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Intellectual Property Law

: IBLS Internet Law Blog

ONLINE SHOPPING: AN OVERVIEW OF THE LEGAL PITFALLS FACING BUSINESS TO CONSUMER E-COMMERCE WITHIN THE CONTEXT OF THE SOUTH AFRICAN LAW

By IBLS Editor

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1. Introduction

Purchasing goods and/or services online is quick, convenient and allows the purchasing or selling of services and/or goods outside the borders of a country.[1] The online parties, especially the purchaser, generally known as the consumer,[2] is seldom concerned with the meaning of the term, 'e-commerce'[3] and the legal ramifications of online purchasing but is more interested in the advantages[4] of cyber shopping that can vary from purchasing a plane ticket to books or accommodation to software.

However, once the parties encounter a problem with the online purchase, they look for direction from the commercial law to provide a solution to address the legal pitfall.

This discussion will be an overview of the pitfalls that may be encountered with online purchasing within the context of the South African law. The discussion relating to the law governing online purchasing in South Africa is not only of importance to a non-South African consumer who trades with a South African based website, but it will also affect a website owner who wishes to trade outside the borders of his country with South African consumers.

The discussion focuses on the online contract of purchase between a consumer (offeror) and an merchant and vendor and/or electronic supplier (offeree) of goods and services, so called business to customer ecommerce (B2C ecommerce).

Obviously, not all the pitfalls can be discussed in depth. Central to online purchasing is the contract of purchase that embodies the legal relationship between a consumer and an online merchant or vendor. Although a contract may be valid and enforceable, pitfalls such as dispute resolution, consumer protection, privacy protection, security of payment and crime detection and prevention, to name but a few, may nonetheless be encountered with the B2C contract of purchase.

Much has been written on the online contract per se, but these discussions lack an overview, however brief, of the legal pitfalls facing online B2C purchasing on a domestic and international level. Such a discussion, although quite ambitious, goes a long way in facilitating an understanding of the laws that regulate the various issues in respect of online B2C contracts of purchase by focusing on the problems that may be encountered from the South African legal perspective. It also illustrates which trust-enhancing mechanisms should be part of an online B2C e-commerce.

2. The Internet in South Africa[5]

2.1 Legal regulation of the Internet

The history of the origin of the Internet[6] is certainly well known and for that reason will not be discussed.

However, one must be mindful of the remark by Oliver Wendell Holmes, a former judge of the United States of America, that "(w)e must study the history in order to understand the path of the law."[7] One cannot have a true understanding of the evolution[8] of legal regulation in South Africa without giving a historical perspective on the commercialization of the Internet.

The legal position in South Africa from 1993 to 2002 serves as a good example of the consequences of inadequate legal protection in respect of conduct on the Internet. When the Internet became commercial in South Africa in 1993, the Internet became part of society without much fanfare. Very little attention was given to the Internet, probably a consequence of the fact that South Africa was involved in a process of political transformation and constitutional development. South Africa was furthermore urged not to regulate the use and access to the Internet and warned that "excessive regulation or control of the Internet would backfire."[9] The warning went as far as to state that "the Internet and its technology would render the controls worthless" and that regulation should be conducted "not with fear and prejudice."[10]

The result of not regulating the Internet in South Africa was legal uncertainty in respect of various e-commerce aspects, for example, it was not clear whether a valid online contract could be concluded by means of an electronic communication.[11] South Africa may be a developing country, but the government realizes the advantages of the development and growth[12] of e-commerce and that includes establishing legal certainty by means of state regulation of conduct and information on the Internet.

The implementation of the ECT Act in 2002 was a major step forward in establishing an e-commerce legal framework by addressing various aspects of e-commerce. The ECT Act was also the first comprehensive[13] legislation that deals exclusively with an electronic medium.

2.2 The effect of foreign and international legal regulation of the Internet

South Africa has the advantage that international law and foreign law may be considered in the process of drafting its own e-commerce legislation. This illustrates the effect of globalization on a country. In respect of state regulation[14] of the Internet, three dominant powers or approaches to Internet regulation have developed, namely the approach of the European Union (EU), the United States of America (USA)[15] and China. Other countries align themselves with one of these approaches. As indicated, the focus in the discussion will be on the South African legal framework governing B2C contracts of purchase with a comparative analysis, where relevant, to the legal position in the EU and the USA.

