Friday, April 06, 2007

Music Rights in Film (Part 2): Hiring a Composer

Music Rights in Film (Part 2): Hiring a Composer
The Director's Chair, February 27, 2007

Filmmakers who would like to create an original score for their films often engage the services of a composer to write, compose, arrange, perform and produce the master recording of the score.

One of the main issues, amongst others, that will have to be determined is who owns the copyright in the music. Another important point that needs to be determined is the deemed “author” of the music for copyright purposes.

Under Canadian copyright law, in the case where a filmmaker hires the composer as an employee, then unless stated otherwise in a written agreement, the employer (i.e. the filmmaker) will be the first copyright owner of the music. In the case where the composer is hired as an independent contractor, then the composer will be presumed to be the first copyright owner of the music and then will have to grant, assign, transfer or license the rights in the music to the filmmaker in a written agreement. In Canada, whether the composer is being hired as an employee or an independent contractor, the deemed author for copyright purposes is the composer.

U.S. copyright law differs from Canadian copyright law in an important way in that in the U.S., the “work made for hire” doctrine applies to:

(i) works prepared by an employee within the scope or his or her employment; or

(ii) a work specially ordered or commissioned for use as a part of a motion picture or other audiovisual work if the parties expressly agree in writing signed by them that the work shall be considered a work made for hire.

The key point is that, unless stated otherwise in a written agreement, the “author” under a work made for hire is the employer or the person for whom the work was prepared. This makes a difference in not only how the copyright registration forms are filled out in the U.S. and Canadian copyright offices, but it can also affect how a filmmaker or composer may enforce his or her rights in the music.


The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

Music Rights in Film (Part 1): Using Pre-recorded Music

Music Rights in Film (Part 1): Using Pre-recorded Music
The Director's Chair, December 29, 2006

Filmmakers and producers who wish to use pre-recorded music in their films must first secure the appropriate rights from the copyright owner of the music. The first important point that needs to be understood by a producer is that two separate copyrights exist in the music. One copyright exists in the written musical composition itself, which usually is a combination of both lyrics and music or melody. The other copyright exists in the sound recording that embodies the written musical composition. The second important consideration for the producer is that generally, different parties may own these two existing copyrights.

Typically, a music publisher will own the copyright in the written musical composition, and a record label (now CD label) will own the copyright in the sound recording that embodies the written musical composition. Music publishers (which are often affiliates of the label that own the sound recording of the music) will hold the copyright in the written sound composition for the purposes of administrating the performance rights of the songwriter(s). Accordingly, licenses will have to be secured from both the copyright owner of the sound recording and the copyright owner of the composition.

Three kinds of licenses need to be secured to use the music as part of a motion picture that is going to be exhibited either in theatres, on television, or to the public using other exhibition vehicles such as the Internet. One license that is required from the copyright owner of the musical composition is called a “synchronization license” whereby the copyright owner(s) grants a license to the producer to use the musical composition with the visual images or motion picture. The reason why the license is called a synchronization license is because the producer is coupling or adding the music with visual images, or in other words, the music is being used in “timed relation” or “synched” with the visual images.

Another license that must be secured from the owner of the sound recording that embodies the musical composition is a “master use license”. In the master use license, the copyright owner of the sound recording is in essence granting the producer the right to use and to reproduce, in whole or in part, the recording of the song in the film.

The last kind of license that needs to be secured is a “performance license” because when the music is being played in theatres or on the television while part of a film, it is now being publicly performed. Although, a performance rights license is usually obtained from organizations known as performance rights organizations (PROs), such as SOCAN in Canada or ASCAP and BMI in the United States, a prudent producer should still verify that all necessary performance rights have been secured.


The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

Sunday, September 03, 2006

Option Agreements

(Writer) Option Agreements
The Director's Chair, August 22, 2006

After a writer has developed an underlying work such as a screenplay, novel, treatment or sometimes even a detailed project proposal (“the property”), producers and production companies alike have to acquire the rights in the underlying work prior to adapting it into a movie or a television series. This is generally referred to as securing the movie or television rights. As I wrote in an article entitled “The Importance of Securing Chain of Title”,

“For a literary work such as a screenplay, copyright protects it or any substantial part of it in any material form from being, among other things, produced, reproduced, distributed, published, translated, adapted, made into a film, or communicated to public by telecommunication without the permission of the author.” The Director’s Chair, April 26, 2006

Sometimes producers who wish to acquire the movie or television rights may either immediately purchase the rights or they may wish to enter into an option agreement with the original writer in order to keep development costs as low as possible. An option agreement essentially gives a producer an option to purchase the rights of the underlying work at a later date. In other words, producers at their election only have to pay a portion of the purchase price (“option fee”) in exchange for the exclusive right to develop the property for a period of time (“option period”). If the producer decides to exercise the option before the expiry of the option period, then he or she will pay the “exercise price” of the option.

For example, consider the case whereby a producer approaches a writer and wishes to acquire the movie rights in the writer’s property that took the writer, let’s say 5 years combined with a lot of sweat and tears to research and develop. The writer then says to the producer,
“Thank you for your interest in my work. You know what, I am willing to sell it to you for the small price of $100,000.00 USD if the finalized production budget is $25,000,000.00 or less, or $200,000.00 USD should the production budget exceed $25,000,000.00 because then you probably attached a noteworthy actor to the production and if you did that, my work must be worth my price.”

