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The reverse auction marketplace is becoming increasingly popular, particularly following the success of Airtasker and Freelancer. Reverse auction marketplaces connect buyers and sellers where a buyer posts the task and sellers (those who deliver the service) bid or compete for a particular job. The reverse aspect of the marketplace is where sellers outbid one another to deliver the service at a lower cost (compared to a traditional auction marketplace where buyers bid the cost up). If you are thinking of setting up a reverse auction marketplace, typically you will require a set of marketplace terms and conditions, a privacy policy and a website terms of use.

Reverse Auction Marketplace Terms and Conditions

Reverse auction marketplaces operate with the input of three different parties: 

  1. service providers (sellers), 
  2. customers requiring services (buyers), and 
  3. the marketplace operator. 

A common format for a reverse auction marketplace is for a customer to create a request or post about a particular task, outlining details of the job on the post. Service providers create profiles on the site outlining their qualifications and experience. Service providers bid on a job, and the customer can choose which service provider to use based on information in their profile.

There are legal risks inherent in running a reverse auction marketplace connecting service providers with customers. Key areas of legal risk are the relationships between the parties and payment. A set of marketplace terms and conditions ensures that risk is limited as much as possible.

Relationship Between the Parties

The key benefit of operating a reverse auction marketplace is that the marketplace operator simply connects one party to another. The marketplace operator can charge a small fee for this introduction service, but it doesn’t need to perform the work or provide the product.

It needs to be clear to every party on the marketplace that the marketplace operator’s role is simply to provide an introduction service. 

Both the website description and the marketplace terms and conditions must clearly state that the marketplace operator: 

  • is not a party to any transaction between the parties;
  • only provides an introductory service; and 
  • the buyer and seller should manage any dispute that arises about the services provided.

Ensuring that the parties to your reverse auction marketplace understand that you provide an introductory service is important to help reduce your risk. 

Payment

Payment is another area of risk for marketplace operators. There are three ways a marketplace operator can arrange for customers to pay a service provider.

  1. The operator can require the customer to make payment outside the platform (e.g. marketplace operator charges service provider to post on the platform and then the customer pays the provider at the time of service);
  2. The operator can use a third party payment services provider such as Stripe or PayPal; or 
  3. The operator can act as a limited payment agent, collecting money on behalf of the service provider. 

Collecting money on behalf of others is risky. In Australia, there are clear rules about collecting credit card details, security and compliance when processing credit card payments and holding funds in bank accounts. Marketplace operators may then prefer to use third party payment service providers that already comply with credit card compliance standards such as the PCI DSS.

Privacy Policy and Website Terms of Use

Running a reverse auction marketplace involves collecting personal information such as customers’ and service providers’ names and emails. The Privacy Act 1988 (Cth) defines this type of information as ‘personal information’. A privacy policy sets out how the marketplace operator collects, uses and stores personal information. It should be used to give marketplace users confidence in using the marketplace. 

Website terms of use set out prohibited and permitted uses of the reverse auction marketplace, and complement the marketplace terms and conditions. For example, website terms of use usually set out that visitors cannot use the marketplace for any illegal activity, to defame another user of the marketplace, or to ‘scrape’ emails and other data from the website. Email scraping refers to the practice of collecting emails for personal use and potentially breaches the Spam Act 2003 (Cth).

The key benefit of website terms of use is that they apply to all users of the marketplace, whereas marketplace terms and conditions only bind those who have registered for an account.

Key Takeaways

Businesses setting up reverse auction marketplaces should ensure that they have a set of marketplace terms and conditions which limit liability and clearly sets out the relationship between parties on the marketplace and how payment operates.

Marketplace operators should avoid interfering with the transaction between party A and party B, other than introduce the two. Regarding payment, using a third party payment service provider is a more straightforward and possibly less risky option, especially compared to taking and holding funds on behalf of another party. If you have any questions or need assistance drafting documents for your marketplace, get in touch with our specialist online business lawyers on 1300 544 755.

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