January 17, 2012

Use Caution When Mixing Traditional and Online Contracts: Fadal Machining v. Compumachine

Holland & Knight Alert
Ieuan G. Mahony

Many companies have established contracting structures that rely on both online and traditional, paper-based contracts. Although this “hybrid” structure can offer increased — and valuable — contracting flexibility and efficiencies, it presents challenges for contract managers and negotiators, and can dramatically increase the risk of miscommunications. The Ninth Circuit’s recent ruling in Fadal Machining Centers, LLC v. Compumachine, Inc., 2011 WL 6254979, highlights these risks.

Case Background

In the case, the plaintiff, Fadal, drafted a distributorship agreement appointing Compumachine as Fadal’s exclusive distributor. In standard choice-of-forum language, the parties’ offline, hard-copy agreement provided that any action or claim arising from the agreement would be heard “solely and exclusively” in the federal District Court for the Central District of California. The agreement also specified, however, that Fadal could unilaterally establish the terms of sale “from time to time.”

The Fadal court reasoned that the “terms of sale” clause was implicated when Compumachine’s purchases at issue were effected under invoices stating simply “For Terms & Conditions of Sale: WWW.FADAL.COM/TERMS.” Problematically, the Terms and Conditions located at the Web page “WWW.FADALCOM/TERMS included: (a) a mandatory arbitration clause, as well as (b) boilerplate language stating that the online terms would prevail over any other agreement. Under these facts, the Ninth Circuit found that the online Terms and Conditions controlled and ruled that the contract dispute could only be submitted for arbitration.

This case has important implications for all contracting parties who operate portions of their business through online portals. Perhaps unsurprisingly, given the case law surrounding online agreements (e.g., click-wrap and click-through licenses), the Ninth Circuit had little trouble finding that Fadal’s online Terms and Conditions were enforceable. Given the explicit language of the Terms and Conditions, the court also easily found that the Terms and Conditions “trumped” the negotiated, offline contract, and required the parties to arbitrate any contractual disputes stemming from purchase orders referring to the Terms and Conditions. Interestingly, however, it was Fadal — the author of the distributorship agreement and the online terms and conditions — who sought to escape the arbitration clause and was instead bound by it. Fadal likely thought itself well protected by an offline distributorship agreement that gave it unilateral power to specify terms of sale. At the same time, Fadal likely believed it was well served by referencing its online Terms and Conditions in invoices.

What You Need to Know

Maintaining online and offline contracting structures creates complexity, particularly where these structures can overlap. The benefits of such structures can well outweigh their disadvantages, provided contracting personnel take care to harmonize their company’s online and offline worlds. Fadal’s mistake serves as a warning to others: create consistency between online and paper contracts, and do not intermingle the two without careful analysis.

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