Guidelines for Creating Enforceable Contracts Online - “The New Way is the Same as the Old Way”
By A.J. Zottola, Partner in the Technology Transactions & Outsourcing Group of Venable LLP, and Robert Parr, Associate in the Corporate Group of Venable LLP
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.
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:
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:
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:
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:
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:
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:
Practice tip for avoiding contracts of adhesion:
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:
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.
Maintain electronic records. Retain a copy of all electronic agreements, including evidence of electronic signatures.
Practice tip for memorializing electronic signature requirements:
Accessibility and accuracy requirements. Storage of an electronic record will satisfy legal record retention requirements if:
Secondary procedures. Back-up the records with other electronic copies and encourage contracting parties to maintain their own records.
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.
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.
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.
Published on December 20, 2012
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