Make Your Internet Contracts Airtight

In today’s world of electronic commerce, consumers and businesses routinely enter into contracts (to buy or sell goods and services, to confirm the terms of use of a Website, to outline the rights and obligations of the parties regarding privacy, and many other purposes), all at the click of a mouse. Are these contracts valid? If so, what’s required to make them enforceable?

The Web (business to consumer, business to business, consumer to consumer, and various other combinations) is one giant exchange of goods and services, almost all of which is governed by private, individual contracts between the participants in each transaction. The elements of these contracts are the same as they are in the “paper” world: offer, acceptance of the offer, some form of exchange or consideration, and legality of subject matter.

These requirements are easily met by the vast majority of electronic contracts. Problems in enforcing such agreements arise, not so much from the basic format of the contract, but from the circumstances surrounding the making of the contract.

A contract may be invalid if it is an “unconscionable” agreement, that is, a contract that is substantively and/or procedurally unfair in some way. State laws vary as to the meaning of the term “unconscionable.” Many state courts refer to agreements that are grossly one-sided; some insist that there must be some evidence of coercion, fraud, or lack of notice of the terms of the agreement.

The unconscionability label may be applied in quite unpredictable ways. In Bragg v. Linden Research, Inc., 487 F. Supp.2d 513 (E.D. Pa. 2007), available at www.paed.uscourts.gov, the court held that an arbitration provision in the user agreement for the “Second Life” Website was unconscionable, because it was tilted in favor of the service provider, and because the terms were “buried” in a “general” provisions section of the agreement.

In Comb v. PayPal, Inc., 218 F. Supp.2d 1165 (N.D. Cal. 2002), available at euro.ecom.cmu.edu, the court found that prohibitions on class action relief, written into the service provider’s standard agreement, were unconscionable, because individual claims were so small that no users would ever pursue their rights, unless they could proceed by class action.

In light of these kinds of cases, certain “best practices” for electronic contracts emerge. The following list is not intended as a recipe for contract terms in every agreement; but it may be used as a basic checklist:

1) Make sure that the agreement is the only form of agreement offered. Avoid separate correspondence or other communications separate from the agreement offered on the Website.

2) Make sure that promotional materials and preliminary offers clearly state that the final agreement is the exclusive source for terms of any actual transaction.

3) Conspicuously display terms to prospective users. At a minimum, at the first opportunity in a Website visit, provide notice that use of the site is subject to the terms and conditions of an agreement. Offer an immediate link to the terms of the agreement.

4) The agreement should be clear and concise, so that the average person can understand the nature and terms of the agreement.

5) Require users to manifest their assent to the terms of the agreement with some affirmative action. Methods may include: (a) Typing the words "I Agree," or "I Consent" in response to the agreement; (b) Clicking on icons with the same words; or (c) Typing the user's name in a space provided, such as completion of the sentence: "I, ________, hereby agree to the terms of this contract."

6) Provide for the alternative of rejection. The user should have the option to terminate the process of registration at any point before final acceptance of the agreement.

7) If the site operation involves delivery of a product, the buyer may be reminded that use of the product constitutes acceptance of the terms. The buyer may also be offered the option of a refund on return of the goods, if he or she decides to reject the terms.

8) Provide reminders, where appropriate, that use of the site is subject to the terms of an agreement.

9) Maintain accurate records of the user's acceptance of terms. Records of acceptance should indicate the specific terms that were accepted by a particular user, and the date of such acceptance.

Finally, as with all agreements, if in doubt, seek the advice of counsel. Agreements that are fair, balanced, and adapted to the practical realities of commerce are most likely to be upheld by the courts.

[Disclosure: The author is a partner in the New York City offices of Jones Day, a law firm, and teaches Electronic Discovery at Rutgers and New York Law School. The views expressed are solely those of the author, and should not be attributed to the author’s firm or its clients.]

— Steven C. Bennett is a partner in the New York City offices of international law firm Jones Day.