The Christmas which just passed saw an explosion in the use of the Internet to purchase goods online. It has now been recognised that e-commerce is one of the major growth industries of the new millennium, and with that growth has come a need for the law to legislate for new situations in contract law which have not been considered previously.

One of the most pressing issues which has already arisen is the process of the formation of a contract by a customer purchasing online when they are dealing with an automated system. This issue of a mistake in such a contract first attracted a great deal of interest around September 1999 when retailer Argos offered through their website a Sony television for £2.99 - a pricing error (the true price was £299). Argos refused to honour orders, but the case apparently died a quiet death after solicitors Taylor Joynson Garrett abandoned the proceedings dues to costs. The issue has arisen again recently in relation to Kodak.

Around the start of January 2002, Kodak offered via its website a digital camera package including a DX3700 camera, docking station, memory card and paper. The offer was advertised as a “special deal!” and the price was £100. Over the next few days (the exact length of time is disputed by Kodak) the offer remained on the site and a great number of offers were taken (reportedly in excess of 10,000). Customers placing an order received a confirmatory email. However, when Kodak realised their error, they withdrew the offer and claimed that the mistake vitiated any agreements made with customers.

It is fair to say that this subject of consumer law is a very grey area in the UK right now. This article will explain the current legal position, what proposals are currently being considered, and finally what practical steps might be taken both by Kodak and their customers. Throughout this article, I am looking at the position where both retailer and customer are in the UK, which appears to be position for the vast majority of people involved with Kodak. This means both UK and European laws apply.

The average layman's understanding of UK contract law is quite good, because the principles have been established over decades of testing before the courts. If an item is mispriced in a shop the customer does not simply have a right to purchase the goods at that price. Shop pricing is an invitation to treat – a concept which was established in the 1950's case of Pharmaceutical Society of Great Britain v Boots Limited. For a binding contract to exist, there must be an offer, a consequential acceptance, consideration for the deal and an intention to create legal relations.

How Does This Apply to Buying from the Web?

Current understanding of web-based transactions is based almost solely on a collective belief of how such transactions should progress from lawyers – it has not been legislated for by Parliament, nor tested before the courts. From recent debates on the topic, it is generally accepted that an advert on a website of an item for sale at a certain price is the invitation to treat, and the process of filling out the order form and passing over personal details such as credit information by the customer is the offer. Following this to its logical conclusion, the next communication from the retailer is the acceptance of the offer, at which point the contract is formed, and the retailer is therefore under a legal duty to perform. It is an unfortunate reality that automated responses are more often than not used for this purpose, and it is this practice that is causing online retailers problems which their standard terms and conditions do not adequately legislate for.

Where is the Consideration?

This might at first seem disingenuous at first, but it is a recognised tenet of British contract law that a promise can provide sufficient consideration for a contract. Cheshire, Fifoot & Furmston's leading text "Law of Contract" explains this as:

""The typical modern contract is the bargain struck by the exchange of promises. If A orders goods on credit from B, both A and B are bound from the moment of agreement, and, if the one subsequently refuses to execute his part of it, the other may sue at once. The consideration for each party's promise is the other party's promise. It is difficult to see at this stage either party has suffered benefit or detriment unless each party is said to have received the benefit of the other party's promise and suffered the detriment of making his own."

Can the Intention to Create Legal Relations be Formed via an Automatic Response?

The retailer cannot argue that because any response from them is automatic that they are not capable of having formed the necessary intent. This is clear from Thornton v Shoe Lane Parking in which a contract was formed by a customer entering a car park via an automatic barrier – the operation of the barrier effectively performed the act of contract creation as well as satisfying intent on the part of the car park.

What if There is a Mistake in the Price?

The precedent on this issue was set by Hartog v Colin and Shields in which there was a pricing error where the seller thought he was pricing per pound, but the cost was actually calculated per item. The Court held that purchaser could not reasonably have supposed that the offer expressed the real intention of the persons making it, and must have known it was a mistake. The purchaser therefore did not, by his acceptance of the offer, make a binding contract with the seller. This would therefore give an on-line retailer a defence if the price of a product was so ludicrously low that the intention to create legal relations could not be formed. It is on this point which Argos had a particularly strong argument.

