Legal Aspects of Online Transactions
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Legal Aspects of Online Transactions
There’s no doubt about the convenience of making commercial and business transactions over the Internet. You can, among other things, make purchases, pay your bills, effect fund transfers, make a bid, or do commodities and stock market trading over the Internet with all these in the comfort of your home.
Electronic business has become a 21st century reality that had its roots in the mid 90s ending the last century. Variously called E-commerce, Internet and E-business, online transactions have been estimated to account for $115 billion at the close of the 20th century, reaching $1.7 trillion in 2004.
Your traditional business model, now referred to as your “brick-and-mortar” stores, while still enjoying brisk sales at the malls, neighborhood corners and 24-hour convenience locations, have joined the rush to have a World Wide Web presence to compete with emerging cyberspace stores.
And for a while, a dot com presence was the darling of stock markets worldwide. Without the usual tangible merchandise and building assets to account for, e-commerce portals have sprung like mushrooms that made millionaires from virtually nothing overnight. Until the bubble burst sometime in the late 90s.
With e-commerce came a slew of issues that have questioned the way consumers and vendors do business with lawmakers dragged into the equation. For sure the phenomenon had lawmakers realizing the laws of the land were ill-versed to handle the various concerns from both sectors.
Are transactions made online legally binding for both customer and vendor? Are consumer and merchandiser rights enjoyed under traditional transactions enforceable in an electronic faceless transaction? Are so-called electronic signatures sufficient to meet current legalities behind a business transaction? What about issues concerning consumer privacy when consumer identities are transmitted over the Internet? Is there enough legal protection against fraudulent claims or simple mistakes made online for both parties?
For a while legislative responses to these issues have been half-hearted, varied and generally had fallen short of enforceability. Criticized as ineffective to handle emerging e-commerce concerns, legislation had to rise to the occasion and over the last 5 years have seen the enactment of appropriate laws to address them. And we’re still just at the beginning of such legislation. Over time they are expected to mature.
Electronic Contracts and Signatures
The bedrock for securing Internet transactions as a legal transaction is the enforceability of electronic contracts that enable a transaction to effect the transfer of goods and moneys via the Internet. A digital signature gives these documents legal stature and is basically any form of electronically generated seal both buyer and seller agrees to use in a contract generated over the Internet. Recently, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) passed the Uniform Electronic Transactions Act (“UETA”).
Described as technologically transparent, the UETA provides a procedural statute that ensures legal acceptance of electronic or soft documents and signatures by mandating their legal equivalence to the traditional tangible manually signed documents. The provisions establish an “equivalence” and impart on electronic records and signatures the same legal standing as manually signed paper documents. All other concerns arising from the creation and enforceability of electronic “contracts” are, like traditional contracts, covered by general contract laws.
The law essentially makes electronically created and signed documents acceptable in a court of law in any dispute case where before they were not admissible.
This admissibility is defined by the attribution rule which makes any electronically signed document attributable to the person who has expressed agreement to the terms and conditions of a transaction by electronically indicating an expressed acceptance thereto. . That is why all online transactions cannot proceed without this acceptance by the consumer.
In addition the EUTA also governs security and control procedures in on-line transactions and prescribes procedures for determining liability in the event of a breach in security.
A digital signature uses encrypted technology created together with the transactional documents and contains features like authentication (proving who the users are), non-repudiation (proving the transaction is made and messages sent to confirm them) and integrity checks (proving that data cannot be altered without detection.). Used to authenticate a system-generated document containing the computer identity and time stamp of use, a digital signature, just like any written signature, is just as vulnerable to hackers and online fraud.
There’s nothing much the law can do against counterfeiting digital signatures and it is worth mentioning that the E-commerce industry has taken itself to task in adopting cryptographic encoding schemes to protect digital signatures as well as using secure server and virtual private networks in transactions done over the net. While some technological weakness remains, almost all e-commerce sites use some form of cryptic digital certificates to protect digital signatures from frauds.
Online Risks of Fraud
One of the biggest headaches for both consumers and vendors is online or electronic fraud. For the most part, mutual trust governs online transactions – something that in a faceless transaction is so easy to abuse.
