Auctioneer/Seller Withdraws an Item with Bids. Is It Legal?

February 20, 2011

terry hagen Says:

I recently bid on an item at a live auction of a store going out of business. After many bids I was the highest bidder and the auctioneer was going to bring down the hammer. At the last second a family member told the auctioneer he felt the item would get a higher price at local dealer’s place of business. The family member then told the auctioneer to only accept a bid that was quite a bit higher than my bid. At that point I stopped bidding. The bidding had passed the reserve price. The item did not sell that day. The more I think about this the more irritated I am. Was this ethical and/or legal?

Another great topic from one of our readers! So, Terry Hagen receives the honor of having the question answered in its own topic on the Auction Law Weblog.

First, I must note that Terry did not state that this auction was advertised as “Absolute” and insinuated that the “bidding had passed the reserve price,” so it implies that this was an auction “With Reserve.”

Of course, now I might ask a few questions. How did Terry know that the “bidding had passed the reserve price?” Did the auctioneer announce the reserve price? Did the auctioneer state that it had met its reserve? Do these questions really have any effect on the manner in which the auctioneer handled this? Nope!

Of course, while sometimes it might not look good upon the auctioneer (by a misinformed buyer), in an “auction with reserve” the Seller/Auctioneer does have the right to withdraw any item, regardless of whether it has a reserve price or not. This is where most people are misinformed about auctions “with reserve.” Most people think that an “auction with reserve” means that one or more items have a minimum reserve price. However, this is FALSE.

It really means that certain “rights” have been reserved which may be outlined in the Terms & Conditions of the auction, as well as other factors concerning the sale of the items offered, which are determined by law and not required to be specifically announced. In any case, only one of those “rights” is the right of withdrawal, which is predetermined under the law and does not require any specific announcement (remember that old phrase, “ignorance of the law is no excuse”) and the bidders are presumed to be knowledgeable and acting with such knowledge. There may be many other rights also reserved, which is why the bidders should always read the Terms & Conditions and/or listen very closely to the opening statements at an auction.

Take a quick look at the U.C.C. and see what it says about an “auction with reserve.”

2-328. Sale by Auction.
(3) Such a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale.

You will note that the U.C.C. does not say anything about an item having a reserved minimum, nor does it address items without a reserved minimum. Therefore, it is implied that any item may be withdrawn at any time prior to the call of “sold,” regardless of any other minimum or whether it even had a minimum. So, it is certainly legal.

Now, one might ask why this section of the U.C.C. was drafted in this manner. To answer the question would require reading the history and opinions of those that drafted the document. However, since I’ve already read about such things, I’ll try to summarize those reasons to save everyone the time and effort.

The primary reason was to protect the seller on a “bad day” (in case the “right bidders” were not in attendance) so that they would not be subjected to an unreasonable loss. Therefore, an auctioneer with the appropriate knowledge of an item and its value would still have the right to withdraw an item if it did not reach a reasonable price, whether the Seller specifically instructed him/her to do so or not.

Now, to address the question of ethics – First, it should be noted that the auctioneer’s fiduciary (that’s a fancy, legal word for “primary”) duty is to the Seller. Would it be ethical for the auctioneer to sell their item for less than a “reasonable” value? Of course, “reasonable” is a relevant term (depending on the individual), but that should be an easy one to answer, especially if you put yourself in the Seller’s shoes and those were your goods being sold. By the same token, since the auctioneer is working for the Seller, if the Seller decides to withdraw an item, then the auctioneer has little choice but to abide by their wishes.

Now, on a side note, the Seller should be aware of any contractual obligations that may be noted in their contract, as most auctioneers will include a “penalty for withdrawal” and the Seller may still be required to pay commissions or a fee for exercising their right of withdrawal.

The auctioneer has no duty to the buyer (except equal fairness to all buyers present) or to sell an item at any price, just because someone bid on the item. After all, while the purpose of the auction is to put items up for competitive bidding, there is no guarantee that if you bid, you will win the item. If another bidder outbids you, you have still lost the desired item, just as if the Seller decides to withdraw it. In either case, there is no contract between you and the Seller, until the auctioneer announces a completion of the sale.

So, when the issue of ethics arises, it is only subject to which side of the bargaining table you were seated and whether you were actually treated fairly, which is the only ethics consideration.

As a buyer, you are at opposing interests with any seller, since you are wanting to get the lowest price and the seller wishes to obtain the highest price. The only time that you are not being treated fairly in this case, is if the seller favors another offer over yours, based on factors other than receiving the highest price. Therefore, as the Seller’s agent, the Auctioneer was most likely treating you ethically and also complying with the wishes of his/her fiduciary, the Seller.

