Agents’ and Dealers’ Duties
Leonardo Da Vinci's drawing Madonna and Child with St Anne and a Lamb (c.1501-19) was the subject of a lawsuit decided by London's High Court in November 2010, which shed “a bright light on an extremely murky corner of the art world” according to John Martin QC who acted for the claimant.
It is indeed extremely rare for confidential financial arangements and trade secrets of agents and dealers to be revealed and examined in public, and be judged and found wanting. Insights and lessons learned from this case are equally applicable to agents and dealers in contemporary art. But let us first consider the facts of the case.
The claimant was the Liechtenstein-based Accidia Foundation that had bought the work in 2006, and months later decided to sell it privately through leading London art dealer Danielle Luxembourg's company Luxembourg Art Ltd. The defendant was Simon C. Dickinson Ltd, another leading London art dealer, who had been engaged by Luxembourg to find a suitable buyer on the basis of a ‘net return price' agreement between the two dealers (meaning that if Dickinson sold the work for more than the price required by Accidia, he could retain any surplus as his commission fee).
In August 2007 Dickinson was paid US $7m by the buyer he had found, Nasser Kazeminy who owned a US-based investment business. Dickinson retained US $1m as his commission fee, and paid US $6m (the seller's asking price) to Luxembourg. After retaining her commission fee of US $500,000 (originally agreed with the seller), and paying a further US $500,000 to an associate of Accidia (connected with the search for a suitable buyer), Luxembourg paid the remaining US $5m to Accidia. In other words, commission fees of US $2m had been paid out of the US $7m purchase price.
Unfortunately, Accidia believed the sale price had been US $6m and that Dickinson would have been paid his commission by Luxembourg out of her US $500,000 fee. In 2008 Accidia discovered the sale price had been US $7m, and so filed the lawsuit against Dickinson for return of the ‘secret profit' he had made of US $1m.
In his evidence to the court, Dickinson explained that such ‘net return price' agreements were common practice amongst dealers. The court ruled that such an agreement was unlawful because the seller had not been told of the agreement and authorised it, commenting that Dickinson “found it hard to understand the problem with his being the arbiter of whether his own commission was fair. However, equity lawyers may take a different view.”
The court ordered Dickinson to pay Accidia almost all his ‘secret profit' (with compound interest), plus Accidia's legal costs (which, together with Dickinson's own costs, are estimated to be around US $1m). Dickinson's financial burden has been exacerbated by his having bought the work back for US $ 7m, following Kazeminy's complaint to Dickinson that leading auction houses “had serious concerns about the authenticity of the drawing”.
Dickinson is reported to have said: “We abide by the judge's decision. However Mr Justice Vos indicated that there would be good reasons to proceed against a third party, and it is our intention to do so. At every stage in this affair we sought to do the right thing…we paid commissions where we felt honour bound (though not legally bound) to pay them. We charged a fair and reasonable commission for our work. And when the buyer decided that he was no longer happy with the deal, we refunded him in full…. our reputation is intact, and that was something worth fighting for”. Luxembourg's lawyer told The Art Newspaper (January 2011) that “Luxembourg Art Ltd, which was the sole and exclusive agent of Accidia Foundation for the sale of the work, relied fully on the representation by Simon C. Dickinson Ltd in a written agreement dated 9 August 2007 that Dickinson was acting as agent to the buyer. Mr Justice Vos did not accept that this representation was correct.”
“Hamlet without the Princess” was the court's comment on Luxembourg's absence from the case. The judge also said “she must have known that Dickinson was taking an additional commission above $6m and ….. had not told [Accidia] that Dickinson was, to her knowledge, taking such a commission”. And the judge went much further, writing in his judgment “It is about two innocent parties who have been forced to litigate because of the conduct of a third, whom neither has chosen to bring before the Court, namely [Luxembourg who] knew full well that Mr. Dickinson was taking a turn, and I am fairly confident that he was right to say that she had a good idea what turn he was making. It was (at least primarily) her function to disclose these matters to her principal [Accidia] and she did not do so.” In open court, the judge said “the claims against Ms Luxembourg could have been legion”. Dickinson has recently instructed his lawyers to bring lawsuits against Luxembourg.
When artists consign works to gallery dealers for sale; when sellers consign works to public auction for sale; when sellers engage agents/dealers to find a buyer and secure a sale; when buyers engage agents/dealers to find a seller and secure a sale; when agents/dealers engage other agents/dealers to act for them – in all these cases – the agents/dealers have special legal responsibilities to their Principals. At the heart of this relationship lie duties of the trust and faith placed in the Agents by their Principals: ‘fiduciary duties', which include: not making a secret profit or accepting bribes; disclosing all material facts to the Principal (to enable the Principal to be sure that the Agent has performed properly); not to reveal confidential information about the Principal to third parties; to account to the Principal for property and money of the Principal which is under his control.
Fiduciary duties are the legal ‘default' position or starting point for the basic Principal/Agent relationship. These can be, and often are, varied or modified in ordinary business-to-business contracts (but not in business-to-consumer transactions). In artist/gallery representation deals, for example, the gallery is the Agent and the artist the Principal in a business-to-business relationship when selling works consigned by the artist. In practice many such deals are not recorded in writing or, if they are, do not state one way or the other whether the buyer's identity will be disclosed to the artist – in which case, the Agent's ‘default' duties would apply, and the gallery would be obliged to identify buyers if the artist requested that information. Dealers selling consigned works often refuse to disclose buyers' identities to their artists, fearing that their artists and buyers may do future deals cutting out the gallery. Such fears could be minimised or avoided through the signing of a written contract with their artists clarifying whether buyers' identities will be disclosed and, if disclosed (or discovered), that the artist will not sell directly to such buyers and, if they did so, that any such sales would require the artist to pay the gallery's commission. The contract could also usefully include a non-disclosure clause, whereby the artist undertakes not to reveal any buyer's identity. It's a case of caveat vendor.
© Henry Lydiate 2011