The Law of Auctions

All of us are familiar with the movie version of auctions in which precious works of art are bid upon in elegant rooms, bids of millions of dollars made with the slight raise of a hand. Equally common in the world of movies, tense bidding back and forth occurs as wealthy and desperate characters seek to outmaneuver each other as the audience in the auction house look on and gasps in suspense. Good movie material but seldom what occurs in the real world.

In reality, auctions are a relatively common way to buy and sell a huge variety of assets ranging from art work to real property, from rights to air waves to household furniture. They are a common method used to raise money for foundations and churches and a typical way for the average probate estate to sell its real property or a trustee in bankruptcy to liquidate a business. Auctions can occur in a crowded room, on the steps of a court house, in the court room, on the internet (what is Craig’s List but an on line auction house?) or by telephone. In hot real estate markets, the seller of property often arranges an auction so that the various potential buyers can vie for the real property in question.

In short, auctions are a business tool much in use but quite often little understood by the participants. The law of auctions is extensive and such issues as to when is a binding contract to buy made, what warranties apply, what licenses are required, are matters that persons utilizing this method of buying and selling should know.

This article shall provide the basic law applicable to auctions.

 

Definitions and Basic Process:

An auction is a form of sale. In an auction, property is publicly put up for sale. An auction has a seller and a varying number of prospective buyers. Thus, an auction can be defined as “the public sale of a property to the highest bidder.” See Pitchfork Ranch Co. v. Bar TL, 615 P.2d 541, 546-547 (Wyo. 1980)

In an auction, the final sale is usually the result of competition between bidders though a single bidder can still purchase if no other bids are received. Before auctions came into existence, bargaining was the common practice. In bargaining, sale was conducted through negotiation but lacked the element of open and public competition among buyers.

As is the case for an ordinary sale, an auction also has a seller and a buyer. The difference is that in an auction there will be several prospective buyers called bidders. Among various bidders, the one who offers the highest price or bid will normally be the successful purchaser. Initially, the seller often places a minimum price for his/her property. The bidders compete among themselves by offering competitive prices and the highest bid will normally be accepted by the seller.

Similar to an ordinary sale, in an auction, the sale can be performed either by the seller himself or through an agent engaged by him/her. The person so engaged is known as auctioneer. The rules for determining winning bidders may also differ in different auctions. In some auctions, the identities and actions of participants may not be disclosed to others. Usually, bidders physically participate in an auction. Bidders can also participate in an auction by phone or internet. The auctioneer is usually paid by the seller based on commission.

At least two bidders are needed to conduct an auction though bids need not be received from both. When the auctioneer announces prices, bidders call out their bids. Bidders can call out bids themselves or by proxy. A bid can also be submitted electronically with the highest current bid publicly displayed. Acceptance of a bid is denoted by the fall of a gavel or by any other audible or visible means signifying to a bidder that the bidder is entitled to the property on payment of the bid price. When no participant is willing to bid further, the auction ends for that particular property. Once a bid is accepted, the seller has no right to accept a higher bid, nor can a buyer withdraw the buyer’s bid[ii]. Generally, an auction is complete when the bid is accepted. A binding contract is created by the auction. The seller can also set a reserve price in advance. If the final bid does not reach the reserve price, the property remains unsold.

Note that the popular understanding of an auction is identical to the legal definition of an auction. Legally, an auction is defined as the “public sale of property to the highest bidder.” In Pitchfork Ranch Co. v. Bar TL, the court defined the term auction as “a public sale of property to the highest bidder by one licensed and authorized to do so and the goal is to obtain the best financial return for the seller by free and fair competition among bidders”.

Competitive bidding is an essential element of an auction sale. Free and fair competition among bidders brings the highest financial return to the seller. Any agreement that restricts such competition is against public policy and void. Indeed, collusion to coordinate bids between sellers defeats the validity of the auction, may be fraud or even criminal in nature. n every sort of auction, there are either successive bids for the property or successive offerings at different prices to promote competition. The definition of auction should be interpreted to preserve and promote competition.

The Concept of a Reserve

There are generally two methods of selling property at an auction:

• with reserve; or
• without reserve, also known as absolute auction, See Pyles v. Goller, 674 A.2d 35 (Md. Ct. Spec. App. 1996)

In an auction held with reserve, the owner reserves the right not to sell the property. Here, an auctioneer’s bringing a piece of property up for bid is an invitation to make a contract, and is not an offer to contract. Before the highest bid is accepted, a seller can withdraw the property from the auction. The auctioneer can withdraw property from the auction sale before the dropping of the gavel. Additionally, if the bidding is too low, an auctioneer need not sell property. See Pitchfork Ranch Co. v. Bar TL, 615 P.2d 541 (Wy).

Note also that the methodology of an auction may differ depending on the jurisdiction. An English auction is different from a Dutch auction. In an English auction or open ascending price auction, participants bid openly against one another, with each subsequent bid higher than the previous bid. However, in a Dutch auction, the property is put up at a price greater than its value. The price is gradually lowered until someone closes the sale by accepting the offer. The English auction is the most common form of auction in use today and is commonly used for selling antiques, artworks as well as real estate.

