OK, auction buffs, its pop quiz time!
Here’s the scenario: You’re at an auction, and the lot being offered is a Conoco sign. There are four primary bidders. Bidder A drops out at $200; Bidder B drops out at $300, and Bidders C and D drive the bidding up to $600. Bidder C then bids $650, but gets a sharp elbow in the ribs from his wife. Bidder C then frantically waves his arms saying “I’m out, I withdraw my bid.” The auctioneer should:
A. Refuse to release Bidder C from his bid because a bid is legally binding.
B. Release Bidder C from his bid and pick up the bidding with the next higher bid, Bidder D’s bid for $600.
C. Start the bidding over from zero.
The correct answer is C: Start the bidding over from zero. The reason for this is found in the Uniform Commercial Code.
Although state auction rules vary slightly, all states (except Louisiana) base their auction law on the Uniform Commercial Code, or UCC. According to the UCC, (section 2-238 paragraph 3): “a bidder may retract his bid until the auctioneer’s announcement of completion of the sale, but a bidder’s retraction does not revive any previous bid.”
I’ve heard auctioneers argue vehemently in favor of each of the three alternatives listed above. If some auctioneers aren’t clear on the law, it’s no wonder that the auction-going public is a little confused. Let’s consider each alternative:
Are bids legally binding?
Whether a bid is legally binding depends on the type of auction. In the United States, the two primary types of auctions are “reserve” and “absolute.” In a reserve auction, the seller has placed a minimum acceptable price on the item to be auctioned. In an absolute auction, the seller has agreed to sell for the highest bid, regardless of the amount offered.
The role of the auctioneer is to ratify the contract formed between the buyer and the seller.
The UCC states that “the sale of an item is complete when the auctioneer so announces by the fall of the hammer or in other customary manner.” In a reserve auction, the auctioneer is not authorized to sell for any amount below the reserve price. Any bids that are placed below the reserve cannot be ratified by the auctioneer; such bids are simply offers, and they are not binding. Bids above the reserve are binding, with the high bid ratified by the auctioneer when he declares the item sold.
In an absolute auction, the item offered must be sold to the highest bidder regardless of price. All bids are binding. Some auctioneers mistakenly believe that a bid for an item is just an offer, and that they can either accept the offer or reject it. I’ve seen auctioneers offer an item at “absolute sale” and then decline to sell the item because the bids offered didn’t meet the auctioneer’s expectations. Such a move is illegal. In an absolute auction, it’s the auctioneer who offers the item for sale, the terms being “the highest bidder gets it regardless of the price.” The auctioneer is legally bound to accept the highest bid.
When the high bidder drops out, does the bidding start again at the second highest bid?
I’ve seen this tactic used occasionally by auctioneers, and it’s illegal, as well. In the scenario offered above, the auctioneer would be wrong to say, “The last bid was $600; will you bid $625?” The price went up to $600 based on the competition between bidders C and D. Remove either of them from the competition and the price may never have gone that high. The auctioneer, therefore, is required to drop the price back to zero (or whatever the starting offer was) and then re-open the bidding. As the UCC says, “a bidder’s retraction does not revive any previous bid.”
Sharp auction bidders who know the law (UCC) can sometimes capitalize on sloppy auctioneering. By law, all auctions are considered to be reserve auctions unless they are declared to be absolute auctions. In other words, the default format for an auction is a reserve auction. Reserve auctions have minimum prices in order to protect sellers. Such price protection is to be guarded by the auctioneer, but sometimes an auctioneer will inadvertently throw away the price protection that the seller has instituted.
Take the above example, wherein the high bidder withdrew his bid. Suppose that the Conoco sign had a reserve price of $500. Suppose then that when the bidding reached $500, the auctioneer declared, “We now have an absolute auction!” I hear this regularly at auctions, and every time I do I cringe and hold my breath to see what will happen next. You see, the auctioneer has just announced that since the reserve price has been reached, the item will be sold to whoever is the high bidder. In an attempt to boost the bidding, he has declared an absolute auction.
However, that’s a terrible move for the auctioneer, because he just took away all of the buyer’s protections, and did so publicly (and in most cases, on videotape). When the high bidder withdrew his bid, all other bids bit the dust, and the bidding goes back to zero. The auctioneer changed the terms of the auction. Unless he specifically reinstates the reserve, the sign will be sold to the highest bidder. Since the auctioneer has announced that the Conoco sign is now being sold absolute, a bid of $1 would get the sign if $1 happened to be the highest bid. What would that mean for the seller? Well, the auctioneer would have to make up the difference between the high bid ($1) and the $500 reserve price. The auctioneer would owe the seller $499, minus whatever the selling fees on $500 would have been.
The Uniform Commercial Code section pertaining to auctions is short and sweet; just four paragraphs. Everyone who attends auctions regularly should become familiar with the section and its implications.
Originally posted 2013-12-16 11:28:00.