,

Draw the Law: Contracts Part IV, Oral and Written Contracts

I finally come to a topic that many of you are familiar with, but probably still have questions or misconceptions about: oral contracts.

Are Oral Contracts Enforceable?

Yes, by the very nature of being a contract (remember from the prior weeks the definition of a contract) oral contracts are enforceable. The real problem comes from proving what the terms of the contract were because if you are depending on a court enforcing those terms remember it has to hear a whole series of he said, she said arguments.

Is it Dangerous to Ignore Oral Contracts?

Yes, most definitely. Even though they are harder to prove and enforce, a court will look to evidence where it is available. Mainly, this type of evidence is called course of conduct.

Example: Let’s say a content writer orally agrees to produce for website a blog post every 1st and 3rd Tuesday of the month with the website’s owner. The website owner agrees to pay the content writer $300.00 per month. They shake on it and for seven months the content writer meets these deadlines and the website owner pays. Let’s say for argument sake they do not e-mail each other or have any other piece of writing that evidences this agreement other than the postings and the website owner payments.

Now, let’s say after those seven months one of them does not perform as they promised. Either the content writer stops posting or the website owner stops paying. A lawsuit is filed and now a court must figure out if there is a contract.  This is where a course of conduct argument will be made to prove that a) there was a contract and b) every time the content writer wrote he got paid.

Now, back to the Real World . . .

Notice, that I excluded e-mails, receipts, payment stubs, and the like from the example. Even if the original contract was oral, generally speaking, we always have a lot of actions and pieces of evidence that show what the contours of the agreement were. It may never be precise, but that is where the court steps in to try and figure out what the contract was, but that is why attorneys insist on substantial agreements be in writing.

Bottom line: do you want to define your contract or do you want a court to do it for you? 

Are there Some Unenforceable Oral Contracts?

Yes, there are a series of contracts, due to their subject matter, that MUST be in writing. While it depends on what state you are there are the general categories of subjects that MUST be in writing and signed by the parties who are obligated to keep the promises:

  1. Guaranty is a when someone else promises to be liable for the debt if the original debtor fails to pay (this is what banks use to pierce an entity’s limited liability and get at an owner’s personal assets);
  2. A promise that cannot be fulfilled within a year of when the promise was made;
  3. Anything involving land, an interest in land (including leases), or sale of real estate;
  4. A promise for the sale of goods worth equal to or more than $500.00;
  5. Promises to be executed after death, such as in a will or trust;
  6. The promise to sell stocks and/or bonds.


Lawyers Drafting or Reviewing Contracts

Remember that attorneys are wordsmiths. We write for a living. Therefore, if you have a sophisticated transaction consider having a lawyer draft it or for you or at the very least you draft it and have them review it and point on things. Oral contracts may be fine in some situations, but in today’s modern economy that is becoming rare. See you next time!

If you enjoyed this post be sure to “Subscribe” today!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

,

Draw the Law: Contracts Part III, Void vs. Voidable and Contracts with Legal Persons

Last week recall that I talked about the need for persons to have the capacity to enter into a contract. Therefore, kids and intoxicated people may have grounds to avoid the contract. Recall even further back that I discussed that some contracts are illegal. Today, I will discuss the difference between void and voidable. In addition, I will go into contracting with legal persons better known as business entities.

Void vs. Voidable

If you noticed I used the term “voidable” as opposed to void. We make a distinction in the law between the two. Void contracts are ones that the court will not recognize. They are either illegal or very improper. Recall that a contract is a promise or series of promises that a court will enforce. Therefore, a void contract is an oxymoron in a way as a court will nullify it.

A voidable contract is a type of improper contract, but the victim has the choice whether to avoid the contract or honor it. Therefore, using the kid example again, the child has till age 18 to avoid the contract, but may choose not to if they do nothing and continue to comply with the contract’s terms by age 19.

One way to remember the difference is that void, is like a black hole, a completely empty space. Therefore, a void contract is not even there, it is nothing (because a court of law will not enforce it). On the other hand for voidable, just put an “a” in front of it and you will get the concept. The contract can be avoided.

