The following 5 Contract Provisions will undoubtedly help save your business future headaches! While no contract provision can be guaranteed to be enforceable, following some basic principles of use will dramatically increase the odds. Of course, your business won’t get any protection without using them in the first place.

 

1. Warranties

You may or may not want to include specific, express warranties for anything you sell on your website. There is no law requiring you to give any written express warranties. Although, you can unwittingly make an express warranty through any ads or written materials contained on your website.

But, there are also implied warranties. Certain warranties arise automatically under the law or are “implied” unless they are specifically disclaimed in a written agreement. To avoid the possibility of providing an implied warranty, your contracts must include a disclaimer waving these warranties in a conspicuous manner. A conspicuous manner means that the disclaimer is set off from the rest of the contract by all capital letters, bold type, or a different color. The type cannot be smaller than the surrounding type in the contract.

A written statement regarding the “As-Is” or “With All Faults” nature of the product or service (or actually disclaiming the implied warranties by name) is sufficient. Internet businesses may use a clearly-labeled hyperlink such as IMPORTANT WARRANTY INFORMATION to lead to the full text of any warranty. Also, the warranty should be presented in a way that is capable of being preserved, either by downloading or printing.

Implied warranties could include a warranty of title (seller owns the goods, has the right to sell them, no creditor will interfere with buyer’s purchase of the goods, and the goods are free from copyright, trademark, or patent claims of third parties), a warranty of merchantability (goods are reasonably fit for the ordinary purposes for which such goods are used), a warranty of fitness for a particular purpose (seller has reason to know of the purpose for which the goods are bought and knows that the buyer is relying on the skill and judgment of the seller to select the goods) and a warranty arising from course of dealing or trade usage (a court presumes both parties have knowledge of trade custom and presumes that custom is intended to apply to the contract). These warranties apply equally to services and goods.

Not all states will allow you to disclaim all implied warranties if you sell goods online. But, you should still disclaim all implied warranties in writing in your terms of sale . (You should also understand disclaiming implied warranties will not shield your business from liability for any injuries caused by a product sold from your website). Without this provision, the goods or services provided under the contract will be warranted with the express warranties arising from what your company states on its website and with the implied warranties provided under state law. Reducing the uncertainty this creates requires a warranty disclaimer.

 

2. Limitation of liability & Damages

You may limit or alter the types of damages normally recoverable by your customers. Customers may suffer damages if your business breaches any of the terms of sale with a customer or any warranty or if your business is liable for any product defects that cause any injuries. In those cases, the customer would be allowed to recover damages reasonably foreseeable or “within the contemplation of the parties” at the time of contract formation. This means your customers can suffer “direct damages” or the damages that you would expect to occur from the breach, such as cost to repair or replace a product. However the customer may also suffer “consequential damages” (also sometimes referred to as indirect or “special” damages) which encompass all damages that aren’t either direct or incidental damages.

Expenses incurred by your customers in connection with enforcing available remedies are “incidental damages.” Any lost profits or revenues suffered because of failure of the product are consequential damages. This is a factual determination that could lead to your customers being able to collect a large amount of damages above and beyond the simple cost or value of the product. If you don’t limit your damages contractually, your customers may be entitled to collect any and all foreseeable damages.

TIP: Always limit damages to the cost of the item itself or replacement of the item and also have your customers waive their rights to collect lost profits or any type of incidental or consequential damages!

Not all courts will honor these limitations if they feel they are unfair to the consumer (i.e. “unconscionable”). For instance, limitation of consequential damages for injury to the person in the case of consumer goods is unconscionable on its face, but limitation of damages where the loss is commercial is not. Most courts generally uphold limitations of liability and you should always include them anyways. Damage costs that could be recovered include direct damages, which are damages that are a direct result of what happened, like medical costs or property damage, and indirect damages. Indirect damages are those that are not directly caused by the other party but that are incurred because the party was injured.

Some states have laws that require a disclaimer of liability in a contract to be conspicuous within the contract to be enforceable. For that reason these provisions should be in all capital formats, bolded, set in a larger font than the surrounding text, or otherwise distinguished from the rest of the contract. You also may want to limit the timeframe in which the consumer may bring a claim. This greatly decreases the likelihood of a claim being filed.

 

3. Include An Attorney’s Fees Provision

Always include an Attorney’s Fees provision in your terms of sale. This clause creates a right to recover costs and expenses paid by the party that prevails in a contract dispute. The way this clause is worded, the costs and expenses are not limited to those paid in a lawsuit-the costs and expenses incurred in any contract dispute could be recovered. This provision is thought to discourage frivolous lawsuits because the party filing a lawsuit risks payment of the other party’s legal costs if the suit is lost.

 

4. Using Forum Selection Clauses (Venue)

I have had numerous clients ask me about forcing their customers to settle any future disputes in a specific location. This is a type of contractual term known as a “forum selection clause” (or “choice of venue” clause), which more or less binds the parties to litigate in a specific jurisdiction. You can and should use a forum selection clause on your website user and product purchase agreements. They are not illegal and can even be justified from a business standpoint. They are used to avoid costly and frivolous litigation. Since these clauses can be extremely valuable, you should understand how to effectively use them. Assuming the terms were validly accepted and proper notice of the terms was given, these types of provisions generally are just as enforceable as the underlying agreement.

