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New Jersey Law Journal

September 30, 2002

HEADLINE: Help Yourself When It Comes to Internet Contract Breaches
Self-help remedies are useful when dealing with Internet and e-commerce legal difficulties

BYLINE: By Jonathan Bick The author is of counsel to Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer & Gladstone of Roseland and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of 101 Things You Need To Know About Internet Law (Random House 2000).

The rapid and robust communication provided by the Internet and the anonymity provided by e-commerce continue to retard the application of traditional judicial contract remedies. As a consequence, the nontraditional legal remedy of self-help is increasingly being embraced to deal with legal difficulties associated with the Internet.

The legal validity of contractual self-help remedies is being expanded by statute and the courts. When used without challenge, self-help does not depend on formal invocation of the judicial system and, thus, provides the rapid resolution that Internet and e-commerce legal difficulties sometimes require. In light of the extensiveness and the rapidity of damage that can be caused when the Internet is employed as a communication device, immediacy is of immense value to Internet and e-commerce users. Contractual self-help remedies are designed by contracting parties to control or prevent contract-breach transactions. The term "self-help" refers to private actions taken by those involved in a transaction to prevent or resolve disputes without assistance from a court, a governmental official or a disinterested third party.

In the past, courts have not normally favored the use of self-help methods to remedy a contract breach because unhindered self-help has great potential to produce unfair results. Courts have found that self-help remedies tended to favor the well-heeled entities over those with few assets.

Recently, however, wealthy entities have successfully used traditional judicial procedures to drain the assets of poor entities in order to ensure unfair results, and courts have not been able to prevent the use of such tactics (for example, when patent litigation is used to stifle Internet and e-commerce startup firms).

Courts would rather enforce remedies, but to avoid unfair results, they are becoming more amenable to self-help remedies. As a result, those who exercise self-help remedies and end up in litigation are more likely to find favorable court treatment.

At the time a contract is formed, the parties may specify what is to be done in the event that either of them breaches the contract. Traditionally, this involves court action.

The situations in which self-help may be invoked are varied. A few traditional examples of self-help include the withholding of rent by a tenant when the leased premises are not suitably maintained and the repossession of goods when payment for them is not timely rendered.

Examples of Internet related self-help include the deposit of Web site software source code with the user or a third party to be used in the event the code owner breaches a license contract (usually due to bankruptcy). Similarly, Web site producers and Internet network management firms are increasingly required to secure surety bonds to be paid in the event of a certified breach.

A software deposit will ensure a party's ability to continue to effectively use a Web site in the event of the other parties' inability to perform. A surety bond, in the form of a performance or payment bond, is a common device in the construction industry that is now being used in the Internet software and network management service industries.

Strong support for self-help is found in Article 2 of the Uniform Commercial Code, where numerous provisions authorize its use. See, for example, U.C.C. 9-503, which permits a secured party to repossess collateral in the event of a borrower's default, and U.C.C. 4-403, which authorizes customers to stop payment on checks. The U.C.C., however, is directly applicable only to certain contracts for the sale of goods.

Outside the sale of goods context, self-help is also recognized and authorized in the Restatement (Second) of Contracts. These provisions are not as helpful as those in the U.C.C. because they are not law, thus, courts are free to ignore their dictates.

Representatives from the Internet and e-commerce sector have argued that traditional rules of contract law do not adequately meet the needs of the Internet in general and the needs of electronic media transactions in particular. These concerns led to an effort to form a new uniform statute known as the Uniform Computer Information Transactions Act.

In short, UCITA gives Internet software licensors the right to include code that disables software when the licensee is in material breach of the license. There are limitations on this self-help remedy, including that the licensee must specifically assent to it in a conspicuous contract term.

In particular, two of the provisions of UCITA, §§815 and 816, refer to a licensor's right to prevent the continued exercise of contractual rights in the licensed information. These provisions have been interpreted to mean that the Internet and e-commerce industry may insert disabling bugs or time bombs in Internet software, or content that disables a program if a licensee refuses to pay for the product or service. The licensor is restricted by not being allowed to use the device without providing at least 15 days notice.

UCITA also states that the licensor may not use self-help at all if doing so would risk personal injury or significant damage to information or property. A licensor who uses self-help improperly may be held liable for damages, and this liability cannot be disclaimed.

One advantage of a self-help contract remedy is the immediacy of the action. A party can act quickly in response to problems if it can avoid seeking judicial remedy or other third-party intervention, both of which typically involve delay.

For instance, the electronic repossession or remote destruction of software code for nonpayment gives the seller the control over the goods without waiting for external authorization. This avoids delays in dealing with the goods, which could frustrate an unlawful use and distribution of the software in question.

Moreover, self-help action is more certain in its immediate result. A party waiting for judicial determination of rights and obligations may not be able to take protective action prior to a decision since the outcome of the judicial process is uncertain. Although a party may have to pay for its decision to exercise self-help, its use produces an immediate result that is certain.

A second advantage of using self-help is the reduction of costs. If the seller electronically repossesses or remotely destroys software code, cost can be minimized.

A third advantage is control. The party that invokes self-help is better able to control the timing and the extent of the remedy than if court action had been sought.

Finally, a fourth advantage is access to a satisfactory solution. It is widely recognized that wealth has created an imbalance in accessing the judicial system in the United States. Individual plaintiffs face many monetary barriers when deciding whether to pursue a claim in court, including the costs associated with finding a lawyer and bringing the case into the judicial process.

Due in part to the nature of Internet and e-commerce funding, participants in the electronic economy have scarce resources available for traditional legal recourse. In short, they may not have the funds to file a complaint, but may have the assets to invoke self-help.

The most serious disadvantage of self-help actions (such as termination of Internet access or destruction of Web site code) is the possibility of subsequent judicial challenge.

There are many circumstances under which the law recognizes a privilege of self-help. One is permitted, without calling upon any officer of the law, to attempt to redress his or her own wrongs or to prevent their occurrence. Such self-action may properly be described as a legal remedy; but it is not a judicial remedy.

It has been argued that self-help should be the preferred remedy for breach of contract. This argument is based on the fact that a damage remedy does not fully compensate a promisee because subjective and unforeseeable elements of damage are noncompensable. Thus, contracting parties face noncompensable losses upon breach, and are susceptible to opportunistic behavior by other parties to the contract.

The self-help remedy ensures a promisee of receiving the promised performance, with all of its subjective and unforeseeable elements of value.

In most cases, parties that resort to self-help have some understanding of their legal rights, which guides the determination as to what self-help to use, when to use it and the amount that is acceptable. A party that uses self-help does so with the backdrop of the judicial system in mind.

For example, a Web site service facing breach by a buyer who refuses to pay may exercise self-help by terminating further Web site update services. The Web site service provider does not seek official recognition of its decision to stop delivering Web site updates; it simply uses self-help to protect its interests. The decision to do so is made with some understanding of legal rights, even if those rights are not expressly relied on.

Due in part to the Internet and the courts' increasingly favorable view of self-help as a way to preserve equitable treatment for those without sufficient assets, parties should be encouraged to create and control their contractual rights and duties. In addition, parties should be encouraged to prepare provisions in their contracts that create legal privileges and powers, the exercise of which may prevent a breach or harm by one party or may redress a wrong that has already been done.