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contracts

Forget the handshake - cater for the divorce

Posted Mon, 15/02/2010 - 09:46 by shirley

Not so long ago, a person was really as good as their word- or handshake. Agreements were struck and adhered to simply because one’s reputation within the business world, or any other sphere, was at stake. It was known and understood that people had relative freedom to enter into and perform agreements as long as the means and the result of that particular agreement were lawful. It was for precisely this reason that the law (and the respective governments worldwide) sought not to interfere in the freedom of its peoples in the entering into and adhering to the terms of their agreements. In fact in South Africa, only two forms of agreement have historically had to be in writing and signed – a credit agreement and a sale of immovable property.

The times however are changing: people are becoming ever more aware of their perceived rights and with this change in perception comes increased litigation. We are not for a moment suggesting that business associates cannot and should not be trusted. However, how certain can you really be that you have all understood the same thing? Are you absolutely sure that what your co-contractant said is what he/she actually meant? What happens if two or three years later a dispute emerges and none of the original contracting parties are available to provide any insight into the transaction? This is particularly so when there is no one else to witness the transaction in question.

So how does one safeguard against “I said, you said” type disputes developing before the courts and the various other dispute resolution fora that have emerged in recent times? The answer is quite simple- at the start of a relationship, and by this we mean any relationship, while basking in the warm glow of all the benefits that may be achievable- cater for the divorce.

We are continuously surprised by how many of our client’s come to see us because of a transaction that has gone sour, where the transaction is not embodied in any written document. Frequently such transactions are several years old and the people who were actually involved are no longer available to fill in the information gaps, leaving everyone in something of an invidious position. A problem which could be easily solved if at the time the transaction was entered into, the intended objectives and consequences for failure had been embodied in a written agreement – an agreement which the law says is evidence of the arrangements between the parties – and that is exactly the evidence we need to protect your interests.

There is of course much to be said for a properly drafted agreement. We are again frequently surprised by the number of clients who are willing to pour money into litigation, but not into the preparation and negotiation of detailed agreements.

As set out above, agreements are evidence of what the parties intended at the time they entered into an agreement. As such, it is highly advisable to include as much detail as possible in respect of not only what the parties wish to achieve by their agreement but what the consequences for failing to achieve these objectives within a stated (or reasonably determinable) period of time will be. By leaving as little as possible to chance, the parties themselves foreclose the possible areas of dispute, and thereby reduce the risks of litigation.

Could I have a simple 1 page agreement?

Posted Thu, 15/10/2009 - 09:33 by Paul

One of the most common requests I receive from clients is for a "simple 1 page agreement" for some or other business venture. These clients are often dismayed when I inform them that I can't give them a "simple 1 page agreement" (well, unless I drop the font to size 6, use columns and print on both sides of the page) and that a properly drafted agreement will run considerably longer.

I've written about why website terms of use are so important as well as how some prominent companies have gotten it wrong in the past. I took a look at a couple local services' terms of use the other day when I was doing some research for a current project and found that some popular sites don't even have website terms of use. Terms of use are contracts with users and, as such, they must be carefully drafted.

It almost goes without saying that the agreements that a business uses for its ongoing activities should also be carefully drafted. Well, maybe it doesn't go without saying because if it was that obvious clients wouldn't ask for "simple 1 page agreements".

Perhaps it would be helpful to briefly consider what role an agreement plays in a business relationship. For starters an agreement (here I am talking about a written document that is also referred to as a "contract") must record the terms the parties have discussed and reached consensus on. In other words, you and your trading partner must have reached consensus on what each of you is going to do and receive and those rights and obligations must be accurately recorded in the document you will presumably sign. This is critical because if there is ever a disagreement about what those rights and obligations are, you need a reference point that you both agreement is the authoritative reference point.

