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.

__________________

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.

0 Comments:

Post a Comment

Links to this post:

Create a Link

<< Home