‘Fair Warning’ – 7 Legal Risks of the E Auction

Online auctions (or e auctions) are big business and can catapult the regional auction house onto an international stage with access to new and dynamic global markets.

Companies such as eBay have added all kinds of auction capabilities to their websites in order to attract users and add excitement. But running an online auction – an auction which is held over the Internet – raises many legal issues both for the seller and the buyer.

This article looks at ways to mitigate the organisation’s risks which come from adding an auction to a company’s website. The information does not constitute legal advice and organisations considering an online auction should always seek expert opinion.

1. What kind of auction?

You might think that an auction is a sale where buyers bid the highest price for an item and the fall of the auctioneer’s hammer confirms the deal. This English auction is the most common type, but there are others and each carry their own legal risks and responsibilities, including:

  • Vickrey auctions – the highest bidder obtains the item at the price offered by the second highest bidder;

  • Dutch and Yankee auctions – auctions formatted to handle a situation in which a seller wishes to sell multiple, identical items;

  • First-price sealed-bid auction – a single bid is made by all bidding parties and the single highest bidder wins, and pays what they bid. The main difference between this and English auctions is that bids are not openly viewable or announced as apposed to the competitive nature which is generated by public bids;

  • Reverse auction – where the roles of buyer and seller are reversed. Multiple sellers compete to obtain the buyer’s business and prices typically decrease over time as new offers are made. They do not follow the typical auction format in that the buyer can see all the offers and may choose which they would prefer. Reverse auctions are used predominantly in a business context for Procurement.

  • Bidding fee auction, or penny auction requires customers to pay for bids, which they can increment an auction price one unit of currency at a time

2. Bidder terms and conditions

Sophisticated auction websites such as eBay publish several policies that cover the variety of goods intended for auction. Less sophisticated sites will still need to carry bidder terms and conditions which include:

  • the method by which bids will be processed;
  • how winning bids will be handled;
  • how winning bidders will be notified;
  • the use of “reserve” prices (a secret price below which no bid is accepted); how disputes between bidders will be addressed;
  • how merchandise and payments will be shipped;
  • refund and return policies;
  • information on fees, membership eligibility requirements, and feedback mechanisms;
  • which country’s jurisdiction and laws will apply.

The rules may also include a list of prohibited items due to their potentially hazardous or unlawful nature (e.g., firearms, chemicals, or fireworks). Some countries may also prohibit certain products, such as France’s ban on the sale of Nazi memorabilia.

The European Distance Selling Directive does not apply to online auctions so bidders acting in a private (rather than a business) capacity do not have the right to a cooling of period, as consumers generally do when purchasing products ‘at a distance’.

3. ‘Sale of goods – as seen’

Offline, items are sold in auction ‘as seen’. Companies that are auctioning off their own goods (as opposed to merely creating a forum for third party transactions) should be particularly aware of the legal issues that auctioning specific items may pose, such as rare wine which may be subject to pricing or shipping regulations. Similarly, although companies may be tempted to describe their goods for auction with glowing words to encourage bidding, they should bear in mind that all the rules, regulations, and laws which govern the conventional sale of goods still apply.

4. Privacy

Most auction sites require that users, both bidders and sellers, register before participating. The registration process usually involves collecting some user information, including name, address, phone number, etc. The auction site owner should publish and adhere to a “privacy policy” regarding how it collects and utilizes user information online. This includes compliance with the EU cookies rules in EU member states as well as Data Protection.

Auction rules do vary significantly in other countries, so companies may wish to limit participation to their own country. However, if you do allow those in other countries to participate in online auctions, you must be aware of international privacy laws and regulations.

5. User feedback

Following the lead from eBay, many auction sites now provide a feedback mechanism through which registrants can provide post-transaction commentary about other users. This user “feedback” is meant to keep the bidding process open and honest, and to allow customers to communicate their satisfaction or dissatisfaction with the seller and its goods. However, user feedback has already become the basis of at least one libel lawsuit, in which one car retailer sued another, alleging that the defendant had posted false and defamatory feedback.

