Please note the Law may have changed since publication of article.
Before we consider the particularities of the online world, we must take a step back and examine contractual formation in the offline world which is the background against which the relevant rules which have now been applied to the online world were established.
The Offline World
In the traditional world, it has long been clear when a contract has been concluded. It is when both parties put their pens to the signature section of a physical document which sets out the agreed terms. It is true that a contract may be concluded orally but if either party subsequently denies the existence of the contract, there are often enormous evidential problems in establishing that the agreement actually did come into place.
Before we consider the impact of the Internet on the contractual process, we need to consider the legal components which enable a contract to come into existence.
The 4 Contractual Components
There are four such elements. These are consideration, the intention to create legal relations, offer and acceptance,. The concept of consideration really means that each party should derive something beneficial from the transaction, hence if I offer to give you my car as a gift, I derive no consideration. The second element, namely the intention to create legal relations may be passed over swiftly as this is usually understood to exist by virtue of the fact that the parties are in negotiations. This leaves us with the essence of the conract; offer and acceptance.
Offer or Invitation to Treat?
By way of example, an offer is made when one party proposes to another that it should buy a particular item on particular terms, including the precise nature of the item, the price to be paid, the mode of delivery and the date of payment. An offer must not be confused with an invitation to treat. The latter is an intimation by one party to another that it may be willing to do business in relation to a particular article on particular terms and that the other party, if interested should make the first party an offer in relation thereto. This can be a very subtle distinction but is, from the contractual perspective, a crucial one. For example, perverse as it may sound, if you go to the check-out in a supermarket with a basket full of items of food and drink, the person at the check-out, if he/she were very well informed about the nuances of the law, would be fully entitled to turn you away and inform you that the supermarket does not wish to accept your offer for those items. Indeed, the items that you see with price labels on the supermarket shelves are deemed by the law to constitute invitations to treat not offers and therefore not capable of acceptance by the customer. In summary, you cannot accept an invitation to treat and thereby conclude a contract.
Acceptance – when does it occur and what are the effects?
This brings us on to the final element, acceptance. Let us assume that there is a proper offer on the table. For example, A offers B to sell him his car for £10,000 p.a. plus delivery costs of £250. Let us also assume that this offer is acceptable to B. The question then arises of how B can accept this offer. Again in the traditional environment, this would usually be achieved by both parties signing a document containing those and other relevant terms or, possibly by an exchange of correspondence. The moment of acceptance would generally determine not only the time the contract was entered into but also, if nothing contrary were stated in the terms of the contract, the nationality of the laws that would apply to the contract and the jurisdiction that would be the appropriate forum in which any disputes would be adjudicated. This can become very important if the 2 parties are in different countries with different legal systems. Most contracts avoid the risk by expressly stating the choice of law and jurisdiction. Readers should note the difference between an acceptance and a counter-offer. For example, if in response to A’s offer above, B were to write back and say, “yes I accept your offer to sell me the car for £10,000 including delivery, that would not constitute acceptance as the terms are not identical and therefore at this point no contract would enter existence.
With the advent of the online world, the law of contract has not altered; rather it has had to apply the existing concepts to a new medium. There are two mainstream ways of concluding a contract online.
The first is by way of exchange of emails. This is similar to the exchange of physical correspondence. As long as the email of acceptance does not vary the terms set out in the email of offer, a contract will be concluded by the second email. However, questions can arise as to when the acceptance is valid. This is especially so when there is a limited supply. For example, what happens if a computer company has a total of 5 PCs to sell and sends out emails to all of its clients on 2nd January notifying them of the PCs and their price. If 6 of the company’s customers send emails of acceptance on 3rd January, which customer loses out? In the offline world to cover the equivalent situation, the first letter to be posted is the one which is deemed to be the successful acceptance even if it happens to arrive on the desk of the offeror after the other letter has already arrived. In the online world, it has not yet been unequivocally determined as to what constitutes the equivalent of posting in a letter box – is it the moment of transmission of the email, the moment it arrives in the addressee’s inbox or the moment that the addressee opens that email. The particular circumstances will usually dictate the answer. To avoid doubt, the company should specify in its terms and conditions how, in the event of competing emails of acceptance, it will determine which email has been deemed to arrive first.
By a Website
The other method of concluding an online contract is via a website when you go onto a website, select certain items and proceed to the checkout. The issue discussed above as to whether the display of certain items on a website constitutes an offer of invitation to treat or offer is also relevant to the website environment as Argos and other retailers who have made mistakes in the prices advertised on their website have discovered. In order for a company to run a proper e-commerce operation, it needs to ensure that its terms and conditions are property adapted to the online environment, that potential clients have sight of the terms and conditions which will govern the contract before conclusion of the contract and that it constructs its site in such a way as clearly to indicate whether the site is an offer capable of acceptance or an invitation to treat which is not. The acceptance will generally be by way of a click on the word “accept”. “Clickwrap” acceptance has now been granted similar status to the offline signature although, understandably, evidentially, the former is still preferable.
The SLA must also set out the maximum credit available in respect of any period and that the service credits cannot give rise to a refund or credit against fees due under any other agreement in place between the parties.
To conclude a valid online contract on the legal basis that you wish, you must ensure that the terms and conditions:
are clearly displayed on the website or integrated into the exchange of emails;
have been adapted properly to the online environment – certain changes are necessary to reflect legislation which only applies to online transactions;
clearly set out whether the site constitutes an offer or invitation to treat;
what will constitute valid acceptance.
© This article is copyright Simon Halberstam 2008 and should not be construed as legal advice or opinion in any specific facts or circumstances. the contents are intended for generic information purposes only. You are urged to contact a suitably qualified lawyer for specific advice.