The evolution of trade systems has progressed over time –
- from barter trading,
- to the introduction of currency to facilitate trading,
- to the use of credit cards, which were the beginnings of the era of e-commerce that is widely used today and
- to E-commerce.
E-Commerce covers products and services that are bought and/or paid for over the Internet but are delivered physically, as well as products and services that are delivered as digital information over the Internet.
E-commerce – the production, advertising, sale and distribution of products and services via telecommunication networks – can be divided into five broad categories -:
- the basic internet interface stage where producers and consumers, or buyers and sellers, first interact (often called business to consumer or B2C);
- the ordering and payment stage once a transaction has been agreed upon (B2C);
- the delivery stage;
- the business to business or supply chain stages (B2B) and
- the advertising and marketing stage.
The internet is not a bubble waiting to burst. However, there are differences which are already apparent between industries and across industries. Your competition is coming from new players with lower overheads, no bricks and mortar and no incumbent baggage. This paper will give you an overview of e-commerce in practice and is designed to help you use e-commerce in your business and your clients’ businesses. It will then deal with the law on the Internet and some common specific legal issues.
The Internet Strategy Plan
The first stage of the development of a Web strategy should be a carefully considered plan. It basically tries to address the following questions:
- What types of suppliers exist and which are the most appropriate for me? ( buy versus make principles apply here)
- How do I evaluate partners?
- How do I use my (future) Website to develop relationships with my audiences?
- How much should I expect to pay and how long might my initiative take?
- What’s the process to (re)-develop my site?
- How do I evaluate the experience users will have at my web site?
- How do I drive traffic to my website?
- What are my objectives and how will I measure their success?
- What internal resources will I need and what information must I share?
- What information does a partner need in order to supply a meaningful response and quote?
An internet strategy plan should give detailed answers to above questions which result in a deliverable report containing the following topics:
- a defined internet strategy mapped with your (existing or to be enhanced) business plan. The strategy document should include topics like both upside and downside potential ( SWOT strategies, Return on Investment etc.)
- an implementation plan including resources needed ( human effort, capital investment and so on)
Recent history shows us what has happened with e-commerce to date. Technology companies like Intel , Dell , and Cisco Systems were among the first to use the Net to overhaul their operations. At Intel Corp., Web-based automation liberated 200 salesclerks from entering orders. Now, they concentrate instead on analyzing sales trends and pampering customers. Cisco Systems Inc., handles 75% of sales online. And 45% of its online orders for networking gear never touch employees’ hands. They go directly from customers to the company’s software system and on to manufacturing partners. That helped Cisco increase productivity by 20% over the past two years. The 3 companies are doing a $70 million in online business each day.
The above examples show the benefits of supply chain management systems. They also reflect what is assumed to be a truism in internet strategies – cost savings and management efficiencies will exceed the value of business to consumer (B2C) sales on the internet ($1.3 trillion compared to $1.0 trillion in 2003 according to a recent U.S. estimate).
In June, 1999, the average value per unique internet user to one of the top 10 Web sites was estimated by Ameritrade to be $430 each. Ameritrade used the following market capitalisation values –
AOL.com (46.2 million users) $17,500 million
Yahoo (31.3 million users) $30,707 million
Excite@Home (17.2 million users) $12,944 million
Amazon.com (10.8million users) $18,963 million
This type of analysis assumes that users or customers have an intrinsic value. However, Amazon.com lost $400 million last quarter (Q4 1999) in the course of growing its customer base. And recent data shows that some 3 to 4 million customers have used Amazon only once and/or not revisted in the last 12 months (AFR 28 February, 2000). Moreover, Amazon’s business model assumes sales per customer will increase but that does not appear to be the case. In effect, Amazon.com is selling everything from flowers to books but does not yet appear to haver a profitable line. By contrast, AOL sells internet access and eBay auctions other peoples’ goods and makes a margin as a middleman. eBay is also differentiated from Amazon because it makes a profit, which is suggestive of an emerging e-commerce trend.
Customer service savings on the internet have been estimated to exceed the value of sales, thereby leading to increased productivity and profitability. A Forrester Research Inc. study of financial institutions says internet service costs companies 4 cents per customer on average for a simple Web page query, vs. $1.44 per live phone call. Shifting service to the Net, says Forrester, could let companies handle up to one-third more service queries at 43% of the cost.
The ultimate money-saver, though, is automating service. The idea is to let the Web do for customer service what automated tellers did for dispensing cash. Using software from Motive Communications Inc. in Austin, Tex., companies including Netscape (NSCP) and Dell (DELL) take a digital ”snapshot” of a customer’s troubled computer system, pinpoint the problem, and send repairs over the Web–all without human intervention.