Companies should incorporate rules concerning the content of user communications in their web site terms and conditions (not the same as bidder terms and conditions) as well as expressly disclaim all responsibility and liability for user-provided content.

6. Website terms and conditions

Website terms and conditions govern visitors’ use of your website. It covers issues such as legal notices, ownership of intellectual property, use of hyperlinks and disclaimers.

A “clickwrap” agreement requires the users to view the agreement and click “I Agree” or some similar wording before gaining access to the site or a feature. Terms and conditions are usually accessible through a link at the bottom of the home page of the site and do not require viewing or consent. Although many companies opt to have terms and conditions rather than clickwraps because of their more user-friendly nature, as between the two, clickwraps are more likely to be found to be enforceable in court.

7. Money laundering

In a cash high business, you have to take a zero tolerance attitude towards money laundering. Not only will the regulators come down heavy on an organisation that doesn’t have sufficient controls in place to prevent money laundering, but it also doesn’t look good from a commercial and professional standing.

And finally…

Auction companies tend to outsource the online part of their operations to hosting companies such as i-bidder. Not only does this ensure that expertise and service is consistent, but the auction company will also get access to a wider market as well as Internet savvy customers. All in all, professional auction houses will always ensure that customers have a safe and enjoyable browsing experience when bidding online.

The Benefits and Risks of Real Estate Auctions

As many people have discovered, the traditional realtor firm isn’t the only way to sell a property. Real estate auctions are increasingly popular among people who buy and sell properties. As an alternative to the traditional marketplace, “[t]he benefits of selling via auction are particularly obvious during the bidder qualification period.” (Source: “Brokers See Benefit of Auction Process”, National Real Estate Investor) If you haven’t considered the auction route, you should keep the following benefits and risks associated with the auction process in mind. You may find that it suits your property-selling goals.

Benefits of Real Estate Auctions

One of the major reasons sellers seek the auction format is because it often allows them to dictate terms and conditions as well as a deadline. Selling for cash also allows sellers to move forward with their plans without delay once the sale is made. Since roughly 90% of auction sales close, there is every possibility that the deal transaction will close without a hitch–particularly with pre-approved buyers in attendance at the auction.

When it comes to complicated properties, many auction houses actually recommend the use of brokers. This provides sellers with the best of both worlds–the auction format coupled with the selling expertise of the realtors. Often sellers obtain great prices for properties they sell at auction–more than they expected. This is usually because buyers come prepared with a cap and may bid until they reach that cap.

Risks of Real Estate Auctions

While selling properties at auction often results in a great deal, it doesn’t always. There isn’t any guarantee that the price will be bid up by other interested parties. Also, sometimes bidders do not have the opportunity to have home inspections. Buying a home without an inspection is risky for the buyer, so the more inspection information you can present the better. Property sellers “have dozens of decisions and choices on both advisor sale terms and many auction formats.” (Source: “Commercial Real Estate Auctions in Soft Markets”, Heritage Global Partners) It’s important to weigh these considerations carefully. What is the minimum acceptable bid or can the property simply be let go to the highest bidder? These questions must be mulled over in advance.

Sellers who sell at auction have to rely on marketing. While a great auction firm often has regular clientele, some may not do all they can to market your auction. You may want to promote your upcoming sale online or at other venues in order to attract potential buyers to your sale.

Work with a Reputable Auction Firm

When you attend auctions hosted by reliable and respected auction houses, you’ll feel more comfortable about the process and may even find that some risks are mitigated. Many sellers find the auction route liberating. They can plan accordingly because they know what day they are selling their house. Working with a trusted auction firm with experience in real estate is essential for sellers who may be new to the action process.

These are a few of the pros and cons associated with selling a property at auction. Before you make your decision, talk to an auction house that can answer your specific questions and address all your needs.

Source:

“Brokers See Benefit of Auction Process”, National Real Estate Investor, http://nreionline.com/retail/brokers-see-benefit-auction-process