The Constitution is the supreme law in South Africa and therefore when it comes to the drafting and interpretation of legislation, all legislation must comply with the South African Constitution. Section 39(1) of the Constitution provides that when the Bill of Rights is interpreted, the legislature or court or any other tribunal may consider foreign law and it must consider international law.[16]

Part 1: An overview of the legal pitfalls in respect of online B2C purchasing within the context of the South African law

In part 1 the focus will not be on a discussion of the various issues relating to online purchasing but the emphasis will be on the problems that can be experienced with online purchasing. These problems are embodied as legal pitfalls.

3. Understanding the problems in respect of an online contract

3.1 Introduction to the online contract

Central to online purchasing, is the legal relationship between the contracting parties, namely the consumer (offeror) and online merchant or vendor (offeree). The legal relationship is embodied in an online B2C contract of purchase. Establishing the validity and enforceability of the contract of purchase is the starting point in respect of B2C e-commerce.

A contract of purchase may be defined as an agreement that creates legal obligations which is, or intended to be enforceable in law.[17] An online contract of purchase means that the contracting parties made use of electronic communications to conclude the contract of purchase. This means that the parties moved from a physical medium, which consists mostly of paper-based, face-to-face negotiations to an electronic medium which is a global, paperless, faceless and in many instances, cross-border conclusion of a contract.

2.2 Sources of an online contract

The sources of the online contract are the South African common law (unwritten law that derive from the Roman-Dutch and English law) and legislation, namely the ECT Act.

In general the national laws of a country govern the main aspects of contract law and that is also the legal position in respect of the South African law of contract. The International Chamber of Commerce (ICC)[18] supports freedom of contract as a general principle that should drive decisions in respect of choice of law and forum. In a nutshell,[19] a binding contract comes into existence when two or more parties with appropriate legal capacity reach consensus regarding the terms of the agreement. Consensus is expressed by means of an offer made by the offeror and acceptance by the offeree.

2.2.1 Common law requirements

The South African law of contract requires that the following common law elements of a contract be present for it to be a legally binding agreement between parties, namely the capacity to act, consensus, lawfulness and physical possibility.[20] If the electronic communication between two or more parties complies with the common law requirements for a contract, then it may be inferred by taking cognizance of the provisions of the ECT Act, that a valid electronic contract of purchase has been concluded.[21]

2.2.2 Brief overview of the provisions of the ECT Act

Chapter III of the ECT Act consists of two parts and addresses the following aspects:

i. Chapter III part 1 confirms that a valid online contract may be concluded by means of an electronic communication.[22]

Normally the online purchasers in a B2C contract do not sign the contract but express their intent to contract by clicking the mouse on a specific icon on the screen. The ECT Act[23] provides that such conduct constitutes a valid purchase and sale agreement, although an electronic signature[24] was not used. This conduct can be compared to the use of click-wrap (web-wrap) and shrink-wrap agreements. Although there has been no court case in South Africa on the validity and enforceability of shrink-wrap and click-wrap contracts, click-wrap agreements should be enforceable. The South African courts may, in respect of shrink-wrap agreements, follow an approach similar to that of the United States courts that take a cautious approach to shrink-wrap contracts by evaluating the facts on the basis of each case.[25] It is advisable for a South African based website to make use of click-wrap agreements in the light of the United States judgment, Specht v Netscape Communications Corp[26] where the court stated that a click-wrap contract used by a software company was invalid and unenforceable.

ii. Chapter III part 2 consists of the so-called default provisions. These provisions are only applicable where the parties in an online contract of purchase did not agree on the time and place of contract conclusion. In the latter instance, time and place will be determined by section 22(2) of the ECT Act that provides: "An agreement between parties by means of data messages is concluded at the time when and place where the acceptance of the offer was received by the offeror." After much debate,[27] it has been accepted that the absence of a contractual provision in respect of the place and time of contract formulation, the information (reception) theory is applicable and not the expedition (postal) theory. The contract is formed in the country (place) where the offeror (buyer) receives the acceptance, in other words, where the offeror's computer is located. E-mail acceptance is deemed effective from the moment that the e-mail drops into the recipient's mailbox and not when it is actually read. Snail[28] considers section 22(2) a modified version of the information (reception) theory. It is interesting that South Africa deviated from the UNCITRAL Model Law on E-Commerce that does not prescribe such a stipulation as to not interfere with the existing national laws of the various countries.[29]

2.3 Effect of international law and foreign law

2.3.1 International law

In accordance with section 39(1) of the Constitution, a South African court must take note of the international law when interpreting statutory legislation. Similarly the international law plays a role in respect of the validity and enforceability of electronic contracts.

