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18 Jul 2022

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Blog

A Legal Perspective on Absentee Bids

Posted By: Michak Legal

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Legals

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Within the auction industry absentee bids left with an auctioneer are generally seen – and should be seen – as a ministerial accommodation to bidders who are unable to be physically present at an auction (or, if present, choose not to execute their own bids). Absentee bids can also benefit the seller by potentially increasing the Hammer Price on a lot, and by potentially providing a starting point for bidding. Because bidders and sellers often bring their own expectations to the auction (including expectations around absentee bidding), and because those expectations may, and often are, inconsistent with industry standards and with the practices of the individual auctioneer, it is important for all parties to understand the nature of an absentee bid, and relationships of the parties with respect to an absentee bid. As such, in order to educate the parties, manage their expectations, avoid disputes, and reduce the risk of liability, auctioneers who receive absentee bids should clearly establish the nature of absentee bidding and the procedures employed by the auctioneer in handling absentee bids. Moreover, in some licensing states, the auctioneer is required to describe his or her policies regarding absentee bids in the seller’s contract. Under any circumstances, I would suggest that your procedures for handling absentee bids be set out in your seller’s contract, in your Bidder Terms and Conditions, and in your absentee bid form.

As a starting proposition, the auctioneer is the seller’s agent. This means that the auctioneer acts on behalf of, and for the benefit of, the seller. Notwithstanding this essential reality, when an auctioneer agrees to receive and execute an absentee bid, several questions arise:

• What, if any, relationship and potential liabilities are established between the absentee bidder and the auctioneer?

• At what amount do you set-in the absentee bid? (By way of example, if you have a $500 absentee bid, do you set it in at $500 or at some lower amount to be advanced competitively?)

• What happens if there is a failure to execute the absentee bid, and, in particular, is the auctioneer potentially liable to the absentee bidder or the seller?

Like so many issues confronted by auctioneers, the answers to these questions should be found in both the auctioneer’s Bidder Terms and Conditions and in the written contract between the auctioneer and the seller.

The Bidder Terms and Conditions provide the auctioneer with the opportunity to establish rules applicable to the auction and to describe the contractual relationship between the auctioneer and the bidders. The Bidder Terms and Conditions should clearly state that the auctioneer is the seller’s agent, and that, under no circumstances (including the receipt of absentee bids), will the auctioneer act as, or be deemed, an agent of a bidder. Additionally, the Bidder Terms and Conditions should indicate that if absentee bids are accepted, they will be accepted in the auctioneer’s sole and absolute discretion, and will be executed as a ministerial accommodation only – not as an obligation.

Should an auctioneer be willing to make the accommodation of receiving absentee bids, he or she must determine, as a matter of policy, whether an absentee bid will be executed at its full amount or whether it will be executed competitively (i.e., initiated at a lower opening amount that is typically a percentage of the maximum bid and only executed up to the amount necessary to constitute the high bid, or until exhausted (whichever comes first)). Once this determination is made, it should be stated clearly in the Bidder Terms and Conditions, and in the seller’s contract, so that there are no surprises.

Occasionally, I’ve been told by an auctioneer that “I set it in where the absentee bidder tells me to set in.” When I hear that, which, fortunately, is not often, it gives me palpitations because, if you are not the agent of the absent bidder, the absentee bidder should not be giving you instructions. And, to the extent you are taking instructions from the absentee bidder you run the risk – at least of the argument – that an agency relationship was created. Remember, it’s your auction, your rules, and you work for the seller. If the absentee bidder can direct how his or her bid is executed, do you risk creating the expectation of an agency relationship on behalf of the bidder?

Bear in mind that, in a brokered real estate transaction, a listing agent who receives an offer from a potential buyer is, typically, required to provide a disclosure of agency relationship, in writing, so that the offeror understands that the listing agent is working for the seller and that there is no dual agency (unless expressly agreed to). An auctioneer receiving an absentee bid really wants to have a similar disclosure in place. Once the auctioneer determines how an absentee bid will be set-in it needs to be set forth in Bidder Terms and Conditions, in the absentee bid form signed by the absentee bidder, and in the seller’s contract with the auctioneer so that everyone is on the same page. In this regard, if the auctioneer is setting the bid in at a percentage of the maximum amount, you want to explain the rationale to the seller up front so that you don’t have to explain, later, how it was that you had a $500 absentee bid, but sold the lot for $480.

