Electronic Promises: Contract Law Reform and E-Commerce in a ...

Electronic Promises: Contract Law Reform and E-Commerce in a
Comparative Perspective

Jane Kaufman Winn*
Jens Haubold**

US and European Union approaches to revising contract law to accommodate
electronic commerce are diverging. The ad hoc, piecemeal approach to reform in
the US favors deregulation in most contexts, stiff regulation in others, and relies
heavily on case law developments. The comprehensive, broad approach taken by the
European Union places greater emphasis on regulation generally by maintaining
consistency in the regulation of traditional and online markets. Each approach has
produced both deliberate and unintended revisions to existing contract law. While it
is too soon to be sure, the European Union approach seems more likely to produce
sensible outcomes in some contexts, such as consumer protection and the oversight
of the development of technical standards.

1. Introduction
As the volume of electronic contracting continues to increase rapidly,1
legislatures around the world are evaluating existing contract law doctrines in light
of new business practices. Because electronic commerce traverses national
boundaries even more easily than traditional forms of cross-border trade, a
comparative perspective would seem highly advantageous in this context. Yet, the
following analysis indicates that even the US and the European Union, which

* Professor, University of Washington School of Law, Seattle; co-author, Electronic Commerce
(2002, with Ronald Mann); The Law of Electronic Commerce (4th ed. 2001, with Benjamin Wright).
** Researcher and Ph.D. candidate at Heidelberg University, Germany.
1 The US Department of Commerce publishes an annual report estimating the volume of electronic
commerce taking place in the US economy. It found that in 2000, electronic contracts were used in
transactions worth over US$1 trillion, representing an increase of more than 12% compared with
1999 totals. The annual reports can be accessed at
<http://www.census.gov/eos/www/ebusiness614.htm>.
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together control the largest markets for electronic commerce activities, have already
missed important opportunities to learn from each other and to coordinate their law
reform efforts. This paper considers some of the strengths and weaknesses of certain
recent European Union and US law reforms, highlighting efforts that seem more
likely to achieve their objective of promoting the growth of electronic commerce.
A sharp disparity between US and European Union approaches to electronic
commerce first emerged nearly a decade ago in the context of information privacy
rights. A similar disparity, although perhaps of a lesser magnitude, is now emerging
in the US and European Union approaches to electronic contract law reform. The
US has taken a haphazard approach, favoring deregulation and market forces in some
contexts, while clamping down with surprisingly onerous regulations in others.
Because of its lack of any overarching vision of how electronic contracting law
should evolve, it continues to rely heavily on case law developments to make
incremental reforms in contract law. The European Union, by contrast, has worked
to construct a coherent edifice that balances state control and market forces while
harmonizing the law applicable to traditional and electronic commerce. Both the US
and European Union approaches raise thorny problems regarding the degree to which
any substantive doctrines of contract law require reform in order to accommodate
electronic commerce, and those issues are still far from being authoritatively
resolved. While it is too soon to know whether a piecemeal, ad hoc approach or a
sweeping programmatic approach to the problem of law reform in response to
technological innovation is generally better suited to the logic of electronic
commerce, the European Union approach seems more likely to produce a sound
outcome in some areas, such as consumer transactions and the oversight of technical
standards.
2. Electronic commerce and uniform contract law
a) Basic premises
Legislatures facing electronic commerce issues must confront a basic question:
Do electronic interactions require a fundamental reform in this area of law, or do the
underlying principles and structures remain valid? It is highly doubtful, for example,
whether copyright law will survive the age of electronic communication and
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digitalization in its present form.2 Company law or the law on movable property, on
the other hand, will most likely not see their basic structures affected by electronic
commerce.3
For the area of contract law, the answer will be twofold: Both US and
European Union legislators seem to agree that facilitative or enabling rules of
contract law, in particular those from which parties may derogate, may not require
fundamental reform but mere adaptations: There are few reasons why the
consequences of a breach of contract, e.g., should differ depending on whether the
contract was concluded by electronic or by traditional means.
There is much more of a divergence with regard to the modern overlay of
public law that characterizes what was once the law of purely private contractual
obligations. In Europe, a generally stronger public sentiment in favor of regulation
of markets leads legislators to work to update and preserve the content of existing
regulations that limit the scope of private choice in markets. In the US, by contrast, a
profound skepticism regarding the efficacy and desirability of regulation of markets
leads legislators to resist updating regulations that were written with traditional
markets in mind and that might apply to electronic commerce if their formal terms
were modified slightly. The net result of the US reluctance to restate existing
regulations in terms that make their application to electronic contracts explicit is a
gradual diminution of public oversight of market behavior as economic activity
assumes more on-line dimensions. The laissez faire or self-regulatory approach
favored in the US and the more conventionally regulatory approach taken in the
European Union may also reflect in some measure US enthusiasm for new
technology and the much more ambivalent popular attitude toward innovation in the
European Union.4 These different perspectives lead to diverging approaches to
contract law reform with regard to electronic commerce.

