Auctions

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Auctions

A sale open to the general public and conducted by an auctioneer, a person empowered to conduct such a sale, at which property is sold to the highest bidder.

A bid is an offer by a bidder, a prospective purchaser, to pay a designated amount for the property on sale.

A Dutch auction is a method of sale that entails the public offer of the property at a price in excess of its value, accompanied by a gradual reduction in price until the item is purchased.

According to the Uniform Commercial Code (UCC), a body of law governing commercial transactions that has been adopted by the states, the auction sale of any item concludes with the fall of the hammer or in any other customary manner. Such a sale is "with reserve," which denotes that the goods can be withdrawn at any time, until the auctioneer announces the completion of the sale, unless the goods are explicitly put up "without reserve," which signifies that the article cannot be withdrawn after the call for bids unless no bid is made within a reasonable time. In both types of auctions, the bidder can withdraw a bid prior to the auctioneer's announcement that the sale has been completed.

Regulation

As a legitimate business enterprise, auctions cannot be proscribed. They are not above reasonable regulation by both state and local authorities. Some states subject auction sales to taxation.

In the absence of statutes, any person can act as an auctioneer, but a license, which usually restricts his or her authority to a certain region, is often required. Licensing officers can refuse to issue a license, but only if done reasonably, impartially, and to promote the interest of the community.

Agency of Auctioneer

An auctioneer serves as the agent of the seller who employs him or her, and the auctioneer must act in Good Faith, advance the interest of the seller, and conduct the sale in accordance with the seller's instructions. If real property or goods priced at $500 or more are sold at auction, a written agreement is necessary to satisfy the Statute of Frauds, an old English Law adopted in the United States that requires certain contracts to be in writing. The auctioneer is authorized to sign a memorandum of sale on behalf of both parties, but this authority is limited and expires shortly after the sale has been concluded. Both the buyer and the seller are bound by the announcement of the auctioneer concerning the identity of the property and the terms and conditions of the sale.

In the absence of a statutory provision requiring authority to be in writing, an agent, pursuant to oral authorization, can execute any contract required to be in writing. The statutory provisions vary, however, in regard to the execution of contracts to purchase real property.

Because of the trust and confidence the seller reposes in an auctioneer, the individual cannot delegate the power to sell without special authority from the seller. The delegation of insignificant duties, such as the striking of the hammer and the announcement of the sale, is allowable if conducted pursuant to the auctioneer's immediate supervision and direction.

An auctioneer's authority normally terminates upon the completion of the sale and the collection of the purchase price, but the seller can revoke the authority at any time prior to the sale. According to some authorities, the buyer or seller can end the auctioneer's authority to sign a memorandum on his or her behalf between the time of the fall of the hammer and the signing of the memorandum, but the prevailing view deems the auctioneer's authority to be irrevocable. Private sales by an auctioneer are generally impermissible.

Conduct and Validity of Sale

The owner of the property has the right to control the sale until its conclusion. Unless conditions are imposed by the seller, the 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. The auctioneer cannot amend the printed terms and conditions of the auction, but he or she is empowered to postpone the sale, if that is the desire. The auctioneer can modify the sale terms of goods advertised in a catalog at any time during the sale, if announced publicly and all of the bidders present are cognizant of it. The auctioneer may also retain the right to resell should there be an error or a dispute concerning the sale property. The description of the property in the catalog must be unambiguous. A significant error in a description might cause the cancellation of the sale, although trivial discrepancies between the property and the description are not problematic. The seller can withdraw property until the acceptance of a bid by an auctioneer.

A bid is an offer to purchase, and no obligations are imposed upon the seller until the bid is accepted. It can be made in any manner that demonstrates the bidder's willingness to pay a particular price for the auctioned property, whether orally, in writing, or through bodily movements, such as a wave of the hand. Secret signals between the bidder and the auctioneer militate against equality in bidding and are thereby prohibited. The auctioneer accepts a bid by the fall of the hammer or by any other perceptible method that advises the bidder that the property is his or hers upon tendering the amount of the bid in accordance with the terms of the sale. An auctioneer can reject a bid on various grounds, such as when it is combined with terms or conditions other than those of the sale, or is below the minimum price acceptable to the owner.

As a general rule, any act of the auctioneer, seller, or buyer that prevents an impartial, free, and open sale or that reduces competition in the bidding is contrary to public policy. An agreement among prospective buyers not to bid has been held to void the sale to any buyer within this group. A purchase by a person who has not participated in the illegal agreement remains in effect. A puffer or shill is a person who has no intention of buying but is hired by the seller to place fictitious bids in order to raise the bidding of genuine purchasers. In general, if a purchaser at an auction can prove that a puffer was employed, he or she can void the sale. Some jurisdictions require the buyer to have been financially hurt by the puffer, but others permit an individual to void a sale even if no harm occurred. Puffing and by-bidding are synonymous.

A deposit is not a pledge but a partial payment of the purchase price, usually made payable to the auctioneer who retains it until the completion of the sale.

The property of one person should not be commingled and sold with the property of another by the auctioneer unless notice is furnished to all interested parties, or it might constitute Fraud.

An auctioneer is not entitled to bid on property that he or she has been hired to sell, but the auctioneer can, however, bid a particular sum for a purchaser without violating any duties to the seller or even to other prospective bidders.

An auctioneer who does not have the required license but who executes a sale can be penalized, but the sale remains valid; an auction is void, however, when it is conducted without the owner's consent.

