SOLD!! Auction Law: What Every Bidder Ought to Know

Artwork is a common auction purchase -- but are you really getting the original you bid on?

Are you attending any auctions this summer? 

An auction, according to Black’s Law Dictionary, is “a public sale of property to the highest bidder by one licensed and authorized for that purpose,” but for all of us who have purchased art, antiques, horses, cars, or who-knows-what-all at an auction, the event is clearly much more than that.  Auctions represent opportunity, a combination of chance from random stumbling across an object of interest, coupled with strategy and skill based on our own knowledge of the area we’ve developed a personal interest in.  Sure, it’s great to stumble on a fantastic sale at the local department store, but to find the perfect addition to your collection at an auction and then secure the winning bid on it is somehow much more satisfying.  The item has greater meaning because you won it. 

For many enthusiastic auction-goers, however, once we are traveling down that road of goal-oriented excitement, headed towards our prize (be it a painting, a baseball card, or any number of random wacky things some of us are known to bid on at auctions), we sometimes lose sight of the legal and logistical details of what we are engaged in. Whether you are a first-time auction-goer or a cool, experienced pro with your own bidding paddle, it is wise to take a deep breath and understand the legal implications of your auction participation.

While you may go your whole life without running into a problem with an auction purchase, if you are an avid auction-goer the odds are that eventually you’ll engage in a transaction that goes awry: the bidding process does not seem above-board, or the item you purchased doesn’t look like the one you inspected, or the payment terms were not as you anticipated and you can’t make the payments as requested.  Understanding the legal context of an auction ahead of time will help you be in the best position to deal with any such eventuality that arises. The legal environment surrounding auctions has evolved to protect consumers from scurrilous and unscrupulous auction practices–and admittedly, such practices do still exist to varying degrees in ordinary auctions, but at least there are rules to be followed, and legal recourse for the purchaser when those rules are broken.

SALES AND CONTRACTS: 

WHAT IT IS, AND WHEN IT HAPPENS

An auction is a means of conducting a specifically defined legal sales transaction, regulated by the terms of the Uniform Commercial Code, as well as each state’s consumer protection, sales, and auctioneer licensing laws. Many municipal regulations that shape the timing, location, and terms of an auction event, either through zoning or by requiring event permits for specific auctions.

What constitutes a “sale of property” is clarified by the terms of the Uniform Commercial Code(UCC) and other state laws pertaining to sales. In its most basic form, a “sale” is the transfer of an ownership interest in something for consideration, meaning money. The UCC is the most common legal code that governs the sale of “goods.”  The UCC uses the term “goods” instead of “property” to distinguish the sale of items, which are within the umbrella of the UCC, and the sale of real estate, which is not regulated under the UCC. Chapter 2 of the UCC pertains to sales, and Section 328 of Chapter 2 specifically pertains to the sale of goods by auction.

Under the UCC Section 2-328. Sale by Auction, a “sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. If a bid is made during the process of completing the sale but before a prior bid is accepted, the auctioneer has discretion to reopen the bidding or to declare the goods sold under the prior bid.”  That is, when the hammer falls, you, the winning bidder, have ownership title to the item.  The auction is actually a series of separate sales, each concluding with the fall of a hammer, and transferring the ownership title to each item or, when goods are put up in “lots,” to all the items within that lot.

In addition to the UCC terms, the terms and conditions of a sale at auction are determined by the contract entered into between the bidder and the auction house and the seller, or item’s owner.  You don’t remember entering into a contract with them?  You did, whether you are aware of it or not. Courts hold that the terms and conditions of sale listed in an auction house catalog or separate terms and conditions handed out to bidders comprises the contract – a contract you accept when you tender a bid in that auction.  When you bid on an item at auction, you are accepting the sales terms as stated by that auctioneer, so be sure you read them over carefully and understand them thoroughly so you can make an informed decision as to whether to participate in that auction or not.

GOODS, AND WHO OWNS THEM

Within the meaning of the UCC, an auction is a legally authorized process for the sale of goods. Under the terms of the UCC, the “goods” sold at an auction are those items right there present to be transferred at the auction, and the “sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner.” UCC Section 2-238(2).

This UCC definition of “goods” seems intuitive to most auction-goers: Obviously, you go to an auction early to view the actual items you are going to be bidding on, and when you win your bid, you put that actual item in your trunk and drive off with it.  Unfortunately, with the rise in internet “auctions” as well as other questionable auction practices like the cruise-ship art auctions, the question of what goods you are actually bidding on is one consumers must now be attentive to.  Be sure you know BEFORE you bid: is the item listed in the lot the actual item you are purchasing?  Or will you be subjected to a “bait and switch,” being sent “substitute” goods rather than taking home the item in front of you? 