And bricks and mortar is not dead! The Ecomomist said in September, 1999,
“Today, much of that thinking has changed. Convergence is the new religion. With e-commerce in America
alone set to rise from $12 billion this year to $41 billion by 2002, according to Jupiter Communications,
traditional retailers can no longer ignore it. At the same time, and against all expectations, Internet retailers
are being forced to recognise the importance of having a physical presence. Many firms are now betting on
the power of integrated shopping—combining stores, the Internet, catalogues, the telephone and eventually
Already, bricks-and-mortar or catalogue companies that sell online—known as multi-channel
retailers—account for 62% of e-commerce. That is mostly because these retailers are selling
high-value goods such as computers, tickets and financial services. But most of the high-street retailers
have been slow to get online……”
Types of website
On the Web, shopping is easy. Buyers can quickly compare information about products and vendors almost anywhere. Suppliers are only a click apart and an E-mail message away, giving buyers unprecedented influence to demand lower prices, better service–even a direct say in product design. Dell Computer Corp. lets buyers configure their own personal computers and track them through manufacturing and shipping–all online.
Dell said net revenue for the fourth quarter, 1999 grew 31 percent, to $6.8 billion. Fourth-quarter net earnings increased to $436 million. For the full year, net revenue was $25.3 billion, up 38 percent. Sales through dell.com reached nearly 50 percent of revenue and averaged $40 million per day-up from $14 million a year ago-by the end of the quarter. Chief Executive Officer Michael Dell, said,
“Customers are increasingly demanding the type of direct relationship we pioneered in this industry, and the Internet is enhancing that preference. They’re insisting on the efficiency and value of our direct Internet business model, and we believe we’re widening our fundamental competitive advantage in the process.”
“Analysts estimate that U.S. companies alone will spend $200 billion annually on their Internet infrastructures by 2003, a sizeable portion of which will be for server and storage hardware.”
Dell closed the period with six days of inventory, the same as at the end of Q2, 1999.
Compaq Computers drives its customers to its on-line partners’ stores.
Amazon.com -see above
EMUMEDIA is a division of Entertainment World Limited, who have been in educational video distribution to educational institutions for the past 30 years- “Over the years we have added excellent educational products to our collection and now would like to take this opportunity to offer that product for use in the home. We have carefully selected items from the collection making up an exciting mix of video, CD-ROM’s and books covering a wide variety of topics for all age groups.”
eBay claims to be the world’s first, biggest, and best person-to-person online trading community.
eBay is “a giant marketplace, right at your fingertips. Looking for vintage Barbies® or toy
soldiers? Need a faster modem? How about a leather jacket—and a Harley® to go with it?
Whatever you need, odds are you’ll find it at eBay: there are over 1,000 categories and more than
a million auctions a day.”
eBay has not been without its problems –
“Andrew, 13, placed roughly $3.1 million worth of bids on merchandise on the San Jose, Calif.-based Internet auction site eBay.
Contacted at his Warwick Road home yesterday afternoon, the eighth grader said: “It’s sort of weird that it’s so open to everyone. They don’t ask you for your credit card or any proof that you’re over 18.”….
Kevin Pursglove, an eBay spokesman, dubbed Andrew a “deadbeat bidder” and said the company closed the account Monday. Pursglove said eBay had conducted 49 million auctions since its inception in 1994. He said that from January through March, the company auctioned about $541 million of merchandise.
Pursglove said deadbeat bidders — people who bid but have no intention of paying — occasionally use the site. He said credit cards are not required to open an account, and payment is conducted between the winning bidder and the seller. Children younger than 18 are not permitted to bid on merchandise without their parents’ consent, he said.
However, he said, because eBay does not require money up front to open an account, people not willing to pay can bid on merchandise. Successful bidders then negotiate a shipping date with the seller. He said eBay had no plans to update its site.”
Priceline.com is “a revolutionary new buying service where you can save money by naming your own price for the things you need.
Let’s say you want a hotel room in New York City, but you only want to pay $100.Priceline will take your offer to our participating, name-brand hotels in New York City to see if any will agree to your price. If we’re successful, you’ve got the room you want at the price you want to pay!
Since airlines fly with over 500,000 seats empty every day, and thousands of hotel rooms go unsold every night, you can understand why companies would be willing to consider your price. It makes sense for them, and you benefit by getting a great deal! Airline tickets and hotel rooms are just the beginning. At priceline, you can also name your own price for home mortgages, home equity loans, mortgage refinancing, even new cars and trucks!”
“customized business-to-business online auctions for the world’s largest buyers of industrial parts, raw materials, and commodities.
We created online auctions covering approximately $1 billion in 1998, and estimate we saved clients 2-25%.
