Contract Law: Are Form Contracts and Online Contracts Legally Binding?

Men shaking hands for an online contract on smartphone devices
  • James Notaris

    CPA, ESQ. Legal Editor

  • Steve Longo

    Executive Editor

    In Brief:

  • Many people often have questions about whether online contracts are legally binding. 

     

  • Form contracts, similarly, often fall into the legal "grey area" for many people. 

  • We examine whether form contracts and online contracts are legally binding below!

Contracts may seem pretty simple at face value. Two parties who wish to enter into an agreement get together, lay out the terms, and, quite literally, sign on the dotted line in most cases.

But contract law is more complex than this. How are issues with standard form contracts handled? Are online contracts legally binding? Let’s take a closer look at these key components of contract law! 

What are Form Contracts?

Form contracts, also commonly known as standard form contracts or contracts of adhesion, are contracts between two parties where the terms and conditions are set by one party alone, giving the other party no input to negotiate terms more favorable to them. Ultimately, the party without any input is often left in an unequal “take it or leave it” position. 

While these types of contracts are not technically illegal, they could be deemed unenforceable due to unconscionability if found to be especially unjust. Plus, if the contract is found to be too ambiguous, it can be resolved via Contra proferentem against the party that wrote the contract, meaning that it’s meaning should work against the interest of that party. 

There’s a number of issues that could arise from standard form contracts. 

Part of the problem is that standard form contracts are rarely read through thoroughly by the signing party, giving the writing party the opportunity to hide important information in fine print and draft it with complex, legal language that the typical layman probably wouldn’t understand. Even if these terms are uncovered, there likely wouldn’t be any time for the signing party to negotiate them given the “take it or leave it” basis on which these types of contracts are offered. 

In addition, there may be strong social pressure for one party to sign the contract as quickly as possible even while its details are still being written or explained. This leaves the signing party vulnerable to last-minute changes that could impact them in a negative way or not fully understanding the details of it. Sometimes, standard form contracts are not even fully complete when signed, as the writing party usually gives an excuse that the rest of the contract is in another location that can’t be accessed at the time. However, these particular contracts are usually not enforced, as common law states that all the terms in a contract need to be disclosed before it’s signed. 

Finally, key terms of the contract may be written in a way that seems trivial and confuses the signing party, while they also could be used to leverage an unequal relationship, such as a manager pressuring a lower-level employee to sign a particular contract that may not be favorable to them. 

Despite these issues, standard form contracts are typically legal to create in the United States, though these issues and more may bring into question whether they’re actually legally binding.

Are Form Contracts Legally Binding?

In most cases, standard contract forms are enforceable in the U.S., as common law generally states that the signer is legally bound to the contract even if they didn’t understand it’s terms and specific details. Uniform Commercial Code, followed by most states in the country, has provisions about standard contract forms relating to the lease or sale of goods. 

However, due to the nature of standard form contracts, many jurisdictions have adopted special rules to handle them. They often face special scrutiny in many legal areas, particularly when it comes to examining them for unconscionability and ambiguity. 

Standard form contracts found to be unconscionable, that is, extremely unjust and unequal between the two parties, can be deemed unenforceable in court. Likewise, courts often rule against the party that drafted the contract if it’s found to be too ambiguous to enforce. While these principles don’t mean that every standard form contract can be voided in a court of law, they do offer protection against especially egregious examples of parties who would abuse the system to take advantage of another party with a particularly unfair contract.

A man signs a form contract

Are Online Contracts Legally Binding?

  • Yes, online contracts are legally binding. This issue was addressed when the Federal government passed the Electronic Signature in Global and International Commerce Act (ESIGN) in 2000, which made online contracts and signatures legally binding much like paper contracts are. All U.S. states have also adopted the Uniform Electronic Transactions Act (UETA) or enacted their own online signature laws to establish online contract signatures as legally valid. 

To form binding online contracts, a signature is not always actually required. However, when it is, whether it’s considered to be legally binding depends on the intent and consent of the party. In addition, for online signatures to be deemed legally enforceable and valid, the online contract itself must be enforceable and valid, which means it must be unaltered in any way, signed by all parties, and be able to be saved and printed at a later date. 

As physically signing an online contract isn’t possible, they must be signed another way, typically with one of the following choices:

  • Typing the name of the signing party into a signature box
  • Pasting a scanned signature into a signature box
  • Typing a code or ID number into a designated area
  • Clicking on an “I Agree” button
  • Using secure cryptographic signatures

Notably, some contracts are legally required to be on paper and can’t be enforced as online contracts. Specifically, the ESIGN Act excludes:

  • Wills, testamentary trusts, and codicils
  • Court documents
  • Family law, divorce, and adoption documents
  • Documents relating to the transportation of hazardous materials
  • Product recall notices that impact public health and safety
  • Utility service cancellations
  • Notices relating to default, foreclosure, repossession, and eviction
  • Notices pertaining to the cancellation of health or life insurance benefits

Though the ESIGN Act bars the use of online contracts for these types of documents, some state laws may allow for online signatures for these agreements under certain circumstances. Additionally, the ESIGN Act’s exclusions are subject to change in the event that Federal regulators believe that the exclusions are no longer necessary to ensure consumer protection.

Sign up for free tools.

Incredibly simple.

Your hear first.

Unsubscribe anytime.