Next, the Bidder Terms and Conditions and the seller’s contract should recognize the possibility that – for any number or reasons – an absentee bid may go unexecuted. I’ve actually been in that position as an absentee bidder. Having left a $500 absentee bid on a lot, I called the auctioneer (a good friend of mine) after the sale and asked how I did. After a moment of awkward silence, I was told I didn’t win the lot. Expressing surprise, I told the auctioneer that I thought I left some cushion in the bid. Well, it turns out that the lot sold for $300, and my bid was never executed. It happens. And, you want to let both your absentee bidder and your seller know that – while you will make reasonable efforts to execute absentee bids, there are circumstances that may result in such a bid not being executed, and that there will be no liability for the failure to execute an absentee bid. Essentially, the risk of a failure to execute should not rest on the auctioneer.

Each absentee bidder should also be advised that a lot subject to an absentee bid may be sold to another bidder for the maximum amount of the absentee bid based a bidding sequence that causes another bidder to reach that amount first (for example, the maximum amount of the absentee bid was $100, the absentee bidder was in at $90, and the lot sells to another bidder for $100). Additionally, the Bidder Terms and Conditions should address how an absentee bid will be handled if its execution would be for less than a full bidding increment established by the auctioneer. By clearly articulating the rules for handling absentee bids in the Bidder Terms and Conditions, the auctioneer can manage the bidder’s expectations and reduce the risk of liability.

Here is an absentee bid form that I have provided to auctioneers addressing the issues discussed in this article. Remember, the provisions should be paralleled in your seller’s contract, as well.

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Given all of the foregoing, I was taken aback recently to read a theory on social media that an auctioneer’s receipt of an absentee bid to be executed competitively creates a conflict of interest between the absentee bidder (who hopes to get the lot at the lowest possible price) and the auctioneer (who benefits from striking it off at the highest possible price). That theory is based on fundamental misunderstanding of what constitutes a conflict of interest, and improperly suggests an agency relationship between the auctioneer and the absentee bidder – which you want to avoid. Typically, parties to a contract will have divergent interests. Even in so-called win-win situations, the parties want different things. The potential for a conflict of interest, typically, only arises when the parties are in a confidential relationship or when one party owes a fiduciary obligation to the other. So, a trustee who buys property out of an estate has a potential conflict of interest even if a fair price is paid (that’s why you get court approval for that), an officer in a real estate development company has a potential conflict of interest if he seizes a corporate opportunity, and a director of a non-profit corporation has a potential conflict of interest if she sells goods or services to the entity for a profit. If you do not represent the absentee bidder, and you have agreed to execute the absentee bid as a ministerial act according to your rules, there is no conflict of interest.

THIS ARTICLE IS FOR INFORMATION AND DISCUSSION PURPOSES ONLY, AND IS NOT INTENDED AS, AND CANNOT BE RELIED ON AS, LEGAL ADVICE. NO ATTORNEY-CLIENT RELATIONSHIP IS INTENDED OR ESTABLISHED. SPECIFIC QUESTIONS SHOULD BE REFERRED TO AN ATTORNEY OF YOUR OWN CHOOSING. ANY SAMPLE LANGUAGE OR FORMS SHOULD BE REVIEWED BY AN ATTORNEY OF YOUR OWN CHOOSING BEFORE BEING USED.

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Auctioneer Discretion in Reopening the Bidding to Recognize a Timely Tendered Missed Bid

I was watching another lawyer argue an appeal once, and one of the judges, paraphrasing a point that the lawyer had just made, asked – “Are you saying that . . . .?”. The lawyer responded – “That’s not what I’m saying, your Honor, that’s what the General Assembly said, I’m just repeating it.” That was a great answer that was wholly accurate in the context of the case, and he ultimately won the appeal based on the application of the statutory language.

With that backdrop, let’s look at an auctioneer’s discretion to reopen the bidding to recognize a timely tendered missed bid (i.e., a bid tendered before the fall of the hammer, but brought to the auctioneer’s attention only after the fall of the hammer). Auctioneers (and people who might be willing to sue an auctioneer) have been barraged by “expert” advice on social media – accompanied by a copious amount of table pounding – advising, first, that auctioneers can’t reopen the bidding, and, then (after being confronted with the law as it actually exists), advising that auctioneers should never, never, never reopen the bidding even if it is consistent with the law and industry practices.

The rationale for the “you should never, never, never reopen the bidding” advice is – as near as I can tell – multifold: first, BECAUSE I SAID SO, second, BECAUSE IT MIGHT DISCOURAGE BIDDERS FROM ATTENDING YOUR NEXT AUCTION, and third, BECAUSE IT MIGHT RESULT IN A LAWSUIT. These reasons are not compelling. The first rationale (because I said so) is not a sound argument, and rarely works on anyone over the age of four. The second rationale (because it might discourage bidders from attending your next auction) raises the ethical question as to the possible elevation of an auctioneer’s interest in potential future revenues over the interests of the auctioneer’s current seller. And, with respect to the third, while it is a good idea to avoid litigation when reasonably possible, I’m not sure it’s reasonable under all circumstances to give away the seller’s money to avoid a meritless lawsuit.

