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A Legal Perspective of that Risky Internet Business

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by Michael Paterson

There is a vast amount of material about the interaction between computers and the risk of legal liability for the consequences of things go wrong. This paper will focus on the legal risks in three main areas:

  1. Common Internet Usage - browsing the World Wide Web and sending and receiving E-mail;
  2. Internet Commerce; and
  3. Internet Web Page Development which is increasingly being used to promote companies and achieve sales.

As well as the risks, the paper looks at some legal and practical precautions that can be taken to limit exposure to risks.

1. Common Internet Usage

1.1 The Common Uses

The most common uses people make of the Internet are:

  1. browsing web pages; and
  2. E-mail messages.

When browsing, people are looking for information, products and entertainment.

Companies are using the Internet to promote themselves and offer goods and services.

Governments are finding the Internet a cost effective way to disseminate information and services.

Individuals put up information about themselves and their interests. The Internet provides the cheapest way yet of getting published. 1.2. Copyright Risks

1.2.1 The risks

The most common risks with browsing and E-mail is breaching copyright.

Browsers are designed to allow the information to be freely copied. Text, graphics, sound and video can easily be copied from an Internet web page. That is the whole idea. To view a page, it is necessary to copy the information from the host computer to your own computer, via several other computers.

Similarly, E-Mail messages or parts of them can easily be copied and re-transmitted or incorporated in other material.

Copying text, graphics, sound and video from the Web or from an E-Mail message is a breach of copyright if done without the permission of the copyright owner, usually the author, the author’s employer is produced in the course of ordinary employment, or a publisher that has had copyright assigned to it.

Some copyright owners reserve their rights with notices. This is probably sufficient, provided the notice is visible and the warning can occur before the material is copied.

The main question is "If there is no reservation of rights, are copyright rights waived?"

In some cases I suggest that there is an implied licence to copy because of the nature of the Internet and everyone’s familiarity with it. I heard recently of some recent US cases on the point, but I have not been able to obtain the information on the Internet at the time of writing this paper.

My own thoughts are that personal use would be ok but not commercial exploitation. This sounds fine, but it produces grey areas, for example, advertising or promotion in a Web page does not involve a "sale" of the copied material, but nevertheless, it involves a form of commercialisation. Should this be precluded. Better to be safe than sorry.

The big trap, however, is that people publish material on the Web that is not theirs to publish. You therefore breach a third party’s rights. Unless you know the pedigree of the material being copied and used, again, it is better to be safe than sorry and avoid using it.

1.2.2 The potential liability

The person that breaches copyright, the copier, will be liable.

The employer of the person that breaches copyright, the copier, will also be liable, if the copying is in the ordinary course of business, or the employer impliedly "authorised" the copying to take place.

Note that the employee is not let off the hook! The copyright owner can sue both. The employer is the more likely target, having more financial resources, but that is not the approach that I take, for example. I like to make as many people as uncomfortable as possible.

1.2.3 Some Precautions

Employers should warn employees not to copy material from the Web unless there is permission to do so.

It is better to copy the URL, rather than the information itself.

Do not sell text, graphics, sound or video copied from the Web. Seek permission to reproduce material. Usually an E-mail can easily be sent.

1.3 Failure to Use the Internet!

If information could have readily been found, it might be negligent to fail to find it using the Internet! This is somewhat scary, but certainly it is becoming a reality for lawyers and their professional indemnity insurers.

It might become a term of the professional indemnity insurance policy that the professional has a personal Internet account and training to enable the Internet to be used!

1.4 Reliance on Internet Information

Relying on information posted on the Internet is risky. It may be negligent for a person to post incorrect information on the Web, but they may limit their liability with a disclaimer. The user of the information should appreciate that it may not be accurate and not use it to make important business decisions without independent verification.

2. Internet Commerce

Internet commerce is increasing daily and is set to become one of the biggest growth areas in the provision of goods and services. Some problem areas that this paper deals with are:

  1. buying goods and services over the Internet; and
  2. making agreements over the Internet.

2.1 Internet Trading

There are two perspectives to consider - that of the buyer and that of the seller.

2.1.1 Let the Buyer Beware!

Is the Internet Secure Enough

The Internet is still perceived as an insecure market place and many people shy away from sending credit card details over the Internet. I have purchased software over the Internet and not had any trouble, but I would be wary about the choice of vendor.

The potential for fraud is greater with the International nature of the Internet, but note that the merchant typically takes the risk in a credit card transaction because if you dispute an item on an account, and can prove that you did not receive the goods you ordered you do not have to pay the amount showing on your statement.

The difficulty is in establishing that you did not receive the goods as ordered. you may not be able to prove that you did not receive the goods or services.

Legal Requirements

Some transactions are liable for stamp duty, especially. transfer of land, mortgages and other securities, shares sales, etc. Usually the purchaser is liable for the payment of duty.

The contract may be wholly electronic, not in writing on paper. So what do you stamp?! A memorandum setting out the terms and circumstances of the contract will have to be created. Luckily, most contracts do not have to be on paper.

2.1.2 Selling Wares Over the Internet

Credit Card Risk

The merchant bares the risk in credit card payments. If the credit card is non-existent or has expired, or is over the limit and no check was made (due to the automatic nature of the Web transaction, for example), the seller will lose.

In the case of electronic goods, the risk is probably outweighed by the convenience of automatic processing. Physical goods should not be dispatched until the payment is confirmed. It is best to advise the customer of this policy.

It may be appropriate to use encryption, electronic signatures or other security measures in different cases if the exposure is great.

