Contract terms and liability
English law gives the contracting parties the freedom to set many of the terms upon which they will contract the business. But this will be subjected to two areas where the law will imply terms. First, certain terms will be implied by statute. Secondly, the law will imply terms just to give “business efficiency” to a contract. This happens where either parties have forgotten to deal with an issue expressly in circumstances where they would have done so had they thought about the issue at the time f the contract was finalized.
The main terms implied by statute in contracts to sell goods is the Sale of Goods Act 1979. This terms will imply to any contract that:
- the goods will be of satisfactory quality;
- where expressly or impliedly known by the supplier, the goods will be reasonably fit for the buyer’s purposes;
- where goods are sold by reference to a description, the goods will correspond to that description. This term is particularly important for internet sales where a buyer may make a purchase of certain goods having visited a supplier’s website.
If a supplier provides services, the implied term for the services will be that they will be dealt with “reasonable skill care”, and within a reasonable time frame (Supply of Goods and Services Act 1982).
Under the Unfair Contract Terms Act 1977, these terms cannot be exempted in any circumstances with respect to consumers. Sometimes in the contract for a business, a supplier can exclude liability for breach of these implied terms where it is “reasonable” to do so.
Not only the Unfair Contract Terms Act 1977 in which the implied terms under the Sale of Goods Act can be exempted, but the Act also imply other liability can be limited as far as the services concerned. The main provisions deal with:
- liability for death and personal injury – this cannot be exempt under any circumstances;
- liability in negligence other than for death and personal injury – this can be exempt where reasonable;
- liability to a consumer – this can be exempt only where reasonable (except in the case of liability for breach of the terms implied under the Sale of Goods Act;
- liability when dealing on the supplier’s standard terms and conditions – a supplier can only be exempt liability to his customers where it is reasonable to do so;
There are a number of matters with regard to the reasonableness that the court will take into account when questioning each case individually. The questions are undoubtedly related to the insurance carried by both parties; what other sources were open to customers; and whether the buyer knows or ought to know the exclusions and limitations clauses incorporated into the contract.
If there are any ambiguities in the terms of the contract, the court will be in favour of the customer. And the supplier will be left to prove that his exclusions are to be reasonable with respect to doing the business.
No doubt that many online contracts will incorporate standard terms and many sales will be directly to consumers, the Unfair Contract Terms Act will play a role in determining the exposure a supplier may face in providing the services or goods using the Internet as a communication mechanism. The UCTA will only be using the English law system for a contract of consumers if they are based in the UK and for a contract where there is a choice of law other than English law, when it is selected for the purposes (mainly or wholly) of trying to avoid the effect of UCTA.
Apart from the Unfair Contract Terms Act, there is one exception with regard to the contracts conducted over the Internet. It concerns the international supply contracts where the offer and acceptance of the sale of goods take place in different countries or the goods are physically shipped from one jurisdiction to another. Many companies wishing to sell goods through the Internet could use this exception whereby the purchaser accesses the server to order goods from other location which is outside of the English jurisdiction. It should be realized that this exception can be applied even where the English law is governing law of contract.
When a contract is considered to be an international one, the Unfair Contract Terms Act will not intervene and a supplier is free to limit or exclude his liability without having to look at the UCTA to see whether if it is reasonable to do so. Although it is likely to apply to sales to businesses only in the light of certain parallel consumer legislation – the Unfair Terms in Consumer Contracts Regulations 1994.
In addition to UCTA, any supplier considering doing businesses over the Internet must also bear in mind the impact of the Regulations when dealing with the consumers. These Regulations incorporate into English law of the European Community Directive on Unfair Terms in Consumer Contracts, which provides the entire states of the European Union cases in which it is unfair to limit or to exclude certain rights of consumers by contract terms. If the terms of the contract is considered to be unfair, then it will be declared as void. Furthermore, the Regulations could assist the consumers if the consumers are asked to pay a penalty in the event they fail to complete their contractual obligations and when the supplier restrict the consumers’ legal recourse in the event of a breach (for instance, by making the consumer go to arbitration). It is for this reason that it was suggested that the international supply contract with the exception in UCTA will only be of real benefit to those selling goods to businesses.
Furthermore, there are also other helpful pieces of legislation which a consumer can depend on:
- The Consumer Credit Act 1974 – if a customer has paid for the goods by credit card and the value of each item is £100 or more then the credit card company assumes the same responsibilities as the supplier does and a consumer can make a complain to them.
- The Misrepresentation Act 1967 – may give a customer the right to return goods and have his money back if he/she has been told something factual about them that made him/her decide to buy but which turns out to be untrue.
