Summary

The Federal Court of Australia recently handed down a judgement which provides some insight into issues surrounding the enforceability and effect of “internet contracts”: Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846.

Dialogue is alleging in these proceedings that Instagram has breached its Terms of Use by excluding Dialogue from access to its platform. Instagram, which alleges that Dialogue was engaged in unauthorised data “scraping”, sought a stay of proceedings under section 7(2) of the International Arbitration Act 1974 (Cth) on the grounds that a version of the Terms of Use which was originally in place when Dialogue commenced using Instagram required disputes to be submitted to arbitration.

Beach J rejected Dialogue’s arguments that the online terms had not been accepted or, if accepted, that the arbitration clause was an unfair term as defined in section 24 of the Australian Consumer Law or alternatively that Instagram’s reliance on it constituted unconscionable conduct as defined in section 21.

Applying US law, Beach J nevertheless held that Instagram had waived its right to invoke the arbitration term, noting that it had corresponded with Dialogue for several years before the proceedings were commenced without invoking the term, it had chosen at the inception of the proceedings not to plead or rely upon the arbitration term, and it had continued to participate in the proceedings for a lengthy period without applying for the stay. These matters demonstrated, together with other factors, a deliberate or intentional waiver of the contractual right.

Perhaps the most significant aspect of the judgement was the court’s analysis of US cases dealing with online contract terms, even though the question of enforceability was determined under Australian law – his honour noted the terminology which has developed in US jurisprudence of “clickwrap”, “browsewrap” and “sign-in wrap”, to describe different categories of online contract terms. Beach J concluded that the Instagram Terms of Use fell into the latter category and they were enforceable.

Background

Dialogue commenced proceedings against Instagram, alleging that Instagram breached its Terms of Use by excluding Dialogue from access to its platform. Instagram asserts that Dialogue breached the Terms of Use by engaging in the unauthorised access and collection of user data from the Instagram platform, a practice known as “scraping”.

The proceedings commenced in April 2019 and for 12 months Instagram submitted to the Federal Court’s jurisdiction and actively participated in case management procedures and various interlocutory applications. Instagram then sought a stay of the proceedings under s 7(2) of the International Arbitration Act 1974 (Cth), asserting that the Terms of Use incorporated a valid arbitration process and the dispute should be referred to arbitration in California in accordance with the Terms of Use.

Dialogue denied the existence of any arbitration agreement and further contended that if an arbitration agreement existed, it should be declared void or unenforceable on the basis that the arbitration clause constituted an unfair contract term or on the basis of statutory unconscionability. Failing that, Dialogue contended that Instagram had waived its right to arbitrate.

Dialogue succeeded only on the last, albeit significant, point.

Acceptance of online contract terms

The existence of an arbitration agreement depended on whether it is possible under Australian law to enter into an enforceable agreement online by clicking a button.

The issue has received surprisingly scant attention from Australian courts, although the courts have been seemingly untroubled about enforceability in those cases where the issue has arisen: see eBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450; Smythe v Thomas (2007) 71 NSWLR 537; Centrebet Pty Ltd v Baasland [2013] NTSC 59; Gonzalez v Agoda Company Pte Ltd [2017] NSWSC 1133.

The assumption by Australian courts seems to have been that the enforceability of online contracts can be adequately addressed by applying traditional common law principles, dating back to Robertson v Balmain New Ferry Co (1906) 4 CLR 379 and more recently Toll (FGCT) v Alphapharm Pty Ltd (2004) 219 CLR 165.

In Dialogue, Beach J applied Australian law took but also took account of the myriad US decisions on the validity of online agreements, observing that “Australian common law contains and applies similar principles”.

His honour stated that, consistent with Australian common law, US jurisprudence required that in order to determine that a party’s entry into any contract has been validly undertaken, it is necessary to prove two essential elements, namely, reasonable notice and a manifestation of assent.

Noting that Australian courts recognised and applied “similar themes” in determining whether an offeree had manifested assent, his Honour proceeded to consider a number of US cases dealing with internet contracts. In this regard, he recognised that:

“US courts place internet contract forms in one of three basic categories: ‘clickwrap’, ‘browsewrap’, or ‘sign-in wrap’ agreements. US courts place the three forms of internet contracts on a spectrum of validity, with ‘clickwrap’ and ‘sign-in wrap’ agreements on one end of the validity spectrum and ‘browsewrap’ agreements on the other.”

