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Contracts. There are all types of contracts, and ways to enter into a contract. Express versus implied; bilateral versus unilateral; contingent versus non-contingent, and the list goes on.

Auction bid-calling contracts are somewhat unique, and different in many ways with other contract arrangements. This brings us to our topic today titled, “Reserve not met … means bid is rejected?”

In customary common law contract precedent, one enters a contract by making an offer. The offeror tenders the offer to the offeree who has two choices: accept the offer from the offeror or reject the offer from the offeror.

For instance, Bob (the offeror) makes an offer to Ed (the offeree) to purchase Ed’s lawnmower. Bob says, “Ed, I’ll give you $500 for your lawnmower.” Ed has two choices: Ed can say, “I accept your offer, Bob” or Ed can say, “No, Bob, that’s not acceptable.”

On the contrary, at auction the auctioneer invites offers from the bidders when a lot is presented for consideration. The bidders offer amounts to the auctioneer, and the auctioneer typically accepts any higher offer than he has received thus far (and thus forming a contract) and then invites the bidders to offer more.

At auction, the bidders are the offerors and the auctioneer acting on behalf of the seller is the offeree. Thus, the auctioneer receives offers from bidders and somewhat automatically accepts any higher offer than he has at that moment. If an offer is tendered which is less than the current bid, the auctioneer cannot accept it as his prior contract only allows him to accept a higher bid.

Apparently, there is online auction software which displays the message, “Reserve not met” when a bid is placed which is less than the predetermined reserve amount. And, apparently this appears to some to be a rejection of the bid. However, this is not the case.

When a bidder makes an offer it this scenario, the bid is (typically) automatically accepted if it is higher than the previous bid — even if the reserve is not met. Then, the contract this bidder and seller enter into can be voided under one of 3 (three) contingencies in a with reserve auction:

    1. A higher bid.
    2. Retraction of the current bid.
    3. Seller withdrawal (if the reserve is not met, or for whatever reason.)

For example, Tom owns a John Deere 4020 which is in today’s auction. He and the auctioneer have agreed that the tractor will not be sold for less than $4,000. In other words, the reserve is $4,000.

The bidding starts out at $2,000 and the auctioneer says, “I’ve got $2,000 and I want $2,100.” At this moment, this bidder is in contract with Tom at $2,000 as the auctioneer has accepted this bidder’s offer, but Tom can void this contract because the reserve is higher than $2,000.

If Tom stood near the tractor with a sign that said, “Reserve not met,” he could hold that sign up continually while the bidding went from $2,000 to $2,100 to $2,200 … to $3,800 to $3,900.

Tom would be accepting these offers, and essentially saying, “I accept your offer, but I’m going to hold out for more, and void our contract if the reserve is not met.” If the bid never reached $4,000, then Tom could withdraw from the contract and thus withdraw the tractor.

However, if someone bid $4,000, he could put the sign down, indicating the reserve had been met. He would continue to accept offers until the highest offer was not bested, and could even then withdraw from the contract. Yet, given his reserve is $4,000, it would be more likely he would allow that highest contract price in excess of $4,000 to stand.

As such, Tom did not reject any bids. Rather, he maintained the option to void those contracts for less than his reserve. Therefore, “Reserve not met” does not mean the bid is rejected.

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 and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.