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This article has been written by Rhea M B, from PES University.

Introduction

The origin of auction dates back to 500 B.C, it was first seen in the Roman Empire.  In the year 1595, the initial records of auction in the modern times were recorded in the Oxford dictionary (see here). Auctions were seen as a method to liquidate estates. In recent times, it has become tremendously popular and has changed and evolved over the years. In India, Section 64 of the Sale of Goods Act, 1930 deals with the rules and determines the process that takes place in an auction. The area of movable property is dealt under the Sale of Goods Act, 1930 and that of immovable property under the Transfer of Property Act, 1882 (see here). An auction sale is a sale that is public where interested buyers can bid for the goods . The goods are sold to the highest bidder (the price offered by interested buyers is called bid).  There are four parties that are generally present in an auction: auctioneer, bidders, seller and buyer. The various aspects of an auction are addressed in this article.

Kinds of auctions

There are various kinds of auctions. First, live auction which takes place on site where prospective buyers are informed about the items with the descriptions of the goods given, the auctioneer calls for the bid and is sold to the highest bidder once the conditions required are fulfilled. Second, Online auction which takes place virtually at a given time or sometimes it is relaxed and flexible depending on the website. Here, the bidders enter the bid and the highest bidder gets the goods. Third, Sealed bid auction is where various bidders submit sealed bids to the auctioneer and hence none of the bidders know what each other has bid. (See here)

Rules of Auction Sale

There are certain rules that need to be followed in an auction sale and they can vary based on type of auction. In India, Section 64 of the Sale of Goods Act, 1930 deals with auction sale and lays down certain rules that are required to be followed during an auction sale.  When the goods are put up in a lot, each of the items are considered separately and there will be a separate contract of sale for each of the individual items. 

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The sale is complete only after the falling of the hammer and by declaring the completion of the sale, till then the buyer has the chance to revoke. The seller may expressly reserve the right to bid and can ask any individual to bid on his behalf. However, if the seller has failed to expressly notify his right to bid, he can neither bid at the auction nor appoint anyone to represent him to bid at the auction on his behalf. Any sale contradicting this rule may be considered as fraudulent in nature. In addition, if there is a reserve price set, then the bid must be an amount above the reserve price. 

If the bid is lesser than the reserve then there is no contract of sale. Furthermore, if the seller or any person acting on his behalf intentionally raises the price, in order to fetch higher bidding from the other prospective buyers it is voidable at the expense of the buyer. (See here)

Auction contract

In an auction, there are both sellers and buyers and it is different from an ordinary sale due to the fact that there are many buyers bidding for that good or property. These buyers compete among themselves and try to outbid the other buyers and whosoever is the highest bidder gets that piece of property or goods. 

For a contract to be formed the general principles of offer, acceptance and consideration are applied. There is an offer to the public at large and the interested parties are free to bid. Acceptance in an auction is depicted by the falling of the hammer. The seller cannot refuse to give the goods or the property if there is a higher bidder and once there is acceptance the buyer cannot withdraw from the same. A binding contract is created in the auction. (See here)

The essential for a contract to be valid are stated in the Indian Contract Act 1872. According to Section 10 of the Indian Contract Act,  there must offer, acceptance and consideration, the parties must have attained the age majority and must be of sound mind, the object must be lawful and must not be expressly declared as void and as per the provisions of the Sale of Goods Act, there must be at least two parties in this case a seller and buyer. There must be an agreement for sale with performance of the conditions and consideration for the sale of these goods and it is applicable to movable property.

Types of an auction contract

Auction generally involves seller, buyer, auctioneers and prospective bidders. There are three types of auction contracts: “consignment contract”, “Registration Contract”, and “Bid calling contract”. (See here)

Bid calling contract is between the seller and the buyer. In this contract the item is sold to the highest bidder and is marked by the falling of the gravel which indicates the acceptance and it is a binding contract between the seller and the buyer.

A consignment contract is a contract between the seller and the auctioneer. This contract deals with the services rendered or to render that includes advertising, arrangements, bid calling, etc. It also includes the promise of the seller in allowing the property to be sold, etc.

Registration Contract is between the auctioneer and the prospective bidders it can be both written and oral. It deals with the participation of the bidders, agreement to follow the terms and conditions, deposits, and much more if they become a buyer.

Auctioneer’s role

This segment addresses the duties and the liabilities that govern the auctioneer and the role he /she plays as an agent.

Auctioneer as an agent

An auctioneer can be considered as an agent of the seller; hence the seller becomes the principal of the agent. He must act and perform in accordance with the wishes of the seller and must act in good faith keeping in mind the interest of the principal. (See here) 

The agreement that is beyond the scope and the authority of the auctioneer is not binding. An auctioneer’s authority as an agent ends when the sale is complete and the buyer pays the costs and the amount is collected. And once the auction ends, by any means the contract of sale cannot be varied without any special authority. (See here)

Duty of auctioneer

A certain amount of duty rests upon the shoulders of the auctioneer; he must state all the terms and conditions, the description and the quality of the goods before the sale. The laws of agency govern the rights of the auctioneer if there is no applicable statute. The auctioneer must act in good faith and in the interest of the seller. (See here)

Liabilities of an auctioneer

The liability of the auctioneer extends when the seller suffers losses by not performing in accordance with his duty or failing to perform the instructions laid down by the seller. 