What is my Remedy?

If Kodak is held to have breached the contract of supply with the customer, then the customers loss is the loss of a bargain. The customer could get the goods elsewhere, but he would lose the value of the deal he has struck. The loss of bargain in the case at hand is initially the difference between the normal selling price of the package (not just the camera) and the price at which the contract was made - a difference of some £239. However, a claimant has a duty to mitigate their loss, and this means that a court would expect to calculate the amount of loss by means of a market value, and not necessarily what Kodak themselves would normally retail the package for. As such, if you can find the package cheaper, then the loss of bargain will be calculated from this lower figure. This system is also set out in the Sale of Goods Act 1979 at section 51 - Damages for Non-delivery:

"51(3) Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver."

It is interesting to note that it might be rather embarassing for Kodak to find themselves in court trying to determine on one hand the lowest possible figure on the market for the DX3700 for the purposes of reducing the loss of bargain (which will no-doubt make their online shop look very expensive), while at the same time arguing that £100 is such an unbelievable price that the contract should be struck down for mistake.

These are UK Regulations created to comply with the 1997 E.C. Directive on the Protection of Consumers in respect of Distance Contracts. These Regulations do not really have a direct impact on the subject at hand, but are more aimed at consumer protection through the provision of such requirements as a seven day right to withdraw from any contract, a time limit for order completion by the supplier, company identification and the like.

While it is possible that Kodak have breached some of the Regulations through their confusing use of an agent to perform their web sales, I shall not be examining this point as it is unlikely to have an impact on the decision of whether and how the contract was formed.

The next step by Europe is an attempt to provide a unified framework for online transactions across the whole of the EU. Interestingly, in the original proposals, a further confirmatory email was to be required from consumer to supplier in order to complete the legal relationship. However, this was dropped as unworkable, and the Directive now requires the laws of member states to be that acceptance (and therefore the creation of legal relations) occurs when the retailer has responded to a customer order and the customer is able to read that response – ie. It is available on their PC, or on their mail server.

In relation to Kodak, we must look at exactly what steps were taken to form any potential contract, and what the terms of that contract might be.

The general understanding of how contract law should function, either under the current interpretation of the law, or by applying the newer viewpoint of the Directive, would indicate that the necessary, order and confirmation has taken place. Kodak are not in a position to claim that they had no intention to create legal relations. Indeed, if we look at the wording of the terms and conditions provided by Kodak, it is apparent that this is their intention for how transactions through their website should proceed. Kodak's terms and conditions provide that

"After you place your order, you will receive an email confirmation within one business day. The message will contain the details of your order with the total amount that will be billed to your credit card, including tax, shipping, and handling. This message is your receipt…Be sure to keep your receipt. You will need it if you require warranty service. If there is a problem with your order, you will receive an email notice stating what the problem is and what you need to do to correct it."

This certainly fits with the typical model of e-commerce, and the understanding that the confirmatory email acts as both acceptance of the original offer and a receipt. Kodak stipulate that if there is a problem with the order they will state that in the email. If Kodak wish to include further control over the formation of the legal relationship beyond the typical understanding, then they must do so via their confirmatory email or their standard terms. Kodak do include terms and conditions within their confirmatory email, which relate back to the standard terms on the website. The confirmatory email states (clearly to comply with the Distance Selling Regulations):

"Thank you for shopping at kodak.com! Please review the terms and conditions at: http://www.kodak.co.uk/GB/en/corp/store/op/orderPolicy.jhtml
These govern this contract which are provided for your reference. Please print these off and keep them in a safe place. You should also be aware that you have a right to cancel this contract if you wish, without stating any cause, by sending or delivering to us a notice in the form attached within seven (7) working days beginning with the day on which the relevant goods are delivered to you. Any monies paid will be refunded within 30 days. If exercising this right, we would ask you to keep the goods in the condition they arrived in, and return them, in their original packaging, to the address stated below."

