Electronic agreements hinder companies despite widespread use

Authentication issues may arise from entering contracts via e-mail.

Every day, millions of consumers scroll through legal terms and conditions in electronic contracts and click “I agree” to obtain goods and services online. Yet some companies’ online procedures do not even come close to creating enforceable contracts in cyberspace, as evidenced by several recent court decisions.

Some of the cases question whether the parties reached a binding agreement, while others concern the authenticity of e-signatures. Still others focus on whether adequate notice of terms and conditions was given.  For example, in February a federal district court in Connecticut held in Schnabel v. Trilegiant Corporation that an arbitration clause included in a welcome e-mail but not referenced on subsequent sign-up screens is not enforceable as part of the contract between a user and an online service.

“The court held that a welcome e-mail was a far cry from the language necessary to indicate manifest agreement from the user,” says Baker Donelson Shareholder Jason Epstein.

This and other recent cases underscore the need for in-house counsel to review their company’s contracting policies, particularly concerning the use of e-mail, text messages, phone calls and other informal methods, as well as the processes used for online transactions.

On Notice

While e-contracts are now widely used and broadly construed, it is essential to include clearly stated notice and avoid ambiguous or unconscionable terms, Epstein says.

That didn’t happen in Cvent v. Eventbrite, a case decided by the Federal District Court for the Eastern District of Virginia in September 2010. The court held that the Terms of Use for Cvent’s website did not bind because they were hidden behind a link that appeared among 28 links in “extremely fine print” at the bottom of a page, where no reasonable user could be expected to notice them.

However, when the notice is clear, courts are not reluctant to uphold contracts. Click-through agreements can provide protection by requiring the user to affirm he is aware of the terms.

A website user’s claim that he inadvertently, through a keystroke error, checked a box marked “I agree” beneath a scroll box of binding terms does not negate those terms’ otherwise reasonable provisions, the Federal District Court for the Eastern District of New York held in Scherillo v. Dun and Bradstreet last year.

E-mail Agreements

Another problem for in-house counsel involves employees creating e-contracts containing terms to which company executives never intended to agree.

In Carimate v. GinsGlobal Index Funds, a 2009 case in the Federal District Court for the Central District of California, the case centered on a statement in an e-mail: “Yes I agree with your comments re splitting all future initiatives … —no problem.” The court said that statement was definitive enough to constitute a material term of agreement.

An automated document assembly system with alternative clauses preapproved by executives and counsel may help prevent employees from changing contract terms. Legal departments must train employees in electronic communication and deal-making, Epstein says.

Taking proactive steps to prevent unauthorized creation and acceptance of e-contracts can pay off. For example, in a 2010 case in the Federal District Court for the Southern District of Florida, National Auto Lenders v. SysLOCATE, the court found a company wasn’t bound by an Internet clickwrap terms of service agreement, which a subcontractor and an employee accepted, because it had previously notified the online service that only its executives could commit to contracts.

Authentication Issues

Other important issues in e-contracts include authentication: For example, when a bank receives an electronic payment order from a customer directing that money be paid to a third party, the bank must be able to verify the source of the request.

The way electronic transactions are set up can be critical in later proving that an electronic signature was attached to a particular e-record and the identity of the signing party, says Wildman Harrold Partner Thomas Smedinghoff.

He points to Prudential v. Dukoff, decided in December 2009 by the Federal District Court for the Eastern District of New York. In that case, Prudential wanted to deny coverage under a life insurance policy and tried to use allegedly false statements that appeared in the electronically signed online application as the basis for doing so. The insured argued that the online application did not contain a valid electronic signature under the New York Electronic Signatures and Records Act, and therefore the allegedly false statements could not be used to deny coverage. The court held that in order for an insurer to use statements made in an online application to support its fraud lawsuit, it must have had sufficient authentication processes in place to make the signer reasonably identifiable.

“At one level it might be argued that this case states the obvious—if you want to hold someone to a clickwrap signature, you must be able to prove who clicked,” Smedinghoff says. “But it also represents an interesting case illustrating a court’s recognition of the need for appropriate identity management.”

When setting up the online procedures for any electronic transaction, it is important to understand the critical role of the “process” in ensuring legal compliance, Smedinghoff adds.

“Creating an enforceable online contract requires more than just getting each party to sign the document,” he says. “The process by which the signature is applied—both by the signer and by the underlying software—can well determine whether the so-called ‘signed’ agreement really has a valid signature.”

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