Enforceability of Website Terms

I have written an article here on 2 recent US cases about the enforceability of website terms & conditions. The cases provide good examples of basic contract law principles – here, reasonable notice and agreement – being applied to website terms. They deal with common law contract principles that are equally relevant in New Zealand.

In one case, the website terms were binding. In the other, they were not. These decisions do not change the law, but they are useful reminders not to overlook your disclaimers when designing a website.

Full article: Update on Enforceability of Website Terms, February 2010

Links to the cases:

Lex mercatoria and e-commerce: a small step

A court decision has taken a small step – in the right direction – towards recognising customary practices and policy considerations in applying online terms and conditions.

In the case Miller v Facebook (15 January 2010, US District Court, Georgia), the plaintiff claimed that part of Facebook’s terms and conditions did not apply – specifically, the clause requiring any claims to be brought in Facebook’s home state of California (known as a “forum selection” or jurisdiction clause). The court said:

“striking the forum selection clause could wreak havoc on the entire social-networking internet industry. If this court were to determine that the forum selection clause contained in Facebook’s TOU was unenforceable, the company could face litigation in every state in this country and in nations around the globe which would have potential adverse consequences for the users of Facebook’s social-networking site and for other internet companies”

The court therefore upheld Facebook’s forum selection clause.

Common law legal systems (such as New Zealand, the UK, the US and Australia) have long recognised “customs of merchants” (the lex mercatoria) in applying and shaping the law. There are good reasons why the common law has done so, going back many centuries: it provides certainty for commerce, recognised accepted “best practice”, and promoted uniformity conducive to trade. To ignore it would have been to potentially disrupt and destabilise commercial dealings.

For the same reasons, as the common law is continuously evolving, the customs of “e-merchants” should also be taken into account by courts.

This is likely to be relevant to the enforceability of website terms and conditions. There have been a number of cases in the past year involving disputes over whether or not website terms are binding (for example Website disclaimers – yes, they do work). Some have argued that a standard link to a disclaimer is insufficient. There are a number of legal grounds for finding it is sufficient (and a growing number of cases have upheld them – successful challenges are rare).

However, there is good argument that such practice is now also customary. Many websites have a disclaimer link, often at the bottom of the page. It is commonly understood that when you use a website, there may be “Terms of use” or “Disclaimer” link. That is accepted and, today, could be said to be the custom for online business. The common law should not disregard the accepted, reasonable and necessary practices established by modern merchants.

Although the Facebook decision is only a lower-court procedural ruling, it provides an encouraging demonstration of a court’s willingness to consider the new lex mercatoria (and other policy considerations), and the perils of the law ignoring them, relating to e-commerce.

Website disclaimers – yes, they do work

Website disclaimers (you know, the least-read page of any website containing the legal terms and conditions), while commonplace, have long been an ever-so-slightly grey area of the law. The basic principles are clear enough:

  1. A person can be held liable (in certain circumstances) to a third party for negligent statements.
  2. It is possible to disclaim liability for negligent statements.

Accordingly, it is customary on many, if not most, websites to include a disclaimer such as: “This information is of a general nature only, and is not professional advice”. Or “This information is provided ‘as is’, and we accept no liability for its accuracy”.

Surprisingly, however, there has not been a Commonwealth court decision (of high authority) on their effectiveness until recently. As a result, there has been some small degree of uncertainty over basic question, such as:

  1. In what circumstances is there a legal “duty of care” between a website operator and members of the public reading the website?
  2. In what circumstances will a disclaimer protect the website operator from liability?

The UK Court of Appeal recently reviewed these issues for the first time in the case Patchett v SPATA [2009] EWCA Civ 717 (15 July 2009).

Facts

The facts are briefly as follows.

Mr & Mrs Patchett decided to install a swimming pool. They searched on Google, and found the website of the Swimming Pool & Allied Trades Association (SPATA). SPATA is a voluntary UK trade body representing UK swimming pool installers. On the “about us” page, it stated:

“Installing a swimming pool is a specialised task requiring skills and technical expertise in a number of different areas. One way of guaranteeing that the pool installation company has this expertise, is to make sure they are a member of the Swimming Pool and Allied Trades Association (SPATA) before contacting them for a quotation… SPATA pool installer members are fully vetted before being admitted to membership, with checks on their financial record, their experience in the trade and inspections of their work. They are required to comply fully with the SPATA construction standards and code of ethics, and their work is also subject to periodic re-inspections after joining. Only SPATA registered pool and spa installers belong to SPATASHIELD, SPATA’s unique Bond and Warranty Scheme offering customers peace of mind that their installation will be completed fully to SPATA Standards – come what may!”

There was also a function for requesting an “information pack” (which would be sent by post) containing more information about the warranty and member requirements.

The website had a “member finder” function to help visitors find SPATA members near to them. The Patchetts used the function to locate Crown Pools Limited, who they hired to install their pool. Unfortunately, Crown became insolvent before completing the job, but after the Patchetts had paid their money. It soon emerged that Crown had not been financially vetted by SPATA, and was not even a full member, despite the Patchetts having been referred to Crown via SPATA’s website. As Crown was insolvent, the Patchetts attempted to sue SPATA on the basis that statements on its website – which suggested Crown was reliable and financially sound – were negligent.

The issues and findings

The issue, essentially, was whether SPATA was liable for negligently implying that all businesses listed on its website were reliable and of good financial standing.