What about Legal Persons?

So far I have talked about living, breathing people, but if you follow my blog and have come to my law talks, then you know that corporations, limited liability companies, and the like are separate entities; they are legal persons that can contract. However, we understand that this is a legal fiction. The brick-and-mortar store is not going to sprout arms and grab a pen and sign a document. A person does it, and normally this is fine.

However, consider pre-formation and post-windup of the business. For start-ups, the issue is sometimes you are getting things prepared for your company, but have not filed your paperwork with the state, and thus YOU are contracting with vendors, suppliers, etc . . . On the other end, if you have entered the winding up process a fellow co-owner still has authority to the bind the company with third parties.

Therefore, you want to make sure after your articles are filed that you get contracts changed over to reflect they are with the business (as the legal person) and not you the (individual person). When winding up the business you want to make sure you send out notices to everyone who deals with the business so that your co-owner is not continuing to enter agreements with your business as it winds up (because you will owe them if that co-owner skips out).

As a side note, remember if you are contracting with someone check if you are contracting with them or their entity, sometimes it does matter and that is when limited liability comes into play.

If you enjoyed this post be sure to “Subscribe” today!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

,

Draw the Law: Contracts Part II, Capacity

Well, continuing on our tour of contract law, remember that last time I talked about what constitutes a contract and what is good consideration for a contract.  Today I am going to talk about capacity and the difference between void and voidable contracts.
Who can Enter a Contract?

An enforceable contract is only created when both parties have maturity and mental capacity. Why? Well, we decided a long time ago that a promise for a promise require some degree of understanding, and if one party did not comprehend they would be at a disadvantage.

Who lacks Maturity and Mental Capacity?

In terms of maturity, it will be minors. Businesses always have to be wary about selling things to kids. The law in contracts (as with many other parts of the law) assumes minors need protection due to lack of maturity. The goal is avoid the car salesman selling the shiny new red truck to the 15-year old who has no idea how much car loan payments are.

In terms of mental capacity, intoxicated, drugged out, and mentally handicapped people will lack mental capacity. Why? They are not in their right mind. A court of law may feel that if one party was intoxicated and the other side knew about it, and was trying to take advantage of the fact, that the contract is voidable.

Therefore, when entering a contract (and remember what I told you last week a contract is not a formal looking set of paper!) be wary of kids and drunks.

What Happens When Entering a Contract with Someone Who Lacks Maturity or Mental Capacity?

For children, if they enter a contract they may still have to comply with the terms if they do nothing to rescind the agreement once they reach the age of majority. Therefore, for teens in modeling, and they sign the modeling agreement at 17, then wait till 19 to complain about it – they may not be able to get out of it. Additionally, for necessities a minor’s parents may be forced to pay fair market value.

Other than the mentally handicapped (unless they should become lucid at some point) the drunk who does not appear to be drunk or is trying use their drunkenness to get out of a contract may have also still have to comply. Basically, the court would make them prove they were drunk and had a lack of capacity.

Check back next week, where I will talk about the difference between void and voidable contracts and entering contracts with legal persons (i.e. business entities).  As always, I urge you to “Subscribe” today!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

,

Return of Draw the Law: Contracts Part I

It’s a New Year, but it’s time to return to an old favorite. DRAW THE LAW! Seeing, as it is so popular with business people, entrepreneurs, social media mavens, DJs, other lawyers, and corgis (ok, I made the last one up). I am moving the postings for Draw the Law up to either Tuesdays or Wednesdays (given my schedule) so you can enjoy it for more of the week! I will always being going back to basics of law and legal issues for entrepreneurs and small business owners. They will also be more bite-sized (or is that byte-sized for a blog?).

Starting Out With Contracts

So it’s a New Year, and it is the Year of the Water Dragon in the Chinese zodiac, which means for most signs prosperous. Let’s forget the debt collecting from last post and the woes of last year, let’s make some deals!

