Online Contracts: What You Need to Know

‌Many contracts these days are online contracts—that is, they’re drafted, negotiated, and executed entirely online. Since online contracts don’t need to be printed out on paper, you can end up cutting a lot of costs by switching from traditional pen-and-paper contracts to online contracts.‌

As online contracts become more popular, it’s important for your organization to know how to make sure they are enforceable and legally binding. Read on to learn about contracts, how to write them, and how to figure out if they are legally binding. By the end of this article, you’ll also learn how to enforce legally binding contracts and to streamline contract management.

‌Before we discuss how to write an online contract, let’s briefly talk about the definition of a contract. A contract is an agreement between two individuals or companies that creates legally binding mutual obligations. ‌

‌While a contract can be written or oral, contracts used by companies tend to be written, since oral contracts are usually difficult to enforce. On top of that, courts may not enforce certain types of contracts unless they are in writing. Check your state’s Statute of Frauds, but contracts that typically must be in writing include land contracts, marriage contracts, and sales of goods contracts over a specific amount.

‌Contracts must also have the following elements to be considered legally binding:

• An offer: An offer to pay or provide a service, such as paying $2,000 for 200 books
• An acceptance of this offer: the other party accepts paying $2,000 for 200 books
• A promise to do what has been accepted: The other party promises they will pay the amount
• Consideration: The $2,000, since that’s what the paying party will give to the other party in exchange for the 200 books
• An event or time when the performance has to be made: The 200 books have to be given 2 weeks after payment
• Terms and conditions for the performance: The books must be hardcover and have at least 150 pages
• Performance: The party delivers the 200 books and receives $2,000 on time

‌Additionally, contracts must:

• Have a legal purpose, meaning they can’t be used for illegal actions such as breaking into a bank.
• Involve a “meeting of the minds.” In other words, a contract must establish a mutual agreement between the parties. For the contract to be valid, everyone must be on the same page and understand what is being offered in exchange for something.
• Have consideration, which is when both parties agree to exchange something of value for a service, good, or benefit. This means you have to offer to give something of actual value, such as money, a house, or a promise to do something you don’t have to do.  However, promising to do something that one party was already obligated to do isn’t valid consideration. Neither is it valid consideration if you draft a contract for a good or service that has already been exchanged before the contract was agreed upon.
• Involve legally competent parties. If the parties involved in the contract are minors or mentally impaired, the contract will be considered void. Each party must also be of sound mind during the process of contracting, which means they can’t be under the influence of drugs and alcohol. 
• Involve parties who agreed to the contract of their own free will. This means there was no coercion or misrepresentation during the contracting process.

Now that we know which requirements your contract needs to meet before courts can consider it legally binding, let’s discuss how you can create online contracts.‌

‌What makes online contracts different?

An online contract is a type of written contract, but there are some things you need to look out for when drafting one.

‌Firstly, there are many types of online contracts. Some are just like traditional hard copy contracts, only you sign electronically instead of signing with a pen. These are known as electronic contracts since they are made and signed electronically. They are typically created on a computer and sent to a colleague via email. The colleague then sends it back to you with an electronic signature to show that they have accepted your contract.

‌‌Other online contracts involve using digital signatures to indicate assent. These include clickwrap or “click-to-agree” contracts. Instead of using electronic signatures, parties agree to these contracts by clicking a button or checking a box that indicates acceptance. 

‌In other words, the act of signing with an electronic signature is replaced by the act of clicking to indicate “I agree.” Related contract types include browsewraps (where users indicate acceptance of terms by continuing to use the website—also called “browserwrap” or browse wrap license) and sign-in-wraps (where clicking “sign-in” or “register” indicates acceptance of a website’s terms and conditions).

Yes, electronic contracts and clickwrap agreements are legally binding. 

‌Electronic contracts and signatures are just as enforceable and legally binding as traditional signatures signed on paper. In 2000, the United States federal government passed the Electronic Signatures in Global and International Commerce Act (ESGICA), which stipulated that e-signatures are as legally valid as traditional ones.

‌The federal Electronic Signatures Act (ESIGN) and The Uniform Electronic Transactions Act (UETA) have also established that clickwrap is an acceptable, binding form of signing an online contract. What’s more, UETA commentary has explicitly stated that an electronic signature includes “the standard webpage click-through process.”

Case law has also established clickwrap as legally legitimate. As long as your clickwrap agreement gives users notice of the existence of terms and obtains their affirmative assent to such terms, the court will enforce your agreement.

