Defining an Auction Agreement
An auction agreement is a legally binding contract between the seller, or donor, of an item and an auctioneer, whereby the seller agrees to award the sale contract to the highest bidder and the auctioneer receives commussion as a fee for the item. Simply put, an auction agreement is an agreement between the buyer, the seller/donor or the auctioneer. In general, the auction agreement commonly contains the date and location of the auction along with a description of the item or items being offered. The rights and obligations of all parties, as well as any representations, warranties and covenants , should also be included in the agreement.
Buyers: Each buyer or participant of the auction will agree to participate in the auction under the terms and conditions set forth in the auction agreement. Each buyer agrees that all purchases are subject to sellers’ terms, at which point the seller fullfills the conditions of the auction agreement by providing the property in accordance with said agreement.
Sellers: Each seller or donor under an auction agreement agrees to participate in the auction under the terms and conditions set forth in the auction agreement. Each seller agrees to provide the offered property to the highest bidder under the terms and conditions of the auction agreement.
Auctioneer: An auctioneer is considered a third party and is obligated to conduct the auction according to the terms and conditions of the auction agreement.
Forms of Auction Agreements
The more common forms of auctions are reserve auctions and no-reserve auctions. No-reserve auctions tend to be more successful for sellers and, as a result, no-reserve auctions are more common than reserve auctions in art transactions.
Reserve Auctions
In a reserve auction the seller of an artwork sets a minimum price, or reserve, at which that artwork will be sold. If bidding stops below the reserve price, no sale will be recorded for the artwork and the artwork will not be sold at the auction. A reserve auction will typically include a provision whereby the seller must accept the high bid that exceeds the reserve price at the end of the auction (i.e. a seller may not engage in negotiations with bidder(s) with a view to selling the artwork at a lower price than the high bid price). In this respect reserve auctions are generally better for sellers than no-reserve auctions because in reserve auctions there is the chance of receiving the high bid, which could be significantly higher than the seller’s reserve price. However sellers should be aware that a reserve price will also diminish interest in the artwork and the potential for the artwork to sell for a high price.
No-reserve Auctions
In a no-reserve auction, the seller of an artwork consents to the work being sold at the highest bid, no matter how low. There is no reserve set by the seller and the work will be sold if there are any bids placed on the artwork. As such, the seller is required to sell the artwork at or above the high bid amount and the seller has no further recourse to negotiate with the buyer. A no-reserve auction will typically include a provision whereby if the bidding does not exceed the minimum guarantee provided to the auction house for the artwork (i.e. artwork will be sold at a price equal to, or greater than, the minimum guarantee), then the seller is responsible to pay the difference between the high bid and the minimum guarantee as a forgone commission. A no-reserve auction is generally better than a reserve auction from the seller’s perspective because of the possibility that bidding will exceed the high bid (in a reserve auction the seller may simply protect against this through a higher reserve). The seller of course must appreciate, however, that the artwork may sell for less than the seller expected. From a buyer’s perspective a no-reserve auction is generally more attractive because of the absence of a seller’s reserve which could result in a lost opportunity to procure the artwork.
Crucial Aspects of an Auction Agreement
When preparing a contract for auctioning items, the agreement contained therein should contain the following terms and conditions:
(a) The precise identity of the property being auctioned. If an individual item is specifically identifiable, it should be identified in the contract. If the property is in a lot, it should be referenced by lot number and described in sufficient detail to permit identification. This is especially important when the nature of the property is such that someone could be mistaken as to what is included in the sale.
(b) The seller, and by extension the auctioneer, should have full rights to sell the property free and clear of rights of any third parties.
(c) The contract should provide a comprehensive description of the property being auctioned such that there are no problems later with identification or ownership. For instance, a bill of sale should describe not just the make, model and serial number of a vehicle, but also list the license plate number.
(d) Restrictions on the use, transfer, ability to use the property as collateral, or ability to engage in other commercial transactions with the property should be expressly stated. If there is any question concerning the ability to use the property as collateral, that should be stated. If the buyer for instance wishes to obtain a full security interest in the property, that security interest should be documented in a separate security agreement.
