Auction sale contracts

In terms of a typical auction sale, four basic contracts underpin the auction process. First, there is a contract between bidders inter se, what can be termed as the ‘taking part contract’. Secondly, there is a contract between the auction house and each individual bidder. Thirdly, there is the sale contract itself which exists between the bidder whose bid is accepted and the seller. Fourthly, there is the potential for a separate (or collateral) contract to exist between auctioneer and highest bidder where the auction involves the sale of a lot without reserve.

Taking part contract

When a bidder attends an auction and acquires an auction catalogue containing the auction’s standard conditions, each bidder individually contracts with all the other bidders to abide by the conditions. Each individual bidder provides consideration by agreeing to be bound by the common auction rules. In short, a multiplicity of individual contracts arise between each bidder at the auction and all bidders are deemed to play the ‘bidding game’ by the auction rules. Essentially, the contract represents the legal mechanism which ensures that all bidders at the auction play by a common set of mutually enforceable rules.

Contract: auction house and bidder

As well as entering into a multiplicity of individual contracts with each of his fellow bidders, a bidder also enters into a separate auction contract with the auction house itself. In terms of consideration, the auction house allows the bidder to take part in the auction according to its sales conditions in return for which the bidder (by taking part in the bidding) helps force up the price and provides the auction house with the opportunity to earn its commission. The contract which exists between the auction house and each bidder is also necessary to protect the economic interests of each bidder. Essentially, each and every bidder should be permitted an equal opportunity to take part in the auction on the condition that he abides by the auctioneer’s conditions.

Sale contract

The main sale contract comes into existence between the seller and successful bidder when the auctioneer accepts the highest bid for a lot in the customary manner of hitting the hammer on the block: Payne v Cave [1789] 3 Term Rep 148; s.57(2) of the Sale of Goods Act 1979. A distinction, however, needs to be made between those auctions where there is a ‘sale with reserve’ and those where there is a ‘sale without reserve.’

The position is relatively straightforward in the case of auctions held with a reserve price. Here, the auctioneer, in inviting bids for a particular lot, makes an invitation to treat to the various bidders. The offer is then made by the relevant bidder. That bid is not usually accepted immediately. The auctioneer invites further bids to be made for the lot. If no other bids are forthcoming, the auctioneer will accept the bid on the fall of his hammer: British Car Auctions v Wright [1972] 1 WLR 1519. It is at this point that acceptance of the offer by the auction house (on behalf of the seller) takes place and the contract of sale is struck.

It has also been held that an advertisement by an auction house to hold an auction sale with reserve on a certain day will not constitute an offer to potential bidders that the auction sale will actually take place. In Harris v Nickerson [1873] LR 8 QB 286, the claimant failed to recover damages for loss suffered in travelling to the advertised place of an auction sale which was ultimately cancelled. His claim was condemned as “an attempt to make a mere declaration of intention a binding contract”.

Collateral contract

Where the auction sale is held without a reserve price, the contract law position is more complicated. The dicta of three judges of the Exchequer Chamber in the nineteenth century case of Warlow v Harrison [1859] 1 E & B 309 suggests that, in the case of an auction held without a reserve price, the auctioneer makes an offer to sell the lot and that offer is accepted by the bidder who makes the highest bid at the auction.

Similarly, on this reasoning, an advertisement to hold an auction without reserve will amount to a unilateral offer to sell to the highest bidder which is capable of acceptance by any bidder complying with the terms of the offer. The situation is analogous to a contractor who makes a tender in response to an invitation for tenders. The tender is an acceptance of the offer to consider compliant tenders.

It is important, however, to observe, that there is no contract of sale between the highest bidder and the seller of the property if the auctioneer refuses to accept the highest bid. The auctioneer, in these circumstances, is liable on a separate (or collateral) contract between him and the highest bidder that the sale will be without reserve.

A contrary argument is that there is no separate or collateral contract because the auctioneer who holds an auction without reserve is merely making a request for bids from those participating at the auction. The offer, therefore, is made by the bidders and no contract is formed, in the same way as an auction for a lot with a reserve price, until the fall of the hammer. The cases of Harris v Nickerson [1873] LR 8 QB 286 and Payne v Cave, above, support this approach, although they can be distinguished on the grounds that they both involved auction sales which were not without reserve.

