Internet Auctions, Agency and Consumer Rights

November 1, 2003

Despite the wider economic gloom, consumer spending has been buoyant in the last couple of years, nowhere more so than on the Internet. A recent survey suggests that UK online shoppers are becoming much more comfortable with online purchasing. Sales have now reached the level of £1bn mark in just one month and since 2001 Internet sales have almost doubled. Online auction houses have not missed out on this sales boom. eBay reported profits of £54m ($87m) in the fourth quarter of 2003, and QXL, eBay’s British rival, indicated that they will move into profit a year earlier than expected.

The ‘Classic’ Auction

Although auctions may differ from country to country, generally they comprise two essential elements. First, the price is determined in competition – two or more people compete for the goods to be auctioned. Second, the price is established for a single transaction only – a one-off price.

There are a number of different types of auctions, such as Japanese auctions, Dutch auctions or ascending-bid systems. There are also different ways in which the host of the auction can participate in the auction. The host may also be the buyer (eg e-tendering) or the host may be the seller. Most often the host acts as an intermediary, effecting (or at least helping to effect ) the contract between buyer and seller. Most of the popular Internet auction sites, such as eBay, uBid or QXL operate on this basis and it is this ‘classic’ auction (typically with ascending bids) which we shall use as the basis for our discussions here.

Physical Auctions v Online Auctions

Contracts in a traditional ‘physical’ auction are created by way of agency. The auctioneer acts as the seller’s agent for the purpose of negotiating or effecting a contract with the buyer. Although actual authority to act as agent is generally given expressly, it can be implied. Auctioneers negotiate the contract between buyer and seller by way of a bidding process and the contract is formed on the fall of the hammer. Buyers can physically inspect the goods on offer before the sale to verify they correspond to description. Once the sale is complete, the buyer pays the money to the auctioneer who then releases the goods, deducts his commission and forwards the remainder onto the seller.

In most of the key respects, online auction companies would seem to carry out the same function as the physical auctioneer. They set down rules and operate auctions in the same way, albeit that the fall of the hammer is replaced by the less impressive, but no less onerous, expiry of a set time period. Online auctions list and describe the goods to be auctioned in the same way as auctioneers do – and multimedia presentations of the goods, as opposed to two-dimensional representations in a catalogue, may even provide a better service.

Although it is true that online buyers cannot inspect goods prior to sale, many buyers at physical auctions don’t bother. Whereas online auction sites cannot physically control/withhold the goods until payment, many sites operate escrow systems or secure payment methods, such as PayPal, which at least provide some assurance to buyers over the existence of goods prior to purchase. In saying all of this, it should be borne in mind that the sale price is secondary; it does not affect the relationships that arise at auction.

It therefore appears that, with the exception of the physical control of the property, online auctions operate in a similar way to physical auctions. It would also seem that the role of the auctioneer is similar in each model of auction. Traditionally, the auctioneer is an agent yet you won’t find much in the way of support for this view if you look at the terms and conditions which govern the use of Internet auction sites.

Secret Agent?

Internet auction sites state that they are providing a service, a mere means for buyers and sellers to get together. Internet auction operators purport to be ‘mere conduits’, like ISPs; they claim that they act as a venue, and are thereby not involved with the contract between buyer and seller. Specifically they do not want to be seen as agents.

Now, all of this makes perfect sense from the auction sites’ point of view. Occupying the position of agent carries with it certain responsibilities and one can understand why they would want to steer clear of any such implication. Also, personal liability may attach to the agent in certain circumstances. For example, if the agent is a party to a deed or negotiable instrument; if they contract on behalf of a non-existent principle; if they are guilty of deceit; or, most relevant here, where they contract on behalf of a foreign principal (the fact of a foreign principal may help to determine the mutual intentions of the parties regarding personal liability). Other liabilities arise where the agent:

  • acts without authority – actionable by a third party who has suffered loss.
  • acts in breach of warranty of authority – actionable by a third party.
  • acts in the knowledge that they do so without authority – actionable by a third party for deceit.
  • fails to take reasonable care to represent the existence and extent of authority – actionable by a third party for negligent misstatement.

It is also true to say that the auction sites would benefit from a certain amount of protection by virtue of any agency; for example, principals must indemnify agents against all liabilities and claims which the agent reasonably incurs in performing its duties. Nevertheless, the auction sites are no doubt less interested in this aspect than in avoiding potential liability at the outset.

The argument runs that the rules attaching to auctions were never intended to apply to Internet auctions. However, in the same way as this does not prevent the application of contract law to e-commerce, this argument shouldn’t render these rules inapplicable. Whether a relationship of agency exists in any situation depends not on how the parties choose to describe themselves but on the true nature of the circumstances that exist between them – and agency may arise despite a provision in an agreement that it shall not (see Re Neville ex p White (1871) and Customs & Excise Cmrs v Pools Finance (1937) Ltd [1952] 1 All ER 775).