Today, I am kicking off with contract law, which I hope to culminate in a month or two into a live contract workshop for businesspeople to understand what the word “contract” means for attorneys. Why? I believe the more you know, the more it helps lessen your legal costs and doesn’t waste your attorney’s time of re-explaining the wheel to you. (*In addition, for the time we are on contracts, Boilerplate Blurb will be fused with Draw the Law).

What is a Contract?

IT IS NOT THAT PIECE OF PAPER YOU SIGNED! Let me repeat that a “contract” is NOT a set of papers with words on it that you signed. The papers with words on them are merely an embodiment of the agreement.

A contract IS a voluntary promise or a set of promises that a court will enforce.  A contract can be oral or written. The details of the contract are the provisions or terms.

Do I Need a Lawyer to draft my Contract?

No, not at all. We make contracts all the time. Have you every told a friend you would sell them an old textbook or computer for X dollars? Notice what you are doing. Your promise is that you will exchange your property for the promise of them giving you the proper amount of money? Did you need an attorney for that?

What you did need for this to be a contract is the promises, but the support of an exchange of something valuable between the parties (you and your friend).  This is called consideration. Typically, in our modern capitalistic society, consideration is money in exchange for goods or services.

Do I Always Need Consideration?

Yes.  There is no contract without consideration. To tell if something is good consideration we look for a bargained-for benefit or detriment. However, the benefit or detriment MUST be legal. Remember that a contract needs to be enforceable by a court. Thus if you wanted to trade your gold watch for meth, and the drug dealer stole your watch, you could not go to a court to enforce the agreement to get the meth. Why? Meth is an illegal substance, therefore not good consideration. While you always need consideration the subject of the promise(s) can never be something illegal.

A Word on Complex Contracts and Attorneys

While, I did say you did not need a lawyer to draft your contracts first consider the complexity of the transaction you are doing. Consider what you want spelled out, what you are bargaining for, and what does it mean for your company? Finally, realize that many transactions are regulated or have a certain applicable commercial laws, thus legal review can be crucial.

If you enjoyed this post be sure to “Subscribe” today (I’m sure it was a New Year’s Resolution)!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

, , , ,

Last Post of 2011 and Looking Forward to 2012


Aloha Everyone!

Hope you are having an awesome Friday for this last aloha Friday of 2011. I just wanted to take the time, as I close out for the day to wish you all a happy and safe New Year’s Eve and for a start of a good New Year. In addition, I would like to thank all my friends, acquaintances, clients, readers, supporters, and yes even my Twitter followers for making 2011 a good start for me.

Storytelling in 2011 

I appreciate getting to know you all in the various settings that I have and welcome meeting new people and reconnecting with old friends whether it be in social media, IRL networking, or for coffee. Also thank you for allowing me to tell you all my story and journey of an attorney that loves the intersection of law, business, and politics in the realm of small business and startups.

Past Highlights 

I would like to highlight thanks to all of you for the positive feedback regarding this site and my services. In particular, I would like to continue to make this site a place a resource for small businesses and startups navigating transactional and compliance issues. Thus from this 2011 you will continue to see posts series like the following:

Because I care about the Hawaii community and am finding that I meet new people of this great state via social media I will continue to do special write-ups on:

New Features for 2012 

Although like all good growing businesses, their ideas change and grow I will be rolling out new features and ways to get information into struggling business owners’ hands. In fact, I’ll admit that being an attorney who just started going solo there were times I wish there were resources for me, and there were, but I will continue to try to deliver information to the people who want its and need it. I would like to thank various people and organizations that have given me feedback before I talk about my 2012 features.

First the Thank Yous

Thank you to my friends at Off-Menu Catering, all of you give so much support and thoughtful feed back to carry me through continuing to serve small business.