2 See generally, Glynn S. Lunney, Jr., The Death of Copyright: Digital Technology, Private
Copying and the Digital Millennium Copyright Act, 87 Va. L. Rev. 813 (2001).
3 Of course, the use of electronic communication and electronic registries may become common in
company law and property law as well. However, the legal mechanisms to establish a company or a
security right will likely remain the same whether registered electronically or in a paper register.
4 See generally Misha Glenny, How Europe Can Learn to Stop Worrying and Learn to Love the
Future, Wired 9.02 (February 2001), available at
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b) US codification efforts
In the US, efforts to codify the law governing electronic contracts have met
with mixed success. The federal Electronic Signatures in Global and National
Commerce Act and the state Uniform Electronic Transactions Act,5 have been very
successful, largely because they address only a narrow range of all the issues raised
by technological innovation in contracting practices. An attempt to codify the law of
software licensing, the Uniform Computer Information Transactions Act (UCITA)
included some provisions that would have regulated software licenses formed using
electronic media and might have been applied by analogy to other contexts. UCITA
has been hugely controversial, however, and seems very unlikely to achieve
widespread acceptance.6 Among the controversial provisions of UCITA were those
making enforcement of standard form contract terms easier, and validation of post-
payment disclosure of material terms in consumer transactions.7 This approach is in
direct conflict with that taken in the European Union with the Unfair Contract Terms
Directive,8 which generally limits the enforcement of standard form contract terms,
and the Distance Selling Directive, which requires full disclosure of terms prior to
the formation of the contract and payment by a consumer.9
In the absence of real prospects of codification, the US law of electronic
contracting is developing in fits and starts through the development of judicial

<http://www.wired.com/wired/archive/9.02/misha.html?pg=1&topic=&topic_set=>.
5 Discussed infra at n. 69 ff.
6 In 2002, only 2 states (Virginia and Maryland) had enacted UCITA, but 3 states (Iowa, West
Virginia and North Carolina) had enacted laws to invalidate any choice of law provision that would
make UCITA applicable to a citizen of that state. A neutral panel of experts convened by the
American Bar Association (ABA) to review UCITA issued a report in 2002 finding the model law to
be so flawed it could not recommend the ABA support its enactment in the states, an exceptional
conclusion for the ABA to draw with regard to a NCCUSL model law. The working group report can
be accessed at <http://www.abanet.org/ucita/report_on_ucita.pdf>.
7 UCITA §§ 112, 209.
8 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, [1993] O.J.
L 95/29.
9 Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the
protection of consumers in respect of distance contracts, [1997] O.J. L 144/19, Art. 4 and 5. They are
also in conflict with Article 2:104 of the Principles of European Contract Law which limits the
enforcement of terms not brought to a party’s attention by the contract drafter, Article 2:208 which
would invalidate additional or different terms offered after offer and acceptance if they materially
alter the terms of the agreement, and Article 4:110 which limits the enforcement of unfair terms that
were not individually negotiated. Ole Lando and Hugh Beale (eds.), Principles of European Contract
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precedent, but this does not yet provide very consistent guidance. Because there are
not yet many reported cases dealing with electronic contracts, most lawyers in the
US look to older cases interpreting the significance of ”shrinkwrap” software
licenses (licenses enclosed in a shrinkwrap cover with software disks or CDs and
bearing a legend stating that breaking the shrinkwrap to access the software
constitutes acceptance of the terms of the software license), and telephone order sales
of goods. Many of the cases involve the efforts of the vendor to enforce mandatory
arbitration terms in consumer contracts, terms which would not be enforceable in a
consumer contract in the European Union over the objection of the consumer.10 The
lack of a consistent body of case law analyzing the rights and responsibilities of the
parties to distance contracts, software licenses and by extension, electronic contracts,
seems to reflect the absence of any broad consensus regarding how US contract law
should be adapted to apply to new forms of transactions. There is considerable
support for a laissez-faire approach that would limit many forms of government
intervention in markets by failing to revise law that by their current terms do not
apply to electronic commerce. However, there is also considerable support
preserving a role for government oversight in online markets; the degree of popular
support in the US for government regulation of new technologies became apparent
following the terrorist attacks on September 11. Until some progress is made in
resolving this political controversy, it is unlikely that either a new federal law or a
uniform state law addressing these issues will make much headway.
In early shrinkwrap cases, US courts showed a reluctance to enforce strictly
standard form contracts. In Arizona Retail Systems, Inc. v. Software Link, Inc.,11 the
court held that the shrinkwrap license might be part of the contract with regard to the
first sale of a copy of software. When the licensee placed an order by telephone after
having inspected that first copy and the licensor did not insist in that phone call that
the terms in the form contract were part of the agreement, the shrinkwrap license
terms were deemed not to be included in the subsequent telephone order contract. In
later shrinkwrap cases, however, courts have been more willing to enforce all the