The United Nations Commission on International Trade (UNCITRAL) adopted in 1996 and amended in 1998 the UNCITRAL Model Law on E-Commerce[30] to assist countries in drafting and enacting laws to enable electronic contracting. In 2001 the UNCITRAL Model Law on Electronic Signatures (UNCITRAL Model Law on E-sign)[31] was drafted. The United Nations Convention on the Use of Electronic Communications in International Contracts[32] followed the two Model Laws. The United Nations Convention aims to harmonize the provisions of the two Model Laws to form an international law instrument that provide guidance on electronic cross border contracts.

It is important to note that although the two Model Laws and the United Nations Convention on the use of Electronic Communications in International Contracts are not legally binding on South Africa, it influenced the drafting of the ECT Act and as already indicated, form the basis of many provisions in the ECT Act that addresses the recognition, validity and enforceability of the electronic contract. The latter has the benefit of aligning the South African law of online contracts with similar legislation worldwide.[33]

2.3.2 Foreign law

Section 39(1) of the Constitution also states that the court may take note of foreign law, which includes foreign case law. To ensure valid and enforceable contracts, it is advisable for the South African website to take note of the United States judgments[34] that stated that disputes may be prevented if the terms and conditions on a website are not only clearly visible on the homepage but before proceeding through the site, the visitor must click on an "I agree" button.

3. Consumer protection

Closely related to a B2C purchase contract, is consumer protection.

3.1 Brief overview of the provisions of the ECT Act

A ?consumer' in terms of the ECT Act refers only to natural persons and does not apply to transactions between suppliers and companies.[35] Chapter VII of the ECT Act contains consumer protection provisions aimed at ensuring trust and confidence in the use of online shopping. A contract may be valid and enforceable, but if it does not provide the necessary consumer protection, the consumer may cancel the agreement.

Chapter VII determines that a business selling goods or services over the Internet must supply the online consumer with 18 specific pieces of information.[36] The South African website must also provide additional information, either required in terms of other South African legislation or which is necessary to protect the organization in the way it interacts with consumers and surfers on its website.[37] If the South African e-vendor fails to provide all the information or the consumer did not have the opportunity to review the entire transaction, to correct any mistakes, and to withdraw from the transaction before finally placing an order, then irrespective of the nature of the goods and/or services involved, the customer can cancel the electronic transaction within 14 days of receiving the goods or services in question. If the transaction is cancelled, the consumer must immediately return the goods and/or stop using the services and the e-vendor must refund the payment made by the consumer minus the direct cost of returning the goods.

Since a consumer cannot evaluate the goods online, chapter VII contains a ?cooling off' period of 7 days for goods and services purchased over the Internet for the consumer to cancel the transaction.[38] If the consumer cancels the transaction, the vendor must refund the consumer within 30 days of cancellation.

The ?cooling off' period excludes certain electronic transactions, such as, to name a few, accommodation, transport, catering, the selling of newspapers and provision of financial services. However, the supply of digital goods such as digital music downloads, e-books and software are not included in the list of exclusions. Such goods may be purchased, installed and used by the consumer who may then elect the ?cooling-off' right and return the goods to the supplier. The effect is that the market for digital downloads in South Africa is not profitable.[39]

A South African consumer will be afforded the consumer protection even when contracting with a vendor in a foreign jurisdiction with a different legal system.[40] However, it is uncertain how this provision will be enforced on an international level. It may be that a foreign vendor decides not to do business with South African customers or may, in all probability, ignore this provision.[41]

3.2 Effect of international law

According to Buys[42] the EU favors statutory regulation of consumer protection as opposed to the United States that prefers market regulation of consumer protection (self-regulation). South Africa favors the EU approach and this is reflected in the strong consumer protection afforded in Chapter VII that is very similar to provisions provided in the European Union Directive on E-Commerce 20000/31EC (EU Directive on E-Commerce)[43] and the EU Distance Selling Directive 97/7/EC.[44] The Organization for Economic Cooperation and Development (OECD) published the "Guidelines for Consumer Protection in the Context of Electronic Commerce"boomark / email).