Creating Certainty Through Contract Terms.

Online terms of contract fall within the classification of express terms. An express term is a clear stipulation in a contract which the parties intend to be binding on them. If there is doubt as to the meaning of an express term, the court will construe or interpret the meaning.

Contracts of Adhesion.

Although it is possible to negotiate in some kinds of contract, there are certain categories of contract where such negotiation is difficult to achieve. In such situations the seller would simply impose the terms of the contract on the purchaser. A contract of adhesion is, therefore, a contract drafted by one party and offered on a take-it-or-leave-it basis, therefore giving the offeree very little opportunity to bargain and contribute to the terms of the contract. Online contracts fall into this category.

Typical examples are contracts of insurance and loan agreements. With such contracts the consumer does not normally bargain over the terms of the contract and such contracts are legally enforceable. In the area of electronic contracts, especially in the IT industry, suppliers normally attempt to contract on their own standard terms. In such cases the customer’s bargaining power will determine the extent to which the supplier is ready to deviate from those standard terms. The importance of bargaining for terms that are better than the standard terms of a supplier was highlighted in Mackenzie Patten v. British Olivetti (1984) ICL & P 92, 95.

In this case, a law firm bought an Olivetti computer system to run its accounts. They indicated the purpose for which the computer was intended to be used and without any negotiation signed up on Olivetti’s standard terms. Those terms only related to the technical performance of the computer. The computer was unsuitable for the stated purpose, the law firm ended up expending time and money to litigate the matter.

Shrink-Wrap Agreements.

In today’s information age the information industry has coined a licensing contract to meet the needs of its participants. It is now common for the software industry to use a standard form contract in the form of a shrink-wrap licensing agreement. Shrink-wrap agreements are the terms and conditions of use that accompany software that are sold or distributed in computer stores. Normally such terms and conditions are inserted in an plastic envelope that holds the disk with the software in a box.

Such an agreement construes a customer who has opened the plastic shrink-wrap as assenting to the terms and conditions of the licence. By including a shrink-wrap licence provision on the software product, the supplier’s objectives are:

- To prohibit infringement of intellectual property rights

- To limit liability and disclaim warranties

Normally, a shrink-wrap licence agreement will deny the user the right to make backup copies, modify or resell the software to anyone. A typical shrink-wrap agreement will state that:

“By opening this parcel or envelope, you are bound by the terms and conditions of the licence”

Legalities.

The shrink-wrap agreement raises two main legal issues in relation to contract law:

- Formation of contract

- Assent of parties to contract terms

A contract is normally formed between two parties after the terms have been negotiated and there is a clear understanding between the parties as to the issues involved. The goods are only transferred from the seller to the buyer after such mutual negotiation and understanding. In a shrink-wrap agreement the question is when is the contract formed? Is it at the time of purchase or later at home when the buyer reads the terms of the contract and proceeds to use the product. The enforceability of such a contract may be questionable as the buyer has not given his assent to the stipulated terms.

Initially the courts were sceptical whether such contracts were legally binding and enforceable. The main reason for this was the belief that a contract may not be imposed on a party as this was upheld as a well-established principle of the law of contract universally. The courts, therefore, objected to the idea of first paying out money and then later finding out what the arrangement or agreement was.

In the American case of Step-Saver data Systems, Inc. v.Wyse Tech., 939 F2d 91 (3d Cir. 1991), Step-Saver, the appellant, was a reseller of software for physicians and lawyers. Step-Saver selected an operating system from software producer The Software Link, Inc (TSL). According to Step-Saver, TSL salesmen made certain verbal representations regarding the capabilities of the licensed program. Based in part on these representations, Step-Saver submitted purchase orders for the licensed program. When the actual licensed programs arrived, the packaging contained some terms in an envelope which, among other things, disclaimed all express and implied warranties (with the exception of a warranty that the disks would be defect-free) and limited TSL’s liability to replacing a defective disk.

Step-Saver resold the licensed program to more than one hundred of its own customers before terminating sales because of the numerous customer complaints regarding the capabilities of the licensed program. The customer complaints eventually developed into law suits against Step-Saver. Step-Saver, in turn, sought indemnification from TSL for its costs in defending and resolving such suits. In defence, TSL pointed to the warranty disclaimer and limitation of liability contained in the license. The court, however, held that a contract had been formed when Step-Saver submitted a purchase order and TSL shipped the licensed program to Step-Saver, not as TSL argued, when Step-Saver read the license and effectively consented to it by not returning the licensed programs. The court concluded that the terms in the envelope amounted to additional terms that were not incorporated into the contract.

