Incorporating Online Terms By Reference: Avoid the Common Mistakes
Terms of Service agreements are used to outline the legal relationship between a party providing a service and a party receiving or using a service. The Terms typically include contractual components such as definitions, rights and responsibilities, and representations and warranties. Service providers may offer Terms of Service in several ways, including by paper, by attachment to an order form, or during the process of “click through” ordering, either on a website or mobile application. Additionally, service providers are increasingly providing their Terms of Service online, and incorporating them into contracts and order forms by reference.
Benefits of Incorporating Online Terms of Service By Reference
Incorporating Terms of Service by reference can provide several advantages over traditional methods. First, incorporating online terms significantly reduces the amount of physical paper used by both parties. Reducing paper consumption and waste is not only an increasingly popular initiative for companies concerned about the environment, it can also increase efficiency and reduce costs.
Second, incorporation by reference allows companies to establish uniformity across all of their contractual agreements. Service providers often contract with hundreds or thousands of customers, and the more consistency those agreements have, the less time and effort is required to track, analyze, and report the company’s legal exposure.
Another valuable benefit is the ease with which a company can rollout updates to its standard Terms of Service. By incorporating Terms by reference, a company can simply update the agreement online and it will subsequently apply to all contractual provisions that incorporate those terms (assuming the incorporation language is worded correctly, as discussed below). This method of updating standard terms by one upload can save massive amounts of time as compared to the alternative: sending the updated terms individually to every customer.
Lastly, providing terms online offers customers a valuable, easy-to-access portal to the contractual agreement. Customers can certainly retain their own copies, but online availability can provide a quicker, easier resource than clunky contract retention systems.
Are Incorporated Terms Enforceable?
While the digitization of traditional business practices is nothing new, incorporating online terms into purchase orders is a relatively recent development. Yet courts at both the federal and state levels have held such incorporated terms enforceable, and several courts note that failing to inquire about incorporated terms is no defense. Where courts have found terms unenforceable, the incorporating language did not make clear that the online terms were binding.
Additionally, all U.S. states but Washington and Georgia have adopted the Uniform Electronic Transactions Act of 1999 (“UETA”), which states, “a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.” However, under the UETA, the electronic records must also be “capable of retention by the recipient.”
Another issue is the enforceability of updates to the incorporated terms. While few courts have considered the issue, generally it appears courts will uphold updates as enforceable when the party to be bound was made aware that updates could occur, even if the party is not provided notice of the actual update. In Briceno v. Sprint Spectrum, L.P., a Florida appellate court held a customer was bound by updated terms because the invoice noted that the terms could be periodically updated.
Best Practices for Incorporating Online Terms
To ensure enforceability, companies should not simply state the location to find additional terms. Companies must state the binding nature of the terms in clear, specific, and conspicuous language (e.g., “Parties agree to be bound by the terms of this order form as well as ACME’s Service Terms found at www.acme.com/Terms.”).
Additionally, companies must be sure to provide incorporated terms on an easily accessible website. Companies should not use barriers like login requirements or other security measures that make it difficult for the counterparty to copy, download, or print the terms.
Even if enforceable, companies should consider the best way to apply updated terms to their contracts. Some companies do not have long-term agreements with their customers, and each purchase order constitutes a new contract. For these types of relationships, it likely makes sense for updated terms to apply immediately to any new purchase orders.
Other companies maintain existing contractual agreements with their customers, and each purchase order may simply constitute a means for the customer to request goods, or to periodically change business terms, such as upgrades to the number of subscriptions or users, within the overarching framework of a master agreement. For these companies, it may be contrary to their customers’ expectations if, for example, a simple user upgrade suddenly binds them to an entirely new and different set of terms than had previously governed the relationship. Additionally, for these customers, having different subsets of users bound to different terms may unnecessarily complicate the contractual situation rather than streamlining it.
Lastly, companies should consider whether it’s even desirable for standard terms to apply to all of their customers. If customers are situated in a variety of international jurisdictions, or if customers have widely divergent needs, it may be advisable to tailor contractual terms to the different customer bases.