An Auction Where Seller Reserves Right to Accept or Reject Bids after the Close of Bidding is a Conditional Auction

In Young v. Hefton, 38 Kan. App. 2d 846 (Kan. Ct. App. 2007), the Kansas Court of Appeals discussed three types of auctions in answering the question as to whether or not a contract was formed at the end of the auction sale.  The Court stated that an auction in which a seller reserves the right to accept or reject bids after the close of the bidding is a conditional auction.  However, for an auction to be considered conditional, the conditions must be effectively communicated to prospective bidders. 

Young involved questions relating to auction sale of five tracts of land.  The Hefton Family (“Appellee”) hired an auctioneer to sell these tracts at public auction.  The auction sale was advertised in newspaper and also on auctioneer’s website. These notices were not consistent as to the auction terms, and none of them specifically mentioned whether there were minimums in the auction.  The sales bill, however, included the following language: “All contracts will be signed at the end of the auction. Earnest money is refundable only if seller rejects contract.”  

On the auction day, the auctioneer announced the sale terms.  But there is conflicting evidence as to the content of the announcements.  Young, the Appellant (“Appellant”) was the successful bidder on tract 3 and 4. On both bids, the auctioneer closed the bidding at Appellant's bids with the call, "Mark it down."  Young's bid on tract 3 was $ 275/acre below the minimum established by the Appellees.  And Young's bid on tract 4 was $ 30 above the minimum of $ 750/acre.

After bidding, the Appellant was informed that he could not purchase tract 3 because his bid amount was below the minimum as established by the Appellee. However, he could purchase tract 4.  But the Appellant responded stating that he did not want tract 4 without tract 3.  

Shortly, the Appellant tendered checks to the Appellee attorney for both tracts at the bid prices. These checks were returned to the Appellant.  However, the Appellant , later tried to purchase tract 4 at his bid price with a tender to the auctioneer, but the check was rejected with a counteroffer, which was twice the original minimum for this tract. Subsequently, the Appellant filed suit for specific performance of the purported contract on both the tracts.  The district court ruled against the Appellant on his claim for specific performance of a contract to purchase a tract 3, and ruled in favor of Appellant for the specific performance of contract with respect to the bid on tract 4.  Both parties appealed against the district court judgment.  

In deciding the issue at hand, the Court of Appeals discussed the different types of auction: (I) with reserve; (ii) without reserve; and (iii) conditional, and analyzed which type of auction applies in this case. 

Section 84-2-328 of the Kansas Annotated Statutes recognizes a presumption that an auction is "with reserve" unless there are explicit terms to the contrary. In an auction with reserve, the placing of the property for sale is an invitation for bids, not an offer to sell. According  to 7 Am. Jur. 2d, Auctions and Auctioneers §§ 17, 20, 31, each bid constitutes an offer that may be accepted by the seller. Bids are accepted on the seller's behalf and a contract is formed when the auctioneer closes the bidding, typically by the fall of the hammer or other method that notifies the high bidder that the bid has been accepted. In an auction with reserve, the seller does not have any right to accept or reject bids after the close of the bidding. Id. at 852.  Whereas, in an auction without reserve, the seller may not withdraw or refuse to sell the property once the bidding has been opened on that property unless no bid is made within a reasonable time. Id. 

In a conditional auction, the seller reserves the right to accept or reject bids after the close of the bidding. Id. However, most authorities recognize that in order for an auction to be considered a conditional auction, the conditions must be effectively communicated to prospective bidders. Id. Those conditions generally inform potential buyers that the auctioneer does not have the authority to accept the high bid and that bids will remain mere offers until accepted by the sellers. Id.

To determine the type of auction sale, the Court looked into district court’s findings. The district court opined that the sales bill contained the language: "All contracts will be signed at the end of the auction. Earnest money is only refundable if seller rejects contract." Id. at 853.  The court then concluded this language may be open to several interpretations, but "one obvious interpretation is that all contracts are subject to final approval of the sellers for whatever reason." Id. Although the auctioneer's website did not mention conditional terms, it said: "Any announcement made the day of the auction takes precedence of any printed ad." Finally, regarding any such announcements, the district court found there was conflicting testimony regarding preliminary announcements at the auction, but concluded "[t]here were signs and indications before and during this auction that the sellers were retaining some measure of final approval or control. Id.

The district court  found that the auction was intended to be a sale with reserve because the Appellee communicated the minimums on the tracts to the auctioneer. Id. at 849.  However, the auctioneer failed to communicate to prospective bidders that there were minimums associated with the tracts. Id. The district court found that there was no meeting of the minds as to tract 3.  The Appellant’s bid fell below the minimum established by the Appellee and they did not agree on a price term.  Therefore, a contract did not exist between the parties as to tract 3.

On the other hand, the district court found that a valid contract was formed as to tract 4 when the auctioneer indicated Appellees’ acceptance of Appellant’s bid. Id.  The court found that the Appellant neither rescinded nor repudiated the contract on tract 4.   Therefore, the Appellant was entitled to specific performance of contract with regard to tract 4 at the bid price. Id. at 849- 850.

Based on the above, the Court of Appeals concluded that the auction in this case was conditional.  The sellers reserved the right to accept or reject bids after the bidding closed. Id. at 855.   The Court found that a contract was not formed with respect to tract 3 because the Appellant’s bid on this tract was never accepted. Id. And a contract was formed between Appellant and Appellee on tract 4 because the Appellant’s bid was accepted by the auctioneer after the close of the auction. Id.  The Court affirmed the district court’s judgment.