(e) The contract should state clearly what expectations the seller has for compensation for the property and how it will be compensated for the property.
(f) The contract should state clearly the payment terms. If multiple payments or installments will be used, these should be expressly identified. Interest on the payments should be considered. Generally speaking, if the payment will extend over a period of months, this can permit greater flexibility when a buyer wishes to seek financing through a financial institution. This is most typically seen in a real estate purchase agreement where the buyer pays a deposit, a series of installments along the way and final payment at the time of closing.
(g) Practical limits to the auction should be carefully considered and addressed. These can include minimum bids or a reserve price, but parties should exercise caution here. A buyer who wishes to donate to charity will not be happy when the auction is suspended at $500.00 because the reserve price was not met.
Legal Aspects of Auction Agreements
In any auction agreement, it is essential to understand and comply with relevant laws and regulations. Auction agreements can be subject to rules governing the sale of property, such as real estate and personal property. They may also be subject to antitrust laws, depending on the nature of the property being auctioned and the players involved. For example, sales of corporate assets pursuant to auction agreements must comply with various provisions of the Bankruptcy Code.
Auction agreements also may be subject to state and federal antitrust laws. If two or more parties enter into an auction agreement, competitive concerns may arise if the agreement lessens competition. There are several antitrust risks that apply to auction agreements. For instance, agreements between competitors to use the auction method for all or certain sales of their respective assets create illegal restraints of trade, and agreements between two or more parties regarding an auction for the sale of their assets to the highest bidder can constitute an illegal group boycott. Certain types of joint ventures, such as joint B2B auctions (where an auction house or intermediary is used to broker an online auction of goods or services between businesses) can lead to vertical restraints of trade, which may be subject to strict scrutiny.
Non-compete restrictions are pervasive in auction agreements. Auction agreements frequently contain non-compete, non-disclosure, and related restrictive covenant provisions, which can raise issues under the law. In fact, one of the major concerns in any non-compete provision or agreement is whether the scope of the applicable restrictions is reasonable. Courts do not look favorably upon overly restrictive non-compete agreements.
In addition to these considerations applicable to auction agreements generally, certain industries have specific legal directives. For example, explicit disclosure may be required when customers desire to auction items that are protected intellectual property. Depending on the type of customer, failure to provide such disclosure can lead to tort liability.
Best Practices in Auction Agreement Drafting
When it comes to drafting auction agreements, the primary goal should be to avoid ambiguity and ensure that all parties understand their obligations. In the fast-paced environment of an auction, even small misunderstandings can lead to significant problems and lead to costly legal disputes down the line. One of the best ways to minimize the risk of post-auction disagreements is to provide clear and concise definitions for the most important terms of the auction agreement. Doing so can prevent misinterpretations of critical provisions and ensure that all parties are on the same page when the dust settles.
Another proven strategy is to set realistic expectations for the parties involved at every step of the process. Whether it is relating to the timeline, the available resources or the anticipated outcomes of the auction, all terms should be clearly delineated so everyone understands what is expected of them. In addition , deadlines should be implemented throughout to provide a structure for the auction process and ensure that milestones are reached in a timely manner. Setting strict requirements and timelines can often prevent delays that could increase costs and reduce efficacy.
It is also essential to review the document on an ongoing basis. Even after an agreement has been signed, it is critical to continue sharing information between parties and keeping them abreast of any changes to the plan. Communication is essential to both ensuring compliance with the terms of the contract and ensuring an amicable post-auction resolution.
In some cases, it can be more beneficial to publicly draft and circulate the terms of the agreement. Obtaining feedback from all parties can provide valuable insight and help to ensure that the contract addresses all concerns. The result is a more effective auction agreement that clearly delineates the responsibilities of each party and sets reasonable terms for the auction process.
