October 31, 2011

Do Web-based Terms of Sale Work? Only through Incorporation by Reference

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. A business lawyer would ask if those terms of sale are legally enforceable against the world if they were simply posted on the client's website.

The answer is not as simple as it may seem. Enforceability will always depend on the facts, the parties, and the jurisdiction examining the question. However, as technology develops and businesses and customers find innovative ways to contract, both on paper and electronically, new lines of case law are emerging, combining technical realities and traditional contract principles, which instruct the practitioner how to incorporate web-based terms of sale by reference into a client's contracts.

The terms of sale under which goods or services are sold are critical to both seller and buyer. The terms of sale set forth the contract rules, for example, relating to methods for acceptance of the offer, price, payment, delivery, risk of loss, credit and collection, warranty, limitations on liability, indemnification, choice of term, choice of venue, period for making claims, and so forth. A well drafted set of terms of sale should be customized for the client's situation and the interests of the client that need legal protection.

A decade or so ago, the terms of sale always appeared on paper-somewhere. Usually, they were printed, in small font, grayed-out, on the reverse side of the seller's order acknowledgement or invoice form. Sometimes, they were a five-page appendix stapled to the contract for services. Today, though, it is possible to simply post the terms of sale on the client's website.

Posting terms of sale on the client's website has several advantages. For example, doing so allows for universal accessibility by the client's customers. This is certainly true if the client sells only business-to-business, since virtually all businesses can be expected to have web access, and over time will also apply to individual consumers. Also, a client may not desire-or even be able-to print order acknowledgments or invoices with an extensive listing of the terms of sale on the reverse side. This may be especially difficult for a client whose orders come in via e-mail, PDF, or electronic data interchange. For clients who sell only through their website, the only option is to post the terms of sale there. Finally, posting the terms on the client's website might allow the client to change the terms of sale as needed in the future for either current or future customers. This idea makes too much sense to ignore. This article seeks to determine the best ways that it can be done.

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. In E.J. Rogers, Inc. v. UPS, 338 F. Supp. 2d 935 (S. D. Ind. 2004), a customer sought to ship a loose diamond via UPS. When UPS lost the package, it refused to reimburse the customer based on a tariff containing terms of service which stated that UPS would not be liable for any packages containing articles of "unusual value," such as precious stones. The tariff had been posted on the UPS website, but no reference to it was included in the paper airbill received by the customer. The court held that the terms of the tariff were not enforceable because there was no reference in the airbill to the tariff or any other documents. In the end, the lesson from E.J. Rogers is that some reference must be in the contract that the customer actually sees. Just putting the terms of sale on the client's website is not enough.

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 reference to the agreement on the paper invoice stated the following:

NECC's Agreement "Disclosure and Liabilities" can be found on-line @ www.necc.us or you could request a copy by calling us at (800) 766-2642

The Manasher 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. Also, there was no indication that the parties intended it to be incorporated into the agreement. Cases like 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.

In Affinity Internet, Inc., v. Consolidated Credit Counseling Services, Inc., 920 So.2d 1286 (Fla. Dist. Ct. App. 2006), an arbitration clause contained among a list of terms of sale posted on a website was not enforced when the paper contract stated this:

This contract is subject to all of SkyNetWEB's terms, conditions, user and acceptable use policies located at http://www.skynetweb.com/company/legal/legal.php.

Surprisingly, even the statement that the contract was "subject to" web-based terms was insufficient to bind a customer to the terms of sale. The Affinity Internet court, in reaching its decision, said that no clear language was present evidencing an intention by the parties to incorporate the website terms, despite the "subject to" language used. In addition, the court considered that the customer was not given a paper copy of the website terms and that the terms were not attached to the paper contract. 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. (Restatement (Second) of Contracts §132 (1981)). The comments to this section 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. Due to the relative difficulty of establishing clear and convincing evidence of a connection from external evidence, the clearest path to enforceability is the "incorporation by reference" doctrine.

Most attorneys are familiar with the incorporation by reference doctrine, and there is case law from virtually every state upholding its application. It is often used, and in many different legal contexts. Perhaps the most familiar is the incorporation by reference treatment afforded American Institute of Architects Form A201, General Conditions of the Contract for Construction. This form, which is not even meant to be signed, is made legally binding on owner and contractor by incorporating it by reference in the dozen or so AIA construction contract forms that are signed by owner and contractor.

Signed Contracts

The clearest cases for enforcing website terms of sale are those with a signed paper contract. In International Star Registry of Illinois v. Omnipoint Marketing,LLC, 2006 WL 2598056 (N. D. Ill. 2006), the disputed paper contract stated:

. . . by my signature below, I certify that I have read and agree to the provisions set forth in this invoice and to the terms and conditions posted at http://www.omnipoint.marketing.com/genterms.html.

The court found a choice of venue clause in the website's terms of sale to be enforceable. The clause was contained in a page displaying three hyperlinks, all of which were found by the court to be incorporated by reference. The court found these to be enforceable because the external documents were described with the requisite specificity, and the parties' intent to be bound by the terms was clearly expressed.

