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Online transactions the “plane” truth

Feature Articles

Cite as: (2007) 81(12) LIJ, p. 50

The popularity of online auctions is based on an assumption that the process binds sellers and buyers to their agreements. But does it?

By Cameron Ross

The popularity of online auctions is based on an assumption that the process binds sellers and buyers to their agreements. But does it?
By Cameron Ross

The popularity of the Internet has created new types of commercial transactions. One is the online auction.

This article considers the recent decision in Peter Smythe v Vincent Thomas[1] (Smythe v Thomas) in which an Australian court considered for the first time the enforceability of arrangements between a buyer and a seller arising out of an online auction. The decision is relevant to online auction transactions, but is also an illustration of the application and adaptability of the law of contract to new types of commercial transactions.

Online auctions take place on the Internet. They may be business-to-person transactions or person-to-person transactions. The transaction occurs when a seller posts an item for sale on an auction website and potential buyers place bids for it. The major difference between an online auction and a traditional auction (such as an auction for the sale of land) is that an online auction is completed when a nominated deadline expires. At the expiration of the deadline the highest bidder is deemed the buyer provided that any reserve has been met.

For sale: one vintage aircraft

While the goods the subject of the dispute in Smythe v Thomas may be unique, the transaction considered by the NSW Supreme Court is representative of the online auction process.

Mr Thomas owned a rare World War II Australian aircraft and listed it for sale on the online auction website eBay, with a reserve price of $150,000. Mr Smythe subsequently made a bid of $150,000. At the conclusion of the online auction, Mr Smythe and Mr Thomas received a notification from eBay that Mr Smythe had “won” the aircraft.

Mr Thomas subsequently advised Mr Smythe that he had received an expression of interest to buy the aircraft for $220,000 outside the online auction and that he had really been hoping to get $250,000. Mr Thomas indicated that he did not consider the online process bound him to sell the aircraft to Mr Smythe. Mr Smythe issued proceedings on the basis that having been the highest bidder in the online auction, a contract for the sale of the aircraft was concluded. He sought specific performance of the contract.

The significance of registration

It is important to note that to use the online auction service both Mr Thomas and Mr Smythe had registered with eBay. As shown below, this was significant to the Court’s analysis of several issues because the registration process involved the seller and buyer agreeing to conduct the auction in accordance with the eBay terms and conditions.

Submissions to set aside online auction

In unsuccessfully contending that no binding agreement arose as part of the online auction process, Mr Thomas relied on three main submissions:

  • 1. The only contracts created during the online auction were between eBay and Mr Thomas and eBay and Mr Smythe and the online auction did not create circumstances where these parallel contracts crossed over to produce an agreement between Mr Thomas and Mr Smythe.
  • 2. The advertisement of the aircraft by Mr Thomas on eBay was no more than an invitation to treat.
  • 3. As the term relating to the time and method of payment was not agreed between the parties at the conclusion of the auction, there was no concluded agreement.

An explanation of the reasons provided by the Court for rejecting these submissions is set out below.

Contractual framework of the online auction

On the first submission the Court considered the nature of the online auction with particular regard to the eBay terms and conditions. Rein AJ noted that online auctions were a species of auction. He further noted that the automatic close of bidding at a fixed time and the generation of the advice by eBay that a buyer had “won” an item was the equivalent of the fall of the hammer in a traditional auction. However, he observed that an online auction was not an auction in the traditional sense in which the auctioneer acts as an agent on behalf of the seller. In a traditional auction three different types of contracts are created during the auction process:

  • an agency agreement between the seller and auctioneer;
  • a purchase agreement between the auctioneer and the buyer formed at the conclusion of the auction; and
  • a contract of sale between the seller and buyer.

The Court noted the eBay terms and conditions expressly stated the online auction website merely established a forum for communications between sellers and potential buyers. The Court relied on this to find, first, that no agency agreement arose between the seller and the online auction website and second, no purchase agreement arose between the online auction website and the buyer. In reaching this conclusion the Court referred to US authority that online auctions involve transactions consummated directly between the buyer and seller without the involvement of an auction house.[2]

It has previously been observed that sales at auction are difficult to fit into the traditional categories of offer and acceptance.[3] Nevertheless, the Court in Smythe v Thomas had the benefit of the eBay terms and conditions when considering what constituted the offer and acceptance. The relevant eBay terms and conditions were:

  • Where a person is the highest bidder at the end of the auction and the bid is accepted by the seller, then the bidder is obliged to complete the transaction.[4]
  • Where a person is selling an item and receives at least one bid above the stated minimum price, the seller is obliged to complete the transaction with the highest bidder.[5]

Accordingly, the Court held that the bid by the buyer constituted an irrevocable offer that was accepted by the seller when the auction concluded and the buyer’s bid was the highest price.

Invitation to treat

Mr Thomas’s second submission was that the placement of the aircraft on the online auction website constituted no more than an invitation to treat. In other words, the placement of the online advertisement was no different from an advertisement in a newspaper or brochure and, as a mere request to others to make an offer with a view to negotiating a contract, was not an offer capable of acceptance.[6]

The Court rejected this contention by referring to the eBay terms and conditions that a seller listing an item on the online auction website is obliged to complete the transaction with the highest bidder.