The classic test of agency is whether one party is authorised by another to contract on behalf of that party. The auctioneer in a physical auction acts in just such a capacity, holding the ability, often express, to conclude a contract with the buyer on the seller’s behalf. The credibility and effectiveness of the auction itself relies on this authority. Although there is no direct authority on this point, we consider that online ‘auctioneers’ occupy a similar position. Online buyers usually have no idea who the seller is until the bargain has been struck online. The seller’s details are then made known to the buyer in order that the parties may make arrangements for settlement and delivery of the goods. The online auction company needs to ensure that the contract is formed on the expiry of the relevant timescale, otherwise the business model fails. In their terms and conditions, the online auction companies make it clear that sellers are obliged to conclude the transaction with the highest bidder, provided any reserve or minimum price has been achieved, so giving the online auctioneers the authority they need.

So the online auction companies may well be saddled with the types of liability which we outlined above and unless the auction companies have worded their exclusions or limitations of liability carefully enough, it is quite possible that in denying their status as agents, they may inadvertently give the courts cause to strike-out clauses which might otherwise give the auction sites protection. Also, and perhaps more importantly, if the agent has set out clearly in writing the scope of its warrant of authority and operates within that authority, then it is far less likely that it would be liable for exceeding or breaching that warrant. Where it has made no effort to set out that warrant, that ambiguity may work against it.

When one considers that, in broad terms, if an agent discloses the existence (but not necessarily the identity) of the principal, they will then normally have no rights or liabilities on the concluded contract, it emphasises that it may be a better strategy for auction houses to be clear on their status and to make that status clear on their site and in their terms.

These points gain added importance when one considers that 80% of eBay sales were made by 4% of its sellers. What we are witnessing is a fundamental change in the function of auction sites. They are still being used by some as a means of clearing out the unwanted printer, golf clubs or whatever but they are being used increasingly as a marketplace for businesses, albeit one where the traditional pricing of goods no longer applies. If so small a percentage of eBay’s sellers are responsible for so large a slice of revenues, have eBay not moved (or been driven by market forces to move) into the function of a business to consumer medium? If so, what is the nature of eBay’s relationship with this small but powerful group of sellers and how should they be looking to address and document or delimit their relationship or role with this important group? Is it still right to say that, as regards these sellers, eBay is no more than a conduit?

There is also increasing concern that auction sites are being used to sell counterfeit goods. It has been argued that an action for trade mark infringement may be more effective against the auction sites than against individual sellers; all of which emphasises the importance of being clear about the role which the site owner plays in the process.

Consumer Legislation

The statistic mentioned above also raises the issue of the status and function of auction sites generally. By and large, consumer legislation does not apply to sales by auction. The protections and assurances of standards, such as goods being of satisfactory quality or fit for their purposes fall away where auctions are concerned and the buyer is warned to beware.

Auction sites can, and do, disapply legislation, such as the Sale of Goods Act, to the extent they are able. The Distance Selling Regulations 2000 do not apply to sales by auction.

Certain legislation does bite, such as the Trade Descriptions Act 1968, which ensures that a buyer may have a claim if he or she:

  • bought the goods without seeing them first; and/or
  • relied on the seller’s/auctioneer’s skill and expertise to sell them what they needed.

However, if the auction sites are successful in claiming that they are mere conduits who have not seen the goods, then the buyer will only be able to look to the seller for compensation. In many cases, the seller may be difficult to track down or may be abroad, in which case, the chances of recovering the monies may be slim. Online auction sites are very careful to state that the responsibility for arranging the exchange of money and goods lies in the hands of the seller and buyer and is not the responsibility of the site. Practically speaking, the buyer would be well advised to consider the escrow arrangements which some sites operate to ensure that buyers get something for their money.

More fundamentally we might ask if it is right that the 4% of sellers who were responsible for 80% of eBay sales ought to be able to trade in this way, relatively free from the restrictions to which sellers would otherwise be subject?

Time to Reconsider

The function of Internet auction sites is changing and in that change we are seeing the start of new ways of pricing and buying goods and services. We are also seeing new types of businesses emerging to take advantage of these changes. We are not proposing steps here to stop this development but we are suggesting that we need to be aware of these changes, to ensure that consumers are not unfairly prejudiced – and that perhaps it is time to reconsider the role which Internet auction companies occupy, and their degree of involvement and liability – given the changes that are taking place.

James Mitchell is an Associate in the IP and Technology Department at Maclay Murray & Spers, and is based in their London office.