On July 13th of this year, the Supreme Court of Canada (“SCC”) nipped a potential class action lawsuit against Dell Computer Corporation in the bud when it handed down its decision in Dell Computer Corporation v. Union des consomateurs and Olivier Dumoulin [“Dell”].

The Dell case is significant for two primary reasons: (a) its ruling with respect to the validity and applicability of mandatory arbitration clauses; and (b) its conclusion regarding contractual terms and conditions that are accessible only through a hyperlink. The case is also interesting in relation to recent U.S. caselaw in the same area.

The brief facts of the Dell case are as follows: in April 2003, Dell’s Canadian website erroneously listed two models of a handheld computer called “Axim” at prices substantially lower than their usual price – $290 lower for one model and $431 lower for the other. Not surprisingly, online sales of Axim computers spiked dramatically over the weekend during which the incorrect price was listed.

Although Dell had blocked access to the site containing the price error, resourceful consumers could still access it through a direct hyperlink. One such resourceful consumer was Olivier Dumoulin of Quebec, and when Dell refused to honour the incorrect price, Dumoulin, with the assistance of consumer group Union des consomateurs, filed a motion to institute a class action against Dell on behalf of all consumers who had purchased Axim products during the relevant time period.

Dell argued that Dumoulin and the other affected customers were bound by a clause in Dell’s online consumer contract requiring mandatory arbitration. Dumoulin argued (among other things) that the arbitration clause was unenforceable because the relevant details were not available in the main text of the consumer contract, rather they were buried in the terms and conditions that were accessible only by a hyperlink.

Both the Quebec Superior Court and Court of Appeal decided that Dumoulin and the other consumers were not bound by the arbitration clause in the contract and that the class action against Dell could proceed. In particular, the Court of Appeal concluded that because the arbitration clause was accessible only by a hyperlink, it was not binding due to the fact that it was “external” to the online contract and had not been brought to the consumers’ attention as required by the Quebec Civil Code.

When the case reached Canada’s top court, the majority of the SCC reversed the decision of the lower courts and acceded to Dell’s arguments that the arbitration clause was binding, referring the case to arbitration for determination.¹ In reversing the Court of Appeal’s finding in favour of Dumoulin, the SCC pronounced on the two issues highlighted above.

On the issue of the validity and applicability of mandatory arbitration clauses (which ultimately deny consumers the ability to file class action lawsuits), the SCC held that the arbitration clause in question was enforceable and that the consumers who purported to purchase Axim computers were bound by the clause. Ultimately however, as most commentators have pointed out, this finding will have limited impact in Canada, as Ontario, BC and now Quebec all have enacted legislation that bars companies from using mandatory arbitration or other clauses to block potential class action lawsuits in consumer contracts. Certainly it is conceivable that the remaining provinces will follow suit by enacting similar legislation.

On the issue of contractual clauses that are accessible only by hyperlink, the SCC noted that the Dell case marked the first instance where the Quebec Court of Appeal had occasion to consider this issue in relation to electronic consumer contracts. The SCC stated that it should be no more difficult to access a clause in an online contract than it would be to access its paper equivalent. The SCC noted that in the case of Dell’s online contract, the hyperlink to the arbitration clause appeared on every page that the consumers accessed in the terms and conditions and as such, the clause was no more difficult for the consumer to access than would have been the case if, for example, the consumer had been given a paper contract with the terms and conditions printed on the back of the page.

It is interesting to note that in two recent cases, different U.S. courts have had occasion to consider arbitration clauses and the issue of notice of terms. On August 3rd of this year, the U.S. District Court for the Northern District of California held in Brazil v. Dell Inc. that a class action waiver rendered an arbitration clause in a “click-through” contract unconscionable notwithstanding that the consumer had clear notice of the terms before purchasing the goods. Similarly, on July 18th of this year, in Douglas v. Talk America Inc., the U.S. Court of Appeals for the Ninth Circuit ruled that companies cannot make changes to their contracts and post those alterations online without first directly notifying their customers. In that case, Talk America changed a consumer contract to add price increases, an arbitration clause and a class-action suit waiver but aside from posting the changes on its website, did not directly notify its customers of the changes. Clearly, courts in North America are still grappling with striking the appropriate balance between the rights of consumers and businesses in the world of electronic commerce and online contracting.

At the end of the day, the Dell case is important, but it is not the blow to consumer rights that many commentators portrayed it to be. The impact of the case will likely only be felt in provinces that do not currently have consumer protection legislation forbidding the use of mandatory arbitration clauses in consumer contracts. In the provinces of Ontario, Quebec and BC, where such legislation is now in place, the Dell decision will have little practical effect. The bigger lesson to be taken from the Dell decision is that the courts in Canada will likely find that consumers have had notice of important contractual terms and conditions even where those terms and conditions are not part of the body of the contract but are accessible only through a hyperlink.

As an entrepreneur, you have struggled to get the attention of investors and finally convinced them to support your “world-changing” concept. With each meeting and draft of the term sheet, you become more firmly fixed on the future. But did you know that your chances of getting the financing you need depend almost as much on what you have done in the past?

Many financing deals have been delayed or have collapsed altogether because the company failed to appreciate the need to get its legal affairs in order before signing a term sheet with an investor. The most common problems companies encounter, and the steps you can take to prevent them, are set out below:

1. Failing to Document IP Ownership: As part of its due diligence process, your potential investor will want confirmation that your company owns and has the right to commercialize its intellectual property assets. You will need to provide fully signed copies of well-written non-disclosure agreements, contracts with employees and independent contractors regarding the ownership of inventions and work product, and contracts with key suppliers or joint venture partners.

2. Failing to Comply with Corporate and Securities Laws: Most entrepreneurs have an inaccurate or incomplete understanding of how corporate and securities laws apply to their company and to their shareholders. As a result, when issuing shares to founders and early stage (“family and friends”) investors, many companies fail to comply strictly with those laws.

3. Failing to Maintain Your Corporate Records: It is critical that your company have a well-maintained and complete set of corporate records. Those records include lists of the shareholders and directors, copies of minutes of meetings and signed resolutions of the directors and shareholders. Your potential investor will want to review those records as part of its due diligence process in order to understand the history of your company.

For most companies, these problems arise as result of cutting a few corners during the early stages in order to save a few dollars on their legal bills. Entrepreneurs either try to “play lawyer” themselves or skip the process entirely. However, these strategies almost always fail in the long term because entrepreneurs find that they need to resolve these problems and prepare the required documents in a hurry in order to complete their financing. Resolving your problems in this fashion will not only distract you from closing the investment transaction, it will increase your transaction costs.

If you make the effort to address these matters before you sign the term sheet, then you can focus your energies on closing your financing. You will also project to your investors an image of someone who understands the need for strategic legal advice at the right point in a transaction; and in a business where the people involved in a company can be the deciding factor in whether an investor wants to make an investment, that’s a good thing.

The Technology & Intellectual Property Group at Clark Wilson is pleased to welcome its newest member, Niamh Pollak.

Niamh was educated at the University College Dublin and the Dublin Institute of Technology. She did her articles at Clark Wilson while completing the requirements for her call to the British Columbia Bar. Niamh formerly practised as a solicitor in Ireland and will be called to the BC Bar on November 23, 2007.

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