Thank you to The Greenhouse: Innovation Hub and in particular Doc Rock (@docrock) and John Garcia (@johngarcia) for creativity and inspiration, Jill (@swamwine) of SWAM, Danny (@wangchungs) of Wang Chung’s, and Shawn of Small Business Planning Hawaii (@SBPHawaii) for bouncing ideas off of to deliver services and information to small business owners. Melissa Chang (@Melissa808), Jennifer Lieu (@jlieu), and Capsun Poe (@capsun) always guiding lights for social media use.

Mahalo to the Young Lawyers Division, HSBA, and Leadership Institute for providing guidance to an attorney.  To fellow attorneys Wayne J. Chi and Scott C. Suzuki thank you for doing talks with me, some more planned in the future! To William (@alohastartups) of Alohastartups.com, much thanks as you are providing a great resource for startups in Hawaii and I am excited for the plan in 2012. However, I think I still owe you a post from 2011! Thanks to Rechung (@TheBoxJelly) of The Box Jelly for providing a space for legal talks and helping Hawaii coworkers.

Finally, thank you to Marcus Landsberg, a fellow Hawaii attorney that has helped out and set down this path of being a solo practitioner like me and showing that solo does not mean alone.

. . . Back to New Features of 2012

Ok, enough with the thank yous and let me get to the new features that you readers can look forward to from me in 2012 for this site in particular:

  • PODCASTS – that’s right Hawaii small business owners, no worries if you cannot make it down to one of my talks! I will be providing portions of them for you to watch in your store or at home.
  • One-sheets – simple pdfs talking about one particular issue for you to download, print, and share.
  • Newsletter – I am not sure what the frequency will be, but definitely watch your e-mail inboxes!
  • REVAMP of blog and website – I will be shifting gears and making sure that I deliver to you content in a more user-friendly style!

That’s it for this year! Have fun and be safe this New Year’s Eve and see you in 2012 (Year of the Dragon!).

-RKH

Boilerplate Blurb: Memorandum of Understanding

Hey everyone, this will be the last weekly Boilerplate Blurb for 2011. I will be cutting back the number of Boilerplate Blurbs to once a month and shifting gears to roll out new content. So look for it in 2012. So let’s get to it!

Letter of Intent or Memorandum of Understanding

As a small business and startup attorney, many of my clients are not laden with cash to spend a lot of time and money of negotiating a 100-page agreement. Time management for an owner-operator consists of being at the storefront (so to speak) while spending time with the banker, accountant, attorney, and doing their own books and marketing. Thus when they come upon deals that require time and thought they sometimes feel like they have to rush through it to secure it.

In cases like that, especially where the two parties met at an informal event or through networking, I sometimes advise that it might be best to set a date in the future to enter into a formal agreement, but during the negotiating and review process sign a letter of intent, memorandum of understanding, or term sheet.

Why?

It usually signifies that both of your will make a good-faith attempt to reduce your terms into a workable formal agreement. It basically says you are both interested, but you need time to evaluate and develop the agreement. In that way for the small business owner it gives them the kind of space and pacing at their own time without losing the deal immediately.

Lose? How could they Lose it?

Well, a memorandum of understanding is typically nonbinding, even though both parties sign it. What’s the point of that? Well, both parties generally use it as a guide, a starting point, for reaching the final agreement. However, during that process one party might in good-faith disagree with the final outcome. Recognize too that even if nonbinding, elements of the letter of intent, such as a confidentiality provision may become binding, which is important for startups floating future worker agreements, additional owners, or the like.

What is this Whole Deal with Good Faith?

Good faith is not a pie in the sky idea, it really does have a body of law lineage and is something courts do consider. Good faith requires you and the opposite party to deal with each other reasonably and fairly. So no sneaking around with prices and secret info to sabotage the deal and no blowing the guy off because you did not like way he looked one day. Therefore, if you enter a memorandum of understanding be honest and deal with the white hat on.

Example of the Nonbinding part of a Letter of Intent:

. . .

This document is only a Letter of Intent. It is not intended to be, and shall not constitute in any way, a binding legal agreement.

That’s it for this last Boilerplate Blurb of 2011, lookout for the next one sometime in January 2012.  Happy holidays!