The Auctioneer

A seller can employ another on his behalf to conduct the sale. Such person is known as an auctioneer and often is a professional who makes his or her living in that role. An auctioneer is an agent of the seller, sells the property of the principal, and is employed by commission or for reward. The term auctioneer can be defined as “one who sells goods at public auction for another on commission, or for a recompense; one who conducts a public sale or auction, whether the goods sold are his own or those of another person who employs him.” See State ex rel. Danziger v. Recorder of Mortg., 206 La. 259, 266-267 (La. 1944).

An auctioneer’s primary duty is to make an offer to dispose of goods or lands by public sale to the highest or best bidder. It should be noted that in some jurisdictions the right to sell goods at a public auction is not an absolute right. Auctioneering is a special privilege, which can be withheld unless reasonable regulations are complied with. The business of an auctioneer is a matter of public policy and subject to legislative restriction and regulation in order to prevent abuses and frauds. State legislatures can impose limitations or regulations upon the acts of an auctioneer. As an example, see State ex rel. Danziger v. Recorder of Mortg., 206 La. 259, 267 (La. 1944).

The legal position of an auctioneer is the same as that of an agent. An auctioneer must act in good faith and in the interest of his principal. He/she must conduct the sale in accordance with the instructions of his principal. An auctioneer is a special agent, who can act only under the authority of his/her principal. An auctioneer cannot bind his principal beyond his actually granted authority. Moreover, an agreement or a contract, which is beyond an auctioneer’s authority will not be binding on the principal. An auctioneer’s authority ends when a sale is completed and the purchase price is collected. After an auction, an auctioneer cannot vary the contract of sale or the terms on which title is to be given, without any special authorization. In re Premier Container Corp., 95 Misc. 2d 859, 866 (N.Y. Sup. Ct. 1978.

Moreover, an auctioneer may be liable if he/she conducts auction without knowledge of the principal’s lack of title or authority to sell, although he/she acts in good faith. An auctioneer may be liable for selling property with defective title, although he/she was conducting an auction in compliance with the principal’s specific instructions. Parker v. P & N Recovery of N.Y., 182 Misc. 2d 342, 346 (N.Y. Civ. Ct. 1999). An auctioneer’s good faith and his/her lack of knowledge is not a defense in an action for conversion. State Sec. Co. v. Svoboda, 172 Neb. 526, 530 (Neb. 1961). Thus, auctioneers face substantial liability as to the sales and must take appropriate steps to assure themselves of title to the asset being sold.

 

The Role of State and Federal Law:

Conducting auctions is a legitimate business that cannot be prohibited directly or indirectly. The selling of merchandise at auction and the occupation of auctioneer are legitimate, lawful, and useful.

However, the right to sell at auction is not absolute but may be withheld unless reasonable regulations are complied with. . Steinberg-Baum & Co. v. Countryman, 247 Iowa 923 (Iowa 1956). The source of the authority to regulate auctions is the police power and a regulatory statute adopted by virtue of the police power. Gilbert v. Mathews, 186 Kan. 672 (Kan. 1960).

An ordinance which undertook to regulate the sale of personal property by auction within a city’s corporate limits was held to be a valid exercise of the city’s police power because its purpose was to protect the public and to minimize deception. Jones v. Jackson, 195 Tenn. 329 (Tenn. 1953). But note that in Perry Trading Co. v. Tallahassee, 128 Fla. 424 (Fla. 1937), the court held that a city may not directly prohibit auction sales nor adopt such unreasonable or oppressive regulations as would indirectly produce such results.

Bonds and Other Restrictions

The auctioneer is a public agent, who is employed to sell goods at public venue. He is not only the exclusive agent to sell, but the law makes him the exclusive agent to collect the amount of the sales. In order to protect the private citizens, who are compelled to trust a public agent, an auctioneer may be required to give a bond for performance of his duties. Lea v. Yard, 4 U.S. 95 (Pa. 1804). Other reasonable restrictions may be applied by the local authorities. In Hall of Distributors, Inc. v. Bowers, 139 F. Supp. 400, 406 (D. Ohio 1956), the court upheld the law that the auctioneer must have been a resident of the municipality for one year to protect the owner of the goods as well as the purchaser from fraud and misrepresentation.

In Lea v. Yard, 4 U.S. 95 (Pa. 1804), the court held that the auctioneer’s bond is intended, by law, for the benefit of private customers, as well as for securing the duties payable to the government. The court further held that auctioneers are prohibited from buying at public sales on their own account and if it is repeated or if an auctioneer failed or neglected to account, s/he will be discharged, and his bond is put in suit.

License Requirements

State laws regulate auctions by providing license to bona fide dealers. Each state has discretionary powers to impose regulations in auctions for general welfare of public. Administrative officers are provided discretionary power for granting licenses to auctioneers. The officials can refuse license if the character and qualifications of a person are not satisfactory. They can refuse license if public interest requires refusal of license. The state licensing board can revoke license of persons if they do not meet the standards of honesty, truthfulness, integrity, and competence imposed]. When a licensee violates the terms of the license, the license can be revoked. If the authorities receive complaint of defrauding clients, also, license can be revoked. Commonwealth, Pennsylvania Liquor Control Bd. v. Venesky, 101 Pa. Commw. 456 (Pa. Commw. Ct. 1986).

Even if a license is granted, it can be revoked when it is disclosed that the licensee has committed an act that would justify denial of license. However, the licensee should be provided a notice which describes the charge against him/her. The licensee should also be provided a chance for hearing. Estate of Breeden v. Gelfond, 87 P.3d 167 (Colo. Ct. App. 2003).

