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.

 

  1. 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.

 

  1. 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.

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