Since 1995, we have created online auctions for more than 30 buyers in over 50 product categories. More than 1,800 suppliers from more than 30 countries have participated in our auctions. These online markets are real-time interactive bidding events between pre-qualified suppliers that enable buyers to purchase industrial materials and components at true market prices.”
“If you’re thinking of buying anything from a VCR to a new Sport
Utility Vehicle, and want to do some in-depth comparison
shopping first — you’ve come to the right place.
CompareNet has the largest most up-to-date product
comparison information on the Internet. Categories include:
Automotive, Electronics, Home & Garden, Home
Office,Services, Computing, and Sports & Leisure
With more on the way! Anyone can tap into this huge
storehouse of data by simply selecting a product category and
checking off options from a menu of features. A
comprehensive listing of all the available products and models
that meet your criteria will be displayed — including suggested
A portal is a gateway that passes a user through to other destinations. It is a term used for sites that gather links to Internet resources in one place, and are designed to be the first destination on the Web surfer’s journey, the first page automatically loaded when the user double-clicks on their Internet browser icon. Increasingly, all manner of online services, search engines and Web directories are vying to become the all-purpose portal to the Internet — the one-stop shop.
A summary of thr portal/hub distinction is in the Technology and the Law
2.25 To give the information on the Internet structure and make it easier to use, portals
and hubs have begun to proliferate. ……. Portals
generally have customisable news, sports, weather, stocks, yellow and white pages,
driving directions, horoscopes, and shopping.
2.26 While portals have been the trend in the last few years, we are now moving towards
hubs. A hub is a central position from which everything radiates. While portals provide
general interest information without any specific general focus, hubs are more narrowly
organised. To succeed as a hub, a site must surround itself with content, commerce and
community appropriate to one particular audience. The near future will see more and
more specialised legal portals and hubs that are customisable and contain all the
information an individual lawyer would require. ”
Getting paid – SSL, credit cards, direct debits and smartcards.
Most e-commerce sites use SSL (short for Secure Sockets Layer), a protocol developed by Netscape for transmitting private documents via the Internet. SSL works by using a private key to encrypt data that’s transferred over the SSL connection. Both Netscape Navigator and Internet Explorer support SSL, and many Web sites use the protocol to obtain confidential user information, such as credit card numbers. By convention, Web pages that require an SSL connection start with https: instead of http:.
Another protocol for transmitting data securely over the World Wide Web is Secure HTTP (S-HTTP). Whereas SSL creates a secure connection between a client and a server, over which any amount of data can be sent securely, S-HTTP is designed to transmit individual messages securely. SSL and S-HTTP, therefore, can be seen as complementary rather than competing technologies. Both protocols have been approved by the Internet Engineering Task Force (IETF) as a standard.
Encryption is the translation of data into a secret code. Encryption is the most effective way to achieve data security. To read an encrypted file, you must have access to a secret key or password that enables you to decrypt it. Unencrypted data is called plain text ; encrypted data is referred to as cipher text.
There are two main types of encryption: asymmetric encryption (also called public-key encryption) and symmetric encryption. Public-key encryption is a cryptographic system that uses two keys — a public key known to everyone and a private or secret key known only to the recipient of the message. When the customer wants to send a secure message to the vendor, he uses the vendor’s public key to encrypt the message. The vendor then uses his private key to decrypt it.
An important element to the public key system is that the public and private keys are related in such a way that only the public key can be used to encrypt messages and only the corresponding private key can be used to decrypt them.
A digital certificate is an attachment to an electronic message used for security purposes. The most common use of a digital certificate is to verify that a user sending a message is who he or she claims to be, and to provide the receiver with the means to encode a reply.
An individual wishing to send an encrypted message applies for a digital certificate from a Certificate Authority (CA). The CA issues an encrypted digital certificate containing the applicant’s public key and a variety of other identification information. The CA makes its own public key readily available through print publicity or perhaps on the Internet.
The recipient of an encrypted message uses the CA’s public key to decode the digital certificate attached to the message, verifies it as issued by the CA and then obtains the sender’s public key and identification information held within the certificate. With this information, the recipient can send an encrypted reply.
eBay SSL payment methodology
An example of SSL payment methodology is contained at eBay.
When you register with eBay and you plan on listing items for sale you have two ways to pay:
Credit Card on File: You can place your credit card (Visa or MasterCard) on your eBay
account for regular monthly payment. This allows unlimited access to list items as long as eBay
is able to authorize your card for each month’s payment amount.
Pay-As-You-Go: You can “pay as you go” by check, money order or one-time credit card
request. This option allows you to accumulate up to $10 in fees before payment is due. Once
your account accumulates $10 in fees, you will be unable to list any new items until payment is
made or a credit card is placed on your account for regular monthly payment.
