally effective


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 States’ Electronic Signature
Acts (could be adopting UETA)
 – Washington’s ESA: Use certifying authorities
 – California: unique, verified, under sole control
   of person, linked to data in such a way that if
   the data is changed, the signature is
   invalidated, conforms to regulations adopted
   by the appropriate state agency



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             Federal E-Sign Act
• Federal law
• Passed to recognize electronic writings and signatures
  until the states passed their own laws
• Does not change any substantive writing or signing
  requirements
• Preempts state law that is not technology neutral
• Does not pertain to will, testamentary trusts or family
  records, cancellation of health or life insurance benefits,
  hazardous product recalls, repossession and
  foreclosure, utility services
• As to UCC, only applies to Articles 2 and 2A
• Special rules for consumer transactions
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 Federal E-Sign Act and UETA
• State adopts official version of UETA,
  overrides E-Sign Act
• Differences
  – UETA is more comprehensive
  – UETA addresses attribution
  – UETA allows parties to vary signature
    creation and attribution formats by agreement
  – Electronic form is OK

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        What about Electronic Data
           Interchange (EDI)?
• Computer-to computer contracts

• American National Standards Institute developed national and
  international standards for the interindustry exchange of business
  data = established a common, uniform, business language

• UCITA specifically validates such contracts – but what about the
  form? Writing?

• Art. 2 Sales of UCC $500 or greater should be in writing

• Master Trading Partner Agreements are in writing and they say
  future communications between the contracting parties in a certain
  electronic form will be a “writing.”


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         Software Licensing
• Owner of software decides to transfer to
  another person the use and enjoyment of
  his creation, while still retaining the
  ownership of his creation
  – Software code is copyrighted and then
    distributed under a license agreement
    • Restricts users to installation of only one copy of
      their software
    • Only purchasers of license may use it

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   Key Terms/Components of a
  Software Licensing Agreement
• Define the Scope of the agreement
  – Physical territory
  – Purpose
  – Prohibited actions – cannot copy
  – Breach of license = breach of contract and/or
    infringement of copyright
  – Access to software’s source code? Or in
    escrow?
  – Permitted to transfer to third parties or not
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       Key Terms/ Components
• Delivery provisions
   – Download, CD-ROM
• Acceptance provisions
   – Shrink-wrap or Click-wrap acceptance
• Establish warranties
   – Only when properly installed by….
   – Qualified warranties if new or experimental software
   – Free from defects, viruses, infringement on another’s intellectual
     property
• Limitation of Liability clauses
   – dollar amount
   – Disclaimers for consequential, incidental or punitive damages

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   Click Wrap, Shrink-Wrap, and
    Browse-Wrap Agreements


• ProCD, Inc. v. Zeidenberg
• Brower v. Gateway 200, Inc.
• Specht V. Netscape Communications
  Corp.


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    E-Commerce and Insurance:
  Insuring Online Contracting Risk
• Standard commercial general liability policy

• Does traditional insurance cover electronic
  commercial mishaps?
  – State Auto Property & Casualty Insurance Company
    v. Midwest Computers & More

• What is physical property damage?
  – American Guarantee & Liability Insurance Company
    v. Ingram Micro, Inc.

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International Aspects of Electronic
            Contracting
• UN Convention on Contracts for the
  international Sale of Goods (UNICISG)
  – U.S. ratified
  – Like UCC
     • Except:
        – no writing requirement
        – Mirror image rule




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Other International Agreements
• United Nations Commission on International
  Trade Law (UNCITRAL)
  – Electronic documents are legally binding
  – Signatures must identify the originator and confirm
    the originator’s approval, be reliable as appropriate
• EU Directive Concerning E-commerce
     • Harmonizing legislation in four areas
         –   Commercial communications
         –   Online formation of contracts
         –   Liability of intermediaries
         –   Enforcement issues
     • Limitations on online contracts to consumers

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