Sellers, Buyers and Auctioneers Beware

London is arguably the world’s leading art auction location, and the oldest. Sotheby’s was established in 1744, Christie’s in 1796, Bonham’s in 1793 and Phillips in 1796.

The legal and business framework for auctions in the UK has been developed largely in response to the settling of disputes that have arisen in relation to sales at those three auction houses. Good legal and business practices have resulted, and have been emulated elsewhere in the developed world.

Auction sales can bring considerable benefits. They stimulate open competition from the highest bidder; test unknown markets; protect the value of lots by enabling sellers to place on them a reserve sale price, below which the auctioneer cannot accept a bid, and can produce handsome profits. Conversely, hammer prices can be adversely affected because buyers pay an additional premium to the auctioneer, and sellers also pay a premium to the auctioneer.

Auctioneers are employed by sellers, acting under their instructions as special selling agents. The fall of the hammer to the highest bidder signifies the sale by the principal/seller via the agent/auctioneer to the buyer. Three contracts are in play, between: the seller and auctioneer (to sell the seller’s lot at auction, with or without reserve, and pay the auctioneer’s premium); the seller and buyer (to buy the lot for the hammer price that has been bid); and the auctioneer and buyer (to pay to the auctioneer the hammer price bid, plus a premium, and to collect the bought lot). Sellers’ and buyers’ premiums are calculated on a percentage of the hammer price, and can range between 7-20% in the UK depending on the type of goods sold. Two years ago in the US the former Chairman of Sotheby’s, Alfred Taubman, was convicted of conspiracy with Christie’s to fix the level of sellers’ premiums at their auctions. US law has for many years had strong ‘anti-trust’ (ie anti-competition) laws. Taubman was imprisoned for his offence. Sotheby’s holding company had earlier pleaded guilty and paid a fine of around US$4om. Both auction houses undertook to remedy their breaches of US law by paying around US$50om dollars in total to their customers who fell victim to the conspiracy.

Auctioneers regulate their contractual relationships with sellers and buyers through written conditions of sale. These are usually standard, written by the auctioneer and, in the case of buyers, are printed in the auction catalogue which also specifies, describes and/or illustrates the lots for sale. Those descriptions have been the cause of many celebrated legal disputes.

If an auctioneer fails to spot a ‘sleeper’ (ie wrongly describes and as a result undersells an artwork that subsequently turns out to be more celebrated and valuable) the seller might sue the auctioneer for negligent performance as agent. In the 80’s a pair of paintings were sold at a country auction in the UK for £840, only then to be sold at a Sotheby’s auction shortly afterwards for £88,000: they were not spotted as being by George Stubbs at the first sale. The first auctioneers, described by the court as ‘provincial’, were sued by the original sellers and escaped liability for negligent breach of contract on the basis that they were ‘general practitioners’ and not ‘expert consultants’ specialising in such paintings. This is regarded as an exceptional judicial ruling in the UK, where auctioneers are potentially liable for misattributions of authorship and negligent advice on market values.

The reverse scenario is where the auctioneer fails to spot fakes or forgeries (ie wrongly describes and oversells an artwork that subsequently turns out to be less celebrated and valuable), and the buyer might sue the auctioneer for negligent breach of the conditions of sale. In the 80’s Christie’s sold a painting they described in the auction catalogue as ‘Egon Schiele and signed with initials, painted in 1908’. The hammer price was £500,000. Several years later Schiele experts opined that ‘an unnamed person had extensively over-painted’ the original, including Schiele’s initials. The High Court Judge agreed that the painting was a ‘forgery’ and that Christie’s was on the face of it liable to the buyer for negligent misstatement in their auction catalogue. However, Christie’s successfully relied on a disclaimer in their conditions of sale excluding them from any liability for ‘the correctness’ of their description.

Auctioneers’ conditions of sale always seek to exclude their liability for misdescriptions or misattributions of authorship – in relation to both sellers and buyers. Such disclaimers may not be legally valid, which is why there has been so much interest in a case soon to be heard by London’s High Court. It concerns the auction sale at Christie’s in 1994 of a pair of porphyry urns, described as ‘Louis XV (1715-75) made C1760 by Ennemond-Alexandre Petitot for Philip, Duke of Parma or his entourage’ – that are allegedly fakes made in the early 20th Century. If this suit is not settled out of court, the judgement will affect all future auction practices in the UK, because at the heart of the dispute is the validity of Christie’s conditions of sale: ‘neither the seller, nor any of our officers, employees or agents, are responsible for the correctness of any statement of whatever kind, whether written or oral, concerning any lot, nor for any other errors or omissions in description or for any faults or defects in any lot’. Are such disclaimers reasonable and fair, and should they be allowed to exclude liability for lots that turn out to be fakes?

UK’s Unfair Contract Terms Act 1977 provides that such an exclusion clause may be invalid if it is judged to be ‘unreasonable’, and the UK’s Unfair Terms in Consumer Contracts Regulations 1994 (which came into force on July 1, 1995, and so would not apply to sales before that date) may render invalid an ‘unfair’ contract term that has not been specifically negotiated by a ‘consumer’. Buyers at auction do not negotiate auctioneers’ conditions of sale, because they buy catalogues with standard terms and conditions and have to accept them as written; it has been argued, but is yet to be determined, that buyers of art at auction are not ‘consumers’ in the conventional sense – especially if they are professional collectors or dealers. ‘Unfair’ means ‘any term which, contrary to the requirement of good faith, causes significant imbalance in the parties’ rights and obligations … to the detriment of the consumer; taking into account the nature of the goods or services … and referring to the circumstances … and all relevant terms.’ Moreover, these regulations require the seller to ensure that conditions of sale are written in plain, intelligible language – with any doubts being resolved in favour of the consumer. Finally, the UK’s Trade Descriptions Act 1968 provides that it is a criminal offence for anyone in the course of trade or business to apply a false trade description. This is an offence of ‘strict liability'(ie the prosecution only has to prove that the description was false, and made in the course of trade or business – not that the trader intended to deceive or mislead) and the defendant has the task of proving that the false description was made by mistake, accident, reliance on a third party, and that they took all reasonable precautions. The most recent case under the 1968 act concerning art auctioneers was decided by London’s High Court in 1990: the catalogue entry read ‘J.M.W.Turner RA. A watercolour of moorland, stream, bridge and people; unframed 6″ x 9′”. Sold at £400, it subsequently turned out to be worthless. Despite a lengthy disclaimer at the front of the catalogue, the auctioneers were found guilty.

Sellers, buyers, and auctioneers, beware.

© Henry Lydiate 2004

 

 

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This article is from the Artlaw Archive of Henry Lydiate's columns published in Art Monthly since 1976, and may contain out of date material. The article is for information only, and not for the purpose of providing legal advice. Readers should consult a solicitor for legal advice on specific matters. Artists can get free online legal information from Artquest.