The sale by auction process of something other than the item actually there in front of you (or pictured in the photographs in an internet auction) flies in the face of the UCC auction procedure, which anticipates the sale of “goods” rather than “fungible goods,” which would be “goods of which any unit, by nature or usage of trade, is the equivalent of any other unit, or... goods which by agreement are treated as equivalent.”  A legal, UCC sales-regulated auction is not a process of bidding on fungible goods but rather on a real item in front of the purchaser, with a sale that concludes on the spot.

The UCC definition section states that “Goods must be both existing and identified before any interest in them may pass. Goods that are not both existing and identified are "future" goods. A purported present sale of future goods or of any interest therein operates as a contract to sell.”  The term “existing” is fairly obvious; in order to be presently sold, such as happens at the fall of a hammer at an auction, an item must really exist in the real world. If you “purchase” an item, such as for example an art poster that hasn’t been printed yet, you have not actually made a purchase, you have entered into a contract for a purchase of future goods; it only becomes a completed sale after the item is created and passes into your possession.

In addition to existing, an item must be “identified” before the legal ownership interest in it can pass to the purchaser and complete the sale. At a UCC-type legal auction, the sale is complete when the hammer falls, and an actual good passes legal ownership to the purchaser.

Part of the reason that auctions are regulated by law is precisely that finality: when the hammer falls, the sale is over and done with, without time to reconsider the purchase or return it as one might do with a fungible good you bring home from a store, like a toaster that you decide is not the right color for your kitchen. But if in fact what you’ve done is not finalized a sale, but rather entered into a contract for a future sale of goods yet to be identified, in theory the purchaser should still have all the protections at law regarding the execution and completion of a contract.

Another point which purchasers ought to consider before bidding on goods at an auction is the question of who presently owns those goods.  In most auctions conducted by auction houses or licensed auctioneers, the goods are owned by some other person or many people, but have all been “consigned” to the auction house.  A consignment contract is a legal form of temporarily turning over ownership title to an agent for the specific purpose of selling that item.  When you buy an item at auction, you are typically buying that item from the auctioneer, who has been authorized to sell it by the full owner.  Some auction houses reveal who the owner is that they are acting as agent for; others do not.  And under most states laws, individuals are allowed to auction their own personal property without engaging a licensed auctioneer – the usual case with all those eBay auctions. 

As an auction bidder, consider who you are doing business with.  Are you purchasing an item from a reputable auction house which has a reputation to protect – and business insurance to seek recourse from if there’s a problem?  Or are you buying directly from an owner?  And if so, is that owner someone you wish to engage in business with at the dollar levels you are anticipating bidding?  Many of us consider the source when making large purchase decisions around our home: we might buy our appliances from, say, Sears, because of their warranties and staff repair people, or we might choose to buy a computer from a local dealer rather than a mail-order discount place because we know and trust their reputation and like having a local tech person available to answer our questions.  When investing in art or antiques at auction, you should ask yourself the same kinds of questions about whether you are content doing business with the actual owner and seller of the goods you are considering buying.

WHAT IS SOLD: 

CATALOG DESCRIPTIONS, INSPECTION, and GUARANTEES

We’ve already discussed the need to make sure that the item you are bidding on is actually the item you will be buying.  But there are more questions you should ask about that item – like what exactly is it? 

In addition to the terms and conditions of sale, art auction catalogs typically include a specific list of each “lot” or item (or sometimes groups of items) to be sold.  These catalogs are not as common in estate and farm auctions, which sometimes provide lists of the major items being sold, but towards the end of the day it usually collapses into ad-hoc lots comprised of whatever the auctioneer can throw into the remaining buckets, trunks, and suitcases (meaning you wind up buying eight hand-planes along with that theorem painting you were eyeing).  But art auction catalogs ordinarily contain detailed descriptions of the items being offered in numbered lots.

Although these descriptions contain a lot of information regarding the pieces offered, a careful reading of the warranty or guaranty being offered by the auction house usually indicates that very little of that information is being presented as legally supportable fact.  Typically, however, reputable auction houses will provide a limited warranty as to the authenticity of works which can be reasonably attributed to a particular artist.  Read these warranties very, very carefully, and understand what exactly is being stated and warranted. 

Courts look askance at auction goers who do not personally physically inspect the item they are purchasing before bidding on it.  The catalog description, outside the specific language (usually the bold-type or capital-letter heading identifying the item only) being guaranteed, is legally no more than advertising hype.  Auction items are sold on an As-Is basis: what you see is what you get, regardless of what flowery language the catalog uses to describe the beastly, rusted, tattered thing. You are fairly assured of getting no quarter from the courts if you bought a hunk of junk (or poster instead of an original painting) on the basis of the catalog description without giving it a close personal inspection first.  If you are bidding via telephone or on line, your risk increases greatly.  Ask for additional photos of the item and carefully research the seller’s reputation before dropping large sums of money on an item sight unseen.

