Auctions 101:
Important LEGAL Principles Concerning Auctions
Most farmers and ranchers reserve some time on their calendar for attending auctions of
various kinds, perhaps buying or selling horses, cattle, equipment or land. Auctions can be fun,
profitable and entertaining, but also confusing and intimidating to the novice. Auctions are
governed by unique laws and principles which don’t often appear in other commercial
arenas. In addition, auctioneers have unique legal responsibilities and b y l aw are given a
considerable amount of authority and discretion in the auction environment.
Auctions have become common only in the last several hundred years. However,
auctions actually occurred as early as 500 B.C. Auctions of women for marriage were held
annually in Babylon. The auctioneer began with what he considered to be the most beautiful
woman and progressed to the least. It was considered illegal to allow a daughter to be sold
outside the auction method. Romans auctioned the spoils of war recovered by soldiers and the
proceeds went to help pay for the war effort. Romans also utilized auctions to liquidate the
assets of debtors whose property had been confiscated. The entire Roman Empire was offered
for sale to the highest bidder at an auction in 193 A.D. by the Praetorian Guard after it had
killed the emperor. A civil war ensued, as you might imagine. Thereafter, auctions lost favor in
Europe until the 18th century.
Auctions in Europe in the 1700’s were often held “by candle” when selling goods. The
auction began by lighting a candle after which bids were offered in ascending order until the
candle went out. The highest bidder at the time the candle extinguished itself won the auctioned
item.
Auctions were frequent in the American Civil War whereby colonels sold goods
seized after battles by their armies. Thus, some of today’s auctioneers in the U.S. carry the
unofficial title of “colonel.” A single book auction liquidating one of the world’s great book
collections began in the 1886 and continued monthly for over 140 years before the entire
collection was liquidated. It continued in spite of two world wars with the hammer falling on
the last lot of this auction in 2006. A recent National Auctioneers Association report stated
that the auction industry generates over 300 billion dollars in annual revenue. And that report is
several years old.
Most U S a u c t i o n s o f c a t t l e , h o r s e s , v e h i c l e s , e q u i p m e n t a n d
l a n d are conducted according to the “English auction” method or “open ascending price
method.” Bidders openly bid against one another with each subsequent bid higher than the
previous bid. Another interesting variety is the “Dutch auction” (using the “open descending
price method”) in which the auctioneer begins with a high asking price that is gradually lowered
until a bidder is willing to accept the announced price. The Dutch tulip auction is the best
known example of this method.
This article highlights some key principles sellers and buyers should keep in mind when
attending horse or livestock auctions, but which principles apply in most auction settings. It will
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highlight and explain common announcement and disclaimer language found in sale catalogues.
Below each “Principle” is a paragraph entitled “So What?” discussing the practical
significance of the Principle it follows and a paragraph entitled “Now What?”
containing recommendations and suggestions for one to consider and adopt in order to
implement the Principle involved. In summary, this article is about “expectations” and is
intended to help you set your legal expectations when buying or selling cattle or any other items
when using the auction format.
Principle No. 1: Each lot sold in an auction is the subject of a separate sale
between the seller/consignor (“Seller”) of an animal and the bidder/buyer (“Buyer”) of an
animal. While this statement seems pretty basic, even elementary, this principle has many
important legal consequences. First, the sale transaction is not between the auctioneer and the
bidding audience or, more specifically, a winning bidder. An auction may be the format by
which the sale is taking place and many people may be involved. However, the “bid and call”
procedure and the striking of the hammer ultimately do not create a contractual relationship
between the auctioneer and any party. Only one contract is formed each time the hammer falls
and that is the one between the Seller and the Buyer.
Sales catalogues often say one or more of the following: “The Buyer must look to the
Seller for fulfillment of all guarantees and representations made in the catalogue.” “Breeder
guarantees are strictly between the individual consignor and the Buyer at the sale.” “The
above terms and conditions shall constitute a contract between the Buyer and Seller of each
animal sold.” Each of these statements is the result of applying this first principle. They
anticipate questions or issues that will arise at the proposed auction and during each individual
sale transaction that may occur there.
The auctioneer is almost always deemed to be the agent of the Seller and thus, to the
extent the auctioneer has knowledge or information that is important to potential bidders,
he or she has the responsibility described below as to disclosures, representations and
warranties. But the auctioneer is not a “party” to the sale transaction though his or her legal
responsibility is often variously defined by the courts as requiring the auctioneer to act
“fairly,” “beyond reproach,” “with integrity” and even as a “fiduciary” (a very high legal
standard that is beyond this article).