If you enjoyed this post or any of my others please “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Boilerplate Blurb: Act of God or Force Majeure Clauses

So last week I discussed the “Clickwrap” type of agreement, heavily favored by online retailers, app makers, and video game console giants. Remember, in general, I mentioned that these agreements are known as adhesion contracts or the take-it-or-leave-it contact. In these agreements the party that drafted the agreement has much more power and many times courts will peruse these contracts in consumer situations due to the imbalance of power.
However, today I will be turning to a higher power and given all the wind and rain here in the islands of the past week I though it would be appropriate to discuss act of God or force majeure (which means “greater force”) clauses.

Example Situation of When this Clause is Applicable

To give this clause a better context, consider you have opened shop and promised to deliver 1,000 menehune widgets to a mainland company in exactly 1 months time. However, it is hurricane season and two weeks from when the agreement was made your factory has rain and wind damage and you will be unable to fulfill the order. The mainland company was depending on that shipment to make their product for an event, the result is they lose out on sales.

Explanation

If there is a force of majeure clause it would excuse performance under the agreement under these circumstances. Basically, it is clear that performance is impractical under the situation due to the hurricane.  No amount of due diligence and/or care could have avoided the disaster and the party would have been able to accomplish the task nude the contract. It is clear that a hurricane is not under the control of person, thus it is an act of God or a force of nature. However, this clause is not only limited to purely natural disasters, but can include ones induced by human action, such as drilling and excavation that causes landslides or the changing of the land so there is a flood.

Further Discussion on Human-Controlled Situations

In general force majeure clauses cover three kinds of scenarios. One of them being the natural disasters, as just discussed. However, human events, such as riots, wars, or major societal upheavals are also covered. Consider, that a lot of things are produced overseas and the location of the factories. Here it is good to understand supply chain management on the business end, and then really think how an act of God clause is sometimes a necessity for a contracting party.

What’s the Third Situation?

The third situation are those man-made technical problems. No, I am not talking about the blue screen of death on your PC, but rather more severe performance failures where the contracting party has no control. Things like the telephone service going out due to the telephone company, labor strikes (not due to the contracting party),  and government restrictions and regulations. The main thing is that similar to the other situations, these technical and performance issues arise not out of the party’s control, but someone else’s. Thus, simple computer failures and software glitches are not covered, but may be a systematic power outage or server-wide failure might.

Main Point

The main thing to take away is that in these situations an act of God clause will excuse the party that fails to deliver or is delayed because of these kinds of scenarios, but the clause does not cover failures when it is due to the party’s financial condition or its own negligence.

Sample Language

Force Majeure Event ” means any cause(s) which render(s) a Party wholly or partly unable to perform its obligations under this Agreement (other than obligations to make payments when due), and which are neither reasonably within the control of such Party nor the result of the fault or negligence of such Party, and which occur despite all reasonable attempts to avoid, mitigate or remedy, and shall include acts of God, war, riots, civil insurrections, cyclones, hurricanes, floods, fires, explosions, earthquakes, lightning, storms, chemical contamination, epidemics or plagues, acts or campaigns of terrorism or sabotage, blockades, embargoes, accidents or interruptions to transportation, trade restrictions, acts of any Governmental Authority after the date of this Agreement, strikes and other labor difficulties, and other events or circumstances beyond the reasonable control of such Party.

While, I do not necessarily agree with this example (as it starts looking like a disaster movie as people who get carried away throw everything in) it does give you the flavor of what a force majeure clause is trying to accomplish within an agreement. Anyway, if you enjoyed this post or any of my others please “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

,

Draw the Law – Payment Issues, Part III: Credit Policy and Application and TILA

So on last week’s post I discussed the process of extending credit, the concerns of doing so, and the legal requirement that interest on the extension of credit be capped, depending on State law. Today’s Draw the Law, is all about the policy (what can and can you not do), the application that customers will fill out to get credit from you, and the federal law Truth in Lending Act (TILA).

