Are foreign arbitration clauses in online contracts 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, 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 decision of 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. The Federal Court held that an arbitration clause contained in online terms of use is capable of amounting to a binding and enforceable arbitration agreement for the purposes of the International Arbitration Act 1974 (Cth) (IAA). However, to rely upon 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.  

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 be relied upon for the purposes of the IAA so long as they are properly incorporated by way of appropriate design and content. At least, in this case, a submission that a foreign arbitration clause was an unfair contract term for the purposes of the Australian Consumer Law (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

Dialogue Consulting Pty Ltd (Dialogue), a small tech company based in Melbourne, and Instagram Inc (now, Facebook Inc) (Instagram) are currently involved in a dispute arising out of Dialogue’s Sked Social software tool which allows businesses and advertisers to plan and schedule content on Facebook and Instagram. In 2019, Instagram banned Sked Social’s access to its sites alleging a breach of Instagram/Facebook’s terms of use (Terms of Use).

Dialogue commenced proceedings in the Federal Court on 11 April 2019 alleging breach of implied terms of use, misleading and deceptive conduct under the ACL, and anti-competitive conduct under the Competition and Consumer Act 2010 (Cth).

The parties undertook various steps in the proceedings, including mediation.

On 9 April 2020, over 12 months after proceedings were commenced, Instagram sought a 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, pursuant to an arbitration clause included in Instagram’s Terms of Use.

Readers will be aware that a similar provision in section 8 of the relevant state-based Commercial Arbitration Act which applies to domestic commercial arbitration, stipulates that an application for a stay must be made “not later than when submitting the party’s first statement on the substance of the dispute.”  

In determining whether to grant the stay, 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-application was not made out, and finally, the conditions under section 7(2) of the IAA had been met.

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

The remainder of this article dives deeper into the reasons for Beach J’s decision with a focus on the formation of the arbitration agreement by way of an arbitration clause in Instagram’s Terms of Use, the dismissal of Dialogue’s unfair contract term cross-claim and the waiver which ultimately meant Instagram’s stay application failed.

The existence, validity and scope of the arbitration agreement

The competence-competence principle

According to the ‘competence-competence’ principle of arbitration, arbitrators have the power to determine their own jurisdiction, including any challenge to the validity, existence or scope of an arbitration agreement. So, if on the face of it, there is a valid arbitration agreement that appears to cover the matter in dispute, then this principle would ordinarily dictate that the court proceedings be stayed so that the matters in dispute can be determined by the arbitrators themselves.

In this case, Beach J concluded that while the competence-competence principle applied, he was not bound to apply it. In this regard, Beach J stressed the importance of context, the consideration of which led to the conclusion that, on the balance of probability, His Honour was best placed to determine whether an arbitration between Dialogue and Instagram existed (and later the question of a waiver), and notwithstanding that his Honour also found that California was the ‘seat’ of the arbitration.

Was there an arbitration agreement to which the stay provision applies?

In order for a stay under section 7(2) of the IAA to be ordered, there needs to be a valid arbitration agreement in existence that covers the matter in dispute. Specifically, section 7 of the IAA requires that:

• there is an arbitration agreement (sections 3(1) and 7(2)(a)
• the arbitration agreement is in writing (section 3(1))
• the procedure in relation to the arbitration is governed by the laws of a Convention country, or a party to the arbitration agreement was, at the time when the agreement was made, ordinarily resident in a Convention country (sections 3(1) and 7(1))
• the proceeding involved the determination of a matter capable of settlement by arbitration (section 7(2)(b)).

After concluding with reference to relevant sections in the IAA that the Terms of Use satisfied the writing requirement above, His Honour was required to determine whether under Australian law, as the law of the forum chosen to finally decide the matter, that an arbitration agreement was formed. Under Australian law, arbitration agreements in contracts formed on the internet are valid and enforceable so long as there is reasonable notice and manifestation of assent by the party to which the Terms of Use are seeking to be imposed. The US also applies similar tests, which His Honour also considered.

On the evidence, Beach J concluded that Instagram’s Terms of Use amounted to an arbitration agreement. At the relevant time, any person who wished to open an Instagram account was presented with an initial registration or sign-up screen where hyperlinks were allowing them to view the Terms of Use prior to creating an Instagram account. Further, if the user chose to proceed, he or she was required to confirm at the point of registration that he or she agreed to the Terms of Use.

