Author:Contract Formation and Formalities Under Article 2

Kansas Bar Journals

Volume 68.

68 J. Kan. Bar Assn. May, 22 (1999).


Journal of the Kansas Bar AssociationMay, 1999ELECTRONIC COMMERCE IN KANSASContract Formation and Formalities Under Article 2Christopher R. Drahozal [FNa1]

Copyright (c) 1999 by the Kansas Bar Association; Christopher R. Drahozal

Electronic commerce is booming. Computer prices continue to fall, and almost half of all American households own a personal computer. [FN1] Microsoft, a producer of computer software, has the largest market capitalization of any company on the New York Stock Exchange. [FN2] New and established companies are setting up Internet sites that not only provide information about their products but also permit purchasers to buy online. [FN3] Total commerce over the Internet is estimated to have been upwards of $50 billion in 1998, with perhaps three-quarters involving transactions between businesses, and the total will continue to grow. [FN4] Internet sales to consumers are rising as well, with holiday sales during the past year more than triple those in 1997. [FN5]

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As is common when technology changes, the law is having to adapt to this new business environment. Doctrines and statutes that worked just fine with pen and paper sales do not always transfer to sales by mouse clicks. This article attempts to trace a part of the transformation of contract law being worked by the microchip. It focuses on Article 2 of the Kansas Uniform Commercial Code ("UCC") and how Article 2 deals with issues of contract formation and formalities in electronic commerce. Part I provides a brief description of what I mean by electronic commerce. Part II addresses whether Article 2 applies to transactions involving electronic commerce. Part III discusses contract formation issues in electronic commerce. Part IV examines whether electronic communications can satisfy the writing requirement of the statute of frauds. Each part discusses the current state of Kansas law, and also looks ahead to see how pending revisions to Article 2 and the adoption of new Article 2B on computer information transactions would alter the analysis.

I. What is electronic commerce?

Two leading commentators explain that "[t]he term 'electronic commerce' generally refers to the conduct of trade by means of electronic technologies in which computers play some integral role." [FN6] In other words, electronic commerce involves transactions in which the means of transacting are electronic: e.g., when a buyer buys goods over the Internet or by means of electronic data interchange (EDI). [FN7] Because my focus here is Article 2 of the Uniform Commercial Code, I use the phrase "electronic commerce" both more narrowly and more broadly than this definition. "Electronic commerce," as used in this article, has a more narrow meaning because it does not include all forms of trade that may be the subject of electronic transacting, such as financial transactions. [FN8] Instead, consistent with the scope of Article 2, it involves transactions in goods. On the other hand, as I use the phrase here, it has a broader meaning because I include commerce as "electronic commerce" when the subject of the transaction is related to electronics--e.g., when the buyer is buying a computer or software for that computer--even though the means of contracting are not electronic. [FN9]

II. Scope of Article 2

Article 2 of the Uniform Commercial Code applies to "transactions in goods." [FN10] "'Goods' means all things . . . which are movable at the time of identification to the contract for sale." [FN11] Although Article 2 extends to "transactions" in goods, its main thrust is limited to sales of goods. Thus, the short title of the article is "sales," [FN12] and most of its provisions refer to a "contract for the sale of goods" [FN13] or the "buyer" or "seller." [FN14]

For many transactions involving electronic commerce, Article 2 plainly governs. A purchase of a computer monitor or blank diskettes certainly is a transaction in goods. Similarly, a purchase of goods of any sort is subject to Article 2 even if the sale is done through electronic means, such as over the Internet. For other transactions involving electronic commerce, however, Article 2 either does not govern or its scope is less clear.

*24 Leases. One such transaction is a lease of goods, such as computer hardware. In 1991, Kansas adopted Article 2A of the UCC, which governs "any transaction, regardless of form, that creates a lease." [FN15] A "lease" is "a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease." [FN16] Thus, so long as the transaction is a "true lease" and not a disguised sale subject to a security interest, [FN17] the provisions of Article 2A would govern rather than Article 2. [FN18]

International sales. A second such transaction is an international sale of goods. With the growth of Internet-based commerce, international sales of goods will only continue to increase. Many international sales transactions, however, are not subject to Article 2 but instead are governed by the Convention on Contracts for the International Sale of Goods (CISG). [FN19] The United States ratified the CISG in 1986, and it became effective Jan. 1, 1988. [FN20] As a treaty, the CISG pre-empts the UCC when it is applicable. [FN21] The CISG "applies to contracts of sale of goods between parties whose places of business are in different States" when both States are parties to the convention. [FN22] The CISG applies only to commercial transactions; it does not apply to "goods bought for personal, family or household use." [FN23] Thus, a contract for the sale of goods between an American business and a business located in another country that is party to the convention would be governed by the CISG, not Article 2. [FN24]

Licenses of computer software. A third scope issue involves contracts by which parties license the use of computer software. The scope questions are twofold. [FN25] First, is computer software a good? Computer software is an intangible. Parties acquiring software are not interested in the disk (which clearly is a good), but rather the information or instructions contained on that disk. Second, are licenses of computer software "transactions" in goods? Customers purchasing computer software ordinarily do not acquire title to the software but instead obtain a license to use the software. Licenses would seem to be "transactions," but, as noted above, many provisions of Article 2 only apply to the "sale" of goods, [FN26] which Article 2 defines as "the passing of title from the seller to the buyer for a price." [FN27]

Despite these uncertainties, most courts have applied Article 2 to licenses of computer software. [FN28] In Systems Design & Management Information Inc., v. Kansas City Post Office Employees Credit Union, [FN29] the Kansas Court of Appeals concluded that a credit union's purchase of computer software for processing account data was governed by Article 2. [FN30] The court distinguished contracts for the "analysis, collection, storage, and reporting of data" and contracts for the sale of custom designed software, which, at least in some cases, courts have held to be service contracts not governed by Article 2. [FN31] The court concluded that the software was a good: The software was movable at the time of identification to the contract because the credit union was able to attend a demonstration of the software before agreeing to purchase it. Furthermore, the modifications to the program made by the seller were services that were merely incidental to the sale of the software, so that the sale of goods predominated. [FN32]

The issue of the law applicable to computer software would be mooted if Kansas were to adopt new Article 2B of the UCC, currently being prepared by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. [FN33] New Article 2B applies to "computer

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information transactions." [FN34] A "computer information transaction" is defined as "a license or other contract whose subject matter is (i) the creation or development of computer information or (ii) to provide access to, acquire, transfer, use, license, modify, or distribute computer information." [FN35] "Computer information," meanwhile, "means electronic information that is in a form directly capable of being processed by, or obtained from or through, a computer." [FN36] Accordingly, if adopted, new Article 2B rather than Article 2 will govern most transactions involving computer software. Article 2B will not apply, however, "to a copy of software contained in and transferred as part of other goods unless: (A) the goods are a computer or computer peripheral; or (B) giving the purchaser of the goods access to or use of the software is a material purpose of the transaction." [FN37]

III. Contract formation

Article 2 provides that "[a] contract for the sale of goods may be made in any manner sufficient to show agreement." [FN38] Common law contract doctrine generally assumed that assent would take the form of an offer followed by an acceptance. [FN39] Electronic commerce has tested this traditional doctrine in a variety of ways.

A. Shrinkwrap licenses

Vendors of computer...

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