It may not be too long before some form of centralised vouching system is created to guarantee that people are who they say they are.

Sales Tax

Some transactions will involve sales tax liability. The seller is usually liable to collect and pay sales tax but may not know of the obligation if a foreign purchaser is involved. The Clinton administration is seeking a tax free Internet, but this is unlikely to occur, particularly where some form of GST is in operation.

You cannot know all the sales tax laws for the world. One trick is to make the purchaser liable so that if the revenue department chases you, you can recover from the purchaser, if you can track the purchase down, or if it’s worth chasing 20,000 customers for $1.00 each!

Product Liability

The Internet is being used to advertise goods and services. Many web sites are set up in the form of mail order catalogues. Orders can be placed for goods and services electronically.

The same rules apply to goods sold over the Internet as to goods sold by mail order. The only main difference is the often international nature of the purchase. The merchant carries primary responsibility for defects in the goods obtained from other suppliers.

Sale of electronic products are becoming more common. Software is notoriously defective. Defective software can result in serious losses. Some liability for consequential loss and damage can be avoided by licence agreements.

The licence agreement should also cover you for accidental infection with a virus and the consequential losses that may result from it. It may still be possible to sue for negligence for not taking proper precautions. It is best to scan programs thoroughly. Implied Terms and Conditions

The Trade Practice Act is applicable to any transaction involving purchases of goods or services by someone in Australia for use in Australia.

Similar legislation, about which you and I do not know anything, will operate in respect of sales to other parts of the world. The provisions are not likely to be much if anything more onerous than our own legislation, so at least ensure that you comply with it.

It may not be possible to effectively limit liability, because of non-exclusion provisions. For automated systems, it might be possible to put the onus on the purchaser, such that they are only able to purchase the goods or services if the laws in their country are no more onerous than ours, but such a provision is likely to be interpreted to be a void exclusion of liability clause. One suggestion is to use the Internet to find out information.

2.2 Contracting Over the Internet

2.2.1 Offers and Acceptances

Be wary of making offers that are capable of acceptance when it may not be able to fulfil the contract due to lack of stock or other reason.

It is best to make the purchaser place a order which you as the seller can choose to accept or advise that you are not able or willing to accept.

2.2.2 Keeping Records

Contracts can be created using E-mail. It is not just the final offer and acceptance that are important to record. All the pre-contractual E-mails that shed light on the negotiations are also important if things go off the rails at a later date. It is important to keep records of all E-mails sent and received.

An organisation needs to develop rules of thumb for determining what to keep and what to discard.

3. Web Page Development

Some of the issues with selling via the Internet have already been discussed. Other problem areas are:

  1. infringement of copyright by using material on the Web page;
  2. giving negligent advice;
  3. making defamatory comments about competitors
  4. security breaches; and
  5. development contracts.

3.1 Content

Pictures scanned from colour brochures used already by the business may not be safe! The owner of the copyright may not be the business if a person was engaged to produce the pictures. The licence to use the pictures may be limited to the publication in the brochure. Any use beyond that may not be permitted.

It is important to vet all material being placed on the Web to ensure that the necessary permission has been obtained. Ensure that the initial contracts to produce text, pictures, sound recordings and video allow the material to be used for all possible purposes.

3.2 Negligent Advice

The rules are the same as for any publication, except that publication is now very easy for all sorts of people and there is a potentially world-wide audience for the advice. The same problems exist, they are just magnified to a large extent.

It must be reasonable for people to rely upon the advice. This will not be the case if they are told with a disclaimer that they should not do so.

I use the following for my Web page: "This material can be used freely for private use, but not commercially exploited. I will seek to recover the profits of any unauthorised exploitation of this material. I am not responsible if you use any material without first consulting us and you lose a lot of (or a little) money as a result. Michael Paterson"

Note also that if hackers or others corrupt your page (such that it contains incorrect information) or electronic products that you have for sale (e.g. by substituting a virus-infected copy of the program), you may be liable if it is shown that you did not have an adequate level of security in place.

3.3 Defamation

Again, the rules are the same as for any publication, except that publication is now very easy for all sorts of people and there is a potentially world-wide audience for the advice.

Defamation can be of persons and businesses. The most likely infringement is inthe area of comparative advertising where a competitor is defamed.

3.4 Development Contracts

There are two perspectives to consider:

  1. those engaging people to develop a Web page for their organisation - the more common situation; and
  2. those doing the development.

3.4.1 Engaging a Developer

Problems that occur are common to all contracts for development of computer programs and systems:

  1. cost and time overruns;
  2. failure in the software;
  3. use of unauthorised material
  4. other contract breaches.

Solid contracts and specifications can help overcome the problems. Make sure that the content used by the developer does not infringe anyone’s rights.

Note that you are primarily responsible for a sub-contractors’ work and although you may have a right of recovery, this may prove to be illusory if the sub-contractor cannot be traced or has no funds.

3.4.2 The Developer

Protection can be obtained from a properly worded contract with reasonable liability exclusion provisions which place the risk with the appropriate party.

Be aware that you may be liable for negligence in respect of third parties who access the Web page but with whom you are not able to contract out of liability! It might be possible for you to require the client to contract out of liability for negligence on your behalf but this is not possible if there is no contract, for example, an advice page which you prepared negligently!

4. Summary

In a short space of time we have covered a lot of material. There are increased risks in using the Internet, but they are far outweighed by the benefits. As with all things in life, if some precautions are taken, the risks can be minimised. Good luck!