Additionally, after a user had opened an account, they were able to access the Terms of Use in various ways on Instagram’s website or app. Together, His Honour concluded that the manner of formation was what is known by US courts as a “sign-in wrap” agreement,^[1] that placed a reasonably prudent person on notice that his or her use was subject to the Terms of Use and to which Dialogue had assented. 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 had 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:

• 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 one reasonably to be expected when creating an Instagram account and 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 knew of the arbitration clause in the Terms of Use or chose not to enquire. Further, that 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. Finally, at this time, His Honour confirmed that arbitration agreements under the IAA can be formed online and that this is anticipated by the relevant sections of both the IAA and the Convention despite not specifically referring to them. This is especially because the alternative would have wide-ranging consequences in this day and age of technology when so many contracts are being entered into in this way.

After concluding that there was a valid arbitration agreement, His Honour looked at the remaining elements of section 7 of the IAA to be established confirming that the ‘seat’ and relevant procedural law of the arbitration agreement was the law of the State of California as outlined in the arbitration clause and that United States is Convention country for the purposes of the IAA.

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 should therefore be deemed void. In particular, it argued that the arbitration clause was not transparent and limited its rights to sue Instagram (section 25(k) of the ACL). Interestingly, Beach J took an extremely conservative approach to the unfair contract regime in the ACL by cautioning against its application with moralistic sentiments. Specifically, His Honour stated that the term “unfair” ‘is not to be inflated with imprecision or subjectivity, such that “there is no scope to interlard other feel-good factors or niceties in order to remedy any perceived disparity between the parties”, beyond those factors set out in section 24(1) of the ACL. 

With this in mind and 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 the Dialogue could, in fact, sue Instagram in spite of 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 in order to protect the legitimate interests of Instagram. 

Did the arbitration agreement cause a significant imbalance between the parties?

Beach J held that the arbitration agreement did not cause a significant imbalance between the parties with a “significant” imbalance being one of such “magnitude or sufficiently large to be important.” In so concluding, Beach J stated that a term does not cause a significant imbalance if there was a meaningful relationship between the term and the protection of a party and that that 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.

Was the arbitration clause reasonably necessary to protect the legitimate interests of Instagram?

Although the above finding was enough to have Dialogue’s unfair term cross-claim rejected, 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), it was recognised that 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 the arbitration clause 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. Accordingly, Beach J rejected Dialogue’s unfair contract term argument and maintained that the arbitration agreement should be recognised and enforceable despite Dialogue’s challenges to it. 

Given His Honour’s conclusion in relation to this element of the ACL, it is not surprising that Dialogue was also unable to make out statutory unconscionability under section 21 of the ACL.

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 stay proceedings if the court finds that the party seeking the stay has waived its rights to arbitrate. In determining this question, Beach J concluded that in this case, US law applied and more specifically the Federal Arbitration Act (9 USC §1 et seq.) § 3, as set out in the arbitration agreement. Further, that His Honour was again not required to invoke the competence-competence principle to the matter of waiver when it could be “efficiently dealt with as a discrete exercise.”

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 as a result, the “no waiver” clause in the Terms of Use was of no effect. His Honour set out many tests used by the US courts, the most comprehensive of which is the six-pronged test, which states that on this question of waiver, consideration must be had to whether:

• Instagram’s actions were inconsistent with the right to arbitrate
• the litigation process had been substantially invoked and the parties were well into the preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate
• Instagram either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay
• Instagram filed a counterclaim without asking for a stay of the proceedings
• the important intervening steps, such as taking advantage of judicial discovery procedures not available in arbitration, had taken place
• the delay affected, mislead or prejudiced Dialogue.

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 stay application. This included actions that 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 term so too can 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 stay application was refused.

Conclusion

This decision is significant for a number of reasons, including:

• it confirms that arbitration clauses in internet-formed contracts are binding and enforceable provided 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
• incorporation of such clauses in terms of use and terms of use themselves is most effectively done by way of a “sign-in wrap” agreement
• it is unlikely that an arbitration clause in an internet-formed contract will be deemed “unfair” under the ACL in circumstances where:
  • the protection of a party by the inclusion of this term was reasonably foreseeable at the time of entering the agreement
  • the arbitration clause has the potential to benefit both parties.
• on the basis of the findings in Gonzalez, the avoidance of litigation in multiple jurisdictions is a legitimate business interest worthy of protection and capable of overcoming an ACL unfair contract term claim
• 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

^[1] A “sign-in wrap” agreement is one in which a website notifies users that there are terms of use, makes the terms available on a page accessible by hyperlink and requires the user to do some act, such as click a “sign-in” button.

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:

Geoff Farnsworth

Melanie Long

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