INDUSTRY ANALYSIS

Limits of Drafting One-Sided Agreements

Online and offline, consumers are at a disadvantage when entering into a contract for services or the purchase of goods because, in most cases, a customer is not in a position to negotiate the terms of the item being purchased or the service being provided. Moreover, in the event of a dispute, the user might be held to these non-negotiated terms that almost always favor the vendor or service provider.

Some suppliers or vendors lose sight of the fact that apart from statutory requirements in the form of consumer protection legislation and regulations that exist in all jurisdictions, there also has to be a basic element of “fairness” in these non-negotiated contracts because a court will sometimes refuse to enforce clauses it determines to be particularly onerous or unfair to a consumer or provisions that it finds contrary to public policy objectives.

The following recent cases illustrate some of the circumstances under which a court has either struck down a provision of a user agreement or, in contrast, upheld a disputed provision.

Enforceability of Arbitration Clauses

In Iberia Credit Bureau Inc. v. Cingular Wireless LLC, the Fifth U.S. Circuit Court of Appeals dealt with the validity of arbitration clauses in the customer service agreements of Cingular Wireless, Sprint Spectrum Company and Centennial Beauregard Cellular.

A group of customers sued these service providers for deceptive trade practices and breach of service agreements. The service providers moved to have the allegations dealt with via arbitration pursuant to arbitration clauses in the various customer contracts. The narrow issue on appeal was whether the arbitration clauses were unconscionable and unenforceable.

Know Thou Limits

The court first addressed an arbitration clause in the service agreement of Centennial Beauregard Cellular. This arbitration clause was unusual in that it required only the customer to arbitrate all disputes and left the company with the option of pursuing a lawsuit instead of arbitration.

Citing the one-sidedness of this duty to arbitrate and recent Louisiana case law stating that such arrangements are unconscionable and unenforceable, the Appeals Court upheld the lower court decision that Centennial could not compel the customers to go to arbitration instead of pursuing a lawsuit.

Not Overreaching Pays Off

The other two service agreements did not have this particular arbitration clause and were challenged on other grounds. Most importantly, the customers cited the fact that the contracts included a clause permitting the service provider the ability to change the terms of the agreement and argued that such clauses rendered the agreements “illusory” or made the arbitration clauses unconscionable, or both.

The court stated that the change-in-terms provisions did not render the contracts’ obligations “illusory.” The court found that a notice of a change-in-terms can be understood as an invitation to enter into a relationship governed by the new terms, which the customer then accepts by continuing to use the service. The fact that the company has the right to change the terms upon notice does not mean that the contract never bound the company, nor does the fact that the company could later attempt to change the arbitration clause to render it oppressive mean that the arbitration clause is unconscionable as it stands.

The court also addressed terms in Cingular’s service agreement that contained a provision that the existence and result of any dispute being arbitrated must be kept confidential. Although the court found this requirement to be more favorable to the cellular service provider than to its customers in that it deprived the plaintiffs of the ability to establish precedent while companies involved in multiple arbitrations would have first-hand knowledge of the results of prior arbitrations, it found the provision not so offensive as to be invalid.

Enforceability of Forum-Selection Clauses

In another recent decision, Scarcella v. America Online, the defendant, AOL, had brought a motion in the New York Civil Court to dismiss an action, arguing that the court lacked subject-matter jurisdiction. AOL’s argument was based on a forum-selection clause contained in its Web site service agreement, which provides that the exclusive jurisdiction for any claim or dispute involving AOL resides in the Virginia courts. The New York court refused to enforce this forum-selection clause and denied the defendant’s motion.

In its determination of the enforceability of the forum-selection clause, the court first considered established case law that basically says forum-selection clauses are considered to be prima facie valid and, as such, in order to be set aside, it must be shown that “enforcement would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.”

The plaintiff, Russell Scarcella, argued that since the sign-up process involved viewing a long series of screens that induced a “trance of lethargy and inattentiveness,” it was unreasonable to infer his actual consent from the fact that he “checked” the box saying that he accepted the terms of the AOL member agreement.

The plaintiff also alleged that his consent was procured by deceit, as the screen on which the prospective subscriber is first invited to agree to the terms of the member agreement appears before the actual member agreement.

Public Policy Concerns Trump Contractual Term

However, the court declined to decide on these arguments and instead focused on the rule set down by the U.S. Supreme Court in an earlier case, which states that “a contractual choice-of-forum clause should be held unenforceable if enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision.”

The New York court held that the enforcement of the forum-selection clause in AOL’s agreement would contravene the strong public policy embodied in the small-claims provisions of the New York Civil Court Act (the “Act”). It pointed to low costs, increased accessibility and informal procedures as examples of the public policy features of the Act’s Small Claims section.

In specific reference to the plaintiff, the court noted that he had availed himself of the low cost, relaxed pleading requirements and nighttime proceedings provided by the New York Legislature for small claims and, in order to obtain these benefits, he had waived both his right to sue for more than US$3,000 and his right to a jury trial.

In light of these considerations and the expense the plaintiff would incur if forced to travel to Virginia, the court concluded that “the general policy of giving effect to forum-selection clauses must yield to the scheme enacted by the Legislature specifically to ensure that civil justice is meaningfully accessible to those seeking the adjudication of the small claims.”

User Agreements Instilling ‘Trances of Lethargy’

The lesson to take away from the above decisions for vendors and suppliers is a basic one: it is fine to draft one-sided agreements when it comes to consumer contracts as long as the contract does not totally disregard basic fairness and/or defeat public policy objectives. Also, it does help if your user agreement does not induce a “trance of lethargy and inattentiveness” in the user!


Javad Heydary, an E-Commerce Times columnist, is a Toronto lawyer licensed to practice in both Ontario and New York and is the managing editor of Lawsof.com.


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