BIDDING PROCESS: RESERVES AND WITHOUT RESERVES

Bidding processes are referred to as being with or without reserve, which reflects a provision in the UCC regarding whether or not the seller can withdraw the item, or set a “reserve” price, meaning if bids don’t go over that price the item is automatically withdrawn.  If there is no mention of whether or not the auction is with reserve, then by law the seller retains the right to withdraw the items.

UCC Section 2-238 states:

(3) A sale by auction is subject to the seller's right to withdraw the goods unless at the time the goods are put up or during the course of the auction it is announced in express terms that the right to withdraw the goods is not reserved. In an auction in which the right to withdraw the goods is reserved, the auctioneer may withdraw the goods at any time until completion of the sale is announced by the auctioneer. In an auction in which the right to withdraw the goods is not reserved, after the auctioneer calls for bids on an article or lot, the article or lot may not be withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract a bid until the auctioneer's announcement of completion of the sale, but a bidder's retraction does not revive any previous bid.

(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, the buyer may at the buyer's option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale. This subsection shall not apply to any bid at an auction required by law.

Check carefully before you bid: sometimes the auction catalog or terms and conditions of sales will reflect whether or not the auction as a whole is with or without reserve; other times this will be announced on a lot-by-lot basis. 

AUCTIONEERS LICENSES

According to Black’s Law Dictionary, an auctioneer is “a person authorized or licensed by law to sell lands or goods of other persons at public auction. One who sells goods at public auction for another on commission, or for a recompense.”

The reason that auctioneers are required to be licensed and regulated is that auctioneers play an unusual legal role. In most sales situations, the sales person is clearly the agent of the seller; in real estate purchases and some other large commercial transactions, there may well be a sellers’ agent and a buyers’ agent. The near-universal rule of law is that a person can not be an agent of both parties to a transaction.  But auctioneers are the exception to this rule. Again, according to Black’s Law Dictionary, “The auctioneer is employed by the seller and is primarily his agent. However, when the property is struck off he is also the agent of the buyer to the extent of binding the parties by his memorandum of sale, the satisfying the statute of frauds.”

Because of this unique legal position, and because state legislatures wish to protect consumers against unscrupulous auctioneering practices, states license auctioneers as they do other professionals from lawyers and architects to cosmetologists and dentists. Each state has a statute and regulations regarding auctioneer conduct, which auctioneers must learn and be tested on before receiving a license. And if an auctioneer – on land – engages in unlawful auction practices, then the consumer can file a complaint with the state licensing board, which may result in the auctioneer having his or her license removed, effectively putting them out of business.

Although auctioneers are engaged under contract by the seller of goods, the auctioneer is an independent professional business. Auction houses develop their own business reputation, and a reputable auction house will work hard to maintain their good standing in the business community and resolve any disputes or allegations of misconduct swiftly and professionally in accordance with law. Auctioneer who specialize in particular areas, be it art, antiques, or the sale of business inventories, develop an expertise in the market which can be extremely helpful to both sellers looking to maximize the return for their goods as well as purchasers seeking accurate information about the item being purchased. Of course, there are still slick-talking wily auctioneers as there are slick-talking wily used car salesmen, lawyers, and time-share brokers; but the licensing laws and professional regulations at least provide the consumer with reasonable recourse, and an auctioneer’s reputation helps guide consumers in their decision as to whether or not to attend and bid at any given auction.

LEGAL RECOURSE, AND SUCCESS AT AUCTION

What happens if your purchase goes awry?  The terms and conditions of sale listed in the auction catalog typically specify which court has jurisdiction over any disputes that arise regarding the sale. This is another factor you may want to consider in deciding whether or not to participate in any particular auction – do you want to bid many tens of thousands of dollars in New York if you live in Texas and will have to travel to New York courts for the next four years if there’s a problem?  Perhaps you do, perhaps you don’t, but as long as you are aware of the terms, you can make that decision on a knowledgeable basis. 

The auction catalog terms – the terms of the binding contract you have entered into by bidding – will also likely state the recourse for some of the most typical disputes which might arise at art auction.  For example, most art auction catalogs set out a process for reviewing disputes over authenticity of the work sold, which typically involves having two independent experts examine the work, and if it’s proven to be a fraud, the sale will be rescinded.  However, these terms vary and are set by contract in each individual auction, so be sure you understand what they are before you bid.

Buying art, antiques, and other interesting items at auction is fun, exciting, and rewarding, and can yield fine purchases that prove to be wise investments over time. Just be sure before you bid that you have a clear, knowledgeable understanding of what you are bidding on, who you are buying from, and the terms of the sale that will occur when the hammer falls on your winning bid.  Success at auction is that great feeling when you travel home with a highly desirable item gained at an appropriate, or bargain, price – not that sinking feeling in the pit of your stomach as you wonder, why on earth did I buy THAT?  Take the time to learn the legal framework of an auction sale, and carefully study the terms, conditions, and warrantees offered at the auction you are attending before you get overwhelmed with the bidding excitement.  Then get in there and bid!