Any legal eagles out there?

Contains_Mild_Peril

If you are selling things on ebay as a business, then the usual distance selling regulations should , in theory, apply.

The difference here though being that strangely enough ebay transactions are not deemed to be auctions, they are private sales as bleugh suggested. Ebay is not an auction house, despite what it calls itself, and is therefore treated merely as a marketplace, like a free newspaper where it is buyers beware.

As far as I know (and I got this info from a general interest magazine so can't vouch for its accuracy), if an auction house sells an item on behalf of a private individual (as opposed to a business), the contract is between the original owner and the buyer, not between the auction house and buyer. The auctioneer merely acts as an agent, so it's a case of caveat emptor.
Hintza, what is the exact wording of your returns policy? If it's very vague, it might have been resonable for the customer to assume that it was a "trial period", but they've shot themselves in the foot by damaging an item which was not faulty when received. Do you still have their admission that it wasn't faulty at the time on file? Is the repairer able to provide a reasonably accurate estimate of when the water damage occurred?