There is also the Scottish case of Fenwick v MacDonald Fraser [1904] 6 F (Ct. of Session) 850, which is persuasive on this point. Here, the claimant attended an auction sale and made a bid for lot 50, a bull. His offer of 42 guineas was the highest bid made at the sale of the lot and, accordingly, he was the purchaser in terms of the conditions of sale. The auctioneer then withdrew the lot intimating that there was a reserve price on it for 150 guineas. The Court of Session held that s.58(2) of the Sale of Goods Act 1893 (forerunner to s.57(2) of the Sale of Goods Act 1979, which stipulates that a sale by auction is complete when the auctioneer announces its completion upon the fall of the hammer) implied that the seller had the right to withdraw the lot at any time before the hammer falls. This was a corollary of the right of the buyer to withdraw his bid. Significantly, the statutory provisions make no exception for auction sales without reserve. Moreover, the auctioneer may have good reasons for withdrawing the lot.

So far as English law is concerned, the point has since been clarified by the Court of Appeal in Barry v Davies (trading as Heathcote Ball (Commercial Auctions) & Co) [2000] 1 WLR 1962, where it was accepted that, where a lot was auctioned without reserve, the auctioneer would be in breach of contract to the highest bidder if he withdrew the lot from sale. Indeed, in this case, the court went so far as to say that the withdrawal of the lot would constitute an unlawful bid by the auctioneer on behalf of the seller under s.57(4) of the Sale of Goods Act 1979. Significantly, the claim succeeded on the ground that there was a separate collateral contract between the auctioneer and the highest bidder constituted by an offer by the auctioneer to sell to the highest bidder which was accepted when the bid was made.

The claimant was held to be entitled to recover £27,600 by way of damages, being the difference between the amount that the claimant had bid to purchase the machines (£400) and the amount he would have been required to pay to obtain the machines in the ordinary way (£28,000). Given, however, that there was no contract of sale between the seller and the bidder, but merely a collateral contract to effect a contract of sale, the damages awarded appear misconceived. Arguably, all that the disappointed bidder has lost is the chance of obtaining the lot at the price which he actually bid. This chance may be said to have a value and the court should not reject a claim for damages simply because it may be difficult to assess.

In Thomas Eggar Verrall Bowles (a firm) v Anthony Burnett Rice, (unreported, Ch D, 21 December 1999), for example, a prospective purchaser was wrongfully denied a chance to bid at auction. Rimer J awarded him damages based on the assessment that he had lost a 70 per cent chance of successfully bidding for a lot. He was, therefore, entitled to recover 70 per cent of the aggregate of the cost price of the stock plus the likely profit less the cost of acquisition.

What then was the consideration for the auctioneer’s promise to sell the lot to the highest bidder? On this point, the Court of Appeal held that the highest bidder supplies the necessary consideration by performing the act of making the highest bid. This is a benefit to the auctioneer (as the price is driven up) and a corresponding detriment to the bidder in that he runs the risk of his bid being accepted. Another way of looking at this is to say that the auctioneer’s offer to sell the lot without reserve is a unilateral offer to those bidding at the auction. The highest bidder provides consideration by simply performing the act of making the highest bid. But, if the bidder can withdraw his bid at any time before the fall of the hammer, how can this be a benefit to the auctioneer or a detriment to the bidder?

Finally, a more fundamental question arises as to whether the auctioneer in contracting to sell to the highest bidder is, in fact, acting as agent for the seller so as to make the latter liable under the collateral contract. If an advertisement of a sale without reserve is made on the instructions of the vendor, there seems nothing in principle to prevent the court from holding that this constitutes an offer by the vendor, as principal, to sell to the highest bidder made through the auctioneer merely as agent. To this extent, therefore, there may be no real difference between the notion that the auctioneer is personally liable on the collateral contract but can look to the seller for an indemnity, and one that renders the seller primarily responsible on the contract as principal.

Points for the practitioner

The complexity of auction sales throws up a variety of different contractual scenarios, all of which have a valuable role in protecting the interests of both buyer and seller. In terms of the actual sale contract between bidder and seller, a distinction is drawn, as we have seen, between those auctions where there is a ‘sale with reserve’ and those where there is a ‘sale without reserve.’ In the case of auctions held with a reserve price, the auctioneer, in inviting bids for a particular lot, makes an invitation to treat to the various bidders. The offer is then made by the relevant bidder. Where, on the other hand, the auction sale is held without a reserve price, the auctioneer makes an offer to sell the lot and that offer is accepted by the bidder who makes the highest bid at the auction.

If the auctioneer withdraws the lot without justification, he is liable on a separate (or collateral) contract between him and the highest bidder that the sale will be without reserve. As a matter of policy, it seems right to hold the auctioneer liable under this separate contract. If he were not liable, the fact that the sale was without reserve (which may induce persons to bid) would have no meaning and not benefit bidders at all. In other words, absent a collateral contract, there would be no legal effect in advertising a sale as being without reserve since the sale is not complete until the fall of the hammer.

Mark Pawlowski is a barrister and professor emeritus of property law, School of Law, University of Greenwich gre.ac.uk