The refusal and revoking of license is subject to judicial review. Courts can determine whether the actions of the authorities were against laws established in the states. However, judicial review of revoking a license is normally limited to:

• whether constitutional rights were violated by the licensor,
• whether an error of law was committed by the licensor, or
• whether necessary findings of facts are supported by substantial evidence.

Wiggins v. Chicago, 68 Ill. 372 (Ill. 1873); Kahn v. State Bd. of Auctioneer Exam’rs, 785 A.2d 512 (Pa. Commw. Ct. 2001)

 

Jewelry Auction Requirements:

There is no federal law regulating auctions in the U.S. States have created laws regulating auction industry. Most of the states have created special statutes and ordinances governing jewelry auctions. Reasonable regulations are made by states to regulate jewelry auctions because the sale of jewelry at auctions provides opportunity for fraudulent imposition of jewels over the public. Such laws provide for public’s financial safety.

Some laws have restricted jewelry auctions to certain daytime hours. Such laws are considered valid because when certain jewels are valued in artificial lights there is a great risk of fraud. Quality and value of jewels are determined accurately under daylight than under artificial light]. This helps in preventing abuse and fraud. However, there are limits to restrictions that are considered reasonable. if a law provides that public jewelry auction can only happen in six successive days in a year between 8 a.m. and 6 p.m., the law has been held to be considered invalid. This prevents a person from selling his/her merchandise. The law will be proclaimed void as it unreasonably interferes with legitimate work of an individual People v. Gibbs, 186 Mich. 127 (Mich. 1915).

Generally, sale of jewelry is not a dangerous business and need not be prevented. States are supposed to provide laws only to prevent fraudulent transactions in jewelry auctions, and not to prohibit legitimate sale. The exercise of police power by states is to promote general welfare. Laws created to prohibit jewelry auction will be invalid because it tends to close down legitimate business. However, states can make laws that are constitutionally valid. A state law can hold that it is unlawful to sell jewelry at an auction, but can permit bona fide dealers to sell the articles under certain conditions imposed. Such a law will be valid because it does not amount to denial of equal protection of law. Hirsch v. San Francisco, 143 Cal. App. 2d

 

Mechanics of Sale:

The owner of the property has the right to control the sale until its conclusion. The legal definition of an auction is a public sale of property to the highest bidder. The underlying purpose of an auction sale is to obtain the best financial returns for the owner of the property and to allow free and fair competition among bidders. Therefore, any agreement restricting the opportunity to freely bid is against public policy and is void. Love v. Basque Cartel, 873 F. Supp. 563 (D. Wyo. 1995).

An auctioneer is free to conduct the sale in any manner chosen, in order to bar fraudulent bidders and to earn the confidence of honest purchasers. Hence, the manner of conducting the sale normally lies within the auctioneer’s discretion. It is optional with the owner to give advertisement before the sale but it is only a declaration of intention to hold an auction at which bids will be received. The terms and conditions of sale must be included in an advertisement of the auction.

However, the auctioneer can modify the terms of sale advertised in a catalog at any time during the sale, if announced publicly and the bidders present are cognizant of it. Sale of chattels must be made by public auction and those who attend the sale must be given an opportunity to examine and inspect the chattels. Public auction of chattels is not possible if the thing to be sold is bulk. Manhattan Taxi Service Corp. v. Checker Cab Mfg. Corp., 253 N.Y. 455 (N.Y. 1930).

The auctioneer can describe terms and conditions of sale and it will be considered as binding upon the purchaser even though s/he was absent or failed to understand the announcement Young v. Hefton, 38 Kan. App. 2d 846 (Kan. Ct. App. 2007), see also Coleman v. Duncan, 540 S.W.2d 935 (Mo. Ct. App. 1976). . The conditions announced at auction are binding on the bidder

Generally, any person is qualified to become a bidder. Acceptance of a bid is denoted by the fall of a hammer, or by any other audible or visible means signifying to a bidder that the bidder is entitled to property on paying the amount of a bid according to the terms of a sale. If one person bids for another at an auction sale without disclosing his/her identity until the auctioneer’s hammer falls, either may be held liable for the purchase price Breitbach v. Christenson, 541 N.W.2d 840 (Iowa 1995).

 

Memorandum of Sale:

Generally, a sale by auction comes within the provisions of the statute of frauds and thus a sale of land at an auction is within the statute to the same extent as any other sale or contract of sale relating to land. Scheetz v. Aho, 1998 Ohio App. LEXIS 2498 (Ohio Ct. App., Stark County May 18, 1998). Similarly, an auction sale made by a trustee is within the statute and differs from a judicial sale made by an equity court. If the transaction is within the statute of frauds, it is unenforceable until a memorandum or writing is signed by the auctioneer or his/her clerk.

A memorandum can be signed by an agent of a party as if the party had signed personally. The same third person may be the agent of both parties to sign a memorandum and an auctioneer has irrevocable power to sign for both buyer and seller. The memorandum of an auctioneer must refer with reasonable certainty to the particular individual sought to be charged and the auctioneer acts as the mutual agent of both parties for drawing up and signing the memorandum of sale Freeman v. Poole, 37 R.I. 489 (R.I. 1915).

