Introduction:
The Sale of Goods Act, 1930 lays down the law concerning the sale of movable property or goods. This act can be appreciated in consonance with other laws such as the Indian Contract Act, 1872 and Transfer of Property Act, 1882. Auctions are the sale of property or goods to prospective buyers who congregate in a public area and involves the auctioneer and bidders. The provisions regarding auction sales are enshrined under Section 64 of the Sale of Goods Act. Reserve Price and Upset price are significant elements of auction sales and have been discussed subsequently. Ascertainment of price and Valuation is of paramount importance in any contract of sale. The presence of money consideration is essential of a contract of sale and the intricacies and relevant provisions have also been reviewed in this article.
History of Auction Sales
Auctions can be traced back to 500 B.C when they were used to sell women on the condition that after purchase, they had to be married. In the Roman empire, auctions were used for the liquidation of estate goods and property by implementing a mechanism called “atrium auctionarium”. Interestingly, in 193 A.D., after being sacked, the entire Roman Empire was put on the auction block. There is also evidence of auctions being used by Buddhist monks in China to fund the creations of temples. In the 18th century, auction houses were created in England. In America, slaves were sold at auctions in the South which were also used to liquidate estates. Auctions in the Netherlands was used to sell vegetables and fruits back in 1887. Similarly, in the late 19th century, fishermen in Germany used auctions for selling the catch after arriving at a port which enabled them to liquidate the catch faster and utilise more time to satisfy consumer demand by fishing.[1] With a new economic policy being introduced in India in 1990, several changes were seen in the economy. There was a colossal growth of technology which also resulted in several new products being auctioned such as printers, cell phones and computers.
Reserve Price
“Reserve price” or Reservation Price in an auction can be defined as the minimum price or amount which can be accepted by the seller as a winning bid. Traditional auction theory suggests that a reserve price should be set in the expectation that the selling price will be higher if one is set.[2]To encourage bidding, the starting price is usually kept lower than the reserve price. Typically, a seller does not have to disclose the reserve price to potential buyers. However, they may disclose the price upon the potential buyers’ request. Furthermore, a seller is not bound to sell the item to the highest bidder if the reserve price is not met. Thus, a reserve price prevents a bidder from winning an auction if he offers a price that is lower than the price the owner would accept. Reserve prices often give rise to uncertainty as to the minimum price that is needed to be paid to win the auction. They are also often found to reduce the chances of winning an auction at a bargain price. Hence, auction bidders are often seen to be against reserve prices. A reserve price is, however, distinct from an opening bid. While an opening bid is a price that is suggested to start a bid, the reserve price is the minimum price that a seller is willing to accept.
A study by Professors Stephanie Rosenkranz and Patrick Schmitz shows that the reserve price should be kept secret when exogenous reference prices are high. Also, when objects or goods are auctioned to several potential buyers, higher reserve prices should be set by sellers.[3]
Section 64(5) of the Sale of Goods Act, 1930 states that an auction sale may be subject to a reserve price or an upset price. This indicates that an auctioneer will not sell the goods of an auction at any price below such reserve price.
Example: A intends to sell his car at an auction. He sets the reserve price at Rs. 100000. If the bids are lower than that with the highest bid being Rs. 90000, he does not have to sell the car even to the highest bidder.
In the case of McManus v Fortescue[4], an auctioneer had sold a property below the reserve price which had been stated in a catalogue for each lot. He had done so mistakenly which had resulted in the seller refusing to sign the memorandum of sale. The Court, however, relieved the auctioneer of any liability as the wrong had been committed mistakenly.
In the case of Barry v Davis[5], it was laid down that if there is no reserve price set for the property to be sold or put on auction, then it should be sold to the genuine highest bidder. However, there exist certain exceptions to this rule such as the seller not being authorised to sell, buyer having no right to buy, buyer having insufficient funds to buy the property or the sale of goods being unlawful.
Upset Price
Upset price is defined as the minimum price for which goods can be sold in a public sale or an auction. The property cannot be auctioned below the minimum price which is set by a court in a judicial foreclosure, by an officer who is appointed by the Court. Such an officer who conducts the sale is given an order not to accept bids falling below the fixed price.