Now, I would emphasize that such withdrawals in an auction should be minimal, in most cases. After all, the lure of the auction holds the possibility that deals can be had at auction and in the hopes of retaining the buyers, the Seller should expect some items to sell for less than they might have hoped, yet they may also find that there will be many other items that will sell for more than expected. So, in the end, it all balances out.

Of course, I’ve rarely heard a Seller complain about an item that brought a lot more than they expected. However, I’ve had a few that look at each item on the list and make note of their disappointment in those items that didn’t do as well as they hoped.

The informed Seller will look at the bottom line to determine the success of their auction and basically disregard the individual price that each item brought.


Auctioneer Bidding… Is it Legal?

February 6, 2011

The answer is…  YES…  er, NO…  well, It Depends!

Since this type of question arises quite often from both sides of the aisle (bidders and sellers), it warrants being posted here. Below is one of the more recent responses I replied to and hopefully it will help everyone to understand this often misunderstood part of the law.

neil Says:
February 4, 2011 at 9:02 pm

In an earlier response, you said, in reference to an auctioneer bidding on its own behalf, that “the MAJORITY of states allow an auctioneer to do so, IF it is DISCLOSED to the buyers that the auctioneer reserves the right to bid, whether it is on behalf of any minimums, reserves or for their own personal purchase.
If such bidding has not been disclosed, then it is illegal.” I’m not disagreeing. I just want to know what the basis is for your statement that disclosure is required.

While I’ve responded to similar questions in this blog on numerous occasions, I’ll give it another shot. I’m making a guess that you may have read the post Auction House Bidding & Selling which led to your question.

First, I’ll clarify the statement “the MAJORITY of states“:
I used this phrase as a sort of “disclaimer” because I know of one particular state (off the top of my head) that does not allow an auctioneer to bid for any reason. That state is Pennsylvania, although there could be another one or two that I’m not currently aware of, so it’s possible there could be others.

Second, I must also clarify another of my previous statements to insure it’s not misinterpreted.
An auctioneer may bid on behalf of the seller (i.e. to protect a minimum reserve) if such bidding is disclosed to the bidders.
There is no such requirement of disclosure (in most states that I’m aware of and with the exception of PA, of course), if the auctioneer is only bidding for his/her own personal purchase. In such cases, they are just another bidder for the merchandise. [However, it’s just a good idea to include/disclose such things in your terms, just to help the bidders understand and keep the questioning to a minimum, whether the auctioneer is required to do so or not.]

NOW to answer the question… “the basis for my statement that disclosure is required.”

The statement is based on the fact that almost all of the 50 states, incorporated all or most of the Uniform Commercial Code (U.C.C.) Section 2-328 into their own Business and Commerce codes/laws. You can view that section of the U.C.C. at U.C.C. § 2-328. Sale by Auction

You will note that (the first part of) Paragraph 4 states:

(4) If the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved,

Now, keep in mind… you have to think like a lawyer! In other words, you have to read that statement very carefully to determine what it is stating, as it’s written in sort of a “reverse logic“.

The KEY STATEMENT is “and notice has not been given that liberty for such bidding is reserved“.

Therefore, to reverse this statement into layman’s terms, it is stating that if an auctioneer receives a bid on the seller’s behalf, then they must first give notice that such liberty of bidding is being reserved to do so.

OR more simply… Such bidding must be DISCLOSED (i.e. give notice) to the bidders, prior to doing so.

Now, to take this one step further… there is no requirement for an auctioneer to disclose each individual bid being made on behalf of the seller (i.e. the actual act of such bidding at the time it is being done).

There is also no requirement for the auctioneer to disclose whether or not a particular item has a minimum reserve.

The only requirement is that the auctioneer must disclose that such bidding may take place during the course of the auction. This disclosure may be made during the opening announcements or it may be in the form of a written Terms & Conditions. So, bidders should read the Terms & Conditions and pay close attention to the opening statements. Bidders should also keep in mind, even if you were not present during the opening statements, when you bid at an auction, you have agreed to be bound by those terms even if you didn’t actually hear them spoken. So, it’s always a good idea to arrive early and listen closely.

OH! One more thing… as I stated that most of the 50 states incorporated the U.C.C. into their laws, Louisiana did not incorporate the U.C.C. as written (they just used parts of it) and a few others have also modified the code to some extent. Since other states may have added additional requirements or modified their auction laws, check the laws of your own state and if you’re an auctioneer, you should already know what those laws are to begin with. In any case, if in doubt… Don’t bid or allow the seller to bid on their items and you’ll have nothing to worry about.