The memorandum of an auction sale must contain everything necessary to show the contract between the vendor and the purchaser. The memorandum must contain:

• Description of the property sold,
• A statement of the price,
• Terms of credit,
• Any conditions upon which the sale was made,
• Name of the vendee or purchaser, and,
• Name of the vendor or seller when made by the auctioneer in behalf of the vendor or seller.

In Pitek v. McGuire, 51 N.M. 364 (N.M. 1947), the court observed that a memorandum can be any document or writing, formal or informal, signed by the party to be charged or by his/her agent which states with reasonable certainty. A memorandum of an oral sale of real estate need not be made with the formality of a deed. Rather, it must contain a sufficient description of the land, or furnish the means or data within itself which points to evidence that will identify it.

The nature of the dual agency of the auctioneer is very limited. The auctioneer is the mutual agent of both parties solely for the purpose of drawing up and signing the memorandum of sale.

While authority of auctioneer as agent for the seller begins before the auction and may continue after completion of the sale, his authority as agent of the purchaser begins with his acceptance of the bid and ends with the completion of the memorandum of sale sufficient to take the transaction out of the operation of the Statute of Frauds Rosin v. First Bank of Oak Park, 126 Ill. App. 3d 230 (Ill. App. Ct. 1st Dist. 1984).

Sale Under Deed of Trust:

At an auction sale under a deed of trust, the trustee acting as auctioneer is not the agent for the buyer so as to bind him by a memorandum made at the sale. Schwinn v. Griffith, 303 N.W.2d 258 (Minn. 1981). An auctioneer as such is a mere special agent, having no general authority from the parties to prepare and execute a contract for them, but an authority founded only on the sale he has made, and limited by law to the duty to make that sale binding by signing a written memorandum of it. A majority of the courts which have passed on the question hold or assume that between the fall of the hammer and the signing of the memorandum, the auctioneer’s authority to sign a memorandum may be revoked, by either the seller or the purchaser[x]. Thus, the power of the auctioneer and of his clerk to sign a memorandum may be revoked by a buyer or seller at any time before the power is exercised. Moore v. Berry, 40 Tenn. App. 1 (Tenn. Ct. App. 1955). This necessarily means that for sale of such assets subject to the Statute of Frauds, there is a chance for either the buyer or seller to back out before the document is actually executed.

 

Legal Rights Deriving From Sale: Damages For Breach:

The Uniform Commercial Code governs the sale of goods by auction. According to U.C.C. § 2-403, subsection (2) “any entrusting of goods to a merchant that deals in goods of that kind gives the merchant power to transfer all of the entrustor’s rights to the goods and to transfer the goods free of any interest of the entruster to a buyer in ordinary course of business.” A purchaser at a public auction is a bona fide purchaser. (a bona fide purchaser is a purchaser who is entitled to rely on the right of the seller to transfer good title.) Therefore an agent who has the authority to transfer title was estopped from denying such authority as against the purchaser acting in good faith. Further, official comment 2 to the U.C.C. § 2-403 provides that even a bailee, who has no authority whatever to make a sale, can confer good title to goods on a third party, if such bailee is a merchant who regularly sells the same kind of goods. See U.C.C. § 2-403.

In the event of the sale not closing because of the vendor’s default, the vendee is entitled to the return of his or her deposit. In Teaffe v. Simmons, 93 Mass. 342, 343-344 (Mass. 1865), it was held that if a seller violates the agreement either by failing to show a good title in due time or by refusing to execute the conveyance, the vendee may maintain an action against auctioneer to recover the deposit but not expenses or interest or vendee can maintain an action against the vendor to recover the deposit and interest. The vendor is generally responsible, not only for the deposit, but for the accrued interest. However, in Chateau D’If Corp. v. City of New York, 219 A.D.2d 205, 208 (N.Y. App. Div. 1st Dep’t 1996), the court held that a vendee who defaults on a real estate contract without a legal excuse, cannot recover the down payment. Also, a vendor is entitled to his/her down payment if the default is due to vendee’s actions. The purchaser is not entitled to recover the money, if he/she purchased the property with full knowledge of the facts and also had enough opportunity to examine and assess the property.

Generally, a bidder in an auction is duty bound to pay the bid price in order to fulfill his/her promise and the auction sale will be complete only after the making of such payment. An auction sale can also be subject to an express condition. In such case the title does not pass to the buyer until that condition is fulfilled. This is an exception to the rule that an auction is complete when the auctioneer so announces by the fall of gavel.

Risk of Loss:

The UCC is silent about the transfer of risk of loss at an auction sale. Generally, the ownership of goods is irrelevant in determining which party bears the risk of loss. The essential element is the identity of the party who has control over the goods. The vendee is entitled to have the property delivered to him/her, once he/she has fulfilled the terms of the sale. At this point, refusal of delivery will be considered a breach of contract. Moreover, since the sale by auction is governed by the Uniform Commercial Code, the express and implied warranty provisions of the UCC are applicable to and govern auction sale. Bassford v. Trico Mortgage Co., 273 N.J. Super. 379, 384 (Law Div. 1993); Atl. Orient Corp. v. AOC Energy LLC (In re Atl. Orient Corp.), 2003 BNH 5 (Bankr. D.N.H. 2003)

 

Bona Fide Purchaser:

A sale at auction is nominally an offer by the owner to sell a property to the highest bidder without any qualification, unless the owner reserves to him or her openly at the time of the sale, the right to bid upon the property, or openly announces a price below which the property will not be sold. Broadly speaking, the law does not, on the one hand, countenance anything that will stifle competition among bidders, or, on the other hand, fictitious bidding or puffing.

