Don't go changing that contract on me!

A good and important ruling was made the other day in the 9th Circuit Court in the US about amending contract terms. It is important for anyone who has a Terms of Service, User Agreement or similar on their site to understand this and what it means for them.

In a nutshell the ruling says that you can’t just go changing user agreements and expect the changes to be valid, even if you say in your original user agreement that you can change it whenever you want.

An example of one of these terms that likely isn’t valid anymore is in the “Basecamp Terms of Service”:

37signals reserves the right to update and change the Terms of Service from time to time without notice. Any new features that augment or enhance the current Service, including the release of new tools and resources, shall be subject to the Terms of Service. Continued use of the Service after any such changes shall constitute your consent to such changes. You can review the most current version of the Terms of Service at any time at: http://www.basecamphq.com/terms.html

While 37 Signals are generally considered good guys by most people (including me) and therefore probably wont ever have a problem due to this, it would only take one irate customer and one small contract change to cause problems.

The problem here is while the court said you can theoretically make changes, the burden of proof that the other party has read the updated agreement is really on you the web service operator and not on your users. Therefore making it the user’s responsibility as 37 Signals does above to monitor this is not OK. A couple of approaches would be to email the users every time you make a change, you could also force the users to accept the new agreement on login like PayPal does.

What I think is important here is that the ruling basically says what I’ve been saying all along about contracts. Plain english rules written by the parties involved and not lawyers is what is important. Don’t try to outwit anyone and most importantly don’t do things unilaterally.

There are no such things as magic clauses like the above that magically lets you ignore the fundamentals of contract law. No matter what the lawyer says if you or the other party don’t understand the contract it is not a contract. It is an agreement, and you can not be in agreement if you do not understand what you are agreeing to.

For more on this ruling see CL&P Blog, Eric Goldman and AdamsDrafting.

For the basics of Contract Law read my article Pragmatic Contract Law for Entrepreneurs, it really isn’t particularly difficult to understand.

Also while you’re at it, why don’t you go register for the Agree2 2nd beta. We will are trying to make this apparently complex subject simple for anyone to understand.