Electronic Contracts 101

Until recently, there was doubt in Canada whether contracts could be formed online, for example by having a customer denote consent to various terms and conditions posted on a Web site by clicking an icon or button that says "I Agree". This uncertainty exists no more courtesy of the Rudder decision1 and the electronic commerce statutes that have been passed by Canadian provinces over the last couple of years. However, while it is now clear that contracts can be formed in cyberspace, care must be taken to design online offer and acceptance processes in a way that in fact results in enforceable contracts. A number of recent cases illustrate what can happen when a Web site design team fails to properly apply core contract law principles.

Express Click Consent Agreements

Readers will recall from my February 2000 column, at issue in the Rudder case was the enforceability of the Microsoft Network's member agreement. This decision is consistent with several previous U.S. decisions that have upheld what may be termed "express click consent agreements," namely contracts concluded over the Internet when people either typed "I Agree" or clicked on an "I Agree" icon at the end of the specific agreement they were agreeing to.2 It will therefore help bolster confidence in the enforceability of contracts concluded over the Internet, thereby making the legal environment for e-commerce more certain.

Rudder dealt with a Web site design whereby the user was presented with the relevant terms and conditions, and expressly required to agree to them (or decline them), before the user could go on to the next screen in the site. In this sense, the Rudder case may be said to have dealt with an "express click consent agreement." Often, however, the Web designer does not want to present the user with the terms and conditions expressly. This need not be an insurmountable obstacle to creating an enforceable online agreement. In one recent American decision, the court held that assent to terms and conditions may be manifested by conduct, in this case by using the site for its intended purpose.3

In other cases, however, courts have concluded that the terms and conditions are not binding on the user because insufficient efforts were taken to bring the terms, or even the existence of the terms, to the user. Thus, in one case the court found the link to the terms at the home page to be too small to be noticed,4 and in another case the link was in a colour that did not stand out.5 In yet another case the language on the screen referencing the terms was considered merely an invitation to link to the terms, rather than a firm condition, with the result that the user was able to download the software without having either to view the page containing the terms of the software licence nor clicking a button that manifested acceptance of these terms. In these circumstances the court held that the user had not assented to the licence terms.6

Shrinkwraps and Webwraps: Poor Titles

These latter cases are often referred to by commentators as dealing with "click wrap" or "browse wrap" agreements. In so doing, the parallel is trying to be drawn to "shrinkwrap" software licences. Unfortunately, the intended analogy is not a good one, as most shrinkwrap software licences today do not involve any cellophane packaging either, and instead utilize the "pay now, contract later, with full refund if refuse licence" model, as in ProCD.7

In ProCD, the user purchased the product at retail price, but when he took it home and loaded the disk into his computer, a screen appeared that presented the licensor's licence terms. The user had to expressly agree to these terms in order to continue into the product. If the user declined to agree with the contract, the user could return the product for a full refund. Thus, the ProCD case is akin to the Rudder situation, because in both scenarios the user is given the opportunity to read the contract and then to immediately and expressly agree (or not) to it before commencing to use the relevant service or product.

This does not mean that the only type of online agreement that will be enforceable is the kind where the user is expressly required to scroll through the terms and conditions and then click "I Agree" at the end. There is no doubt, of course, that such an "express click consent agreement" is the preferred vehicle for creating binding, online contracts. Nevertheless, an "implied click consent agreement" will also be recognized by the courts, provided it is designed and presented carefully. Three conditions need to exist. First, the link to the terms must be readily accessible, and ideally should take the user directly to the terms (though as will be seen in next month's column in the discussion of the very recent Rogers Cable decision, indirect links are also acceptable). Second, there should be a prominent notice on the homepage, requiring (not merely requesting) users to read and assent to the terms, and stressing the importance of the terms. Finally, the homepage should have a button that has the user confirm that he or she has read the terms and agrees to be bound by them, thereby manifesting assent to the terms.

Overreaching Terms

In one recent case, Robet v. Versus Brokerage Services (c.o.b. E*TRADE Canada),8 involving a claim by a user of an Internet stock trading service, the court refused to enforce the limit of liability clause (contained in an account agreement concluded partly online and partly by hard copies exchanged by regular mail). Essentially, the court felt the agreement was overly one-sided and unfair, and it concluded that exclusionary clauses should not be enforced where the supplier failed to supply the very thing contracted for. In Robet, a client of E*TRADE purchased three thousand shares, but due to computer and human error, an extra nine thousand shares were shown as having been purchased by the client. Instead of complaining to E*TRADE (as many other clients did), the client sold the nine thousand shares (as many other clients affected by the same error sold their excess shares), which started a chain of events that eventually required the client to cover a short sale position. When the client refused to do so, E*TRADE did.

The resulting loss in Robet was apportioned by the court: E*TRADE was at fault for the original posting of the erroneous account balance showing the extra nine thousand shares, but the client was at fault for not mitigating damages as soon as he was able to do so by promptly covering the short sale position. In effect, a plague on both your houses, said the court.

E-mail to the Rescue

One lesson reinforced by the court in Robet was that the whole sorry story could have been avoided had E*TRADE promptly notified the client that a computer glitch had occurred, and therefore there might be anomalous postings in their account balances. A short e-mail to this effect would have done the trick. In fact, the court observed that since the computer meltdown that gave rise to this case, E*TRADE in fact had added such an e-mail-based warning functionality to its system.

To complete this discussion of electronic contracting, next month we'll look at an important new case, Kanitz v. Rogers Cable Inc.9 that upheld the enforceability of online terms concluded through, essentially, an implied click consent arrangement. This decision breaks new ground in Canada.

1 Rudder (1999), 2 C.P.R. (4th) 474.

2 For example, Compuserve, 89 F.3d 1257.

3 Register.com, 126 F. Supp. 2d 238.

4 Ticketmaster Corp., 2000 U.S. Dist. LEXIS 4553.

5 Pollstar, 2000, WL 33266437.

6 Specht (2001), U.S. Dist. LEXIS 9073.

7 ProCD, 86, F. 3d 1447.

8 [2001] O.J. No. 1341.

9 [2002] O.J. No. 665.


George S. Takach is head of the technology law group at McCarthy Tétrault LLP, the author of Computer Law, and a special lecturer in computer law at Osgoode Hall Law School. This column is intended to convey brief, timely but only general information and does not constitute legal advice; readers are encouraged to speak with legal counsel to understand how the general issues noted above apply to their particular circumstances.

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