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Dealing with Potential Liability for Technology Failures During Online Auctions

· Auction Law,Online Auction,Auction Contract

Technology is a remarkable thing, and it has a tremendous impact on the auction industry. The ability to reach thousands of potential bidders in showcasing your auction, and exposing your seller’s property, provides significant opportunity. However, there are risks associated with opportunity, and it is important for you understand and manage those risks.

Before conducting an online auction, it is necessary for the auctioneer enter into a contract with an online auction platform provider (unless the auctioneer has the time, interest, and resources to establish his or her own platform). Those contracts are typically form contracts prepared by the provider, and – while the auctioneer may be able to negotiate around the margins regarding fees, term, and certain incentives (particularly when establishing the relationship) – the form contract prepared by the provider is largely a take it or leave it proposition (we can talk about that in another post). This, however, doesn’t mean that the auctioneer shouldn’t take the time and effort to read and understand the contract. To the contrary, it is important that auctioneers read and understand the contracts with their online auction platform providers in order to consider if, and how, such contracts might expose the auctioneer to liability – especially the type of liability that the provider seeks to avoid. Additionally, for an online auction to occur, there will, necessarily, be multiple contracts between the provider and end users – otherwise known as bidders. It is equally important for the auctioneer to understand the terms of the end user agreements, as well.

One of the things that contracts do (or should do) is identify and allocate risk. One of the things that online auction platform contracts do (or try to do) is shift risk away from the provider. This is particularly evident with respect to failures of technology. Typically, online auction platform contracts will seek to shield the provider from liability in the event of a failure of technology, loss of connectivity, dely or failure in receiving bids, and other potentially catastrophic disruptions of the online auction event – even if the provider is negligent. Similarly, the end user agreements between the provider and the bidders will typically seek to relieve the provider from liability in the event of a failure of technology, loss of connectivity, dely or failure in receiving bids, and other potentially catastrophic disruptions of the online auction event – even if the provider is negligent. The efforts of online auction platform providers to avoid liability raise important issues affecting the auctioneer, and implicate steps that the auctioneer ought to consider in seeking to protect against claims by bidders and sellers who might be affected by, or unhappy with, the performance of the online auction platform.

Keep in mind that while the auctioneer has a contract with each of the seller, the bidders, and the provider, and the provider has a contract with the auctioneer and the bidders, the provider typically does not have a contract with the seller. However, while there may be no privity of contract between the seller and the provider, the online auction platform agreement will often contain an indemnification clause requiring the auctioneer to protect and hold the provider harmless from third-party claims, including tort (i.e., negligence) claims by the seller. So where are the gaps in protection and the resulting risk? Without more, the relationships I just described have the potential of leaving the auctioneer exposed to claims of liability by the seller and bidders resulting from a failure of technology (over which the auctioneer has no control). This is because the seller is relying on the successful performance of the system to achieve the highest and best results, and the bidders are relying on that same uninterrupted performance to record timely bids. In the event of a failure of technology, the contracts that are in place tacitly direct potential liability to the only unprotected party – the auctioneer. Whether or not such claims could be successful may be dependent on the specific facts and circumstances and could be the subject of another, much longer, discussion. In any event, it is important for the auctioneer to include terms in both the seller contract and the bidder terms and conditions that recognize possible failures of technology and allocate that risk away from the auctioneer. Otherwise, if a bidder loses an item because of a connectivity issue, and that same bidder can’t sue the platform provider, he or she might just be looking at the auctioneer. Similarly, if a seller experiences a bad result due to technology failures, the seller might be looking to the auctioneer (with whom the seller is in contract) and not to the platform provider (with whom the seller likely has no contract). So, the auctioneer really needs to ensure that those moving parts – the various contracts among the seller, the bidders, the auctioneer, and the online auction platform provider – conform in such a way so as to reduce, if not eliminate, liability gaps that may turn into traps for an otherwise unwary auctioneer.