This is Part 1 of our article, “Selling Your Goods In-Store Versus Online: Legally, What’s the Difference?”
Look for Part 2 coming soon!
Legal agreements and store policies
When you set up shop, legal considerations may be the last thing on your mind. Not only are there legal considerations involved in setting up your storefront—when you set up the online arm of your business, there are additional considerations that you need to keep in mind as well.
First, I will cover how contracts of sale are formed, both offline and online. Then, I will examine store policies, and how to get your customers to agree to them.
Finally, in Part Two of this article, I will look at the delivery of goods and the delivery risks that arise when goods are purchased online or are delivered to a customer not in-store.
How a contract of sale is formed in a physical store:
It may not seem like it, but when a customer purchases an item in your shop, they are forming a contract with you.
The primary elements of contract formation are:
Mutual agreement (offer and acceptance);
Consideration;
Intention to be legally bound; and
Legally competent parties.
Let’s look at a common scenario. You display a mirror in your store for $10. Alice brings it up to the till, and pays you $10 for the mirror.
Offer, acceptance, and invitation to treat
While it may look like you are “offering” the mirror for sale for $10, you are doing what is called an “invitation to treat.” An “invitation to treat” is a precursor to a legally binding offer, and in our shop scenario it means that you don’t have to sell her the mirror at the price displayed. It is in fact Alice who is making an offer to buy the item when she brings it up to the counter at that price. You then accept Alice’s offer and she exchanges her $10 for the mirror.
This means that if you accidentally display an item in your shop at the wrong price, when a customer comes up to the till you can correct the error when they “offer” to buy your item at the incorrect price.
Consideration
The $10 and the mirror are both something of value. Consideration is just another term for something of value. The consideration does not have to be “adequate,” but it must be what is called “sufficient” consideration. In other words, the things being exchanged must have some value, but the general rule is that courts do not care how much value. So even if the mirror is worth $2, and you sell it for $10, the consideration is still valid. The only exceptions are when the value given is grossly inadequate (such as if the mirror was worth $2 and you sold it for $4000), or if the value given on both sides is of the same type, such as selling a $1 note for $100.
Legal competence and intention to be bound
Being legally competent means that your customer has to meet a set of legal conditions that allow them to make a contract. For example, in the U.K. and the U.S., minors cannot be legally bound by contracts. However, they enter contracts of sale all the time to purchase candy from corner stores. So how does this work?
It works because the rules aren’t quite as strict as “no minors can enter contracts”—they are more nuanced than that. In the U.K., courts have found that the person entering into the contract must be “capable of understanding the general nature of what he is doing by his participation” (Gibbons v. Wright (1954)).
It means for most contracts in the U.K., the minor is not able to be legally bound, but if it’s something for the minor’s benefit or for “essential items for living,” they can be. While candy is not really an essential item, one could easily argue that it is a food (which is essential for living) and the contract is also beneficial for the minor (as buying the candy makes them happy).
In the U.S., the person must have the ability to understand “the rights, duties, and responsibilities created by, or affected by the decision… the probable consequences for the decisionmaker and, where appropriate, the persons affected by the decision… [and] the significant risks, benefits, and reasonable alternatives involved in the decision.”
This means that it’s likely a child is capable of understanding the risks and consequences when he is purchasing a chocolate bar for $1.50, but would be unlikely to understand a complex employment contract.
Finally, intention to be bound means that for the contract to be enforceable, both parties need to be intending to enter into a legal contract. Intention to be bound is usually presumed when the contract is a commercial one (such as buying an item in a shop), so this isn’t particularly at issue for most business situations.
You may think that an online store is different—after all, you just have a Terms and Conditions document to cover all this stuff! But, things are more complicated than that.
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So, what’s the difference with an online store?
Online, things get a bit trickier in a number of ways.
First let’s look at offer and acceptance for a contract of sale. Most website use a Terms and Conditions document that sets out the conditions of sale, payment information, refunds, ownership of the item, and use of intellectual property, among other things.
Many stores also send out confirmation emails once a person has purchased an item from their store. Here’s an example of the type of email I mean, from Microsoft:
But what happens if you displayed the item at the wrong price? If you sent a confirmation email, have you now agreed to be bound by the contract?
This exact situation happened to Kodak, in 2001. Kodak displayed a digital camera package on their website for an incorrect price of £100. Thousands of customers ordered online and provided their credit card details for the payments to be made. The customers received automated online confirmation emails that told them to keep the email as proof of purchase.
Kodak claimed that the orders had not been accepted and that no contract had been formed. However, the Court held that the website pages with the products listed were invitations to treat, and the customers had made offers to buy the packages for £100. The problem for Kodak was the automated confirmation emails, which suggested that the orders had been accepted. The emails not only acknowledged the order, but also used the words “this contract.”
To avoid problems like this, ensure that your website is structured in the way you want to conduct business, by:
Stating clearly in your website Terms and Conditions when acceptance occurs;
Clarifying any conditions that may affect the acceptance of the offer (such as items being out of stock or listed at the incorrect price); and
Ensuring that regular checks are performed to make sure items are listed at the correct price.