Rights and Liabilities of Buyer and Seller

In an unconditional sale, title passes to the bidder when the auctioneer's hammer falls. If conditions exist, title passes upon their fulfillment or through their waiver, the intentional relinquishment of a known right. The bidder is ordinarily entitled to possession when he or she pays the amount bid.

A person who bids on behalf of another is personally liable for the bid unless the person discloses this relationship to the auctioneer.

Fraud, or a Misrepresentation of a material fact on which the buyer detrimentally relied, or the seller's failure to provide good title furnishes a basis for setting aside the sale.

The seller has a lien, a security interest, on the property until the price is paid. If the purchaser fails to comply with the conditions of a sale, the seller can regard the sale as abandoned and sue for damages. Where a resale occurs, and the price is lower than the contract price, the defaulting buyer in some jurisdictions is liable to the seller for the difference between what he or she had agreed to pay and what the seller received on the resale. In general, whether a deposit or a partial payment must be repaid depends upon which party was responsible for the uncompleted sale. If the buyer is responsible, he or she cannot recover either the deposit or partial payment.

Compensation

The party employing the auctioneer pays a commission regardless of whether he or she procures a sale, unless the auctioneer is responsible for the failure of the sale. The auctioneer is entitled to a reasonable sum unless a statute or contract provision determines the amount.

Liabilities of Auctioneer

An auctioneer is usually liable to the seller for monetary losses attributable to his or her Negligence in failing to follow the seller's instructions. The auctioneer can also be responsible to the buyer for fraud, conduct in excess of authority, and failure to deliver the goods. Since the auctioneer is a stakeholder, a third party designated by two or more persons to retain on deposit money or property that is the subject of a dispute, the auctioneer is liable to the buyer in those instances where the buyer is entitled to the return of the deposit. An auctioneer who sells property on behalf of one who does not own it and delivers the proceeds to that person is personally liable to the rightful owner even though the auctioneer acted in good faith and without knowledge of the absence of title. He or she can recover his or her losses from the person who received the proceeds in the form of damages that he or she was ordered to pay to the actual owner.

Online Auctions

With its ability to connect potential buyers and sellers from anywhere in the world, the Internet has become an increasingly important player in auctions. The first online auctions appeared on the Internet in 1995, and according to the Federal Trade Commission (FTC) these auctions have become "perhaps the hottest phenomenon on the Web." Large organizations can participate in online auctions but so can individual sellers and small businesses.

The rules for online auctions are fairly straightforward. For a typical person-to-person site, the sellers will open an account and are assigned an on-screen name. They must pay a fee whenever they conduct an auction. The seller can set a time limit on the bidding, as well as a minimum price. If a buyer puts in a bid that the seller accepts, they complete the transaction, often via email, arranging for payment and delivery of the goods. Many sites allow buyers to pay by credit card (which protects the buyer in case merchandise is not delivered); some individual sellers require payment by cashier's check or money order (to protect against bounced checks). Some buyers and sellers conduct their money transactions through online payment or online escrow services, which serve as a secure site for sending and receiving payment information. These payment arrangements are more a matter of caution than lack of trust. In fact, auction sites usually offer some form of insurance or guarantees to ensure that merchandise is both paid for and delivered as agreed by the buyer and the seller.

Although online auctions are generally safe for both buyers and sellers, auction fraud does occur. Buyers who report online auction fraud to the FTC commonly complain that merchandise never arrives or that it arrives late or that the merchandise that does arrive is not what was advertised. There are other more problematic types of fraud. In "bid siphoning," a bidder is lured off a legitimate auction site by a phony seller who promises to sell the same item as that being auctioned for a lower price. The buyer sends money to this "seller," who offers no guarantees—and usually no merchandise. Fraudulent online sellers, like their "live" counterparts, may also employ puffers to bid up the price of an item, or they may engage in "bid shielding," in which extremely high bids are submitted and then retracted so that a preferred bidder can put in a lower bid and obtain the item.

Both buyers and sellers who engage in online auctions are advised to take common-sense precautions. First, people should deal with legitimate auction sites whose reputations are established. They should determine that terms of bidding, payment, and delivery are spelled out ahead of time. Also it is a good idea to check out online payment or escrow services, particularly if the buyer or seller insists on using a particular one whose reputation is not known. Buyers and sellers can contact their local branch of the Better Business Bureau to find out whether complaints have been lodged against a particular service or site.

Further readings

Federal Trade Commission. 2003. "Internet Auctions: A Guide for Buyers and Sellers." Available online at <www.ftc.gov/bcp/conline/pubs/online/auctions.htm> (accessed October 13, 2003).

Hix, Nancy. 2001. The Business Guide to Selling through Internet Auctions: A Proven Seven-Step Plan for Selling to Consumers and Other Businesses. Gulf Breeze, Fla.: Maximus.

Hultmark, Christina. 2003. Internet Marketplace: The Law of Auctions and Exchanges Online. New York: Oxford Univ. Press.

Gold, Sarah S., and Leon P. Gold. 2001. "Class Counsel Auctions Inconsistent with Reform Act." New York Law Journal 226 (October 10): 3.

Rappaport, Bret, and Joni Green. 2002. "Calvinball Cannot Be Played on This Court: The Sanctity of Auction Procedures in Bankruptcy." Journal of Bankruptcy Law and Practice 11 (March-April): 189–212.

Cross-references

Internet; Sales Law; Uniform Commercial Code.

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