Auction Law & Ethics
Consigning property to auction is a simple process, until it’s not. The “not” often arises when least expected and can come from something unforeseen. A reader wrote me about a situation that illustrates this point. I’ve edited her letter.
“Dear Mr. Proffitt,
“I consigned an item to auction and have run into a problem. I hope you can give me some advice on how to proceed. Here’s a summary of what happened.
“I inherited an old and valuable widget. I’ve had the piece for many years and finally decided to sell it. I contacted an auctioneer and arranged to consign the widget. It has a well-documented provenance, and I shared that information with the auctioneer.
“The piece had been damaged and repaired long before I got it. The information I have indicates that happened soon after it had been created. The auctioneer included the repair information in its ‘condition report’ for the piece when it accepted the consignment. I don’t know how the auctioneer described the widget at the auction, but I’ve acted in good faith in everything I’ve done.
“The auctioneer sold the widget, and I received the proceeds from the sale that I was due. I was satisfied and believed the matter was closed.
“Several months after the auction, I was contacted by a representative for the auctioneer. He informed me that the buyer now claims the widget is not in the condition represented for it at the auction. The buyer took the piece to an expert for evaluation, and the expert wrote a report in which he concluded the damage and repair were both severe and fairly recent. He went so far as to liken the widget to a ‘fake,’ due to its ‘modern repair.’ I have no reason to believe this finding is true, and, if it is, I’m very surprised. The buyer sent a copy of the expert’s report to the auctioneer with a demand to cancel the sale and refund the purchase price.
“The auctioneer has advised me that it has no responsibility for this issue and wants the matter resolved quickly and amicably. The representative told me that the auctioneer believes the expert’s findings are credible and I should cancel the sale and refund the money to the buyer. The representative warned that my failure to cooperate would likely lead to the buyer suing me.
“A good bit of money is involved, and I don’t want to cancel the sale. I’m unsure what to do and would welcome your advice.”
The best opening advice I can give is go slowly, go very slowly. A matter like this is no place for anger, upset, fear, or worry. It’s a time for listening, looking, questioning, gathering information, and thinking—but that’s much easier said than done.
Bad news, real or perceived, can affect us. We get upset, our emotions kick in, and cool, calm, and clear thought go out the door.
While this is a natural reaction, it’s also one that we cannot afford when important interests are at stake. Lawyers are trained to guard against getting on this slippery slope, yet there are plenty of instances where some of us have trouble adhering to the rule, so you know others struggle, too.
When an issue like the reader’s arises, we need to step back, take a deep breath, and consciously slow everything down—starting with our reaction and proceeding to our response. Our goal should be to gather all the facts, analyze the information, consider the options, pick the best one, make a plan, and execute it for our maximum benefit. Anything less is an error that carries a strong likelihood of doing us harm.
Here’s the rule to remember: resist every inclination you have to “feel” one way or another about an issue, and put emotion aside. In its place, start thinking and working carefully through the matter to find the best solution.
In lawsuits where one side has an expert witness, the other will soon hire one. I’ve been involved with that equation numerous times, and it’s the most astounding coincidence that the two experts will almost unfailingly have different views of the same issue, sometimes 180 degrees different. Lawyers refer to these competing opinions as the “battle of the experts.” While an expert’s credentials are important, the winner is often the one who is most persuasive in explaining an opinion.
Lawyers shop for experts and opinions that they need to support their cases. This doesn’t mean that experts are prostitutes, although some could pass for it. Instead, it shows that different people can come to different conclusions about the same thing. One doesn’t have to be a truth teller and the other a liar. Both experts can be competent and honest people who just happen to look at the same facts and see a different picture—and this can be so whether the experts are testifying at trial, reviewing documents and records, examining financial reports, appraising assets, or evaluating an item that was sold at auction.
In the reader’s case, the equation is incomplete. This is because only one expert has examined the widget, and that one was selected, hired, and paid for by the buyer. I never went to trial relying on the opposition’s expert to support my theory of the case. My client would always hire its own expert to prop up our position.
