THE VALIDITY OF ONLINE “CONTRACTS”

IVAN HOFFMAN, B.A., J.D.


        It is basic, black letter, first week in law school law that in order to have a valid contract, there must be at least 3 essential elements.   These elements are an offer, acceptance and consideration.

        The concept of “offer” is simple: a web site offers goods, services, software, membership in the site etc. etc. and that offer is contained, for the sake of this article, in some sort of agreement posted on the site.

        “Consideration” for the sake of extreme simplicity and because it is not germane to this article, involves something of value being exchanged between the parties.  Let’s just leave it at that.

        This article deals with how, in the context of the Internet, the element of “acceptance” can be satisfied so that, assuming the validity of a given offer and a valid consideration, a binding obligation can be created.

        As discussed above, the creation of such an obligation is not limited to the actual buying and selling of goods, although as you will see below, with regard to the sale of goods, the Uniform Commercial Code (UCC) is the primary body of law.  The context can also be whether or not a site visitor can be held to be bound by the site’s terms of service even though the UCC may not be applicable in such an instance since there may not be a “sale of goods” involved.  The issue is also very relevant when a site is a “membership” site, whether a dating service or other form of membership and the question is whether or not the member has agreed to be bound by the membership agreement.  (Read, in the latter regard, “Membership Agreements”)  Of course there may be many other instances where the issue of the validity of an online contract comes into legal question.

        A number of cases over the past few years have set out the boundaries of the law in this regard.  Some of these cases are discussed below.  There are other cases dealing with “shrink wrap licenses” that are not discussed in this article for the sake of brevity.

        The UCC is a model statute that nearly all the states of the United States have adopted in one form or another.  With regard to the formation of contracts, the UCC, section 2-204, says as follows, again limiting the application of this statute to the sale of goods:

(1) A contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
        In I. Lan Systems, Inc. vs. Netscout Service Level Corp., the Court found that a party was obligated to adhere to the terms of an agreement between it and a site owner when the party clicked on an “I agree” button at the end of the online agreement.  The Court found that by so agreeing, the said party manifested its intent to be bound and specifically referred to the above section of the UCC.

        As I indicated above, there are other situations that do not relate to the sale of goods in which the issue about contract formation arises.  These often have to do with the binding effect on site visitors of so-called terms of service, membership and/or other agreements posted on a web.  Here, too, the issues are whether or not there are the elements of a contract present.  Although the UCC may not be directly applicable, the UCC actually embodies long established principles of the common law regarding contract formation and those principles have gotten a new spin given the Internet.

        In Specht vs. Netscape Communications Corp.  the issue was whether or not the terms of the license posted on the Netscape site was binding on someone downloading Netscape’s SmartDownload software.  The Court stated:

Principally, we are asked to determine whether plaintiffs-appellees ("plaintiffs"), by acting upon defendants' invitation to download free software made available on defendants' webpage, agreed to be bound by the software's license terms (which included the arbitration clause at issue), even though plaintiffs could not have learned of the existence of those terms unless, prior to executing the download, they had scrolled down the webpage to a screen located below the download button. We agree with the district court that a reasonably prudent Internet user in circumstances such as these would not have known or learned of the existence of the license terms before responding to defendants' invitation to download the free software, and that defendants therefore did not provide reasonable notice of the license terms. In consequence, plaintiffs' bare act of downloading the software did not unambiguously manifest assent to the arbitration provision contained in the license terms.
        The Court stated:
Whether governed by the common law or by Article 2 of the Uniform Commercial Code ("UCC"), a transaction, in order to be a contract, requires a manifestation of agreement between the parties. See Windsor Mills, Inc. v. Collins & Aikman Corp., 101 Cal. Rptr. 347, 350 (Cal. Ct. App. 1972) ("[C]onsent to, or acceptance of, the arbitration provision [is] necessary to create an agreement to arbitrate."); see also Cal. Com. Code § 2204(1) ("A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.").13 Mutual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract. Binder v. Aetna Life Ins. Co., 89 Cal. Rptr. 2d 540, 551 (Cal. Ct. App. 1999); cf. Restatement (Second) of Contracts § 19(2) (1981) ("The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents."). Although an onlooker observing the disputed transactions in this case would have seen each of the user plaintiffs click on the SmartDownload "Download" button, see Cedars Sinai Med. Ctr. v. Mid-West Nat'l Life Ins. Co., 118 F. Supp. 2d 1002, 1008 (C.D. Cal. 2000) ("In California, a party's intent to contract is judged objectively, by the party's outward manifestation of consent."), a consumer's clicking on a download button does not communicate assent to contractual terms if the offer did not make clear to the consumer that clicking on the download button would signify assent to those terms, see Windsor Mills, 101 Cal. Rptr. at 351 ("[W]hen the offeree does not know that a proposal has been made to him this objective standard does not apply."). California's common law is clear that "an offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he is unaware, contained in a document whose contractual nature is not obvious." Id.; see also Marin Storage & Trucking, Inc. v. Benco Contracting & Eng'g, Inc., 107 Cal. Rptr. 2d 645, 651 (Cal. Ct. App. 2001) (same).
        In Groff vs. America Online, one issue among other issues was the validity of AOL’s terms of service agreement and whether it was binding on the plaintiff.  The way that the particular AOL site was set up, a visitor was required to proceed through a screen containing the terms of service and to affirmatively click on a button signaling the visitor’s assent to the said terms before the visitor could further proceed through the site.

