Liability of online marketplaces in case of defective goods or services provided by the seller

A recent order passed by the Odisha State Consumer Disputes Redressal Commission has raised the question of liability of online market places in cases of defective products or services.

The State Commission held Amazon liable in a case where a law student’s order for a laptop placed at a discounted rate of Rs. 190 was cancelled soon after it was confirmed. The State Commission observed that Amazon was negligent in providing service and that cancelling the said order after confirmation was an unfair trade practice. Accordingly, Amazon was directed to pay Rs. 40,000 as compensation (Rs. 30,000 for mental agony and harassment along with Rs. 10,000 towards punitive damages) and Rs. 5,000 as costs.

In this matter, though no one appeared on behalf of Amazon in the final hearing, the e-commerce giant had previously filed written arguments stating that the agreement was between a third party seller (who operated through Amazon's website) and the consumer, and therefore, there was no privity of contract and no question of negligence and/or deficiency. However, the State Commission rejected the said argument and observed that when Amazon, which is a reputed online shopping website, made an offer and the complainant placed the order accepting that offer, the agreement stood completed between the parties.

The State Commission further clarified that it would have been a different case had there been a cancellation before the order was confirmed. However, when Amazon allowed the third party seller to operate on its platform, its responsibility cannot be lost sight of, the order stated.

While the above decision may be welcomed by consumers, it creates far reaching consequences for online market places like Amazon, Flipkart etc. The law is not crystal clear in respect of the liability of these companies, as conflicting orders have been passed by different State Commissions.

One such order was passed by the Chhattisgarh State Consumer Disputes Redressal Commission. In this case, the complainant had purchased a mobile phone from Amazon that had a manufacturing defect. Since the phone was under the warranty period, the complainant contacted the authorised service centre, which after a few dates, asked for Rs. 5,200 to change the parts. Upon being asked to pay extra money for part replacement, the complainant asked the service centre to return the mobile. It was alleged that during the time the phone was in the service centre, certain parts of the headphone were removed.

Consequently, the complainant once again contacted the service centre, and when he received no response, he proceeded to file a consumer complaint against Amazon as well as the authorised service centre. Though the District Forum held all respondents liable, on an appeal by Amazon, the State Commission proceeded to absolve Amazon. The company argued that it is only a facilitator, and that at the time of registering himself on the website, the complainant had accepted the “Conditions of Use” which categorically provided that the contract of sale and purchase of items was strictly a bipartite contract between a registered seller and customer. It was further argued that as clearly provided in the “Conditions of Use”, there was no privity of contract between Amazon and the buyer and that Amazon was not responsible for any non-performance and/or breach of contract entered into between the buyer and the seller.

Accepting the argument of Amazon, the State Commission observed that Amazon was just a shopping platform and has no connection with manufacturing, repairing or any other services in relation to the product. It was further observed that unless the person who visits the site agrees to the terms and conditions, the transaction cannot proceed. It was ultimately held that Amazon had been wrongly impleaded as a party in the complaint and the order of the district forum, insofar as it related to Amazon, was quashed.

The law on liability of an online marketplace is in its nascent stages in almost all jurisdictions over the world. With the increased reliance on e-commerce platforms due to the ongoing pandemic, there is a sudden surge in disputes in relation to online marketplaces.

In 2019, the United States Court of Appeals for the Third Circuit in the case of Oberdof v. Amazon held Amazon liable for a defective product. The case involved a plaintiff who was gravely injured when a dog leash purchased by her from a third party vendor at Amazon sprung back, hitting her left eye and permanently damaging it. Unable to locate the third party seller, the plaintiff filed a suit against Amazon. Amazon’s argument that it could not be held liable as it was merely providing a platform where two parties could meet and facilitate transactions, was rejected .The Court held that Amazon was a seller and was therefore subject to Pennsylvania’s strict liability regime. The court reasoned that:

• Amazon was the only member of the marketing chain available to the injured plaintiff for redressal. It was observed that even though the plaintiff could ostensibly sue the third party seller, neither she nor Amazon were able to locate the company. It was observed that third party vendors could communicate with consumers only through Amazon, which allows them to conceal themselves from their customers, leaving them with defective products with no direct recourse to the third party seller.

• Amazon takes no precautions to ensure that third party vendors are in a good standing under the laws of the country in which they are registered and has no vetting process to ensure that third party vendors can be identified and be served with a lawsuit. Imposition of strict liability on Amazon would serve as an incentive to Amazon to vet these third party vendors and ensure safety.

• Amazon exercises substantial control over third party sellers and is fully capable of removing unsafe products from its website.

• Amazon is in a better position to prevent circulation of defective products as it receives feedback on its website.

• In this case, Amazon had an indemnification clause in its agreement with the third party seller, and therefore Amazon could get indemnified.

• Amazon could also adjust the commission-based fees that it charged third party sellers based on the risks posed by each vendor.

Being aggrieved by this decision, Amazon filed an appeal and ultimately the case was sent to the Pennsylvania Supreme Court. However, two months after the Court agreed to look into the case, the parties settled and the case was disposed of as per the agreement between the parties. Thus, the question regarding the liability of Amazon remained open.

However, as is the case in India, conflicting rulings have been passed in the United States as well. For instance, the Ninth Circuit Court in a case involving a defective hoverboard which injured an Amazon customer, concluded that Amazon was not a “seller”. The Court noted that “even entities in the chain of distribution who are better situated to bear the risks and costs of defective products are not strictly liable unless they participate significantly in the stream of commerce.”

The Court analysed seven factors to determine whether Amazon participated significantly in the stream of commerce, several of which focus on the level of control a potential “seller” has.

On the other hand, the intermediate California Court of Appeal held Amazon liable for the online sale of faulty batteries, emphasizing that Amazon had the critical ability to adjust the cost of liability between itself and its third-party sellers. Subsequently, a petition for review preferred by Amazon was declined by the California Supreme Court.

With a view to address the issues in relation to online marketing, the European Union has proposed a Digital Services Act, which inter alia envisages placing new obligations on online platforms including, know your business customer checks, which would have to be carried out by online platforms to improve traceability to help identify sellers of unsafe or counterfeit goods.

In the absence of clear provisions, and with increasing adverse rulings against Amazon and other similar marketplaces, consumers would be encouraged to file complaints against such online marketplaces. This may not only increase the prices consumers pay for the products (to balance the litigation burden), but may also lead to fewer products being available at such platforms. Additionally, in a country like India, many small scale businesses which host their products on online marketplaces may not even be able to bear the burden of such increased consumer litigation, if the facilitator is entirely removed from the equation. The only thing one can do is to wait and watch as to how this controversy is settled either by the legislature or by the judiciary.