Law, Parts I and II (2000).
10 Unfair Contract Terms Directive 93/13/EEC, [1993] O.J. L 95/29, Annex to Art. 3 (3), Nr. 1 (q).
11 831 F. Supp. 759 (D. Ariz. 1993).
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terms in shrinkwrap licenses. In ProCD, Inc. v. Zeidenberg,12 Judge Easterbrook of
the Seventh Circuit held that a shrinkwrap license included with a CD-ROM
containing a noncopyrightable database was enforceable to limit the rights of the
purchaser of the CD. This ruling overturned the district court’s opinion holding that
the terms contained in the shrinkwrap license were unenforceable because the
purchaser of the CD-ROM had not agreed to them at the time of purchase.13 In
Mortenson Company, Inc. v. Timberline Software Corporation,14 the Supreme Court
of Washington held that the limitation on consequential damages contained in a
shrinkwrap license was enforceable against a licensee who submitted a construction
bid $1.95 million less than it should have been due to a malfunction by the software.
The software license limited the software developer’s liability to the purchase price
of the software. While preparing the bid, the software malfunctioned repeatedly,
each time displaying the following error message: Abort. Cannot find alternate.
Mortenson submitted the bid generated by the software notwithstanding the repeated
error messages, and learned after being awarded the contract that its bid was much
lower than intended.
In cases involving telephone sales of tangible goods, US courts have generally
enforced post-payment terms against the purchaser even though the vendor did not
make it clear that acceptance of printed terms to be received later was a condition
subsequent to the sale of goods contract.15 In Hill v. Gateway 2000, Inc.,16 Judge
Easterbrook held that the preprinted-form contract enclosed with a computer the
Hills had ordered by telephone from Gateway was enforceable because the purchaser
had not exercised its right to return the computer within 30 days if the terms were not
acceptable. In Edmond v. Gateway 2000, Inc.,17 a court stayed the proceeding before
it and required a consumer to submit to arbitration a dispute regarding the adequacy

