‘Upping the Ante’: Market Distortion in Auction Sales
| Date | 01 May 1996 |
| Published date | 01 May 1996 |
| DOI | http://doi.org/10.1111/j.1468-2230.1996.tb02087.x |
‘Upping the Ante’: Market Distortion in Auction Sales
F.
Meisel”
Introduction
Auctions play
a
crucial role in the United Kingdom economy, a vast array of goods
(and land) being bought and sold through this form of transaction. Whilst sales of
paintings and antiques, some
of
which may individually fetch astronomically high
prices, may catch the public attention and imagination, there are more mundane
but economically not less significant markets which centre on the auction sale.
These range from the wholesale livestock and produce markets conducted daily
across the country to the regular largely retail sales of second-hand motor
vehicles.’ In addition, one finds several specialist markets where the auction
is
commonly employed, such
as
plant and machinery and postage stamps; in the
latter, postal auctions2 are often, appropriately enough, resorted to. At the more
esoteric end of the scale, one finds auction sales of prospective property held
monthly in L~ndon.~ Finally, the Bank of England regularly launches new
Government securities by auction. These ‘gilts auctions’ provide a useful
barometer of the investment market’s view of the United Kingdom e~onomy.~
Where some commodities are concerned,
a
choice can
be
made
as
to the mode of
sale to
be
adopted
-
that is, the vendor can decide whether he
is
likely to
be
better
served by
a
private treaty sale
or
an auction. A prime example is land, whether
residential
or
business premises bought for occupation
or
in~estment.~ On the other
hand, some trades, such as the wholesale livestock market,
are
particularly suited
to sales by auction and, indeed, it is difficult to
see
how such commodity markets
could operate without the auction.6
Whether the auction is selected because it
is
the only viable,
or
in the
circumstances the preferred, method of bringing buyers and sellers together, the
reason for its appropriateness is the same: the fixing
of
a
proper price on the spot
by the direct action of competition between prospective buyers7 Thus, the auction
is
not merely
a
method of effecting a sale, it is
a
mechanism for valuing and fixing
*Senior Lecturer, University of Birmingham.
I
am indebted to my colleagues Professor Brian Harvey and Professor David Feldman for their valuable
comments on earlier
drafts
of this article.
1
In 1993. sales of second-hand motor vehicles exceeded €17.9 million: see the 1994 Report by ADT
Auctions;
The
Times,
25
July 1994.
2
These often take a form resembling tenders.
3 Including absolute and contingent reversions and remainders, annuities and life interests.
4 This innovation was introduced in 1987 and was
based
on American practices:
see
Financial
Guardian,
14February 1987.
5
The auction tends
to
be utilised either when the property is unique or otherwise difficult to value or
when,
as
in recent recessionary times, it is difficult to achieve private treaty sales. Repossessing
Building Societies have recently
been
disposing of rafts of residential accommodation in that way,
being prepared to set low reserves and thus sell at a considerable ‘discount’ to realise their security.
6 In the
UK
livestock trade, which currently turns over about
f2
billion per annum, the whole of the
producer’s stock will
be
sold by auction.
7
An economic, rather than legal, definition of an auction might thus run as follows: ‘An auction is a
market institution with an explicit set of rules determining resource allocation and prices on the basis
of bids from the market participants’: see McAfee and McMillan, ‘Auctions and Bidding’ (1987)
25
J
Econ Literature 699,
701.
0
The
Modem
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1996
(MLR
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May).
Published by Blackwell Publishers,
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398
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19961
'Upping the Ante': Market Distortion in Auction Sales
the price of a particular commodity at a particular place and time. In a market
subject to continual fluctuation
or
where it
is
especially difficult to assess the
dictates of fashion
so
that valuation is problematic, it should be a source of comfort
to sellers and buyers alike that an appropriate price will be ascertained by
consumer demand.
The prescription of the auction as the approved mode of sale in certain sales
ordered by the court8 and in certain other situations where the seller may be said to
be selling as a fiduciary, bears testimony to the confidence reposed in the auction
as a device for achieving the best possible
or,
at least, an unassailable price. In
other cases where such prescription is lacking but where resort to the auction is
common practice, for example, sales by mortgagees and pledgees, similar
assumptions can be made about the perceptions of the sellers. However, recent
statutory developments suggest that there is a realisation that
an
auction sale may
not necessarily be the most efficaciou~.~ Moreover, the judges have also, on
occasion, been
firm
in rejecting arguments that the mere fact that a sale was
effected by auction answered any allegation of impropriety. This has been seen
both in situations where objection was taken to the existence of a conflict
of
interest and duty, and in cases where it was alleged that the best price was not
achieved. In
Hodson
v
Deans,'O
Joyce J stated:
The property was sold at
an
undervalue
. . .
The investment committee could not have sold
privately to themselves either
as
representing the society or
as
individuals at a price
fixed
by
themselves, nor could they,
I
think, have sold to one or more of their number. It is said that
any such objection is cured by the fact that the sale was by auction.
I
do not think
so.
At all
events
. .
.
the onus is on the-defendant to show that evejthing was done fairly and bona
fide.
In the more recent case of
Tse
Kwong
Lam
v
Wong
Chit
Sen,12
the Privy Council
advised that a selling mortgagee did not discharge the burden of showing that he
had obtained the best price reasonably obtainable merely by pointing to the fact
that the sale was by auction. It was pointed out that included amongst the duties of
a selling mortgagee was the obligation to consult with experts as to the appropriate
method of sale and any reserves to be set if the sale was to be at auction.
There may, therefore, be a discernible trend towards, if not active distrust of the
auction, then at least a removal of it from its pedestal; a recognition that whilst it is
designed to achieve the market price of the lots put up for sale, it may not always
do
so.
Of course,
any
failure may be due to circumstances whereby no censure is
attracted, but those whose livelihood depends upon the auction should be anxious
to allay fears that the equilibrium of the market is unbalanced by any activities
which are objectionable
or
conducive to the creation of distrust amongst the users.
And there is anecdotal evidence to suggest that such activities are not uncommon.
8 Such
as
sales by a sheriff under
a
writ
offierifucius, although the sheriff may apply to the court for an
order that the sale
be
by private treaty. See Supreme Court Act 1981,
s
138A and RSC Ord 47, r6; see
also
s
I
of the Innkeepers Act 1878.
See eg
s
121
of the Consumer Credit Act 1974, replacing the Pawnbrokers Acts 1872 and 1960 which
had made auction sales mandatory when pledges were sold: see also Torts (Interference
with
Goods)
Act 1977, replacing the Disposal of Uncollected
Goods
Act 1952. Under these provisions, no
particular mode of sale is prescribed.
10
[
19031
2
Ch 647.
I1
ibid
653.
12
[
19831 3
All
ER
54. This decision
was
hardly surprising given
that
the property was knocked down to
the lone attending bidder who turned out to
be
the wife
of
the mortgagee acting
as
agent
of
a
company
financed entirely by the latter.
Q
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