To set up automatic billing, the steps are:
1.Go to the credit card submission form.
2.Submit your User ID or email address, password, and credit card billing information.
3.Click the “Submit” button.
4.Your credit card information will be placed on your eBay account within 24 hours of receipt.
You can view your account information online. If you would like to pay by check or money order or
submit a one-time credit card request, you can print out a payment coupon online.
Place or update your credit card on your eBay account
Use this secure form to place your credit card on your eBay account or to update your credit card information for automatic payment of your monthly invoice. The
transmitted credit card information is protected by the industry standard SSL.
Your credit card information will be placed on your eBay account within 24 hours of receipt.
When you place your credit card on eBay for the first time, eBay will attempt to authorize your card. The response from your credit card company will appear
on your account status page as either approved or declined. If approved, eBay will bill your credit card each month for your previous month’s fees.
If you already have a credit card on file with us, you can change or update your credit card information at anytime.
Your credit card will normally be charge 7 to 10 days after receipt of your invoice for the previous mounth’s invoice amount.
Security issues, hackers and firewalls
Security is always an issue, as demonstrated by President Clinton’s February, 2000 online interview at CNN –
“Personally, I would like to see more porn on the Internet.”
However, there has not yet been any recorded case of interception of credit card details during internet transmission. In any event, credit card holders’ contractual arrangements with their bank usually place the risk for unauthorised transactions with the bank provided the unauthorised use is detected by the cardholder in a specified period – usually 6 months.
However, credit card details may be kept on computers which are on the web and are therefore susceptible to attack from hackers. It is advisable to retain credit card databases on stand alone machines or behind secure firewalls
A firewall is a system designed to prevent unauthorized access to or from a private network. Firewalls can be implemented in both hardware and software, or a combination of both. Firewalls are frequently used to prevent unauthorized Internet users from accessing private networks connected to the Internet, especially intranets. All messages entering or leaving the intranet pass through the firewall, which examines each message and blocks those that do not meet the specified security criteria.
There are several types of firewall techniques:
Packet filter: Looks at each packet entering or leaving the network and accepts or rejects it based on
user-defined rules. Packet filtering is fairly effective and transparent to users, but it is difficult to configure. In
addition, it is susceptible to attack.
Application gateway: Applies security mechanisms to specific applications, such as FTP and Telnet servers.
This is very effective, but can impose a performance degradation.
Circuit-level gateway: Applies security mechanisms when a TCP or UDP connection is established. Once the
connection has been made, packets can flow between the hosts without further checking.
Proxy server: Intercepts all messages entering and leaving the network. The proxy server effectively hides the
true network addresses.
In practice, many firewalls use two or more of these techniques in concert. They are a necessary investment for any e-commerce company if it does its own hosting. The alternative is to have your e-commerce servers hosted behind secure firewalls provided by third party e-commerce hosts such as Infobrokers and ECforU.
Insurance may be required by the customer, to insure the goods purchased; the vendor to ensure payment; or the business itself, sometimes to insure the customer against credit card fraud or non-delivery of goods.
FAI Technology Business Insurance is
“A policy which builds on our past innovation in the provision of insurance solutions for small and medium technology businesses. The unique attributes of the policy are based on the “ISR Mk. IV” policy wording with specific extensions such as Computer Virus Cover and Computer Hacker Cover to reflect the unique exposures that the Technology Industry encounters on a day to day operational level. The Technology Business Insurance policy also has the capability of replacing its standard Broadform Public & Product Liability section with the FAI Information Technology Liability Policy for a more comprehensive technology specific insurance package.”
The cover includes:-
Computer Virus Cover – an automatic benefit under the Material
Damage section of the policy that reimburse the cost of reinstating
lost data of up to $10,000, due to a “Computer Virus”.
Computer Hacker Cover – an automatic benefit under the Material
Damage section of the policy that provides cover for loss up to
$10,000, as a result of unauthorised access to the computer system.
Substantiation of Loss – a $1,000 automatic cover for the costs of
substantiating a claim under the policy.
Counterfeit Currency Or Money Orders – a $2,500 automatic cover
in the case of loss due to the use of counterfeit currency or money
Another site is Quicken Insuremarket, where you can get instant auto and life insurance quotes in just a few minutes.
At the Getaway Travel site, insurance is completed online –
“Plan, book and pay for your next business or holiday travel online. Getaway Travel brings you discount fares, accommodation, holiday packages, car
hire, insurance and travel advice.”
The eBay site contains the following FAQ –
“Is every auction/item covered by insurance?
