What the Law Says When Starting an eCommerce Business (Contracts)
Set your mind back the first time you heard of an ‘Online eCommerce Business’. Were you asking ‘What is online business? How does it work? Is it safe?’ and so on. These days all industries, from retail to travel, logistics to agriculture, are wired one way or another. Take for example the success of Amazon.com. It is a multibillion dollar eCommerce business that started in a garage, selling books, CDs and videos, and now it is leader in the industry. It is all because of the eCommerce revolution (Stewart et al., 1999). The internet has changed the infrastructure of business in a vast way; almost all businesses have their own website to enhance their opportunities for success and popularity. However, doing business online could be risky as in the majority of instances, the supplier and customer never meet. This could result in an unfortunate situation where people have disputes when purchasing products.
To address this issue, the UK held its first conference on internet laws in 1995. It is stated that law-makers are finding it hard to keep pace with rapid development in e-commerce (Holt & Newton 2004). e-Commerce law covers a large area such as e-mails, data protection, copy right and many more. The sector the author will focus on is ‘e-Commerce and contracts’ and will look at the following areas: What a Contract is, Forming Online Contracts, Types of Contracts, Laws that Apply, Jurisdictions (British Law vs International Law) and Taxation (VAT).
What Is A Contract?
Tunkel & York (2000) define a contract as an agreement between two or more parties to do, not do, or promise something. Contracts can come in many forms; they can be written, oral, implied or expressed and, in most cases, are legally enforceable.
A simple form of a contract, an offer is made, the other party accepts the offer, the offer is considered, and then a legal relationship is created (Tunkel & York 2000).
For example, when we buy milk and bread or use public transport, we are making a contract (Fell, 2007). Contracts that have strong creditability are those that have an offer, acceptance, clear terms and conditions and are agreed by all parties involved. Contracts that are agreed verbally are considered to be weak as in cases of disputes would be difficult to prove in a court of law.
A full description of the ‘contract’ term is beyond the scope of this document; however, the author has used definitions from both the Oxford and Cambridge Dictionaries to provide definitions:
‘A written or spoken agreement, especially one concerning employment, sales, or tenancy that is intended to be enforceable by law (Oxford Dictionary n.d.).
Cambridge Dictionary (n.d.) defines it as:
A legal document that states and explains a formal agreement between two different people or groups, or the agreement itself. A contract of employment, a temporary/building contract. They could take legal action against you if you break (the terms of) the contract.
Both these definitions are concerned with the legality of a contract that is enforceable in law.
Forming Online Contracts
In order to form an online contract, certain aspects need to be considered. For example, the business needs to devise the terms and conditions of the policy which can be viewed by all parties. According to the Business Names Act 1985 and Companies Act 1985, corporate information such as details of the company name, address, telephone number, fax and any other relevant information that is necessary must be stated on the website (Singleton 2001). Contracts need to be examined properly by all parties involved (Todd 2005).
There are certain areas which need to be considered when forming contracts such as the date, name and address of those entering the contract, description of the contract, what the supplier is going to do and what you must do for the supplier.
In a recent case, Argos advertised a television set for £2.99 on the website, whereas the real price was £299. There was a rush of orders placed by customers; however Argos refused to sell the products to the customers as it realised that an error had been made. Certain customers sued Argos for failing to fulfil a contract. The case was settled out of court (Carey 2001, Holt & Newton 2004).
To avoid court action, Holt and Newton (2004) suggest that it would be wise for e-businesses to clearly state that no contract is formed unless the supplier has notified the customer it has accepted the offer. Bainbridge (2004) agrees that all terms in a contract should be necessary and effective and must be agreed by both supplier and customer before the contract becomes legally binding.
Types of Contracts
There are many different types of electronic contracts. For example, hardware and software development contracts, licence contracts, physical goods and services contracts (Jacobson Consulting 2006). However, there are two types of contracts that are popular in electronic businesses, Service Level Agreement (SLA) and Outsourcing.
SLA is an agreement between two parties; for example, the customer and the service provider. It should specify the service to be delivered, performance, tracking and reporting. These agreements are popular as businesses can focus on the actual business and leave the computing aspect of the business to computing companies (Hiles 2002).
Outsourcing is when a business agrees a contract with another business to provide a service that might otherwise be performed in-house; this is often located overseas and administrative functions like Financial Accounting and the payroll are passed on, mainly to save money (Kendrick 2009).