Reserve Price v. Upset Price
In the case of A.U. Natarajan v Indian Bank[6], the upset price was defined by the Court as the reserve price or lowest selling price indicating that both these terms are synonymous. However, in the case of Nedungadi Bank Limited and another v Ezhimala Agricultural Products and others,[7] the Court observed that the terms “reserve price” and “upset price” though analogous as the “lowest prices for which properties can be sold in the auction”, are not synonymous. While “Reserve price” is used exclusively for mortgagee purchasers, “upset price” is generally applied in all cases of purchases by all others which include third parties. The Court further opined that when the upset price is fixed, a bid commences with it and the sale for that good is held for a price that is more than the upset price. However, in the case of the reserve price, a bid may start with the upset price which can be an amount lower than the reserve price.
Valuation
Valuation is the determination of the economic value of goods. Section 9 and Section 10 of the Sale of Goods Act,1930 deal with the ascertainment of price.
Section 9(1) provides for the ways in which the price in a contract of sale may be fixed, namely, by the contract, determined between the parties in the course of dealing or fixed in a manner agreed by the buyer and seller. Section 9(2) states that if the contract does not determine the price, the buyer needs to pay a reasonable price depending upon the circumstances of every case. The price can also be fixed by valuation. Section 10 of the Act provides for agreements to sell goods at valuation. Section 10(1) says that a third party may fix a price by valuation and contracts may be avoided if such price is not fixed by valuation. Section 10(2) further provides that if a valuation is disrupted by one party, then the other party reserves a right to sue the defaulting party for damages.
In the case of Bhupendra Singh Bhatia v State of Madhya Pradesh[8], a policy had been framed by the State government relating to the sale of liquor in some parts of the State. Ad hoc price was fixed and bids were invited from manufacturers to supply liquor. After this, a final price at a rate less than the ad hoc price was fixed. So, the supplier was made liable to repay the difference between the ad hoc price and final price to the State. The Supreme Court laid down that when a commodity is sold, both the purchaser and the seller must be aware of the purchase price before the sale or at the time of sale. Consequently, it also ordered that the ad hoc price should prevail all year.
Also, in the case of Aluminium Industries Ltd v Minerals & Metals Trading Corporation Ltd.[9], a company was a major manufacturer of aluminium conductors and cables. The government undertaking selling metal to the company provided a condition that the price ruling on the date of delivery would be applicable. The buyers had opened letter credits in favour of the sellers and were given delivery notes to enable them to procure goods. Consequently, the price of goods was increased and delivery of the goods was postponed to a date after which the increased prices became applicable. The Court held that the company was not liable to pay the higher price and the actions of the government were violative of Article 14 and unreasonable. Hence, the government was ordered to sell the goods at the price as per scheduled delivery.
In the case of Martineau v Kitching[10], there was a contract for the sale of sugar with the price to be paid “Prompt at one month, goods at seller’s risk for two months”. The goods were to be drawn down as the buyers wanted and kept at the premises of the seller. When some sugar had been drawn by the buyers and a fire destroyed the rest, after two months, the sellers demanded the price of the sugar sold asking the buyer to pay for undelivered sugar. Court held that the seller was entitled to ask for the price.
Conclusion
It is observed that owners of auctioned items are protected against unfavourable outcomes by setting a reserve price on the goods to be sold or auctioned. Furthermore, there is an ascertainable distinction between “reserve price” and “upset price” as laid down by precedents. Valuation and ascertainment of goods entail the specification of the price of a commodity without any ambiguity. It forms an essential part in concluding a sale of property by fixing the consideration to be paid for it.
References:
[1]History of Auctions, Econport, https://www.econport.org/content/handbook/auctions/historyofauctions.html
[2]How to Set Reserve Prices in Auctions, Royal Economic Society, https://www.res.org.uk/resources-page/how-to-set-reserve-prices-in-auctions.html
[3]How to Set Reserve Prices in Auctions, Royal Economic Society, https://www.res.org.uk/resources-page/how-to-set-reserve-prices-in-auctions.html
[4](1907) 2K.B. 1
[5][2000] 1 WLR 1962
[6]AIR 1981 Mad 151
[7]AIR 2004 Ker 62
[8](2006) 13 SCC 700
[9]1997 (2) CTC 636
[10](1872) L.R. 7 Q.B 436, 453–454
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