This again indicates Kodak's intention that the confirmatory email will act as the contract formation point. The general understanding of contract law and also the provisions of the E-Commerce Directive look bleak for Kodak on this point.

Kodak will probably seek to rely on their Terms and Conditions where they provide:

"All the products on Kodak's web-site are subject to availability and we must therefore reserve the right in exceptional circumstances: to limit quantities of products we supply; to alter any of the terms and conditions on which we do business and on which we supply products to you, including the prices; to alter the availability and duration of, and to terminate at any time, any special offers. Please note that we will, however, not deduct any sums from your credit card unless, or to the extent, we are able to deliver the products to you."

There are two problems with this approach - firstly, this clause could fall foul of the Unfair Contract Terms Act 1977 because it is an onerus clause allowing the retailer in a position of strength to alter the conditions of the contract unilaterally without notice. Secondly, the clause specifically refers to "exceptional circumstances" in relation to "availability" and might therefore be held not to apply to other situations.

It is worth noting that there is some question over whether Kodak appear to have updated their Terms and Conditions since this matter arose. If this is the case, and the Terms have changed, any contract formed would still be governed by the previous Terms. I trust Kodak have not changed the T&C's in an attempt to improve their position, because any court would look very strongly on such an attempt at fraud.

As described previously, Kodak might be able to argue that the mistake was obvious to the customers, and therefore the contract is invalid under Hartog. However, this argument is not very attractive – the offer was marked as a "special deal!", during a sale period (January). The package was priced at £100 which is not entirely unbelievable for a digital camera which has also been the subject of a sustained advertising programme. The point is equivocal, and certainly not as clear as it might have been for Argos.

Finally, we must look at Kodak's response since the situation arose. They have sent an email to customers purporting to reject their 'offers' due to the pricing error. They state:

"Kodak does reserve the right to decline to accept any customer's offer to purchase, prior to payment."

However, this clause does not appear in their standard Terms and Conditions, and it is not open to Kodak to unilaterally change the terms of a contact after it has been formed. The effort to do so is crude, and indicates panic on the part of the company.

Kodak may wish to argue that the contract is not completed until the transaction is complete via the transfer of funds – ie. The charge is made to the credit card. However, this does not sit well with the law, for example in relation to auctions. A winning bidder on an auction makes the legally binding agreement when the final bid succeeds, and he is bound by that even though payment is made at a later point in time. It is a term of the contract that payment is made, not a condition of the contact being made in the first place. It would be perfectly open for Kodak to ensure that this method of contract-on-payment applied to their sales if they had incorporated such wording into either their confirmatory emails, or their Terms and Conditions, which they did not.

It is not just the civil remedies (ie. actions by consumers) about which Kodak need to be concerned. There are also avenues for action to be taken by the authorities. It is arguable that offences have been committed under the Trade Description Act (the provision of a misleading trade description) and also the Consumer Protection Act (the provision of a misleading price indication). Action on these statutes would be taken by the Advertising Standards Authority and the Trading Standards Authority respectively.

Kodak

The solution to a legal problem is not always a legal answer. Because this area has not been tested, Kodak could decide that they want to argue their case in court. The risks to them are that they might lose, which would cost them an estimated £2 million plus the costs of the action for both the customers (likely to be small) and themselves (likely to be extremely large). To win would still most likely be costly to them in terms of both money (they would be unlikely to recover much in the way of costs from claimants) and also bad publicity. While lawyers would love for a case to decide the issue once and for all, my advice to Kodak would be to act extremely quickly to avoid a legal dispute.

