E-commerce presents itself as the newest and most fashionable frontier of business opportunity, particularly for small to medium enterprises that are able to take advantage of the relatively insignificant capital outlay required to establish an on-line presence. However, in the rush to join the on-line business community, it can be easy to overlook some basic principles of risk management and to pay insufficient regard to the potential liabilities that may be only a few clicks away.

This paper seeks to emphasise the continued application of traditional legal principles in the “wired” environment. It also seeks to highlight a number of areas of potential liability to which a business might not have been exposed prior to the implementation of its website.

There are two aspects of the manner in which product liability issues arise in the on-line environment. The first and most obvious arises in the context of a business that advertises its products for sale via the internet. Before considering that aspect, however, it is useful to briefly discuss the potential exposure of businesses that provide the products and services that enable other enterprises to pursue their own on-line business.

Businesses providing hardware and software support

An on-line presence necessarily requires ease of access to as many potential customers as possible. The accessibility and reliability of a website will play a crucial role in the success of that site. This means that those attempting to access the site should be able to do so 24 hours a day, seven days a week, irrespective of the number of “hits” that site is accumulating and regardless of the volume of orders placed through it.

However, the establishment of a website, or even an e-mail account, entails reliance on third parties such as internet service providers, programmers, site designers and also the developers of third party applications. As the number of published sites grows at the rate of 1,000 new sites per month in Australia alone, so too does the number of enterprises devoted to creating and supporting those sites.

An on-line business must not only ensure that the data displayed on-line is accurate, but also that the hardware and software that forms the framework of the site is secure and not liable to failure. The failure of hardware and software to perform as intended has the potential to give rise to both property damage claims and business interruption claims, and those responsible for the provision of that hardware and software should ensure that they have sufficient insurance cover for any such claims.

Businesses venturing on-line

It is unfortunate that the unique characteristics of the internet combined with the absence of the usual paper trail may lead to some on-line retailers (known as e-tailers) paying scant regard to the operation of existing laws to on-line business. However, for the most part, these laws apply to internet-based transactions just as if the relevant transaction was conducted by non-electronic means.

Jurisdictional issues

The internet can open the way to a number of potential new markets for a business moving its operations on-line. However, the number of laws that may potentially govern the contract for sale of products also increases. Some on-line businesses have, indeed, addressed their potential exposures by specifically limiting the number of markets to which they will provide their products. Although such websites can be accessed by any number of countries, they explicitly state that orders from countries other than those nominated by the seller will not be filled.

Those e-tailers who do not wish to limit the number of potential markets are unlikely to find it commercially feasible to take legal advice on all of their potential markets, so on-line businesses should always ensure that the laws of their jurisdiction govern the transaction.

What jurisdiction governs a particular transaction will depend upon where the relevant contract came into existence. For a contract to come into existence, acceptance must be communicated. The contract will then be formed in the jurisdiction where acceptance is received. Vendors do not usually issue offers but make invitations to treat with the offer coming from the purchaser. Therefore, where a seller acknowledges an offer by way of acceptance, a contract will be formed in the jurisdiction of the purchaser. In these circumstances, an e-tailer must have a jurisdiction clause in the terms and conditions in the contract to the effect that the law governing the transaction will be in the jurisdiction of the e-tailer and not the customer.

The potential for consumers from many jurisdictions to engage in e-commerce with Australian on-line businesses highlights the importance of ensuring that liability insurance coverage is appropriate. Typically, product liability coverage excludes liabilities arising in United States and Canada, which could have disastrous implications for an e-tailer where these countries are key markets, particularly given the internet penetration there.

Consumer protection

Part V of the Trade Practices Act 1974 (Cth) (TPA) contains various provisions intended for the protection of consumers within Australia contracting with trading companies for the supply of goods and services. The warranties and conditions imposed by the TPA are mandatory and have an intentionally broad application. The legislation makes no reference to the form which consumer contracts adopt and, thus, any consumer contract formed within Australia via the internet will be subject to its operation.

A company offering its products for sale by electronic means should, therefore, be aware that the TPA imports into each contract for sale these implied warranties where the products are ordinarily acquired for personal, domestic or household consumption.

More importantly, these terms will be implied into the contract where the value of the contract is less than $40,000 and, this is likely to encompass the vast majority of on-line sales of products.

In the context of on-line contracts, it seems that the most important term implied by the TPA is that the product be of merchantable quality. This is because it is unlikely to be open to the e-tailer to argue that a particular consumer examined the product before the contract was made and, as a result, was aware of the relevant defect. Nor is the e-tailer likely to be able to argue that the relevant defect was specifically drawn to the consumer's attention prior to the contract.

There is also an implied condition in any consumer contract that goods supplied are reasonably fit for any particular purpose communicated to the seller. This communication need not necessarily be overt, so that goods supplied under an on-line contract must be fit for the purpose to which those types of goods are normally put.

Failure of goods sold over the internet fail to meet their on-line description or the failure to supply goods of merchantable quality may also entitle a consumer to recourse under Division 2A of the TPA against their manufacturer. Although the on-line seller may not have manufactured the defective product, it is important to realise that if the item is imported, the importer will be deemed to have manufactured it unless the actual manufacturer has a presence within Australia.

It is imperative, therefore, that the on-line company puts appropriate risk management procedures in place. Such measures would typically include the inspection and quality assurance testing of products supplied by overseas manufacturers prior to advertising them on a website.

The local seller should also ensure that it uses reliable, identifiable suppliers, particularly as, under the strict liability provisions of the TPA, a consumer who does not know the identity of a manufacturer may serve on a supplier a written request to identify the manufacturer. If the supplier cannot identify the manufacturer within 30 days, the supplier is deemed to be the manufacturer for the purpose of that action.

Advertising

The TPA also prohibits a corporation engaged in trade or commerce from engaging in conduct that is misleading or deceptive or likely to be so. A business should ensure that its website is not likely to mislead the consumer as to the quality or nature of the products advertised or the manner in which those products will be provided to the consumer.

As with business conducted by traditional means, a seller should be particularly concerned to avoid making misleading statements in relation to the compliance of a product with relevant standards. Similarly, where a website does not specify the overall cost to the consumer, including all delivery and statutory charges, it may be alleged that the customer was misled as to the price of a product.

An on-line company should also be wary of the provisions of the TPA prohibiting false and misleading representations, for example relating to the standard or quality of products, the price of products and the place of origin of the products.

Conclusion

This paper is not meant alarm the e-tailer because, in most respects, his potential liability arising from the sale of products is no different from selling products in the normal manner.

However, it is important for the e-tailer to understand that there are some areas of difference with important implications in the context of product liability laws.

Probably most importantly, the e-tailer must be aware of the markets which it is targeting and the importance of ensuring that the laws of its own jurisdiction apply to the contract and that any liability insurance is wide enough to cover any claim from consumers in other jurisdictions.

Another crucial difference is that an e-tailer is not able to identify the customer to which it is selling products with anywhere near the same degree of precision as with conventional sales. This point is particularly pertinent for those e-tailers who may be distributing products to customers who speak a different language and whose customs are different from the e-tailer's home country. In these circumstances, an e-tailer must pay close attention to information published on the website as to the standard or quality of products to ensure that this information is not capable of misinterpretation to those purchasing the product from a foreign jurisdiction.

  • David Kearney is a partner in the Australian law firm, Phillips Fox. Tel: 02 9286 8263 or email djk@sydney.phillipsfox.com.au.