With most e-commerce Web sites featuring privacy policies, copyright notices, and agreements governing site usage, users might be forgiven for suspecting that some lawyers have quietly turned to Web site design during their spare time.
Despite the mounting legalese, however, a recent case from British Columbia suggests that all these legal terms do little to protect a site that fails to meet users' reasonable expectations.
Wei Zhu, a Vancouver-based software engineer, was a customer of Merrill Lynch's Net Trader system for completing online securities trades.
In May, 2001, Zhu attempted to sell shares on the system but moved quickly to cancel the transaction. He received an electronic message indicating that the vast majority of the shares were not sold and that the transaction had been cancelled.
A few minutes later he again attempted to sell the shares. As it turns out, the cancellation was never completed, so in fact Zhu sold the shares twice and was placed in a short position. When Merrill Lynch insisted that he make up the short position, he lost nearly $10,000.
Acting without legal representation, Zhu challenged the loss in a B.C. court. He argued that he had simply followed the instructions on the screen — the Net Trader system had advised that the transaction was cancelled and so he naturally assumed that this meant that the transaction was in fact cancelled.
Merrill Lynch denied any liability. First, it sought to rely on disclaimer clauses posted on the computer screen as part of the trading transaction as well as those found within the contractual agreement used when establishing a trading account.
Second, it argued that Zhu should have contacted the broker by phone to verify that the transaction had been cancelled. Although the screen had indicated that the transaction was cancelled, this merely meant that Merrill Lynch had attempted to cancel and that there was no actual guarantee that the cancellation had occurred.
The court proceeded to rule against Merrill Lynch on all counts, awarding Zhu compensation to cover the full amount of the losses along with his associated court fees.
The judge was particularly dismissive of the disclaimer clause, which the broker maintained absolved it of any liability.
Instead, he ruled the clause was unenforceable, characterizing it as "an agreement which `virtually eliminates liability for inaccuracy in the performance of the services contracted for by the customer'."
Of even greater interest is the judge's discussion regarding the Net Trader system and the duty of care an online broker owes its customers.
Cognizant of the high risk of loss that may accompany securities transactions, the judge noted that online brokerage services demanded a higher duty of care than would normally be the case for other services.
Moreover, he was very critical of the system, concluding that "an electronic system which is incapable of giving to a customer a simple instruction that he should not continue with a request for a trade or cancellation until he or she is advised specifically that the request has been successfully and completely dealt with" is faulty and does not provide a reasonable level of performance.
Although a lower court case, this decision provides two important lessons for e-commerce and the law. First, while Canadian law clearly recognizes the enforceability of online contracts — several Ontario cases as well as e-commerce legislation in force in virtually every province have removed any uncertainty in that regard — the validity of specific provisions within online contracts remains subject to close scrutiny. Particularly in business-to-consumer transactions, courts are very reluctant to enforce lopsided terms that transfer all the risk from the company to the consumer.
Second, although we have grown accustomed to computer systems that crash regularly and Web site features that fail to deliver as promised, online service cannot be allowed to slip below the reasonable expectations of the average user, particularly where there is the prospect for significant liability.
To meet that standard, software code, Web site design, and users' online experiences can no longer be left solely to software code writers. Rather, lawyers must play a role that goes well beyond providing effective terms and conditions. They must assist in the shaping of the online experience, by understanding that companies are effectively architecting an online presence that is subject to regulatory and legal oversight.
The Zhu case provides a wake-up call to banks, brokerages, and other financial institutions that have assumed a leadership position in offering creative new online services. While innovative features are welcome, Web sites that fail to deliver expected performance and functionality raise the prospect of legal liability — with or without protective legalese.