TIP! You must also make sure that “notice” that this specific type of provision exists in the contract is provided to the user. This requirement has been relaxed by the courts quite a bit recently, but I still recommend using bold font, ‘all caps’ or a larger font for your forum selection clause so it stands out from the rest of the agreement.

Sometimes contractual provisions can overreach and be so unreasonable that they are declared null and void by a court. These are sometimes known as “contracts of adhesion.”  This type of contract is basically an agreement where one side holds all the bargaining power and uses it to write the contract primarily to his or her advantage. This is really how many Internet businesses improperly use forum selections clauses. Understanding how forum selection clauses might overreach and be unreasonable is obviously very important to your Internet business. Basically, the courts won’t automatically honor provisions that require the consumer to waive some right.

An unreasonable forum selection clause may also violate public policy. This typically occurs when a particular state has a strong interest in regulating a particular industry or in protecting a certain class of persons. State courts have various approaches in determining the enforceability of forum selection provisions. If a party opposing the forum selection can demonstrate extreme inconvenience that was not foreseeable at the time the provision was negotiated, some states will reject it. But, usually the opposing party has to show that a heavy burden would be imposed if they were to litigate in that forum.

Additionally, for a forum selection clause to be upheld, the parties must use language clearly indicating that the forum selection clause excludes all other courts in hearing any potential dispute. A few states refuse to enforce forum selection provisions altogether (such as Idaho and Montana) while others limit enforcement with respect to certain types of contracts.

The following case summaries illustrate some of these principles:

Fee v. Expedia Inc.- Zachary Fee sued Expedia, which operates the travel website Hotels.com, for deceptive trade practices. Fee alleged that Hotels.com switched the plaintiff’s paid reservation from a four-star hotel to a three-and-one-half star hotel. Fee brought the lawsuit in the state of Kansas. But, he agreed to a forum selection clause contained in the click-wrap agreement that required all suits to be filed in Texas. The Kansas court dismissed Fee’s lawsuit since the click-wrap agreement on hotels.com required Fee’s lawsuit to be brought in Texas, not in the state of Kansas. The forum selection clause used by Expedia was simple and straightforward and only required that all claims basically be heard in the State of Texas.

Olmstead v. Dell-The plaintiff brought a class action lawsuit in California against Dell, Inc. The plaintiff asserted that Dell designed, manufactured and sold defective notebook computers in violation of California consumer protection laws. Dell’s website required purchasers to accept a click-wrap agreement that contained a forum selection clause. This clause required all lawsuits against Dell to be filed in the State of Texas, but it also required consumers to waive their right to bring a class action suit against Dell for any reason. The California court refused to enforce Dell’s forum selection clause. The difference in this case is that Dell not only required consumers to litigate in Texas, but the company’s click-wrap agreement also required consumers to give up a fundamental right to sue as class action litigants. The court found this to be overreaching.

 

5. Choice of Law provisions

Choice of law provisions usually also accompany forum selection clauses. They really go hand in hand, although choice of law provisions can stand alone. This type of provision specifies that the laws of a certain jurisdiction must be applied by the court hearing any dispute. The particular court hearing the dispute will apply the law of the state the court is located in (the forum) unless there is some conflict, such as when an out-of-state consumer sues an Internet business. The court may also apply a different state’s law if the contract calls for specific laws to be followed.

 Modern courts follow the rule articulated in the Restatement (Second) of the Conflicts of Laws. It provides that choice of law provisions are presumptively enforceable as long as there is some relationship between the transaction and the state’s law that would govern, or by another reasonable basis for choosing a particular states’ laws.

The Restatement basically recognizes there should be no limitation on the power of the parties to incorporate foreign law into their contracts. Under Section 187(2), the express choice-of-law made by the parties is still recognized “even if the particular issue is one, which the parties could not have resolved, by an explicit provision in their agreement directed to that issue.” But, there are three exceptions to Section 187(2). First, the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice. Second, misrepresentation, duress, undue influence, or mistake secured the consent of one of the parties to the inclusion of the provision. Third, application of the state’s law chosen would be contrary to a fundamental policy of the state that would be able to apply its own law but for the choice-of-law provision.

Besides the Restatement, the Uniform Commercial Code (UCCA) also allows the parties to a commercial contract to choose the applicable state law, so long as the transaction “bears a reasonable relation” to the state chosen. See UCC Section 1-105. (The UCC is followed in some form in all 50 states). Thus, the general law in the U.S. is that parties to a contract may choose the law of a particular state to govern the contract, and that the courts will uphold the choice.

TIP! Most businesses online should simply require disputes to be heard under the laws of the state they are physically located. This is valid since there is already a relationship with the state. Also, selecting the laws of your home state is advantageous since your business is operating under these laws already. If no state law is designated, a court will typically interpret the agreement under the laws of the state where either party is located, or where the contract was performed or signed.

 

 

Forum Selection/Choice of Law Lessons:

  • Always use forum selection clauses to avoid frivolous and costly litigation in some distant state;
  • Keep your forum selection clause simple. Don’t restrict “fundamental” consumer rights, such as a consumer’s right to initiate a claim against your business or initiate or join a class action suit;
  • A straightforward clause selecting the forum for any potential litigation and the choice of law should be simply used and no more. The language should be simple, yet crystal clear and should state the chosen forum is the exclusive forum that any and all disputes would be heard;
  • Finally, there is no guarantee any forum selection clause you use will be upheld. As stated, even if it isn’t unreasonable, the clause may violate the public policy of some state.