Laws That Apply
Since the start of the eCommerce revolution, new laws have been put in place to deal with the fast pace of the industry and also to ensure all businesses are doing business according to the law. The EU Electronic Commerce Directive 2000/31 is key legislation; it states all contracts should clearly establish rules and make information transparent so that it is understood by all parties (Todd 2005 & Fell et al 2007). In relation to this legislation, The Electronic Commerce (EC Directive) Regulations 2002 state similar principles that apply to contracts concluded by electronic means over distance whereby the buyer is a consumer.
These two laws are connected to The Consumer Protection (Distance Selling) Regulations 2000 which came into power on 31 October 2000. They apply to contracts between a business and a consumer that are not ‘face-to-face’; for example, contracts entered into electronically.
The regulations enforce two main obligations of suppliers of goods or services. The first is to provide certain information to the consumer, as mentioned earlier. The second is to allow the consumer a ‘cooling off’ period of seven working days during which the consumer is able to return the goods to the electronic business (Carey 2001).
Two other important legislations are The Sale of Goods Act 1979 (SGA) and Supply of Goods and Services Act 1982 (SGSA). The SGA 1979 regulates contracts in which goods are sold and bought, whereas the SGSA 1982 requires businesses to provide services of a high standard (Bainbridge 2004 & UK Statute Law Database n.d).
Todd (2005, p197-200) makes a valid point about the SGA 1979 and SGSA 1982. He states; ‘The electronic purchase of music, computer games, films, etc will not be regarded as goods and it seems unlikely that they would often be regarded as services either’. This statement identifies the thin line between the definitions of both acts.
Jurisdictions (British Law vs. International Law)
This is important because this will determine where any legal action can be commenced. It is especially important in the digital environment when contracting parties may be in different countries. In order to avoid any confusion, the contract should specify in which jurisdiction the contract is formed. For example, if an electronic business sells goods online, it should clearly state which country’s law it would be using and apply it to the contract.
There are two sets of laws that apply to jurisdiction laws; the first is English Common Law and the second, the Rome Convention. However, provisions of the Rome Convention were added to the English law by the Contracts (Applicable Law) Act 1990 (Tunkel & York 2000 & Todd 2005). In disputes of two parties or more, an agreement has to be reached regarding in which country the case will be heard. If an agreement cannot be reached, the regulation on jurisdiction and the Recognition and Enforcement in Civil and Commercial Matters 2001 will decide where the case will be heard (Singleton 2001).
A recent case involved the French courts and Yahoo (US search engine). Yahoo was ordered by the French court to block Nazi memorabilia being viewed by its users. As Yahoo is a US organisation and based in the US, there were major complications in the case. However, as the case was being heard in France, the French court applied its law and banned the display of Nazi symbols and stopped users from viewing such items in their homeland (Holt & Newton 2004).
Taxation (VAT)
The European Commission set new legislation in order to ensure electronic businesses were paying the appropriate tax. The Electronic Commerce (EC Directive) Regulations 2002 were put in place to prevent businesses from the European Union (EU) having a competitive advantage over other businesses (Mellor 2006, Holt & Newton 2004). This directive was extended to 2008 as the original act was due to expire and EU states could not agree on changes regarding VAT. Before this, the law stated that an EU-based supplier that sold to an EU consumer or to a consumer outside the EU, had to charge VAT at the business rate, VAT was paid by the importing company under self-supply arrangements, at the rate applicable where the importer was based. Furthermore, when a non-EU supplier sold to an EU private consumer there was no obligation to charge VAT at all (Holt & Newton 2004, p122).
Conclusion
This seminar has discussed the basic legal contractual requirements an electronic business has to have. Because contracts can be understood differently by different parties, clear definition needs to be established. This seminar has outlined channels to follow when forming a contract and provided examples of real-life case studies to demonstrate the consequences of unclear contracts. Electronic businesses can face complicated situations involving the law, depending on the types of contracts. For example, when a business provides digitalised services such as books, magazines, films and software, the concern with whether these are a service or goods (Chissick & Kelman 2002). Therefore, laws need to be defined and understood at a high level.
Since the boom of the internet, laws and regulations have had to be updated and new laws created. The difficult factors of jurisdictions were identified when purchasing goods from overseas countries. This seminar covered the issues of, in the case of a dispute, in which country is a case is held. VAT regulations wer discussed in terms of who is required to pay tax (VAT) and how this is to be done. Without introducing these laws and regulations, the industry would suffer financially and it would lose respect as it would be seen as a place to do business lawlessly.
Word Count: 1844
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