UK: Not A Pretty Picture: Lessons From Eastman-Kodak’s Recent E-Commerce Disaster

At the start of the year Eastman-Kodak found itself in a real mess when it made a mistake in the pricing of a digital camera advertised on its website.

The company’s EasyShare DX3700 digital camera was advertised at £100 on its e-commerce enabled website when in fact the correct price of the camera was £329. Although the camera was only advertised at the lower price for a few hours on December 31st 2001, news of the bargain seems to have spread like wildfire across the internet and several thousand orders are believed to have been made before the mistake was noticed and rectified by Kodak.

Initially Kodak refused to honour orders for the camera that had been made before the pricing mistake was discovered. However, after several weeks and widespread media coverage, and the formation of a number of action groups by disgruntled customers threatening legal action, Kodak belatedly agreed to honour orders for the camera made at the lower price.

The direct financial cost to Kodak of remedying what appears to have been a straightforward clerical error is likely to be considerable. Although Kodak’s precise exposure is unclear, as it will not confirm exactly how many people ordered the camera at the lower price, some commentators have estimated Kodak’s potential direct losses to be as high as £500,000. The indirect cost of the mistake may have been substantially increased by Kodak’s aggressive handling of the situation after it became aware that an error had been made.

1. Make clear on what basis the offer is made

Kodak initially said that it had not accepted orders made for the camera at £100 and claimed that no contract of sale had been formed with the customer. Kodak argued that placing an order for goods via their website was similar to bringing goods to the till in a shop, a situation where it is settled law that a contract is only formed when the seller subsequently agrees to sell the goods. Consequently, said Kodak, they were entitled to accept or reject orders for the camera made through its website. However, in the circumstances this issue is arguable and to avoid any dispute Kodak should have made clear from the start whether their website presented an offer that was capable of immediate acceptance or whether the contract was formed only upon confirmation of the order.

2. Get the wording of standard e-mails right

Making clear the basis on which a website offer is made is just the start. An e-trader must also take great care with the wording of any e-mailed responses that are sent to the customer, especially those which are sent automatically. In some circumstances automatic e-mail responses may result in the seller entering into a binding contract of sale before they intend to, or on terms which are greatly disadvantageous to them because of errors on their website.

In Kodak’s case, it sent an e-mail confirmation to each customer. This e-mail confirmation contained all the relevant order information, referred to itself as a contract, and gave information about how the customer could cancel "this contract", as well as providing a hypertext link to more detailed terms and conditions of sale. Even if Kodak was correct that placing an order for goods via their website was legally similar to bringing goods to the till in a shop, the wording of its confirmatory e-mail had the effect that Kodak accepted the customer’s offer to buy and was contractually bound to sell the camera for £100.

The immediate sending of its confirmatory e-mail to customers made it impossible for Kodak to identify the problem with the pricing and rectify it before accepting the order. A better approach would have been for Kodak to send an automatic e-mail acknowledging receipt of the order making it clear that no contract was formed until the confirmatory e-mail was sent, which would then follow after 24 or 48 hours. A time-lag between order and confirmation (and the formation of a binding contract) would have given Kodak an opportunity to reject offers to buy the cameras for £100.

However, a seller cannot wholly dispense with an order confirmation as the Consumer Protection (Distance Selling) Regulations 2000 require amongst other things that when an order is made at a distance (that is to say, not in person) certain information must be confirmed in writing by the seller to the customer before the contract is performed.

3. Make sure the standard terms of the offer are binding on the customer

Had Kodak done enough to ensure that their standard terms and conditions of sale were binding on customers? Merely offering a hypertext link to standard terms may not be enough where the customer is not required to verify that they have read and agree to be bound by the conditions before entering into the contract. It would have been preferable for Kodak to ensure that the customer explicitly accepted the standard terms before confirming the order. These terms could have made it clear that the customer’s order still required acceptance by Kodak before forming a binding contract of sale.

4. Say who the seller is

Kodak’s website did not make it clear who legally was the seller, Kodak or the company that ran the e-commerce operation on Kodak’s behalf. E-traders should make sure that their websites inform the customer clearly of the identity of the seller with whom they will be contracting. The Distance Selling Regulations require customers to be informed of the identity of the seller before the contract is made.

5. Don’t expect customers to sympathise with your difficulties or blindly accept your explanations

Of course it’s always easy to be wise after the event, but with hindsight Kodak could have handled the situation a lot better. A point blank refusal to honour orders was bound to inflame an already difficult situation, and before doing so Kodak should have made certain that its position was legally watertight. Instead they tried to argue a legal position that clearly had potential flaws. The result was that when Kodak finally backed down, not only did it have to take a nasty financial hit but it was also made to look as if it had only done the right thing when forced to do so. With a little bit of foresight Kodak might have turned an expensive blunder into a great marketing opportunity.

6. The internet offers great new opportunities, but also brings new dangers

Kodak’s unfortunate experience highlights some of the legal problems that can arise when doing business on-line. However, not all of the problems encountered were related to the legal minefield, but resulted from the ease with which the internet can be used for mass communication.

Not only did news of Kodak’s "special deal" spread rapidly, greatly increasing the number of orders made in the short time the camera was offered at the low price, but aggrieved customers were able to publicise the situation and coordinate their action in a way that would have been impossible using more traditional mediums.

Looking beyond Kodak’s particular difficulties, sales made through a UK based website are regulated to a much greater degree than sales made to a customer in person. As well as the usual laws which apply to all sales, those carrying on e-commerce must also be careful not to fall foul of additional legislation dealing with distance selling and data protection. Soon, even more legislation aimed specifically at e-commerce will deal with issues such as taxation and general principles relating to contracting on-line, and e-traders would be well advised to keep on top of these upcoming changes in the regulatory landscape. E-commerce may offer sellers great opportunities, but it can also present real dangers to the unprepared.