Notice that this writer is pretty sophisticated in that he or she is attempting to tie his or her compensation to the production budget. This approach is not always possible, and of course, the definition of “budget” will have to be defined and one approach would be to have it certified by an independent third party, such as a completion guarantor.

The producer then responds, “Wow, that’s a lot of money to pony up on the spot. And more than that, I need time to develop the property, put the production together and make it to the first day of principal photography (the time when the production financiers will come up with the funds for the production costs which includes purchasing all the rights necessary to carry out the production). How about I pay you (writer) an option fee of $10,000.00 USD for a one-year term subject to allowing me to renew the option for another year at 10,000.00 USD?”

The writer responds, “That may be okay, but I am a popular writer and the work in question is really compelling, so I want you (producer) to satisfy, amongst other things, certain benchmarks in developing the project because I want to see my work made into a film and not end up merely collecting dust on the shelf. If the benchmarks are not met, then the option will terminate.”
The producer says, “Well, you are certainly making this deal a bit more complicated than I originally fashioned and there’s a lot to think about here. I’ll get back to you once I speak with my lawyer.”

An option agreement should spell out a number of important issues relating to:

  • Detailed financial terms including the royalty participation;
  • Duration and expiry of the option;
  • Reversion rights;
  • The nature of intellectual property rights granted (time, territory, type of media, language, novelization, public performance, adaptation, production and reproduction, distribution, publication, stage play rights, multimedia, etc.);
  • Prequel and sequel rights;
  • Commercial tie-ins and merchandising licensing;
  • The rights reserved by the author (e.g. print publishing rights, stage play rights, etc.)
  • Credit

In the option agreement, it is common that the author of the original work will have to make certain representation, warranties and indemnities to the producer. These representation and warranties attempt to securer a clean “chain of title” (see my article “The Importance of Securing Chain of Title, Director’s Chair, April 28, 2006). In a nutshell, the producer requires the author of the original work to make certain claims about the work, some of the most important being, that the work is original with the author, that the work is not in the public domain, that the property has not being exploited by others, that the author is the sole and exclusive owner, and that the work does not infringe any other’s rights (i.e. copyright, trademark, privacy, publicity, etc.).

It is important to remember that negotiating an option agreement is no less complex than negotiating a literary purchase agreement because all the terms of a purchase agreement have to be included or attached to the option agreement, so that if the option is exercised, the terms of acquisition have already been negotiated.


The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

Directors' Agreements

Directors' Agreements
The Director's Chair, July 17, 2006


When directors are hired, they can be employed directly; however, it is often beneficial that a loan-out structure is used. A loan-out structure essentially allows the director to use a corporation to enter into the agreement with the producer, and the corporation will loan-out the services of the director. This kind of structure has the advantage, amongst others, of shielding the director from personal liability.
One issue that directors should consider is whether they wish to offer their services on a "pay-or-play" basis. The pay-or-play commitment generally means that the director will be compensated regardless of whether the production is completed, or whether the services of the director are terminated or replaced. This provision serves as a useful incentive for the producer to use the services of the director, and it provides the director with a certain amount of security that they will be compensated.

A director's agreement will often specify that the director's services will be required on an exclusive basis for pre-production, production, and post-production. A number of other important issues that should be considered include the following:
  • How important is final cutting authority? Will this affect the director's vision?
  • What is the compensation package? What part is fixed,deferred, and is the director entitled to participate in theprofits? How are profits defined?
  • What is the term of the agreement? Does any part of the term interfere with other commitments?
  • How are transportation and other expenses dealt with?
  • How is the director's credit accorded? Is it a separate card? What about teasers, trailers and other ads? What about the right to use the director's name and likeness to exploit the picture?
  • What happens if the director becomes incapacitated due to mental or physical disability?
  • How much control and authority does the director have in hiring people for the production?
  • Is the director assigning and transferring his or her rights in all the results of the director's services?
  • What does the agreement say about termination?
  • Does the producer require the director to become or remain a member in good standing with the various guilds and unions?
  • What laws will govern the agreement? The laws of the State of California or somewhere else

The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

Wednesday, June 28, 2006

Co-Productions & Joint-Ventures: Issues

Co-Productions & Joint-Ventures: Issues
The Director's Chair, June 20, 2006

Producers often realize that a co-production or joint venture is a useful method to develop a film project because of the complimentary skills and resources that each party brings to the table and some of the benefits derived from international and inter-provincial co-production treaties.

Whether the co-production or joint-venture is simple or complicated, a number of important issues should be determined in advance so the parties understand the nature of their relationship, rights, obligations and potential liabilities involved in the project.

One of the first issues that arise in a co-production or joint venture is the appropriate business structure that the parties will use to carry out the project. Generally, there are four kinds of business structures that can be chosen:
  • Corporations;- Partnerships;
  • Limited Partnerships;
  • Limited Liability Companies (in the United States).

Although each structure has its specific advantages and disadvantages, two common issues that many parties are concerned about are potential liabilities and tax implications. In view of these concerns, a corporation or a limited liability company is often utilized as the business legal structure to carry out the project.

In a co-production or joint venture where the parties use a corporation as the legal structure to carry out the project, the parties will usually become shareholders of the corporation and will have to decide the appropriate corporate structure and shareholding options (e.g. voting and non-voting stock, and dividends).

