Digital Contracts

The traditional written contracts are no longer being used in recent years. This is because there are numerous types of technologies that enable the parties to review, modify, sign, and finalize agreements. The new types of digital contracts include: (a) shrink-wrap license agreements; (b) click-wrap agreements; and (c) browse-wrap or “click-free” agreements. In general, shrink-wrap and click-wrap software license agreements are also referred to as End User License Agreements or EULAs.

It is important to understand how these agreements work since most users run across them when purchasing a software program or visiting a third-party’s website. For example, click-wrap and browse-wrap agreements are used in various situations – e.g., software license agreements, linking agreements, website terms of use, or privacy policies.

The courts enforce shrink-wrap software license agreements under the following conditions: (1) the user must have the opportunity to review the license terms before making a final decision on the software’s use; and (2) the license should not include unconscionable terms. The courts have made these decisions by relying on the Uniform Commercial Code. For example, UCC 2-204(1) states that: a contract for sale of goods may be made in any manner sufficient to show agreement including the conduct of both parties which recognizes the existence of the contract. In addition, UCC 2-606(1)(b) states that: a buyer accepts the goods when he or she does not effectively reject the agreement after having the opportunity to inspect them.

Click-wrap agreements are enforceable because the users show assent by interacting with the website. In these situations, the users click on a box or type certain words to show assent. For example, they insert a checkmark or type the word “I Agree” on the webpage.

Browse-wrap agreements include website terms and conditions and privacy policies that are published on a website and do not require the user’s interaction to show assent. The courts are usually inclined to enforce browse-wrap agreements when there is evidence to show the user had actual notice. However, some courts have been disinclined to enforce browse-wrap agreements due to non-interaction with users. So, in other words, the courts are looking for some kind of interaction between the user and website.

There has been some dispute over the enforceability of arbitration clauses in this context. An arbitration clause can be included in the website’s terms and conditions and privacy policy which require legal disputes to be resolved through arbitration. In some cases, the courts have denied a request to compel arbitration based on lack of notice. They have been inclined to enforce mandatory arbitration clauses when the website used embedded links. So, the point is to make sure there is a clear and conspicuous notice of arbitration for the users.

Digital signatures can be used to enforce digital contracts pursuant to the E-SIGN Act. This federal statute – which is codified under 15 U.S.C. §§ 7001-7031 – allows the parties to insert their digital signatures on legal documents. In Newton v. American Debt Services, the court was willing to enforce the plaintiff’s signature even though DocuSign’s technology services were used to execute the agreement. It is worth mentioning that some courts have held emails that were exchanged between employers and employees to constitute signed contracts.

The federal statutes require the retention of electronic records for future reference and production. So, for example, E-SIGN requires that a digital copy of the agreement to be kept and be readily accessible by the website. If, however, it cannot be reproduced, then its legal effect, validity, or enforceability may be denied by the court.

The Uniform Electronic Transactions Act (“UETA”) applies to all parties that have agreed to consummate the electronic transaction. In California, it has been codified under Civil Code §§ 1633.1, et seq. It must be noted that it is broader than E-SIGN and therefore subject to federal preemption. These statutes authorize but do not require the parties to use electronic transactions to consummate the agreement.

The courts have issued several rulings regarding the authentication of digital signatures. This can be a problem if there is a lack of evidence to confirm the user’s signature. However, if there is a unique identifier that links the user’s signature to the so-called “digital contract” – e.g., email confirmation, IP address – then it may be easier to authenticate the digital signature.