An auction sale is the sale of goods through a bidding process and is covered under the Sale of Goods Act, 1930. The process of sale by auction involves the selling of any goods and property of value, in a public gathering where buyers make a bid for the purchase and the sale is made to the highest bidder. Let us understand in detail an auction sale, parties involved, and their rights and obligations.
Rules of an Auction Sale
Section 64 of the Sale of Goods Act states the rules applicable in case of an auction sale.
Sale of Goods in Lots
When the auction involves the sale of goods in different lots, each lot of goods are covered under a separate contract of sale.
An auction sale is deemed to be complete when the auctioneer says so. The same can be done by the fall of the hammer or any other means used to signify the completion of the sale. The bidder can withdraw the bid anytime before the completion of the sale is declared.
The Right to Bid Reserved for the Seller
The seller can reserve his right to bid at the auction but he must expressively reserve this right. He can appoint an agent to bid on his behalf.
Notification of the Right to Bid by the Seller
If the seller has not expressively reserved his right to bid and has not informed about the same, he or his agent is not authorized to bid at the auction. The auctioneer is not entitled to accept any bids made by the seller or his agent if the buyer has not expressed his intent to do so. Any sale that is in contradiction to this rule will be deemed unlawful and fraudulent by the buyer.
The goods for sale at the auction may be subject to a reserve price or an upset price. The auctioneer cannot sell the goods below this price.
Pretend Bidding by the Seller or His Agent
In case the seller or his agent pretend bid for the goods purposely to raise the bid price of the goods, the buyer of the goods has the right to treat the sale as void.
No Credit Sale
The property in an auction cannot be sold on credit or as per his will by the auctioneer. The auctioneer can accept a bill of exchange in an auction sale but only if it has been allowed by the seller.
Let us look at different kinds of auctions like real estate foreclosure auctions and government auctions.
Bank Auction Properties for Sale
In case of properties up for sale through a bank option, buyers can submit their bids through a bid form or a tender form. In some cases, competitive bidding is allowed between the buyers by the bank to raise the price of the auction property for sale. If the buyer or the winner of the bank auction does not pay the balance amount within a specified time, then the entire amount paid is forfeited by the bank.
Railway scrap collected from wagons, coaches, deserted rails, etc is sold by the railways through auction. Indian railways have completely switched to e-auctions since 2013.
Real Estate Foreclosure Auctions
Banks can hold a real estate foreclosure auction under the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act, 2002. This allows the banks to auction repossessed or foreclosed properties to recover their losses. These properties are seized by the banks after the borrowers fail to make multiple payments towards principal and interest. A property in the early stages of foreclosure by the banks is in pre-foreclosure auction. It is a kind of notice to the borrower that the property will be auctioned if the payment is not made to the lender. This stage is considered the grace period that is given to the borrower before the foreclosure auction.
In case of a land auction done by the government, the land must be sold through a public auction and the government must give a notification for the same through wide publicity. In the case of government land auctions, there is no upset price except in the case of railway relinquished lands where a minimum or upset price is fixed in consultation with the Railway Administration before the auction.
Solved Question on Auction Sale
Q1. Can the Auctioneer Sell a Property Below the Reserve Price?
A1. The auctioneer cannot sell a property below the reserve price or the upset price. In certain cases, however, the auctioneer can be relieved if his actions were a result of a mistake on his part.
Let us explain this with case law.
Case Law: McManus vs Fortescue
In this case, the auctioneer had sold the property below the reserve price by mistake. The reserve price had been stated in a catalog for each lot. The auctioneer was relieved by the court as it was considered a mistake on the part of the auctioneer.
Q2. When is the Auction Sale Said to be Complete?
A2. An auction sale is said to be complete when the auctioneer puts down the hammer after giving the final call to the highest bidder. The auctioneer can also declare the auction sale complete in any other manner normally used in auction sales.
Case Law: Payne vs Cave
In this case, the highest bidder withdrew his bid before the fall of the hammer of the auctioneer. Though Mr. Cave was the highest bidder, he had withdrawn his bid before the auction sale was deemed complete. He was not held liable to purchase the goods for which he had made the bid.