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Are foreign arbitration clauses in an online contract enforceable?

10 February 2021

#Dispute Resolution & Litigation

Published by:

Melanie Long

Are foreign arbitration clauses in an online contract enforceable?

Entering into international contracts online is now a commercial fact of life. These contracts can be simple, such as the purchase of a pair of jeans by a consumer, or more complex service agreements between sophisticated legal entities. In both cases, it is customary now to ‘tick’ or ‘click’ a box to accept a set of terms and conditions, which may become binding whether or not they have in fact been read. These terms and conditions may also include a clause referring disputes to binding arbitration in a foreign country.  

The recent case in Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846 concerned a set of terms and conditions that included a referral of disputes to arbitration in California.

Dialogue Consulting Pty Ltd (Dialogue), a small tech company based in Melbourne, took Instagram Inc (now, Facebook Inc) (Instagram) to the Federal Court after Instagram banned Dialogue’s Sked Social software tool – a platform which allows businesses and advertisers to plan and schedule content on Facebook and Instagram – from accessing their sites.

The Federal Court confirmed that an arbitration clause contained in online terms of use is capable of amounting to a binding and enforceable arbitration agreement under the International Arbitration Act 1974 (Cth) (IAA). However, to rely on these agreements, companies must act consistently with the requirements of the clause and not in a way that may amount to a waiver of their rights to arbitrate.  

In this article, we provide an in-depth analysis of the case by examining:

The consequence of this decision, particularly for the online business community, is that arbitration clauses contained in terms of use (or terms and conditions) are valid arbitration agreements that can rely on the IAA, as long as they are properly incorporated by way of appropriate design and content. At least is this case, a submission that a foreign arbitration clause was an unfair contract term under the ACL, was given short shrift.

Furthermore, companies who seek to rely on these arbitration agreements should be careful not to waive their rights to compel another party to arbitration by taking more than necessary steps in any existing litigation involving this party.

Background

In 2019, Instagram banned Sked Social’s access to its sites alleging breach of Instagram or Facebook’s terms of use. As a result, Dialogue commenced proceedings in the Federal Court. The parties took various steps in the proceedings, including a mediation.

On 9 April 2020, more than 12 months after proceedings were commenced, Instagram sought a suspension (or ‘stay’) of these proceedings under section 7(2) of the IAA on the basis that they involved a determination of matters that were capable of settlement by arbitration, according to the arbitration clause included in the Terms of Use.

In determining whether to grant the suspension, Judge Beach was required to consider a number of factors, including:

  • the competence-competence principle (that arbitrators have jurisdiction to determine their own jurisdiction)
  • the relevant choice of law applicable to determining the formation of the ‘internet-formed’ contract
  • whether, applying the relevant law, an arbitration agreement was formed and determining the parties and its scope
  • whether, if an arbitration agreement was formed, Dialogue should succeed on its cross-application that the arbitration agreement (or the relevant term of the principal contract) is void and unenforceable because of conduct amounting to statutory unconscionability
  • whether the conditions under section 7(2) of the IAA have been satisfied
  • whether, if there is an arbitration agreement and the conditions under section 7(2) of the IAA have been satisfied, Instagram had waived its rights to rely upon it, triggering the exception under section 7(5) of the IAA.

After careful consideration and analysis of all of the above, Beach J found that:

  • it was appropriate for His Honour to finally decide all elements of the case despite the applicability of the competence-competence principle
  • the relevant law was Australian and more particularly Victorian law
  •  an arbitration agreement was formed
  • Dialogue’s cross-claims under the ACL was not made out
  • the conditions under section 7(2) of the IAA had been met.

Based on these findings, Instagram’s application to suspend the proceedings would ordinarily succeed, however, Beach J was of the view that, applying US law, that Instagram had waived it rights to have the relevant matters referred to arbitration.

The validity and incorporation of the arbitration agreement in the Terms of Use

Under Australian law, arbitration agreements in contracts formed on the internet are valid and enforceable as long as there is reasonable notice and manifestation of agreement by the party to which the Terms of Use are imposed. The US applies similar tests, which His Honour also considered. 

