Ag Goods Sold At Auction – When Is A Contract Formed?

Overview

A basic rule of contract formation is that an offer for specific goods must be made and the offer must be accepted.   The Uniform Commercial Code (UCC) as adopted by a particular state also helps define when an offer is accepted and a enforceable contract is formed.  

In the context of an auction, what’s an offer and when does acceptance occur?  That’s the focus of today’s post.

General Rules

An auction sale contract is enforced, as is true of any other contract, according to its terms. In general, the owner of property sold at auction has the right to prescribe, within reasonable limits, the manner, conditions and terms of sale.  That means a buyer, for example, will be bound by a written sale brochure provision stating that announcements made day of sale would control terms of sale.

Many agricultural goods are sold at auction.  In an auction sale, the auctioneer is the seller’s agent.  The auctioneer is selected by the seller, is remunerated by the seller, is to act in the seller’s interest and, to a degree, is subservient to the seller’s wishes.  Until the auctioneer signals that the sale has been consummated, the auctioneer is exclusively the seller’s agent and functions in a principal-agent relationship.  The auctioneer’s authority and liability depend upon the nature and extent of the agency conferred on the auctioneer by the seller.  If the auctioneer exceeds the scope of authority, the auctioneer does not bind the owner of the property. 

As an agent of the seller, the auctioneer must exercise ordinary care and skill in the performance of duties undertaken.  An auctioneer may be held accountable to the seller for any secret profits received by the auctioneer as a result of the sale which are not disclosed to the seller.  But, there is no auctioneer liability if the auctioneer never becomes a party to a contract with the bidder.  See e.g., In re Wilson Freight Co., 30 B.R. 971 (Bankr. S.D. N.Y. 1983). 

Offer and Acceptance

The fundamental rule at common law and under the UCC is that a bid at an auction constitutes an offer to buy.  Other than for judicial sales, a contract is formed when the auctioneer signals acceptance by the fall of the auctioneer’s hammer or by some other act. If a bid is made while the hammer is falling in acceptance of a prior bid, the auctioneer has the discretion to reopen the bidding or declare the goods sold.  A bidder may retract a bid until the auctioneer’s announcement of completion of the sale.  UCC § 2-328(3).  But a bidder’s retraction does not revive any previous bid.  UCC § 2-328(3).

Auctions may be held either “with reserve” or “without reserve.”  UCC § 2-328(4).  These terms relate to the seller’s right to withdraw the goods if dissatisfied with the bids received.  In an auction conducted “with reserve,” the seller or the auctioneer has the right to reject all bids if desired.  In an auction conducted “without reserve,” the seller does not have the right to withdraw goods and the goods must be sold to the highest bidder even if only one bid is made.  An article or lot cannot be withdrawn unless no bid is made within a reasonable time. 

“With Reserve” Auction

Under the UCC, all auctions are presumed to be “with reserve” unless it is expressly announced to the contrary.  For auctions conducted without reserve, the seller is committed to the sale once a bid has been entered, regardless of the level of bidding or the seller’s notion of the property’s true value.  In a without reserve auction, the seller is the offeror, the bidder is the offeree and a contract is formed when a bid is made, subject only to a higher bid being made.  For auctions conducted with reserve, a bid is an offer, and a contract is formed when the seller accepts the bid.  Acceptance in a with-reserve auction is usually denoted by the fall of the auctioneer’s hammer, but UCC § 2-328(2) states that a sale may be completed “in any other customary manner.”  This permits a seller to reject the highest bid even after the auctioneer’s hammer falls or the auctioneer otherwise ends the auction.  See, e.g., Bradshaw v. Thomson, 454 F.2d 75 (6th Cir. 1972); Johnson v. Herman, No. CX-98-946, 1998 Minn. App. LEXIS 1390 (Minn. Ct. App. Dec. 22, 1998).

Seller Bidding on Own Goods?

At an auction, a seller may bid on the seller’s own goods only if the right to do so is reserved in advance.  Except at a forced sale, if the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at the buyer’s option void the sale entirely or take the goods at the price of the last good-faith bid before the completion of the sale.  UCC § 2-328(4).  However, the seller must have an obligation to sell to the highest bidder before the bidder has a right to take the goods at the price of the last good-faith bid.

In some instances, the consequences of a seller not giving notice of an intention to bid can go beyond the bidder’s remedies of avoiding the contract or taking the goods at the price of the last good-faith bid.  If the seller acts with a malicious intent to inflate the bids and injure other bidders, punitive damages may be awarded.  See, e.g., Nevada National Leasing Co. v. Hereford, 36 Cal. 3d 146, 680 P.2d 1077 (1984).

What About Real Estate Auctions?

While Article 2 of the UCC does not apply to real estate sold at auction, some courts have applied by analogy the various rules of Article 2 to real estate auctions. For example, Well v. Schoeneweis, 101 Ill. App. 3d 254, 427 N.E.2d 1343 (1981) involved an action for specific performance of a sale of farmland brought by the highest bidder at a public auction against the seller. The court, while noting that Article 2 did not apply to real estate auctions, stated that the rules for real and personal property were identical and that the lower court did not err in relying on Article 2 for arriving at its judgment.  Similarly, in Pitchfork Ranch Co. v. Bar TL,615 P.2d 541 (Wyo. 1980)  the court noted that even though Article 2 did not apply to real estate sales, its auction sale provisions were useful.

Conclusion

As noted earlier, many agricultural goods are sold at auction.  It is helpful to know the basic contract rules that apply in an auction context.  So, enjoy the next farm auction you attend or conduct, and don’t get surprised by an unexpected rule application.