So What? If you purchase an animal that you subsequently discover is not of the
quality or condition that you believe was represented, then your remedy is against the Seller of
the animal. He or she is the only other party to the “contract” you made for the purchase of
the animal. Only if the auctioneer, as the Seller’s agent, has violated his or her duties will the
auctioneer be liable for damages to a Buyer. When you get the animal home, if it just looks
different or scrawny or “not the same as the picture,” then you are not likely to have any
remedies against the Seller. There must actually be a provable false statement or
misrepresentation involved which induced you to buy the animal, i.e., more than a
misunderstanding, difference of opinion or your spouse’s disapproving stare.
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Now What? Before the sale, get familiar with the animal or piece of equipment you are
interested in purchasing, ask the Seller questions, listen for updates from the auctioneer that may
be announced during the sale (which will supersede catalogue information), and don’t rely solely
on the auctioneer or pedigree reader with respect to pregnancy status, estimated f o a l i n g
dates or even the accuracy of the pedigree.
While the information announced by the
auctioneer is probably accurate, certainly to the best of his or her knowledge, it is no substitute
for the specific representations made by a Seller in a face-to-face, e-mail or telephone inquiry.
The auctioneer or pedigree reader may be liable for negligence or carelessness, but that is often
hard to prove and damages may be even harder to recover.
Principle No. 2: Representations and warranties made by a Seller consigning an animal
to an auction must be true. This also seems pretty obvious. However, there are more laws
applicable to auctions in this context than you might realize. False, misleading or deceptive
acts or practices by a Seller in selling an animal through an auction are unlawful in every state.
The cause of action available to the Buyer is not just simply one of common law fraud as defined
in case law or state statutes prohibiting misrepresentations or false statements. Buyers of cattle
who are subjected to deceptive acts of Sellers also have remedies under a variety of state
consumer protection laws. For example, Texas has the Texas Deceptive Practices-Consumer
Protection Act. Under this law, it is a “deceptive trade practice” to make false or misleading
statements about animals being sold. It is also a deceptive trade practice for a Seller to withhold
information that a Buyer would deem important in his or her buying decision.
So What? Consignors of livestock to an auction who make a false representation
(including allowing a false representation to be placed in a sale catalogue) may be subject to
criminal prosecution and are certainly subject to a civil lawsuit by a Buyer. If a lawsuit is
brought under one of the consumer protection laws, a Seller may also be liable for treble
damages in some cases and for the payment of the Buyer’s attorneys’ fees. Misrepresenting an
animal, i.e., the false or deceptive act, may take several forms. It may be stating that an
animal has sponsorship, approval, characteristics (including parentage or breeding) or benefits
that it does not have. It also includes misrepresenting that an animal is of a particular
standard, quality or grade, i.e., longest, best, tallest. There is a fine line, but an important one,
between “touting” or “puffing” (“this cow is from one of the best genetic lines”) and making
false statements (“this cow is the finest ever produced in Texas” or “this horse will always
produce champions”). It is best, as a legal matter if for no other reason, to stay far away from
this line.
To recover damages under consumer protection laws, a Buyer must prove the
representation was “intentionally” made. This means the Seller must have actual awareness
of the falsity, deception or unfairness of the act or practice, or the condition, defect or failure
constituting a breach of the warranty giving rise to the Buyer’s claim. The Buyer must also
prove that he or she acted in reliance to their detriment on the false representation or deception
or purchased an animal in ignorance of the unfairness. Failure to disclose certain material
information that was known to the Seller (with the intention that a Buyer would be induced to
make a purchase they would not otherwise have made had they known the undisclosed
information) is also unlawful. If the Seller can prove the Buyer would have bought the
animal involved no matter what, the Buyer won’t be able to recover anything in Texas.
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Now What? Sellers should read, reread, and rereread the representations and
warranties they submit for sales catalogues. Let friends or advisors reread them. If a Seller
spots an error in a catalogue or if submitted information changes (i.e., a cow is determined to be
unbred or, by checking records, the cow is found to be bred to a different bull than the one
identified in the initial submitted information), notify the auctioneer and request that an updated
announcement be made prior to opening the bidding for the animal when it enters the sale ring.
Every Seller should answer questions from a potential Buyer truthfully and completely. If not,
that cow the Seller thought was sold may come back home after considerable legal expense.
Interesting note: An auctioneer has the legal obligation to deposit into a segregated trust
account the proceeds from the sale of an animal whose sale at auction becomes disputed. The
auctioneer has the responsibility to maintain those funds until either the parties notify the
auctioneer that the dispute is resolved or the proper court orders him or her to release the
proceeds to one party or the other.