Common Challenges and Remedies
The most commonly seen issues are as follows: bid validation or non-payment: All bids placed on an auction website have associated terms and conditions which set out the details as to the bidding and selling process and generally, in the case of the auctioneer, provide that the auctioneer is not a party to the contract of sale formed between the buyer and seller. However, for the purposes of this article, where we refer to "valid bid" we mean a bid from a registered bidder which has been placed on a recognised auction website and has not been cancelled or retracted by the registrant. Also, auctions can be held "live" – where a professional auctioneer conducts the auction in a physical location and bids are placed by or through the auctioneer and "internet" where the auction is "online" and bids are placed electronically. Auction websites have various means of validating bids including credit card registration/deposits and email confirmations for successfully placed bids.
Bid Validation Issues An example of a situation giving rise to a dispute would be where after successful bidding for a lot the winning bidder receives an email congratulating them that they were the successful bidder but, due to a "technical glitch" advise them that their bid did not go through. Unbeknownst to the successful bidder, the email confirmation they have received turned out to be erroneous and they were in fact the high bidder at closing. The seller then refuses to sell to the successful bidder whereupon the auctioneer induces the high bidder to enter into a back-up agreement with them to purchase the lot. To mitigate this risk, the terms and conditions of the online auction website should state that it is the sole responsibility of the bidder to review their bid status to confirm whether their bid has been accepted. A binding contract of sale is formed upon acceptance of a bid and the only way to confirm acceptance will be the registered bidder reviewing the auction website and confirming the lot status. Further, the auctioneer can reserve the right to not welcome changes to bids made on lots. This can be especially important for lots which include a minimum bid increment (i.e. no less than $5.00) as changing bids can dilute the value of lots and change the auction result.
Payment Problems Another common problem is non-payment of assets after sale. Often, the terms and conditions of the auction website will provide that failure to pay for a lot purchased at auction can result in a fine set out in the conditions of sale. Alternatively, such fine may be given at the discretion of the auctioneer. This may leave the auctioneer or seller without a remedy and may create a further risk of dispute between parties. To protect against this risk, the auctioneer can implement the following systems: (1) strict payment schedules requiring instant vehicle releases and payment (or lose all deposits or penalties thereon); (2) it can require a credit card number with a minimum deposit plus an authorization for the auctioneer to charge the credit card if payment is not received by the "close of business" on the auction closing day; (3) ensure that "high dollar" items are purchased with cash or certified funds.
Trends in Auction Agreements
The digital transformation is significantly impacting the auction process, changing how auction agreements are negotiated, executed and enforced. With the increasing adoption of major cloud platforms, the coordination and use of internal and third party resources in the execution of auction agreements is becoming smoother and more efficient, and often with greater transparency and control.
Such shifts in the manner in which companies are conducting auctions have implications for auction agreements. For example, the use of remote platforms to execute and manage auctions often allows auction participants to transact on a timely basis in real time, thus making auction time periods much shorter. The content of agreements may also be impacted by digitization. For example, where the customary notice periods in auction agreements prescribed for the call for bids and the submission of binding offers may be shortened. A shortening of the customary notice period may be preferable to all parties since it reduces the costs and inefficiencies of extending the time over which the auction runs. The nature of relationships between the parties is also likely to evolve as digital transformation increases the number of potential parties and participants in the auction process. Since the purpose of an auction is to generate competition among bidders, this is a positive development. While there are some legal/cultural barriers to entry for new investors in some industries , overcoming these barriers with the use of technology may allow non-typical auction participants to get involved.
Digitization also allows for more and better information to be disclosed in an impactful and streamlined way to prospective bidders. Companies are increasingly viewing data as an asset, with value, and in order to monetize this value, they need to understand how to get and use data in the auction process. This is a shift away from the common misconception that non-cash consideration cannot be used in an auction (it is not uncommon for payment considerations in an auction to include the assumption of liabilities by the purchaser). Rather, the focus is on how to make auction agreements more flexible to enable companies (sellers) to better use their data to maximize the value of the assets in question.
Digital transformation is also allowing companies to negotiate and execute agreements and contracts using blockchain. Instead of requiring human verification and input, blockchain can automatically validate and enforce contract terms and conditions using smart contracts, where transactions involving the sale or purchase are automatically verified and validated. This may be beneficial in a fast-paced business environment where both parties could prefer to minimize the risk of human error in the execution of agreements, contracts and other legally binding documents.