In a recent article, we considered horse sales and the types of problems that can arise. However, there is one subtopic of equine sales that we did not explore at that time, but which deserves a bit of attention – the Auction.

Horse auctions provide both buyers and sellers with certain advantages to private sales, but also come with their own set of pitfalls. For anyone considering purchasing or selling a horse at auction, there are factors that should be taken into account in order to avoid legal troubles and disappointment.

The Seller’s Perspective

For a seller, auctions offer the opportunity to reach a large number of potential buyers with a minimum of time and effort. However, sellers can expect to pay for that convenience and accessibility. Depending on the auction house, a flat fee per head is charged or a percentage of the sale price is taken as a fee. A seller can attend the auction himself or leave the horse(s) with the auction company on a consignment basis.

From a legal standpoint, when selling a horse at auction, it’s important to clarify beforehand what type of fee arrangement the auction house has, and to make sure it is in writing. Some auction houses say there is a flat fee per head, but after the sale, they may insist that the “flat fee” applies only up to a certain monetary amount, after which the auction house takes a percentage of the sale in addition to the flat fee. While this may seem a bit unethical, it is actually legal. Often, the terms to such an arrangement are tucked away in the language of the Agreement they require sellers to sign. Thus, it is always important read the terms carefully and to clarify the terms before the horse goes into the ring.

Most auction companies allow sellers to set a “reserve” on their horse(s). Basically, a reserve is a minimum price a seller is willing to take for the horse. If the horse comes into the ring for auction and the reserve is not met, the horse is typically put on an RNA (“Reserve Not Attained”) list. Again, depending on the auction house, interested buyers may be given the option to contact the seller of an RNA horse after the auction to hopefully strike an independent deal. Keep in mind, though, a seller may still be responsible to the auction company for fees even if the reserve is not met. In fact, some auction houses charge sellers a percentage of the highest bid price, even when a reserve is not met and the horse is not sold. Further, if the sale of an RNA horse proceeds independently post-auction, the auction company may still request a percentage of the full sale price since the auction itself ultimately led to the sale by matching the buyer with the seller. Again, to avoid lengthy and costly legal entanglements, it is important to clarify the policies of the particular auction house prior to listing a horse for auction.

Auctions range in size and type, and are often specialized in nature, selling only certain types of horses. For instance, Keeneland (based in Kentucky) is one of largest thoroughbred sales companies in the world, catering to those primarily interested in thoroughbreds. On the other hand, Billings Livestock Commission Co. (“BLS”), located in Montana, specializes in Western-type horse sales. Obviously, if you want to sell a barrel-racing horse, you wouldn’t list your horse with Keeneland since the buyers there are looking for thoroughbreds. It’s important to know beforehand what types of horses a particular auction specializes in signing the contract. Once signed, a seller may be stuck, and fees may be non-refundable. A quick Google search generally provides a fair idea of what particular auction companies specialize in. Most reputable auction houses have websites and online catalogues listing the types of horses sold. A look at this information should help the seller determine whether any given auction company will provide a viable pool of potential buyers and use their best efforts to make the sale. This is especially important if the auction is taking place on consignment.

The Buyer’s Perspective

For buyers, auctions also provide certain advantages over private sales.

Generally, a private sale is a one-on-one transaction between buyer and seller. The buyer is open to potential risks as discussed in prior articles. At auction, though, the auction company provides an extra layer of protection.

For instance, many auction companies offer a “soundness guarantee.” While this does not necessarily mean that the auctioned horse will be suitable for a specific purpose, it does provide a guarantee that the horse will be in “sound” condition, i.e. will have good air, good eyes, will not be lame, and will not have any undisclosed medical conditions (that are known at the time of auction).

In addition, many auction companies require that sellers provide documentation above and beyond what a buyer might get in a private sale. For instance, some auction houses (including Keeneland) asks sellers to provide x-rays of their horses’ limbs.

Most auction companies offer online and/or hard-copy catalogues so that buyers can peruse the horses before the auction. Buyers are also encouraged to arrive early enough to observe any horse they are interested in and have an opportunity to talk to the sellers or handlers. This is a big advantage because once a horse enters the auction ring, things move quickly, and interested buyers have little time at that point to adequately assess the horse.

Some Disadvantages

• Although there are typically a variety of protections in place during an auction, there are still some unscrupulous people out there who will try to turn things to their advantage. For instance, one particular tactic employed by some sellers is the use of “shills.” Basically, a shill is a person sent in by a seller who has no intention of buying the horse but bids in order to bump up the price or meet the reserve. Sometimes auctioneers themselves get in on the action and are permitted to bid against a buyer if they believe it will get the buyer to meet the seller’s reserve. Shilling, can be legal or illegal, depending largely on whether the shill is simply creating “buzz” or putting uninformed parties at risk of loss. Regardless, more than a few cases have ended up in court because of this practice.

• Buyers generally won’t know if a reserve is set on a horse until the auction is concluded. The only exception is an “absolute” auction, which doesn’t allow reserves to be set. Often, though, “absolute” auctions are used for “loose auctions,” where a horse is sold as is, with no soundness guarantee, creating a “buyer beware” situation.

• For those not familiar with the auction process, it can seem both intimidating and exhilarating. It is easy to get caught up in “auction fever,” which has caused many a buyer over-spend and over-commit. After all, it is the auctioneer’s job to generate excitement and a sense of urgency. When that gavel comes down, though, an enforceable oral contract is formed, legally binding a buyer. Therefore, it is important for buyers to plan a strategy and budget beforehand, especially if they are new to the auction world. In addition, it is wise for a new buyer to attend a few auctions with someone who is familiar with the process before going it alone.

• Finally, it is important to remember that auction houses can sometimes be breeding grounds for disease. All it takes is one sick horse to infect the herd. Buyers should always have a vet check any horses purchased at auction before the soundness guarantee expires, and to keep the new horses sequestered from other horses until the vet gives the all clear.

Mati Jarve is the managing partner of the Marlton, New Jersey law firm of Jarve Kaplan Granato, LLC. He is certified by the New Jersey Supreme Court as a Civil Trial Attorney and the National Board of Trial Attorneys as a Trial Advocate. Licensed in New Jersey, Pennsylvania and Arizona, he maintains a national practice in civil litigation, including equine related issues. This article is for informational purposes only and is not intended to be legal advice.

If you have a specific legal question or problem you should consult with an experienced and knowledgeable equine law attorney. Questions, comments or suggestions can be e-mailed to mjarve@nj-triallawyers.com, by visiting www.nj-triallawyers.com.