On-line Contract Formation
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(Unless otherwise specified, this content is based on information provided by Alison M. Ross of Pinsent Masons. More information on IP law and guidance on website design and e-commerce can be found at Pinsent Masons' free online resource Outlaw.com)
In the UK the process of contract formation on a website is broken down into three stages: an invitation to treat; an offer; and an acceptance. The distinction between the three stages is not immediately obvious. When you see an item for sale in a shop window, you may think that the shopkeeper is offering to sell it to you. However, in legal terms the display of an object is treated as a separate stage which is preliminary to an offer and is known as “an invitation to treat”.
The second stage – the “offer” – only takes place when you go into the shop and say that you’d like to buy the item in the window. Your statement is an offer to purchase the item and, in the normal course, the shopkeeper “accepts” that offer by taking your money and handing you the item in question.
The three stage analysis is critical to the question of how contracts are formed on the web. The consensus is that an item displayed on a website is analogous to an item in a shop window, being an invitation to treat. So, in the absence of any statement or system indicating otherwise, an offer will only be made when a customer gives notice of his intention to buy an item from the site (i.e. submits an order) – at which point the seller will still be free to accept or reject that offer. The significance of this analysis was dramatically illustrated in the UK when Argos.co.uk mistakenly advertised televisions for sale on its site at £2.99 rather than £299. If the advert was an offer (and an order was acceptance) then the retailer would be bound to sell for £2.99; if the advert was an invitation to treat (and the order was an offer), the supplier could refuse to accept the offer.
The application of the three-stage analysis to the web has not been tested by the UK courts. On-line traders should therefore specifically state in their terms and conditions that the display of items for sale on a website is only an invitation to treat.
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Acceptance
With the on-line business process being automated there may be confusion as to when an offer is accepted. The basic rule is that for acceptance to be effective it must be communicated but, in the current state of the law, it is not clear when an on-line acceptance is communicated. For example, if it is by email, is it communicated when the seller presses the ‘send’ button, when it leaves the seller’s e-mail system, when it leaves the seller’s ISP’s mail server, when it hits the buyer’s ISP's mail server, etc.? The safest course is to explicitly set out in the terms and conditions themselves the contract formation procedure and state when acceptance will be deemed to have taken place.
Consideration
Under English law, there must be a consideration for a contract to be binding – each party must obtain a benefit from the contract. In commercial contracts, consideration is rarely an issue – the buyer receives the goods or services and the seller receives the price – but there are rare occasions on which it becomes important (for example, guarantees and non-disclosure agreements which are more one-sided in their nature). Consideration is not a requirement of Scots law.
Incorporation of terms
The terms and conditions on which the parties are contracting must be agreed by both parties and incorporated into the contract between them. Simply placing terms and conditions on a website is not enough to incorporate them into a contract: the parties must agree that they contract on the stated terms, and they must do so before (or at the same time as) becoming contractually bound. When dealing with customers of a website the seller must ensure that the ordering process requires the customers to read and agree to the seller’s terms and conditions. This is normally done by presenting the terms and conditions in a window and requiring the customer to acknowledge he has read and actively agreed them (for example, by clicking a button) before proceeding to place an order.
One of the most important terms to incorporate is a choice of law and jurisdiction clause – a statement that, for example, the contract will be made under Scots law and subject to the jurisdiction of the courts of Scotland. Such a clause is essential in on-line contracts because of the uncertainty as to where in cyberspace a contract is made.
Overriding laws
Contracts made on-line are subject to the same laws as contracts made off-line. So, for example, contracts which are unenforceable off-line (such as gaming contracts and certain contracts with children) will be unenforceable on-line.
Where a contract is made with a consumer, a raft of additional provisions apply. These provisions vary from country to country, emphasising the importance of clearly stating the law which is to apply to your contract. However, even a clear choice of law clause will not prevent national courts from asserting jurisdiction if they feel that their consumers are being targeted by your website and the safest practice is to comply with the laws of all countries which are important markets for your products and to exclude orders from countries which are not.
Further Information
- Further information on IP law and guidance on website design and e-commerce can be found at Pinsent Masons' free online resource Outlaw.com.
- The UK Patent Office publishes guidance on patents, trade marks, designs and copyright, and can answer queries relating to the registration procedures.
- The Intellectual Property Office, a government website maintained by the DTI, contains general information about IP law.
- Detailed trade mark advice and details for trade mark agents can be obtained from the Institute of Trade Mark Attorneys.
- Further information on data protection and privacy can be obtained from the Information Commissioner's Office.
