E contracts 101: The Beginners Guide to Contract Law

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E contracts 101 The Beginners Guide to Contract
Law
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There have been two times in my career where
misapplied or changed signatures and contracts
have led to serious consequences. Let me tell you
those stories briefly, to get you in the mood for
a bit of contract law. In the 1990s, my partner
and I decided to setup our own software company.
We were total novices we had never setup a
company before. Soon after we found a third party
who offered to resell our product for us. This
seemed like a great idea. They had sales
experience we had a product, what could go
wrong. A year later, we were in court, battling
for the rights to our own product. The reseller
turned out to be, less than honest. They had
tricked my partner into signing a contract, which
gave them, world-wide and exclusive rights to
our product. I had no sight of the contract and
my partner, a software developer, wasnt very
savvy about these things (I am shaking my head as
I write). The end result was a cost of over
160,000 in court costs. We did win our case, but
we almost lost our company, the court placing an
embargo on sales until the matter was resolved.
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The second contract debacle happened a few years
later to a colleague. He was the CTO of a small
software house. This software company was taken
over by a larger company. He duly signed the
merger contract, which at that time had no
stipulations over intellectual property (IP)
ownership as they were developing new products.
Subsequently, one of the original products became
a killer app. The merger company then attempted
to take the original product copyright. They
attempted to do this by copy and pasting in IP
ownership clauses into the contract. This came
out in a court case over IP. To all intents and
purposes, it looked like my colleague had signed
a much larger scope of clauses, handing over IP
from his original company. It was only after
forensic analysis of the contract and a court
case that the added clauses were revealed as
fake. Again, the case was won, but at a massive
cost and in the end, the entire company went into
liquidation. Elements of an E contract in
Contract Law When you do any business deal, it
is always a good idea to get an agreement of the
various terms in writing. Contracts can be verbal
or in the form of a deed too. The contract forms
a promise. This usually means that one or both
sides will receive some sort of remit as part of
the obligations in the contract you scratch my
back and Ill scratch yours.
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The obligations are enforceable by law. So if you
renege on any of those obligations, you can be
taken to court and be dealt with. This is what
happened in my cases above, but going to court
should always be the last option. In 1988, the
U.S. became a member of the United Nations
Convention on Contracts for the Sale of Goods.
This overriding structure governs the execution
of contract law (warning, good nighttime reading
for insomniacs). E contracts are digital
versions of the old paper contracts The same
essential laws govern them. The parts of a
binding contract, both e contract and paper, that
are vital, are Offer This is the promise
between the parties. So for example, company X
will develop company Ys web application company
Y will own the intellectual property, and will
pay company X 5,000 for this work. The offer
then needs to be accepted. So, in the example
above company Y will accept that they will pay
5,000 (usually with a timescale set). Company X
will develop the site and make no claims at that
time, or in the future, for the intellectual
property generated during development.
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Acceptance This is where both parties accept the
terms of the offer using some form of
communication. An offer isnt automatically
accepted just because you havent expressively
rejected it. Its not quite as simple as that (is
the legal system, ever). There are variants
around acceptance. A unilateral contract has an
acceptance based on the performance or
non-performance of a task. Bilateral contracts
are only accepted once the promise of the
contract has been enacted by both sides. It gets
trickier when you have a situation where someone
accepts a specification that isnt exactly what
they wanted, pays for it, then realizes it is
wrong. Their payment promise means they have
effectively accepted the contract, which is now
complete, even if it isnt what they hoped
for.   Consideration The consideration of a
contract is the items of value that the contract
revolves around. In the example of company X and
Y above those considerations are software code,
IP, and monies. Mutuality of Obligation This is
related to the promises made in the contract. You
should set out the expectations of the promise
delivery, to avoid ambiguity around performance
and subsequent invalidation of a contract.
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Mutuality of obligation is becoming a contentious
area, especially in employment and contractor
contracts. A case involving a Stringfellows
nightclub dancer shows how complex this element
of a contract can be. Legal competency and
capacity This sets out the legal status of the
persons who are entering into the contract.
Certain persons are deemed as being unable to
give clear consent. Typically this would include
minors, bankrupts, mentally incapacitated or
intoxicated people. This element is to protect
those people from entering into something,
legally binding that they may not
understand.   Writing requirement Almost every
U.S. state has created legislature, which
requires that certain contracts must be in
writing (this includes e contract form) to be
legal. It is known as the statute of frauds and
the basic argument is, its always best to get it
in writing. In terms of freelance or contractor
contracts, anything over 500 really needs to be
in writing to be legally enforceable. Once you
have all of these elements in place, you have a
legally binding contract.
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Creating a watertight contract does not have to
be difficult. Here are a few tips to make sure
you get it right first time and avoid your day in
court Be prepared Firstly, you will often find
that you can re-use the same basic contract
structure for each new client. You may make a few
minor changes, but the important clauses, such as
termination clauses, often remain the same. Using
a lawyer to create a robust contract in the first
instance means that future contracts can be based
on this template. Digital signature portals, like
the ApproveMe system, work with the concept of
contract templates for this very reason. Make
sure all stakeholders have read the
contract Once you have your contract, make sure
every signatory of the contract has read it
thoroughly and understands the implications of
the promises and other clauses. They will be
agreeing to them when they add their signature.
Again, ApproveMe helps with this process by
entering the contract in a document management
control system.
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Have all stakeholders sign the contract If you
are using an e contract system, like ApproveMe,
you can make sure this part of the process is
streamlined. The e contract is sent to each
stakeholder, who in turn authenticates that they
are who they say they are, before adding their e
signature on the contract. If and when it comes
to the time that the contract is to end, or
worse, you have a contract breach, you will have
documentary evidence in the form of audit trails
and even revoked signatures, showing who saw the
contract and agreed, on both sides. If you do end
up in court, having an ESIGN compliant e
signature on an e contract will make the process
much easier and therefore much cheaper. Laws
like ESIGN and UETA mean that correctly applied
digital signatures carry the same weight as
traditional pen and ink signatures. Electronic
signature, technology, however can go one step
further and create fully audited trails of
document access, signing, and agreement. It even
protects those all-important clauses from abuse.
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One rock solid contract.. Having an electronic
signing process in place with a legally binding
contract adds a technological barrier to any
contract shenanigans, like I described above. In
those cases, both could have been prevented
altogether using e contracts with e signatures
based on firm contract law. Today, contracts can
be created that are fully audited with built in
non-repudiation of e signatures, i.e. the
e-signatures are binding and tied to the very
content of the document. If any changes are made,
they instantly invalidate the e-signature and the
signatories are alerted. There is no way that the
two cases above could have occurred if an
electronic contract and an electronic signing
process had been followed. In the first case, as
the director of the company Id have been alerted
to the contract creation and signing event as I
could tie contracts into my document management
processes. In the second case, my colleague would
have been alerted to the contractual clause
changes, the signatures would also have been
invalided, voiding the contract
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. E signature laws like ESIGN give us the tools
to make sure that even e contracts can be fully
enforced under contract law.   To make sure your
contracts are enforceable and unable to be
manipulated, check out our ApproveMe E-signature
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