The auctioneer can be held liable to the buyer if in case there is fraud, failure in delivery of goods, etc. An auctioneer can be held liable if he sells the property on behalf of the one who doesn’t own it , even though in good faith is liable to the rightful owner and he can claim the damages by initiating a suit against whoever wronged him. (See here)

If the auctioneer avails secretly from the sale without the knowledge of the principal he can be held liable. 

Online auctions

With the growth of technology and increased developments in the digital world, there are numerous e-contracts and transactions that are covered under the law. Online auctions are preferred when it comes to the comforts of the people. It helps buyers choose from an array of options at a price which they are comfortable to bid. 

Online auctions take place on the net, which is more advantageous when it comes to being effective, quick and the desired rate of the seller can be achieved as it takes place in the virtual world. It is the choice of the seller to whom he wants to sell and acquire an amount that is satisfied with.

Online auctions are legal contracts and are binding. It is an open invitation to the public at large and interested prospective buyers can bid and make an offer, it is up to the auctioneer to accept or refuse the offer. Once there is acceptance it becomes an agreement where the buyer pays the consideration amount in return for the goods. These are e-contracts and are executed by software. And if all the elements are satisfied it becomes a valid contract. (See here)

There are certain requirements to run an online auction, it requires all buyers and sellers to register on the bidding website. The sellers have to list the items for sale and a time is set for the process of bidding and the interested bidders can log in with their ids. If the bidding is successful above the reserve and the buyer and seller communicate regarding the payment and delivery of the goods. (See here)

Also, online auctions and bidding can be susceptible to fraud and other risks. Hence, a detailed background check must be done to avoid these circumstances.

Vitiating factors in an auction

Online fraud

The easiest kinds of fraud are where the buyer pays for the item on an online auction site but does not receive the delivery of the intended goods.

Second chance scheme where the losing bidders are given a chance, the highest bidder is made to wire the money but the goods are never received.

Triangulation is where a product of high value is listed at a reasonably low price, whereas the original product is bought from another website using a stolen credit card and is sent to the buyer who bought the product at a price of relatively low value.

Illegal items or products are sold online to innocent buyers; sometimes these products are counterfeit where there is no warranty to the buyers. And as per the provisions of the Indian Contract Act, if the object and the consideration amount are unlawful then the contract is void.

Counterfeit products are often auctioned online and unfortunately the buyers fall prey to these activities and lose a lot of money. It must be understood that these goods bear trademark without the knowledge of the owner of the trademark.

Sometimes there is a creation of false escrow sites which is similar to the original site but the money is sent to this site by the buyer, the seller is unaware and the buyer doesn’t revive the goods. (See here)

It is observed that stolen products are sold on these sites and these products are illegal hence the contract is void.

 

new legal draftMisrepresentation

In the case Harsten Developments v. Bleaken, the developer bought the site at an auction. The sellers during the auction made various remarks regarding the property which was considered as misrepresentation by the court of law. The court ordered the sellers to pay for the damages and the losses and they had to buy the property back from the buyers. 

The seller had made statements during the auction, those statements were untrue and it resulted in losses to the buyer and hence there was a claim for the damages. (See here)

Practices in Auction

Knockout agreement

It is an agreement among the buyers that only one of them will bid and this prevents competition among them. Once the auction is over they will share the profits availed. It is illegal if it is done with an intention to fraud another. (See here)

Damping

This method involves discouraging prospective buyers from bidding by asking them not to purchase by defaulting the goods, so that prospective buyers don’t participate. Thus makes sure there is no competition that is unwarranted. (See here)

Implied conditions and warranties in an auction

Implied conditions are not applicable to auction sales. The auctioneer warrants that he has the authority to make a sale; he is not liable for the defects of title of his principal also the possession of goods are warranted by the auctioneer against the price paid by the buyer. (See here)

Conclusion

Auctions have many legal implications, especially under contract law. It is a great method that is flexible where interested buyers can compete against themselves.  With the technological advancements gone are those days where we have to visit auction houses. We can do it in the comforts of our home. This article seeks to understand the intricacy involved in dealing with an online auction and the ill effects of the same; hence it calls for stricter rules and regulation to protect the consumers from the same. Hence, contract law plays a very important role in auction sales. 

An auction sale is where interested and prospective buyers bid for an item or good that they are interested in and the highest bidder gets the product, this is ceremoniously ended with the falling of the hammer which implies the acceptance of the offer. There are various kinds of auctions live, online, sealed-bid auctions, etc. Under the Sale of Goods Act, 1930 Section 64 deals with the rules, process, the rights of the seller, and the constitution of a lawful sale.

An auctioneer is the agent of the seller and he acts in good faith. He must not indulge in fraudulent activities, or avail special benefits without the knowledge of the principal or the seller. Also, the laws of agency govern if there is no applicable statute.

Online auctions are the more preferable method to deal as it is easy and flexible depending on the type of conditions that are required to be fulfilled. Online auction agreements are binding and the conditions for a lawful contract must be met. Along with that, there are varying types of fraud that the buyer must beware of. They can seek the help of law enforcement agents in case they have been involved in a fraudulent transaction. Illegal items are declared as void under the law of contracts. Practices in auctions such as damping and pretended bidding are voidable at the request of the buyer. 

There is a need to develop laws and regulation in the arena of the auction and it should not be limited to a section and with the increase in technology, advent of new institutions and an increase in use of this method to sell goods and property.

Bibliography and references

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