The Control of Unfair Terms in Online Auction Contracts

Chapter 5
The Control of Unfair Terms in Online Auction Contracts

Contracts with (and on) online auction platforms are not the result of negotiation. The consumer is presented with a standard form contract, proposed on a ‘take it or leave it’ basis, and where small print may hide a multiplicity of sins.¹ Terms that may be unfair need to be controlled, in order to correct the imbalance between the supplier, who imposes the terms, and the consumer, who has little choice but to accept them or walk away.²

Directive 93/13/EEC on Unfair Terms in Consumer Contracts (UTD)³ provides protection from unfair terms that have not been individually negotiated.⁴ Any terms found to be unfair are not binding on the consumer.⁵ According to Article 5 UTD, a contractual term is ‘regarded as unfair if, contrary to the requirements of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’.

I conducted a study into the terms and conditions applicable to consumers entering into a legal relationship with a sample of 28 online auction platforms (14 online auction intermediaries and 14 proprietary sites). The terms and conditions were collected between February 2012 and March 2013.⁶ The terms and conditions collected varied greatly in their content. Some sets of terms and conditions were very succinct (less than a page), while others were very detailed and lengthy.⁷ This accounts for some discrepancies in the results. Indeed, the size of the sample for each particular term studied varies because some terms did not feature in all contracts. While in those cases fewer consumers are likely to be affected, it remains that the volume of consumers affected is not a measure of the unfairness of clauses.⁸ Indeed, by means of private enforcement, only one consumer affected is sufficient for legal action to take place. Further, the measure of fairness in the UTD does not simply rest on actual impact, but rather on the propensity for a clause to cause a significant imbalance to the detriment of the consumer. Public enforcement also offers the ability to strike a clause out from contracts before any consumer detriment occurs. Therefore, the presence of a clause which is likely to cause detriment due to its unfairness is sufficient to justify its study. As a result, the survey considered that clauses used, even by a small number of sites, had sufficient significance to be included in the survey results. However, the survey did not include the study of terms for the sales taking place on intermediary platforms for lack of availability of relevant data. Few of those sales in fact contained what would resemble terms and conditions. It is regrettable because anecdotal evidence shows that at least some terms used by traders on intermediary platforms are potentially unfair; but this necessitates further studies beyond the scope of this book. By contrast, the survey included the terms of sales on proprietary websites because those terms were combined with the terms and conditions applying to the consumer’s relationship with the website.

The survey focussed on a series of terms that may be regarded as unfair, all listed in the Annex to the Directive. The unfairness normally stems from granting traders ill-defined discretionary powers, especially when no equivalent protection is extended to consumers, or terms imposing disproportionately heavy burdens on consumers and protecting the trader from claims that the consumer would ordinarily expect to be able to make.⁹ The terms listed in the Annex still need to be assessed on a case by case basis to decide if they create a significant imbalance between the parties. Further, unfairness is not assessed in isolation. Under Article 4(1) UTD, the:

unfairness of a contractual term [is] assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of the conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.

With this in mind, I studied a series of terms identified as potentially unfair, taking into account a number of factors. This included assessing if the terms were understandable, because the Directive imposes an obligation on traders to express terms in plain and intelligible language. When it is not the case, the term is to be interpreted against the supplier.¹⁰ The assessment also included evaluating if the process by which the consumer is committing himself is transparent and compliant with the requirement of good faith.¹¹ Good faith involves fair dealing and the absence of ‘sharp practice’.¹² It ‘is not an artificial or technical concept (…). It looks to good standards of commercial morality and practice.’¹³ The requirement of good faith is one of fair and open dealing. This dictates that the professional, whether the online auction platform itself or a seller on an intermediary platform, must behave in a way which enables the consumer to make a well-informed choice, having knowledge of the terms of the contract and what they imply. It was not always possible to assess a term within the full economy of the contract, including the circumstances surrounding its conclusion or other ancillary contracts.

Yet, despite this limited assessment of terms, the survey showed some worrying trends and raises serious concerns. For example, out of the 28 sites surveyed, 75% reserve the right to arbitrarily cancel or suspend an account. On intermediary platforms, such a clause was found in 86% of cases compared to 64% only on proprietary websites. Despite an array of justifications being used in contracts, too often discretion was the ultimate measure enabling online auction platforms to take action. The problem was compounded by the absence of reliable notification procedures. Seventeen platforms made use of terms enabling them to unilaterally modify the contract. The poorest practices consisted in reserving the right to revise the terms and conditions without giving prior notice. Worse, many platforms put the onus on the consumer to keep up to date with changes without receiving a notification of changes. Nineteen sites used a clause concerning the unilateral modifications of the service (68%). Most clauses (79%) were covert terms and not easily identifiable in the contract; nor did they give reasons for modifications. Notification practices were poor and did not really give consumers a chance to walk away.¹⁴

This chapter proceeds with analysing the fairness of hyperlinking practices, as well as a selection of terms (unilateral modification to the price, limitations of liability and dispute resolution clauses), before reflecting on some solutions to improve the protection of consumers against unfair terms in the online auction context.