Writing about auction law, teaching auction law classes at several schools of auctioneering, and presenting to various auctioneer associations across the country, I have observed that an auctioneer has the discretion to reopen the bidding to recognize a timely tendered missed bid. To be clear, however, that’s not what I’m saying, that’s what the General Assembly in every state that has adopted Article 2 of the Uniform Commercial Code (49 out of 50) has said, and that’s what numerous courts (including courts in Louisiana, the state that has not adopted Article 2 of the UCC) have said. I’m just repeating it.

Moreover, the exercise of discretion to reopen the bidding to recognize a timely tendered missed bid has been a long-standing industry practice. By way of example, in 1744, Samuel Baker (the founder of the firm that became known as Sotheby’s) provided for the possibility of reopening the bidding in his Bidder Terms and Conditions.With respect to the UCC, Section 2-328(2) provides that –

A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.

As a matter of law, then, an auctioneer has the discretion to reopen the bidding to recognize a timely tendered missed bid. To be clear, however, that’s not what I’m saying, that’s what the General Assembly in 49 out of 50 states has said. I’m just repeating it. Moreover, the courts have recognized an auctioneer’s discretion to reopen the bidding to recognize a timely tendered missed bid (see Callimanopulos v. Christie’s Inc., 621 F. Supp. 2d 127 (S.D.N.Y. 2009); Kline v. Fineberg, 481 So.2d 108, 109 (Fla. App. 3 Dist., 1985); Hoffman v. Horton, 212 Va. 565, 186 S.E.2d 79 (Va. 1972)). Again, that’s not what I’m saying, I’m just repeating it.

So, let’s talk about discretion. One definition of “discretion” is “the freedom to decide what should be done in a particular situation.” This means that an auctioneer exercising his or her discretion to reopen the bidding may exercise that discretion in favor of reopening the bidding to recognize a timely tendered missed bid, or may exercise his or her discretion against reopening the bidding to recognize a timely tendered missed bid. There are numerous factors that might influence the exercise of that discretion. By way of example (but not limitation):

- If an auctioneer is selling a $10,000,000 property in Colorado and the missed bid represents a $250,000 advance, circumstances might weigh in favor of reopening the bidding.

- If an auctioneer is selling a $3,000,000 painting in New York and the missed bid represents a $100,000 advance, circumstances might weigh in favor of reopening the bidding.

- If an auctioneer is selling a $200,000 piece of farm equipment in South Dakota and the missed bid represents a $10,000 advance, circumstances might weigh in favor of reopening the bidding.

- If an auctioneer is selling $5.00 box lots in Ohio and the missed bid represents a $1.50 advance, circumstances might weigh against reopening the bidding.

While there will, naturally, be other considerations, I expect that most auctioneers recognize the difference between a high-value asset and a $5.00 box lot, and also recognize that different considerations may be implicated based on asset class, asset value, and the needs of the seller, and that, perhaps, a $5.00 box lot should not be the tail wagging the dog in the auction industry.

To be clear, regardless of your position on reopening the bidding, UCC 2-328 (as written, and as interpreted by the courts) gives the auctioneer the discretion to reopen the bidding to recognize a missed bid, or not. Discretion means that it is the auctioneer’s choice on a case-by-case basis. Certainly, that choice ought to take the interests of the seller into consideration. And, if it is your up-front determination to never, never, never reopen the bidding regardless of the circumstances, regardless of the value of the asset, and regardless of the interests of the seller, you should probably advise the seller of that determination when the seller is deciding whether to hire you. Also, you really want to consider whether it makes sense for an auctioneer to abandon a right afforded under the law (that is also consistent with industry standards as established over hundreds of years) to avoid a possible frivolous lawsuit by a bidder who harbors the unsustainable belief that you shouldn’t have reopened to bidding to recognize a timely tendered missed bid.

This brings me to an interesting point, I have read several social media posts in which a self-proclaimed industry “expert” argues, both, that (i) auctioneers should never, never, never reopen the bidding, and (ii) auctioneers should never, never, never use Bidder Terms and Conditions that vary the effect of any provisions of Article 2 of the UCC (even though that possibility is consistent with the function of the Article 2 as a gap-filler statute, and even though that possibility is expressly recognized in Section 1-302 of the UCC). One of the problems with that advice (and that’s not to say that there is only one problem) is that, while an auctioneer has the right to start the auction by saying “Sold means sold, and I will never, never, never reopen the bidding,” by doing so, the auctioneer is introducing terms that vary the effect of Section 2-328(2) of the UCC. Yes, waiving the discretion to reopen the bidding (or not) up-front (as opposed to exercising that discretion one way or the other on a case-by-case basis) varies the effect of Section 2-328(2) of the UCC. As such, adopting a policy to never, never, never, reopen the bidding (and incorporating that policy into your Bidder Terms and Conditions) and never, never, never using terms that vary the effect of Section 2-328 of the UCC are two mutually exclusive conditions that cannot exist at the same time. Thus, when auctioneers are encouraged to adhere to both of these mutually exclusive conditions, perhaps they should question whether that advice is reasonable, reliable, and informed, or just made up. You might also want to ask how the never, never, never reopen the bidding position can be reconciled with the view adopted by the General Assembly in each of 49 states, as well as the founder of Sotheby’s.