Your Policy and Application for Extending Credit to Customers

Credit Policy

First, having a credit policy forces you to sit down and think of what potential customers you want to go after because you are creating customers where you had none before. Consider, that with their cash on hand plus whatever amount you decide to give on credit creates a customer that can buy bigger ticket items.

Second, the details of the policy should take into account administrative costs, how much risk can you tolerate (or how much credit are you willing to extend), for how long, interest rate, what happens if things go if there is missed payment or you have to try and collect on the debt, and the procedures you are going to follow. There is no point in creating a credit policy if a) you do not reduce it to writing, as you have no record to follow and b) why go through all that effort if you aren’t going to follow your own rules.

Some legal things to note: take a peek at Boilerplate Blurb for forum selection, governing law, and arbitration clauses that you might want apart of your policy. Secondly, putting things in writing (so long as everything is legal) provides a good recordkeeping and evidence function for disputes.

The Application Process

Once you got your credit policy in place, and before you start extending credit, you need to gather information on the creditworthiness of applicants. There are two ways to do it, and depends on the situation, you can try to gather it on your own by requesting reports and contacting other known creditors of the applicant. After you have collected enough creditworthy-type of information, make an assessment if this applicant is good for the credit.

Some things that you want to ask, if you do ask the applicant to fill out a form:

  1. customer’s name
  2. if a business, the entity’s form and name
  3. personal and business addresses
  4. personal and business telephone numbers
  5. their bank(s) name(s)
  6. type of account(s)
  7. account number(s)
  8. credit card account(s)
  9. and if a business, contact information to other trade creditors
  10. social security number*

Be aware as you collect information you cannot discriminate the granting of credit on certain bases, such as race. I will cover this more next week, when I go over the Equal Credit Opportunity Act (ECOA). *Especially, the act of obtaining and recording SSNs is regulated by various other state and federal laws.

Truth in Lending Act (TILA)

What is the Truth in Lending Act?

This law is an effort to help inform consumers whether to buy on credit or borrow, and to shop around for the best credit rate for them. Thus it is a disclosure requirement on your part.

What do I have to Disclose?

Basically, before the signing of a credit contract you have to disclose (in writing) the following:

  1. Amount of money being financed (how much credit are you extending);
  2. What are the number of monthly payments that are to be made;
  3. What is the APR or the annual percentage rate.


Is that it?

No, TILA also regulates your advertising of credit programs, therefore it makes it easy for consumers to shop around. Therefore, content-wise, if you made the pitch that buying a television would only cost the consumer “a low monthly payment” you should be giving a dollar figure and relevant information like the APR.  These are not the only requirements, and the application of TILA’s regulation depends on the structure of the credit extension. So therefore, have an attorney review your policies and papers to make sure you are doing things legitimately.

For another helpful starting point guide out this great write-up on Inc., it lays out from a more business standpoint the setting of credit policy.

Some Insight: Administrative Costs

I cannot emphasize this enough from a business background, while you can setup everything perfectly some people are caught unaware by the intake and processing of large volumes of data, then tracking, and then organizing it. Be aware the extension of credit, especially on a B2B level, is really a relationship building tool. You extend credit to your customer because you think it will be good for them, which in turn keeps them in business and constantly buying from you. However, like all relationship-building exercises you need to monitor and respond, while still looking at the numbers.

If you enjoyed this post or any of my others please “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Boilerplate Blurb in Action, Gamers and Binding Arbitration Clauses, Oh My!

Well, this is quite timely. Remember this past Monday (it seems so recent) where I discussed Clickwrap Agreements?
Well, several video game websites (and I am using Kotaku’s post because I read theirs first) are reporting that Microsoft has updated their Xbox LIVE Terms of Use to include a Binding Arbitration clause. Binding Arbitration clauses are used to have the parties waive their rights to litigate matters under the contract in a court of law. Thus, a lot of companies prefer to arbitrate with their consumers (as it is less costly, and tendency is for arbitration to favor companies for any number of reasons) rather than litigate.

