The Green Sheet Online Edition
August 23, 2010 • Issue 10:08:02
Are your online contracts enforceable?
Savvy companies look for faster, more convenient ways to do business. For example, some companies allow their merchants and ISOs to enter into contracts over the Internet.
Thanks to federal and state laws, contracts entered into via the Internet are as enforceable as those signed with pen on paper; however, Internet-specific contracts require extra steps before execution. Here are tips to make sure your online contracts will be enforceable.
Like traditional contracts, online contracts require assent to the terms of the agreement (among other conditions) to become valid. To meet the requirements for online assent, the process must provide:
- Opportunity to review all terms of the contract before entering into the agreement: The signing party should be able to read at his or her own pace and should not be timed out. All agreement terms should appear on the screen before the signing party has the opportunity to click the "I Agree" button.
Your website should also be configured so the signing party must view the terms of the contract before agreeing to them. Courts have allowed parties to escape contractual obligations when websites have not prominently displayed all of the terms on the website.
Once the signing party views the terms, your website should allow the party to access those terms online for further reference, save them to a computer and print them.
- Clear and consistent terms: The screens on which the contract appears must display all contract terms clearly. The agreement should be in a legible font both on screen and in print.
The information provided throughout your website should be consistent. For example, the portion of your site dedicated to marketing should not contradict the agreement terms.
- Clear notice indicating the consequences of assent to the contract: For example, immediately before the "Yes, I agree" button, include a statement such as: "By clicking 'Yes' below you acknowledge that you have read, understood and agree to be bound by the terms above" or "These terms are a legal contract that will bind you as soon as you click the following assent button."
- A choice to accept or reject: Provide a clear choice between assenting to the terms or rejecting them, and explain the consequence of rejection. The rejection option should be as clear as the assent method, such as clicking a button or typing terms such as "I do not agree," "No," or "I decline."
If the merchant or ISO rejects the agreement terms, that action should automatically prevent him or her from getting an account. No party should be able to complete the transaction without agreeing to the terms.
- A way to detect and correct errors: Provide a reasonable method to avoid, or to detect and correct, possible errors during the assent process. Presenting a summary of the agreement before the "I Agree" button appears is one method.
- A way to retain contract records: Once you have entered into an online contract, make sure you retain the contract in an acceptable form.
Electronic contracts must be retained in a form that accurately reflects the information in the contract, accessible to all persons entitled to access the information for the period of time required by law, and in a form accurately reproducible for later reference by transmission, printing or other methods.
Also, maintain accurate records of the content and format of the electronic agreement process, documenting steps the signing party had to take to gain access to particular items and the version of the agreement in effect at the time of the contract.
Store information about each contract so if your merchant or ISO requests a copy, you can provide it and proof of their assent, either in hard copy or electronic form. Ensure adequate security standards to safeguard the information in electronic records.
Card company rules also state that the member must have prompt and unrestricted physical access to all original, executed merchant agreements and must forward complete copies upon a card organization's request.
- A method of authentication: Implement a method that authenticates the signing party to provide you with confidence that the person entering into the contract truly has the authority on behalf of the signing party.
You can link the signing party's identity to his or her assent by maintaining accurate records of the merchant's or ISO's identifying information, electronic assent to the terms, and the version of the agreed-upon terms.
Amending the online contract
A time may come when you want to change the terms of a contract. Be careful when amending online contracts because specific language is required.
- Don't use language that requires a writing executed by both parties to amend the contract. While this language might be typical in a traditional pen and paper contract, if you want to have the ability to change your online agreement without getting specific consent from the other party, avoid such language at all costs.
- Use language that specifically allows you to amend your online agreement by either posting the change online or, preferably, by providing notice of the change to the other contracting party.
- Use modification language that is expressly limited to prospective modification and does not apply retroactively to any events occurring prior to the contract amendment. At least one court has found that contracts that allow one party to unilaterally amend a contract retroactively are unenforceable.
Abiding by card brand rules
The card company rules also address contract enforceability. For instance, the rules require merchant contracts to be in writing and signed by the merchant and the member; however, they don't specifically require that they be signed with a pen.
Each party to the online merchant agreement must sign the contract, either manually or electronically.
All requirements imposed by traditional laws relevant to original signature contracts, such as know-your-customer and card organization site inspection rules, apply equally to agreements signed electronically.
You can take several steps when posting your agreements online to help ensure enforceability. By providing evidence that the other party actually knew of the contract terms before entering into the agreement, you can almost eliminate the possibility that your contract will be deemed unenforceable.
Additionally, while the safest approach is to get the other party's explicit consent to amend each contract, if you do not want to go through the time and effort to obtain each party's approval to every amendment, then at least be sure:
- Your contracts permit you to unilaterally amend contracts without obtaining the other party's consent.
- You can send notice of the modified contract provisions to the other party by posting notice of the change on your website and by sending notice of the amendment via email or hard copy.
- The amendment is expressly limited to events occurring after the amendment and not effective retroactively.
These recommendations are general suggestions; they are not a substitute for legal advice. For specific information, consult experienced legal counsel. Sarah Weston is an attorney at Jaffe, Raitt, Heuer & Weiss PC and advises businesses on contract and regulatory issues in the merchant acquiring, stored value, automated clearing house and payment systems industries. You can reach her at 248-351-3000 or at email@example.com.
Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.