12.1.1 Auctions and the application of the Consumer Guarantees Act

Under section 41(3) of the Consumer Guarantees Act, an item sold at auction or by competitive tender is exempted from the guarantees of acceptable quality, fitness for purpose, and the other guarantees under the Act.

Auctions are exempted because they are conducted on a buyer beware basis and on the understanding that there are no rights of redress after completion of the sale. A traditional auction is a method for determining the value of a commodity that has an undetermined or variable price, although in some cases, there is a minimum or reserve price; if the bidding does not reach the reserve, there is no sale.

Traditional auctions are run by an auctioneer with bidders attending in person or bidding by telephone. The auctioneer is inviting bids for property as the agent for the seller. The terms and conditions proposed by the auctioneer form the basis of the contract of sale. Common examples of auctions in New Zealand include auctions of real estate, motor vehicles, livestock, art, china and house lots of goods. The value of property sold by auction ranges from relatively small amounts to millions of dollars, and they include business to business transactions, as well as business to consumer and consumer to consumer transactions.

A traditional auction does not involve any negotiation between the buyer and seller. The onus is on the buyer to inspect the item prior to the auction to ascertain whether the item meets their needs.

This means of sale has a long history. It can be a useful way to shift goods in an efficient manner. The price can also be lower than the normal market rate for sales not by auction because the bidders are aware of the risks. Some secondhand products are not able to be sold with any guarantee as to their working order and how long they may last. By providing that auctions are not subject to future claims, vendors are able to confidently sell goods at lower prices than might otherwise be the case, safe in the knowledge that down the track there are no comebacks on the sold goods.

The Consumer Guarantees Act does not define auctions. As noted, sales by auction are defined, however, under section 2 of the Auctioneers Act as:

“the selling of property of any kind … by outcry, by the auctioneer saying ‘I’ll take’ and commencing at a higher figure and going to a lower figure, by what is known as Dutch auction, knocking-down of hammer, candle, lot, parcel, instrument, machine, or any other mode whereby the highest, the lowest, or any bidder is the purchaser, or whereby the first person who claims the property submitted for sale at a certain price named by the person acting as auctioneer is the purchaser, or where there is a competition for the purchase of any property or any interest therein in any way commonly known and understood to be by way of auction; and shall be deemed to include the selling of any property by outcry in any public place, as the same is defined in the Summary Offences Act 1981, or in any room, or mart, or place to which the public are admitted or have access, whether or not the sale of the goods has been advertised to take place.”

“Outcry” is also defined in section 2 of the Act as “any request … made … by means of signs, speech, or otherwise in the presence of not less than 6 people by any person for the purpose of selling any property offered or available for sale …”.

Competitive tenders are also exempted from coverage under the Consumer Guarantees Act, but the Act does not define a competitive tender. There are no definitions of competitive tender in other legislation.

Online market places

Generally, an auction is the process of buying and selling things by offering them up for bid, taking bids, and then selling the item to the highest bidder. Modern auctions can be conducted with telephone and online participants as well as bidders who are physically present at the site of the auction.

In recent years the sale of goods and services through online market places such as Trade Me has become increasingly popular. Over 15,000 New Zealand businesses sell on Trade Me, and there are 2.5 million members in New Zealand. Over a million online trades are completed each month. There are also about 20 other online auction and market place providers operating in New Zealand.

There is a problem of clarity concerning whether the auction and competitive tender exception in the Consumer Guarantees Act is intended to cover internet bidding and online auctions as conducted by Trade Me and similar providers.

There are two common types of trading that typically occur in online market places. The first is where the seller offers goods for sale at a specified price, followed by subsequent acceptance by the buyer of that offer. Many New Zealanders refer to this as a “Buy Now/Confirm Purchase” transaction. The second form of transaction in online market places is what is commonly known as an “online auction” (referred to in this discussion as Trade Me style auctions, so named after the popular website). Businesses and consumers use online market places and Trade Me style auction sites to sell both secondhand goods and brand new articles.

There is debate as to whether online Trade Me style auctions are true auctions of the type intended to be exempted from the Consumer Guarantees Act because they do not meet the definition of auction in the Auctioneers Act. For instance people are not actually physically present for the online auction which is a key component of the “outcry” which is required under the definition of an auction in the Auctioneers Act. As noted, however, the Consumer Guarantees Act does not define auction by reference to the Auctioneers Act, so whether Trade Me style auctions are “auctions” for the purposes of the Consumer Guarantees Act is a grey area, open to interpretation.

The Trade Me style auction is also potentially covered by the exemption of competitive tenders under the Consumer Guarantees Act. It can be argued that an online Trade Me style auction meets the definition of a competitive tender, even if the transaction is not strictly an “auction” in terms of the Auctioneers Act.

There is an inconsistency in consumers using an online market place having the benefit of the guarantees in the Consumer Guarantees Act if they make the final purchase by way of the Buy Now/Confirm Purchase button⁷³. A good may be offered for sale on the online market place by Trade Me style auction (and therefore the Consumer Guarantees Act does not apply on the basis that the good is being sold by auction or competitive tender) but if there are no bids and the same good is then offered and sold under the Buy Now/Confirm Purchase transaction method, the protections under the Consumer Guarantees Act then apply for the same good.

For consumers and suppliers, the fact that the Consumer Guarantees Act may or may not apply depending on the transaction method used to obtain the good is confusing, illogical and arbitrary.

The Trade Me style auction may be being used as an additional channel to market by traders who may or may not have a bricks and mortar outlet. The “auction” character of the market place may be a secondary feature of the channel to market, in which case the reasons for the Consumer Guarantees Act exemption for auctions would not apply.