Consequently, the report from the buyer’s expert might begin a conversation about the condition of the widget, but it should not be the final word. If the matter goes forward, the consignor should engage her own expert to provide a second opinion about the item’s condition. This is the opinion that the consignor should be most interested in relying on to determine how to proceed.
Over the years, I’ve been involved in a number of lawsuits involving auctioneers. Where the case involved a seller suing an auctioneer, I have never seen a lawsuit that did not include an allegation of breach of agency duties by the auctioneer. The reason for this is simple. Agency is the axis upon which the world of seller and auctioneer turns, and nothing is more central or important to their relationship and dealings.
An agent works under the direction and control of a principal. The principal is the boss. The agent is charged by law with a fiduciary duty to be competent, faithful, loyal, obedient, and trustworthy in serving the interests of the principal, within the scope of the agency relationship. An auctioneer serves as an agent for a seller (the principal) and works under the seller’s direction and control. Thus, the auctioneer must primarily serve the seller’s interests and not the auctioneer’s. This is what the law requires.
A knee-jerk reaction to protect itself from a possible legal claim might be for this auctioneer to lobby the consignor to cancel the sale of the widget. This course is not the proper role of an agent unless the agent is certain the lot was misrepresented or otherwise wrongfully sold to the buyer. The clear interest of the consignor is to see the sale of the widget defended, and it is the duty of her auctioneer to assist in this effort.
The respective financial interests of the parties can be illuminating. Suppose the widget sold for $50,000 and the auctioneer was owed a 10% selling commission. This would make the seller’s financial interest in the sale $45,000, while the auctioneer’s would be $5000. This dramatic difference would seemingly indicate that the auctioneer has only a small incentive to act to uphold the sale, but the law of agency turns on the requirement of duty, without consideration of the size of an agent’s financial stake. Indeed, the law cares not what an agent’s monetary incentive is, so long as the principal’s interests are protected.
Several points relative to the auction could have a bearing on the outcome of any dispute between the consignor and buyer. These would include the terms of auction, as well as any disclosures, disclaimers, warranties, and/or guarantees that might have been given to the buyer. It would also include any description of the widget and representations made about it. Points like these could turn a controversy one way or the other, regardless of the actual condition of the widget. By example, the piece could have been sold “as is” and without a warranty of description (but unlikely), or the damage, repair, and condition of the piece might have been fully disclosed to the buyer and all potential liability for the auctioneer and consignor disclaimed.
To the extent that a description of the piece, other representation, and/or disclosure of condition was given by the auctioneer to the buyer, the consignor needs to learn:
a. What was the content of the description, representation, and/or disclosure given by the auctioneer?
b. Was the information complete and truthful?
c. Did the consignor authorize the auctioneer to give this information to the buyer?
If the answer to the second question is “no,” there’s smoke. If the answer to the third question is “no,” there’s fire.
In the event the auctioneer acted wrongfully, either intentionally or in error, agency law could trigger liability that would run back to the consignor. Additionally, the auctioneer’s involvement could expose him to liability to both the buyer and the consignor. This is the importance of agency law in such a matter, and it underscores the need for the consignor to find the answers to the questions listed.
The consignor wants to have the sale of her widget upheld. This will most likely occur if she proceeds slowly, carefully, and deliberately in addressing the buyer’s complaint.
Is the widget severely flawed, as the buyer alleges? Did the buyer assume the risk of this as a result of disclosures and disclaimers given in the terms of the auction or otherwise? Does the auctioneer have any responsibility for this issue? These are important questions to be answered so the consignor can determine their impact on her position, if any.
In the meantime, the matter is right where the consignor wants it. The widget was sold, and, unless something changes, that sale is final. Should the buyer press the issue, the consignor may have to turn to an attorney for legal advice and representation. The first thing the lawyer will likely advise is to take slow, deliberate, and careful steps. This will be a chess game, not a race.
That’s it until the September 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 <email@example.com>.
Originally published in the August 2014 issue of Maine Antique Digest. © 2014 Maine Antique Digest