Another reason why you should have a properly drafted agreement is to safeguard your rights and reduce your exposure to liability. Now it isn't necessary for your agreement to be recorded in a written document for you to have a legally binding agreement (there are exceptions which include agreements to sell land or immovable property and wills). You could quite easily reach agreement orally for to sell and buy a car or enter into a complex joint venture but that isn't recommended at all. People's recollection of oral agreements can fade and parties can easily forget to debate a range of more subtle legal issues. In addition, the law often inserts terms almost by default unless your agreement varies those default terms (many of which may not be to your liking at all or may not suit your needs). A well drafted contract will encapsulate the consensus you have reached with your trading partner and will also contain a number of provisions dealing with issues like:

  • common terms to help simplify interpretation of the agreement;
  • liability;
  • how disputes will be addressed;
  • which legal system will apply;
  • can the parties transfer their rights to other parties;
  • which court will decide disputes and more.

These issues are frequently not considered when parties sit down to chat about how to structure their business activities. They tend to focus on the substantive issues and assume that the rest will be taken care of. These sorts of simplified agreements may well fit on a single page but when you start to consider all the other issues and considerations that have just as much of an impact on your business relationship going forward, the document starts to get a little thicker.

In fact, entering into a business relationship is pretty similar to a marriage in this sense. Anyone who is married out of community of property will probably have signed an ante-nuptial contract and would have been cautioned to have the contract prepared as if the marriage were already ending. This is a particularly disturbing thought, especially when you are about to start a new and hopefully lifelong life together but it is necessary. Like marriages, business relationships can end and catering for the possible end of the relationship could save considerable time and financial costs down the line.

Taking the time to draft an agreement properly will serve the parties far better than a quick 1 page agreement prepared more for the sake of perceived formality and minimal functionality. Clients sometimes mention to me that a lengthy agreement will scare their partners off and my response is almost always that lengthy agreements are commonplace in business and that it is really far better to have your bases covered than to risk disaster later. I think one of the reasons clients are so averse to properly drafted contracts is more because they are traditionally drafted in obscure legalese and are intimidating. A good lawyer will draft a contract in plain language that does what it needs to do without feeling the need to use overly technical language to impress her clients.

The bottom line here is that a "simple 1 page agreement" doesn't serve you. It won't do what it is supposed to do and you risk being terribly exposed if you insist on having one prepared rather than having it done properly.

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An innovative approach to equity in a new business

Posted Thu, 19/03/2009 - 14:27 by Paul

Seth Godin has a pretty innovative approach to how to allocate equity in a new business. His suggested approach represents a stark departure from the usual approach which looks at how to divide up 100% equity in the business. It also represents a challenge to lawyers who would have to capture such an arrangement in an agreement between the parties.

One reason why this represents a challenge is that often a party's stake in a business as a member (in the case of a close corporation) or a shareholder (in the case of a company) is proportionate to that party's interest in the underlying legal entity. In other words a 50% member/shareholder often holds 50% of the equity and exercises an appropriate degree of influence over the business' affairs. Notwithstanding the challenges, this approach seems more sustainable because it caters for changing circumstances which perhaps should, in turn, affect matters like how much equity the parties hold over time.

(Thanks to Matthew Buckland for the link)

Why website terms and conditions matter

Posted Thu, 08/01/2009 - 23:02 by Paul

Trevor (also known as "Twylite") questioned the value of a website terms and conditions in his comment which he posted to my previous post titled "Take website terms and conditions seriously" (at the outset it is important to point out that this post doesn't deal with every issue Trevor raised as my intention is to write about some of these topics in more detail in subsequent posts). It is an important question to ask for various reasons. One such reason is to dispel the notion that lawyers are really high priced snake oil salesmen/women selling a solution in the absence of a problem. Are website terms and conditions really just burdensome codifications of the common law, statute and legal precedent and ultimately a "bad thing for most bloggers" (to paraphrase Trevor)?

The short answer is "no". A properly drafted website terms and conditions (this discussion applies to other legal notices like privacy policies and disclaimers) is tremendously valuable because it provides an effective shield protecting the website owner from a number of risks inherent in online publishing and services and because it helps the website owner better structure a relationship with visitors to the site.

