Overview
While bright line rules regarding online agreements are still being developed, courts generally apply traditional contract principles to online contracts. Every online agreement requires an offer, acceptance, and consideration in order to establish an enforceable contractual relationship. State and federal statutes that address online contracts reflect this approach, such as the Uniform Computer Information Transactions Act adopted by Maryland and Virginia. This thinking is also shown in related U.S. Federal laws such as the Electronic Signatures in Global and National Commerce Act. The following QuickCounsel identifies the key issues that in-house counsel should consider when creating online agreements, and provides advice on how to properly address those issues.
Make an Offer: Notify Contracting Parties that the Terms are Binding
Definition of offer. An offer is a manifestation of willingness to enter into a binding legal relationship. The essential terms must be sufficiently communicated to the offeree in order to invite valid acceptance.
Content of notice of offer. Compose the terms with simple and unambiguous language that fully discloses all material rights and obligations, and clearly expresses that a binding legal relationship arises upon the contracting party's acceptance.
Practice tips for making offers:
- Write the terms in a font that is easy to read and language that is not susceptible to more than one reasonable interpretation.
- Consider also offering a summary of key terms in a notice, especially for material and closely scrutinized (contentious) terms, such as arbitration and forum selection clauses.
Prominence of notice. Ensure that all terms are visibly, conspicuously and prominently displayed and, when presented through a website, available on or through a link from the website's primary page (and all other pages, if possible).
Practice tips for providing adequate notice of the offer:
- Configure (or try to configure) the webpage so that all terms are viewable upon uploading the page without needing to scroll, download information, access or install software, or make payments for purchases.
- Allow contracting parties to easily read and navigate the terms. They should not be pressured to rush through the terms by web-page timeouts, and they should have the opportunity to read the terms as often as they would like before acceptance.
- Display the terms on the same screen and near the "accept" button. Offer contracting parties the option to decline as prominently and by the same method as the option to agree.
- Consider highlighting important terms in a different color or font size.
- Ensure the terms remain accessible online after contract formation.
- Separate the terms from marketing text, and make sure they do not contradict other statements made elsewhere on the website.
Customizing notice. Consider whether the target consumer base or audience has special characteristics that may undermine the effectiveness of notice, such as an international consumer base or audience likely requiring notice in multiple languages.
Practice tip for when agreements will likely be made with people in foreign jurisdictions:
- Evaluate foreign legal requirements for contract formation to ensure compliance. Be cognizant of content restrictions, language requirements, and limitations on advertising and other promotional activities.
Acceptance: Require Electronic Signature to Affirmatively Manifest Assent
Definition of acceptance. Acceptance is a manifestation of assent to the essential terms based on words or conduct. Electronic acceptance can be effective when sent or communicated, not when actually received or acknowledged.
Assent by electronic signatures. Electronic signatures are an "electronic sound, symbol, or process attached to or logically associated with" an electronic document and "executed or adopted by a person with the intent to sign" the electronic document. Electronic signatures have the same legal effect as ink signatures.
Practice tips for inviting valid acceptance:
Acceptable methods of acceptance. Require the contracting parties to accept the terms by a method that affirmatively signals assent:
- Click-through processes, such as checking an onscreen box or scrolling the agreement before clicking "I accept".
- Typed signature at the end of an electronic document or email.
- Automated electronic signature processes that allow for verification by both parties.
- The contracting party expressly affirms that manifesting assent to the terms by the required method constitutes an "acceptance" and gives rise to a contractual relationship.
- The contracting party expressly acknowledges that using a website or online service after being provided sufficient notice of the terms and failing to reject them constitutes "acceptance".
Attribution. In anonymous situations, such as many online transactions for general audience sites, consider using security procedures designed to ensure the authenticity of electronic signatures in order to attribute the electronic signature to the party against whom the contract is sought to be enforced.
Practice tip for ensuring attribution:
- Document related security procedures and regularly review them to ensure effectiveness and compliance.
Consideration: Mutual Binding Promises Required for Enforceability
Definition of consideration. Enforceable contracts must be supported by consideration–a mutual exchange of promises that represent binding legal obligations.
Illusory promises. A promise is "illusory" when at least one party retains an "unlimited right to decide later the nature or extent of his performance". Therefore, an illusory promise lacks consideration and is unenforceable.
Practice tip for avoiding term invalidation:
- Avoid unilateral amendment rights. Terms that permit one party to unilaterally modify the agreement create an illusory promise that is unenforceable.
Additional Enforceability Considerations
Unconscionability
Definition of adhesion contracts. Unilaterally imposed terms of use can sometimes be viewed as contracts of adhesion – agreements drafted and imposed by a party with superior bargaining power on a weaker party, usually a consumer, who adheres to the contract with no real choice about its terms or opportunity to engage in meaningful negotiation.