Essentially, there are three types of internet-formed contracts – “clickwrap”, “browsewrap” and “sign-in wrap”. “Clickwrap” and “sign-in wrap” agreements fall on the stronger end of the validity spectrum, while “browsewrap” sits on the other end.

A “clickwrap” agreement is where the site requires a user to scroll through the terms of use and to affirmatively click a box labelled “I agree” or similar before the user can further use the site’s services.

A “browsewrap” agreement is formed when the site contains a notice that by accessing or using the services of the website, the user is agreeing to be bound by the site’s terms of use. Notably, a site that presents a “browsewrap” does not have an “I agree” button or equivalent, such that a user can use the website’s services without being required to take any affirmative action to indicate his or her knowledge of or agreement to its terms of use. Accordingly, these agreements are the least likely to be upheld by the courts.

Finally, a “sign-in wrap” agreement notifies the website user that there are terms of use (available on a page accessible by hyperlink) and requires the user to fulfil an action, such as click a “sign-in” button to approve them. This, Beach J held, was the type of agreement used by Instagram and that it accordingly placed a reasonably prudent person on notice that his or her use was subject to the Terms of Use and to which Dialogue had agreed to. His Honour came to this conclusion on the basis that:

  • notice of the existence of the Terms of Use was conspicuous
  • the notice provided users with a means to satisfy any inquiry they have about the Terms of Use should he or she have so desired
  • although the standard for the reasonable notice test is a reasonably prudent user, Dialogue was a highly sophisticated user of internet websites.

Further, the evidence showed that:

  • Dialogue had been in contact with Instagram around the relevant time, the correspondence of which indicated that it was aware of the Terms of Use
  • with this knowledge, Dialogue continued to use Instagram and thus there was ratification
  • Dialogue expressly referred to the Terms of Use in its own terms of service
  • somewhat ironically, despite challenging this form of agreement, Dialogue sought to enter into internet contracts with its own customers by a mode similar to Instagram. 

It should also be noted that Dialogue ran a separate argument that an arbitration clause is not reasonably expected when creating an Instagram account and that accordingly, something more by way of provision of information to the acceptor was required before the contract was formed.

His Honour rejected this argument by stating that Dialogue was aware of the arbitration clause in the Terms of Use or chose not to enquire. Further, an arbitration clause is not that unusual and even if something more was required, Instagram had done this because it specifically highlighted the clause at the top of the Terms of Use in capital letters. Therefore, while a “sign-in wrap” agreement is likely to be sufficient to properly incorporate an arbitration agreement in terms of use, it is prudent to make such a clause conspicuous.

Arbitration agreement not an unfair contract term under the ACL

Under Dialogue’s cross-claim which, as aforementioned, His Honour was relatively quick to dismiss, it argued that the arbitration clause amounted to an unfair term under section 24 of the ACL and therefore should be deemed void. In particular, it argued that the arbitration clause was not transparent and limited its rights to sue Instagram.

With reference to the time at which the contract was formed, His Honour held that the arbitration agreement was not an unfair contract term. Addressing Dialogue’s arguments, Beach J found that the arbitration clause was transparent because it was stated prominently in bold, in all-capital letters at the top of the Terms of Use and that Dialogue’s argument that it was unfair due to its apparent restriction against its rights to sue was superficial, on the basis that Dialogue could sue Instagram despite this clause.

In addition, Beach J also considered whether the arbitration clause caused a significant imbalance between the parties and whether it was reasonably necessary to protect the legitimate interests of Instagram. Beach J held that the arbitration agreement did not cause a significant imbalance between the parties because there was a meaningful relationship between the term and the protection of a party and that that the relationship was reasonably foreseeable at the time of entering the agreement.

Further, in any event, the arbitration agreement did not only favour Instagram as both parties had the option to invoke the arbitration agreement. Dialogue’s reliance on the alleged unfairness of an “opt-out” clause that provided it with only 30 days to opt-out of the arbitration agreement did not change this view. Accordingly, Dialogue failed to establish that the arbitration agreement caused a significant imbalance between the parties.