This quick response is based on the assumption that website terms and conditions have any legal force and effect in our law. Trevor refers to American case law as authority for the proposition that website terms and conditions are only really "credible" where there is "conspicuous notice" of the terms and conditions coupled with an "unambiguous manifestation of assent" to those terms and conditions. It appears from Trevor's review of this case authority that website terms and conditions really have little significance in the absence of these two elements. However, as is often the case when basing an opinion on foreign case law, a review of South African law paints a very different picture.

In South African law the Electronic Communications and Transactions Act (I'll refer to this as the "ECT Act below") answers deals with this question in two parts:

“Legal recognition of data messages

11. (1) Information is not without legal force and effect merely on the grounds that it is wholly or partly in the form of a data message.

(2) Information is not without legal force and effect merely on the grounds that it is not contained in the data message purporting to give rise to such legal force and effect, but is merely referred to in such data message.

(3) Information incorporated into an agreement and that is not in the public domain is regarded as having been incorporated into a data message if such information is -

(a) referred to in a way in which a reasonable person would have noticed the reference thereto and incorporation thereof; and

(b) accessible in a form in which it may be read, stored and retrieved by the other party, whether electronically or as a computer printout as long as such information is reasonably capable of being reduced to electronic form by the party incorporating it.”

The ECT Act later provides as follows:

“Formation and validity of agreements

22. (1) An agreement is not without legal force and effect merely because it was concluded partly or in whole by means of data messages.

(2) An agreement concluded 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.”

The effect of these provisions is to give legal effect to what the ECT Act refers to as a data message; specifically contemplates binding contracts concluded through data messages and allows for terms to be incorporated into an contract by reference. We also have a line of cases, commonly referred to as "ticket cases", which support a similar argument. These ticket cases concern the terms and conditions you may find signposted as you enter a parkade, on the back of a hotel check-in card and at the bottom of an invoice referring to terms and conditions of sale located on the reverse. While Trevor is correct that an contract requires that the parties to the contract have what we refer to as a "meeting of the minds", website terms and conditions can and do constitute valid contracts between the website owner and visitors to the website. There are certain conditions for this though, some of which are nicely set out in Acting Judge King’s judgment in the matter of Bok Clothing Manufacturers (Proprietary) Limited v Lady Land Limited:

“It is so, as I have said, that the nature of the document is relevant to the steps required of a party in order to bring the contractual provisions to the other party’s attention. The more contractually obscure or incidental the document, the less likely it is to expect it to contain contractual provisions and the more specific and positive must be the steps be which are taken to bring this to the attention of the other party. Per contra in the case of carriage tickets and bills of lading, where long established usage has created a situation where a contracting party, even an ordinary member of the public, will be taken to be aware of the existence of such provisions on the relevant document, or at least of a reference thereto, and to have knowledge thereof.”

It is likely that a court will view website terms and conditions in a similar light as a result of the provisions of the ECT Act and this line of ticket cases. Website terms and conditions are frequently drafted as contracts between the website owner and visitors to the website. This is why they often include a statement to the effect that if the visitor does not agree to the terms set out in the website terms and conditions, that visitor should not access the website further or that accessing and using the website constitutes agreement with the website terms and conditions (this is how the standard terms and conditions applicable to a parkade work: by taking a ticket and entering the premises your conduct is taken as agreement with the standard terms and conditions governing the use of that parkade). In other words, when you visit a website, your act of visiting the website culminated with the presumption that you are aware that there are website terms and conditions on the website (not necessarily awareness of the specific terms though) is taken as a form of assent to those website terms and conditions, almost as if you signed the website terms and conditions. In this way you have a presumptive meeting of the minds and a binding contract.

As an aside, Trevor referred to the Consumer Protection Bill and mentioned that the reference to "electronic transactions" suggests that the Consumer Protection Bill applies to website terms and conditions as falling under the rubric of an "electronic transaction" and introduces a series of requirements that he argues would mitigate against a 23 page legal document in favour of something much simpler. There are two difficulties with this approach. The first is that a cursory review of the Consumer Protection Bill suggests that it does not necessarily apply to website terms and conditions (I haven't examined the Bill in detail but a reading of the key definition of a "transaction" indicates that an essential element of qualification as a transaction is some form of "consideration" (also defined and loosely meaning payment) in return for goods sold or services rendered, neither of which may apply to a website).