All auctions beginning on or after March 1,1999 will be covered. Final bid amount must exceed $25 to qualify for the program. Only auctions in which both seller and buyer have a non-negative feedback will qualify. The item must be in accordance with eBay’s User Agreement. What is the maximum amount of coverage that I can receive per auction? $200 is the maximum amount of insurance per auction (less a $25 deductible). If a claim is approved, a claimant will receive the lesser of $200 or the final bid amount (less a $25 deductible). ”
Insweb allows the user (in the US) to obtain car insurance quotes online-
“Simply fill out driver, car, and coverage information. Use
our QuotePad to review quotes from leading insurance
companies. Then select your quote and send your data
securely to the company you choose.
Your current policy and vehicle registration have most of
the information you’ll need to complete the form. ”
A number of internet warranty products are available which offer comfort to the user to use his credit card over the internet. Effectively, they are insurance policies purchased by the merchant so they can guarantee if your credit card is used fraudulently as a result of purchasing through the merchant on the Internet, or your goods are not delivered, you will be protected up to a specified value for any one claim.
Advertising and Marketing
No e-commerce plan would be complete without a comprehensive advertising and marketing plan – it would not make any sense to develop or purchase the best web site in the world if no-one knew it was there. There are numerous marketing companies which should be vetted to determine if they can satisfy your needs. the marketing contract should contain specific measurable criteria.
An example of a marketing company is internet.com (http://www.internet.com/mediakit/), which makes the following claims –
“The internet.com Network allows you to target the Internet audience you’re looking for–a hi-tech community of Internet industry professionals, developers, and Web managers. The Network’s Internet specific content assures that your ad dollars are well spent. With 65 award-winning Web sites, 45 e-mail newsletters, 55 online discussion forums, and 52 moderated e-mail discussion lists advertisers can be sure that they can target their marketing message to their desired audience. More than 1.8 million unique users generate over 47 million page views monthly. ”
An alternative is a link exchange arrangement with a company such as LinkExchange ( http://www.linkexchange.com)-
“The web provides advertisers with an unprecedented opportunity to build brand, create new customers and sell products. The LinkExchange suite of advertising services delivers on this promise because each of its offerings is specially customized to meet the needs of unique clients. LinkExchange offers an advertiser unparalleled reach (source:MediaMetrix), an affluent demographic, deep targeting capabilities, quality assurance, convenient reporting, measurable results and the ability to save time.
The key to success on the internet is to have access to the best technology which allows extensive datamining (subject to the relevant privacy laws) and targeted advertising.
Where do internet sales come from?
A report released in August 1999 by Jupiter
Communications shows that less than 10 percent of online commerce
dollars in 2002 will be incremental, and anticipated sales gains will largely
occur in lieu of sales that traditional channels would have captured
otherwise. The research advises that traditional merchants must build
unified ventures that take advantage of their off-line assets—an existing
customer base, a trusted brand name, customer data, and sales and
distribution infrastructure—or risk losing sales to Internet-only merchants.
“With few notable exceptions, traditional merchants’ Internet strategies
have been paralyzed by indecision and the merchants continue to watch
Web upstarts seize the early momentum,” explains Ken Cassar, an
analyst with Jupiter’s Digital Commerce Strategies. “Business leaders have
rationalized that sales generated through their Web site will cannibalize
sales that they otherwise would have captured in their traditional channel,
negating the value of their Internet investment. Since Internet sales largely
represent sales shifted from traditional channels, the Internet is a threat to
existing businesses and must be evaluated accordingly. Merchants must
accept that cannibalized sales are better than lost sales.”
According to Jupiter’s research, only 6.0 percent (or $720 million of the
expected $11.9 billion) of online commerce in 1999 will represent
incremental sales—those that would not have occurred otherwise. Jupiter
estimates that the percentage of incremental sales will grow only slightly,
to 6.5 percent (or $3 billion of the expected $41.01 billion) by 2002, with
growth dependent on merchants’ ability to target offers and promotions.
Product categories, with the following characteristics will become the most
likely to drive incremental sales: maturity, a low price point, high
discretionary basis, high likelihood of impulse purchase, and high product
Business to business supply-chains
E-commerce between businesses is five times as much as consumer E-commerce, or about $43 billion in 1998. And by 2003, Forrester Research Inc. figures it will balloon to $1.3 trillion. That’s 10 times consumer E-commerce, constituting 9% of all U.S. business trade–and more than the gross domestic product of either Britain or Italy. Around 2006 or so, it might reach up to 40% of all U.S. business.
