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Online Contract Formation

This guide is based on the law of the UK. It was last updated February 2008. The ability to form contracts online has revolutionised the way business is conducted. In the UK, almost all types of...

This guide is based on the law of the UK. It was last updated February 2008.

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 (which is addressed in our guide to Formation of contracts). 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 online 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 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 online) 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.)

Contacts