Under auction law, asking for bids is asking for offers, which the seller or the seller’s agent remains free to reject prior to acceptance. The Uniform Commercial Code provides that any entrusting of goods to a merchant that deals in goods of that kind gives the merchant power to transfer all the entrustor’s rights. Thus the good, free of any interest of the entruster may be transferred to a buyer in the ordinary course of business. This provision continues the pre-Code law under which, one clothing an agent with apparent authority to transfer title was estopped to deny such authority as against a purchaser for value acting in good faith. Particularly, where the person to whom the goods were entrusted was an auctioneer or operator of an auction gallery. Moreover, the Code broadens pre-Code law so that even a bailee, who has no authority whatever to make a sale, can confer good title to goods on a third party, if such bailee is a merchant who regularly sells the same kind of goods. The entrustment provision is not applicable when the sale is made by a second merchant to whom the first merchant, the original entrustee, in turn entrusted the goods.

For instance in Zendman v. Harry Winston, Inc., 305 N.Y. 180 (N.Y. 1953), Plaintiff appealed a decision of the Appellate Division of the Supreme Court in the First Judicial Department (New York) in a case involving the auction of jewelry without the consent of the owner. Plaintiff bought a ring at an auction. Defendant, a diamond merchant, claimed ownership of the ring. The gallery that auctioned the ring did so erroneously, without the permission of defendant. The trial court declined to grant declaratory judgment but granted judgment to plaintiff on defendant’s counterclaim for replevin. The appellate court reversed. The court reversed, holding that, pursuant to N.J. Stat. Ann. § 46:30-29, defendant was precluded on the principle of estoppel from claiming that the gallery was not authorized to sell the ring to plaintiff. Plaintiff was an innocent purchaser (bona fide purchaser) and there was nothing to put her on notice that the gallery’s title might be questionable. Further, defendant knew of the ring’s display at the gallery but did nothing to inform the public that it was not for immediate sale. Also, such sale procedures were in the regular course of business between defendant and the gallery. The court reversed, holding that defendant was precluded on the principle of estoppel from claiming that the gallery was not authorized to sell the ring to plaintiff. Plaintiff was an innocent purchaser and there was nothing to put her on notice that the gallery’s title might be questionable.

Ernest Money

Earnest money is a deposit paid to demonstrate commitment and to bind a contract, with the remainder due at a particular time. If the contract is breached by failure to pay, then the earnest payment is kept by the recipient as pre-determined or liquidated damages.

In an auction, the successful bidder is usually required to make a deposit as security for compliance with his or her bid. Payment thereof need not necessarily be made in cash or check.

In the event of the noncompletion of the sale by reason of the vendor’s default, the vendee is entitled to a return of his or her deposit. Similarly, where the vendee returns a purchase to the vendor for not being as warranted, he or she may recover the deposit from the auctioneer for, upon rescission, the auctioneer holds it for the benefit of the vendee.

For instance, in Sohns v. Beavis, 200 N.Y. 268 (N.Y. 1911), Defendant sellers appealed an order of the Appellate Division of the Supreme Court in the First Judicial Department (New York) reversing a judgment in favor of defendants entered upon a dismissal of the complaint filed by plaintiff buyer by the trial court and granting a new trial. The buyer purchased real property at an auction. The appellate court found that such a sale of land, because it was carried out in haste and confusion, was not governed by the strict rules applicable to formal contracts for the sale of real property. Under the circumstances of the auction, the buyer could not have determined, before signing the sales agreement, whether there were unfavorable building restrictions and was forced to rely upon representations by the county clerk about any such restrictions. Though the clerk told the buyer there were no unreasonable restrictions, the appellate court found that there were. The buyer, however, was only protected from unreasonable restrictions. The restrictions that were found to be upon the purchased land restrained only the buyer; thus, the court found them unreasonable. Because the buyer was not given fair notice of the restrictions due to the circumstances of the sale, the court found that the buyer had a right to rescind the contract when he discovered the actual facts and to sue for the recovery of the expenses of examining title. The court affirmed the appellate court judgment.

The purchaser may also be denied recovery of earnest money on the ground that he or she purchased with full knowledge of the facts, or had ample opportunity to inspect and evaluate the sale property.

 

Payment:

Generally, a bidder in an auction is duty bound to pay the bid price in order to fulfill his/her promise. Where real property is the subject of an auction, then payment of bid must be made to the seller, unless the terms of the auction sale provide otherwise.

If the property is personal property, the public auctioneer who sells property for another is entitled to receive the purchase price of the sold property and he/she is responsible to transfer proceeds to his/her principal. Further, in Nixon v. Zuricalday, 12 A.D. 287, 291 (N.Y. App. Div. 1896), the court held that a public auctioneer is also entitled to maintain an action in his/her name against a purchaser to recover the purchase price of the sold property.

With the authorization of the principal, an auctioneer has the right to waive the fulfillment of certain terms of payment under certain circumstances. In In re Premier Container Corp., 95 Misc. 2d 859, 866 (N.Y. Sup. Ct. 1978), the court held that an auctioneer’s authority ceases when the sale is completed and the purchase price has been collected. Further, unless specifically authorized by the seller or principal, an auctioneer cannot, after the sale, alter the contract of sale or the terms on which title is to be transferred.

