Online contract formation
This guide is based on the law of the UK. It was last
updated February 2008 A Hong
Kong version is also available.
Overview
The ability to form contracts online has revolutionised the way
business is conducted. In the UK, almost all types of contract can
be made online, there are very few which the law requires are still
made "in writing" or are physically signed by the parties.
Contracting online is essentially the same as
contracting off-line. The same requirements have to be fulfilled in
order to ensure that the contract is legally binding. These
requirements are fairly basic: there must be an agreed set of terms
and both parties must intend to enter into a legally binding
agreement. Under English law, but not under Scots law, there must
also be some form of "consideration" – payment of some
kind for the goods or services being provided..
Invitations to treat and offers
UK and US lawyers break down the process of contract formation
into three stages: an invitation to treat, an offer and an
acceptance. The distinction between the three stages is not always
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 not
usually an offer to sell that object, rather it is an "invitation
to treat". An invitation to treat comes before the offer in the
contractual process, and is an indication by the seller that they
may be prepared to enter into a contract. 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. However, the shopkeeper could refuse to
sell it to you for any reason whatsoever. This distinction is
important: if the item in the window was considered an offer, which
the buyer accepts, then the shopkeeper would be bound to the
contract as soon as the buyer asks to buy the item.
The three stage analysis is critical to the question of how
contracts are formed on the web. It is likely that websites will be
treated as being similar to a shop window and that the
advertisement of an item for sale on a site will amount to an
invitation to treat. If so, 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 an online
retailer mistakenly advertised televisions for sale on his site at
£2.99 rather than £299. If the advert was an offer (and an order
was acceptance) then the retailer was bound to sell for £2.99; if
the advert was an invitation to treat (and the Customer's order was
an offer), the supplier could refuse to accept the offer.
While it is likely that the websites will be treated like shop
windows, the application of the three-stage analysis to the web has
not been tested by the UK courts. Online 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.
Acceptance
With the online 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. However, as
the law currently stands it is not clear when an online acceptance
is communicated. For example, if the seller processes the
customer's order through the website, but acceptance is made by
email, is it communicated when the seller presses the 'send'
button, when it leaves the seller's email system, when it leaves
the seller's ISP's mail server, when it hits the buyer's ISP's mail
server, when it enters the buyer's email system or when the buyer
reads it (or indeed any stage in between)? There are a number of
initiatives which are intended to address this position – see our
guide on EU and UK Regulations – but the safest course is to state,
in the terms and conditions themselves, when acceptance will be
deemed to have taken place.
One point to consider with an automated e-commerce process is
the use of an automated receipt of order. Where there are a
limited number of goods or where a serious pricing error has
occurred, an automated acceptance could be disastrous, potentially
binding the seller to contracts it cannot fulfill. In order
to protect the seller any automated receipt should make it clear
that it is simply a receipt of order and not an acceptance.
The receipt should make it clear that the acceptance will follow
later (when the seller has had a chance to check the order).The
manner in which the content is formed and the point at which
acceptance of order occurring should be made clear in the terms and
conditions of sale.
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 (and therefore most online selling
scenarios), 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.
See our guide Security Aspects of E-business.
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. Best practice to ensure this is to
include the terms and conditions as a separate page in the sales
process and requiring the customer to acknowledge he has read and
agreed them (for example, by clicking an "Agree" button) before
proceeding to place an order.
However, to reduce the number of pages in the purchasing
process, many websites use a different process, by placing a link
to the terms and conditions from a page during the sales process,
and requiring users to tick a checkbox to confirm that they are
accepting those terms and conditions. Without ticking the checkbox
users should not be able to proceed with the purchase. Underneath
the checkbox users should then be offered buttons to click to
proceed with the sale (for example "Purchase" or "Buy Now"), but
alongside this must be a button allowing them to withdraw from the
sale (for example "Cancel").
You should avoid using words like "I have read, understand and
accept the terms and conditions" next to the checkbox. In the
opinion of the Office of Fair Trading, you are then encouraging
users to make undertakings that could be untrue (users can check
the box without actually reading or understanding the conditions).
Instead place a notice above the checkbox warning users that it is
important to read and understand the terms before placing their
order, and then use words such as "I accept the terms and
conditions" beside the checkbox.
The words "terms and conditions" next to the checkbox should be
an obvious link to the terms themselves. At the bottom of the
linked page you will need to put a link that takes the user back to
the purchasing process.
You should avoid relying on JavaScript based client-side
validation to confirm whether the user has ticked the checkbox.
This may now work with some browsers – or where the user has turned
JavaScript off – meaning that the user doesn't have to check the
box, and your terms and conditions aren't incorporated.
The use of "browse-wrap" agreements has been heavily criticised
by the courts and the Federal Trade Commission in the United
States. A "browse-wrap" agreement gives the purchaser the
opportunity to follow a link to the supplier's terms and conditions
before placing an order, but does not require the purchaser to read
the terms before ordering. A court in New York determined that as
such agreements do not bring the relevant terms to the attention of
the purchaser before the contract is made they are not binding on
the purchaser.
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 English law and subject to the
jurisdiction of the courts of England & Wales. Such a clause
may prove essential in on-line contracts because of the uncertainty
as to where in cyberspace a contract is made, although be aware
that consumers will always have certain rights to sue in the
country in which they live – see our guide on Jurisdiction.
Overriding laws
While you can try and control the relationship between buyers
and sellers in the contract, it is important to bear in mind that
contracts made online are also 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 also be unenforceable online, and
exclusions of liability contained in an English contract made on a
supplier's standard web-published terms can be subject to a test to
make sure that the terms are 'reasonable'.
Where a contract is made with a consumer, a raft of additional
provisions apply – see, for the UK, our guide on Dealing With
Consumers. 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 –
see our guide on Jurisdiction – 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. See also our guide on Internet Advertising.
There are also a number of regulations which specifically
control contracts which are formed online. The 'distance selling'
regulations came into force in 2000 and protect consumers involved
in 'distance contracts' (including contracts concluded on-line) by
requiring the supply of certain information to the consumer before
and after the contract is entered into. They also give the consumer
a seven day cooling off period during which he can change his mind
and withdraw from the contract. The e-commerce regulations came
into force in 2002, and also require a range of information is
provided to consumers before they enter into the contract. For
further information, see our guide on EU and UK Regulations, and
our article, The Distance
Selling Regulations – An Overview.
The distance selling regulations do not apply to financial
services products, although similar regulations came into effect in
October 2004. (See our article, Distance Marketing of Financial
Services.)
