Global cosmetic retailer, Sephora, recently experienced some technical issues on their Australian website where the listed price of certain products was much lower than the standard retail price. Online shoppers rejoiced at the sight of a bargain – gleeful, squeals of delight pierced through the social media posts. The situation dramatically changed after Sephora cancelled some orders suspicious that the quantities ordered were not for personal use. Customers again took to social media to express their dismay.

So what happened? How did a situation with so many potential happy online customers land an unhappy ending? This article will briefly outline the circumstances before considering Sephora’s Australian Consumer Law (ACL) liabilities and lessons for businesses from this harrowing tale of online shopping.

Sephora, Sephora Online Store, Who’s the Cheapest of Them All…

On January 30 2016, Sephora Australia’s website displayed a range of cosmetic products at very, very low prices. For example, $10 was the advertised price for products that typically retail for $50. Make-up lovers in Australia and New Zealand went into overdrive. They spread the good news and glorified their purchases on social media. This wasn’t a sale. There was no advertised two-price comparison. Sephora simply listed products at very low prices. What resulted on the eve of January 30 was the twenty-first century’s equivalent of looting, except it’s anything but illegal.

Over the next few days, Sephora began correcting their product listings while some items also became out of stock, and no longer available for purchase online. Interestingly, Sephora issued some shoppers cancellation notices saying the order was “cancelled due to the large quantity of items ordered” and consistent with their terms of use, Sephora reserves the right to cancel orders when they suspected that their order “may not be for personal use”. Other posters alleged Sephora simply cancelled their order and provided a refund without giving any reason at all.

Don’t be a Big Bad Wolf

Before considering Sephora’s ACL liabilities, let’s first look at what provisions of the ACL apply to online businesses.

Compared to setting up a shop front, running an online business is often seen as a relatively straightforward process:

  • A simpler setup (no need to enter into a lease agreement for a brick and mortar shop front);
  • Your developer creates a site with mechanisms permitting shoppers to submit orders and make payment; and
  • Upon receipt of the order, you simply package the items and ship it to the shopper.

However as many business owners become aware, obligations and liabilities typically associated with the traditional brick and mortar stores still apply, particularly those under the ACL.

The Australian Competition and Consumer Act (2010) (Cth) contains the Australian Consumer Law and is enforced nationally to prevent businesses from misleading consumers or selling unsafe goods. We set these out below.

Consumer Guarantees

When consumers purchase goods or services, these come with a set of automatic rights that the goods will be of an acceptable quality or services will be performed at an adequate standard. Where a business fails to deliver on any of the guarantees, a consumer has the right to repair, replacement or refund; the right to cancel a service; and/or compensation for loss and damages.

Displaying Prices

Any price displayed should be clear and accurate so that it does not mislead your customers. You may be in breach of the ACL if you make any claims, including any price claims that are incorrect or likely to create a false impression.

Wrongly Accepting Payment

If you accept payment for product(s) or service(s), you must supply such product or service to the customer. It is illegal under the ACL to accept payment for a product or service, if you don’t, or you have no intention to, supply such product or service.

Unfair Contract Terms

It is typical for consumer-facing businesses, particularly online businesses, to offer every customer one standard set of terms and conditions that govern the terms of sale. Businesses can enforce the document when a customer agrees to the terms. Typically labelled Sales Terms and Conditions, these contracts are important because they outline the rights and liabilities of each party.

They are generically referred to as standard form contracts under the ACL because the terms and conditions of each contract are standard to each customer (i.e. there is little, if no room, for negotiations). The benefit to businesses here is that it promotes efficient market practice. Although an accepted market practice to create an enforceable contract, if the contract you offer your customers is in a standard form under the ACL and any term is deemed unfair, the term will be void (and consequently unenforceable). A term will be unfair if:

  • It would cause a significant imbalance in the parties’ rights and obligations arising under contract;
  • It is not reasonably necessary to protect the legitimate interest of the party who would be disadvantaged by the term (e.g. a customer); and
  • If applied to, or relied on by a party, it would cause detriment, financial or otherwise.

Honouring What’s on Display

Under the ACL, Sephora must honour any orders paid for by a shopper (referred to as a Customer for the purposes of this article), at the price they paid for at the time of the order. The ACL is not concerned with a business’ mistake or intention. By displaying goods at a particular price (regardless of the fact that they were well below standard retail), Sephora had to honour the price at the point of checkout. They cannot accept payment, and then ask the Customer to pay the ‘correct price’ or take the difference out of a Customer’s account using their payment details. In essence, the principles that apply to a brick and mortar store also apply to online stores. Consumer Guarantees will also apply to these products and must be honoured by Sephora.

Further, if Sephora has accepted payment for the products ordered, they may be obliged under the ACL to supply the products the Customer paid for unless:

  1. Failure to supply is due to a reason beyond Sephora’s control;
  2. Sephora took reasonable precautions and exercised due diligence to avoid the failure; or
  3. Sephora offers the particular customer replacement goods and the customer agrees to receive such different goods.

Where circumstances under point 1 or 2 occur, it may be reasonable for Sephora to offer the customer a refund. What is considered reasonable precautions and exercise of due diligence may vary depending on each situation’s facts. However, it may be relevant to consider the terms and conditions of sale offered by Sephora, and whether Sephora gives customers notice of these terms as well as any changes they make to the terms from time to time.

Protecting Your Online Business

When establishing your online business, it is important to consider the practical mechanisms and legal issues which can affect your online store. For example:

  • How many items consumers can ‘purchase’ before it is out of stock;
  • Whether you will impose limits on the number of products which can be purchased by consumers and whether you give consumers sufficient notice of such limits;
  • Whether you have a set of sales terms and conditions;
  • If you have a set of sales terms and conditions, are they adequate in protecting your liability but will not infringe the law against unfair contract terms; and
  • Do you understand the full extent of your obligations under the Australian Consumer Law?

Key Takeaways

Sephora’s recent online pricing mishap highlights some important issues. Whether a result of a glitch or mistake, pricing mishaps can happen and online retailers should be prepared to wear the consequences of such an event.

Questions about your ACL obligations, or do you require assistance with drafting your Sales Terms and Conditions? Ask our consumer and online business lawyers on 1300 544 755.

Lisa Lee

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