Online auctions have been fraught with unscrupulous product claims and bids but deliberate fraud is statistically less of a risk in many online purchases. In the US there are about 35 million transactions on EBay which claims a worldwide membership of 22 million registered users. . Most online auctions are honest but the risk for fraud is there. Purchase delivery problems as well as credit and debit card failures and plain misunderstandings between seller and buyer are more widespread than outright frauds. . In other words, the incidence of fraud is quite small for the overwhelming volume of online transactions. But it is still a concern that needs legal protection.
Because the buyer pays first before the purchase is delivered, the buyer faces the larger share of online fraud. To a large extent, the mode of transactional payment online can mitigate much of the risk involved.
The degree with which online payment can be recovered after a transaction is made determines the degree of consumer protection. Credit cards afford the most protection and most online sellers prefer this payment mode over other modes of payments like checks or money orders that still require days to clear. In general, credit card users enjoy a more robust protection and are not liable for transactions made when the card is lost or stolen.
Other online payment systems have made inroads to the e-commerce business offering both consumers and vendors the basic protection they need.
They often have contractual obligation between the parties to give them exclusive privilege to transact over the Internet. Paypal and Ballpoint are the more popular online payment schemes that have dominated most eBay transactions while competing Yahoo and Amazon have their own. Whichever online payment systems are used, the impetus is there to attain a level of security for online transactions while enhancing reliability and commercial efficiency and speed between the buyer and the seller.
Do existing laws have enough teeth to protect both parties and punish the culprit perpetuating payment fraud online? This is where a little more legislative fiat is needed. Current laws like the Regulation Z in the Truth In Lending Act gives protection to consumers but it is still essentially a legal remedy aimed at traditional commercial transactions. Regulation Z provides a legal recourse to consumers against fraudulent charges, merchandise returns and spurious products and services.
Consumer Privacy Rights
Transacting over the Internet requires personal information to be collected and transmitted. This has prompted security concerns over how such private personal data are used. The potential for consumer identity theft is clearly the overriding concern. When your home address, phone number, date of birth and even your unique SS number and card number are taken as a necessary part of any online payment mode, the potential for consumer identity theft of such data transmitted over the telecommunications infrastructure poses a clear threat to consumer security.
It may not be that bad if such data are used for statistical consumer profiling often done by retailers and companies for marketing purposes. But when such data are sold to other parties with the clear intent to create mailing spam and scam the customer, the law needs to step in.
Consumer privacy is taken to mean a user’s control over his private data, the use of such data and their disclosures to other parties. Secure networks and cryptographic schemes used in the transmission of such information may afford the consumer some peace of mind every time he makes an online transaction. US laws and those of the European Commission have enacted measures defining encryption of such information. But it is known in the computer industry that anything can be hacked.
The most controversial aspect of online transactions involves gambling over the Internet. US federal laws have made clear at the present time that online gambling is severely restricted or prohibited under pain of prosecution. Online gambling companies face stiff fines and prosecution if their servers are located in the US and US consumers run the same risk when they place bets on line. Even card companies do not support such transactions when originating in the US.
There are of course some loopholes and you can count with your fingers those that have been prosecuted thus far. But until new legislation is enacted to reverse the tide, online gambling remains illegal in the States.
Conclusion on Legal Aspects of Online Transactions
Electronic commerce is a 21st century reality. Businesses have little choice but to adopt World Wide Web technologies to further their marketing presence and enjoy a border less market. So much new knowledge needs to be learned to conduct the novel ways of doing business over the Internet.
Technology driven at its core, online commerce requires rethinking and implementing strategies so that vendors and sellers, suppliers and clients can enjoy the convenience and efficiencies afforded by Internet commerce with the least security problems and most that local laws can support.
Social, ethical and business issues abound. And legal concerns have plagued e-commerce over the last decade. For sure a lot of legislation is still in the works to protect both consumers and vendors in this new age of commerce. There are already efforts recognizing this and they can only get better.
Online payment processing companies should ensure clients that their transactions are secured and properly handled.