1 Fairness of Hyperlinking Practices

The terms and conditions are normally first communicated to the consumer during the registration process. Platforms, by and large (68%), made use of a formal acknowledgement procedure, ensuring that the consumer has formally agreed that he/she will be bound by those terms.¹⁵ However, the terms and conditions were seldom displayed on the registration page itself. One of the most widespread practice was that of hyperlinking. For example, on eBay the registration page states: ‘By clicking “submit” I agree that I accept the User Agreement.’ This statement provides a hyperlink to the user agreement in question. When clicked, the link opens the user agreement in a pop-up window. Worse, some of the terms those agreements refer to often needed to be located by clicking on yet another hyperlink.¹⁶ In the most problematic cases, the terms referred to were not available through hyperlinks and could not be located.

The question is therefore to determine if terms communicated via hyperlinks can have any force. In the UK, to have an effect, terms need to be fairly brought to the attention of the other party before the conclusion of the contract,¹⁷ in particular if the term is onerous.¹⁸ Terms can be incorporated into contracts via the use of electronic signatures (not used in the online auction sector) or click-wrap, browse-wrap and web-wrap methods:

‘Click-wrap’ means that positive assent to the displayed terms (e.g. by an ‘I agree’ button) is required. ‘Browse-wrap’ means that the terms are accessible via a hypertext link. ‘Web-wrap’ denotes a notice to make entry into and further use of the website conditional on posted terms and conditions.¹⁹

The validity of click-wrap methods is not disputed, but is seldom used in isolation in the online auction industry. Too often terms were also incorporated via the use of hyperlinks, even in cases where consumers had clicked on an ‘I agree’ button, leaving the validity of their agreement in doubt.²⁰

Some of the clauses encountered in online auction contracts attempt to circumvent the issue. They indicate that the consumer agrees to terms being incorporated by reference. The survey identified that 39% of sites (a total of 11 sites out of 28) did carry a clause that would incorporate terms by reference. This was made out of 29% of proprietary platforms and 50% of intermediary platforms. In all but one case the clauses seem to be unfair.

For example, the terms collected for the survey showed that on eBay, users agree to the terms contained in the terms and conditions as well as terms available via hyperlinks and the general principles for the websites of subsidiaries and international affiliates. While the consumer has agreed to be bound to the terms and conditions, such terms are unfair. This is because the terms are not directly available to him. Indeed, they are the terms and conditions of an affiliate or subsidiary thereby incorporated by reference. This potentially binds the consumer before he has an opportunity to get acquainted with the terms and, in some cases, even before the affiliates become a working partner of the site. This is likely to cause a significant imbalance between the rights and obligations of the parties, to the detriment of the consumer, because the latter will be bound to terms either contained on a different website (that of the affiliate) or to any terms that do not yet exist. This is especially detrimental since no obligation to inform the consumer about any such terms he or she may be subjected to could be located in eBay’s terms and conditions. Another example was found on CQout’s terms and conditions which indicate that: ‘Website rules are generally displayed at the point of use and summary can be found on the help pages [site rules].’ The statement uses a hyperlink. In this case, the use of the adverb ‘generally’ seems to indicate that the site tends to disclose its rules, but may not be obligated to do so. Further, the hyperlink only goes to a summary of the rules and not the rules the consumer will actually be bound by. If the rules are not displayed at the point of use (whatever that may be) or via the hyperlink provided, where are they to be located?²¹

While hyperlinking can be an acceptable method of bringing consumers’ attention to particular rules, the survey found that on many online auction sites, reference by hyperlink was so common that consumers could in fact get lost in a jungle of information. Yet, under the Annex of the Directive (i), terms that have the object or effect of ‘irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract’ may be regarded as unfair. For a term to be binding, notice about its existence as well as relative ease of access and understanding are prerequisites. This was the view expressed in Spreadex Limited v Colin Cochrane, where the court considered that the use of hyperlinks to four separate documents detailing the terms of use of a spread betting bookmaker was an entirely inadequate way to seek to make the consumer liable for unauthorised trades.²² On online auction platforms, it was not always easy to locate the relevant information.

In addition to barring the consumer from becoming acquainted with the terms before the conclusion of the contract, hyperlinking practices are contrary to the principle of good faith. It is indeed not fair and open dealing to camouflage terms in small print or via a maze of hyperlinks. Such clauses incorporating terms by reference therefore strike me as unfair. It is also not good faith to draft clauses that are vague or unintelligible. In those cases, however, the Directive already offers a remedy that does not need to lead to the clause being void, in the sense that the clause can be interpreted against the trader.²³

2 Unilateral Modifications to the Price of the Service

The service provided by online auction platforms for which payment is required includes the price of bids on pay-per-bid sites, and a listing fee on most intermediary platforms. This price may need to change for economic reasons, and a platform may adopt terms that enable it to unilaterally amend the price of its service. Such clauses were rare,²⁴ but given the severity of their impact on consumers, deserved some attention.

At this point, it is important to note that the review of the price and the main subject matter of the contract is a controversial area. Article 4(2) UTD states:

Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other, in so far as these terms are in plain intelligible language.

