BUSINESS LAW: Do Web-Based Terms of Sale Work?

Vol 29 No 2

By

Raymond P. Kolak and Ryan D. Strohmeier practice at Eckhart Kolak LLC, a Chicago business law firm.

 

Clients use their websites to tell the world about their products and services, and what used to be printed on paper now exists only in electronic form. This also applies to the contracts of clients, such as their terms of sale.

Are web-based terms enforceable? As website-based contract terms are a specifically modern development, case law has only begun to address the issue of their enforceability and application. The first situations addressed by courts were those in which contract terms were posted on a seller’s website but without explicit reference to the terms within the contract itself. Is it enough for a client to post its terms of sale on its website, without more? Does doing so make them automatically binding on anyone buying the client’s goods or services? The answer is no.

How much of a reference is needed? In Manasher v. NECC, 2007 WL 2713845 (E. D. Mich. 2007), a telecommunications service provider sought to enforce an arbitration provision contained in a “disclosure and liabilities” agreement, which was posted on the web. The court held that the disclosure and liabilities agreement was not enforceable because the clause in the paper invoice did not indicate a clear intent that the provisions would be considered part of the agreement between the parties. The court explained that there was no explicit indication that the disclosure and liabilities agreement applied to the service contract between the parties. Cases such as Manasher instruct that the plain text of the contract must do more than simply state the existence and location of similar “disclosure and liabilities” sections intended to be incorporated by the sellers. Rather, the reference in the contract must clearly show that both parties intend to be bound by the web-based terms.

For successful incorporation of web-based terms, a paper contract has to both sufficiently describe what is to be incorporated as well as express the parties’ intent to be bound by it.

A formula for enforceability? In seeking a formula that makes web-based contract terms enforceable, begin with basic contract law principles. According to the Restatement (Second) of Contracts, a contract may consist of several writings if one of the writings is signed and the writings clearly indicate that they relate to the same transaction. The Restatement Comments indicate that explicit “incorporation by reference” is not necessary, but if the connection is dependent on external evidence, the evidence of the connection must be clear and convincing. Owing to the difficulty of establishing clear and convincing evidence of a connection from external evidence, the clearest path to enforceability is the “incorporation by reference” doctrine.

Clickwrap agreements. Clickwrap agreements are those in which a customer must evidence affirmative assent to viewable contract terms in order to gain access to a licensed product, typically through the use of “Agree” and “Disagree” buttons. In Hugger-Mugger, L.L.C. v. NetSuite, Inc., 2005 WL 2206128 (D. Utah 2005), the court held a customer to be bound to a choice of venue clause contained in web-based terms of service by affirmatively agreeing to exactly this type of clickwrap agreement. Whether the customer actually read the terms was irrelevant. Later courts have reinforced the binding quality of terms of sale incorporated by clickwrap agreements.

The lesson from clickwrap agreements is that simply clicking on a button indicating assent, which courts treat as a written signature, will be enough to bind a customer to web-based terms provided the terms meet the standard for incorporation by reference.

No signed contract or clickwrap. When there is no signed contract or clickwrap assent by which web-based terms are clearly incorporated, courts will generally look at other factors, such as the adequacy of notification to the customers affected. Incorporation of web-based terms will not be effective unless there is proof of direct affirmative assent. In Feldman v. UPS, 2008 WL 800989 (S.D.N.Y. 2008), the shipper of a diamond ring was forced to print his own shipping label on a computer at a UPS Store. Because there was proof that the customer clicked a “Print” button but not an “Agree” button, the court ruled there was a triable dispute as to whether the customer had been given adequate notice of the UPS tariff limiting the company’s liability.

Website changes. Web-based terms of sale can be changed by a seller with a single mouse click. If a seller does so, are all of its customers bound to the new terms? In Douglas v. United States District Court for the Central District of California, 495 F.3d 1062 (9th Cir. 2007), a customer alleged that his phone provider had changed the terms of his service contract without notifying him. The provider countered that it had posted the changed terms on its website. The court held that the mere posting of revised terms on the company website was insufficient notice, distinguishing this from other cases in which service providers notified customers of changes to web-based terms of service by written notice.

Changing web-based terms of sale can become complicated. Clients who seek to change the terms must retain a record of the terms that were posted at their website at the time of execution of any contract. In addition, having a separate URL for each successive amended terms of sale, or coding the website to allow a user to reference a complete set of terms by particular date, would lead to a multitude of forms, seemingly undermining the entire purpose of having a standard contract form in the first place. If a client is seeking to alter its terms of sale on a regular basis, it may not be feasible for these terms to be solely web-based.

How to do it. In summary, there are certain things to remember in seeking to make terms of sale posted on a client’s website enforceable. First, the contract should make a specific reference to the terms of sale in the contract document itself. If possible, it is always helpful to obtain either a manual signature or to obtain customer consent by using a clickwrap-style “I Agree” button. Also, it is vital to state that the terms of sale are “incorporated by this reference and made a part of the agreement between the parties.” Finally, remember that it is insufficient to simply refer to the terms of sale, or just provide the website reference, or even to make the transaction “subject to” the terms of sale.

Here are two final cautions to consider. First, some clients may not want their terms of sale to be disclosed to all the world. Second, because courts will examine the parties’ notice of the terms of sale and intent to be bound, conclusions on the enforceability of web-based terms of sale are less certain when applied to the sale of consumer goods or services, as opposed to a business-to-business sale.

Conclusion. A client can post its terms of sale on its website and make them enforceable using the traditional contract doctrine of incorporation by reference, so long as it is tailored to the medium of the contract, be it on paper or electronic.

 

For More About the Business Law Section

- This article is an abridged and edited version of one that originally appeared in the September 2011 issue of the online magazine Business Law Today.

- For more information about Business Law Today and to view an archive of past issues, go to www.businesslawtoday.org.

- Website: www.ababusinesslaw.org.

- Periodicals: Business Law Today, online resource; The Business Lawyer, quarterly business law journal.

- Books and Other Recent Publications: Nonprofit Governance and Management, 3d ed.; Model Merger Agreement for the Acquisition of a Public Company; Environmental Issues in Business Transactions; Privacy, Security and Information Management: An Overview; Annual Review of Developments in Business and Corporate Litigation, 2011 ed.; Corporate Director’s Guidebook, 6th ed.; The Guide to Business Divorce.

 

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