Putting Revised Contract Terms on Website Deemed Insufficient Notice to Customer

Attorneys, risk managers and consultants advise their clients to use various techniques in contracts to manage the clients’ liability and contractual exposures. Underwriters of online liability risks scour an applicant’s website, contracts and the application for insurance to evaluate how aware an applicant is of potential risks and how adept it is at managing or eliminating risks. Now a case decided by the U.S. Court of Appeals for the Ninth Circuit provides guidance that may cause some of those parties to review how they use contracts and websites in the risk management process. The issue before the court was simple: whether a service provider may change the terms of its service contract by merely posting a revised contract on its website. The answer was a unanimous “no.”

The plaintiff, Joe Douglas, contracted to receive long distance phone service through America Online. Talk America later acquired that phone business from AOL. Talk America then added four terms to the service contract:

1. additional service costs,

2. a class action waiver,

3. an arbitration clause, and

4. a choice of law provision specifying New York law.

The arbitration clause and the choice of law provision are standard risk management techniques that we have discussed before. The class action waiver is less common and may be subject to challenge on grounds it is unconscionable and therefore unenforceable.

Talk America posted the contract with the new terms on its website, but apparently it never mailed or e-mailed a copy to Douglas, nor did it provide any notice to Douglas that the terms had changed. Douglas had authorized his bills to automatically be paid with his credit card. Four years later Douglas became aware of the additional charges and filed a class action suit in federal court in California.

Talk America asked the court to compel arbitration under terms of the revised agreement, and the district court agreed. Under federal law Douglas was unable to appeal a decision compelling arbitration. So he asked the appeals court for a writ of mandamus, a remedy used only in limited circumstances which permits an appeals court to command an official or court of lower status to perform a particular act.

The appeals court addressed the practicalities this way: absent notice from Talk America, Douglas could only have learned of the new contract terms by going to the company’s website and examining the contract for changes. Without notice, a party wouldn’t know when to check a website and might have to do it as often as daily. And a person would have to compare every word of the original contract with the posted contract in a search for changes.

Then the court addressed concepts of contract law: parties to a contract are not obligated to check the terms to learn whether they have been changed by the other side. A party can’t by itself change the terms of an agreement; it must first obtain the other party’s consent. A “revised contract” put forth by one party is nothing more than an offer that is not binding until accepted by the other party. And generally an offeree cannot actually consent to an offer unless he knows it exists. Even if the court were to infer that continued use of the service by Douglas constituted consent, it is only proper to infer assent after the offeree receives proper notice of the proposed changes.

The remainder of the court’s decision focused on (1) the notion that even if Douglas was deemed to be bound by the new terms, at least some of the provisions probably would not be enforceable in California anyway because California law might deem the terms to be unconscionable; and (2) whether the limited circumstances that permit a writ of mandamus actually existed in this case. The appeals court ruling found that the conditions for a writ did exist, and it vacated the district court’s order that compelled arbitration. 

The growing use of websites to disseminate information and terms to customers and visitors, whether through pages addressing Privacy and Terms of Use or through click-through agreements, may lead some parties to go too far. Specifically, website owners may place too much faith in protection that is perceived to be afforded by simply placing information and/or changed terms on their website and pay too little attention to fundamental contract principles.