THIS ARTICLE IS FOR INFORMATION AND DISCUSSION PURPOSES ONLY, AND IS NOT INTENDED AS, AND CANNOT BE RELIED ON AS, LEGAL ADVICE. NO ATTORNEY-CLIENT RELATIONSHIP IS INTENDED OR ESTABLISHED. SPECIFIC QUESTIONS SHOULD BE REFERRED TO AN ATTORNEY OF YOUR OWN CHOOSING.

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Understanding the Risk Associated with the Auction Purchase of the Brady Football

On Sunday, January 23, 2022, Tom Brady threw a 55-yard touchdown pass to wide receiver Mike Evans who, after scoring, tossed the ball into the stands. A week later, Brady made the surprising announcement that he was retiring from professional football. Because of Brady’s announced retirement, the ball was not just tied to Brady’s 86th playoff touchdown (a seemingly unpassable record), but it became the ball used for Brady’s final career touchdown. On March 12, 2022, the football was at auction for $518,628 (including Buyer’s Premium). Then, on March 13, Brady tweeted that he was un-retiring, and was planning to play for Tampa Bay in the 2022 NFL season. Sports memorabilia experts have speculated that Brady’s un-retirement resulted in a precipitous drop in the value of the football.

Not surprisingly, there has been discussion about the legal rights and responsibilities of the auctioneer, the seller, and the buyer under these circumstances. In some of these discussions, there has been speculation as to whether, under the Uniform Commercial Code, the buyer could reject the football as nonconforming goods, or, if the buyer had taken possession, whether the buyer could revoke acceptance of the football as nonconforming goods. I have also even seen speculation about whether the auction house somehow misrepresented the nature or character of the football. I don’t find these assessments, or associated theories, compelling. First, at the time of the auction, the football was exactly as described. And, because Tom Brady hasn’t yet thrown another touchdown, the football is, today, exactly as described at the time of the auction. So, there was certainly no misrepresentation by the auction house, and to suggest otherwise is just silly. Also, the UCC doesn’t afford the buyer the opportunity to reject acceptance of, or to revoke acceptance of, conforming goods. And, as of today, the football constitutes conforming goods. Moreover, because it appears that the Bidder Terms and Conditions did not reserve title in the seller until payment was made by the buyer, by operation of Section 2-328 of the UCC, the buyer owns the football (which is subject to possessory liens in favor of the seller and the auction house), and is obligated to pay the hammer price and the buyer’s premium.

So, how should we look at this situation from a legal perspective. To start, it is important to recognize that every auction transaction involves risk, and each auction transaction may involve risk that is unique to the specific transaction. The first question to be asked, then, is – What was the risk associated with the auction purchase of Tom Brady’s final career touchdown football? The second question might be – Did the auction house guarantee that Tom Brady would not un-retire?

The provenance of the football was well documented, and, therefore, the risk of whether this was THE FOOTBALL was pretty well covered. Plus, the auction house warranted authenticity (i.e., that this was THE FOOTBALL). So, what was the risk? The risk, from a value perspective, was that Brady might un-retire (which he has announced) and that he might throw another touchdown (which he hasn’t done yet, and may never do). Nothing in the Bidder Terms and Conditions, or in the UCC, made the auction house the guarantor of Tom Brady’s retirement. It’s as simple as that. I would argue that the value of the football vis-à-vis Tom Brady’s retirement status was a risk assumed by the buyer. In this regard, hindsight suggests that a call from the buyer to Lloyd’s of London (or some other provider) to explore customized insurance products might have been prudent.

How this is handled among the parties may, largely, be a business decision. From a legal perspective, however, with the exception of an action by the seller and/or the auction house to enforce the buyer’s payment obligation, any litigation might be premature and unsustainable.

THIS ARTICLE IS FOR INFORMATION AND DISCUSSION PURPOSES ONLY, AND IS NOT INTENDED AS, AND CANNOT BE RELIED ON AS, LEGAL ADVICE. NO ATTORNEY-CLIENT RELATIONSHIP IS INTENDED OR ESTABLISHED. SPECIFIC QUESTIONS SHOULD BE REFERRED TO AN ATTORNEY OF YOUR OWN CHOOSING.

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