It is suggested that even in the absence of the unequivocal eBay terms and conditions, the act of listing the aircraft on the online auction website was an expression of willingness to contract with the highest bidder and satisfied the traditional criteria for an offer under the law of contract.[7]

Certainty of terms

The third contention by Mr Thomas was that because the time and method of payment for the aircraft had not been agreed, the absence of certainty of these essential terms meant no agreement had been reached. It should be noted that it is not uncommon for payment terms to be discussed after the conclusion of the online auction.

The Court held that this was not fatal to the formation of a contract. The approach by the judge reflected the approach to the issue of uncertainty and incompleteness whereby courts seek to adopt a construction which will preserve the validity of the contract.[8] The Court also referred to dicta that when considering the issue of whether a concluded agreement has been reached, an important consideration will be the number of matters remaining unresolved.[9] At the time the notional hammer fell to end the online auction, all terms but one had been concluded. Therefore the Court rejected the argument that the parties had agreed that there would be no binding agreement until payment terms had been resolved.

It may be that in the long term online auctions and other Internet-based transactions requiring prospective buyers and sellers to agree to the conditions for use of the Internet service will produce greater certainty because a clear record of the basis of the transaction will be created. Further certainty is provided by s7 of the Electronic Transactions (Victoria) Act 2000 that provides a transaction is not invalid if it takes place wholly or partly by means of electronic communications.

However, because online auctions are a new type of agreement it is likely there will be instances where a seller or buyer who has made a bad bargain electronically will ask whether the forum provides an adequate process for concluding an agreement. The Court in Smythe v Thomas provided some guidance to sellers on how to avoid difficulties associated with the possible uncertainty about the terms of agreements concluded during an online auction. The Court suggested that when listing an item a seller should “... specify elements of the sale that are important to him – method of payment, type of payment, and where appropriate exclusion of warranties where such exclusion is permitted by law”.

Where such matters are incorporated as part of the offer, they will be incorporated as terms in the concluded agreement.

Jurisdictional issues

Another potential area for uncertainty is the jurisdiction that applies to online auction contracts where the buyers and sellers are interstate or international parties. In Smythe v Thomas, the issue of jurisdiction did not arise because the parties agreed that the relevant law was New South Wales law. However, where there is a conflict between state laws governing such transactions or a conflict between the terms and conditions of an online auctioneer and relevant legislation, this issue may cause difficulties for both parties.

Liability of online auctioneer

Notwithstanding that the terms and conditions of online auction websites often state that contractual liability for online purchases is a matter between the buyer and seller, there is Australian authority that an online auction house may be liable to a buyer in certain circumstances.

In the Victorian Civil and Administrative Tribunal (VCAT) decision of Evagora v eBay Australia and New Zealand Pty Ltd,[10] an online auction buyer brought proceedings under the Fair Trading Act 1999 (Vic) (FTA) against an online auction house after goods that he had bought during an online auction were not delivered by the seller. The buyer’s claim sought to rely on representations made on the online auction website that all purchases were insured and that buying online with eBay was safe. The VCAT member noted that the FTA applied to online auctions as the online auctioneer provided a service, namely the provision of a venue for an auction, to both sellers and buyers and fell within the definition of “fair trading dispute” in the FTA. On the facts the VCAT member held that the buyer was induced to use the service by misrepresentations on the online auction website and was entitled to damages for the replacement costs of the goods he had bought.

Conclusion

In enforcing the agreement created during the online auction in Smythe v Thomas the Court was faced with the challenging task of applying contract law to one of the new types of commercial transactions generated by the Internet.

It has been suggested that the creation of new commercial relationships through e-commerce and the Internet will be the major platform for future growth of contract law and commercial law in general.[11] If this is correct, then the decision in Smythe v Thomas is an illustration of how the courts and the law of contract will consider such transactions.


CAMERON ROSS is corporate counsel at SingTel Optus, practising in commercial law and dispute resolution.


[1] [2007] NSWSC 844.

[2] US eBay Inc v Bidder’s Edge, Inc (2000) 100F Supp 2d 1058 at 1060.

[3] New Zealand Shipping Co Ltd v Satterthwaite [1975] AC 154 at 157 (Rutherford LJ).

[4] Smythe v Thomas, note 1 above, referring to eBay terms and conditions cl 4.

[5] Smythe v Thomas, note 1 above, referring to eBay terms and conditions cl 5.2.

[6] Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640.

[7] Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 at 457.

[8] Meehan v Jones (1982) 149 CLR 571 at 589.

[9] Australian Broadcasting Corporation v XIVth Commonwealth Games (1988) 18 NSWLR 540 (Gleeson CJ).

[10] .[2001] VCAT 49.

[11] Raymond Nimmer, “The legal landscape of e-commerce: Redefining contract law in an information era” (2007) 31 (1 & 2) Journal of Contract Law 10, 31.

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