Another interesting note: Some courts have ruled that a Buyer at an auction take cattle
“as is” and cannot recover from a Seller if the cattle turn up later to have diseases or
injuries. These cases generally come out of weekly auction barns where a Buyer is proven
at trial to have known that the “custom” or “usage of trade” in that barn or vicinity was that
buyers bought sale barn cattle without any representations or warranties. Those cases also tend
to be older cases and the trend may be way from that pure caveat emptor approach.
Principle No. 3: A sale is “complete” as to an animal in the sale ring (or exiting the
sale ring) when the auctioneer SO ANNOUNCES. How? By the fall of the hammer OR
IN ANOTHER CUSTOMARY MANNER. The auctioneer’s use of the hammer is often
entertaining and designed to encourage bidding. It is often instinctive to the auctioneer who
raps the hammer to keep the bidders’ attention to the matters at hand. The auctioneer may not
even know he raps the hammer as part of the “bid and call” process. However, the “fall of
the hammer” indicating termination of bidding has very specific legal significance. It signals
the end of that particular sale transaction, that is, the acceptance of the last bid.
Upon the hammer’s fall, a completed contract is formed between the Buyer and the
Seller. However, the hammer’s fall may not mean that a sale is concluded IF the auctioneer
has established another customary manner of announcing the end of a sale such as waiving the
hammer over his head while yelling “sold” or pointing to the winning bidder while yelling “you
got it” or ringing a bell. Such “other customary manner” must be “established.” If it has, the
fall of the hammer may be entertaining, but have no legal significance for that particular
auctioneer and that particular auction.
So What? This is where the auctioneer has great legal power under law. If a question
arises about the amount of a winning bid or when two or more people believe their bid is
actually the highest one at the time the hammer falls, the auctioneer may, in his or her
discretion, reopen the bidding. Or, exercising this discretion, the auctioneer may declare the
animal sold pursuant to the last bid which he or she accepted. The auctioneer alone has the
authority to determine whether a last bid has been accepted and he or she alone designates
which bid was accepted as the hammer was falling.
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Several interesting questions arise which the law does not address. Under what
circumstances should the auctioneer reopen the bidding? When is the hammer “falling?” When
it is just starting down, when it is halfway down or the moment before it strikes the auctioneer’s
table or podium? What is the auctioneer’s discretion supposed to consider? Is it ever
mandatory for the auctioneer to reopen the bidding? The answers seem to be that the
auctioneer may and should exercise his discretion whenever it is necessary to make the auction
process fair. Otherwise, one should never reopen the bidding, certainly not to cave in to a
particular bidder who complains regarding a lost bid.
If the auctioneer does exercise his discretion and reopen the bidding, he or she will
generally begin the sale again of the animal in question at the point in the bidding where he or
she left off. The laws are not precise about this requirement, but this seems to be the uniform
practice which occurs. The law does appear to require that the auctioneer reopen the bidding to
all bidders in attendance, not just the final two bidders. Why? Because the acceptance of the bid
for which the auction is reopened may affect the mindset or desire of other bidders who otherwise
lost interest or dropped out.
Now What? Listen carefully for any announcements when an animal enters the ring.
Listen to the bid and call very carefully. Ask the auctioneer or the “ring man” closest to you for
the current bid if you do not understand the precise amount then being asked or the current bid
being offered. Generally, once an auctioneer knows you are an interested bidder, they will make
eye contact and keep you informed during the auction of that particular animal. The
auctioneer may yell “sold” and strike the hammer simultaneously or he or she may not. If
the “sold” exclamation and the hammer strike do not occur at precisely the same instant, it is
generally when the hammer hits the table that the bidding is closed (unless of course, the
auctioneer has established some other customary method for closing bidding on the lots).
Principle No 4: “Sales with reserve” and “sales without reserve” are two very different
types of sales. In a sale catalogue, the following may appear: “Each animal will be sold to the
highest bidder with reserve.” This phrase has significant legal impact on an auction and, in
some cases, on individual lots within an auction.
The law of most states assumes that sales are made “with reserve” unless the
auctioneer or the sale catalogue explicitly states that the animals are offered for sale “without
reserve.” If a sale of a lot is “with reserve,” an auctioneer may pull the animal being offered at
any time until he or she announces the completion of the sale of that lot. Why? Because the
bidding did not reach a pre-set or “reserve bid” or “reserve price.” If a sale is “without reserve,”
once the auctioneer calls for the first bid of a lot, he or she cannot withdraw that animal unless no
bid is made within a reasonable time.
