Distance selling and IT suppliers

January 1, 2004

IT suppliers will have even less excuse for failing to comply with distance selling rules when the Office of Fair Trading publishes its final guidance following its October Consultation Paper: IT consumer contracts made at a distance (OFT672). Suppliers would do well to heed the OFT’s observations on consultation in relation to some of the failings of IT suppliers who make contracts with consumers at a distance, particularly online. The consultation contains draft guidance on compliance with the Consumer Protection (Distance Selling) Regulations 2000 (the DSR) and in relation to the unlawful use of unfair terms under the Unfair Terms in Consumer Contracts Regulations 1999 (the UTCCR).

The purpose of the proposed guidance is to encourage IT suppliers who deal with consumers at a distance to revise their contracts so that they meet minimum standards of fairness and transparency under the UTCCR, as well as being compliant with those rights which consumers have under the DSR. The guidance is not designed to provide a comprehensive list of standard model terms, although the consultation paper includes useful examples of the worst offenders and the steps taken to remedy them.

Much of the guidance on the DSR is simply a restatement of the legal requirements around distance selling (eg the 7-day cooling-off period). Perhaps of more importance is the guidance on the UTCCR which will impact on the way IT suppliers draft their terms of business (in particular, global suppliers). It may also be that this guidance which relates to IT suppliers (which term is, unhelpfully, not defined) could be extended to cover all suppliers who sell to consumers at a distance.

Distance Selling

The DSR require suppliers to provide the consumer with clear information about the goods and services offered before the conclusion of the contract. There is also a further requirement to give additional information about the goods or services which information must be given, at the latest, when the goods are delivered or during performance of the services. This latter information must be provided in writing, or in another durable medium available and accessible to the consumer. The consultation paper does not provide a definition of durable medium. However, the consumer must be able to keep the information, unchanged, for the time it is needed, and access it for future reference. E-mails are therefore a durable medium but Web site information, which may change, will not, in the OFT’s view, meet this requirement. Suppliers will need to think how this affects their procurement systems. For example, e-mailing the requisite information will be acceptable but requiring a customer to print off a Web page may not be.

Other DSR requirements include an obligation on IT suppliers to perform the contract within 30 days, unless otherwise agreed. There is also in most contracts an unconditional right for the consumer to cancel. The cancellation period is seven days and the only condition that can be attached to it is to require the consumer to notify cancellation in writing or in another durable medium. There are certain exceptions to the right of cancellation. For IT suppliers, the one that matters is that relating to software which has been unsealed by the consumer.

All of these rights available to the consumer under the DSR run in parallel with the obligations on online IT suppliers under the Electronic Commerce (EC) Directive Regulations 2002. For example, those Regulations require suppliers to provide information about the operation of the online transaction such as the different tactical steps to follow to conclude the contract. They also require the supplier to acknowledge receipt of orders without undue delay and make available to consumers appropriate effective and accessible technical means to allow them to identify and correct input errors before they place the order. Failure to do this may result in the contract being rescinded by the consumer, which would have dire consequences if this failure affected all the supplier’s contracts.

Unfair Terms

The UTCCR provide that standard terms used by suppliers in contracts with consumers are unenforceable unless they are fair. A standard term is one which has been pre-formulated and has not been negotiated with the consumer. A term is unfair if it creates a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of consumers, and contrary to the requirement of good faith.

The UTCCR do not apply to B2B transactions, contracts between private individuals, or those that have been individually negotiated. Terms that set the price and/or define the product or service being supplied are the “core terms” of the contract and are also exempt from the test of unfairness provided they are in plain, intelligible language.

The most common types of unfair term, those which are essentially black-listed by the UTCCR, are those which have the effect, for example, of excluding or restricting liability for breach of contract, those that impose financial penalties on the consumer, allow the supplier the right to cancel without notice, bind consumers to hidden terms, or restrict the consumer’s legal remedies. These are but a few.

The Draft Guidance

The draft guidance looks in some detail at the compliance issues regulators have encountered in relation to online software supply and related goods and services. The final guidance will therefore act as a permanent reference tool for online IT suppliers. For example, in relation to the actual making of the contract, apart from the prior and additional information requirements under the DSR, the draft guidance stresses that such requirements apply again to any additional service contracts at a distance, such as PC support packages, that are associated with the main contract.