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. The agreement in dispute stated:

. . . In consideration of the license fee paid by Customer [Hugger-Mugger] and subject to the terms of this agreement and the Terms of Service posted at www.netsuite.com, or successor Website, Netsuite grants Customer . . . a . . . license . . . .

This Agreement and Incorporated Terms of Service represent the entire agreement of the parties and may not be modified unless expressly agreed to in writing by both parties.

The court noted, in addition, that whether the customer actually read the terms was irrelevant. Later courts have reinforced the binding quality of terms of sale incorporated by clickwrap agreements. In Appliance Zone, LLC v. Nextag, Inc., an online merchant using an online registration process selected a box stating "I accept the Nextag Terms of Service" by clicking that box on the web page next to a hypertext link to the terms. 2009 U.S. Dist. LEXIS 120049 (S.D. Ind., 2009). The court held that a choice of venue clause within the terms of service were binding on the merchant, whether or not the terms were even viewed by the merchant. 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, so long as those terms meet the standard for incorporation by reference.

No Signed Contract or Clickwrap

When there is no signed contract or clickwrap-type assent by which web-based terms are clearly incorporated, as in the above cases, courts will generally look at other factors, such as the adequacy of notification to the customers affected. A contract for services can be formed when an offer is accepted by using the services. In Conference America v. Conexant Systems, Inc., 508 F. Supp. 2d 1005 (M.D. Ala. 2007), two parties who had previously had an ongoing contractual relationship entered into a series of unilateral contracts formed when the customer requested services and the seller provided them. Upon the termination of the initial contractual relationship, the service provider had sent a termination letter stating:

Any services used or requested by Conexant [Customer] after termination will be made available only on and subject to Conference America's [Provider's] standard terms, conditions, and prices effective at the time the services are rendered . . . Terms & Conditions is available at www.yourcall.com.

The issue was whether the customer was required to pay a deactivation fee contained in the web-based terms of sale. The court found the terms of sale to be successfully incorporated into each subsequent unilateral contract between the two parties. In addition to this, the court noted that any terms of sale posted on the website before the formation of any of the unilateral contracts was irrelevant to the particular contract formed upon the performance of services by the provider; the terms of sale existing on the date of services governed.

It is possible to bind a customer to incorporated terms of sale through notification from other sources, such as a telephone conversation. In Greer v. 1-800-Flowers.com, Inc., 2007 WL 3102178 (S. D. Tex. 2007), a customer placed a telephone order for flowers for his girlfriend, at which time he inquired about the company's privacy policy. Privacy seemed important to this customer. The vendor directed the customer to the company's website, which stated:

Privacy Policy is part of the Terms of Use, which governs your use of 1-800-Flowers.com.

The girlfriend received the flowers. Shortly afterward, 1-800-Flowers, attempting to show good customer service, sent a thank-you-for-ordering note for the flowers to the customer's wife. The customer sued for a violation of the privacy policy. The court held that a choice of venue clause, which was contained in the terms of use, was enforceable against the customer. Since the customer sued under the web-based privacy policy, this meant the customer was bound by the broader terms of use, of which the privacy policy was but one part, even if the customer had not even read the terms of use, or in fact even visited the website at all.

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 the UPS store. 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 limited the company's liability, since there was no proof that the tariff was accessible on the UPS computer or present at the store in paper form.

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. The court distinguished the situation from other cases in which service providers had notified customers of changes to web-based terms of service by written notice. In contrast, in Conference America, the court noted that where a series of unilateral contracts existed, the terms of service present on the website at the time services were rendered were the only relevant terms; anything posted prior was irrelevant. Thus, the service provider in Conference America could change the terms of sale, and enforce the changed terms on future sales of services.

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 of sales on a regular basis, it may not be feasible for the terms of sale to be solely web-based.

How to Do It

In summary, there are several 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 is a sample clause applying the preceding principles:

This sale is subject to the Client Products, Inc. Terms of Sale effective on the date the purchase order is received, which are incorporated in full by this reference. The Terms of Sale are available at www.client.com/terms, and also will be sent by mail or fax to the purchaser upon request. Client Products, Inc. limits acceptance to the Terms of Sale, and objects to any other additional or different terms in the purchaser's purchase order or acceptance.

Here are two final cautions to consider. First, some clients may not want their terms of sale to be disclosed to all the world. For example, a client may include pricing formulas or special warranties in a set of terms of sale, which are to be made available to certain customers but not to others, and certainly not to its competitors. Second, since 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 sale of consumer goods or services, as opposed to a business-to-business sale. In a business-to-business sale, it can be presumed that the purchasing business has a computer with web access to view the terms of sale. According to recent surveys, however, only about 60 percent of the American public has usable access to the web. Several of the cases cited in this article enforce website terms of sale against consumers. But suppose a court were asked to enforce a warranty disclaimer posted on a website for a consumer product like, for example, oven cleaner, against a poor person who could not afford a computer. If the injured consumer lacked web access, it is unlikely that a court would enforce the disclaimer.


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. The key issue is whether the customer received adequate notice of the existence or changes of the terms.