In terms of how this relates to Electronic Agreements is that when you update your video game console’s software it will tell you that the Terms of Service have been updated and to continue to use the service you have to “Agree”. Once you Agree, you are locked in to those terms, and thus for gamers, you see how a Clickwrap Agreement works today!

That being said, and I am glad Kotaku brings it up toward the end of their post (in italics), as it highlights a point I have made in past posts. Contract drafters can put any number of provisions in an agreement, but if any of those are illegal, go against public policy, or are unconscionable a court of law will not enforce it. Thus in states where you cannot waive your right to go to court a binding arbitration clause will not be enforced.

Rock on gamers know your rights and read your agreements! For companies, know that if you put a binding arbitration clause in your agreement it tends to be seen as a consumer protection issue and in several states it is unlikely to be enforced if challenged.

If you enjoyed this post or any of my others please “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post

Boilerplate Blurb: Clickwrap Agreement

So last time I talked about Electronic Agreements I mentioned “clickwrap agreements.”  As you go cybershopping for the right gifts, and you invariably sign-up for new services or download new apps to play with on your iPad during the holidays you will come across the clickwrap (aka “clickthrough” or “clickwrap license”).  In particular, because of the Electronic Signatures in Global and international Commerce Act, these types of agreements have found legitimacy and therefore, commonplace usage.

What is a Clickwrap?

Before, we get to the clickwrap, you have to understand the shrinkwrap. The shrinkwrap agreement was how boxed software was sold. It basically state on the plastic wrapper that by tearing it open, you as the user, would agree to the terms of the software enclosed. Many people found this unfair that how could you agree to something you did not even see. However, courts upheld these agreements as enforceable (and I will get more into why later).

Thus, as the industry has shifted from boxed CD-ROMs for sell and moved to downloadable apps and packages online the shrinkwrap became the clickwrap. Usually, it is in the form that requires the end-user to manifest your acceptance through clicking a button that says “Ok” or “I Agree” after scrolling through that wall of text that you did not read. If you clicked, “Cancel” or the like, you would be unable to access the product or service. This take-it-or-leave-it approach is usually an adhesion contract, where one party lacks bargaining power and thus are forced to accept terms heavily in favor of the drafter.

Are these Enforceable?

Yes. Despite the imbalance in the bargaining power among the parties, Courts have upheld them. However, like all contracts any provisions that unconscionable, against public policy or law, will not be enforced. With that being said here are some of the grounds or various provisions that agreements have been upheld on:

  1. by clicking the clickwrap button after notice means consent has been given
  2. a clickwrap is simply “Money now, terms later”
  3. forum-selection clause
  4. arbitration clause*.

*Mandatory Arbitration is that Legal?

It depends. In a case between a user and the virtual world, Second Life, owner, the judge actually struck down a mandatory arbitration clause. The plaintiff argued that it had been “both procedurally and substantively unconscionable and is itself evidence of defendants’ scheme to deprive Plaintiff (and others) of both their money and their day in court.” The judge agreed and then struck down the arbitration clause. In general, the court went through a thorough analysis, but the main thing to takeaway was the arbitration would have made it more costly, rather than less costly for the plaintiff and for them to initiate the arbitration the plaintiff would require to advance fees and due to confidentiality no plaintiff would be able to learn from past disputes, thus the company would hold all the cards.

Why is it Referred to as a “License” sometimes?

As a I discuss in my IP Law talk for Small Businesses I discuss that software is actually copyrightable. Software is “written” and reduced to a “tangible medium” which makes it like literary works and sound recordings. Typically, with copyright, in your “bundle of rights” that come packaged with it you reserve the right to control the copying.  Thus notice that a famous series of books, the original copyright owner can license parts of the book out to studios for certain characters, duration of time, etc . . . because they own the “right to copy.”  Thus, there is no difference between software and their end-users, that the end-user is merely receiving a license to use the copyright owner’s software and is not given the ability to make copies as terms of the End-User License Agreement (EULA).

If you enjoyed this post or any of my others please “Subscribe” to this blawg.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.