Auction Law & Ethics
Transparent is not a correct adjective for the auction process. Murky is close. Midnight is the truth. When I serve as an auction consultant to consignors, this is the message that I continually emphasize.
Since April, we have been considering the lack of transparency in auctions and how that can affect bidders and buyers. Before concluding this topic, we should look at several areas of significance for consignors that auctioneers seldom address in more than a dim light and passing manner. As a result, consignors understand far too little about these issues.
Before we start, I want to clarify my intention. This column is not about auctioneers mistreating consignors. The premise is that each side to a business deal has priorities and objectives that it will try to promote during discussions and negotiations. Auctioneers have an agenda just as consignors do. These agendas are not the same. Auctioneers will strive for the best deals they can make, and this leaves consignors to advance their own interests. My goal here is to assist consignors in the consignment process by turning midnight into high noon on a hodgepodge of important points. Click on the high beams.
Auctioneer: “Relax. We’ve been in business since Methuselah was a baby and have done this for thousands of consignors.”
Translation: We’re in charge, so just do as we say.
Truth: In business dealings, one of the parties usually comes to the table with more power than the other. This party will control the direction and tempo of the discussion, as well as dictate the key terms for an agreement. A small businessperson goes to a big bank seeking a loan. Which party is the kingpin? The answer is obvious.
The bank’s dominance is the same king-of-the-hill standing with which auctioneers want consignors to view them. While this is natural, it’s often not the truth. This is because auctioneers lack the clout that banks possess. A consignor with valuable property to sell holds the straw to stir the auction drink. This means the consignor has a lot of potential power, but it must be exercised to become real power. Quality consignors are highly sought after by auctioneers, and the competition for them can be fierce, so auctioneers know they must bow to please these consignors in order to land them. Consignors with quality property rule the auction roost when they use the power that they have.
Auctioneer: “This is our standard contract that all consignors sign.”
Translation: Sign the contract as it is and don’t ask to change anything.
Truth: Part of the power that comes with being the top dog is the consignor’s ability to insist on favorable terms. The auctioneer knows that if reasonable concessions aren’t made, the consignor will go to a competitor that will agree to the terms requested in order to capture the business. A consignor should not hesitate to negotiate the terms in an auction contract that are important to the consignor’s interests. Negotiation favors assertiveness, while the meek lose money.
Auctioneer: “An auction without reserve is your best choice.”
Translation: We want sales—not misfires.
Truth: There are two primary types of auction: (a) an “auction with reserve” where the consignor controls the lot and has the right to protect it against a sacrificial sale and (b) an “auction without reserve” (aka “absolute auction”) where the consignor has no right to protect the lot, and it will sell to the highest bidder regardless of the amount of the bid. Many consignors want reserve protection in place to shield them against a possible sacrifice of their property. Conversely, many auctioneers want to contract for unreserved auctions because they know the lots will sell and selling commissions will be generated. Each auction method has pros and cons, and a consignor’s particular needs and circumstances will dictate the best choice. Some auctioneers like to pitch this line to prospective consignors: “An absolute auction (i.e., auction without reserve) will always bring the most money.” Do not be fooled. That statement is false.
Auctioneer: “You and I have the same interests in the auction.”
Translation: Everything done will be in your best interest.
Truth: An auctioneer and consignor do not have the same interests in an auction. A consignor comes to auction to see the property sell for the maximum prices. An auctioneer’s primary goal is to make sales (regardless of price level) and generate selling commissions. This is why auctioneers so often push for consignors to agree to auctions without reserve. No consignor ever comes to auction with the goal of having an auctioneer make sales and be paid commissions, so there’s no chance they have the same interests.
Auctioneer: “Our selling commissions are very competitive.”
Translation: Just sign the contract.
Truth: Many consignors believe signing an auction contract is all about the selling commission. It’s not. Contracting with an auctioneer ought to focus on hiring an honest, competent professional, for a reasonable fee, to do what the consignor needs done. When it comes to the commission rate, there are three things to know. First, talk is not as important as arithmetic. Indeed, some commission arrangements are designed to blur the real cost. Have the auctioneer explain the commission rate and then calculate it on a hypothetical sale (the consignor should save that piece of paper). Second, the commission rate is subject to negotiation, dependent upon the quality of the consignment. The better the goods are, the lower the commission rate can be negotiated. Third, a consignor should not try to jiggle every possible concession out of an auctioneer. Auctioneering is a competitive business, but a consignor doesn’t want just any auctioneer. A consignor wants a real professional to provide good service, good effort, and good results. To get that, the consignor needs to strike a deal that’s good for both sides.