So What? Determine if the sale generally will be “with reserve” or “without reserve.”
Certain lots within a sale may be “without reserve” and some may be “with reserve.” This is
common. If a sale is with reserve, you, as a bidder, must determine the maximum price that
you are willing to pay and realize that the reserve for the particular animal you want may
exceed that number. You may never know the amount of the reserve price for that animal.
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Neither the auctioneer nor Seller is obligated to disclose the reserve price.
Now What? If the reserve is not met on an animal that interests you, approach the Seller
later and make a direct offer. That person is then likely to tell you the amount of their reserve
price. Or, they may say something like, “I really have to have this or that amount in order to let
this animal go.” This number is often less than the reserve price that was communicated to
the auctioneer because the Seller would rather not carry the animal home and resume its
feeding and care.
Principle No. 5. Sellers and consignors may bid on their own animals. No auction
laws appear to prevent a Seller from bidding on his or her own animal other than to require that
a Seller must pay the consignment fee and/or commission due to the auctioneer or sale
manager. There are provisions in certain state laws, however, that permit a Buyer, at his or her
option, to void their purchase if notice has not been given that the liberty of Sellers to bid on their
own animals has been “reserved.” If an auctioneer knowingly receives a bid on a Seller’s
behalf and that notice is not given, i.e., that “seller bidding” has been reserved, the Buyer may
void the sale or take the animal at the last “good faith bid” prior to the completion of the sale.
So What? Potential bidders may find themselves “bid up” when considering an animal if
a Seller is also bidding on his or her own animal. That is legal and is another way for a
Seller to achieve a minimum price for his or her animal. Whether or not it is ethical is a matter
of conscience for each Seller to resolve. As discussed earlier, Sellers bidding on their own
animals is another way of establishing “reserve prices” just as if such reserve bids had been left
with the auctioneer. However, a bidder may not like that approach if the bidder is unaware that
seller bidding is permitted.
Now what? Potential bidders should review the sales catalogue carefully and
determine if bidding by Sellers on their own animals is permitted. The auctioneer may also
announce this at the beginning of the auction. If the catalogue says that the auction is “with
reserve,” bidders should assume that seller bidding is permitted unless it is clearly stated
otherwise. If it is permitted, bidders may also want to identify the Seller of a particular animal
and observe them during the bidding process to see if they are also bidding on their own
animal. Again, it is not necessarily an indication that the Seller is unethical or underhanded;
but it may mean that you, as a bidder, will have to bid up to a previously established, pre-set
(but undisclosed) price if you want to go home with that animal.
Principle No. 6: A bidder can withdraw their bid during the bidding process. This goes
back to Principle No. 1 and is a concept that is probably not well understood. This also
addresses the question about the bidder who scratches her nose or waives at a friend in an
auction and whether they may be a “bidder” or worse, a buyer. Can they be stuck with that
kind of a bid? The answer is no, although most auctioneers will politely smile and gently
“threaten” the accidental bidder, nose scratcher or hand waiver that next time they may own a
cow.
So What? A bidder may retract his or her bid until the auctioneer’s
announcement of completion of the sale. Is the previous high bid revived? No. Why? Each
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bid by a bidder constitutes a new offer to purchase the animal in the ring. Generally, you must
have the intent to make a bid for it to be an accepted offer. There is really no such thing as
“accidental” or “inadvertent bidding.” An exception to this rule is when the “accidental
bidder” sees the auctioneer accept his or her bid and does not correct the misunderstanding of
the auctioneer. The “accidental bid” becomes a real bid once the bidder becomes aware of the
accident or mistake and fails to quickly take steps to correct the mistake.
Acceptance of a bid by an auctioneer constitutes a new offer for the animal in the
ring and supersedes any prior bid. A prior bid cannot be accepted because it is no longer an
effective offer for an animal being sold. If the last bid an auctioneer receives is withdrawn,
what is the auctioneer to do? Though not required to, the auctioneer generally goes back to the
prior bidder and asks if he or she would like to revive their bid, in effect, make a new offer. If
that bidder doesn’t, then the auctioneer will reopen the bidding and begin again, frequently
starting at the next lowest bid at which an interested party will revive his or her “bid” or offer.
Now What? If you believe the auctioneer has accepted your scratch or waive as a bid,
though accidental or inadvertent, immediately notify the auctioneer of the mistake. If you fail
to correct the situation and simply wait to see what happens, then your mistake may turn
into a new cow in your pasture. If you observe the animal in the ring and see something you
don’t like or that is a surprise and want to withdraw your bid, you may do so. However, if
your bid is not then the current high bid, interrupting the sale to correct or withdraw that bid
is unnecessary. You are “out” and can’t be brought back “in” unless you bid again and your bid
is acknowledged by the auctioneer.
