E-vidence of change

CONCERNS about the authenticity and reliability of shipping contracts have existed for centuries. Indeed, the very phrase carta partita, from which charter party is derived, is Latin for 'divided document', referring to the medieval practice of writing contract terms in duplicate on a single sheet which was then divided up so that each part fitted the other. The requirement that the two sheets match up presumably prevented either owner or charterer from altering the terms or challenging the authenticity of the document.

Although the days of the divided document are long gone, the need for authentication and integrity with respect to commercial contracts has remained. In the latter part of the century just ended, these needs were largely satisfied by telex and fax. Twenty years ago, owners, charterers and their brokers used telex on a daily basis to negotiate charters and to fix ships. The telephone was faster, but failed to provide a written record of who said what to whom, leaving the door open for disputes about whether a contract had been agreed and, if so, what its terms were. Telex, on the other hand, provided a written record, complete with the date and time of transmission and proof of receipt by the intended recipient in the form of an answerback.

Nevertheless, the telex was not foolproof. In 1983, a US bank's London office reportedly transferred $13.5m in Colombian government funds on the basis of telexes that turned out to be fraudulent. The telexes bore the correct answerback for the Colombian central bank, but lacked a cryptographic test key. The US bank apparently did not always demand test keys for such transfers and, in this case, fell victim to a scam. The thieves absconded with the money, and a subsequent investigation showed that an answerback could be forged.

Telex was routinely used for contract negotiations and other vital correspondence. The decline in its use undoubtedly had less to do with concerns about the integrity of answerbacks than with the growing use of a convenient alternative.

As the 1980s developed, the use of fax machines encroached on the dominance of telex, leading to a hybrid situation where some companies or brokers preferred fax, while others refused to give up on telex. The cost of fax transmission was generally cheaper and the need to have a full-time operator for a telex machine was eliminated because, with a little instruction, anyone in the office could send a fax, without having to retype documents. But fax raised issues about authenticity and reliability, from a legal standpoint.

It is sometimes difficult to tell whether fax transmissions are complete. If the receiving machine is configured to have a high tolerance of errors, lines in a document can be corrupted or dropped entirely, with no tell-tale sign at either end. One can imagine the problems that could result from the unknown loss of one or more lines of text from a fax sent during the heat of contractual negotiations.

Questions of authenticity can also arise with fax transmissions. The header at the top of a transmitted fax is supposed to indicate the identity of the sender (by name, fax number, or both) but this information can easily be falsified.

Despite these drawbacks, the convenience of fax enabled it to gain wide acceptance as a means of commercial correspondence. However, the pace of technological change and the need for even more speed in communications has dealt a blow to the primacy of fax. Just as telex gave way to fax, it is now apparent that fax has lost major ground to electronic mail.

Unlike telex or fax transmissions, an email message can be sent without any use of paper. The message is typed into a computer and sent electronically to another computer, where it appears on-screen. Only if the sender or recipient wants to preserve the message as a document does it actually need to be printed on paper. This aspect of e-mail may affect how it is viewed by the courts in certain situations.

The legal issues presented for decision depend on what is disputed by the parties. If neither side challenges the existence of a contract, judges and arbitrators will not need to determine whether an agreement formed by an exchange of email messages is legally enforceable.

Interesting issues are presented, however, if one party contends that an agreement based on an exchange of such messages is not legally enforceable. The legal analysis may vary, depending on when the challenge to enforceability is made. For example, if Party A materially changes its position (i.e., relies to its detriment) on promises made in emails sent by Party B, the tribunal could conclude that an enforceable contract exists on the basis of promissory estoppel, without even considering whether email can be the basis of a binding contract.

The more fundamental issue is presented by a party which challenges the existence of a contract after negotiations have been concluded but before performance has begun. Can it be validly argued that, because the communications between the parties consist only of emails, a legally enforceable contract was not created?

Before recent legislation, this issue could have been troublesome for courts or arbitrators deciding cases governed by state law in the US. Nearly all states have a statute of frauds requiring that certain types of contracts be in writing and signed to be legally enforceable. Contracts governed by the statute of frauds include contracts that cannot be performed in less than a year, surety ship agreements and contracts for the sale of goods worth $500 or more.

Does an email contract satisfy the requirements of the statute of frauds? Is it in writing and signed? Courts and arbitrators applying state law would have been confronted with this issue. However, many states have enacted legislation - in some states based on the Uniform Electronic Transactions Act - designed to overcome problems with the enforceability of contracts agreed electronically, including problems related to the statute of frauds.

Further action by the states may not be necessary since a new federal statute, the Electronic Signatures in Global and National Commerce Act, took effect on October 1 this year. The federal statute provides that a contract 'may not be denied legal effect, validity, or enforcement solely because it is in electronic form' and appears designed to overcome the obstacle presented by the statute of frauds on a national level.

Aside from concerns about the statute of frauds, it is difficult to see that there is anything inherent in the nature of an email contract that would render it unenforceable. There have apparently been no court cases in the US that have dealt directly with the enforceability of a contract consisting solely of emails. But in one case, Barman v Union Oil Company, a federal court in Oregon ruled that a proposed written agreement "together with . . . numerous email messages and memoranda" was a contract for purposes of the state's declaratory judgment statute.

Would the same result have been reached if all communications in the case had been email messages? It is difficult to predict the outcome of cases in new areas of the law, but there is no clear reason, apart from the statute of frauds, why such communications could not form a contract, assuming that all the usual elements of a contract (e.g., offer, acceptance and consideration) were present.

Concerns about the lack of a signed writing should not exist in maritime disputes in the US since, except for newbuilding contracts, shipping contracts are not governed by the statute of frauds. Indeed, it is a longstanding rule of US maritime law that even oral contracts are enforceable. Accordingly, there should be fewer concerns about the legal validity of email contracts in maritime law, at least in the US, than with non?maritime contracts.

However, we should not confuse legal enforceability with authenticity and reliability. Like telex and fax transmissions, email can be falsified or spoofed. With respect to authenticity, header information can be forged and the originator of an email message can make it appear that the transmission came from another source. With respect to reliability, it can be difficult for one sending an email to prove that it was actually received by the intended recipient. Senders believes they have transmitted their message, and indeed, they have, but for a variety of reasons it may never be received by the intended recipient. If this message is the acceptance of an offer otherwise supported by (legal) consideration, senders will believe they have performed the final act needed to create a contract, while intended recipients will believe their offer was quietly rejected or is still under consideration.

Despite the recent legislation, the mere fact that email was the method of communication does not necessarily mean a contract was formed. The proponent of the agreement must still prove that the evidence of the contract (e.g., the printed email messages) is both authentic and reliable.

The fact that email transmissions can be spoofed, falsified or misdirected does not mean tribunals should adopt a rule that email agreements are unenforceable per se. Similar concerns exist about telex and fax. Judges and arbitrators should not impede the use of technical innovations by rejecting agreements based on new means of communications. But they should make sure that, if challenged, such agreements pass muster under traditional rules of evidence and contract law.