Auction Sale Notes – CA Foundation Business Law

A sale by auction is a public sale where various intending buyers offer bids for the goods and try to outbid each other. The highest bidder ultimately purchases the goods. The auctioneer accepts a bid by the buyer when announcing its completion, typically by the fall of the hammer or in any other customary manner. The words ‘any other customary manner’, takes into account all the manners which may be prevalent to denote acceptance in an auction sale. It may be by shouting one, two, three; or shouting going, going, gone, etc.

A person may himself sell his own goods by auction, or he may appoint an agent, known as auctioneer, to conduct the sale on his behalf.

15.1 Rules of Auction Sale (Sec. 64) Following rules have been laid down to regulate the sales by auction:
1. Sale of goods in lots Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale.
2. Completion of Sale An auction sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner, and until then the bidder has the right to revoke or retract his bid. If before the fall of the hammer the bidder withdraws, his security amount cannot be forfeited. But if he does so after the fall of the hammer, it amounts to a breach of the contract and his security amount will be liable to be forfeited. If the conditions of sec. 20, namely, the goods should be specific and in a deliverable state, are satisfied, the property in such goods passes to the buyer at the completion of the contract (by the fall of the hammer)
3. Seller’s Right to Bid Unless the auction is notified to be subject to a right to bid on behalf of the seller, it is not lawful – (i) for the seller to bid himself or to employ any person to bid at such sale on his behalf and (ii) for the auctioneer to, knowingly take any bid from the seller or any such person. Any contravention of this rule renders the sale as fraudulent.
4. Pretended bidding If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. However, the seller may expressly reserve the right to bid at the auction and in such case, the seller or any one person on his behalf may bid at the auction. But there should be only one person on behalf of the seller; if there are more than one person, the intention is to raise the price and is fraudulent.
5. Reserve Price The seller may notify that the auction will be subject to a reserve or upset price, that is, the price below which the auctioneer will not sell. In such a case the auctioneer is not bound to accept the highest bid unless it reaches the reserve price. Further the property in the goods, even if they are specific, will not pass if the highest bid falls short of the reserve price.
6. Knock-out agreement Knock-out agreement is a form of combination of buyers to prevent competition among themselves at an auction sale. They agree that they will not raise the bid against each other and only one of them will bid of the auction. When the goods have been purchased they will share the profits. Prima facie, a knock-out agreement is not illegal.

If the parties intend to defraud a third party, the third party can claim damages. To protect his interests, the seller can reserve the right to bid at the auction or fix a reserved price.

15.2 Upset price “Upset price” is the Scottish equivalent of “reserved price”.
15.3 Damping It is an unlawful act by which an intending purchaser is prevented from bidding or raising the price at an auction sale. The damping is usually done in any of the following ways:
(i) By pointing out defects in the goods put up in an auction sale.
(ii) By taking the intending buyers away from the place of auction by some other device.
Damping is illegal and the auctioneer can withdraw the goods from auction sale in case he observes that the damping is being resorted to.
Puffer – A person who is appointed by the seller to raise the price by fictitious bids.
15.4 Incidence of Taxation [Sec. 64A] 1.If a tax revision occurs after a contract has been made but before it has been performed, the parties would become entitled to readjust the price of the goods accordingly. Taxes covered are customs or goods and service tax on the goods and any tax payable on manufacture, sale or purchase of goods.
2. The buyer would have to be pay the increased price if the tax increases and would be entitled to the benefit of reduction if taxes are curtailed.
3. Thus, the seller may add the increased taxes in the price.
4. The effect of the provision can, however, is excluded by an agreement to the contrary. It is open to the parties to stipulate anything about the incidence of taxation.

Frequently Asked Questions (FAQs)

Ques 1. What is an auction sale?

Answer: An auction sale involves potential buyers offering bids for goods, and the goods are sold to the highest bidder in a public sale.

Ques 2. When is a bid in an auction considered accepted?

Answer: The auctioneer accepts a buyer’s bid by announcing its completion, often with the fall of the hammer or through customary means.

Ques 3. Can a bidder withdraw their bid before the completion of the auction sale?

Answer: A bidder can revoke their bid before the auction ends, but withdrawing it afterward breaches the contract.

Ques 4. Is it lawful for the seller to bid on their own goods at an auction?

Answer: Generally, sellers bidding on their goods or using proxies is unlawful, potentially making the sale fraudulent, unless notified otherwise.

Ques 5. What is a reserve price in an auction sale?

Answer: A reserve price is the seller’s minimum, and the highest bid must match or exceed it for the sale to proceed.

Ques 6. What is a knock-out agreement in an auction sale?

Answer: Buyers arrange a knock-out agreement to avoid competing at auctions. It’s legal, but fraudulent intent can have legal repercussions.

Ques 7. What is damping in an auction sale?

Answer: Damping is unlawful, blocking bidders from raising prices at auctions through tactics like highlighting defects or diverting buyers.

Ques 8. What is a puffer in an auction sale?

Answer: A puffer is someone designated by the seller to artificially inflate the price through fictitious bids.

Ques 9. How is taxation handled in auction sales?

Answer: Taxation adjustments apply if tax rates change between contract and sale. Buyers may pay more, sellers benefit, but contracts can override this.

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