Control of what are known as ‘core terms’ can be excluded as long as such terms are drafted in plain and intelligible language. The difficulty resides in defining what a core term is. In the UK, some controversy exists. In Director General of Fair Trading v First National Bank Plc, the House of Lords concluded that a term making provision for the payment of interest where a borrower defaults was not a core term. It was an incidental term. This was because the term prescribed the consequences of the borrower’s default and not the adequacy of the interest earned by the bank as remuneration for its loan.²⁵ Similarly, in Office of Fair Trading v Foxton Limited,²⁶ a number of terms relating to the fees charged by the estate agent for the introduction of tenants during the initial tenancy as well as its renewal or even its sale to a third party were not core. This was because the focus of the contract would be on getting the tenants into the property and not on renewal.²⁷ Up to this point, the courts had assessed core terms by reference to what a typical consumer would expect. This was a view rejected in Office of Fair Trading v Abbey National Plc,²⁸ where the UK Supreme Court decided that the identification of the price or remuneration was a matter of objective interpretation by the court²⁹ and not to be assessed by reference to ‘whether or how far consumers had actually exercised contractual freedom when agreeing upon a price or remuneration stated in plain and intelligible language in a contract into which they entered’.³⁰ The bank charges applied to consumers for unauthorised overdrafts on their current accounts were a core term because they were remuneration attached to the use of a package of services.³¹ They could therefore not be assessed under unfair terms legislation. In view of the above, it seems that the price paid for the service of participating in an auction is a core term because the price of bids or of the commission paid after sale is not an ancillary term. It is very much at the heart of the bargain struck between the online auction platform and the consumer.

Those clauses are, according to the Supreme Court, subject to unfair contract terms regulation.³² Therefore, unfairness needs to be assessed by reference to the ability the clause gives to consumers to be aware of the changes, as well as the ability to dissolve the contract.

Out of the three clauses discovered, one gives consumers a fair opportunity to agree the changes or dissolve the contract. Indeed, the clause on eBay indicates:

Joining eBay and any bidding on listed items is free. We do charge fees for using other services such as listing items. When you list an item or use a service that has a fee you have an opportunity to review and accept the fees that you will be charged based on our Fees Policy, which may change from time to time. We will give you notice of any proposed changes to our Fees Policy by email, by posting the changes on the eBay site or via ‘‘my messages’’. You may close your account without penalty within 30 days of such notice being given (…).

This clause reflects some amendments made to increase the period of notice from 14 to 30 days in recent years. It now gives a much more reasonable time for consumers to assess the impact of a change in fees on their use of the service. By contrast, Ziinga’s terms do not offer notice of the changes. Indeed, they state: ‘Member price and benefits are subject to change without notice.’ This lack of notice may render the term unfair as it subjects consumers to changes in fees without giving them the ability to find out about the change and/or walk away from the contract. On Fastbidding, the clause concerned the price of bids and may also be considered unfair. It states:

3 Clauses Limiting the Liability of the Online Auction Sites

The survey found that all websites did limit their liability across a wide range of issues, although this section is reserved to looking into the most popular exclusions on intermediary and proprietary platforms. On intermediary platforms, the most common clause (found in 18% of cases) excluded liability in contract and in tort (including negligence). This was followed by the exclusion of liability for the content of the listings appearing on the site (16%); the limitation of liability concerning losses for the use of the site or the auctions (13%); the absence of liability for the provision of substitute goods or damage in transit (11%); and the absence of liability for the actions of third parties on the site (11%).³³ On proprietary platforms, the main focus of exclusion of liability concerned computer failure and viruses that would affect consumers participating in auctions (17%), followed by interruptions in auctions (13%), inaccessibility of the website (12%) and, more broadly, technical issues (12%), as well as typographical errors or inaccuracies in the descriptions of goods (12%).³⁴ The exclusion of liability in contract and in tort (including negligence) for a series of losses was only present in 4% of cases.

Across the platforms, most clauses were formally identified as liability clauses. However, some contracts did not carry such headings or included liability clauses within other sub-headings,³⁵ making it more difficult for consumers to be aware of the exclusions or limitations of liability applying, even if a consumer wanted to look for them in their contract.

3.1 Clauses Limiting Liability in Contract and in Tort (Including Negligence)

Overall, liability in contract or tort was specifically limited in 57% of cases on intermediary platforms.³⁶ The aggregate results were that 36% of online auction websites carried such a clause, a discrepancy in the results explained by the fact that most proprietary sites did not carry such specific exclusion. Only 14% of proprietary sites adopted such a clause. Most clauses followed a similar format, disclaiming liability first, followed by a statement explaining that such limitations are not always valid. For example, eBay’s terms and condition contained the following clause:

We (…) shall not be liable to you in contract, tort (including negligence) or otherwise for any business losses, such as loss of data, profits, revenues, business, opportunity, goodwill, reputation or business interruption or for any losses which are not reasonably foreseeable by us arising, directly or indirectly, out of your use or your inability to use (…) our sites and services.