What about agreement to store policies?
Your customers need to not only be bound by the contracts you make with them, they also need to be bound by your Store Policy (in your retail store), your Returns and Refunds Policy, your Terms of Use (for using the website), and your Privacy Policy.
Your Terms of Use sets out how your customers can use your website, how to make an account, circumstances in which customer accounts may be deleted, and behaviors or actions that are not permitted. This is basically the same as what a Store Policy is for your physical retail store.
Your Returns and Refunds policy covers the circumstances in which you will accept returns or give refunds, and may include time limits or set out directions for posting or returning an item by mail.
Your Privacy Policy sets out how you collect, use, manage, and disclose customer data. It should also explain to the customer how their privacy and personal information will be protected.
The contents of your Terms of Use, Returns and Refund Policy, and Privacy Policy will depend on what country you are in, what countries your customers are in, what information you are collecting, and the business decisions you have made. Sites like TermsFeed can help you to generate a Privacy Policy, Terms of Use, and a Return and Refund Policy in minutes for your online store.
Before you start selling items from either your online store or your physical store, make sure you have these policies in place and tailored to your situation. As each policy and set of terms is so particular to your individual situation, I won’t go into detail on these here.
Now that you’ve got these documents in place, how do you make sure your customers agree to them?
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Policies online
Online, there are two different ways of displaying your Terms of Use and Privacy Policy, called browsewrap and clickwrap.
Browsewrap is where the user has to browse to find your terms on the website. This is the method that many websites use, where the Terms of Use and Privacy Policy are small links down at the bottom of the page. Sometimes the user has to scroll down quite far before they can find them. Here’s a visual example of what browsewrap is from Hortonworks:
Image via Hortonworks
This image is taken from right down the bottom of their page.
Clickwrap is a much stronger method (from a legal perspective), where the customer has to actually click “I Agree” to the Terms of Use and Privacy Policy. Usually this is implemented with a pop up that appears when the customer reaches the website, or a tick box at the end of a web form. Here’s an example of what a clickwrap method is from Budget Travel:
Image via Budget Travel
Without offer and acceptance of those terms, they haven’t been agreed to. This is why a clickwrap method is much stronger, as the user clearly clicks “I Agree” and they become bound by the terms.
Another problem is that online, you can’t tell how old your customer is. It could be a six year old purchasing a Gucci bag without the knowledge of his parents. It is incredibly common that children make in-app purchases when they are playing with a parent’s phone.
Luckily for the parents, these contracts are not enforceable as the minor does not understand the nature of the contract. However, the difficulty arises when the parent needs to prove that it was the child who made the purchase (rather than it having actually been the adult).
Now let’s look at getting agreement to your in-store policies.
Policies in-store
Online, it’s particularly important that your customers agree to your Privacy Policy, as a large amount of data is collected simply by the customer visiting the website. If you use Google Analytics, or if the user can make an account, your website collects even more personal information. In a physical store, it is rarer that customer data is collected. This means that privacy and information security issues arise for an online store that a physical store usually does not need to deal with.
However, as physical stores collect increasing amounts of personal information about their customers, privacy issues are beginning to appear for them too. Many large retailers now track customer movements throughout the store and create “heat maps” to figure out which areas customers visit most.
There’s also the case in the U.S. where Target knew a customer was pregnant before her father did. As the customers at Target can create a Guest ID, with their name, email address, and credit card linked to the ID, Target can collect information about each purchase that customer makes, and analyse the data to form an overall impression of what kind of things that customer is buying.
Target was quick to say that they complied with all privacy laws when conducting this exercise, so it’s likely that when a customer signs up for a Guest ID they agree to a privacy policy of some kind. This commonly occurs when customers sign up for a customer loyalty program, where a slip of paper is filled out with their details. The Privacy Policy or Terms are often printed on the back of the paper.
A physical store usually has a document like a Terms and Conditions, but it’s normally called a “Store Policy” instead. Refund and return policies are required by many states in the U.S. to be posted conspicuously for the customer to be bound, and the same will likely apply to your Privacy Policy if your store is collecting customer data. Likewise in the U.K., if a store has a returns policy, they must display it prominently and frequently.
Here’s an example from the Dekalb County World Farmer’s Market in Atlanta:
You can see that the refund policy is prominently displayed, in bold, and also highlighted in red to bring it to their customers’ attention.
This is effectively a strong browsewrap method, where the customer needs to look around the store, at their receipts, or search online for your in-store policies.
As long as you display these prominently and frequently, your customers are likely to be bound. While methods that require your customers to actually sign an agreement would be stronger from a legal perspective, carrying this out in-store for every policy is impractical and likely to turn customers away.
Conclusion
Always remember that there are unique circumstances when running an online store when compared to a physical store, and you need to keep on top of your legal obligations by following the above tips.
Stay tuned for Part 2 of this article, coming soon!