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Report on E-business

All electronic contracts are not created equal

Friday, May 25, 2001

For businesses engaging in e-commerce, contractual certainty is a critical legal issue. Whether for an e-tailer, a B2B enterprise or a provider of on-line services, the contracts consummated on-line must be enforceable. Without this assurance, e-commerce simply isn't viable.

To address this concern, governments worldwide have raced to enact e-commerce legislation that eliminates legal uncertainty by ensuring that electronic contracts are as valid and enforceable as their paper-based counterparts.

The Canadian courts have also contributed to emerging Canadian e-commerce law. In Rudder v. Microsoft, a landmark case decided in late 1999, an Ontario court upheld the validity of a "clickwrap agreement."

Clickwrap agreements originated with the old software-licensing agreements printed on the outside of software boxes, often referred to as "shrinkwrap agreements." Due to the popularity of downloading software from the Internet, the shrinkwrap agreement is rapidly being replaced by the clickwrap agreement, with users clicking on the "I Agree" button rather than removing the shrinkwrap packaging.

Although the trend at both the legislative and court levels is to enforce electronic contracts, it would be a mistake to think that all electronic contracts will be enforced. In fact, several recent U.S. cases suggest that while the concept of electronic contracting is perfectly valid, the actual enforceability of any given electronic contract will depend upon the specific facts of the case.

Close examination of recent case law reveals that two issues are particularly important -- the form of assent and the reasonableness of the contractual terms.

In Ticketmaster v., a dispute over hyperlinks between rival event ticket sites, a U.S. court considered the enforceability of the terms and conditions page found on the Ticketmaster site. It concluded they were not enforceable since Ticketmaster did not require that the user click "I agree" or otherwise ensure that the customer read the terms.

While the form of assent may call into question the validity of an electronic contract, the actual terms of the contract itself are of even greater consequence. Courts are required to consider the reasonableness of the terms of a contract as part of their analysis. Several courts have refused to enforce electronic contracts in recent months based largely on the fact that they found the terms in the contract to be unreasonable.

In Mendoza v. AOL, the court surprised America Online Inc. by refusing to enforce the company's service agreement in a dispute over an Internet service bill. After Mendoza sued AOL in California state court, AOL sought to dismiss the case on the grounds that the AOL service contract contains a forum-selection clause that requires all disputes arising from the contract to be brought in Virginia.

The court refused to enforce that clause, ruling that "it would be unfair and unreasonable because the clause in question was not negotiated at arm's length, was contained in a standard form contract, and was not readily identifiable by the plaintiff due to the small text and location of the clause at the conclusion of the agreement."

These newer cases make it clear that, as courts become increasingly comfortable with electronic contracts, they are likely to engage in more rigorous contractual analysis. For example, although many experts applauded the 1999 Rudder decision, in hindsight it is questionable whether it is good policy for an Ontario court to enforce a contract that effectively precludes a Canadian consumer from relying on Canadian law or bringing his or her dispute to a Canadian court.

These developments reveal a good news/bad news situation for electronic contracts. While the legislative trend is to enforce such contracts, care must be taken in drafting and implementing electronic contracts to ensure that assent is clear and that the terms are reasonable.

In the world of e-commerce, all e-contracts are not created equal.
Michael Geist is a law professor at the University of Ottawa Law School and director of e-commerce law at Goodmans LLP. He can be reached by e-mail at

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