Where one party may be providing the financing while the other party may be contributing all the technical and administrative skills necessary to carry out the project, or where both parties contribute capital and services, the parties should consider a number of further issues which should be included in a written co-production or joint venture agreement, including but not limited to the following:

  • What services and/or resources will be provided by each party?
  • If a third party producer is required for the project, do both parties have to agree on an acceptable third party producer?
  • Should one party no longer want to be involved in the project and desire to carry out another project alone or with other parties, should the corporation have a first right of refusal to undertake the development of that project? Is there an exclusivity clause?
  • Who has authority to decide important business and financial, legal, and creative elements of the project? For example, in the case of a financier partner, one may not think that he or she is in the best position to determine creative elements pertaining to the project.
  • What rates of remuneration, if any, shall be provided to the parties?
  • Shall producer fees and executive producer fees that either party may be entitled to, and general overheads, be shared equally?
  • Shall all distribution decisions be made jointly?
  • What happens if one of the parties passes away or becomes bankrupt?
  • Are there management contracts? What do such contracts say about confidentiality and non-competition?
  • What happens if one of the parties breaches the agreement?

Although the above points are not meant to serve as an exhaustive list of things to consider when entering into a co-production or joint venture, they serve as a sample of some of the important issues that producers and filmmakers should consider prior to carrying out their project.

The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

The Importance of Securing Chain of Title

The Importance of Securing Chain of Title
The Director's Chair, April 28, 2006

Professionals in the film industry, especially writers and producers will hear about a concept called “chain of title”, if they have not already heard about it. Chain of title refers to the succession of title of ownership of copyright back to the original owner.

When an idea for a film is formulated in writing by an author who is not an employee or who has not by contract negotiated away his or her copyright in the respective work, that person is generally considered the original author and owner of the copyright in that work.

As the old adage goes, copyright does not exist in an idea itself. Rather, in Canada and the United States (and most other jurisdictions in the world), copyright protection exists for works in tangible form. It is the expression of the idea rather than the idea itself that is subject to copyright protection. In other words, the idea has to be “fixed” in material form. For a literary work such as a screenplay, copyright protects it or any substantial part of it in any material form from being, among other things, produced, reproduced, distributed, published, translated, adapted, made into a film, or communicated to public by telecommunication without the permission of the author.

Now, screenplays oftentimes start out with an idea and then a treatment or synopsis is derived from such treatment. Alternatively, some screenplays are derived from novels or stage plays. In cases where a screenplay is derived from a treatment, the first thing to note is that the screenplay is a derivative work of the treatment, and as such, the treatment is the first element in the chain of title. Without the permission of the author of the treatment to create a screenplay based on it, the chain of title would be broken, so to speak. Moreover, the screenplay is oftentimes a joint effort among more than one author, therefore, the producer who wishes to use the screenplay may likely have to obtain the appropriate rights from all those joint-authors who contributed to that screenplay. If there is a possibility that a producer believes that a specific third party may have some rights in the screenplay, then the producer may want to take precautions by having the third party execute a quitclaim or other similar document that effectively establishes that the third party has no interest in the screenplay.

To ensure that the producer fully owns the film, the producer will also have to secure all the necessary rights from everyone involved in the production so that chain of title of the film itself, is intact. Agreements with the director, actors, cinematographer and everyone else involved in the production will have to be executed.

The most significant reason why producers want to keep an eye on the chain of title is to ensure that they can secure distribution. Distributors will want the producer to ensure that all rights to the film have been secured, and they will require the producer to make certain representations and warranties in regards to the ownership of the film. For example, the distributor will likely require the producer to represent and warrant that the film does not violate or infringe, among other things, any agreement with any third party, trade-mark, trade name, copyright, moral right, patent, literary right, dramatic right, and rights of privacy and publicity. If any of these representations and warranties turns out to be untrue, the producer will usually have to indemnify and hold harmless the distributor for any breach of the respective representations, warranties and any covenants under the distribution agreement.

Prior to making a film, it would be prudent for a producer to make himself or herself aware of the kinds of agreements required to secure chain of title of the film, and a lawyer oftentimes can provide valuable assistance with these matters. Although there is an upfront cost and time to properly secure chain of title, the cost of not doing so can ultimately be much greater as the chances of entering into a distribution deal may be jeopardized.

The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

Protecting Your Pitches

Protecting Your Pitches
The Director's Chair, May 16, 2006

When a writer or filmmaker conceives a great idea for a film and wants to pitch it, he or she is sometimes fearful that it can be stolen and made into a film. Many of us have heard stories by people who claim that a particular film was really based on their conception, and that someone else must have stolen it. Some writers and filmmakers, in response to this apprehension, decide to keep their thoughts for a film top secret. Obviously, this approach may be problematic since some form of disclosure will be required to elicit the interest of others.

When I hear someone tell me that they have a great concept for a film, and that they would like to protect it prior to disclosing it to a third party, I usually refer to basic copyright principles.
Copyright protection does not protect an idea, but rather such protection exists only for works fixed in tangible form. This means that a writer or filmmaker should record his or her idea onto some tangible medium for it to be protected. A few easy ways to protect your idea includes:
  • Writing it down (i.e. fixing it in material form);
  • registering the written material with the copyright offices in the U.S. or Canada, or other applicable offices around the world;
  • and the inexpensive method of putting the written material in an envelope and mailing it to yourself by registered mail;
  • however, care should be taken to not open the envelope.