When the Trade Me style auction is being used to sell goods more quickly, it can be likened more to offering a good at a negotiable sale or discounted price rather than a true auction where the rules are “buyer beware”. For goods purchased at a sale or discounted price the guarantees in the Consumer Guarantees Act apply.

The Trade Me style auction also typically does not provide for pre-inspection of the goods prior to sale. Again, this makes the online market place auction different from the traditional auction where the risk between the buyer and seller is in part mitigated by the buyer being able to inspect the item/good prior to the auction to ascertain whether the item meets their needs.

There would appear to be justification, accordingly, to clarify that Trade Me style auctions should not be exempted from the Consumer Guarantees Act. This might be achieved by: clarifying the definition of auction; requiring that auctions exempted from the Consumer Guarantees Act must be conducted by a licensed auctioneer or an auctioneer who belongs to an approved industry body (see section 11 regarding proposals for ongoing occupational regulation of auctioneers); and, requiring that traditional auctions conducted online must make it sufficiently clear they are being conducted on that basis otherwise the Consumer Guarantees Act applies. These approaches are now discussed.

Definition of auction

Desirably there should be one definition of auction that applies with respect to the occupational regulation of auctioneers and to the exemption of auctions under the Consumer Guarantees Act⁷⁴.

The Auctioneers Act definition of sale by auction needs updating. For example, it only applies to sale by auction where a minimum of 6 people are present (in other words are at the place of the auction). The modern day auction does not always meet this requirement. It is possible for people to participate in an auction over the internet with the use of web cameras and other communication technologies. Two people may be attending an auction in the presence of the auctioneer and five may be bidding via the internet. This situation does not meet the sale by auction requirement in the Auctioneers Act that the auction needs to be conducted in the presence of six people despite there being seven potential bidders.

A possible modern definition of auction could be:

“An auction is the public sale of goods or services of any kind (excluding land covered by section 42 of the Property Law Act) to the highest bidder where the auction has been conducted by a natural person. An auction includes the following features:

• An auction commences when the person conducting the auction invites a first bid from members of the public participating in the auction. 
• Bidders may bid in person, via telephone or through the internet or any other means where they can hear (at least¬) the auction being conducted. 
• All auctions of goods are subject to the provisions in section 59 of the Sale of Goods Act 1908, namely:
  • Where goods are put up for sale by auction in lots, each lot is prima facie deemed to be the subject of a separate contract of sale.
  • A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner: until such announcement is made any bidder may retract their bid.
  • Where a sale by auction is not notified to be subject to a right to bid on behalf of the seller, the seller shall not bid themselves or employ any person to bid at such sale, nor shall the auctioneer knowingly take any bid from the seller or any such person. Any sale contravening this rule may be treated as fraudulent by the buyer.
  • A sale by auction may be notified to be subject to a reserved or upset price and a right to bid may also be reserved expressly by or on behalf of the seller.”

Auctions that meet a definition written along these lines would be exempted under section 41(3) of the Consumer Guarantees Act. In other words, goods purchased at the auction would continue to be exempted from the statutory guarantees under the Act.

Trade Me style auctions, where there is only a computer program conducting the auction rather than a real time auction being conducted by an auctioneer (who is a natural person), would not be covered by the definition, so consumers buying from traders using this selling mode would have the benefit of the statutory guarantees under the Consumer Guarantees Act (assuming the seller is a trader, and the property being purchased is for personal use).

Auctioneer must be licensed or approved

As discussed in section 11, there are a number of possible approaches to the ongoing regulation of auctioneers. With either licensing or an industry-led approach (requiring auctioneers to be members of an approved body), there could be a tie-in to requiring auctions exempted from the Consumer Guarantees Act to be conducted by a licensed auctioneer or member of an approved auctioneers body.

There may need to be some clarification that the exemption would also apply for fundraising type auctions of the sort conducted by communities and charities involving low value and donated items.

Disclosure online that the sale is by traditional auction

Given the current use of auctions and the online environment, it can be difficult to make it clear on an online website what kind of auction the transaction actually is. If a legal distinction between a traditional auction carried out online and a Trade Me style auction was to be mandated, one option may be to require that traditional auctions conducted online must meet certain defined requirements including that it must be sufficiently clear to participants in the auction that it is an auction being conducted on essentially a “buyer beware” basis.

One potential approach could be to require an acknowledgement from consumers participating in the online auction that they understand no Consumer Guarantees Act rights apply to their transactions prior to their entry into the online “bidding section” of the auction (this could be in the form of requiring a “I agree to these terms and conditions” tick-the-box type form to be completed).

Other requirements which could apply in distinguishing that it is a traditional auction could be that the auction will start at a certain time (having been advertised earlier), that pre-registration may be required for participation and that an auctioneer will be communicating in real time to the bidders through audio, or video or both. These elements would go some way to reducing the potential for consumer confusion as to what kind of auction they are participating in.

Competitive tender

Online auctions may potentially also fall within the exemption for “competitive tenders” under section 41(3) of the Consumer Guarantees Act. Two options to address this are to no longer include an exemption for competitive tenders from the application of the Consumer Guarantees Act or to define competitive tender as follows:

“A competitive tender for consumer goods must be conducted by a natural person and cannot use an online trading mechanism.”

Questions

Footnotes

73 And if they are buying goods or services for personal use, and they are buying from someone who is a trader (not a casual private seller).

74 Any revised definition of an auction may also need to be reflected in section 42 of the Property Law Act, which deals with auctions of land and mirrors section 59 of the Sale of Goods Act.