By Greg Smith

CHESTER, N.Y. — If history has shown us anything, it is that the agreement between auction house and buyer is anything but concrete. Take, for instance the recent lawsuit filed by Christie’s against the famed New York collector Jose Mugrabi. Mugrabi bought a Jean Michel Basquiat for $37 million and failed to keep up with his payment schedule. After a year of collection attempts, Christie’s sued, claiming that “buyer’s remorse” did not invalidate Mugrabi’s contract. Shortly after Christie’s filed the suit, Mugrabi settled out of court.

William J. Jenack auctioned this Mstislav Dobuzhinsky painting in November 2015 for $7,475, including premium. After a nonpaying bidder forced the company to reoffer the work in March 2016, it brought $6,325.

While the prestigious houses at the top have fat commissions and seasoned lawyers on standby to handle heavy situations, the remainder of the secondary market players have little more than their Terms of Bidding to protect them. That, as it turns out, is not enough.

With the transition to online bidding platforms, the emergence of a global bidder base has left the buyer and house relationship in an impersonal and distant place. This distance, combined with the Wild West of Internet anonymity, has brought about a startling trend in the bidder base: bidders are increasingly willing to disregard an invoice and accept the repercussions of a permanent ban from an auction house. Regardless of contract, many auction houses are defenseless when this occurs.

Houses are struggling to keep up with the pace of fraudulent bidders while simultaneously honoring their commitment to get the best price for their consignors. Kevin Decker, an associate appraiser at William Jenack Appraisers & Auctioneers in Chester, N.Y., says, “Ten years ago, Internet sales used to be ten to 15 percent, now they’re edging up over 40 percent. You cannot disavow that size of an audience.”

Buyer defaults have been an issue in the auction world for quite some time. This is spurred by one fact: a bid is merely a promise. While many houses have a signed bidding contract in hand, they cannot legally force someone to pay for something without costly legal action. When the numbers are run, many houses do not earn enough in commission to cover the cost of legal fees or to sell the debt off to a creditor and pay the consignor their due balance off the hammer price. With no other options in hand, it then becomes more sensible to ban the bidder and reoffer the lot in a future sale.

“We are one of the auction houses that has been [involved in Internet bidding] probably the longest.” Decker says. “The worst offenders come from China, Russia and Eastern European countries.”

As the market continues to become more globalized, the distance between buyer and seller will broaden, as it has already begun to do. Whereas before it may have been difficult to tell an auctioneer face-to-face that you refuse to honor your bid, it is now as simple as ignoring your invoice. The repercussions are nil, there is no broad regulatory body that will block you from participating in the market as a whole and creating a new bidding account with a different name is as easy as signing up for a new email.

So, who loses out? Reoffering a lot in a future sale impacts its freshness and may consequently diminish its performance in the marketplace. While many auction houses have begun to employ a note in their lot descriptions identifying the nonpaying bidder as the reason for reoffering the lot, it is unlikely to result in an equal or higher selling price.

Decker says, “The people who were interested in the lot, their immediate question is, ‘Why is it back up, what’s wrong with it?’ Results on the second run are less, sometimes 40 to 50 percent.”

In Jenack’s November 2015 sale, a Mstislav Dobuzhinsky painting sold for $7,475, including premium, to a nonresponsive Internet buyer. The very same painting, when reoffered in Jenack’s March 13 sale, brought $6,325, including premium.

While the auction houses look to the platforms to impose more stringent criteria and security measures on their users, some of the platforms are less willing to take on that responsibility.

“It’s a matter of culpability and legal issues, it’s easier for [the platforms] to provide a service,” Decker says. “They don’t have to worry about chasing down bidders. They’re starting to take baby steps to appear that they are making it easier and more secure for auction houses, but it’s all smoke and mirrors. It’s a false sense of security, there’s no way to evaluate them. Anyone can come up with a string of 16 numbers.”

Deirdre Pook Magarelli, a vice president at Pook & Pook, a partner house on Bidsquare.com, related the company’s experience using Bidsquare as a platform. “All of the bidders on Bidsquare go through a credit card authorization process and nonpaying bidders are marked as such, making eliminating the bad eggs a fairly simple process. This is the same type of system we have implemented in-house for the past five years or so. We also have more stringent requirements for new overseas bidders, requiring a much larger authorization amount to guarantee that the card provided is not only valid, but can hold a substantial charge. Having both an in-house list of bad bidders and an online one to rely on greatly improves our ability to weed out nonpayers before they get their foot in the door.”

For some time now, the platforms have employed independent dispute databases that list all discrepancies associated with a particular user. As a user gets a dispute filed against him or her due to late or nonpayment, the user’s dispute history is available to see by any auction house on the platform for as long as that user continues to use that particular account. While that is certainly a helpful tool, it is a retroactive view that does not protect the auction houses against fraudulent bidders who create new accounts.

As the digital market expands, it will be interesting to see how the platform-seller relationship continues. It can be presumed that auction houses will continue to use online bidding platforms for their audience, but, with more platforms popping up each year, they are going to have to fight to retain their quality seller accounts. Competition is good, as the saying goes, and it will likely spur the aggregators into action to create a more secure environment for their clients.

On the other hand, auction houses should take Internet security very seriously and impose more stringent requirements for all online bidders. While there are costs associated with information verification and correctly storing payment information, there are plenty of benefits. A security bottleneck has the effect of creating a stronger relationship between buyer and house, which may result in bids taken off of the online platforms and into the house’s hands in the form of absentee bids, phone bids or bids tendered via proprietary platform. It is necessary to understand that, in the year 2016, online bidding is a powerful, but feral animal.

Without doubt, aggregators are doing an unprecedented job at bringing bidders from around the world to auctions in which they otherwise would have never participated. People from New York and China can bid on an auction in a small town in Ohio, based solely on a keyword search. That search is really what has changed the game: people do not need the auction house; they come for the item, and, sometimes, they come in too hard.