Indiana Business Law Blog
From a legal perspective, auctions are interesting transactions.
Offer and acceptance in most sales
Let’s start by discussing an ordinary contract for the sale of goods, one not created at auction. Law students learn in their first year that the formation of a contract requires, among other things, offer and acceptance. Generally speaking, an offer must include all the essential elements of a contract and may include other terms. An acceptance must be the “mirror image” of the offer. That means, to form a contract from the offer, the person to whom the offer is made must accept it exactly as presented, without changing any of the terms or introducing new ones. A purported acceptance that changes, removes, or adds terms is not an acceptance at all. It is a rejection of the offer and the extension of a counteroffer.
An example of an offer is a sign at a roadside fruit stand that reads, “Apples for sale: $30 per bushel. Cash only.” It is implied, or simply understood from common practices, that the customer is to pay for the apples on the spot and that the seller will allow the customer to take possession of the apples as soon as the customer pays for them. Unless the sign limits the number of bushels one customer may buy (“Limit: Two bushels per customer”), it is also implied that the offer may be accepted with respect to any or all of the apples on display at the stand. Acceptance occurs, and a contract is formed, when a customer says, “I’ll take two bushels of apples,” meaning that the customer agrees to the advertised price and method of payment (“cash only”) and to the other implied terms. The sale is complete when the buyer pays for the apples and takes them away. More sophisticated sales contracts may include other terms such as shipping obligations and provisions specifying when title to the goods and risk of loss will pass from the seller to the buyer.
Sometimes a buyer and seller agree to a sale but do not specify all the essential terms. In that case, the gaps are filled in by default provisions — appropriately called “gap fillers” — specified by Article 2 of the Uniform Commercial Code (or the “UCC”) which has been incorporated, sometimes with minor variations, into the law of every state. Note that the UCC applies only to contracts for the sale of goods, not to contracts for the sale of real estate or to service contracts.
Offer and acceptance in auction sales
The sale of goods at auction is interesting because offer and acceptance happen a bit differently. First, the auctioneer usually does not own the goods being sold but rather acts as the agent of a seller. Second, when the auctioneer places a particular lot up for bidding, he does not extend an offer to sell. Instead, he invites bidders to make offers to purchase by naming the price they are willing to pay. If the auctioneer has established other terms and conditions of sale, they are incorporated into each offer made by a bidder. The bidding continues, with the offer made by each bidder expiring when another bidder offers a higher price. No offer is accepted until the auctioneer declares that the lot is sold, either by the traditional method of rapping a gavel or by another method, such as announcing, “Going once. Going twice. Sold!” The close of bidding is often called “the fall of the hammer” even if the auctioneer does not use a gavel. In announcing that the lot is sold, the auctioneer, on behalf of the seller, accepts the offer made by the highest bidder, and the contract is formed. Usually.
What happens if another person shouts out a higher bid just as the gavel falls or as the auctioneer announces, “Sold!”? Is the new bid too late? Does the new bid win? That situation may be addressed by the auctioneer’s terms and conditions, but if not, the answer is provided by Section 328(2) of UCC Article 2, the Indiana version of which appears at Ind. Code § 26-1-2-328(2):
A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.
Thus, the auctioneer has two choices under the UCC: Reject the bid made while the hammer is falling and sell the lot to the person who was the high bidder just before the fall of the hammer, or accept the new bid and allow the bidding to continue until the bidding is again closed by the fall of the hammer. The auctioneer cannot merely accept the bid that’s made while the hammer is falling without continuing the bidding.
When does “sold”mean “sold”?
Finally, we get to the question in the title of this article. Although there is an exception for last-second bids under which the auctioneer may reopen bidding after the fall of the hammer, the usual answer is that the lot is sold when the auctioneer declares it to be sold by rapping a gavel, by announcing “sold,” or by any other means of communicating that the lot is sold. By doing so, the auctioneer, acting on behalf of the seller, accepts the offer made by the person with the highest bid, thus completing a contract that binds the seller and the buyer.