Vendor bidding differs from ghost bidding in the same way that marriage differs from murder

Director and lead auctioneer at The High Street Auction Company

The auction industry has come under much scrutiny of late for its use of vendor bidding, the process whereby an auctioneer is allowed to enter bids at an auction on behalf of the seller up to a stated reserve price in order to ensure that a market-related sale is achieved.

Sadly, many commentators continue to confuse this perfectly legal practice with ghost bidding, which is both unethical and highly illegal. What many fail to realise is that there is a fundamental difference between vendor bidding and ghost bidding. They differ from each other in the same way that marriage differs from murder. One is protected by the law and the other is punishable by the law. The law recognises this fact because vendor bidding is a legitimate process that is purposefully designed to protect the interest of both buyer and seller during the course of achieving a market-related sale at an auction.

Part of the confusion between vendor bidding and ghost bidding arises because many South Africans still regard auctions as being synonymous with bargain purchases. In fact, the auction industry has evolved into a highly sophisticated mechanism, which is used by some of this country’s biggest listed property and investment companies, to conclude efficient, market-related transactions.

Auctioneers typically make vendor bids on the seller’s behalf in order to kick start the bidding process and to keep bids moving towards a market-related value, which is typically benchmarked against the seller’s stated reserve price. Section 45 of the South African Consumer Protection Act, Act 68 of 2008, only allows vendor bids to be made if clear and transparent notice is given in advance of the sale that the auction is subject to a reserve price. The act also requires that bidders are informed that the auctioneer, or indeed any one person on behalf of the seller, may bid at the auction.

As one of the leading custodians of ethical and lawful best practice in the South African auction industry, The High Street Auction Company always undertakes to inform bidders when auctions are subject to vendor bids. This is done by:

–          Notifying potential bidders via advertisements in various print and online platforms that auctions are subject to clearly defined auction rules available on specified websites as well as High Street’s offices.

–          By requiring all bidders to officially register for auctions and supply all necessary FICA documentation as required by law. This includes the need for a signature by the bidder acknowledging that they have read, understood and are bound by the terms and conditions of the auction. It should also be noted that part of this registration process involves the payment of a refundable deposit.

–          The auctioneer then also reads out the rules of the auction to the persons present at the auction, making it clear that vendor bids will be made on behalf of the seller.

The key differentiator for vendor bidding is thus the absolute transparency of the process. Buyers are also allowed to retract their bids at any point in an auction prior to the fall of the hammer. They can also demand to see the FICA documentation as well as proof of registration of all buyers participating in the auction. The auctioneer is not permitted to accept bids from any buyer who has not registered for the auction and who does not have the appropriate FICA documentation on hand.

By contrast, ghost bidding involves the surreptitious planting of fake bidders in secret collusion with the auctioneer (which almost invariably involves illicit and fraudulent payment to the ghost bidder) for the purpose of deceiving genuine buyers and driving up the value of their bids. Because the ghost bidding process is inherently fraudulent and deceitful in nature, such bidders are invariably not registered for the auctions they are attempting to participate in. It is therefore illegal for auctioneers to accept any bids from such ghost bidders.

One question that sometimes arises is: What happens when a vendor bid is made by the auctioneer on behalf of the seller and no further bids are received? The answer is in fact quite simple in that the property or good on auction would remain unsold. Legally, this amounts to the seller exercising their right not to sell on the premise that they had not achieved an acceptable price. This is precisely why the reserve price, which remains confidential until after the auction, is a crucial component of the vendor bidding process.

In such a case the next highest bidder, known as the under-bidder, would be informed that a sale had not been concluded and would be offered the opportunity make a higher purchase offer. Should the seller accept the under-bidder’s revised offer after the initial auction has taken place, the transaction would be concluded as a Private Treaty Sale.

While the aim here is to achieve a more market-related price for the seller, the process also works in the interests of the buyer. Vendor bidding protects buyers at auctions in that the legally required registration process, which includes the need for FICA documentation, ensures that they do not fall prey to unscrupulous practitioners in the industry. The legality of the vendor bidding process empowers the buyer to demand verification of the identity and legitimacy of all bidders participating in an auction. This reduces the likelihood of them falling victim to surreptitious ghost bidding.

Unfortunately, as with any industry, the auction business has attracted some unscrupulous characters. However, the existence of so-called garage auctioneers does not mean that the entire industry is rotten. It also does not mean that vendor bidding is a nefarious practice.

In fact, vendor bidding is regarded as best practice across the international auction industry. This is precisely why The High Street Auction Company’s use of vendor bidding was recently vindicated in a landmark ruling by the Supreme Court of Appeal, which found that the company had acted in strict accordance with the law in its application of the practice in a recent legal claim.

The judgement delivered by the Supreme Court of Appeal on 30 March 2015 upheld an earlier ruling which found that The High Street Auction Company’s use of vendor bidding did not constitute so-called ghost bidding. Not only did this precedent-setting judgement reaffirm the legality of vendor bidding but it also clearly defined it as being distinct and separate from ghost bidding.

To coin a colloquialism, the two practices are as different as chalk and cheese. By the same token, auctioneers whose sole aim is to deceive and defraud are also distinctly different from those whose only goal is to achieve a fair, market-related price for both buyer and seller.