The second difficulty is that a longer document does not necessarily mean it is incomprehensible to non-lawyers. There is a trend to draft legal documents in plain language such that most literate people can read the documents and understand what they are saying. This is a welcome departure from the classic legal documents encrypted with 256 bit legalese. The reason why these documents are often so lengthy is that there are so many legal issues and risks to cater for that the stereotypical 1 page contract is simply not enough.

On the basis that a website terms and conditions constitutes a valid contract, the question then becomes what to put into the document. To answer this question you have to consider what the purpose of a website terms and conditions is. As I mentioned earlier, website terms and conditions help address known legal risks and help regulate relationships with visitors.

When it comes to legal risks, website terms and conditions frequently contain disclaimers of liability (where the website owner and the visitor agree that the owner is not liable for certain things); limitations of liability (where the owner is liable, its liability is limited in some way) and indemnities (where the visitor indemnifies the owner where the owner is held liable for something). Website terms and conditions also deal with content licensing issues (either to reiterate a legal position, for example ownership of copyright, or to vary this position with a content license like a Creative Commons license); which uses of the website are acceptable and authorised, to establish jurisdiction by consent, assert the governing legal system and so on.

Website terms and conditions should arguably aim to encapsulate the contractual relationship between the website owner and the visitor to the website. Therefore they should be as comprehensive as is possible in the circumstances and the end result is a legal framework for the use of and access to the website. The default position established by the common law and statute is frequently unsuitable given a website owner's needs or leaves too much up in the air so website terms and conditions help bring more certainty or change the default position to suit the website owner, where possible. It is therefore critically important that website terms and conditions be carefully considered and well drafted.

When it comes to privacy and the collection of personal information, it is important to note that the privacy provisions in the ECT Act (in particular, Chapter 8) do not supersede the Promotion of Access to Information Act (also known as "PAIA" and one piece of legislation designed to give effect to the Right to Privacy in the Bill of Rights). PAIA deals largely with how people may access personal information held by public and private bodies. Chapter 8 of the ECT Act is a precursor to more comprehensive and dedicated legislation dealing with how personal information (defined in both the ECT Act and PAIA) may be collected and processed. Informed consent is an important consideration when it comes to collection and processing of personal information and privacy policies play an important role in facilitating this. The fact is operating a modern website means that personal information of some description is going to be collected and processed in some way, whether this be manually or automatically. This happens when a visitor to a blog comments and when analytics software collects information about visitors and analyses trends, for example. Website owners therefore need a privacy policy to let visitors know what information is being collected and what it is going to be used for as a precursor for obtaining their consent to this.

While I am on the topic of terms and conditions, it is worth repeating an offer I made to South African bloggers:

In order to assist bloggers we have prepared a generic set of terms of use (incorporating a privacy policy) which are available for free to bloggers. This document is licensed under a Creative Commons license so bloggers are free to share it and pass it around. The blog terms of use is a fairly simplified version of the commercial grade terms of use typically required by larger companies and is tailored for use on blogs. The zipfile includes an explanatory note with a little more information about the terms of use. It is important to note that the terms of use do not represent legal advice on any specific blog or set of circumstances and should not be regarded as such. Consult your lawyer if you require specific legal advice.

Update: The blogger terms of use are also available through Scribd although remember that you still need to add your details to the document before you can use it.

It is very helpful when people like Trevor take an active interest in their legal positions and take the time to comment on and respond to posts and articles on these topics. It is equally important to find out what the legal position is and how you can best protect yourself from the myriad risks people encounter on a daily basis, particularly online.

Take website terms and conditions seriously

Posted Wed, 07/01/2009 - 10:09 by Paul

Social_contract_rousseau_page.jpgOne of the biggest area for concern on the Web today is the paucity of adequate website terms of use and privacy policies. Website proprietors often take a relatively casual approach to these two documents without any regard for the degree to which they could be endangering themselves in the process. There are a substantial number of risks that arise out of publishing content on the Web. These include copyright violations, defamation, improper use of personal information or outright privacy invasions. Terms of use and privacy policies are intended to structure relationships with website visitors and minimise the risk of a dispute arising (and succeeding) due to these risks eventuating. They operate as contracts with and advisories to visitors as well as cater for a range of legislative requirements.