Practice tip for avoiding contracts of adhesion:
- A court may be less likely to conclude that an agreement is a contract of adhesion when the offeree must accept the terms by one of the methods described above that clearly and affirmatively signal assent. The more control the offeree appears to have over the acceptance process, the less likely the court will be to view the terms as being forced upon a weaker and disempowered party.
Shock the conscience standard. Contracts of adhesion are unenforceable when their terms "shock the conscience." Courts determine whether terms cross this threshold on a case-by-case basis depending on the unique facts. Generally, excessively harsh or one-sided terms will be invalidated.
Practice tips for avoiding term invalidation:
- Keep in mind that class action waivers, arbitration requirements and inconvenient forum selection clauses have been identified as examples of controversial terms. Arbitration clauses and forum selection clauses are most heavily scrutinized by the courts.
Balance business interests with fairness to the consumer. Consider whether there is a legitimate business justification to use any of the foregoing terms, such as lowering transaction costs. Even if such a justification exists, evaluate whether it would be substantially unfair to include any of the foregoing terms in an agreement with a consumer of average sophistication.
Violations of Public Policy
Illegal provisions. Terms that are illegal, such as usurious finance charges, are unenforceable. Ensure the terms do not violate state or federal laws.
Unfair trade practices. Terms that violate local and federal consumer protection laws are unenforceable. Do not make false representations about the goods or services, and review federal and state consumer protection laws for compliance.
Record Retention Requirements
Maintain electronic records. Retain a copy of all electronic agreements, including evidence of electronic signatures.
Practice tip for memorializing electronic signature requirements:
- Document any electronic signature requirements that are not apparent from reading the terms displayed onscreen to contracting parties. For example, explain in writing that contracting parties cannot accept the terms without first clicking an "I agree" button, and keep this document (and the date of acceptance and the identity of the acceptee) on file.
Accessibility and accuracy requirements. Storage of an electronic record will satisfy legal record retention requirements if:
- The electronic copies accurately reflect the actual agreement between the parties:
- Given that websites are often redesigned, website proprietors must keep records showing what version of their electronic agreements applied to what contracting parties at what time;
- The stored records remain freely accessible for later reference; and
- Both parties may download, store or print the agreement without interference.
- Records can be kept in electronic-only form, if they meet the above requirements. Such records will also satisfy court evidentiary rules or other rules of law that require transaction records to be kept in original form.
Secondary procedures. Back-up the records with other electronic copies and encourage contracting parties to maintain their own records.
Verify the Identity of the Contracting Parties
Anonymity. Among other issues, the sometimes anonymous nature of online contracting complicates efforts to ensure that the contracting party has the legal capacity to consummate a binding legal relationship, and that he or she is not located in a country subject to export sanctions or other legal requirements, such as age. Consider using different approaches to verify counterparty location and identity.
Commercial identity verification service. These services require a contracting party whose identity is to be confirmed to provide specific personal data to an online identity verification firm for contracting purposes. The firm searches public and private databases for information about that person and requires him to answer questions based on matched records. An identity score is then calculated and the identity of the contracting party is either given the "verified" status, or not, based on the score.
Digital certificate. This device is an electronic document that verifies the authenticity of an encrypted digital signature. The certificate can include name, address, organization affiliation and other information.
Other verification methods. Consider requiring contracting parties to provide other information, such as address or birthday, in text boxes displayed on the computer screen.
Security procedures. These services should supplement, not replace, the internal security procedures designed to ensure the authenticity of electronic signatures that were mentioned above.
Amending an Existing Electronic Agreement
Notice of amended terms. Like with the initial terms, provide adequate notice of the revised terms and inform contracting parties that they may terminate the agreement or affirmatively accept the terms by electronic signature.
Timing. Provide contracting parties with a reasonable amount of time to consider their options, such as 30 days.
Renewals.Consider tying the amended agreement to the effective date of a renewal term.
Closely scrutinized amendments. Courts may be more likely to invalidate amended terms that are presented to customers who receive ongoing services, or when the revised terms expand a company's right to disclose personal information about its customers.
Practice tip to avoid amended term invalidation:
- Consider using a click-through process to obtain clear proof of assent to the new terms.
Conclusion
In-house counsel should remember that traditional contract law principles generally govern online contract formation notwithstanding the fact that some state and federal legislation has been passed that specifically addresses online contracts. When drafting online agreements, therefore, keep in mind the above issues and recommendations in order to maximize the likelihood of drafting enforceable online contracts.