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handshake-2056021_1920Several of us saw this concept recently being discussed in an auction seminar.

I was asked just today in a seminar I was teaching what I thought of this phrase … what I thought it meant for auctioneers. I have to admit it seems a bit bemusing.

Properly written contracts educate sellers, bidders, buyers, lawyers, regulators and judges.

Yes, you’re not misreading. The claim is your properly written auction contracts will help educate [sellers, bidders, buyers] lawyers, regulators, and judges … and yes, you are allowed to wonder — educate them about what?

I might start with this premise: The more educated sellers, bidders and buyers are about how auctions work, the more empowered they feel about any slight variances from those laws and rules. One only has to look at how the Internet has changed the auction litigation landscape. More availability (education) has resulted in more lawsuits, not less. Not knowing what standard practice or the rules or laws were for centuries resulted in relatively few lawsuits.

Likewise, regulators are the ones who have largely written or sanctioned much of the auction law in the United States. These institutions typically take the stand that they need to educate the auctioneers and would be humored by auctioneers trying to educate them. Attorneys and judges can research auction law in seconds, and for the most part what’s in the contract and/or terms and conditions is immaterial other than how it differs from law or precedent.

Maybe the above intriguing phrase needs to say, “Properly written contracts — and terms and conditions — need to comply with local, state and federal law?” And far more importantly auctioneers need to operate within current law; It’s my opinion that if anyone needs educated, it’s auctioneers, not sellers, bidders, buyers … and everyone else.

Some basics: Contracts are voluntary agreements between two (or more) competent people outlining legally enforceable rights and duties with consideration (something of value.)

For instance in regard to a real property auction, an auctioneer enters into a contact with a seller-client outlining that the auctioneer will market/advertise a subject property, sell via the auction method, and secure a deposit from the high bidder; the seller-client agrees to pay the auctioneer a commission upon sale or closing. Here are the typical components:

  • Competent: Presumably auctioneer/real estate licensee and seller is at least 18 years old and otherwise not incompetent.
  • Legally enforceable: Selling a property owned by the seller; working as an auctioneer/real estate licensee.
  • Rights: Auctioneer has a right to commission; seller has a right to service.
  • Duties: Auctioneer has a duty to provide service; seller has a duty to pay the commission.
  • Consideration: Auctioneer is receiving commission in trade for service; seller is trading commission for service.

Further, this contact between the auctioneer/real estate licensee should outline the particular duties the service provider will provide (advertising, staffing, etc.) and any particular duties the seller must provide (provide access, cleaning, provide marketable title, etc.)

This contract should also provide for how this auctioneer/real estate licensee will attract qualified bidders/buyers. For centuries, the “prospect of a deal” drove buyers to virtually any auction — and unique or special properties nearly always attracted attention. However, in the age of wireless Internet access, many buyers today appreciate the “prospect of saving time” as much as a possible deal.

Yet, it’s being suggested that this contract — and maybe the purchase/sale contract, and the auction terms and conditions educate everyone potentially involved? Educate these parties regarding what auctioneers typically do, how auctions typically work, what sellers can expect, what bidders/buyers can rightly anticipate …?

For instance I suppose, if the auctioneer is selling property “as-is” but previews will be limited, and the auctioneer intents to take bids off the wall to get the property in a salable position, or the auctioneer will purposely misrepresent the subject property … these may indeed be an auctioneer’s customary practice, but the courts in the United States have ruled all these practices illegal/unenforceable.

Are some suggesting that these practices would be okay so long as they are in our contract, and we “educate” the bidders, attorneys and the courts that this is customary practice? Given my experience as an expert witness in cases discussing these very issues, I can only think “Good luck with that plan.” I’ve seen judges weigh this type of customary practice against equity and reasonableness and the law in the United States, and “How we’ve always done it” doesn’t hold much weight.

However, I have held that customary practice does matter for auctioneers in a legal, ethical customary practice discussion. For instance, in a case a few years ago, a seller felt the auction marketing was insufficient (unhappy about the sales price) but we showed that the promotion in regard to this property was at least — if not exceeding — customary.

I agree with the premise that auction terms and conditions set the ground rules for bidders/buyers to participate. But to assume bidders/buyers routinely disregard these terms and conditions — as if they don’t really matter — is a fallacy. And if the goal is to educate bidders/buyers these terms and conditions will matter even more.

Auctioneers need sellers. To the extent contracts and terms and conditions favor the seller they disfavor the bidders/buyers the seller (and auctioneer) needs; it’s essentially a zero-sum game. To think that enhanced auction consignment and/or listing contracts which favor sellers will prevent them from becoming unhappy and suing the auctioneer is improbable, and heightened seller terms and conditions encourage bidders/buyers to sue.

Auctioneers need bidders/buyers. To create contracts and terms and conditions which favor them, or limit the buyer pool to only qualified buyers is a worthy goal, but to assume these buyers won’t become unhappy and won’t sue is optimistic; it’s essentially a zero-sum game. Further, a seller with a small bidder/buyer pool will be hardly comforted by terms and conditions which are highly one-sided.

As we’ve said before, “Is an extremely seller-favorable auction all that seller-favorable?” It’s not. Is an extremely buyer-favorable auction all that buyer-favorable? It’s not either. We need balance, equity, reasonableness so all parties feel the contracts they are entering into are fair. When do sellers and bidders/buyers tend not sue anyone? When they are happy, and feel the agreement is balanced — where they don’t think they would have a case, or quite frankly don’t even give that any thought.

Lastly, before you rewrite your seller contract or your terms and conditions, you should check with your state to see what requirements there are for those documents. Particularly in license-states contract requirements may be set by statute. Of course, you could likely have additional provisions and if your goal is to avoid court, set out those terms and conditions in a balanced fashion.

My home state by statute requires all auction contracts to include the definitions of “with reserve” and/or “without reserve” as the contract is written. The argument when this law was proposed was that sellers needed to know (be educated) about the type of auction their auctioneer was to conduct. Yet, this law hasn’t educated any attorneys, regulators nor judges, not once; nor has it prevented disgruntled sellers, and some suggest the enhanced verbiage has resulted in more lawsuits.

If this topic is not clear, try this: Take your 6-year-old daughter and her best friend who’s 6-years-old to get some ice cream on a bright sunny hot day. Get your daughter a 2-dip cone and get her friend just a one dip cone. Of course, you could try to educate the best friend about inequity, including that this is how “ice cream distribution works” but is everyone happy? Probably not.

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, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.