There are a few mistakes that website proprietors make when they prepare terms of use and privacy policies.

  • The first mistake is that they don't prepare both documents. Websites that have any form of interactions with Internet users require both a terms of use and a privacy policy. They can be part of the same document but both a terms of use and a privacy policy must be published to a website. The terms of use will cater for access to and use of the website (as well as vital provisions dealing with liability concerns, dispute resolution and licensing issues) and the privacy policy will deal with the collection of personal information and its processing (legislation increasingly requires that these policies be in place and impose penalties for non-compliance).
  • The second mistake is to copy and paste terms of use and privacy policy provisions that the website owner finds on the Web and which look impressive enough to use. These imported terms are often taken from websites in other countries and their terms of use and privacy policies are written in the context of foreign legal systems. They include terminology that is foreign to local law (and which probably doesn't have any real meaning in the local legal system) or provisions which simply don't apply or just muddy the waters even more.

    Another problem with imported terms of use and privacy policies is that they are often imports themselves, are poorly drafted or are simply inadequate. Cutting and pasting these terms may seem like a good idea and a real time and money saver but they can cost website owners dearly if a dispute ever arises and the terms are either of little assistance or even disadvantage the website owner. It is a little like building your own car based on what you have seen on other cars using dubious spare parts and materials. The car may drive ok, then again you could find yourself in a catastrophic accident.

  • It sounds a little self-serving but another mistake website proprietors make is that they don't consult with their lawyer when they build and publish a website. There is a diverse range of legal issues that apply to websites and it is really important to speak to a trusted legal advisor who is familiar with these issues and who can guide you around the more common pitfalls. This isn't to say that consulting with a lawyer will protect you absolutely from any liability (it won't), but it can help you minimise your risks greatly. It is certainly worth the initial cost making sure that you have a sound legal foundation for what will hopefully become a very successful venture.
  • Yet another mistake is to skimp on terms of use and privacy policy provisions because the end result of a proper drafting process looks like too much text to wade through. Properly drafted terms of use and privacy policies run to many pages because they cater for a substantial number of issues. Cutting back on the page count means cutting out important safety features that are frequently built into these documents. To use the car analogy, this is like taking out the brakes, seatbelts and airbags because it makes the car a little heavier and perhaps a little bigger. The car will be just fine until you need to slow down or protect yourself in the event of a collision. At that point, it will be too late to add these safety features back.

One group of website owners that seems to be overlooked and largely uninformed is the blogging community. It is so easy to publish a blog and post to it that bloggers often overlook the need for the same legal protections more mainstream websites have been using for years. Bloggers potentially attract more liability in certain respects than traditional, static websites and arguably need terms of use and privacy policies even more. Unfortunately bloggers frequently don't make much money from their blogs and can't afford the legal advice larger companies take for granted. It is an unfortunate Catch-22.

In order to assist bloggers we have prepared a generic set of terms of use (incorporating a privacy policy) which are available for free to bloggers. This document is licensed under a Creative Commons license so bloggers are free to share it and pass it around. The blog terms of use is a fairly simplified version of the commercial grade terms of use typically required by larger companies and is tailored for use on blogs. The zipfile includes an explanatory note with a little more information about the terms of use. It is important to note that the terms of use do not represent legal advice on any specific blog or set of circumstances and should not be regarded as such. Consult your lawyer if you require specific legal advice.

Update: The blogger terms of use are also available through Scribd although remember that you still need to add your details to the document before you can use it.

Digital signatures and contracts in South Africa

Posted Wed, 22/11/2006 - 19:13 by Paul

Duncan McLeod asked the following question in response to my post titled "Corporate laws to go digital":

I was wondering what the precedent was for digital signatures in South Africa. For example, is it possible to digitally sign a contract using public/private key type signatures and have that accepted in a court of law?

