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Breach of Contract in an Auction Context
Question: What is a breach of contract in an auction context?
To address this question properly, we must break it down into two separate prongs. First, we must define exactly what constitutes a breach of contract generally. A breach of contract is a violation of any of the agreed-upon terms and conditions of a binding contract. In other words, a breach of contract occurs whenever a party who entered a contract fails to perform their promised obligations. In a typical contract, there are usually several requirements for proper performance. Suppose a contract is for the sale of 10,000 widgets. In that case, there should normally be provisions identifying the widgets (or the type of widgets) desired, stating the purchase price, stating when the payment is to be made, stating how the payment is to be made, stating when delivery of the widgets is to be made, stating how delivery is to be made, and several more provisions. The violation of any one or more of these provisions could result in a breach of contract.
Second, we must explore how a breach of contract typically occurs in an auction setting. A breach of contract would occur when an auctioneer, a seller, or a bidder fails to fulfill his or her contractual obligations under the terms and conditions of the auction. For example, an auctioneer or seller may refuse to transfer the goods or property to the successful bidder, or a bidder may refuse to pay the hammer price. Any of these situations would likely be a breach of contract.
A breach of contract can occur with any contract. A breach of contract could occur, for example, in a contract for the sale of goods, real estate, or intellectual property. In addition, a breach of contract can happen with both a written contract and an oral contract (it is generally harder to prove the breach of an oral contract, or there may be limits on the enforceability of oral contracts). As previously discussed, Auctioneers should have written contracts with their sellers and all bidders which clearly state each party's obligations.
When a breach of contract occurs, the parties involved may resolve the issue among themselves through negotiations. It is often best for the parties to resolve their differences independently. If the parties are unable to resolve the dispute among themselves informally, one party may file a lawsuit to resolve the dispute in a court of law. This is often a more expensive and less efficient form of resolution. It may take years to resolve a contract dispute through the litigation process. Other methods that can be used to help resolve a dispute without formal litigation include but are not limited to, pre-suit mediation and arbitration.
There are different types of contract breaches. For this article, we will limit our discussion to a breach that will either be non-material or material. When a breach occurs, how to respond and the recourse available depends on the type of breach. What is the difference? A non-material breach is generally a minor or technical breach of the contract terms. The contract can still be fulfilled, and the non-breaching party is still obligated to hold up its end of the deal. If a successful bidder at an auction buys 10,000 widgets for $25,000.00, for example, but only receives 9,900 widgets, this would likely be a non-material breach. The successful bidder would likely still want the 9,900 widgets and would generally be obligated to pay for them. Since less than 10,000 widgets were purchased, there would likely have to be a price reduction.
The factors typically considered when evaluating whether a breach is material are:
• How much of the contract was fulfilled, and what the non-breaching party has already received.
• Whether the breaching party would be in a difficult spot if the breach was treated as material and the non-breaching party did not fulfill their contractual obligations.
• Whether the non-breaching party can be reimbursed or paid damages to be made whole.
A material breach of contract, however, is more significant. A material breach of contract means that the fundamental purpose of the contract was not fulfilled – it defeats the purpose of even having a contract. In other words, this is not a simple mistake or a failure to adhere to every letter of the contract. An example would be a seller seeking to sell 10,000 widgets at an auction and the successful bidder refusing to pay for them. When there is a material breach of contract, the non-breaching party can generally terminate the contract. The non-breaching party is no longer obligated to fulfill the terms and provisions outlined. If the successful bidder refuses to pay anything for the widgets, the seller generally would not be obligated to deliver the widgets to the successful bidder. In some cases, it can be more challenging to determine whether a breach is material.
In the event of litigation for breach of contract, the non-breaching party may be able to seek different types of remedies. A breach of contract can result in legal action for specific performance (a court order to complete the transaction), an injunction (a court order not to do something), or damages (the payment of money). In most circumstances, the non-breaching party would be made whole by damages. This may include:
• Restitution (actual damage or reimbursement for what was lost);
• Liquidated Damages (damages agreed to by the parties in the contract itself)
• Expectation Damages (damages that cover what the nonbreaching party reasonably expected to receive from the contract)
• Compensatory Damages (damages that reimburse the nonbreaching party for “reasonably foreseeable, indirect loss”).
Auctioneers should be careful with the contracts they enter and the terms of those contracts. The best approach is to follow the terms of the contracts and avoid any potential breaches (when possible). Breaching a contract invites costly litigation that often takes years to resolve. If an allegation of breach of contract arises, it is best to work with a licensed auction law attorney and seek to resolve the breach quickly.