Most of us know that during a pitch, there is usually little or no time to procure the necessary legal documentation to ensure that your idea will not be used without your consent.

Moreover, even if a writer or filmmaker had the documentation readily available, a producer may be put off by the notion that a writer or filmmaker thinks that the producer is a person capable of theft, and therefore the producer may refuse to hear the pitch. And it is in these situations that writers and filmmakers may be apprehensive about sharing, especially when they have not taken steps to protect their interests, as mentioned above.

However, all may not be lost in the absence of an express written agreement that protects your rights. There may be a way to argue your idea for a film is confidential information and an implied contract exists between you and the producer or other third party whereby the latter party owes you a duty not to disclose such confidential information without your permission and if the producer or other third party uses your information, then you will be compensated for it.

Although the fear of pitching in the absence of an express written agreement can lead some writers and filmmakers to completely refrain from pitching, learning about ways to protect your rights may help alleviate such fears, and ultimately, help you get your idea out there.


The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

Tuesday, April 18, 2006

Some Considerations for Entrepreneurs

Some Considerations for Entrepreneurs
Rajwans.com, April 2006
by Jindra Rajwans

Setting Up Your Business

When setting up a business, one must consider a number of factors, including among others, financing, the marketability of the products and services to be provided to the customer (whether it is business to consumer (B2C) or business to business (B2B)), cost, price, competition, hiring workers if necessary, marketing, distribution, outsourcing, accounting, legal issues, etc.

Although the list of things that an entrepreneur must deal with is non-exhaustive, due consideration must be taken in establishing the best legal structure for your business, as the legal structure may have a significant impact on a business’ bottom-line, and either increase or decrease an owner’s potential liability.

There is no one best legal structure for all businesses. Rather, depending on the nature of the business, one legal structure may be more advantageous than another. The most common legal structures that are used to operate a business are (i) corporations; (2) partnerships; and (3) sole-proprietorships, and each have their distinct advantages and disadvantages.

Incorporations

The most common type of business is the corporation and one of the greatest advantages of incorporating a business is that there is limited liability of the shareholders for the debts, obligations, and liabilities of the corporation since the corporation is a separate legal entity. This means that in case a corporation becomes bankrupt, the shareholders will not lose more than their investment into the corporation, subject to some exceptions, such as when a shareholder has provided a personal guarantee for all the debt and liabilities of the corporation. In cases where a business operates as a partnership or sole proprietorship, the partners or individual himself or herself, as the case may be, is personally liable for all the debts and liabilities of the business.

Other advantages of incorporating include potential tax advantages such as tax deferrals, and lower corporate tax rates which are generally lower than personal income tax rates. Moreover, a corporation has perpetual existence which means that until dissolved or wound-up, the corporation can change its shareholders, directors, and officers.

A further potential benefit of incorporating is greater access to capital since a corporation can issue shares or sell bonds to attract capital. In addition, a financial institution may feel that a loan to a corporation is a safer investment than a loan to a sole-proprietorship, although this may not always be the case.

Since the corporation is a separate legal entity, a corporation can sue or be sued, enter into contracts, acquire assets and liabilities, and be found guilty of a committing a crime.

Although corporations are more expensive to set up than either a sole-proprietorship or a partnership due to filing costs and professional fees, the potential benefits related to tax rates, access to capital, and limited liability may justify carrying on business as a corporation.

Shortly after the business has been incorporated, the next step is to organize it by completing the Minute Book. A company is “organized” when the shares have been issued, by-law(s) have been approved, directors have been elected, officers have been appointed, and all the relevant filings of the notices to the appropriate government bodies have been made. Normally, a lawyer will assist with the organization of the business, and it is wise for each shareholder to consult with his or her accountant on tax related matters in connection with share ownership issues.

A business may be incorporated federally or provincially. One benefit of incorporating federally is that a named federal corporation is entitled to use its corporate name in each province in which it carries on business. A provincial corporation does not have this name protection advantage, and in some cases, a provincial corporation may be required to use another corporate name in another province.

Entering into a Shareholders Agreement

For a corporation that has more than one shareholder, it is often very beneficial that a unanimous shareholders agreement be entered into which is signed by all of the shareholders of the corporation. A shareholders agreement is a contract which typically governs the voting rights attributable to the shares held by the shareholders, and matters relating to the management and affairs of the corporation by the directors, whose powers can be restricted by such an agreement.

It should be noted that there is no standard shareholders agreement. Rather, each shareholders agreement should be tailored according to the specific facts of the situation and needs of the corporation and its shareholders. A shareholders agreement should clearly outline what the shareholders have agreed to in advance upon the occurrence of a variety of events. One major benefit of having a shareholders agreement is that it gives the shareholders the opportunity to think through many scenarios that may occur, and such a process can unveil many unspoken assumptions on important issues.

