Bidding Practices At Auction
01 August 06
It is a well-established practice for dealers to bid at auction in partnership with other dealers. Recent developments in the law have
cast the spotlight on the difficult distinction between legal joint acquisition agreements and illegal auction rings.
Traditionally, auction rings involve a group of dealers agreeing not to compete against each other in the auction room in order to
keep the price of property offered at auction artificially low. The members of the ring select one of them to bid on a lot, and at the
end of the auction, they conduct a second, private auction, during which the lot is re-sold to the highest bidder
amongst the ring members and the difference between the public auction price and the second, private auction price, is divided
amongst the members according to a pre-agreed formula.
This type of auction practice is illegal in the UK. It prevents true competition and can discourage other bidders from participating in
the auction. It deprives the seller of the true value of his property and has a detrimental effect on the level of the auctioneer's
commission.
A distinction should be drawn at the outset between a genuine joint acquisition agreement and an illegal auction ring. Dealers may
decide to buy jointly because they cannot afford to buy independently or because, on a cost-risk analysis, they are unwilling
individually to invest the amount necessary to acquire the property. Buying together means that they are able to spread the risk. A
genuine joint acquisition agreement can promote competition where a party entering the fray would not have done so in the
absence of an agreement to buy jointly with other dealers. So genuinely pro-competitive joint acquisition agreements are not
illegal. However, as we shall see below, it should not be assumed that all genuine joint acquisition agreements are on the right side
of the law. Joint acquisition agreements can be illegal if their object or effect harms competition.
How does English law regulate auction rings?
Auction rings are regulated by four separate sets of rules:
1. The Auction (Bidding Agreements) Acts of 1927 and 1969
These Acts make it a criminal offence for dealers to give an inducement or reward to any person for abstaining from bidding at a
sale by auction and for any person to accept the inducement or reward.
Criminal sanctions are a fine and/or up to two years imprisonment. Other sanctions are (a) the seller may avoid the contract of sale,
and the members of the ring will be jointly and severally liable to compensate the seller for his loss, and (b) the convicted member of
a ring may be prohibited from participating in an auction for up to three years.
The Acts recognise that a genuine joint acquisition agreement is not prohibited, provided that the agreement is disclosed. The Acts
require the parties to the agreement to record it in writing and lodge it with the auctioneer prior to the auction.
Does an auction ring become legal by disclosure? The answer is no. The Acts protect "agreements to purchase bona fide on a joint
account" that are disclosed. If the agreement records an auction ring, disclosure will not make it legal. It should also be noted that
the Acts require disclosure of the full written agreement, and not simply notice to the auctioneer that a joint bid is to be made.
2. The Enterprise Act 2002
This Act makes it a criminal offence to participate in a "bid-rigging arrangement". The offence seems to be directed primarily at
contractors who in the course of a tender process agree to fix prices or share markets. The auction process has similarities with a
tender process and the provisions of the Act would appear equally to apply to an auction.
Liability under this Act requires, first, that there is an agreement amongst potential bidders to the effect that one or some of them will
abstain from bidding or that they will bid in a certain way. The effect of such an agreement is to distort competition, hence the
abstain from bidding or that they will bid in a certain way. The effect of such an agreement is to distort competition, hence the
offence. The second element of the offence is a mental state of dishonesty. The Office of Fair Trading, one of the agencies
responsible for prosecuting offenders under the Act, has indicated that it will assume dishonesty where there is bid-rigging.
The sanctions are a fine and/or imprisonment of up to five years.
Criminal liability will not arise under this Act if before or when the bid is made, participants inform the person inviting bids that there
is a bidding agreement in place. Accordingly, if the arrangement is a genuine joint acquisition agreement and appropriate
disclosure is made, the parties will avoid liability under the Enterprise Act.
3. Competition Law
Competition law in the UK includes the provisions of the EC Treaty (where there is a potential effect on trade between Member
States) and the Competition Act 1998. The Competition Act prohibits agreements, decisions or concerted practices between
undertakings which have as their object or effect the prevention, restriction or distortion of competition within the UK. In order to
establish if an agreement has an anti-competitive object or effect, one must analyse the relevant market and the impact of the
agreement on that market. This can be a complicated exercise, and it would be impractical to suggest that such an analysis be
conducted each time dealers agree to bid jointly on a lot. The difficulty is this: if two or three important dealers in a given collecting
area agree to bid jointly in an auction as part of a risk sharing strategy, there can be no guarantee that, if investigated, their
agreement will not be found anti-competitive and thus in breach of the Competition Act, even if they have made the pre-auction
disclosure to the auctioneer contemplated by the Auction (Bidding Agreements) Acts and the Enterprise Act. There is no disclosure
defence available under the Competition Act. If the dealers are able to prove that none of them would have been able to make a
serious bid independently, this may defeat the allegation of anti-competitive behaviour. However, the inability to make a bid could
be difficult to prove and if a dealer could have made a bid but preferred not to in order to minimise his risk, the prohibition in the
Competition Act might apply.
The consequences of a breach of the Competition Act or the EC Treaty can be severe. The offender may be liable to pay a
substantial fine (up to 10% of annual turnover), individuals may be disqualified from acting as company directors and offenders may
liable to compensate third parties (the seller and the auctioneer) for their loss.
4. Common law
Persons operating an auction ring may also incur criminal liability for participating in a criminal conspiracy to defraud. If found guilty
of a conspiracy, the offender is liable to a fine and/or up to ten years imprisonment.
5. Extradition
Where an illegal auction ring has effects in more than one jurisdiction, exposure to criminal liability in the UK may also carry the risk
of extradition. In a recent case involving industrial components, the USA have applied to extradite British defendants accused of
price-fixing and bid-rigging (also criminal offences under US law), in circumstances where the alleged anti-trust activities occurred
outside the USA but had an effect on the price of the industrial components sold in the USA. This case has highlighted the
determination of the US authorities to assert jurisdiction over individuals engaged in activities abroad with anti-competitive effects
within the USA, and the potential risk for those engaging in large scale auction rings.
So is it safe to conclude genuine joint acquisition agreements when buying at auction in the UK?
The Competition Act and the Enterprise Act have imposed another layer of regulation over and above the obligations imposed by
the Auction (Bidding Agreements) Acts of 1927 and 1969. The two regimes operate in parallel.
Under the Auction (Bidding Agreements) Acts of 1927 and 1969 and the Enterprise Act, proper disclosure is essential to protect
parties to a bidding agreement from the accusation of operating an unlawful auction ring. Dealers are understandably reluctant to
disclose their arrangements with other dealers to auction houses, but there may be practical ways to comply with the disclosure
requirements whilst limiting the dissemination of the information.
However, disclosure is no defence against a charge of violating the Competition Act, or EU competition law, if the arrangement is
deemed to distort competition beyond the relevant UK market. Joint acquisition agreements may be in breach of competition law,
even if they are disclosed in advance to the auctioneer. If an agreement is potentially anti-competitive, it is advisable to seek legal
advice before entering it.
© Withers 2016