12 86 F.3d 1447 (7th Cir. 1996).
13 ProCD, Inc. v. Zeidenberg, 908 F. Supp. 640 (W.D. Wis. 1996).
14 140 Wash.2d 568; 998 P.2d 305; 2000 Wash. LEXIS 287 (Wash. 2000).
15 A condition subsequent is an event that extinguishes a duty that has already arisen. E. Allen
Farnsworth, Farnsworth on Contracts, 2nd ed. (1998), § 8.2; Restatement (Second) of Contracts
§ 230.
16 105 F.3d 1147 (7th Cir. 1997).
17 29 Conn. L. Rptr. 456 (Conn. Supr. 2001). Westendorf v. Gateway 2000, Inc., 41 Ucc Rep.
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of the customer service provided based on the terms of a service contract Gateway
had included in the box with the computer. However, in Brower v. Gateway 2000,
Inc.,18 an appellate court in New York held that, although the terms of the preprinted-
form contract were generally enforceable, the arbitration clause it contained was
unconscionable and therefore unenforceable. In Klocek v. Gateway, Inc.,19 the court
refused to dismiss a compliant filed by a pro se plaintiff based on a mandatory
arbitration clause contained in a contract which was enclosed in a box with a
computer. The court rejected Judge Easterbrook’s reasoning in Pro-CD and
Gateway as unpersuasive. If a contract was formed at the time of a telephone order,
then the printed form shipped inside the box with the computer would only be an
offer by Gateway to modify the terms of a contract already formed. Under such
circumstances, the mandatory arbitration provision in the contract would not be
binding on the plaintiff, so summary judgment for Gateway was not warranted.
c) Parameters of electronic commerce legislation in the European Union
The European Union has not yet produced any detailed legal instrument for
electronic contracting that could be compared to the draft legislation produced in the
US such as UCITA,20 or a broad attempt to transpose the UNCITRAL Model Law on
Electronic Commerce into member state law such as UETA.21 The Electronic
Commerce Directive22 mixes public and private law provisions, each focusing rather
narrowly on some specific problems that arise in electronic commerce.23 It is clear
that this directive is not aimed to be the comprehensive and final regulatory
framework for electronic contracts in Europe. To some extent, this may be the
consequence of a failure by the Commission or the Council to take into account
international models or examples such as the UNCITRAL Model Law on Electronic

Serv. 2d 1110 (Del. Ch. 2000) reached a similar result on similar facts.
18 246 A.D.2d 246, 37 U.C.C. Rep. Serv. 2d (CBC) 54 (N.Y. App. Div. 1998).
19 104 F. Supp. 2d 1332 (D. Kan. 2000); later dismissed on other grounds, 2000 WL 1372886 (D.
Kan. 2000).
20 Discussed supra at n. 6.
21 Discussed infra at n. 69.
22 Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain
legal aspects of information society services, in particular electronic commerce, in the Internal Market
(‘Directive on electronic commerce’), [2000] O.J. L 178/1.
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Commerce or the uniform instruments in the US.24 However, the process of
European legal harmonization in electronic commerce seems to be influenced by
other factors:
Long before the emergence of electronic commerce from business to
consumers, the European Union had been very active to anchor strong consumer
protection mechanisms in contract law. The result is a set of directives which
provide the framework for most of the national consumer protection rules: the early
directives on defective products liability25 and on contracts negotiated away from
business premises;26 the directive on package tours;27 the directive on unfair contract
terms;28 more recently, the directives on distance selling29 and on the sale of
consumer goods30 among others. Both the provisions of these directives and their
underlying purposes are not limited to paper world contracts, but based on general
assumptions why consumers may need protection against certain business practices:
Consumers have commonly been presumed to have weaker bargaining powers and
few means to negotiate standard form contracts;31 the consumer is supposed not to
grasp the true value of a contract and the economic impact of his commitment when

23 Discussed infra at n. 41.
24 See Christina Hultmark Ramberg, The E-Commerce Directive and formation of contract in a
comparative perspective, 26 E.L.R. 429, 431 ff. (2001).
25 Council Directive 85/374/EEC of 25 July 1985 on the approximation of the laws, regulations
and administrative provisions of the Member States concerning liability for defective products, [1985]
O.J. L 210/29.
26 Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of
contracts negotiated away from business premises, [1985] O.J. L 372/31.
27 Council Directive 90/314/EEC of 13 June 1990 on package travel, package holiday and package
tours, [1990] O.J. L 158/59.
28 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, [1993]
O.J. L 95/29.
29 Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the
protection of consumers in respect of distance contracts, [1997] O.J. L 144/19.
30 Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain
aspects of the sale of consumer goods and associated guarantees, [1999] O.J. L 171/12; introduction
by Dirk Staudenmayer, The Directive on the Sale of Consumer Goods and Associated Guarantees − a
Milestone in the European Consumer and Private Law, 8 ERPL 547 (2000).
31 For a closer analysis of the original rationale behind the Unfair Contract Terms Directive see
Mário Temeiro and Jens Karsten, Unfair Terms in Consumer Contracts: Uncertainties, contradictions
and novelties of a Directive, in: Hans Schulte-Nölke and Reiner Schulze (eds.), Europäische
Rechtsangleichung und nationale Privatrechte (1999), 223.
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he is addressed in his home by a sales representative; and the consumer cannot see or
test the goods before she buys them through a distance contract.32 Recently, the
justifications given for a high level of consumer protection seem to find support in
economic analyses such as information assymmetries and weak competition.33
There is a broad consensus within European legislative institutions that most of
the rationales of the consumer protection instruments equally apply to electronic
commerce situations. It is also a general understanding that the level of protection in
electronic commerce should not be lower than in traditional paper-based
transactions.34 At the same time, the scope of application of the existing consumer
protection directives extends to all types of contracts whether concluded on paper or
by electronic means. Neither the provisions of the unfair contract terms directive nor
those in the directives on distance contracts or on the sale of consumer goods are
restricted to paper documents. The directive on distance contracts even gives an
example for explicit “cross-sectional” consumer protection legislation: Its drafters
clearly had in mind contracts concluded by the use of new media.35 Nonetheless,
they decided not to limit the scope of the directive to online contracting, but to
extend it to all contracts concluded without personal contact on the basis of an
organized sales and distribution system. This directive is a clear example of
European efforts to coordinate the rules for both electronic contracts and contracts
concluded through other, more traditional means of communication. Thus, European
consumer protection law has been “technology neutral” from the very outset.
Electronic commerce in Europe is not taking place in an lawless space or “legal
vacuum” that would have to be filled by broad legislation. As a consequence, to
legislate for consumer protection in electronic commerce on a European level can
only mean to harmonize and eventually adapt the existing instruments and to fill