Although each shareholders agreement should be made for its particular purposes, most agreements cover common issues such as:

  • What happens if a shareholder wants out of the business and wishes to sell his or her shares? What about third-party offers? - Is there is a right of first refusal?
  • Is there a “shotgun clause” dealing with ownership buyouts?
  • Who has authority to make important decisions?
  • What mechanism is in place in case there is a dispute? Arbitration?
  • What is the total financial exposure and legal liability of the shareholders?
  • How is the Board of Directors determined?
  • Can a shareholder be forced out of the company?
  • What is the ownership structure of the company?
  • Who are the officers and managers?
  • How is a quorum for meetings determined?
  • Are there restrictions on offering new issues of shares (e.g. anti-dilution clause, tag-along provisions, pre-emptive rights)
  • What are the shareholders commitments to the company? (e.g. disclosure of any conflict of interest)
  • What happens if a shareholder passes away or is incapacitated?
  • Are there management contracts? What do such contracts say about confidentiality and non-competition?
  • What happens if the company requires further funding to maintain operations? How is the obligation to provide such funding distributed among the shareholders?
  • Are there shareholder loans to the company, and if so, how are those obligations handled?
  • How is the valuation of a share determined?
  • Do shareholders require life insurance?
  • Does the company require insurance? If so, what kind?
  • How will the officers and directors be compensated?
  • What decisions require unanimous shareholder or board approval?
  • What events call for the dissolution of the business?
  • What happens if a shareholder breaches the agreement?

As part of the process in drafting the agreement, each shareholder should obtain tax advice from his or her accountant or tax advisor to ensure that future earnings are appropriately dealt with.

The process of drafting a shareholders agreement is extremely useful because it allows the opportunity for the shareholders to thoroughly and honestly evaluate their roles and commitments to each other and to the corporation. It is also an opportunity to for the shareholders to gauge the interests and motivations of their fellow shareholders prior to the occurrence of certain events.

Thursday, March 16, 2006

Contractual Validity: Online Trading in North America

Contractual Validity: Online Trading in North America
by Jindra Rajwans & Javad Heydary

There is widespread recognition that e-commerce is growing rapidly worldwide. Specifically, there is an ever-increasing percentage of online transactions in Canada, the United States and the European Union. For example, it has been estimated that United States retailers expect online sales to rise 22 percent in 2005. However, concerns over the validity of online contracting still permeate consumers' minds even though these kinds of contracts have become quite common. Given the broad scope of the topic, this article will focus on some of the recent developments that have occurred in the United States and Canada.

Generally, the same traditional legal requirements required to create an enforceable offline contract apply to online contracts or to contracts made through e-mail. Basically, the three elements necessary in creating an enforceable contract are:
  • the offer;
  • acceptance; and
  • consideration.

For simplicity, consideration is merely something of value given in exchange for something else of value. A binding contract can be created in writing, by oral agreement, or even implicitly by the conduct of the parties. Moreover, the parties must intend to enter into a legally binding relationship for there to be a valid contract. Without the intent of the parties to be legally bound, no enforceable contract will be created. As a general rule, and subject to contract law rules about unconscionable terms, a valid offer will contain all the material terms of a contract, and such terms must be clearly and accurately presented. The formation of a valid contract requires that the acceptance of an offer be unconditional and unequivocally communicated to the offering party, and consideration must flow between the parties.

The mere display of products and services by a website may not constitute a valid offer. This is because there is a difference between an "offer" and an "invitation to treat" in that, in the latter case, one is merely inviting others to make an offer of their own. For instance, a website that merely posts prices of its products may be considered an invitation to treat, whereas if the website contains more contractual terms related to delivery, payments, or quantity, it may be considered to be a proper offer.

With online contracts, it is sometimes more difficult to determine whether these traditional requirements have been satisfied. In particular, in the context of the Internet, there may be uncertainties as to what constitutes an "offer" or an "acceptance". Furthermore, in the past, many have wondered whether a website visitor is legally bound by a website's terms of use. Some people have also questioned whether "click-wrap", "click-through" or "web-wrap" agreements are enforceable. In addition, others have questioned even whether a properly executed contract can be formed using e-mail or whether it must be signed in writing on paper. With recent developments in common law and legislative reforms in most jurisdictions, there is now greater certainty in understanding the laws relating to the enforceability of online contracts and contracts formed via e-mail.

"Click-Wrap" or "Click-Through" Agreements

Prior to the enactment of e-commerce legislation in both Canada and the United States, little case law dealt specifically with the enforceability of "click-wrap" or "click-through" contracts. A brief review of some of the jurisprudence helps one understand how courts have dealt with these agreements. Generally, these types of contracts require the user to scroll through the terms and conditions on a website and to confirm that he or she has accepted the terms and conditions of the agreement by taking some sort of action, such as clicking an "I accept" button or by taking some similar action. Oftentimes, the enforceability of the forum selection clause in these "click-wrap" agreements is at issue since these clauses may dictate that the plaintiff must bring his or her action in a particular jurisdiction, which may be located far away from the plaintiff's home jurisdiction, to settle all disputes.

In Canada, Rudder v. Microsoft1 is a significant case because in 1999 the Ontario Superior Court found that the forum selection clause, and the entire "click-wrap" agreement containing this provision, was enforceable. In Rudder, the plaintiffs launched a class action on behalf of all Canadian MSN subscribers against Microsoft alleging financial improprieties, which included the allegation that Microsoft had wrongly charged MSN subscribers' credit cards, thereby violating the contractual terms. Microsoft filed a motion with the Ontario Court of Justice for a permanent stay of the class action, arguing forum non conveniens. Microsoft claimed that the parties explicitly agreed online to the exclusive jurisdiction clause that stated that the State of Washington was the governing jurisdiction for any dispute arising from the use of MSN.

