In Auctions Where the Seller/Seller's Agent Bids without Advance Notice, the Successful Bidder’s Right to Rescind an Auction Contract must be exercised promptly On Discovering the Facts That Permit the Bidder To Rescind the Contract

Section 41-02-45 of the North Dakota Code permits a successful bidder to evade an auction sale on the ground that the seller or his agent bid at the auction without giving notice of reserving the right to do so.  However, bidders must be careful to exercise this right within a reasonable time after discovering the fact that the seller or his agent bid at the auction.  Or else, they may forfeit the right itself. 
In Berg v. Hogan, 322 N.W.2d 448 (N.D. 1982), the Supreme Court of North Dakota held that the right to rescind a contract must be exercised promptly after discovering the facts that allows the party to rescind. Id. at 451.  This case involved an auction sale of aerial and ground spraying equipment conducted by the plaintiff seller, Berg on May 7, 1980. Id. at 449. Defendant Hogan was the highest successful bidder and paid the first down payment.  Defendant suspected that the plaintiff seller was bidding at the auction. Id. He stopped making subsequent payments and told the plaintiff that he intended to make a lump sum payment but the sale never closed. Id.  Therefore, the plaintiff filed a suit against the defendant. Id.

Two months later, on the date of his answer to the complaint (7 July 1980), the defendant gave notice of his election to rescind the contract. Id. The defendant claimed that it was on this day he first knew of his legal right to rescind. Id. The trial court found that the right to rescission had to be exercised promptly after knowing the facts giving him the right. Id. at 450. Here, because the right was not exercised promptly, it was waived. Id. The trial court added that the defendant had the responsibility to inquire the legal rights that was available to him. Id. In addition, his subsequent actions indicated sale ratification rather than rescission. Id.
The Supreme Court analyzed this case in light of precedents.  The Court stated that the statute aims to “protect the prospective bidders at an auction sale so they will not be forced up in their bidding by secret bids on behalf of the owner.” Id. at 451 (citing Drew v. John Deere Co. of Syracuse, Inc., 19 A.D.2d 308, 241 N.Y.S.2d 267 (N.Y.App.Div. 1963).) The statute specifically provides that the successful bidder has the option to void the sale on the ground that it was fraudulent if the seller has bid without an advance notice to the bidders. Id. 
The Court further pointed out that rules of rescission are set out in section 9-09-04 of the Noth Dakota Code. The section reads as follows:

"Rescission, when not effected by consent or pursuant to sections 9-08-08 and 9-08-09, can be accomplished only by the use, on the part of the party rescinding, of reasonable diligence to comply with the following rules:

1. He must rescind promptly upon discovering the facts which entitle him to rescind, if he is free from duress, menace, undue influence, or disability and is aware of his right to rescind; and

2. He must restore to the other party everything of value which he has received from him under the contract or must offer to restore the same upon condition that such party shall do likewise, unless the latter is unable or positively refuses to do so."
 Id.

After considering the facts of the case in light of the above provisions, the Court found that the buyer had burden to prove that the seller bid on the property without advance notice; at least initially the burden rested on the buyer. Id. Hogan testified: "I sensed that some of the equipment was being bid up by the sellers and I was competing against them." Id. So, he sensed that the seller was bidding on the date of the auction itself and he was competing with the seller. Id.

The Court stated that the right to rescind a contract must be exercised promptly after discovering the facts which gives one the right to rescind. Id. (internal citation omitted).  The Court further stated that, if at all the party does not know the legal consequences or right that he has when a seller bids at an auction without advance notice, he had a duty to find out the legal rights that were available to him when he sensed the seller bidding. Id. at 453. He had to perform this duty promptly. Id. Failure to do so may be detrimental to the party. Id.

Therefore, in the present case, Hogan should have found out the true situation and acted promptly in terms of the action that was to be taken.  But, here, Hogan did not act promptly.  Rather than rescinding the contract, his acts seemed to ratify the sale presumably with knowledge of the facts which could have been a ground for rescission. Finally, the Court ruled in the plaintiff’s favor and affirmed the trial court’s finding that Hogan failed to act promptly in rescinding the "sale" and that Hogan's actions were compatible with the doctrine of ratification of the sale. Id. at 453. 

So, bidders who sense the seller or his/her agent bidding without advance notice should exercise their right of rescission promptly.