In more recent times the courts have taken a different stand where shrink-wrap agreements are concerned. In ProCD Inc. v Zeidenberg, 86 F. 3d 1447 (7th Cir. 1996), ProCD compiled information from 3,000 telephone directories into a computer database program called SelectPhone. The program enabled the users to search various telephone and address listings and to incorporate their search results into documents. ProCD offered the database for sale to both consumers and commercial users but consumers paid less for the program than commercial users. To justify the lower price, ProCD packaged the retail software with a licence which limited it to non-commercial purposes.

The defendant bought a retail copy of SelectPhone, and his company proceeded to resell the SelectPhone information over the Internet, in violation of the shrink-wrap agreement and was sued by ProCD. Zeidenberg argued that he was not bound by a contract whose terms he could not examine until after purchase since the license was inside the box.

The court held that ProCD had made an offer to license its product and by using the program, Zeidenberg accepted the offer and bound himself to the terms of the license accompanying the program. The court insisted that unless the terms of the license accompanying the software are objectionable on grounds applicable to contracts in general such shrink-wrap agreements are enforceable.

Click-Wrap Agreements.

It is now common for companies to sell products and services directly to the public over the Internet. Most software companies now offer their products online to those who electronically agree to their online license terms in the form of click-wrap agreements. A click-wrap agreement is a contract for the purchase or sale of products or services offered through an online seller. The online purchaser is expected to agree to the terms of the contract by clicking the “I ACCEPT” icon.

Click-wrap agreements are an improvement on the shrink-wrap as the user is normally required to view the terms and conditions of the contract before affirmatively assenting to the terms of the software to be downloaded. They can be described as a standard-form agreement which is available to the end-user in an online environment.

Typically, a click-wrap agreement appears as a pop-up window from the original page viewed by the user. Alternatively, it will pop-up when a user attempts to download software or order goods and services online. The pop-up window normally contains the terms and conditions of the contract governing the sale or license of the goods or services and the user is instructed, in plain language, to review the contract’s terms before assenting to them by clicking a button at the bottom of the agreement.

The main difference between the online click-wrap and the offline shrink-wrap type is that the vendor is assured that the user’s assent is obtained prior to the formation of the contract. By reviewing and accepting the license agreement the user will subsequently be bound by the contract. This will make the terms of the agreement an integral part of the transaction which work to incorporate those terms into the contract.

An online order system should contain the following to make any click-wrap agreement between the parties legally binding.

The purchase price of the product A clear indication that no contract will be entered into unless the purchaser agrees to the terms. Facility for the purchaser to reject the terms and, therefore, not be bound by them.

The main question with these type of agreements is whether the click on the relevant button satisfies the requirement of acceptance thus creating an enforceable contract between the parties.

In Steven J. Caspi, et al v. The Microsoft Network, L. L. C., et al, 1999 WL 462175, 323 N.J. Super. 118 (N. J. App. Div., July 2, 1999), the plaintiff had entered into a binding contract by agreeing online via the click of a mouse to be bound by the terms of the Microsoft Network’s subscriber agreement. The terms of this agreement appeared in a scrollable window next to blocks containing the words “I agree” or “I disagree”. The user could not commence use of the Microsoft Network unless she clicks the “I agree” button. Each of the plaintiffs clicked the “I agree” button, thereby indicating their assent to be bound by the terms of the subscriber agreement. Both the trial and appellate courts held that this created an enforceable contract between the defendant and their subscribers.

In Groff v. America Online, Inc. ( File No. C.A. No. PC 97- 0331, 1998 W L 307001 ( R.I. Superior Ct., May 27, 1998 ), the plaintiff entered into a click-wrap agreement with America Online Inc. (AOL) which contained a jurisdiction clause. That clause stated that legal actions were to be taken to appropriate courts in Virginia, where the defendant’s base of operation was located.

The court dismissed the plaintiff’s action for improper venue, holding that the parties’ contract entered into online by the click of “I agree” button was enforceable. The court insisted that a party who signs an instrument manifests his assent to it and cannot later complain that he had not read the instrument or that he did not understand its contents.

Key Recommendations.

Online terms and conditions of contract should be displayed in full and positioned in a way that the makes them clearly visible and unmistakable.

There should be a clear statement to the effect that the terms and conditions are an integral part of the contract.

Wherever there is reference to the terms and conditions of contract there should be a direct link to the page where they can be retrieved electronically.

The terms and conditions of contract should be presented in a way that customers can easily print out or download.