32 Distance Selling Directive 97/7/EC, [1997] O.J. L 144/19, consideration 14.
33 Cf. Stefan Grundmann, The Structure of European Contract Law, 9 ERPL 505, 515, 520 (2001).
34 Council Resolution of 19 January 1999 on the Consumer Dimension of the Information Society,
[1999] O.J. C 23/1, consideration 6: "[...] a necessary condition for establishing [consumer]
confidence and trust is the provision of an equivalent level of protection regarding the new
technologies as is available in traditional consumer transactions [...]; Electronic Commerce Directive
2000/31/EC, [2000] O.J. L 178/1, consideration 11.
35 Not primarily the Internet which had not been developed for business services before 1997, but
electronic mail, fax, teleshopping or automatic telephone order systems; cf. Distance Selling Directive
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remaining gaps, but not to proceed to a complete codification of electronic consumer
contracts.
The other factor to be considered is the level of harmonization of contract law
which the European Union has achieved before the emergence of electronic
commerce. This landscape of European contract law can be divided in two
characteristic areas:36 Those mandatory rules of contract law which can be seen as a
reaction to market failure − like labour law, antitrust regulations or consumer
protection − are broadly harmonized or even standardized within the European
Union.37 Here, European legislation for electronic commerce can be based upon a
well-developed and detailed structure. National legislation in this area is strictly
limited by the Treaty provisions establishing the internal market.
The situation turns out to be very different for the area of „facilitative“ contract
law, meaning all those rules which provide a fall-back framework on which contract
parties may rely in cases where they have not agreed otherwise in their contract.
This „general“ contract law − like the rules on conclusion or avoidance of contracts,
on performance or breach − has still remained a national affair until now. A uniform
European model for national legislation comparable to the US Uniform Commercial
Code does not exist, and a fully harmonized European law of contracts or a European
civil code have not yet evolved beyond the project phase.38 It is not even finally
decided whether the internal market actually requires such a level of harmonization
of general contract law39 and whether the European Union has the competence for
it.40 In this situation, it would seem rather daring, if the European Union decided to

97/7/EC, [1997] O.J. L 144/19, Annex I.
36 Cf. supra at n. 3 ff.
37 Grundmann, supra, n. 33 at 517 f.
38 Peter-Christian Müller-Graff, Gemeinsames Privatrecht in der Europäischen Gemeinschaft (2nd
ed. 1999), 9, 27.
39 See Communication from the Commission on European Contract Law of 11 September 2001,
COM(2001) 398 final, and the Summary of responses to the Communication on European Contract
Law, both available at
<http://europa.eu.int/comm/consumers/policy/developments/contract_law/index_en.html> (visited
May 10, 2002). See also the proposals for a system of European contract law on the basis of the
conflict of laws rules by Grundmann, supra, n. 33.
40 For positive answers, see Jürgen Basedow, A Common Contract Law for the Common Market,
33 Common Market Law Review 1177 (1996); Arthur Hartkamp e.a. (eds.), Towards a European
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