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18 Jul 2022

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A Legal Perspective on the Gap-Filler Provisions of UCC Article 2 for Auctioneers

Posted By: Michak Legal

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Legals

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Article 2 of the Uniform Commercial Code (the “UCC”) is a statute applicable to contracts for the sale of goods. Article 2 has been adopted as state law in forty-nine of the fifty states, with Louisiana being the only non-adopter (although Louisiana applies similar rules for the formation and enforcement of contracts). Section 2-328 is the only Article 2 provision in which auctions are specifically referenced. Consequently, there has been a fair amount of discussion within the auction community regarding Section 2-328. Unfortunately, the focus on Section 2-328 tends to ignore other provisions of the UCC that are also applicable to the sale of goods at auction. Additionally, it appears that an enduring misperception regarding the purpose and effect of Article 2 has created confusion among some auctioneers. In particular, auctioneers have been advised that Bidder Terms and Conditions (which form a contract between the auctioneer and each bidder and set out the terms of the contract between the seller and the buyer), must strictly conform to Article 2’s statutory provisions at the risk of being unenforceable. In this regard, auctioneers have been told that Bidder Terms and Conditions that are contrary to the provisions of Section 2-328 are neither advisable nor likely to be enforceable. Such advice, however, misses the purpose, intent, and application of Article 2, and is a classic example of the tail wagging the dog.

The purpose of this article is to add some legal perspective to the discussion. It may seem a little esoteric and in the weeds, but putting Article 2 in its proper perspective will facilitate a more meaningful discussion about Bidder Terms and Conditions, and, in particular, about an auctioneer’s ability to use Bidder Terms and Conditions that are reasonably favorable to the auctioneer and the seller, that conform to the individual auctioneer’s practices, and that are appropriate to the asset class and the nature of the sale.

Prior to the adoption of Article 2 (and, before that, the Uniform Sales Act), contracts for the sale of goods were governed exclusively by the common law (i.e., judicial precedent) – and the rules for contract formation, interpretation, and enforcement were fairly formal and rigid. Under the common law, parties to contracts for the sale of goods (particularly in non-auction sales) needed to be very specific. The offer needed to address all pertinent terms including, without being limited to: identification of the goods; price; payment; delivery; title; possession; risk of loss; warranties; disclaimers; and remedies. Then, the acceptance needed to mirror the offer. A problem with the common law rules was that – even though the parties may have desired to form a contract for the sale of goods, the absence any necessary term(s), or some slight difference between the acceptance and the offer, could result in there being no contract. Thus, while the parties had the right to determine the terms to be included in their contracts, the failure to include all essential terms could be fatal to the contract. Additionally, differences in the common law rules from state to state could lead to confusion in transactions where the seller was in one state and the buyer was in another.

This is where UCC Article 2 comes in. Like the Uniform Sales Act before it, Article 2 was designed to establish a set of rules for the sale of goods that was essentially uniform or consistent from state to state. I say essentially uniform or consistent because the states could choose from various alternative provisions in certain sections of the UCC, and the courts in each state still have the ability to interpret statutory and contract language and determine its application in specific cases. Another significant goal of Article 2, like the Uniform Sales Act, was to facilitate the formation of contracts when it was apparent that the parties intended to enter into a contract but failed to satisfy all of the common law requirements. In particular, UCC Section 2-207 is intended to prevent the potentially draconian consequences of the common law as regards contract formalities. Section 2-207 provides, as follows:

§ 2-207. Additional Terms in Acceptance or Confirmation.

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

Sections 2-207(1) and (2) were designed to address the common law’s mirror-image rule and overcome what had become known as the battle of the forms. Section 2-207(3) addresses gap-filler provisions that fall into place if the parties have not included every essential term in their intended contract.

A critical point to bear in mind regarding UCC Article 2 is that, while the common law required that every essential term be addressed in order for there to be a contract between the seller and the buyer, by operation of Section 2-207(3) and the gap-filler provisions set forth throughout Article 2, so long as an intent to enter into a contract is expressed between the parties, there are only two essential terms that must be agreed to – (i) the identity of the goods and (ii) the quantity. Thus, if parties expressing an intent to enter into a contract for the sale of goods agree on the identity of the goods and the quantity – and nothing else – the gap-filler provisions of Article 2 will provide every other term, including the terms for: payment (Section 2-310); delivery (Section 2-308); passage of title (Section 2-401 and Section 2-328(2)); risk of loss (Section 2-509); and even price (Section 2-305), to mention a few. While the applicability of Article 2’s gap-filler provisions might seem more readily apparent to non-auction transactions, many of those provisions – beyond just Section 2-328 – apply in the auction context, as well.

Section 2-207(3) suggests the proper sequence for interpreting a contract for the sale of goods – first, you start with the terms agreed to by the parties, and, then, you fill in any gaps not specifically addressed by the parties by using the default provisions of Article 2. Thus, only after focusing on the terms expressly agreed to by the parties does the Article 2 – as directed by Section 2-207(3) – turn its attention to the “supplementary terms incorporated under . . . other provisions of [the] Act.” This is where those who derisively dismiss the “infamous gap-filler crowd” (of which I am a member) fail in their analysis. Specifically, the suggestion that you can’t – or shouldn’t – use Bidder Terms or Conditions that diverge in any way from the provisions of Article 2 misses the entire point of Article 2. Thus, starting your contract analysis from the perspective that the provisions of Article 2 are carved in stone, and dictate the terms that must be agreed on between the parties, gets the process backwards. Instead, the analysis of a contract for the sale of goods should start with the terms actually agreed on by the parties, before turning to Article 2 to fill in any gaps. That’s what Article 2 actually requires.

