It does happen. Buyers at auctions deciding, either suddenly or with some premeditation, that they aren’t going to pay for their purchase. The courts are filled with such cases, and there is significant precedent.
First, it does matter if the transaction involves real property or personal property. Each are handled in very different ways due to the Statute of Frauds, which has been adopted by all states in some form or another. The Statute of Frauds dictates that all purchases of real estate must be in writing to be enforceable.
Enforceability is the major issue here. If an agreement can be enforced, then a court can take action to require performance. If an agreement is not enforceable, then a court will typically not require any performance, and will usually dismiss a lawsuit asking for performance.
For example, Bob is the high bidder on a house sold at auction. The auctioneer says, “Sold! for $225,000 to bidder number 27 (who is Bob).” Bob then refuses to sign the purchase contract, and refused to close. Of course, the seller and auctioneer sue Bob and ask a court to require Bob to perform. However, without a signed purchase contract, it is unlikely the court will take such action.
The Statute of Frauds does not apply to personal property sold at auction (although strictly speaking, many states adoption of the Statute of Frauds includes that the sale of any personal property in excess of $500 must be memorialized in writing, this law is rarely invoked in auction cases.)
For example, Bob is the high bidder on a 1963 Winchester Model 94 Rifle. The auctioneer says, “Sold! for $275 to bidder number 27 (who is Bob).” Bob then refuses to pay for the gun and goes home. Of course, the seller and auctioneer sue Bob and ask a court to require Bob to perform. The Statute of Frauds does not require personal property auction contracts to be in writing, and with sufficient evidence of Bob registering and participating in the auction, the court would likely rule he must perform — i.e. pay for the gun and assume title.
Or, a court might not require Bob to perform — because the seller has not sustained any damages yet. If the above house sells later for $215,000 then there’s $10,000 in damages. If the Winchester Model 94 later sells for $175, there’s $100 in damages. The question then becomes: “Will the cost of litigation exceed my possible gain?”
One common misconception is that all purchases for real estate must be in writing. Actually, they don’t, and many times aren’t in writing. The Statute of Frauds only dictates that they must be in writing to be enforceable, not that they must be in writing, regardless.
Would having the buyer sign something following “Sold!” ever be a bad idea? If it required too much time and/or inconvenience, it may deter buyers, but otherwise, it would certainly not hurt in the event the buyer decided not to perform. Many auction venues selling very high priced items (artwork, horses, equipment … to name a few) do require the buyer to sign a memorandum immediately following the auctioneer’s declaration of “Sold!”
And, what about Promissory Estoppel? This doctrine essentially rewards a party if another party makes a promise to them, and the promisee relies on that promise, and with the promissor now refusing to perform, there is economic harm or detriment. Promissory estoppel essentially requires the promissor to hold up to the promise made.
So, could this be a factor in such cases? In real estate, occasionally, courts have ruled that despite there being no written contract, per the Statute of Frauds, that promissory estoppel requires the buyer to perform nonetheless. While this is not typically the case, it may help some auctioneers when a contract is not signed following the auction.
Lastly, is it worth filing a lawsuit against a buyer who won’t pay? If another buyer can be procured for about the same price (or, for no less than the likely cost of litigation), then maybe it’s best to let the issue rest. However, if no other buyer can be found, and this non-payment is costly, a lawsuit may be prudent.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.face book.com/mbauctioneer. He is Executive Director of The Ohio Auction School.