 

Title to Goods or Property:

The passing of title is the transfer of title of a good or property from its seller to its buyer. Generally, title passes at an auction sale upon the fall of the gavel or upon any other action by the auctioneer that constitutes the acceptance of a bid. This is based upon the fact that the original sale relates to existing goods which were identified in the contract and thus the title passed at the time of the transaction. However, an auction sale can be subject to an express condition so that the passing of title will occur only when that condition is fulfilled. See In re Western States Wire Corp., 490 F.2d 1065 (9th Cir. Cal. 1974) discussed below.

In In re Western States Wire Corp., 490 F.2d 1065 (9th Cir. Cal. 1974), respondent conducted a public auction and the petitioner was the successful bidder. Petitioner paid a deposit and the balance of the purchase price was to be paid before taking possession of the boat. The county assessed an annual property tax against the boat. Thereafter, petitioner paid the balance and received the certificate of ownership. But respondent refused the tax claim of the county.

The court observed that petitioner had an enforceable contract for the purchase of the boat although he was not yet the owner because the conditions precedent to the passing of title had not yet been completed. Thus, respondent was liable for the property tax.

However, the provisions that provide postponement of transfer of title has to be differentiated from guarantees and warranties made by an auctioneer. For example, if an auction sale is conducted on the basis of a thirty day money back guarantee, it will not postpone the transfer of title Hawaii Jewelers Asso. v. Fine Arts Gallery, 51 Haw. 502 (Haw. 1970)..

Even after the auction, if there is something yet to be completed, it will not postpone the transfer of title in the absence of an express stipulation to that effect. For example, if a horse is sold at an auction, title automatically passes to the buyer even though the papers regarding the same are not yet delivered.

 

Risk of Loss:

A sale by auction is complete when a property is sold to the highest bidder. The successful buyer has to pay and take the property after auction. At the purchaser’s request, the auction property can be held by the seller after sale. The general rule regarding the risk of loss of property after auction is that a seller cannot transfer risk of loss and the risk remains upon the seller until actual physical possession by the buyer. The risk of loss will pass to the buyer on his receipt of the property or on tender of delivery.

According to Article 2 of the Uniform Commercial Code, the ownership or title of goods is irrelevant in determining which party bears the risk of loss. Risk of loss is on the party who has control over the goods and is determined by the manner in which delivery is to be made. A seller who is to make physical delivery at his or her own locale continues to control the goods. The buyer, who has no control over the goods, will not carry insurance on goods not in his possession. Uniform Commercial Code, § 2-509, Comment 3.

Parties to an auction can alter the liability for loss of property by an agreement to that effect. Silver v. Wycombe, Meyer & Co., 124 Misc. 2d 717, 718 (N.Y. Civ. Ct. 1984). A buyer and seller can adjust the risk by contract.

However, under certain circumstances the risk of loss is shifted. The seller who desires to shift the risk of loss to the buyer before the buyer receives the property must clearly communicate his/her intent to the buyer. Hawkins v. Federated Mut. Ins. Co., 1996 U.S. Dist. LEXIS 21436 (N.D. Miss. Aug. 14, 1996). The shifting of risk of loss to the buyer before the buyer receives the property is not common. A statement in the auction memorandum clarifying the intention of the seller to shift the risk of loss to the buyer is enough to shift responsibility at the time of sale. Unless specifically communicated or agreed to by the parties, the risk of loss will not pass to a buyer until the property is received by the buyer. Caudle v. Sherrard Motor Co., 525 S.W.2d 238, 240 (Tex. Civ. App. Dallas 1975).

 

Right to Possession:

The vendor of property sold at an auction for cash is entitled to a lien to secure the payment of the purchase price from such a sale. The vendee is not entitled to possession of the purchased good unless and until payment is made to the vendor. In Morgan v. East, 126 Ind. 42 (Ind. 1890), the court stated that the title of property purchased at a public sale pursuant to a published notice on the terms proposed does not completely pass until the terms of the sale have been duly complied with by the purchaser. This rule applies to one who actively takes part in conducting the sale.

After the vendee complies with the terms of the contract of sale, the vendee is entitled to the delivery of the property and any refusal of such delivery shall be a breach of contract.

 

Warranty:

The reader should review our article on warranties before reading further.

Pursuant to the Uniform Commercial Code (“UCC”), express and implied warranties are applicable to auction sales. Therefore, an auction sale subject to the provisions of UCC are governed by the express and implied warranty provisions of the Uniform Commercial Code.

In Kendall v. Bausch & Lomb, Inc., 2009 U.S. Dist. LEXIS 52195, 31-32 (D.S.D. 2009), the court stated that “the warranty of merchantability generally promises that the goods will conform to the ordinary standards and are of average grade, quality, and value of like goods which are generally sold in the stream of commerce.”

While some provisions of the UCC apply to a broader group, other provisions such as the implied warranty of merchantability are limited in application to those who are merchants of a certain kind of goods, thereby restricting the implied warranty to a much smaller group. Whether a party is a merchant is a question of fact. Therefore, the implied warranty of merchantability under the UCC may be applicable to auctioned goods where circumstances establish that their owner is a “merchant” within the UCC definition.