Perhaps the best description of how the gap-filler provisions apply was articulated by the New Jersey Supreme Court in Lott v. Delmar, 2 N.J. 229, 66 A.2d 25 (1949). The Lott case was decided under the Uniform Sales Act (which, as indicated earlier, was the predecessor statute to Article 2 of the UCC), but the principle is the same. In Lott, the court considered the issue of when title passes to goods sold at auction, and focused on a provision of the Uniform Sales Act that was later carried forward into Article 2 of the UCC – “A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner.” The Lott court observed that, if the parties had said nothing about the passage of title, then, title (along with the risk of loss) would have passed with the fall of the hammer. However, the Bidder Terms and Conditions actually used in that case called for title (along with the risk of loss) to be retained by the seller until payment was made. Because, in Lott, the property was lost before payment was made, the Bidder Terms and Conditions controlled over the gap-filler provision of the Uniform Sale Act and the loss was realized by the seller, not the buyer. In describing the interplay between Bidder Terms and Conditions and the gap-filler provisions of the statute, the court observed that –

“[T]he Uniform Sales Act is largely declaratory of the common law. Its modifications of the common-law rules were designed to make for uniformity in the law of sales in this country. The act does not deprive parties of the common-law right of contract. The rule of the Uniform Sales Act is presumptive merely, and is therefore applicable only where the parties have not expressly stipulated [otherwise].”

This is wholly consistent with UCC Section 2-207(3) (as described above) and with UCC Section 1-302, which provides that the “effect” of the provisions of the UCC may be varied by agreement.

Here, it is important to spend a moment on the words used in Section 1-302. Section 1-302 does not say that the UCC, including Section 2-328 “can be modified” by agreement, it says that “the effect of provisions of [the Uniform Commercial Code] may be varied by agreement.” This is an important distinction. By way of example –

• If the parties to a contract for the sale of goods say nothing about price, the default provision set forth in UCC Section 2-305 will apply to set “a reasonable price at the time for delivery.” However, if, in the first instance, the parties agree on a price, the effect of Section 2-305 is modified by agreement.

• If the parties to a contract for the sale of goods say nothing about when payment is due, the default provision set forth in UCC Section 2-310(a) will apply and payment will be “due at the time and place at which the buyer is to receive the goods.” However, if, in the first instance, the parties agree on payment terms (i.e., 30, 60, 90, 120 days), the effect of Section 2-310(a) is modified by agreement.

• If an auctioneer’s Bidder Terms and Conditions say nothing about when title passes from the seller to the buyer, the default provision set forth in UCC Section 2-328(2) will apply, and title will pass with the fall of the hammer (even before the buyer pays). However, if, in the first instance, the Bidder Terms and Conditions provide that title only passes when payment is made, the effect of Section 2-328(2) is modified by agreement.

In other words, the agreement of the parties determines the applicability and, thus, the effect, of the Article 2 gap-filler provisions. That is precisely how the court in Lott said it should work. And, that is precisely how Section 2-207(3) says it should work. It’s kind of like going to a wedding – you get the first choice on what you’re going to eat, but, if you don’t check the Vegan box when you RSVP, you’re going to get the steak by default.

Article 2 of the UCC is intended to facilitate the formation of, and performance under, contracts for the sale of goods. Under Article 2, contracts are formed on the terms and conditions agreed to by the parties. If, however, the parties have not addressed every essential term of the contract, the gap-filler provisions drop in to complete the contract. Starting with your own reasonable terms is not contrary to Article 2, it is anticipated by Article 2. In this regard, the courts have consistently recognized both (i) the ability of the auctioneer and seller to establish reasonable terms for the auction, and (ii) the general enforceability of such terms. Terms that do not strictly track the Article 2 default provisions are not – without further analysis – unreasonable, unenforceable, or ill-advised. Absolute statements to the contrary – without considering the specific terms at issue – are inconsistent with both the letter and intent of Article 2, and do not contribute to a meaningful discussion. I am confident that most auctioneers understand customary practices and can identify and implement reasonable Bidder Terms and Conditions. That’s where the discussion should be. Certainly, Article 2 is not the only measuring stick for reasonableness. Conversation stoppers like “you can’t do that because it’s not in the UCC” . . . or . . . “Bidder Terms and Conditions that are inconsistent with the UCC are illegal” . . . or . . . “you have to strictly follow the UCC”. . . all miss the point and suggest that auctioneers must abandon the right to establish their own reasonable contract terms. That’s simply not the case. Of course, specific questions about enforceability and reasonableness should be referred to a competent attorney of your own choosing.

Hopefully, having added some perspective to UCC Article 2 and its application, we can move on to a meaningful discussion of Section 2-328 – which will be the subject of another article for auctioneers to consider.

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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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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