Ordering online: when do you own what you have paid for?

Answer

Since 1994, when Dan Kohn sold a Sting CD in a transaction many sources regard as the first online shopping transaction, internet retail has been growing at a steady pace. Businesses had been gradually expanding their online offerings to match increasing demand, with some customers still cautious to make the switch. However, the pandemic left retailers and shoppers with no alternative and online sales have accelerated in a way that could not have been anticipated.

Pre-pandemic, e-commerce accounted for around 19% of total retail sales. During the pandemic, this percentage has peaked at nearly 37%. Research by Retail Economics and Natwest suggests that since March 2020 nearly half of UK consumers have now purchased a product online which they had previously only ever bought in store.

The pandemic also brought a significant rise in retailer insolvencies. Purchasing goods online poses different risks to consumers compared to shopping in-store. One such risk is that a retailer could become insolvent after you have paid for the goods, but before you have received them. This poses the question: who owns these goods?

When do you own what you order online?

Typically, consumers would look to the Consumer Rights Act 2015 (CRA) for protection; the legislation drafted with consumers in mind. However, when it comes to the transfer of ownership of goods, we must still rely on the Sale of Goods Act 1979 (SGA) and a position that remains largely the same as it was in the late 1800s.

The SGA sets out the basic principle that ownership of goods transfers to the consumer when the parties intend it to do so (section 17(1)). This means consumers must examine the retailer's terms and conditions to find the point at which ownership transfers. This point can vary greatly between retailers and can lead to uncertainty for consumers.

If the contract is silent, the rule in section 18 may apply; that property passes to the buyer when the contract is made. As this is consumer-friendly, traders often make express provision to displace this rule or seek instead to delay the formation of the contract. Retailer terms and conditions often state that a contract is not formed until goods have been dispatched.

Law Commission report

In April 2021, the Law Commission reported on the transfer of ownership in consumer contracts and produced draft legislation in an effort to simplify and modernise the rules.

The Law Commission's view is that the current position is old-fashioned and unclear. The report states that the current rules "…were not designed with consumer transactions in mind, let alone internet shopping…". The result is often confusion for consumers, particularly in the event of retailer insolvency, where consumers struggle to understand why they cannot claim for goods that they have paid for.

The draft Bill would introduce new rules into the CRA. When a product is purchased online, there would be a range of points that could trigger the contract of sale. For most goods, ownership would transfer to the consumer when the retailer identifies the goods to fulfil the contract (eg, when the goods are labelled, set aside or altered to the customer's specification).

However, the Law Commission points out that, on deciding whether to implement the Bill, the government would need to strike a balance between the potential benefits to consumers and the cost implications for traders and insolvency practitioners. Also, given that it is common for businesses to delay contract formation until goods are dispatched, the reform may have limited impact in practice (and may even encourage such delays).

The report notes that delaying contract formation may affect consumer rights. One example given is that under the CRA it is an implied term of sales contracts that retailers must deliver the goods to the consumer, unless agreed otherwise. If a contract is not formed until dispatch, this obligation to deliver the goods will not technically arise until the retailer has already sent the goods for delivery – making this obligation redundant. The Law Commission does not consider this practice of delaying contract formation to have a significant impact on consumers, yet, but recommends that this be kept under review.

For more information, please see the Law Commission's summary report and full report and draft bill.

What happens next?

The next step is for the Department for Business, Energy and Industrial Strategy (BEIS) to decide whether the Bill should proceed. The government will consider the factors and opinions put forward by the Law Commission.

It is still unclear whether the increased online sales activity is here to stay. However, with mobile phone use also on the rapid incline, and an estimated annual global consumer spend of $270 billion on mobile alone by 2025, it seems likely that consumer rights relating to online sales will become a focus point going forward. Businesses must keep fully informed of any developments in this area to ensure their terms and conditions remain fair and enforceable.

Abbey Smith is a solicitor in the commercial team at Michelmores LLP.