Remedies for Breach:

Once a bid has been accepted, the relationship between the parties is identical to that which exists between a promisor and a promisee in a conventional executory contract of sale. The seller has no right to accept a higher bid, nor may the buyer withdraw the bid. In re Community Inv. Associates I, 14 B.R. 211 (Bankr. E.D. Va. 1981); Lawrence Paper Co. v. Rosen & Co., 939 F.2d 376 (6th Cir. Ohio 1991). However, through an action for breach of contract, either party may enforce the rights thereby acquired. Wright v. Vickaryous, 611 P.2d 20 (Alaska 1980). The vendor may bring an action for damages in his/her own name where the vendee neglects to comply with the terms of the contract. Note, however, that the vendor cannot sue for the purchase price, where credit has been given, until the expiration of the time allowed for payment. Girard v. Taggart, 5 Serg. & Rawle 19, 9 Am. Dec. 327, 1818 WL 2207 (Pa. 1818).

 

Specific Performance:

Where the subject of an auction sale is land, either the vendor or vendee may obtain specific performance of the contract in an equitable proceeding. Under particular circumstances, specific performance may be invoked regarding the sale of personal property. In re Cole & Stevens Roofing Co., 134 B.R. 60 (Bankr. S.D. Fla. 1991).

The highest bidder may specifically enforce the acceptance of the bid where:

• the sale is without reserve; and
• the right to withdraw the property does not exist after a bid has been made.

The highest bidder may also enforce a transfer of the property pursuant thereto, or may recover damages for breach of contract. There is no contract between the parties in the absence of a sale without reserve, or where the property is withdrawn from auction sale before the acceptance of any bid. In such circumstances, the specific performance remedy is not available.

 

Seller's Remedies:

Pursuant to the Uniform Commercial Code, sellers of goods have certain rights upon a buyer’s default such as:

• The right to resell and recover damages (difference between resale price and auctioned price);
• the right to recover damages for non-acceptance of the goods; and
• the right to cancel the contract of sale.

In choosing the method to determine the extent of damages, it is within seller’s discretion whether to adopt the resale method or not. However, the resale method is a prerequisite to vendor’s right to maintain an action against the vendee to recoup his/her loss, where the terms of sale expressly provide for such a contingency by authorizing resale of the property at the vendee’s risk in case of the latter’s default. Webster & Ford v. Hoban, 11 U.S. 399 (U.S. 1813].

Moreover, the Uniform Land Transactions Act provides that the seller may resell and recover damages, or recover damages for non-acceptance or repudiation, or recover the contract price upon a buyer’s:

• wrongful rejection of real estate,
• failure to make a payment due, or
• repudiation of a substantial part of the contract.

 

Buyer's Remedies:

Where a seller fails to make a delivery of purchased goods, repudiates the purchase, or where the buyer rightfully rejects the goods or justifiably revokes his/her prior acceptance of the goods, the various remedies available to a buyer under the Uniform Commercial Code are:

• cancellation of the sale;
• recovery of the goods;
• specific performance; and
• recovery of damages for non-delivery.

Pursuant to the Uniform Commercial Code, a buyer may revoke his/her acceptance of goods, or part thereof, for nonconformity of the goods sold to reasonably expected character within a reasonable time after the buyer discovers the nonconformity.

Moreover, the Uniform Land Transactions Act provides that if a seller of realty fails to convey, repudiates with respect to a substantial part of the contract, or if the buyer rightfully refuses to accept or rightfully revokes a prior acceptance, the buyer’s remedies pursuant to the provisions of the Act concerning liquidated damages and modification of remedies include:

• recovery of any part of the price already paid; and
• damages for failure to perform or repudiation; or
• specific performance;

Pursuant to the provisions of the Act concerning revocation of an acceptance, if the seller breaches with respect to real estate accepted, the buyer may revoke his/her acceptance and recover damages, recover damages for breach of contract, or deduct his/her damages from the price still due.

RESCISSION

Even though rescissions continue to exist in sales cases as a non-code remedy, the Uniform Commercial Code makes no mention of rescissions. If proper grounds exist, either the vendor or the vendee may rescind a contract of sale entered into at an auction. Chambers v. Kennington, 796 So. 2d 733 (La.App. 2 Cir. Sept. 28, 2001).

Thus, the seller may elect to rescind the sale, where bidding has been stifled, or where the purchaser fails or refuses to comply with the terms and conditions of his/her purchase. The auctioneer possesses no authority to rescind a sale and his/her agency is limited to selling the property. Therefore, the election must be made by the vendor personally. Boinest v. Leignez, 31 S.C.L. 464, 2 Rich. 464, 1846 WL 2230 (Ct. App. Law 1846).Furthermore, a right to a rescission may be expressly provided as an equivalent to a reservation of the right to reject bids. Gilbert v. United States, 60 Ct. Cl. 1005 (Ct. Cl. 1925).

 

Duty of Auctioneer:

Before beginning any auction sale of real or personal property, it is the duty of every auctioneer to state fully the terms and conditions upon which the sale will be made. Further, an auctioneer shall announce the character, quality and description of the property offered for sale to the persons present. The duty of an auctioneer generally includes, but is not limited to, the notification as to whether or not a right to bid is reserved by or on behalf of the seller.

An auctioneer, by selling property for another at an auction, is the agent of the seller. In the absence of an applicable statute to the contrary, the auctioneer’s rights and liabilities are governed by the general principles of the law of agency.

