Aug 2008

The Internet age has changed the way in which many companies now contract with their customers. More than ever, companies are using the Internet to conduct business transactions, frequently requiring customers to agree to standard terms and conditions before agreeing to process any order for goods or services. It is important that appropriate measures are taken to ensure that these online contracts are enforceable.

The prevalence of online contracting can be demonstrated by observing the web surfing habits of a typical Internet user.  In any one internet session a user could be engaging in a multitude of online contracts, ranging from signing up for membership of an online social networking site, to subscribing to a news website, to purchasing the week's groceries.

With agreements signed in paper form, there is generally a sense of greater certainty around enforceability as there is a general presumption that if terms are printed on a piece of paper that has been physically signed, the signature indicates agreement to those terms.  On the Internet, users are not required to sign physical agreements and as such, two important issues arise regarding whether or not these agreements can be enforced:

• whether or not adequate notice has been provided to the user of the terms which are being sought to be enforced so it is reasonable to assume user has accepted them; and
• whether the terms include unusual or particularly onerous terms that would require a high degree of notice.

Two types of contracts are commonly used in the context of the Internet:  browse wrap and click wrap agreements.  New Zealand Courts have not specifically considered the enforceability of such contracts despite their use being widespread.  However, the decisions of overseas Courts provide a good indication as to how New Zealand Courts would treat the enforceability of browse-wrap and click-wrap agreements.

Browse-wrap Agreements

Browse-wrap agreements are generally agreements where terms and conditions are available online, but positive assent (eg by clicking an "I agree" button) is not required before a user is deemed to be bound by them.  Typically, the full terms of a browse-wrap agreement are viewed by clicking on a hyperlink on a website which will then direct users to a separate page. 

There have been a number of U.S. cases that have considered the enforceability of such agreements.  They have been upheld in some cases but not others. In Specht v Netscape Communications, Netscape Communications offered software for download from its website on the basis that users were bound to the terms of its licence agreement.  Users could download the software by clicking on a download button found on the website.  The court held that the licence terms were not enforceable against Specht as a user did not have to acknowledge reading the terms of the licence agreement before downloading the software, nor was it made clear to a user that they would be bound to the terms of the licence agreement by virtue of downloading the software.  In fact, the reference to the licence agreement appeared at the bottom of the page, some distance from the download button.  The court considered consent to be an essential element as to whether a contract had been formed between Netscape Communications and the user.  Failure to bring adequate attention to the terms and not requiring positive action by the user to assent to those terms, meant that there was not the requisite consent for a contract to be formed, and accordingly, the agreement was not enforceable.

However, other U.S. cases have held that browse wrap agreements are enforceable.  In Register.com v Verio, Inc¹  the court held that there was no requirement for positive assent by a user before a browse-wrap agreement could be held enforceable.  The court stated that where a benefit is offered subject to stated terms and conditions, the act of taking the benefit offered would amount to acceptance of the stated terms and conditions.

To reduce the prospect of terms of a browse-wrap agreement being found unenforceable it would be prudent to make it obvious to users where browse-wrap terms apply. 

Click-wrap Agreements

Click-wrap agreements differ from browse-wrap agreements in that they require the positive assent of a user to signal acceptance.  Click-wrap agreements are often used where software is sold over the Internet.  Users will often be required to accept terms and conditions (usually by clicking on a button or icon or checking a check box) either before downloading the software or during the installation process of the software.

Generally, U.S. courts have held click wrap agreements enforceable, provided that a user is made sufficiently aware of the terms and it can be demonstrated that they have accepted the terms.  The U.S. case of De John v TV Corporation International² , held that a click wrap agreement was binding on a user despite the user not reading the terms before clicking the "accept" button.

Onerous Terms

Despite a general presumption that click wrap agreements are enforceable, particular care should be taken when trying to enforce unusual or onerous terms.  A court may determine that a particularly onerous or unusual term is unenforceable despite unequivocal acceptance, unless that term had been brought to the particular attention of the other party.  The ability of a Court to strike out onerous terms despite evidence of positive assent was demonstrated in the decision of Comb v PayPal, Inc³ where the court held that the arbitration clause (which was particularly onerous) in Paypal's User Agreement was not enforceable.

Of course, the same care to bring onerous or unusual terms to the attention of the other party will apply equally to browse-wrap agreements.

Practical Steps to Ensure Enforceability of Online Contracts

In summary, to reduce the prospect of the terms of your online contracts being found unenforceable you should:

• provide adequate notice to the other party of the existence of the terms;
• ensure the other party positively assents to the terms; and
• ensure that any particularly onerous terms are specifically brought to the attention of the other party.

Footnotes:

¹ 126 F Supp 2d 238 (SDNY 2000).
² ND III, No. 02 C497, 16 January 2003.
³ (ND CA, 30 August 2002).

Key Contacts

Karen Ngan +64-9-977 5080 karen.ngan@simpsongrierson.com
Karl Loo +64-9-977 5245 karl.loo@simpsongrierson.com

Note: The information provided in this article is intended to provide general information only.  This information is not intended to constitute expert or professional advice and should not be relied upon as such.  Specialist legal advice should always be sought for your particular circumstances.