If you've ever purchased an item online or signed up on a social media platform, chances are you've agreed to an online contract, even without giving it much thought!
Back in the day, contracts meant piles of paperwork, multiple physical meetings, penned signatures, and firm handshakes. But with more organizations taking their operations online and customers spending more time on digital devices, the traditional idea of what a contract is has completely changed.
Online contracts eliminate the need for physical meet-ups and paperwork, making them the new favorites in the world of business. But are they as legally binding as their traditional counterparts?
Yes, if done right!
In this guide, we’ve explained everything you need to know, from what makes an online contract different to how you can ensure its enforceability.
What is a contract?
Before properly discussing online contracts, let’s set the pace by briefly defining what a contract is.
A contract is simply a legal agreement between individuals or businesses. In it, the parties promise to do something (or refrain from certain actions) in exchange for money, goods, services, or something else of value.
Business contracts contain a set of rules that all parties agree to follow, and if one side doesn’t hold up their end of the deal, the other can take them to court.
What is an online contract?
Source: MiClient via LinkedIn
An online contract is a legal agreement initiated, executed, and managed over the Internet.
An online contract comes in many forms, each with a different level of enforceability. Some online contracts are structured just like traditional agreements, comprising multiple rounds of negotiations and only differentiated by the use of digital signatures.
Other forms of online agreements don't require multiple contract negotiations but are signed by either checking a box that says "I agree" (as in clickwrap), signing up for an account (as in sign-in-wrap), or using a website (as in browsewrap).
Also read: Getting Digital Contracts Signed: Everything You Need to Know
Difference between a traditional contract and an online contract
Online contracts and traditional agreements both focus on protecting the interests of parties engaging in business relationships.
However, they’re different in so many ways, some of which we’ve explained below:
#1 Format
A traditional contract relies on physical documents. You spread the entire contract terms across several pages, including a space for contract signing where the counterparty can indicate consent after reading and agreeing to the provisions.
Online contracts don’t require physical documents. With online contracts, you draft your agreements, negotiate the terms, sign, and manage them all on the cloud.
#2 Execution process
With traditional contracts, execution involves signing contracts using a pen or a stamp.
Execution of online contracts involves electronic signatures and can be done in a few ways: you can draw your signature on a digital interface, click on a button, check a box, or take other actions that demonstrate consent.
This signing process is normally facilitated by contract management platforms or dedicated electronic signature tools.
#3 Storage
Traditional contracts are stored in physical filing cabinets, safes, or archives. In many cases, they’re arranged by category, date, or client for easy retrieval.
Online contracts are stored in the cloud using dedicated document storage platforms or Contract Lifecycle Management (CLM) systems. All parties involved can then access them using their internet-enabled devices.
Also read: Tips to Store Your Contracts Effectively
#4 Automation
Traditional contract lifecycle management processes are naturally manual. All aspects of the contracting process, from drafting and review to execution and storage, require human involvement. Any changes made to the contract at any point will require reprinting or manually redistributing the new version to everyone involved.
Online documents benefit tremendously from automation. Contract management solutions like SpotDraft allow you to automate the entire contract lifecycle, including drafting, review, approval, signing, storage, and tracking.
Also read: What is Contract Automation? Expert Tips & Insights
#5 Logistics
Source: Amanda Weir via LinkedIn
With traditional contracts, you’ll often need to deliver a copy of your agreement to your counterparty either in person or through courier services. This often involves printing multiple copies, scheduling in-person meetings for signing, or mailing documents back and forth.
Online contracts are often delivered via email or a contract management platform. Parties can negotiate contract terms and make multiple rounds of revisions to a contract document over the Internet. Delivery is instant, and version control is relatively easy.
Also read: From Paper to Pixels: Persuading Clients to Embrace E-Contract Signatures
Are online contracts legally binding?
Source: Cecil Williams via Quora
Online contracts are legally binding, and thousands of businesses across the world use them every single day.
Laws like the Uniform Electronic Transactions Act (UETA), the Electronic Signatures in Global and National Commerce Act ( eSign), and the Electronic IDentification, Authentication, and Trust Services (eIDAS) were developed specifically to cater to the enforceability of online contracts.
But to ensure your online contracts have strong legal backing, you must closely follow the laws of the jurisdiction where you’re executing your deals.
For instance, in the US, online contracts can be legally binding as long as there's proof that all parties have agreed to the terms of the contract and the use of electronic signatures for its execution.
This is demonstrated in various case laws involving clickwrap and browsewrap agreements.
Clickwrap agreements are generally easier to enforce because users are required to take very specific actions, like hitting a button or checking a box, to show consent.
Browsewrap agreements rely on implied consent and don’t require any explicit actions. Thus, they’re more difficult to enforce.
So, here’s the bottom line: online contracts are legally binding as long as they are implemented in accordance with relevant laws.