I was about to respond with a comment of my own and thought I'd rather talk a bit about digital signatures here instead.

The starting point for a discussion about digital signatures in the context of South African law is the Electronic Communications and Transactions Act which was passed in 2002 or so. The ECT Act started with the basic premise that digital communications are no less valid than paper based communications. An important consideration that was taken into account when the Act was drafted is that the Act should be technology neutral so that it isn't quickly dated as technologies evolve. This translated into an Act that sets out certain features and technology neutral requirements for things like digital signatures which can be used to determine whether the signature concerned (in this example) are satisfactory.

One important consequence of the Act is the fact that a data message, like an email, has just about the same effect as a fax or letter in our law:

Information is not without legal force and effect merely on the grounds that it is wholly or partly in the form of a data message. (Section 11(1))

When it comes to signatures the Act makes reference to an advanced electronic signature which is a specific form of digital signature that has been accredited by the Accreditation Authority, or the Director-General of the Department of Communications. An advanced electronic signature is required where a law specifies that a document be signed. What is also interesting is that where an advanced electronic signature is used there is a presumption that the document concerned has been properly signed unless the contrary has been proved.

Where there is no legal requirement for this sort of signature, a 'normal' digital signature can be used to sign agreements, letters and other documents which you may wish to signify your assent to. In the commercial sphere, parties are free to contract electronically and to sign agreements using digital signatures if they wish. It would be up to the parties to the agreement to determine which forms of digital signature they require in order for the agreement to be properly signed. The Act specifies two requirements where the parties to the agreement have not specified the form of digital signature to be used:

3) Where an electronic signature is required by the parties to an electronic transaction and the parties have not agreed on the type of electronic signature to be used, that requirement is met in relation to a data message if-

a) method is used to identify the person and to indicate the person's approval of the information communicated; and

b) having regard to all the relevant circumstances at the time the method was used, the method was as reliable as was appropriate for the purposes for which the information was communicated.

Basically what this means is that the rules that we apply to the signature of an agreement recorded on paper are applied to digital versions as well. When you sign an agreement your signature is a means to identify you as the signatory. Your signature is also applied to a point in the document where it is clear that the presence of your signature signifies your assent to the terms of the agreement.

Should the digital signatures on an agreement or other document be contested in court, the Act says that the mere fact that the agreement is recorded in a data message (or in digital form) does not invalidate the document. What is required is that the court evaluate the integrity of the data message and, most likely, the system it was generated and transmitted on to ensure that the data message has not, for example, been tampered with and was, in fact, signed by the purported signatory and that this has been verified.

When it comes to the admissibility of data messages, generally, the Act provides as follows:

A data message made by a person in the ordinary course of business, or a copy or printout of or an extract from such data message certified to be correct by an officer in the service of such person, is on its mere production in any civil, criminal, administrative or disciplinary proceedings under any law, the rules of a self regulatory organisation or any other law or the common law, admissible in evidence against any person and rebuttable proof of the facts contained in such record, copy, printout or extract. (Section 15(4))

This clause is an example of how the Act seeks to achieve parity between paper based documents and their digital cousins by catering for the inherent features of paper documents that we take for granted and ensuring that users of data messages are given a leg up, so to speak, and empowered to use data messages as replacements for paper documents with confidence.

I seem to recall that the South African Post Office was supposed to have been accredited as an authentication service provider and authorised to issue advanced electronic signature. As far as I am aware, this has not happened and there don't appear to be any service providers authorised to issued advanced electronic signatures as contemplated in the Act. When it comes to ordinary digital signatures, you can obtain these from various certification authorities including Thawte and Verisign (Thawte was started by Mark Shuttleworth and who made his initial fortune in the deal to sell Thawte to Verisign).

This post is really just a summary of some of the provisions of the Act pertaining to digital signatures and their commercial application. The Act is far more involved and deals with issues that go beyond the subject matter of this post.

I am interested if anyone has been using digital signatures either in emails or to sign documents and what your experiences have been so feel free to comment below and let me know.