auction
Image source: https://thedaily.case.edu/competitive-auctions-drive-women-to-bid-and-value-winning-more-than-men/

This article is written by Tejas Geetey who is pursuing a Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction 

Every businessman or enterprise engages or participates in auction activities to increase its capital. In doing so it improvises its market standing thereby improving its goodwill thereby assisting in achieving its objectives. The auction sale is one of the most engaging yet one of the most competitive ways to purchase valuable assets and other movable properties. An auction sale can be based on the purchase and sales of securities, stocks, patents, and any other moveable items. Any interested party/parties which might include companies, government agents, and potential investors can participate in the auction sale. The interested parties should therefore have a clear understanding of what all involved in the auction sales so as to what benefits the most out of the process. This article is provided for the same purpose so as to guide emerging entrepreneurs and enterprises to engage in auction sales.   

Purpose and process of an auction  

Auction sales are governed by the Sales of Goods Act, 1930. Pursuant to Section 64 of the Sales of Goods Act, 1930, an auction sale is the purchase and sales of goods between the auctioneer and the buyer. The auctioneer acts as an agent of the seller act on the behalf of the seller and acts as a host to the whole auction. A formal contract has to be formed between the auctioneer and the seller which provides warranties and obligations of both of the parties. 

The auctioneer will provide an advertisement or similar publication through public mediums to gather potential buyers for the goods. The advertisement shall include the details about the products, the seller and the agent details, the reserved price of the products, and the rules of the auction process.

The process of the auction sales can be explained through the following steps:

  • The agent or the seller opens the auction sales for the public through advertisements, whereby the agent conducting the auction sells the items to the highest bidder.  
  • The advertisements provide relevant details and information on the no. of items to be auctioned, including the auctioneers and seller details, the place and time of the sales, and the rights and obligations in the aftermath of the sales.
  • The parties involved in the auction are the auctioneer, agent, and buyer. The auctioneer governs the whole auction process and bids the items. The seller is the owner or in charge of the goods. And, lastly, the potential buyer who bids the highest price for purchasing the auctioned item.
  • As the auction sales are initiated, the auctioneer places the product for bidding in the customary manner of hitting the hammer. The bidding starts with the minimum or reserved price of the product. During the course of the bidding process, the potential buyers invite their bids for the product out of which the highest bid is accepted. The case of Payne v. Cave held that a buyer can rescind his bid at any time before the hammer falls or the property is eventually knocked down in an auction sale.
  • The auctioneer, then through the customary means hits the hammer declaring the accepted bid thereby completing the bidding process.
  • After the bidding process, a contract is entered into and executed between the buyer and the seller converting the bidding into a written legal relationship based on quid pro quo and governed through the Sales of Goods Act, 1930.  The agreement provides a transfer of ownership and the rights and obligations of both of the parties relating to the auctioned goods/item.  

What are the different aspects to consider when participating in an auction?

An auction sale is essentially a contract between a seller and a potential buyer to pay a certain price for the property being sold. Every auctioned item implies a separate contract dealing with different parties and the nature of the agreement and shall be governed through the relevant provision of the Indian Contract Act, 1972.  In the case of Chelmsford Auctions, it was observed that the auction involves different contracts which include a contract between the seller and the highest bidder (buyer) and a contract between the seller and the auctioneer.  

Auctions are legal events governed by the Sales of Goods Act, 1930. The said act provides and governs every type of arrangement or agreement pertaining to the buying and selling of goods. As per the Section 2(7) of the Sales of Goods Act, 1930, goods include every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.  

It is a well-known fact that auction sales can become a very competitive activity. Every potential buyer to purchase the auctioned goods deals with manipulative and unfair tactics to bid the highest price. Also, it is important to mention that the seller shall not be bound by the highest bid allotted by the auctioneer. The bidding process only implies an offer by the potential buyer and does not mean a contract. The same was affirmed in the case of the coffee board, in which the court decided that The seller stated explicitly that he will consider any bid, be it the highest or lowest, whichever he prefers or feels is a reasonable price for the land. This is entirely his choice, and which will not be changed by the highest bid. He is therefore under no obligation to have any justification for his decision, and his decision is definitive and conclusive.

Also, the auctioneer has the right to set up his own terms and conditions for the auction sales. The same was held in the case of M. Lachia Setty and Sons vs The Coffee Board. The court in the above case also observed that the seller does not bind himself to accept the highest bid. He is not bound to assign any reasons for his decision, and his decision shall be final and conclusive. 

What are the legal compliances required for this?

Section 64 of the SOGA, provides the rules and the legal compliance to be followed in the auction process.

  • As per the provision, The auction sales can be reserved by or on behalf of the seller as an express right to buy. Also, if the right to bid is reserved, the seller or someone else can bid on his behalf at the auction.
  • If the auction sale is not informed to be subject to a right to bid on behalf of the seller, the auction shall not be valid if the seller bid the goods himself or employs another agent and therefore shall be then treated as a fraud for the auction.
  • Also, the sales of the auction process shall be subjected to reserved or upset prices. After the completion of sales, the auctioneer shall announce the same through the fall of the hammer or in any manner so as to make the bid official. The same was decided in the case of the coffee board, in the court decided that
  • Also, it is important that the auctioneer do not indulge in any misleading tactics to increase the price of the auctioned item. As for illustration, the auctioneer used not to reduce the reserved price of the goods, or pretend the bidding to unfairly increase the price of the product, then the same shall make the sales not valid. The same is mentioned in Section 64(6) of the act which provides that sale is voidable at the option of the buyer if the seller or its agent conducts a pretended bidding to raise the price of the product.  

Conclusion

Auction sales are one of the most engaging business activities. Whether it is the potential buyers and investors, or the exchange of high-value products, the event includes everything. An auction sale is a unique type of contract governed as per the Sales of Goods Act of 1930. It is critical to fulfilling the essentials provided under Section 64 of the Sale of Goods Act, 1930, in order to ensure the legitimacy of this particular auction sale. Any business enterprise should engage in auction sales so as to increase its business relations, in a positive and dynamic way, with other competitors and market players. An auction sale will not only benefit you from the purchase of assets and goods but also in the long run improves the market standing of your services in the business circles thereby increasing the goodwill which in turn shall lead to profit generation.     


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