Knockout agreement is a form of combination of buyers to prevent competition among themselves at an auction sale. They agree that they will not raise the bid against each other and only one of them will bid at the auction. When the goods have been purchased, they will share the profit or proceeds, as the case may be. Prima facie, knockout agreement is not illegal. However, if the intention of the parties to the agreement is to defraud a third party, this will be illegal.
1. It is the nature of an illicit act intended to dissuade the prospective bidder from bidding. The tactics include pointing out defects in the goods, or misleading the purchaser so that he may not participate in the auction.
2. Obviously, damping is highly undesirable and therefore, illegal. It empowers the auctioneer to withdraw the property from the auction.
3. A right to bid may be reserved expressly by or on behalf of the seller, and where such right is expressly so reserved but not otherwise, the seller or any one person on his behalf may, subject of the provisions hereinafter contained, bid at the auction. [Sec. 64(3)].
A seller is not allowed to bid at an auction unless he has expressly reserved this right.
4. Where the sale is not notified to be subject to a right to bid on behalf of the sellers, it shall not be lawful for the seller to bid himself or employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such person. Any sale contravening this rule may be treated as fraudulent by the buyer (Sec. 64).
5. If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. The bid is said to be pretended when it is made by the seller or some one on his behalf. If it is allowed, it will unnecessarily raise the price to the prejudice of the other buyers.
Implied Conditions and Warranties in an Auction Sale :
As a rule, implied conditions applicable to other sales are not applied to an auction sale. As such, an auctioneer does not undertake to comply with those conditions. However, the following warranties are found in an auction sale:
1. The first and foremost is that he warrants that he has authority to sell.
2. He warrants that he is not aware of any defect of title of his principal.
3. He warrants possession of the goods against the price paid.
4. He warrants quite possession of the goods auctioned.