Online retailers have done aggressive advertising and brisk business this festival season, selling things ranging from electronic goods to holidays. Considering the range and number of products, the online retailers are forever close to making pricing mistakes. Would they honour a price if the customer has completed the transaction and the credit card debited?

A contract once made is binding on the parties. A contract is made when the parties reach an agreement by a person making an offer, and the other accepting it. In most online transactions, the customer makes an offer by submitting the request, along with the credit card details. The seller closes the transaction by a confirmation. The seller should be held to the contract. The law, however, makes exceptions in certain cases. One of them is when the parties are mistaken about an aspect of the contract. When a party to a contract is mistaken, and the other person, takes advantage of the mistake and enters in the contract, is called snapping-up. In the case of snapping-up, the law takes it that there is no agreement (meeting of minds), as the parties have different things in their minds. Thus, a snapping-up contract is void and not binding on the parties. While the principle has been there for two centuries, widespread use of it has come only with the online stores.

An online store would automate and reduce human intervention in the transitions. The best way of organising this was to make the customer offer with the credit card details. On successful realisation of the payment, the online store could close the session by accepting the offer. The automation, however, exposed the store to a risk. If a mistake was made in pricing, a large number of contracts would get formed, without the store realising and correcting the mistake. The only way out for the store would be to claim to set aside the contract on the grounds of mistake. This is what was claimed in the celebrated case, Chwee v. Digilandmall.com Pte, of the Singapore High Court.

Digilandmall.com Pte ran an online store, exclusively selling HP products. A trainer, in training the employees in managing the webpage, had entered a hypothetical price of $ 66 for a printer whose price was close to $4000 in the webpage template. Later, by mistake, an employee uploaded the template. With the mistaken price, 784 persons made a total of 1,008 purchase orders for 4,086 printers. Some ordered a hundred printers. One person had ordered 760 printers.

The store claimed to set aside the contract on the grounds of snapping-up. The courts are stringent in making an exception to the binding force of a contract as it erodes the sanctity of contracts and reduces commercial stability. There were several factors which went in favour of the store. The printer was a special commercial printer. The listed price was a fraction of the regular price and several of the buyers had bought multiple pieces only to make a windfall gain. The court concluded the transactions to be snapping-up and held the contracts to be void.

The online stores have quickly learnt and adapted. For example, while transacting with Amazon.in, the customer makes an offer to the store with the credit card details. The seller realises the money, closes the transaction, but does not accept the offer. It only confirms that the order (offer) has been received. According to the terms, the offer is accepted, and a contract formed, only when the goods are shipped. At this stage, Amazon sends an email of ‘shipment confirmation’. Delaying the formation of contract till shipment of the goods gives it the time and opportunity to notice pricing errors. On noticing a pricing error, it has the option of rejecting the offer and refunding the payment.

Delaying the acceptance of offer to the stage of shipment has been one means of guarding against pricing errors by the sellers of goods. The strategy, however, would not work for several of the services. Take the case of an online purchase of an airlines ticket or a hotel booking. An airline cannot defer making of the contract to a later date or till the customer arrives at the airport. The offer of the customer would need to be accepted on realisation of the payment. The risk of pricing error, thus, continues. One of the much reported pricing errors has been by the United Airlines in the USA.

In November 2013, for about 15 minutes, the United Airlines webpage listed fares for several of the sectors to be as low as $ 5. The regular fares for the sectors were over $ 1000. The airline attributed the mistake to ‘human error’. Hundreds of transactions were done in those 15 minutes. The Digilandmall.com case, in several respects, was exceptional. The error was for a special kind of a printer selling at a fixed regular price. In a context, where the businesses are attracting the customers with unbelievable discounts, throw-away prices, deals and promotions, it will be hard for a store, which actually makes a mistake, to establish that the customer knew the price to be a mistake.

To guard against this, online stores have been introducing a term in the contract giving them the right to cancel the contract in case of a pricing error. The United Airlines honoured the contracts, despite a term to this effect. Likely, it wanted to retain the confidence of the customers. Mistakes continue to happen and most online stores, relying on the right to cancel term, cancel the contract. Amazon (UK), cancelling contracts for Xbox Elite Controller, on the grounds that it had made a pricing error, wrote to the buyers: ‘Despite our best efforts, with millions of items available on our website, pricing errors can occasionally occur.’ Online sellers have covered themselves against pricing errors by contract terms. The next will be testing the validity of these terms and their application.

The author is Professor at IIM, Ahmedabad. The views expressed are of the author and not the institution.