Also read: Are Clickwrap Agreements Legally Binding?
How to create an online contract
The process of creating an online contract is largely similar to traditional agreements, with the inclusion of digital signatures marking the key difference between them.
Here's a quick rundown of how it's done:
- Determine what kind of contract you want to create: It can be an NDA, a SaaS agreement, a vendor contract, etc.
- Identify the parties involved: Include the legal names of the individuals or organizations involved, along with their contact details.
- Detail the terms and conditions: This should include the scope of work, payment terms, duration of the agreement, obligations, etc.
- Introduce your legal guardrails: Include provisions like confidential clauses, force majeure, dispute resolution, etc.
- Determine how you want the contract to be executed: Common methods include:
- Clickwrap, which requires the other party to tick a checkbox or hit a button that says "I Agree."
- Browsewrap, which doesn’t require any explicit action from the other party.
- eSignature, which allows the counterparty to embed their signature on a secure interface.
- Review the contract for accuracy and compliance: Double-check that the terms are clear and make sure the contract is constructed in accordance with relevant laws.
- Send to the counterparty: You can push this to the counterparty via email. If it's a standardized agreement, you can host it on a page on your website, a section in your online store, or a tab in your software application.
Also read: 4 Basic Contract Terms & Conditions And How To Write Them
Benefits of online contracts
Online contracts are steadily becoming a staple in the business world, and honestly, it’s not hard to see why. They’re fast, smart, and packed with perks that can’t be found in traditional contracts.
Some of its benefits include:
#1 Speed and efficiency
“One of the revenue leaders I worked with told me, "Time kills all deals; you gotta close deals fast," and I keep this in mind every time I’m pulled into a sales deal.”
~Sue So, Head of Legal, Hopin
Streamlining Contracts in Hypergrowth Startups
Online contracts don’t require the wait times associated with traditional contracts. Instead of relying on couriers for deliveries, you can push your contracts to your business partner via email and they’ll receive it in a few seconds.
But that's not all. With online contracts, all parties can collaboratively modify provisions and execute a fully-fledged agreement in just a few clicks, without requiring physical meet-ups.
This saves time for everyone, allowing business teams to close more deals and ramp up revenue for their organizations.
Source: Bernard Stepherson via LinkedIn
#2 Cost savings
Your savings can quickly add up when you eliminate the expenses associated with printing on paper, buying filing cabinets, and using courier services.
More importantly, online contracts automate manual processes at various stages of the contract lifecycle, helping you cut down on labor hours and miscellaneous costs associated with administrative tasks. While you may incur expenses during their initial implementation, the long-term cost savings always outweigh these upfront expenses.
“Although a contract management solution might seem costly in the early stages, companies should have it in place and build workflows within the contract management tool to process contracts better. By doing so, they can keep legal costs low in the growth stages and close deals faster. Moreover, they will have clear visibility into the contract pipeline and use their legal resources to optimize workflows better for yielding maximum results."
~Igor Poroger, the Director of Legal (EMEA) at Vectra AI
How CLMs Empower Legal Teams in B2B SaaS Companies
#3 Accessibility
Source: Kelly Salvage via LinkedIn
According to EY, 90% of contracting professionals cite accessibility as a major challenge when managing contracts. With online contracts, this challenge is completely eliminated.
Unlike traditional contracts that might be locked away in a filing cabinet or stored in a specific office, online contracts are stored in the cloud.
This means anyone who needs to see or work on a contract can do so from anywhere, as long as they have an internet connection and the right permissions.
This ease of access is a game-changer, especially for organizations with remote teams or international business operations. It speeds up collaboration, ensures everyone has access to the latest version of a contract, and makes processes like reviews or audits much smoother.
“Think about how many contracts sit on someone’s laptop or in multiple databases and then think about the value of contract management. The importance of simply being able to locate all of the company’s contracts and relevant amendments in one place without significant effort cannot be minimized.”
~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: Minimizing Risk In Commercial Contracts
#4 Scalability
As your company grows, the number of business contracts you manage grows along with it. Online contracts are built to scale with you because they are sufficiently automated.
Platforms like SpotDraft allow you to handle hundreds or even thousands of contracts without drowning in paperwork or needing to hire extra staff.
With online contracts, you can utilize pre-approved templates and benefit from automated workflows.
That way, you can close hundreds of contracts without breaking a sweat.
#5 Improved compliance and risk management
Online contracts make risk management significantly easier. They’re often integrated into systems that quickly flag typographical errors, inappropriate clauses, and potential ambiguities in contract language.
Online contracts also come with comprehensive audit trails, making it difficult for anyone to sneak unwanted clauses into the agreement.
This ultimately translates into fewer disputes, better compliance with regulations, and more beneficial relationships.
Challenges with online contracts
Online contracts come with so many benefits. However, they’re not without challenges. Here are some of its major drawbacks:
#1 Compliance and enforceability
The enforceability of online contracts varies, depending on the type of contract in use. For instance, a clickwrap contract is more enforceable than a browsewrap agreement.