The plaintiffs argued that since only a portion of the agreement was on the screen at any one time, Microsoft had a duty to bring such a clause to the attention of the user. In essence, the plaintiffs maintained that the clause was in "fine print" and hence, since no specific or special notice was provided to them, the clause should not be enforceable. The court rejected the plaintiffs' claim and stated:

Admittedly, the entire Agreement cannot be displayed at once on the computer screen, but this is not materially different from a multi-page written document which requires a party to turn the page.2

In rejecting the plaintiffs' claim, Winkler J. also reasoned that the MSN members were required to click on an "I agree" button presented on the computer screen while the terms of the agreement were displayed. Moreover, the forum selection clause was no more difficult to read than any other term.

The judge also rejected the plaintiffs' excuse of ignorance of the clause. The court held that the MSN sign-up procedure required the applicants to view the agreement's terms and conditions and click "I agree" twice during the process. During the second time the terms were displayed, the agreement stated that even if the applicants did not read the agreement before clicking the "I agree" button, they would still be bound to all the terms. The court also held that all clauses should have legal effect, including the choice of law and forum selection clause, since the plaintiffs were seeking to have others enforced, and that to give legal effect only to some clauses would not advance the goal of commercial certainty. Lastly, the court held that on the facts of the case, the terms of the Member Agreement were valid and binding and that such a "click-wrap" agreement "must be afforded the sanctity that must be given to any agreement in writing".3

In the United States, the jurisprudence tends to support the position that "click-wrap" contracts that satisfy the essential elements of a contract will be enforceable. In Caspi v. Microsoft Network L.L.C4 the facts of the case were similar to those in Rudder - a user was able to select either the "I accept" or "I Don't Agree" button without the user being required to read all the terms and conditions. However, the user could not have access to the service without having made a selection. Here, the Superior Court of New Jersey, Appellate Division, held that the contract was valid while noting that the user could only proceed after he or she had a chance to review the membership agreement.

In another United States case heard before the District of Columbia Court of Appeal, Forest v. Verizon Communications Inc.5 the dispute was over whether a choice of law and forum selection clause, which mandated that all claims be brought in a particular jurisdiction, could be applied to a class action suit. The appellant customers argued that Verizon, "did not provide.adequate notice of the [choice of law and forum selection] clause or its significance". The clause, which was located at the end of the agreement, could only be seen if the user scrolled through the entire agreement where only a small part of the agreement was visible at any one time. However, at the beginning of the agreement, it stated "PLEASE READ THE FOLLOWING AGREEMENT CAREFULLY", and subscribers could click an "Accept" button below the scroll box. The court in this case was of the view that that there was adequate notice of the relevant clause since had the plaintiffs read the agreement before it was accepted, they would have inevitably come across the choice of law and forum selection clause. The court stated that "The general rule is that absent fraud or mistake, one who signs a contract is bound by a contract which he has an opportunity to read whether he does so or not". The court also was of the view that "A contract is no less a contract simply because it is entered into via a computer".

Although most courts in Canada and the United States will find "click-wrap" agreements to be enforceable, it is important to remember that the rules of contract law are still applicable to these agreements. A court in any particular case depending on the facts could hold that a "click-wrap" agreement is void, or that a particular provision be struck, if it finds that the agreement or provision breached any of the established rules of contract law.

Browse-Wrap Agreements

"Browse-wrap" agreements, in contrast to "click-wrap" agreements, do not require the active consent of the user. Rather, "browse-wrap" agreements typically infer the user's consent, such as to the terms and conditions of the website, by the mere act of the user using and browsing the website, even when the user has not reviewed the terms and conditions. "Browse-wrap" agreements usually consist of a link or button within a webpage to direct the user to another webpage that displays the terms and conditions of use of the website. Sometimes, the location of these links or buttons is placed at the bottom of the screen and oftentimes, these agreements are not reviewed by the user. These agreements have become quite popular due in part to the fact that it is impractical to have separately negotiated agreements for each visitor.

In a Canadian case, Kanitz v. Rogers Cable Inc.6 the customers of a telecommunication company, Rogers, were required to sign a service agreement whereby a provision allowed Rogers to change or amend the agreement at any time, and the provision allowed any such amendments to be posted on the Rogers website. Rogers subsequently amended the agreement to include the provision that all disputes would be settled by arbitration. The agreement was updated and posted on the website, along with a notice that the agreement had been amended. The plaintiffs, who experienced service outage problems, attempted to bring the proceeding to court by way of a class action under the Ontario Class Proceedings Act and claimed that they had not assented to settle disputes by arbitration.

The Ontario Superior Court in Kanitz concluded that the notice of amendment was made in accordance with the terms of the agreement, and that the effect of the amending provision was to place an obligation on the user to check the website from time to time. Importantly, the court maintained that the plaintiffs' continuing use of the subsequent service after the posting of the notice and the amendments constituted a deemed acceptance of those amendments. In other words, the plaintiffs' conduct could form the basis for the plaintiffs' assent, even where the plaintiffs had not expressly agreed to the unilateral amendment.

Although the court in this case concluded that the mandatory arbitration clause was not invalid under the Ontario Arbitration Act, it is important to note that new regulations of the Consumer Protection Act (Ontario), which are expected to come into force on July 30, 2005, will favour class proceedings over arbitration thereby diminishing the precedential value of the Kanitz decision with respect to the enforceability of arbitration clauses in online agreements.