Don’t throw a fit if the auctioneer reopens the bidding if a new bid is made as the hammer
falls on an animal that you think you just purchased. The auctioneer has that discretion. He
o r s h e may reopen the bidding as to only the two highest bidders then remaining, or he or she
may open it up to everyone in the room (or on the phone). Again, don’t make a scene, you will
be embarrassed and the auctioneer will be within his or her rights. By showing good humor and
demonstrating good faith, the auctioneer is likely to pay closer attention to your subsequent
bidding because he or she may “owe you one” in appreciation.
Principle No 7: The Buyer assumes the risk of injury to an animal when the hammer
falls. A recent notice in a sales catalogue appeared as follows: “The sole risk and responsibility
for each animal sold at this auction will be transferred to the Buyer upon the sale of the
animal.” This principle derives its logic once again from Principle No. 1 above.
Since each lot is considered a separate sale transaction, until the hammer falls, the animal
belongs to the Seller. Once the hammer falls, ownership is deemed to have transferred to the
Buyer even though the registration and transfer documents are not completed for several weeks.
Stated another way, if the animal is hurt coming into the sale ring, the Seller will suffer the loss
or decrease in value of that animal. If the animal is hurt leaving the sale ring, the Buyer will
suffer the loss or decrease in value of that animal.
So What? Each party, Seller and Buyer, may have a remedy against the auction company
or sale manager for injury to animals in their care, while being moved into or out of a sale ring,
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from a holding pen to the sale area or in the loading area. But that remedy must be sought by
the damaged party as the “owner” of that animal. His or her ability to recover will be based on
the standard of care expected of the cattle handler and whether or not that standard or duty of
care was met. It is not the basis for voiding a purchase made at the auction and the parties will
not likely have a cause of action against one another. If a Buyer gets an animal home and finds
a broken hoof or a tipped horn or some other serious injury, they will need to look to the sale
company or the cattle hauler and not the Seller for relief unless it is an injury the Seller knew of
and failed to disclose.
Now What? Inspect cattle you intend to bid on while they are still in the holding pen
prior to their entry into the sale ring. Look for any possible injury, lameness or health issues.
Inspect each animal again once they enter the sale ring and look at their overall condition prior to
allowing your “final bid” to be accepted. Inspect each animal again prior to loading them in
your trailer or that of a hired hauler. And, of course, inspect the animal again once it is
unloaded at your place. Determining when injuries occur very often determines where
responsibility lies. Once the hammer falls, as a Buyer, that animal belongs to you and you
must seek your own relief. Don’t simply call the Seller and try to reverse the transaction.
Worse yet, don’t put a stop payment on your check as your misery will only get worse.
Final suggestion/recommendation that is most often overlooked: Read all general
“sale-wide” warranties and representations contained in the sale catalogue. These are the ones
that apply to every animal to be sold and the auction as a whole. Then, go one step further
and look carefully at the limitations of those warranties in the conditions or terms of sale, both
generally and as to each individual animal. For example, if a catalogue says that an animal will
be healthy and/or bred, but a Buyer will only get relief if a discrepancy is brought to the
Seller’s attention within say 48 hours, that is a limited warranty. It won’t be effective
beyond the specified time period. Most catalogues say that issues regarding health or
breeding status are strictly between the Seller and Buyer and thus no representations are made. In
that case, i.e., “no warranty,” or in case of a limited warranty, it is best to contact the Seller
directly and be assured of what the warranty is as to an animal’s health and whether that
warranty is unlimited or limited.
Auctions are fun, frustrating, exciting, and often mysterious. They are the commercial
backbone of the horse and livestock industries. The lack of much case law suggests that either
most transactions don’t involve enough dollars to justify lawsuits over the transactions involved
or that most disputes are resolved at the auction itself or within days following its conclusion.
However, lack of case law doesn’t mean that auctions always go smoothly. Reflecting on the
above principles may help set your legal expectations before and after a sale so that you end up
with the horse or cow you desired in a transaction that was a fun and pleasant way to buy an
animal.
Jim Eggleston is the founding partner of Eggleston Flowers & King, LLP of
Weatherford, Texas. He can be reached at jim@efklaw.com He is board certified by the Texas
Board of Legal Specialization in Farm and Ranch Real Estate Law and Commercial Real
Estate Law.
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