        The Court stated:

While defendant prepared this contract, plaintiff was under no obligation to agree to the terms. Plaintiff had the option to refuse the service and the contract offered by plaintiff.  Although plaintiff in his affidavit, states “I never saw, read, negotiated for or knowingly agreed to be bound by the choice of law...” ha [sic] does not point to any conduct of defendant or other reason why he could not. Indeed as pointed out in defendant’s affidavit and argued in his memorandum, one could not enroll unless they clicked the “I agree” button which was immediately next to the “read now’ button (Exhibit 1, page 33) or, finally, the “I agree” button next to the “I disagree” button at the conclusion of the agreement (Exhibit 1, page 79).

In McKendall Lumber Co. vs Kalian, 425 A.2~d 515 (RI. 1981)) where the facts disclosed an agent for defendant purchased and signed a sales slips upon receipt which called for interest, defendant at trial argued that he was not bound to the terms. Our Court, at 518. stated the general rule that a party who signs an instrument manifests his assent to it and cannot later complain that be did not read the instrument or that he did not understand its contents. Here, plaintiff effectively “signed” the agreement by clicking “I agree” not once but twice. Under these circumstances, he should not be heard to complain that he did not see, read, etc. and is bound to the terms of his agreement.

        In Register.com, Inc. v. Verio, Inc., that Court held that the terms of use that was on the Register.com site was binding on a user even though the user did not have to pass through that screen and signal its affirmative consent to be bound.  The Court summarized the Verio argument, in part, thusly:
Second, Verio argues that even if Register.com’s terms of use are enforceable, Verio has never manifested any assent to those terms.
        The Court found that other conduct manifested the requisite assent and agreement to be bound.  It cited to the fact that the said terms and conditions said that if a visitor uses the WHOIS query, that indicated an agreement to be bound by the said terms.  This case is of questionable reasoning in my mind since the “assent” did not have to occur until after the WHOIS submission.

        The better line of reasoning to me is in Ticketmaster Corp., et al. v. Tickets.Com, Inc.  In that case the issue (among many other issues) was whether or not the terms and conditions of site use on the Ticketmaster site was binding on site visitors, in this instance Tickets.com.  The Court found that because the site did not mandate that a visitor affirmatively click on the “I Agree” button before accessing the site, the terms and conditions were not binding, absent a showing of some other form of “assent” on the part of the visitor.  The Court stated:

Many web sites make you click on “agree” to the terms and conditions before going on, but Ticketmaster does not. Further, the terms and conditions are set forth so that the customer needs to scroll down the home page to find and read them. Many customers instead are likely to proceed to the event page of interest rather than reading the “small print.”  It cannot be said that merely putting the terms and conditions in this fashion necessarily creates a contract with anyone using the web site. The motion is granted with leave to amend in case there are facts showing Tickets’ knowledge of them plus facts showing implied agreement to them.
What These Cases Mean to You

        While there is no guarantee that any of these agreements will be held valid, it seems clearly better to have these agreements than not.  To increase a site’s chances of having any such agreement enforced against a site visitor, the agreement should be set up so as to create a “contract.”  This means that, aside from the issues about validity of “consideration,” there must be an offer (which is set forth in the respective agreement, terms of service etc.) and, for the issues related to this article, a valid “acceptance” of the terms of that offer.  Therefore, a site must make certain that prominently displayed on the site, preferably on the home page, in CAPS AND BOLD, is a link to the respective agreement.  This link must take the visitor to the agreement and there must be a mechanism deployed whereby the visitor must affirmatively click on some sort of “I Accept These Terms and Conditions” button before the visitor can proceed through the site.  This latter procedure, blocking access to the site until there is this affirmative response from the visitor, is what the courts seem most likely to look to in determining if there has been an “acceptance.”  There can also be a “I Decline” button as well.  Ideally, a site should be able to retain a record of the acceptance of the visitor but under any circumstances, should be able to establish that there could be no access to the site without the affirmative act of assenting by clicking on “I Accept.”

Conclusion

        As with all things legal in general and as with all things legal with regard to the ever-evolving law of the Internet in particular, general rules are often riddled with exceptions.  All cases are truly evaluated on their own merits, which merits are defined by the facts presented in each instance.  Thus, it is the visionary site owner that does what it can do to enhance the odds in its favor even though there can be no guarantees of any enforceability.

        As I have repeatedly said, we are in the “day of the deal” and it is up to each party to exercise that party’s personal responsibility to have current, thorough and experienced legal advice in all matters but in particular regard to the Internet.  Read “Private Laws”.

© 2002 Ivan Hoffman

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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