In the United States, the enforcement of "web-wrap" agreements has been inconsistent. In Register.com v. Verio, Inc.7 the New Jersey Superior Court Appellate Division upheld the enforceability of the terms and conditions of a website, which provided that the user agreed to the terms and conditions by merely submitting a search inquiry even though the user did not expressly assent to them. Specifically, at the end of the "terms" paragraph, it stated "by submitting this query, you agree to abide by these terms". The court noted that the terms of use in this case were clearly posted on Register.com's website, and that the defendant's conduct in performing a search inquiry constituted agreement of the terms.

In Specht v. Netscape Communications Corp.8 the issue was similar to that in Kanitz as the court had to consider the enforceability of an arbitration clause in Netscape's end-user licence agreement. At issue was whether or not the terms of the licence posted on Netscape's website were binding on a user who downloaded the software. Available by a hypertext link, the users were asked to review and agree to the terms of the agreement prior to downloading and using the software; however, the users could proceed to download the software without providing their express agreement. The court denied the enforceability of the arbitration clause and stated:

We agree...that a reasonably prudent Internet user in circumstances such as these would not have known or learned of the existence of the licence terms before responding to the defendants' invitation to download the free software, and that the defendants therefore did not provide reasonable notice of the licence terms.

The court concluded that the bare act of downloading did not unambiguously manifest assent, therefore the terms were held to be unenforceable.

In another United States case, Ticketmaster Corp. v. Tickets.com Inc.9 the U.S. District Court, Central District of California, held that Ticketmaster's website terms and conditions were unenforceable. Ticketmaster argued that assent to the terms and conditions of its website was analogous to the terms and conditions of a "shrink-wrap" licence agreement, which sometimes provide that the opening of the package constitutes adherence to the licence agreement contained therein. Although these "shrink-wrap" agreements have been held to be enforceable, the court noted that the difference in this case was that a "shrink-wrap" licence agreement "is open and obvious and in fact hard to miss". The court further noted that Ticketmaster's terms and conditions were only accessible if the visitor scrolled down to the bottom of the page.
Although there are some cases that suggest that some of these "browse-wrap" agreements will be enforceable where it is shown that the user was made aware of the terms and conditions (even if he or she chose not to review them), and that the terms and conditions were easily accessible and conspicuously placed, there are always exceptions to general rules, and as such, each case needs to be evaluated on its own merits.

E-Commerce Legislation: Electronic Contracts and Signatures

Although the jurisprudence has provided some guidance on the enforceability of online contracts, Canada, the United States and a number of other countries have enacted legislation to provide greater legal certainty to e-commerce transactions by providing legal effect to electronic media (documents, files, etc.) and electronic signatures. Also, in 1996, all U.N. member countries adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce ("U.N. Model Law"). The U.N. Model Law provided the initial framework from which Canada and the United States, and most other United Nation members adopted their e-commerce legislation.

In 1999, the United States adopted its version with the Uniform Electronic Transactions Act (UETA) and most states in the U.S. have now adopted some form of the UETA. The United States federal government also enacted the Electronic Signatures in Global and National Commerce Act, widely known as "E-SIGN" in 2000, which also was designed to provide for an equivalency of electronic signatures and electronic records with writings and signatures on paper. E-SIGN does not preempt a state's enacted version of the UETA if the applicable state enacts a "clean" version of the UETA.

In Canada, the Uniform Law Conference of Canada adopted the Uniform Electronic Commence Act (UECA) in 1999, and recommended that the federal government, provinces and territories, adopt it. The UECA, which acted as a model for the Canadian provinces, has since been mirrored in similar provincial legislation, hence, almost all provinces across the country have enacted substantially similar legislation.

The basic principle behind the legislation in the United States and Canada is that actions must not be denied legal effect merely because information is exchanged in electronic form. Specifically, statutory "writing" requirements and the common law of contracts provide barriers that the United States and Canadian legislation remove. In other words, electronic messages and signatures are equal to ones written on paper. For electronic information to meet the writing requirement, both the UECA and the UETA address the issue similarly. Essentially, the electronic information must be accessible, capable of retention by the recipient at the time of receipt, and capable of being stored. Generally, the idea is that the recipient should get to decide how long to retain the document, without the risk that the person providing it will delete it.

Both the UECA and the UETA apply to a broad variety of transactions. The UECA applies to any rules of law that are not expressly excluded, therefore, its application goes beyond commercial transactions. The UETA applies to all electronic records and signatures relating to a "transaction", which means "an action or set of actions occurring between two or more persons relating to the conduct of business, commercial, or governmental affairs". However, the UECA or UETA do not apply to all writings, such as wills or codicils, or powers of attorney.

One key point to these statutes is that the parties must consent to use electronic means to conduct their transaction. In certain cases, such consent may be implied by the conduct of the parties. The use or acceptance of electronic documents is not mandatory, and any one of the parties may choose to refuse to proceed via electronic methods. More importantly, it should be noted these law-enabling statutes validate and effectuate electronic documents and signatures without affecting legal rules and requirements, which essentially means that the legislation does not override any of the substantive principles of contract law. The UETA and UECA effectively grant businesses and individuals the freedom to create their own agreements concerning the legal validity of electronic communications.