The mere fact that an auctioneer is sometimes required to take out a license in order to exercise his or her calling does not make the auctioneer a public officer. Since an auctioneer is usually selling the property of another, an auctioneer’s authority to conduct the sale is derived from the person whose property he or she undertakes to sell.

As a general rule, an auctioneer owes a basic duty of competence and fairness to the seller. An auctioneer, as the agent of the seller, is in a fiduciary position and has a duty to turn over proceeds of the auction sale in full, such proceeds being tantamount to trust funds. An auctioneer must exercise ordinary care and skill in the performance of the duties confided to him or her. If an auctioneer assumes a position that is entirely inconsistent with that of his or her agency relationship, the auctioneer may lose his or her right to compensation for his/her services and may be held accountable to the principal for any side profit received by him or her as a result of the sale which the auctioneer did not disclose to the principal.

In Rose v. Nat’l Auction Group, 466 Mich. 453 (Mich. 2002), appellees, the property owners, sued appellants, the auctioneers, for reimbursement of commissions paid to the auctioneers. The auctioneers moved for summary disposition. The Alpena Circuit Court (Michigan) ruled in favor of the auctioneers. The court of appeals affirmed as to the pre-contract claims, but reversed as to the post-contract claims. The supreme court granted the auctioneers’ application for leave to appeal. The property owners entered into an agreement with the auctioneers to sell the property owners’ island at auction. The auctioneers told the property owners that it would be no problem to obtain the desired price of $ 850,000. However, during the auction, it was clear that the price would be nowhere near that amount, so the property owners agreed to the use of a false bidder. Even with the use of a false bidder, however, the desired price for the island was not met. The property owners then sued the auctioneers, alleging fraud and misrepresentation. The trial court ruled in favor of the auctioneers on all of the claims. The court of appeals held that some of the property owners’ claims should go forward. The supreme court held that the property owners entered into the agreement with unclean hands, since they acknowledged agreement to engage in an illicit shill bidder scheme. Thus, the clean hands doctrine barred the property owners’ claims. The decision of the appellate court was reversed in part to the extent that it was inconsistent with the opinion. The trial court’s orders granting summary disposition in favor of the auctioneers were reinstated.

 

Liability of Auctioneer:

An auctioneer, in selling property for another at auction, is the agent of the seller and the auctioneer’s rights and liabilities, in the absence of an applicable statute changing them, are governed by the general principles of the law of agency.

The mere fact that an auctioneer is sometimes required to take out a license in order to exercise his or her calling does not make the auctioneer a public officer. Since the auctioneer is usually selling the property of another, the auctioneer’s authority to conduct the sale is derived from the person whose property he or she undertakes to sell.

The auctioneer is primarily the agent of that person, being selected and remunerated by him or her, acting in that person’s interests, and in a measure, being subservient to his or her wishes[i].

As a general proposition, an auctioneer owes a basic duty of competence and fairness to a seller. The auctioneer, as the agent of the seller, is in a fiduciary position and has a duty to turn over proceeds of the auction sale in full, such proceeds being treated as tantamount to trust funds. The auctioneer must exercise ordinary care and skill in the performance of the duties confided to him or her. If the auctioneer assumes a position that is entirely inconsistent with that of his or her agency relationship, the auctioneer may lose his or her right to compensation for services, and the auctioneer may be held accountable to the principal for any secret profit received by him or her as a result of the sale, which the auctioneer does not disclose to the principal. However, a person cannot avoid the clean hands doctrine by “relying” on advice or inducement by an auctioneer to engage in a course of conduct where it is plainly evident that the conduct is illegal or unethical. Any representation, in order that one may be justified in relying upon it, must be, in some degree at least, reasonable; at all events, it must not be so self-contradictory or absurd that no reasonable man can believe it[ii].

In Gilly v. Hirsh, 122 La. 966 (La. 1909), court held that except where an auctioneer infringes upon the rights of others, as where he or she sells at auction property to which the principal has no title, the auctioneer’s liability generally depends solely upon the contractual relations which have been voluntarily assumed, or upon obligations imposed by operation of law.

 

Conclusion:

In such fields as purchasing electrical surplus from the government and large concluded construction projects, this writer knows of several businesses that travel the world bidding on large lots of such goods. Their entire business derives from success at auction since all the materials are purchased in such a manner. Fortunes have been made by those expert in the workings of auctions, knowing what auctions to attend, how much to bid and when to bid.

Others simply enjoy the excitement of the auction, the battling of strategy and tactics with other bidders. Foreclosed real estate sales, abandoned vessel sales, probate estate sales, and jewelry estate sales occur daily and are well attended. Auctions are as much a part of business and personal life as any other type of purchase.

One expert at auctions once told the writer that the real skill in auctions did not occur at the bidding phase but in the investigation phase, when one takes every opportunity to learn as much as possible both about the goods, being sold, the nature of the auctioneer, and the likely actions of the other persons bidding. That expert, now deceased, told the writer that the worst thing that can happen at an auction is when an “amateur” as he called them, arrived to enjoy the process and distorted the workings of the professional bidders. Perhaps. But for the sellers, such “amateurs" are vital to avoid implicit or explicit understandings among the professional bidders to bid or not to bid.

It is a skill worth mastering and, while the expert never explicitly stated it, a seemingly enjoyable method of engaging in the buying and selling of goods and property. Just know the rules and the law.