Within the auction industry absentee bids left with an auctioneer are generally seen – and should be seen – as a ministerial accommodation to bidders who are unable to be physically present at an auction (or, if present, choose not to execute their own bids). Absentee bids can also benefit the seller by potentially increasing the Hammer Price on a lot, and by potentially providing a starting point for bidding. Because bidders and sellers often bring their own expectations to the auction (including expectations around absentee bidding), and because those expectations may, and often are, inconsistent with industry standards and with the practices of the individual auctioneer, it is important for all parties to understand the nature of an absentee bid, and relationships of the parties with respect to an absentee bid. As such, in order to educate the parties, manage their expectations, avoid disputes, and reduce the risk of liability, auctioneers who receive absentee bids should clearly establish the nature of absentee bidding and the procedures employed by the auctioneer in handling absentee bids. Moreover, in some licensing states, the auctioneer is required to describe his or her policies regarding absentee bids in the seller’s contract. Under any circumstances, I would suggest that your procedures for handling absentee bids be set out in your seller’s contract, in your Bidder Terms and Conditions, and in your absentee bid form.
As a starting proposition, the auctioneer is the seller’s agent. This means that the auctioneer acts on behalf of, and for the benefit of, the seller. Notwithstanding this essential reality, when an auctioneer agrees to receive and execute an absentee bid, several questions arise:
• What, if any, relationship and potential liabilities are established between the absentee bidder and the auctioneer?
• At what amount do you set-in the absentee bid? (By way of example, if you have a $500 absentee bid, do you set it in at $500 or at some lower amount to be advanced competitively?)
• What happens if there is a failure to execute the absentee bid, and, in particular, is the auctioneer potentially liable to the absentee bidder or the seller?
Like so many issues confronted by auctioneers, the answers to these questions should be found in both the auctioneer’s Bidder Terms and Conditions and in the written contract between the auctioneer and the seller.
The Bidder Terms and Conditions provide the auctioneer with the opportunity to establish rules applicable to the auction and to describe the contractual relationship between the auctioneer and the bidders. The Bidder Terms and Conditions should clearly state that the auctioneer is the seller’s agent, and that, under no circumstances (including the receipt of absentee bids), will the auctioneer act as, or be deemed, an agent of a bidder. Additionally, the Bidder Terms and Conditions should indicate that if absentee bids are accepted, they will be accepted in the auctioneer’s sole and absolute discretion, and will be executed as a ministerial accommodation only – not as an obligation.
Should an auctioneer be willing to make the accommodation of receiving absentee bids, he or she must determine, as a matter of policy, whether an absentee bid will be executed at its full amount or whether it will be executed competitively (i.e., initiated at a lower opening amount that is typically a percentage of the maximum bid and only executed up to the amount necessary to constitute the high bid, or until exhausted (whichever comes first)). Once this determination is made, it should be stated clearly in the Bidder Terms and Conditions, and in the seller’s contract, so that there are no surprises.
Occasionally, I’ve been told by an auctioneer that “I set it in where the absentee bidder tells me to set in.” When I hear that, which, fortunately, is not often, it gives me palpitations because, if you are not the agent of the absent bidder, the absentee bidder should not be giving you instructions. And, to the extent you are taking instructions from the absentee bidder you run the risk – at least of the argument – that an agency relationship was created. Remember, it’s your auction, your rules, and you work for the seller. If the absentee bidder can direct how his or her bid is executed, do you risk creating the expectation of an agency relationship on behalf of the bidder?
Bear in mind that, in a brokered real estate transaction, a listing agent who receives an offer from a potential buyer is, typically, required to provide a disclosure of agency relationship, in writing, so that the offeror understands that the listing agent is working for the seller and that there is no dual agency (unless expressly agreed to). An auctioneer receiving an absentee bid really wants to have a similar disclosure in place. Once the auctioneer determines how an absentee bid will be set-in it needs to be set forth in Bidder Terms and Conditions, in the absentee bid form signed by the absentee bidder, and in the seller’s contract with the auctioneer so that everyone is on the same page. In this regard, if the auctioneer is setting the bid in at a percentage of the maximum amount, you want to explain the rationale to the seller up front so that you don’t have to explain, later, how it was that you had a $500 absentee bid, but sold the lot for $480.
Next, the Bidder Terms and Conditions and the seller’s contract should recognize the possibility that – for any number or reasons – an absentee bid may go unexecuted. I’ve actually been in that position as an absentee bidder. Having left a $500 absentee bid on a lot, I called the auctioneer (a good friend of mine) after the sale and asked how I did. After a moment of awkward silence, I was told I didn’t win the lot. Expressing surprise, I told the auctioneer that I thought I left some cushion in the bid. Well, it turns out that the lot sold for $300, and my bid was never executed. It happens. And, you want to let both your absentee bidder and your seller know that – while you will make reasonable efforts to execute absentee bids, there are circumstances that may result in such a bid not being executed, and that there will be no liability for the failure to execute an absentee bid. Essentially, the risk of a failure to execute should not rest on the auctioneer.
Each absentee bidder should also be advised that a lot subject to an absentee bid may be sold to another bidder for the maximum amount of the absentee bid based a bidding sequence that causes another bidder to reach that amount first (for example, the maximum amount of the absentee bid was $100, the absentee bidder was in at $90, and the lot sells to another bidder for $100). Additionally, the Bidder Terms and Conditions should address how an absentee bid will be handled if its execution would be for less than a full bidding increment established by the auctioneer. By clearly articulating the rules for handling absentee bids in the Bidder Terms and Conditions, the auctioneer can manage the bidder’s expectations and reduce the risk of liability.
Here is an absentee bid form that I have provided to auctioneers addressing the issues discussed in this article. Remember, the provisions should be paralleled in your seller’s contract, as well.
Given all of the foregoing, I was taken aback recently to read a theory on social media that an auctioneer’s receipt of an absentee bid to be executed competitively creates a conflict of interest between the absentee bidder (who hopes to get the lot at the lowest possible price) and the auctioneer (who benefits from striking it off at the highest possible price). That theory is based on fundamental misunderstanding of what constitutes a conflict of interest, and improperly suggests an agency relationship between the auctioneer and the absentee bidder – which you want to avoid. Typically, parties to a contract will have divergent interests. Even in so-called win-win situations, the parties want different things. The potential for a conflict of interest, typically, only arises when the parties are in a confidential relationship or when one party owes a fiduciary obligation to the other. So, a trustee who buys property out of an estate has a potential conflict of interest even if a fair price is paid (that’s why you get court approval for that), an officer in a real estate development company has a potential conflict of interest if he seizes a corporate opportunity, and a director of a non-profit corporation has a potential conflict of interest if she sells goods or services to the entity for a profit. If you do not represent the absentee bidder, and you have agreed to execute the absentee bid as a ministerial act according to your rules, there is no conflict of interest.
THIS ARTICLE IS FOR INFORMATION AND DISCUSSION PURPOSES ONLY, AND IS NOT INTENDED AS, AND CANNOT BE RELIED ON AS, LEGAL ADVICE. NO ATTORNEY-CLIENT RELATIONSHIP IS INTENDED OR ESTABLISHED. SPECIFIC QUESTIONS SHOULD BE REFERRED TO AN ATTORNEY OF YOUR OWN CHOOSING. ANY SAMPLE LANGUAGE OR FORMS SHOULD BE REVIEWED BY AN ATTORNEY OF YOUR OWN CHOOSING BEFORE BEING USED.