The OFT also indicates that it objects to terms that appear to allow the supplier to make arbitrary decisions after the consumer has placed an order, or terms that allow suppliers to vary the product, price, specification, offers and availability, arbitrarily without prior notice after the contract has been concluded. The draft also warns against the use of oral representations and statements that are in any way inconsistent with written terms and conditions. For example, written terms and conditions should not seek to exclude liability for any promises made orally, or provide that all binding terms and conditions are contained in the standard written contract and that these supersede oral statements or representations. A term that states that no employee has authority to vary or waive terms of the contract will also be considered unfair. This will clearly be an issue for telephone sales where suppliers may need to curtail operators’ abilities to be flexible when dealing with customers.

Other types of term and examples

The draft guidance deals with other aspects of the online contract in a similar way. It looks in turn at DSR and UTCCR compliance relating to price and additional charges; performance and delivery; variations of the contract; the issue of cancellation; warranties and support services; suppliers’ liability and consumer rights; terms relating specifically to software; sanctions for breach of contract by the consumer; risk; declarations required for consumers; arbitration and choice of law terms; and finally access and powers over consumers’ goods. The guidance is clear and does not need repeating word for word here. However, it is worth pulling out one or two of the more objectionable terms and conditions that the OFT has encountered. Take the following term, for example:

If you do not pay amounts owed on a timely basis, the company reserves the right to charge you interest on overdue amounts at such rates consistent with applicable law as may be fixed by the company from to time.

The OFT would find the following more acceptable:

If you do not pay amounts when due, the company will charge you interest on overdue amounts at the rate of 4% interest above the Barclays Bank base rate for the time being in force.

Another howler would be a term that says something like “Goods are not sold on a trial basis”. This is a clear interference with cancellation rights under the DSR. Similarly, saying that deposits are non-refundable on any goods under any circumstances will not be acceptable. Nor, as in one case, is a requirement that the “customer must obtain a Returns Authorisation Number from the company in order to be able to return faulty goods”. However, an element of force majeure allowing the supplier to cancel, vary or suspend a sale will be acceptable provided the consumer has the right to cancel the contract should the supplier seek to invoke that clause.

Dubious warranties

The OFT also makes it clear that apparent exclusion of statutory sale of goods rights by reference to a warranty is not acceptable. The same goes for any term making the exercise of a warranty by the consumer conditional upon an invoice accompanying any goods returned. Other clauses to which the OFT objects would include one in which the supplier accepts liability for defective goods only to the extent that the company is itself entitled to make a corresponding claim under its manufacturer’s warranty, or a term to the effect that a warranty is not transferable.


Other examples of unacceptable clauses include an exclusion of the supplier’s liability beyond the invoice value of goods or a term purporting to exclude consequential loss. Less offensive would be a clause restricting liability of each party to losses which are a reasonably foreseeable consequence of the relevant breach of contract. This is a significant point for multi-nationals (particularly US suppliers) who would be accustomed to limiting their liability in this way.

The OFT also makes it quite clear that suppliers should not exclude liability for defects in software licences in consumer sales. This is a linked contract for which the supplier is responsible. A licence to use is an integral part of the value of the software product being purchased.

Returned goods

Charging the consumer a fee for inspecting returned goods is not acceptable. Nor is limiting the consumer’s right to reject defective goods, for example by only offering a replacement rather than a full refund.


The deadline for responses to the consultation is 30 January 2004. Hopefully, final guidance will be available by next summer. In the meantime, IT suppliers would do well to examine the consultation paper to gain a clearer idea of the type of terms that will call their agreements into question. The fact that the OFT has produced the draft guidance at all is perhaps an indication of the regulator’s concern about lack of compliance with distance selling and unfair contract terms legislation in the B2C online software supply sector. Notably, the guidance is not only aimed at suppliers, but will serve as an aid to the OFT, trading standards, and other qualifying bodies, to take speedy enforcement action against contract terms that clearly fall within the types of unfair and non-compliant terms shown.

Mike Butler is an assistant solicitor in the Commercial and IP department at Hammonds: Michael. Butler@Hammonds.com