- The Trades Description Act 1968 – if a seller makes a particularly gross misrepresentation about an article or if he or she is regularly misrepresenting the qualities of any goods then this may warrant a complaint to and investigation by Trading Standards who have the power to prosecute.
- Misleading Prices Regulations - the law does not control prices as such but does requires that prices are accurately displayed or advertised. If a seller has incorrectly displayed a price a customer cannot force a sale at that price but it may warrant a complain to Trading Standards.
So how can businesses conducting sales over the Internet protect themselves from the inevitability of pricing errors? Hence thousand of orders can be placed with online retailers before they can detect the problem. When the prices are incorrectly displayed and contracts are formed, the sellers are forced to choose between accepting that price as a financial loss in goodwill or trying to consider the contracts under the doctrine of unilateral mistake.
Otherwise to avoid the contracts to be binding with customers with the incorrectly pricing, the sellers should employ protective methods of contract formation that assist them to prevent loss.
The risks and costs of pricing errors
Many online errors result from the fact of proofreading mistakes and software problems, but a lot of mistakes keep increasing because many sellers online tend to change their prices more often than normal and convenience high street stores [1]. Furthermore, online businesses execute sales automatically and therefore lose the added safety of having the human eye confirm the price.
The Internet, with all the richness of information resources, can cause some harm. Many of the online shopping combine with chat rooms, emails and bulletin board which in turn can result in a flood of orders and thousands of sales being processed before the sellers is able to pinpoint and correct the mistake. For instance, in 2001, Kodak offered a £329 digital camera for £100 [2]. At the time the case was decided that Kodak’s automatic confirmation email formed legally binding contracts [3], and in the end, the company was forced to honour the sales. The incident caused the company substantial losses of more than £2 million [4]. Kodak argued that, if there was a contract formed, that contract could be void by reason of “mistake” (i.e. the price of the goods offered was so low that there was obviously a mistake).
Kodak’s refusal to fulfill orders was widely reported. The common law view was that Kodak would lose any actions brought against it because 1) its standard terms were unfair to the consumer; 2) a camera worth £300 being sold as a special offer for £100 was not an obvious mistake; and 3) Kodak’s reply not only to acknowledge the sale, but used the words “this contract”, Kodak forced to accept the orders.
In another example involving Argos, a catalogue online retailer, who advertised a TV on its website for £2.99, one one-hundredth of its normal price. Argos received orders worth over £1 millions, none of which were acknowledged. Argos argued that there was no contract between the customers and itself, because Argos did not confirm any orders as far as the product concerned. The case was decided confidentially and it is believed that Argos did not fulfill the majority of those orders.
The equitable doctrine of unilateral mistake
When the online seller make honest and honourable mistake on pricing which result in big losses, their mistake could be considered based on the doctrine of unilateral mistake. What this means is that one party’s mistake could make the contract voidable when the mistake concerns a basic assumption on which the contract was formed and has a material effect on the agreement that is adverse to that party [5]. Furthermore, the effected party must prove that: a) the mistake is such that enforcement would be unconscionable, or b) the other party had reason to know the mistake or should have known that the price was a mistake [6].
An unconscionable contract is defined as “no man in his senses, not under delusion, would make….and which no fair and honest man would accept….” [7]. The contract, if was formed, must cause hardship to the effected party [8]. In addition to this, the court would look to see whether the sale would cause the seller a big loss and not merely a diminished profit [9].
Alternatively, the online seller could also prove that the customers had reason to know or ought to know that the price was wrong [10]. “Reason to know” means that a person “has a duty to another” and “he would not be acting adequately in the protection of his own interests were he not acting with reference to the facts which he has reason to know” [11].
Rescinding the contract is the only remedy option under the unilateral mistake; it is not a basis for reformation [12]. It means that the seller cannot ask the customer to go ahead with the sale at the actual price. But instead, the seller must cancel all customer’s order and re-offer the good at the actual price. However, after the re-offering the good the customer might not show any more interest in purchasing it.
In some instances, the court might refuse to order rescission. The court will consider whether one party has so detrimentally relied on the contract it would be inequitable to order rescission [13], will be prejudiced by rescission [14], or cannot be returned to the status quo [15]. Furthermore, the court might refuse to rescind the contract when the mistake resulted from the seller’s negligence or lack of due care [16].
Case of an e-seller policy
Amazon.com provides an example of an online seller who has incorporated a policy into its website to deal with potential pricing mistakes. It provides a direct link to its pricing policy from its term of use. In its term, Amazon states that the price of any products is not confirmed till the customer completes the order. Additionally, Amazon further states that the items in the catalogue may be mispriced and the price will be verified before it’s sent out. If the actual price is lower than the stated price, Amazon will charge the lower price and ship the good. On the other hand, if the actual price is higher, Amazon will either contact the customer or cancel the order and notify the customer of its cancellation.