The UECA and UETA have provided for greater legal certainty by saying that if a law requires a signature, an electronic signature satisfies the law. Electronic signatures need not resemble hand signatures. For example, in the UECA, an "electronic signature" is defined as information in electronic form that a person has created or adopted in order to sign a document and that is in, attached to, or associated with the document.10 It is the intention with which the signature was made, rather than its form or medium that is important. Section 28 of UECA allows a signature to travel apart from the document it signs, but only if the association with the document is clear. The signature is mainly evidence of attribution in order to link a person with the text. The general law in Canada and the United States that data messages may be attributed to those who create them or who authorize their creation still applies.

In summary, given the developments in the jurisprudence and in e-commerce legislation, there is now greater legal certainty in regards to online contracts or contracts formed through e-mail. Legal validity and enforceability of these contracts will not be denied merely because they are in electronic form. However, it is important to remember that substantive contract rules still apply to these transactions and that parties must consent to conduct their transactions electronically. Lastly, consumer protection legislation should be reviewed to determine what impact, if any, it has on these kinds of electronic contracts.

Jindra Rajwans is a business and entertainment lawyer in Toronto, Canada.

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1. Rudder v. Microsoft Corp (1999), 2 C.P.R. 4(th) 474 (Ont. S.C.J.), (hereinafter Rudder).
2. Rudder v. Microsoft Corp, para. 14.
3. Rudder v. Microsoft Corp, para.17.
4. 732 A.2d 528 (N.J. Super. Ct. App. Div. 1999).
5. 2002 D.C. App. LEXIS 509.
6. (2002), 58.O.R. (3d) 299 (Ont. Sup. Ct.), (hereinafter Kanitz).
7. 126 F. Supp. 2d 238 (S.D.N.Y. 2000); aff'd 2004 WL 103400 (2nd Cir. 2004).
8. 206 F.3d 17 (S.D. N.Y. 2001); aff'd 306 F.3d 17 (2nd Cir. 2002).
9. 2000 United States Dist. LEXIS 12987 (C.D. 2000); aff'd 248. F.2d 1173 (9th Cir. 2001).
10. Section 1(b) of UECA.

Major Practice Areas

The practice focuses on business law and entertainment law.

Business Law
  • Incorporations (Canada and Ontario)
  • Corporate organizations (preparation of Minute Book)
  • Business name searches (NUANS) and registrations
  • Trade-mark applications
  • Shareholder agreements
  • Setup of partnerships
  • Purchase and sale of businesses (share purchase or asset purchase agreements)
  • Employment and independent contractor agreements
  • Consulting agreements
  • Setting up franchise businesses and preparing franchise documents
  • Joint-venture and distribution agreements
  • Stock option agreements
  • All aspects of e-commerce law (including terms of use and privacy policies)

Entertainment Law

  • Film and television agreements (option agreements, film financing, production & distribution)
  • Copyright registration
  • Trade-mark issues
  • Confidentiality and non-disclosure issues

Profile of Jindra Rajwans

Jindra's practice is focused in the areas of business and entertainment law. He has experience handling a wide variety of transactions involving:
  • Setting up businesses (corporations, partnerships)
  • Purchase and sale of businesses (share and asset purchases)
  • Setting up joint-ventures Shareholders agreements
  • Setting up franchise systems (drafting franchise documents and negotiating franchise agreements)
  • Privacy matters
  • Distribution agreements
  • Employment and independent contractor agreements
  • Intellectual property (copyright and trade-mark)
  • Stock option agreements
  • Online terms of use and privacy policies
  • Chain of title issues - film
  • Preproduction, production, & distribution issues - film

Professional Activities

  • Canadian Bar Association
  • Ontario Bar Association
  • Law Society of Upper Canada

Admissions

  • Member of the Ontario Bar

Education

  • Osgoode Hall Law School, York University, LL.M., 2004
  • Schulich School of Business, York University, M.B.A. (International Business and Strategic Management), 2003
  • Osgoode Hall Law School, York University, LL.B., 2000
  • University of Western Ontario, M.A. (Philosophy), 2000
  • University of Toronto, B.A. (Hons.) (Specialist in Philosophy), Graduated with Distinction, 1996

Contact
Jindra Rajwans, B.A. (Hons.), M.A., LL.B., M.B.A., LL.M.
Rajwans Business & Entertainment Law
2 Bloor Street West, Suite 700, Toronto, Ontario M4W 3R1
T/ 416.323.5777
E/ jrajwans@rajwans.com

Rajwans Business & Entertainment Law

Rajwans Business & Entertainment Law is a unique Canadian business and entertainment law practice located in the Yorkville area of downtown Toronto. The practice is dedicated to providing value-added legal services to those requiring assistance with corporate and commercial legal matters including but not limited to incorporations, organizations, drafting contracts such as joint-venture, franchise, independent contractor, and other commercial agreements. The entertainment area of the practice focuses on providing legal services to writers, directors, producers, actors, musicians or other professionals, and companies in the entertainment industry. The practice's philosophy is client-centric. Put simply, the success of the practice is measured in terms of client satisfaction. Our approach is to actively listen and evaluate each client's needs, and offer affordable, sound and strategic legal solutions that mesh with the client’s business and personal objectives.

Clients are encouraged to consult www.rajwans.com for details on the practice. For more information or to schedule an initial consultation, please call 416.323.5777 or email info@rajwans.com.