United Technologies Corp. (UTX) decided to try something new in 1998. Once, it would have spent months haggling individually with dozens of vendors to supply printed circuit boards for various subsidiaries worldwide. Instead, UTC put the contract out on FreeMarkets OnLine Inc., a Web marketplace for industrial goods. Bids from 39 suppliers poured in–and the winners managed to slash $10 million off the initial $24 million estimate. Says Ed Williams, vice-president for supply management at UTC subsidiary Carrier Corp.: ”The technology drives to the lowest price in a hurry.”
The internet allows consumers and corporate buyers from all over the world to band together, pool their purchasing power, and get volume discounts. By pooling purchases over the Web, GE divisions get price reductions from suppliers of up to 20% on more than $1 billion worth of goods purchased online.
Specialist suplly chain software houses such as SC21, a Singapore company, create supply chains on the internet –
“The main goal of supply chain management is to integrate and optimize the business and operational functions of an enterprise. With the current business driver for Globalization, shorter time-to-market, higher customer expectations and environmentally “green” products, companies are forced to re-think the way in which they do business in order to streamline their supply chain and be more competitive.”
The Law On The Internet
One of the most useful search engines is found at AustlII, which also happens to be one of the best legal sites in the world. The AustlII site has comprehensively published and indexed all High Court cases since 1947, all Federal Court cases considered by the Court to be worthy of reporting, and most State and Territory statute and case law databases. The AustlII site can be used to search for and find primary content and allows you to either bookmark it or to retain the link in your own interactive data base.
Other useful legal search engines are those contained at
FindLaw (United States Supreme Court),
House of Lords
European Court of Justice ,
the Supreme Court of the United States of America and the list goes on……………………
Some useful NetJustice knowledge database links are –
1. NetJustice Legal Index
2. Intellectual Property and Internet Law
3. Electronic Commerce
5. Resources/Information Technology
6. Intellectual property /Copyright / Computer Programs
7. Professional indemnity insurance
10. Contract / Terms / Implied terms
11. Injunctions / Mareva / General
12. Maritime Union of Australia Dispute
13 Legal search engines
14 Australian Statutes (Companies and Corporations)
15 Practice and Procedure
16 Register of the Available Technologies which may be used by Courts.
17 How to use NetJustice
Globalisation in a shrinking world
Globalisation was well summarised in an article in BusinessWeek e.biz –
“Now You Can Sell Anywhere — and Get Sued Anywhere
Courts are starting to grant jurisdiction for lawsuits far from an E-merchant’s home turf, and that can be costly
While the legal standards in this area are still a bit murky, some guidelines are starting to emerge. For starters, it’s
clear that a passive informational Web site is unlikely to create jurisdiction in distant courthouses. Several judges
have declined to haul companies into their courthouses based on such simple sites. At the same time, however, it
is equally clear that an active E-commerce site that interacts with customers and sells goods will almost certainly
In August, 1997 in its “Tax and the Internet” report, the Australian Taxation Office summarised some of the challenges of the internet
“The application of the existing jurisdictional rules is doubtful
Concepts of jurisdiction based largely on geography, on the domain of nations over land (and sea) are likely to erode.
9.18.2 Existing fundamental tax concepts such as source, residence and permanent establishment can be applied in the Internet environment, but they provide a high potential for tax planning, particularly from defects such as over reliance on form and geographical location. These key concepts are also very uncertain in their application and difficult to administer in a self assessment environment. The Internet provides ample opportunity for jurisdiction shopping in relation to the parking of important sources of wealth (and power) such as intellectual property in low tax jurisdictions.”
Many jurisdictions enact legislation which regulates internet content and would appear to have cross-jurisdictional, indeed, global, reach. For, example, Malaysia enacted the Communications and Multimedia Act, which requires licensing of content providers who provide content to Malaysia.
The law of contract on the web
The general principle is that the source of income derived from a contract is usually where the contract is made. Where an offer is accepted in a particular jurisdiction, the source of income would usually be the place of acceptance. If the offer is accepted by an e-commerce server, the physical location of the server will usually determine the source of the income. However, external factors such as residence of the contracting parties, place of manufacture of the goods or delivery of the service will also play a role. Like “residence”, the issue of “source” is a mixed question of fact and law.
Distributing software via a web site – click wrap licenses
A shrink wrap licence usually comes with packaged software (often encased in shrink wrap plastic). These licences usually state that if you have opened the packaging and have loaded the software onto your computer, then you are deemed to have accepted the terms of the agreement. Arguments have been raised that the contract is actually created when the purchase is made and so the supplier should not be allowed to impose additional contractual terms on the customer, at a later time.