His Honour also discussed why the arbitration agreement was reasonably necessary to protect the legitimate interests of Instagram. In Gonzalez v Agoda Company Pte Ltd [2017] NSWSC 1133 (Gonzalez), the avoidance of litigation in multiple jurisdictions was held to be a legitimate business interest worthy of protection and that inconvenience and cost alone are not likely to be sufficient to establish that submitting to a foreign jurisdiction would be unfair. Therefore, with reference to this decision, Beach J also concluded that Dialogue had failed to argue that the interests that Instagram sought to protect by way of the arbitration agreement were not legitimate and thus could not amount to an unfair contract term under the ACL. This finding, His Honour noted, was even more prevalent in the era of the COVID-19 pandemic which has seen a move towards remote hearings which make them more convenient and cost-effective.

The final and ultimately decisive element on which His Honour was required to decide was whether Instagram had waived its right to arbitrate under section 7(2) of the IAA and thus invoked the exception contained within section 7(5).

Instagram’s waiver of its right to have the dispute determined by arbitration

Section 7(5) of the IAA provides that a court shall not make an order to suspend proceedings if the court finds that the party seeking the suspension has waived its rights to arbitrate.

In determining this question, Beach J concluded that in this case, US law applied. Guided by evidence submitted for Instagram by retired United States District Judge of the United States District Court for the Northern District of California, Judge Ware, His Honour considered a number of factors in coming to the decision that Instagram waived its rights to rely on the arbitration agreement and that the “no waiver” clause in the Terms of Use was of no effect. The factors that Beach J viewed as supporting the inference of a deliberate or intentional waiver by Instagram were:

  • Instagram’s 12-month participation in the proceedings before making the application. This included actions which went beyond what could be construed as simply “defensive” in nature, such that Instagram was more than just responding to Dialogue’s actions to further the proceeding, including, for example, attending a mediation
  • Instagram’s first filed defence indicated detailed familiarity with the Terms of Use. Just as Dialogue can be said to have known about the arbitration clause, so did Instagram and its lawyers, but they chose not to invoke the arbitration clause until this time
  • at one stage, Instagram relied on a later version of the Terms of Use seemingly preferring its terms for the furthering of its case against Dialogue. These Terms of Use did not contain an arbitration clause
  • despite Instagram’s reliance on an earlier letter from its lawyers to Dialogue reserving its rights, this was not enough to reserve its right to arbitrate in of itself and especially considering it still chose not to seek to arbitrate in its first filed defence
  • Instagram’s corporate strategy later became to abandon using arbitration clauses in its Terms of Use so it follows that, consistent with this policy, it chose not to rely on any historical arbitration clauses under earlier agreements
  • it is possible that due to the breadth of Dialogue’s claims (including claims under the CAA which are excluded from settlement by arbitration), that it was Instagram’s position that too much would have been outside the scope of any arbitration proceeding to justify arbitration as a dispute resolution process between two continents and two modes of adjudication.

Finally, Instagram’s intentional inconsistent acts caused relevant prejudice to Dialogue such that the undue and unreasonable delays meant that the efficiencies of arbitration had been significantly impaired and valuable resources on ordinary litigation had been wasted.

In light of the above, Beach J held that Instagram had waived its right to rely on the arbitration agreement and its application to suspend the proceedings was refused.

Conclusion

This decision is significant because it confirms that arbitration clauses in internet-formed contracts are binding provided that they have been incorporated into a contract in such a way that reasonably puts the user on notice of its terms and that there has been a clear manifestation of assent. This is most effectively done by way of a “sign-in wrap” agreement. Furthermore, based on the findings in Gonzalez, it is unlikely that such a clause will be deemed unfair under the ACL in similar circumstances.

Finally, a party seeking to rely on an arbitration agreement is at risk of waiving its right to the benefits of this arbitration agreement if it waits too long to rely upon it and actively participates in any litigation already on foot.

Since the handing down of this judgment, Instagram has applied for leave to appeal Beach J’s decision to the Full Federal Court.

Authors: Geoff Farnsworth & Melanie Long

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Melanie Long

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