Of these three categories, his Honour concluded that, under US law if it were applicable, the Instagram Terms of Use would be a “sign-in wrap” agreement. Citing Fteja v Facebook Inc 841 F Supp 2d 829, 835 (SD NY, 2012), he summarised the expression “sign-in wrap agreement” as “websites that notify users that there are terms of use, that make the terms available on a page accessible by hyperlink, and that require the user to do some act, such as click a ‘sign-in’ button”.

The test under US law for the enforceability of a sign-in wrap contract was explained by his Honour in the following terms:

“A website containing a ‘sign-in wrap’ form of agreement will satisfy the inquiry notice standard if it provides the person with a legitimate opportunity to learn that his or her use is subject to terms of use, even if the person does not take the opportunity. A reasonable user would know that by clicking the registration button, he was agreeing to the terms and conditions accessible via the hyperlink, whether he clicked on the hyperlink or not. Whether a user actually reads the terms is considered by US courts to be irrelevant to formation of a valid contract.”

Beach J concluded that the Instagram Terms of Use satisfied this test under US law, adding that “I would similarly conclude based upon Australian law which in my view embraces analogous notions”. His Honour took particular account of the fact that the notice of the existence of the original Terms of Use on the Instagram website was conspicuous, the website provided hyperlinks that enabled a reasonably prudent user to access the original Terms of Use and, on the facts of the case, it was relevant that Dialogue was a highly sophisticated user of internet websites.

Can an arbitration clause be an unfair term?

Dialogue asserted that the arbitration clause was an “unfair term” within the meaning of section 24 of the Australian Consumer Law.

Specifically, Dialogue asserted that the term caused a significant imbalance in the parties’ rights and obligations arising under the contract. The proposal to arbitrate in California, given the relative size of the two companies, gave the respondents an unfair benefit. Further, the agreement was not reasonably necessary in order to protect the legitimate interests of Instagram, given that respondents had offices all over the world, including in Australia. In addition there would be the added financial burden on Dialogue, accompanied by disruption to its personnel, in travelling to California or at least engaging lawyers in California.

These arguments were rejected by the court.

Without detailed analysis, the court ruled on the facts that the term did not not cause a significant imbalance in the parties’ rights and obligations for the purposes of s 24(1)(a). His Honour noted that unfairness is assessed at the time the contract was entered into. The agreement was transparent –the arbitration term was expressed in reasonably plain language, it was legible, presented clearly, and it was readily available to any party affected by the term. His Honour concluded the term did not cause a significant imbalance in the parties’ rights and obligations because it applied to the partied equally and there was a meaningful relationship between it and the protection of a party (Instagram), which was reasonably foreseeable at the time the contract was entered into. Beach J concluded the term was reasonably necessary to protect Instagram’s “legitimate interests” at the time the contract was formed, as required by section 24(1)(b) (it was not unfair for Instagram to seek to protect itself from dealing with different claims in multiple jurisdictions by enabling a more efficient way to manage disputes).

Unconscionable conduct

Dialogue further asserted that the arbitration clause constituted unconscionable conduct for the purposes of section 21 of the Australian Consumer Law. In rejecting this contention, the court noted that Dialogue was repeating many of its arguments that it advanced concerning its unfair contract terms point, leading Beach J to comment that “I would answer if not reject them in similar terms” and that “they go nowhere close to establishing statutory unconscionability”.

Waiver

Having failed on the other issues, Dialogue succeeded in its contention that Instagram had waived its rights to invoke the arbitration clause for reasons including the significant delay in raising the issue both before the proceedings were commenced and also during the conduct of the proceedings.

The court applied US law, being the governing law of the contract, to determine the question of waiver. In finding for Dialogue on this issue, Beach J noted that Instagram chose at or close to the inception of the proceedings not to plead or rely upon the arbitration term, and this was indicative of a deliberate or intentional waiver of the contractual right. This was supported by the respondents’ conduct in the proceeding, including, for example, by the fact that Instagram’s defence demonstrated a detailed familiarity with the original Terms of Use which had included the arbitration term. Instagram’s defence had pleaded express terms from those original Terms of Use, without raising or referring to the arbitration term. Additionally, a later (revised) version of Instagram’s Terms of Use, which was also relevant to the proceedings, did not contain the arbitration term, which had been abandoned as part of a revised corporate strategy. His Honour pondered “why am I not entitled to assume that consistently with that corporate strategy, the respondents had deliberately chosen not to bother relying on any historical arbitration clauses under earlier agreements?”

Having concluded that the respondent had waived its rights under US law, the court observed that there had also been a waiver under Australian law.

As a consequence of the finding on waiver under s 7(5), whether applying US law or Australian law, there was no mandatory stay of proceedings under s 7(2) of the International Arbitration Act and the respondents’ application for a stay was dismissed.