Kodak will already have contacted their lawyers on this issue, and that mean that the costs are already mounting. I would imagine their legal team would belong to one of the UK's top ten firms, and in this case the legal bill is probably already £5,000-10,000 and rising steeply. The more complaints which are received, which must be reviewed by the lawyers, will simply continue to push that cost up. Only Kodak will know what the cost value of the camera package is, but bearing in mind that the same camera and docking station package is on sale from Kodak US at $380 (about £263) it is unlikely that the cost to Kodak would be much more than £100 per sale. To satisfy some 10,000 customers, at a very small loss (or possibly profit) per customer, would not cost a great deal in comparison to the legal bill for a prolonged dispute. Kodak would also be able to benefit from a significant boost of positive publicity, and may well receive repeat orders or orders for sundries from a large batch of new Kodak camera owners. On the other hand, losing the action would not simply involve the loss of a small amount per camera because the proceedings would be based on the loss of a bargain – an amount of approximately £239 per customer.

The above advice is based only on the likely cost of any civil action taken against Kodak. The company will also need to balance in the possible cost of actions by the Advertising Standards Authority or the Trading Standards Authority which might result in a fine based on the number of cases of deception carried out – in these circumstances a particularly substantial number (a maximum fine of £5,000 per consumer misled). Defending this criminal action would also be costly.

With the above in mind, it is clear that it would be most beneficial for Kodak to approach consumers to offer either a substantial settlement, or attempt to satisfy orders, as soon as possible. While the current statements of denial are the universal response by a company finding itself in such trouble, a measured review of the costs and liabilities involved indicate that a reasoned settlement would be beneficial (if initially expensive) to the company in the long run.

This experience should also prompt Kodak, and many other online retailers to review their procedures, standards terms and website designs. The process of e-commerce is more often than not decided by the functional design of the website itself, and it is only when problems arise that lawyers are involved. This is a dangerous way to proceed, as Kodak have discovered. Standard terms which stipulate exactly when the contract is formed, and how the supplier will deal with errors or malicious tampering must be included both in clear standard terms on the site itself, and also in any confirmatory email which is sent out. It would also seem easy enough to program some form of flood warning system which would provide an automatic alert when a problem of this nature arises. It is inconceivable that the order of some 10,000 cameras over the space of a couple of days is considered normal trading for the Kodak website. These sites should have code which identifies such unusual ordering behaviour early, and flags the item being sold for checking by a human operator.

The Customers

For a consumer, the plan of action is simple. Kodak will wish to spend as little as possible dealing with the issue. You must make them realise that this simply is not possible. Try to avoid using emails or telephone calls to deal with the company, as these are easily lost or forgotten, and/or difficult to trace later. You will also be lost in the melee of people trying to contact Kodak right now. Put your complaint in writing. Keep copies of everything – letters, emails, receipts etc.

Do not take any legal action yet – Kodak have 30 days under the Distance Selling Regulations to perform under their contract. Explain this in your letter, then write again once the period has passed. Once you have exhausted this option, then I would suggest a number of claimants pool together to make claims before the small claims court – the same claim could be used many times, making the process simpler. The Internet would be an ideal place to share information and strategy. The action before the court would be one of 'loss of a bargain' and you would be claiming the difference between the contract price you agreed with Kodak, and the price for which you can buy the camera on the market. The small claims court may well decide that a larger issue is at stake and pass the case to a higher authority. It is at this stage that the cost may begin to rise, and some form of joint action may be necessary. However, the costs will be rising at Kodak, and I would imagine that a new offer might have been made by this point.

Don't forget at the same time that it might be worth contacting the Advertising Standards Authority and the Trading Standards Authority. Trading Standards operate on a 'home authority' system, which means an authority is responsible for the companies within its area. Find out where Kodak Eastman is based within the UK and contact their Home Authority. Put your complaints in writing of course, and again a unified front would be best.

As a lawyer, this situation is exciting because there is a chance to settle a particularly important area of law. This is especially the case because all previous well-publicised cases would have fallen foul of the rule in Hartog because they were blatantly pricing errors. This would not have set any kind of useful precedent. However, these circumstances could clarify that in the absence of extraordinary pricing mistakes, the contract is valid. If Kodak's lawyers are at all alert to the business issues facing their clients, I would expect that a change of approach to something more conciliatory would be on the cards soon.

Daniel Bates
(Solicitor LLB)
This article in no way constitutes legal advice. Anyone believing themselves to have a claim should contact a solicitor.