Auctioneer: “It’s standard in the industry that the buyer’s premium is part of our commission.”
Translation: Sign the contract and don’t question who gets the buyer’s premium money.
Truth: The buyer’s premium is a price surcharge (usually a stated percentage) that is added to the amount of the high bid for a lot to determine its selling price. As a portion of the sale price, the premium money belongs to the consignor. No portion of the buyer’s premium can rightfully be retained by an auctioneer in the absence of an agreement with the consignor to that effect. Any statement to the contrary is untrue.
Auctioneer: “The costs we charge are standard for the industry.”
Translation: Don’t worry about costs, because they’re just routine charges.
Truth: Consignors focus too much on selling commissions and not enough on the calculation of net sale proceeds. The former does not contemplate other auction costs to the consignor, while the latter does. Since it is the net payout that is most important to a consignor, all costs to be charged to the consignor should be clearly defined, understood, and agreed upon in advance.
Consignors should give costs (either proposed or incurred) a lot of scrutiny. A selling commission reduces a dollar of sales revenue by only a fraction (i.e., an amount calculated on the commission’s percentage rate), while a dollar of “cost” will reduce the net sales remittance to the consignor by a full dollar.
Auctioneer: “A hold harmless clause protects us if there is anything wrong with what you represent to us or with your property and that triggers a legal claim.”
Translation: It’s only reasonable that you protect us from something that’s your fault.
Truth: A hold harmless and indemnification clause is a contract provision that provides for a party at fault to pay for the legal defense and related costs of a party not at fault, plus pay the amount of any damages or other losses the fault-free party suffers. This is an important protection that every auctioneer should include in an auction contract with a consignor. However, what’s good for the goose is good for the gander. Just as the auctioneer should have protection against an adverse event caused by the consignor, the consignor should have comparable protection against any harm that results from any fault attributable to the auctioneer. The hold harmless and indemnification clause should be balanced and apply equally to both the auctioneer and consignor.
Auctioneer: “I understand what you need, so let’s get going.”
Translation: Sign the contract so we can have an auction and see what it brings.
Truth: Consignors always want to discuss how much their goods will bring at auction. Auctioneers all too frequently fall into this trap. Discussion of selling prices is a pitfall because the consignor likely hears the auctioneer making a promise, or near promise, to get the amount the consignor wants. Meanwhile, the auctioneer is merely trying to placate the consignor in order to get the goods to auction. Once that happens, the market will set the high-bid prices for the lots. In a lawfully conducted auction, an auctioneer has no means to make prices come out to be what a consignor wants, unless the auctioneer has a buyer at that price going into the auction. If auctioneers could control selling prices, there would be no need to have auctions. They cannot control prices because they have no way to make people bid more than they are willing to bid. When a consignor believes an auctioneer is representing to deliver a certain selling price, unless the auctioneer provides a written guarantee, the auctioneer is likely hoping to find such a buyer, but not promising to do so. When a consignor complains about the high-bid price for a lot, the auctioneer will likely redirect the conversation to “market value.”
Auctioneer: “We will get market value for your property.”
Translation: The market will give all it is willing to pay for your property.
Truth: A correct understanding of “market value” requires that we first define what we mean when we refer to a “market” for property. Many consignors hear “market value” and think that the whole world represents the market. That’s far from true. An auction “market” is no more, nor less, than the set of prospective bidders enticed by a marketing campaign to participate in an auction. A “market” would not include any other persons because they were never brought into the auction and, therefore, could have no effect on bidding and prices. Even when a marketing campaign is directed at a national or international audience, the resultant “market” for the auction will never be greater than the sum of the persons lured to participate in the event. An auction market is typically much smaller than a consignor might believe, and “market value” is accordingly limited.
I closed last month’s column by noting that auction transparency does not exist, so bidders need to be prepared to protect their interests. The same is true for consignors.
That’s it until July issue of M.A.D. Until then, good bidding.
Steve Proffitt is general counsel of J.P. King Auction Company, Inc., Gadsden, Alabama. He is an auctioneer and instructor at the Reppert School of Auctioneering in Auburn, Indiana, and at the Mendenhall School of Auctioneering in High Point, North Carolina. The information in this column does not represent legal advice or the formation of an attorney-client relationship. Readers should seek the advice of their own attorneys on all legal issues. Proffitt may be contacted by e-mail at <firstname.lastname@example.org>.
Originally published in the May 2013 issue of Maine Antique Digest. © 2013 Maine Antique Digest