‌‌In contrast, browsewraps and sign-in-wraps have low enforceability rates because they do not give users adequate notice of the existence of terms. They also fail, for the most part, to capture users’ affirmative assent to such terms. In particular, sign-in-wraps have the lowest enforceability rates because they use a “dual-purpose” button (to sign in and agree to terms). In both cases, it’s harder to get clear, informed, and unambiguous consent from users if you use browsewraps or sign-in-wraps.

‌Electronic contracts and clickwrap agreements, then, are valid replacements for traditional pen-and-paper contracts. However, before you decide to use online contracts once and for all, please note that there are some things you should be aware of. Not all agreements can or should be e-contracts. Even if they can be in e-contract form, you need to put in some work to make sure your e-contract is legally binding and enforceable. 

‌‌Make sure that your online contracts comply with relevant laws and case law

Once you’ve concluded that your contract can be an e-contract, you need to check if your contract complies with relevant laws.

‌Don’t just use online templates or pre-made contracts right out of the box, however tempting that may be. Whether you’re using electronic contracts, clickwrap contracts, browsewraps, or sign-in-wraps, you need to make sure your e-contracts have all of the required elements and language needed to comply with relevant laws and case law.‌

‌For instance, if you’re drafting a privacy policy for a website that receives traffic from the European Union (EU), you need to consider if your contract meets General Data Protection Regulation (GDPR) standards.‌

‌In some cases, you’ll have to consider case law in addition to relevant laws and regulations. If you’re creating a clickwrap agreement, you should consider cases such as Specht v. Netscape (the “original” clickwrap case), Sgouros v. TransUnion Corp, and Nguyen v. Barnes and Noble, Inc..

‌These milestone cases highlight the importance of giving users notice of the existence of the terms of your contracts and obtaining users’ affirmative assent to such terms. If you don’t give users adequate notice of the terms, the courts are unlikely to enforce your contract, as they would likely conclude that the users have not given affirmative assent to your terms.‌

‌Make sure your online contracts follow best practices

To ensure your online contracts can be enforced in court and are binding, you need to draft, present, and execute them in compliance with the best practices of your e-contract type. 

‌For instance, if you’re creating a clickwrap agreement, you need to follow the best practices for clickwrap agreements, including:

• Give your users unambiguous notice of the terms they’re agreeing to.
• Obtain consent whenever terms are modified.
• Require that each user unambiguously and affirmatively agrees to the terms of your online agreement.
• Keep detailed records that prove who agreed to your terms.

‌To facilitate clear communication and understanding between you and your users, you should also consider doing the following for your clickwrap contracts:

• Use clear and specific language. Don’t use legalese—use “plain” language. Users may not have the time, patience, or expertise to read and digest overly legal language.
• Avoid pre-checking the checkbox. You want your users to give unambiguous and affirmative assent to your terms.
• Use a simple and minimalistic screen layout and design. Use readable colors for the background and font.
• Use consistent definitions, terms, and language.
• Make the entire screen visible at once to minimize scrolling.
• Require users to click the hyperlink to the terms before agreeing to anything.
• Make hyperlinks obvious—i.e., by making them blue and underlined.

‌After you’ve confirmed that your online contract is legally binding and enforceable, you need to know how to enforce it in case things go awry.‌

‌In general, the process of enforcing your contract is highly dependent on the content of your contract, the laws of the state you’re in, and how the contract has been breached. Most contracts already have clauses about what you can do if your contract is breached, particularly if they are business contracts involving large sums of money.‌

‌However, if the agreement is silent about a very minor breach—e.g., the price of services offered—you may want to talk to the other party about the issue. This is preferable to going to court, since the court may give the breaching party more time to remedy the problem. 

‌If one of the parties has committed a major or material breach of the contract—i.e., a breach that affects the core substance of the contract—the terms of said contract generally dictate how you should handle the breach. Typically, the non-breaching party is excused from performance. The contract may also state that the non-breaching party will be compensated in a specific amount regardless of how much damage was actually done.

‌If the contract is silent about how you can remedy your breach, contact the other party to find out if they still intend to fulfill their part of the agreement. If not, you can:

• Enter settlement negotiations
• Settle the problem through arbitration or mediation
• Take legal action—before doing this, check your contract to see if mediation and/or arbitration are required

Online contracts are becoming more popular than ever. To make the most out of them and to ensure that they are legally binding and enforceable, you should consider using Ironclad. 

A premier contract management tool, Ironclad will streamline your business’s contract creation process. With powerful features like our Data Repository, DOCX native collaborative platform, and intuitive Workflow Designer with tons of templates, Ironclad transforms contracts from barriers to enablers. Learn more about how it can improve your digital contracting here.