Common Terms and Conditions in Electronic Contracts

April 16, 2014, the New York Times published an article entitled “When ‘Liking a Brand Online Voids the Right to Sue”. Although sensational and somewhat misleading, the headline does speak truth to the fact that many companies are taking steps to protect themselves though terms and conditions that consumers may never read, but implicitly agree to. Not only is this a strong strategy to limit liability, but also it has been upheld, to varying degrees, in major court cases according to the concepts of ‘browse-wrap’, ‘click-wrap’, and ‘shrink-wrap’ electronic contracts.

These electronic contracts, which sometimes a consumer may never read, but has notice of, include a variety of pro-company clauses ranging from choice of forum to warranty disclaimers. In the New York Times article, General Mills (GM) updated Facebook page terms and conditions to restrict consumers from suing the company in court for any incident related to the social network or benefits received from ‘liking’ GM’s page. Instead, the terms required that ‘fans’ seek redress through arbitration proceedings. The clause’s effect was limited to grievances related to the social media page, as would usually be the case in any contract or transaction. Despite this small scope, however, the change could save GM from expensive lawsuits (individual or class action) in an area with a changing landscape: social media.

It is generally a winning strategy for companies to employ electronic contracts like GM’s, but what should be included in these contracts? Here are three common clauses:

 

1. “Type of Forum” and Choice of Forum

GM’s clause is a choice of forum clause because it restricts where the parties to the contract can bring legal action. This clause has two kinds: mandatory arbitration and exclusive venue. In mandatory arbitration clauses, both parties agree to bring any legal dispute before an arbitrator, not a judge. Companies generally prefer arbitration because it is quicker than civil trials and can be cheaper, depending on the extent of the suit. Additionally, studies suggest companies are much more successful in arbitration proceedings than in court—in one study, companies were successful in arbitration 97% of the time. In exclusive venue clauses, both parties are required to bring a civil lawsuit to a certain district court or a court within a certain state, which can suppress the costs of a lawsuit by reducing a company’s counsel’s travel time and related expenses.

Note, however, that GM later changed its course and removed its arbitration clause because many of its consumers were upset that they could not bring suit in the event they were harmed by involvement in GM’s social network. This shows that while choice of forum clauses may help a company by limiting liability for court costs and hassles, there may be negative public relations ramifications. These soft issues must be carefully considered.

 

2. Indemnification Clauses

Companies like Google include indemnification clauses for some services, especially those in which consumers are posting information on company-owned websites, such as Youtube. An indemnification clause can require the other party (another business or a consumer) to pay for any costs and expenses suffered as a result of lawsuits against the company related to the other party’s conduct (third party). For example, if Google is sued by a record company because a Youtube user posted a copyrighted video on Youtube, then Google could require the user to indemnify (reimburse) Google for the costs it incurred trying to defend itself.

 

3. Disclaimer of Warranties

Often, companies desire to limit their liability by limiting a product’s or service’s warranties. Many companies are also unaware that sometimes warranties are implied, even if not stated in a warranty policy. For example, the implied warranty of merchantability requires that a good sold by the company be of good quality and fit for ordinary use. However, companies can disclaim these implied warranties with specific terms and clearly define any express warranties made to the consumer.

 

If you operate a company, it is usually prudent to consider ways in which to incorporate electronic contracts and some of the clauses listed above. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation about electronic contracting or any of your legal needs, contact us.

Advertisement

A Buyer’s Guide to Intermediate Steps in Mergers or Acquisitions

You are a leader in a small to medium-sized company. Along with your executive peers, you are trying to determine the next steps for growth. You could create a new product, add additional services, replicate your business model, etc. One idea is to either merge or acquire a company that has complementary competencies to your own and similar products. After thinking about the company strategically, you decide that merging or acquiring this other company is the best next step, but what to do next?

After conceptualizing a merger or acquisition and deciding it, on paper, seems like a good idea, many leaders don’t know what to do next. We submit that there are three important future steps when further evaluating the potential deal:

 

1. Conduct Due Diligence

In every merger or acquisition, some of the most-contested points in negotiation arise from the representations and warranties made by both parties. On the one hand, the Buyer wants to purchase the entity without its liability baggage, but on the other, the Seller doesn’t want to be left taking care of costly litigation or disputes after the merger or sale. After a Buyer has picked the target company, it absolutely needs to conduct as much due diligence as possible. This can be accomplished in the form of research about the company in the public record—has the company been sued in the past or recently, what sorts of reported disputes as the company been involved in, what information is available on the size of the company’s financial and legal liabilities?

Buyers should consider every kind of liability they face in their own line of business in addition to liabilities they haven’t yet encountered and try to find as much information as is available about the target company on these points. In some cases, an interested Buyer may be able to create a confidential relationship (Confidentiality Agreement) with the target company to learn more about the specifics. In whatever ways due diligence is accomplished, it is absolutely essential that Buyers are aware of any specific risks involved in merging with or acquiring the target company because these risks will be important issues in negotiations and contracts.

 

2. Evaluate the Soft, Intangible Challenges

Beyond the hard facts important to a merger or acquisitions, Buyers should also consider soft, intangible challenges such as whether or not the target company’s strategic priorities already align with the Buyer’s.  If not, Buyers need to evaluate whether the company’s mission and vision can be adapted to complement their business. Are there strengths that can be leveraged? Are there any areas in which the companies are in direct competition, creating a risk of cannibalization after a merger or acquisition? What about relationships the target company has with other businesses—are those valuable to the Buyer in the long-term? Could they be? Most importantly, what is the culture of the target company like? Organizationally, will it be able to adapt to changes, or will its existing structure conform well with the Buyer’s organizational hierarchy? And if none of these things end up happening, is an exit possible after a merger or acquisition? These issues are often overlooked by Buyers.

 

3. Create a timeline

Lastly, leaders at a Buyer company need to think about when they want the merger or acquisition to take place. Negotiations can take months and even years, unless either party has a strong interest in meeting milestones. Timing may be the most over-looked consideration in a merger and acquisition, but it has powerful ramifications that affect everything from taxes to competitive strategy. When Buyers start a merger or acquisition process with set goals for closing dates and dates in which both companies will perform different aspects of the agreement, they are much more likely to finish a deal by that date and ensure the merger and acquisition process is smooth in the short-term transition and, hopefully, the long-term financial success of the now-larger company.

This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you are a business leader and would like a free legal consultation to get started on the right footing in everything from your sales to mergers and acquisition, contact us.