Additionally, laws around online contracts vary across jurisdictions. The eSign Act in the US and the eIDAS in Europe regulate online contracts but have varying requirements. So, it’s often difficult to maintain enforceability when using digital contracts in cross-border business relationships.
“Owing to our operations in multiple geographies, a lot of work our team gets is on the lines of contracting and compliance. We are also required to be extremely familiar with licensing requirements of the countries within which we plan to expand. Understanding licensing and applying for the same considering all compliance requirements is a major part of what we do.”
~Juliette Thirsk, Head of Legal at Peach Payments
Streamlining Legal at a FinTech Startup
#2 Technical challenges
Online contracts heavily depend on technology. Poor internet connection or software glitches can negatively impact users’ ability to create and execute agreements.
This is why businesses must prioritize using robust platforms with reliable support teams. Doing so will reduce the risks of downtime and ensure consistently smooth contracting processes for everyone.
Also read: Everything You Need To Know About Contract Creation Software
#3 Privacy and security concerns
Online contracts live in the cloud, which makes them susceptible to data breaches and unauthorized access, especially when dealing with platforms with weaker security infrastructures.
Leading contract management software like SpotDraft incorporates advanced security measures, such as cryptographic encryption, multi-factor authentication, and access controls, to safeguard contracts against security risks.
Best practices for implementing online contracts
Creating legally binding contracts isn’t as simple as slapping a few terms on a screen and hoping for the best. It's crucial to get everything right from start to finish, as one misstep can introduce loopholes that’ll render your agreements void when you least expect it.
Here are some best practices to keep in mind:
#1 Explain your terms in very simple language
Legalese might sound cool to other lawyers, but most people aren’t lawyers. Including too much technical language in your online contracts can lead to misinterpretation by regular business users.
Ensure your words are easy to digest. You want your readers to know exactly what they're getting into, how the contract will benefit both sides and any potential considerations.
#2 If you’re using a clickwrap, don’t precheck the box
Prechecking the agreement box may seem convenient, but it undermines the validity of user consent. Courts often frown at such practices and may nullify your claims if a legal dispute breaks out.
For every contract, leave your box unchecked and allow the counterparty to check it themselves.
#3 Stay on top of local regulations and update your contracts accordingly
Laws supporting online contracts vary from region to region. So, to maintain your contract’s enforceability, legal teams must keep tabs on the governing laws of the regions they’re doing business in.
If you notice any new laws that might impact the validity of your terms, don’t hesitate to update your agreement in accordance with the new regulations.
#4 Use reliable platforms for managing your online contracts
The enforceability of online contracts heavily depends on the integrity of the platforms that power the entire process.
Legal teams must opt for systems that offer secure storage, comprehensive version tracking, and compliant e-signature functionalities.
SpotDraft provides all of this and more, ensuring that your contracts are not only legally sound but also optimized for maximum efficiency. Here’s how:
SpotDraft comes with a central repository where you can store all your contracts in an organized and searchable format. It fortifies this repository using advanced security measures like end-to-end encryption and role-based access control (RBAC) to give you oversight at the granular level.
It also offers a robust and secure eSignature tool designed in compliance with global standards. The tool comes with powerful encryption, identity verification, and activity tracking so you can safely execute online contracts with partners in any location.
To top it all off, SpotDraft offers automated contract creation, approval, and review, which gives you the leverage you need to close more deals and dominate your market.
#5 Make sure you obtain their consent whenever there’s a modification to the term
As with regular contracts, you must inform your counterparties about any modifications you make to your agreements. If you don't, you'll hold them to terms they did not consent to, and by most laws, such a contract will lose its validity.
Maybe you updated the terms to reflect regulatory changes or to keep up with current market conditions. Always notify those affected and offer them sufficient time to agree to the revised contract, initiate renegotiations, or withdraw from the agreement.
Source: Sterling Miller via LinkedIn
#6 Always include a “severability” clause
If any part of your contract is deemed unenforceable, a severability clause allows the rest of the agreement to remain valid. This prevents the entire deal from falling apart due to one loophole.
Wrapping up
Switching to online contracts isn't just about keeping up with the times. It's about getting ahead.
Online contracts are fast, cost-efficient, and scalable. But to ensure consistent enforceability, you must create and execute them in line with relevant regulations and established best practices.
SpotDraft offers a powerful ecosystem of contract management tools designed to help you execute deals that change the game for your organization. If you’re ready to get a closer look, click here, and we’ll arrange a personalized demo for you.
“I have seen a demo of SpotDraft’s CLM technology and they should be on your short list of vendors to talk to about a contract management software.”
~ Sterling Miller, CEO and Senior Counsel Hilgers Graben PLLC
Ten Things: Cool Tech for In-House Counsel
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