In ProCD v Matthew Zeidenberg & Silken Mountain Web Services Inc, United States Court of Appeals For the Seventh Circuit JUNE 20, 1996 , the Court held,
“Must buyers of computer software obey the terms of shrinkwrap licenses? The district court held not, for two reasons: first, they
are not contracts because the licenses are inside the box rather than printed on the outside; second, federal law forbids enforcement even if the licenses are contracts. 908 F. Supp. 640 (W.D. Wis. 1996). The parties and numerous amici curiae have briefed many other issues, but these are the only two that matter–and we disagree with the district judge’s conclusion on each. Shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are un- conscionable).”
Similar issues arise in relation to click wrap contracts, usually used in Internet transactions. Click wrap contracts are commonly created by e-mail when a customer who must indicate his agreement to the terms of the contract clicks on a button stating “I agree” or similar.
Traditionally, two or more parties enter into a contract before the customer takes possession of the purchased goods. The terms of the contract are negotiated and sometimes recorded in a written agreement. In comparison, the licence terms and conditions for a click wrap agreement are often not provided until the time of installation of the software that has been previously purchased. It is debatable whether the contract arose when the software was purchased or later when the customer agrees to the terms of the click wrap agreement, which may not be displayed until the software is installed. The notion of agreeing to contractual terms by clicking your mouse rather than by written signature challenges the traditional concepts of contractual agreement.
An example of clickwrap Terms and Conditions of use is at the Getaway site.
Intellectual property and restrictions on use of content on the network
User licence to ninemsn
Advertising, links to third party websites and e-commerce offers
Disclaimer and limitation of liability
Use of information gathered on the Network
Trademarks of ninemsn and its Affiliates
Specific terms relating to ninemsn’s partners and suppliers….”
In Hotmail Corporation (“Hotmail”) v Van Money Pie Inc (“VMP”) decided in April 1998, a Californian Court found that customers were bound by terms and conditions detailed at Hotmail’s web site as a result of having clicked on a button marked “I agree”. The Court issued a preliminary injunction to prevent VMP from using Hotmail’s services as a result of VMP’s breach of Hotmail’s terms and conditions, which it had an opportunity to review.
VMP sent spam advertising allegedly pornographic material and configured the return address for their e-mails to falsely indicate that they were sent from a Hotmail e-mail address. Hotmail provides free e-mail services subject to the term that, amongst others, that Hotmail e-mail accounts will not be used to send spam. As a result of receiving complaints from recipients of the spam, Hotmail sued VMP to stop them from sending spam that stated it came from a Hotmail account, and from using Hotmail accounts as mail boxes to receive to replies to the spam. More recently, Hotmail is infamously known for the fact that the same email system allows hackers to easily access other users’ mail (“the worst security breach in Internet history”)
Another US case which discusses the validity of contracts formed online is CompuServe Inc v Patterson 89 F.3d at 1265. The US constitution requires that there is more than a minimal connection between the defendant and the place where a law suit is filed. In this matter, Patterson, a software developer who lived in Texas, entered into a Shareware Registration Agreement with CompuServe, who are based in Ohio by typing “Agree” at various places in the on-line agreement. The Court found that non residents can be sued in a State if they transact business there. It was held that although Patterson had never been to Ohio, that there were substantial ties between Patterson and Ohio due to computer transactions such as Patterson’s subscription to CompuServe and its shareware registration agreement. The Court decided that the contracts should be governed by Ohio law. The case was distinguished in MILLENNIUM ENTERPRISES, INC. v. . MILLENNIUM MUSIC, LP, where the defendants “consummated no transaction” and have made no “deliberate and repeated” contacts with Oregon through their Web site.
In the US, revisions to the Uniform Commercial Code are being drafted, which will enable easier enforcement of shrink wrap and click wrap licences. Of particular relevance to software transactions is the proposed new Article 2B. It is anticipated that, if adopted, this article will serve as guidance for Courts interpreting various types of electronic software licences. The UCC can be viewed at
Draft Article 2B SOFTWARE CONTRACTS AND LICENSES OF INFORMATION is at
The electronic commerce rules are contained in Sections 2B-105 through 2B-120, in addition to some definitions (e.g., Section 2B-102, conspicuous) and various contract formation rules (e.g., Section 2B-204). This group of sections reflects several policies.
1.The parties must be able to use electronic authentication (Section 2B-102(3): authentication encompasses the idea of signature) and electronic records, rather than just signed papers, and to engage in transactions all or part of which will be established by automated systems (“electronic agents” as defined in 2B-102).
2.There must be fair allocation of risk reflecting that licensors and licensees of information will vary in terms of their sophistication and economic power. Thus, while Article 2B creates an important new consumer protection in 2B-118, there are no stated dollar limits limiting risk and favoring one or the other party. The “deep pocket” here may be either the licensor or the licensee. The risk allocation is, in part, in Section 2B-116 and 2B-115.