The court (comprising three judges) found that the statements on SPATA’s website were, to some degree, negligent. Specifically, the statement shown above failed to mention that there were two types of membership – “full membership” and “affiliate membership”. Only “full” members were financially vetted and included in the warranty programme. The ‘member finder’ included both types of member without differentiation. As Crown Pools Limited was only an “affiliate” member of SPATA, it was not covered by the warranty or financially vetted. The statements on the website were, therefore, misleading, and capable of making SPATA liable for its negligent misstatement.

The court then considered whether there was a duty of care between SPATA and the Patchetts. While agreeing on the relevant legal principles, in particular the requirement that it be reasonably foreseeable that a person would act on advice without further inquiry, the court was divided on its finding.

The majority of the court found that there was no duty of care. The statement encouraging users to request an information pack meant that SPATA could not have expected a user to act on the information without making further inquiry, by ordering the information pack. In other words, SPATA expected that users would treat the website as the “first step in the process” and always request the information pack, which would explain the full story about the membership statuses. Because the Patchetts had not done so, SPATA would not be liable.

The minority of the court (Smith LJ) disagreed, and found that there was a duty of care. The dissenting view of Smith LJ is worth noting:

“There is nothing to suggest that the information pack might in any way limit the reliance which the customer can place upon the statement that a particular installer is a member of SPATA and is therefore a good contractor to engage. Nor is there anything to suggest that the information pack is necessary as a check on the accuracy of the information provided on the site itself. Of course, if the information pack had been requested and read, the customer would have discovered the mistake made on the website and would have found out that Crown was not a member of SPATA. But that fact should, in my view, be put out of mind, when considering whether, on an objective reading, there was an expectation that the customer would not rely on the website without the information pack. I do not accept that, objectively considered, this website was merely ‘the first step in the process’. The customer was given an option whether to ask for the further information in the pack. In my view, on reading the website, the customer might ask himself whether he needed the information pack and might well decide that he did not.”

Important findings

Although the court was divided on the outcome, it has given some important findings which will no doubt be relevant in subsequent cases:

  1. The court confirmed that “no different legal principles apply to misrepresentations on a website than to those anywhere else in the public domain.” While this has always been considered the position (after all, why should there be different treatment for websites?), it is nice to have a clear statement of judicial confirmation.
  2. Although the majority did not find a duty here, the court was unanimous that a duty of care can arise from statements on a website. Interestingly, the lead judge (Lord Clarke MR) appeared to suggest that this possibility was limited to “interactive” sites: “Some websites are interactive and it may be possible, applying the principles outlined above, to conclude in particular circumstances that a duty is owed.” Unfortunately, there was no further discussion on this point, such as what “interactive” might mean and how that would give rise to a duty of care over a “non-interactive” site (as the SPATA site presumably was). It should be noted that New Zealand courts apply slightly different legal tests in determining whether a duty of care exists (see this article for details).
  3. The majority accepted that a negligent statement on a website was, in effect, remedied by a disclaimer elsewhere on the site. I note that the critical statement (the encouragement to request an information pack) was not expressly a disclaimer, in that it did not expressly purport to “disclaim” anything. But the majority’s view was that the information pack statement made it unreasonable for a user to rely on the website alone, without requesting the information pack.

Key lessons

The majority judgment is not entirely convincing, but the case does reiterate some important messages:

1. Have a disclaimer

There was no general website disclaimer in this case (e.g. a “terms & conditions” page). Instead, the majority found that the simple statement encouraging users to request the information pack in one part of the website was, in effect, a disclaimer for negligent statements elsewhere. Ensure that your website has an appropriately worded disclaimer. These do not need to be lengthy, complex blocks of text. In light of this case, the key points they need to make are:

  • Instruct users to make their own, independent inquiries before acting on any information.
  • State that all information is of a general nature only and must not be taken as specific or complete advice.

2. Display the disclaimer (or a link to it) prominently

Ensure that the disclaimer is reasonably prominent. While the issue of bringing a disclaimer to the user’s attention was not expressly discussed in this case, if the critical statement (the “quasi-disclaimer” regarding the information pack) was buried away in a hard-to-locate part of the website, the result may have been different. The court acknowledged that if a reader had not read the about the information pack, he or she would probably have been misled (paragraph 30). The applicability of Lord Denning‘s famous red-hand test to website disclaimers did not arise in this case. Likewise, the issue of a general website disclaimer, which is usually tucked away discreetly on many sites, was not considered, but the case supports the generally agreed view that such a practice is effective for standard disclaimer terms.

3. Don’t mislead…

Of course, most problems can be avoided altogether if your website is not misleading. The problem in this case arose not because of any statement actually being untrue, but because some information was incomplete, and therefore was misleading. SPATA could have, for example:

  1. Provided full details about its membership structure and clarified that certain companies are only “affiliates” and not “full members”; or
  2. Removed the membership details and instructed users to contact SPATA for full membership details.

The bottom line is that if you say something on your website, it must not be misleading. Of course, in New Zealand it is possible that the Patchett’s would have had a claim under section 9 of the Fair Trading Act 1986 (FTA) for misleading and deceptive conduct. The FTA cannot be contracted out of.

4. Pay attention to your website

It is not uncommon to see websites with incomplete or outdated information, especially where the website is of a “supplemental” nature to the business or organisation, and the “primary” information is offline in physical form such as information packs. It is also not uncommon for websites to be maintained entirely by a third party (e.g. a web hosting company) or a sole administrator. There are probably many (if not most) organisations with websites that have never been fully reviewed for accuracy and legal risks by the board or a senior manager. The SPATA case highlights just how important it is to ensure that website statements are not misleading and that appropriate disclaimers and other precautions are always kept in place. Information also needs to be kept up to date to ensure it is always correct and does not become misleading if it gets out of date.