Despite all these precautions, however, Amazon has been involved in a number of argument concerning the incorrect pricing. Recently, in the UK Amazon made a mistake in advertising iPaq handheld computers priced at less than one fiftieth of the retail price. But fortunately, Amazon has managed to avoid big losses because its conditions of sale explicitly stated that the contract is not formed till the good was dispatched, giving Amazon the right to cancel most of the orders it has received. The contents of its conditions’ statement were the same throughout. On the same token, in America, Amazon mistakenly put on sale a memory module priced at 10% less than the actual price and DVD’s priced at 75% of their list price. Amazon in America emailed notices to customers, in according to their pricing policy, requesting if they could pay for the actual price of the products or cancel their order completely. Several customers filed complaints to the Federal Trade Commission and the Better Business Bureau. But it is not clear how these complaints have been resolved.
Conclusion
In short, to avoid losses caused by pricing errors, online seller can employ a few measures ensuring that his business is protected. One of the thing the seller should do is he should include the terms and conditions in the contract stating that he reserves the right to cancel orders and an explanation that the customer’s order only constitutes an offer, which the seller can accept by charging the customer’s credit card or by dispatching the good. In addition, the customer should be required to assent to those terms and conditions by clicking “I accept” during the checkout process.
The English cases indicate that the terms of a contract are binding if a seller has made sufficient efforts to bring the terms to the attention of the buyer and if the parties agree to the terms. It is very important that the buyer who buy things online ought to see and accept the terms before an order is placed. However, the terms should allow the sellers to reject orders at any stage before dispatch. Any automatic response to an order ought to let the buyer know that a binding contract has not been entered into and the price is subject to change until it is shipped. Although these precautions has taken place, a seller online may still face potential litigation and consumer complaints, concerning any incorrect prices confirmed by auto-reply emails.
The Internet is undoubtedly will grow in importance and it is no more than a tool of communication just like the telephone, telex or fax. Furthermore, electronic contract is becoming more common and right now a substantial percentage of both commerce and consumer contracts is concluded in cyberspace. Although e-commerce contracts suffer some problem, but they can be overcome by applying the three basic questions, when was the contract concluded? What are the terms of the contract? and where is the contract governed? These questions would help us to deal with any contract whether it is formed electronically or by more traditional means.
“It is the moral equivalent of being given too much change in a supermarket and pocketing the money instead of handing it back” ( Bill Thompson, technology analyst).
References
[1] Bob Tedeschi, mixed – up prices pose dilemma: lose customers or money, Chi. Trib, Dec. 27, 1999, #4, at 2 (citing an internet pricing study conducted by Professor Erik Brynjolfson at the Massachusetts Institutes of Technology’s Cloan School of Management).
[2] Matthew Broesma, amazon mis – priced iPaqs: no sale, ZDNet UK (Mar. 19, 2003), at www. News.zdnet.co.uk/business/0,39020645,2132174,00.htm
[3] id
[4] Lawrence H. Hertz, don’t get trapped into honouring online pricing errors!, 4 No. 7 e-commerce L. Rep. 6 (2002)
[5] Restatement (second) of contracts #153 (1979)
[6] Restatement (second) of contracts #153 (a) – (b) (1979)
[7] Gill v. Waggoner, 828 P2d 55, 58 (Wash. Ct. App. Div. III 1992)
[8] E. Allen Farnsworth, Farnsworth on contracts #9.4 (2d ed 1998)
[9] See e.g. Alaska Int’l Constr. V. Earth Movers, 697 P 2d 626, 629 – 31 (Alaska 1985) (enforcing the contract would not be unconscionable because the mistake was small compared to the size of the project and would not cause the bidder to lose money)
[10] Restatement (second) of contracts #153 (1979)
[11] Restatement (second) of contracts #153 (1979) (comment e)
[12] See matter of ENSTAR Corp., 604 A. 2d 404 (Del. 1992)
[13] See Florida Ins. Guar. Ass’n, Inc v. Love, 732 So 2d 456, 457 (Fla Ct. App. 1999)
[14] See A. A. Metcalf Moving & Storage Co., Inc. v. N. St. Paul – Maplewood Oakdale Sch., 587 N.W. 2d 311, 318 (Minn. Ct. App. 1998)
[15] See Cameron v. Bogusz, 711 N. E. 2d 1194, 1198 (Ill. App. Ct. 1999); Fleming Co., Inc. v. Thriftway Medford Lakes, Inc., 913 F. Supp. 837, 843 (D. N. J. 1995)
[16] See Fleming, 913 F. Supp. At 843