3.The legal protections for electronic commerce must be technologically neutral. This is reflected in the rules on what is the effect of an agreement to follow a procedure to identify a party (described as an “attribution procedure”) or to detect errors in electronic records (Section 2B-118).
Further information at White SW Computer Law
Bullet Proofing your Internet Contracts
The customer should be made aware as early as possible that any transaction between the parties is subject to the terms and conditions of the click wrap agreement. The terms and conditions should be prominently displayed to the customer in a clear and concise way so that an average person can understand the nature and terms of the agreement, before they have agreed to same;
The customer should be requested to accept or reject the terms and conditions by typing “I agree” or “I do not agree” or by clicking on buttons stating “I agree” or “I do not agree”;
If the customer does not accept the terms and conditions by a positive act, the sale should not proceed;
The customer should be given notice at the time of purchase that the transaction is subject to the click wrap agreement.
The supplier’s terms and conditions should include all standard contract terms such as limitation of liability, warranties etc to limit its contractual obligations.
Resolution of disputes and arbitration
The purpose of the WIPO Arbitration and Mediation Center, which was established in 1994 as part of the International Bureau of the World Intellectual Property Organization (WIPO) in Geneva, is to offer arbitration and mediation services for the resolution of commercial disputes between private parties involving intellectual property. The dispute resolution procedures offered by the Center, which lend themselves also to other types of commercial disputes, constitute alternatives to court litigation.
The Australian Commercial Disputes Centre website contains many standard arbitration clauses –
“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules [or the Rules of the London Court of International Arbitration (LCIA) or the International Chamber of Commerce Rules of Arbitration (ICC) or Sydney Maritime Arbitration Rules and Terms (SMART)], which Rules are deemed to be incorporated with reference to this clause….”
Taxation on the Net
This topic is dealt with comprehensively by Robert Gordon, Barrister -at -Law, in a paper at http://www.ecforu.com/
However, it is worthwhile noting the following observation in the ATO Tax and the Internet Report:
“Disintermediation eliminates intermediate “middlemen” businesses which are a significant leverage point for tax collection. These intermediaries are also sources of independent information about transaction values and the identities of parties to a transaction. A reduction in tax collections from permanent establishments and foreign subsidiaries is also probable.
Disintermediation and the reduction of leverage
In the physical distribution chain from a foreign manufacturer, through an Australian importer to an Australian customer, the Australian importer is an intermediary who would be responsible to paying Sales Tax, Royalty withholding tax, if appropriate, and Customs duties.
Using electronic commerce technologies the Australian customer could make direct contact with the foreign manufacturer via the Internet and arrange for the goods to be shipped, by mail or courier, directly to the customer. In this circumstance the Australian customer would be responsible for the Sales Tax, Withholding Taxes and Customs Duties that might be payable.
However it would be practically difficult to enforce the payments of the taxes and duties if the number of consumers was very large. The leverage point of the Australian importer has been removed.”
These concerns about the disintermediation effect created by the internet were a powerful policy consideration behind the drive to replace the Sales Tax regime with a GST imposed on retail sales. Whether the new regime cures the problem is yet to be seen, but at least the problem from a revenue perspective has been clearly identified –
“The practicalities of enforcing sales tax and customs duty differ considerably between the case of a container load of goods imported via a registered importer / wholesaler on the one hand, and several thousand end users who have ordered goods from overseas websites because of cheaper prices on the other.”
Copyright, Trademark and other Intellectual Property issues
This topic is dealt with by Mr Julian Ding of Zaid Ibrahim in a paper at http://www.ecforu.com/
One should have regard to the liability of Internet Service Providers in copyright infringement cases. In A & A Records Inc and Ors v Internet Site known as Fresh Kutz and Anor various record companies applied for an order that the Internet Service Provider which hosts the web site prevent any access to the site to prevent further copyright infringement and to prevent destruction of evidence. Fresh Kutz provided illegal copies of musical recordings at no fee and enabled visitors to the
site to download and create further illegal copies. Despite the fact that the owner of the web site was unknown at the time, the Court ordered, amongst other things, that the owner of the web site or its agents cease infringing the record companies’ copyright, from destroying any record and computer files connected to the web site, and to block access to all infringing copies of musical recordings on the web site.
Web site hosts should expect that Courts will prohibit activities on web sites which involve infringement of copyright. The potential orders against web site hosts for the loss and damage caused by their actions should be borne in mind when adding any material to your web site which may potentially be infringing someone else’s copyright. The host’s insurance policy should cover same.
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29 February, 2000
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Read the information and form your own view. If you intend to rely on anything you think I may have represented to you, consult a lawyer and rely on his/her advice. Have fun.