Last winter, elderly collector Jan Cowles sued Larry Gagosian and the Gagosian Gallery in connection with the sale of a work by Roy Lichtenstein. According to the complaint, when Gagosian got the work on consignment the minimum sales price was established at $3,000,000, of which the Gallery would retain a $500,000 commission. Gagosian ultimately persuaded Mrs. Cowles’ son, Charles, to accept $1,000,000 for the work, attributing the lower price to condition issues with the picture that the complaint says did not exist. Gagosian did not tell Charles that he had actually sold the work for $2,000,000 and was retaining a commission of $1,000,0000.
In a brief filed in the case, Mrs. Cowles’ lawyers quoted from an e-mail sent by the Gallery to the prospective (and ultimate) purchaser:
“Seller now in terrible straits and needs cash. Are you interested in making a cruel and offensive offer? Come on, want to try?”
The brief goes on to describe the transaction as a “gross” and “brazen” breach of Gagosian’s fiduciary duty to its consignor.
This case has not yet been adjudicated, which means that the facts alleged in the complaint have not yet been proved. They remain mere allegations. If the facts are proved to be true, however, it seems likely that the court will find that they constitute a fiduciary breach.
What does it mean to be a fiduciary?
First year law students learn what it means to say that one person has a “fiduciary duty” to another. It is a fundamental legal concept.
Fiduciary relationships abound in the art market. Auction houses and galleries are fiduciaries to their consignors; museum directors and trustees are fiduciaries to their institutions; primary dealers are fiduciaries to their artists.
Yet, it is safe to say that some art market participants are unfamiliar with the word “fiduciary,” the legal scope of the responsibilities that it describes, or the possible consequences of failing to fulfill those responsibilities.
Simply put, a fiduciary must always act in the best interests of his or her “principal,” or client. It is the highest duty that one person can have to another.
Some people are automatically fiduciaries by reason of their profession. Lawyers have a fiduciary responsibility to their clients. Executors are fiduciaries to the beneficiaries of the estates they administer. Other people acquire fiduciary duties because of the nature of their relationship with another person. One is more likely to have a fiduciary duty when he is acting on behalf of someone who is significantly less sophisticated and who is heavily reliant on the advice that he is receiving.
In most of the transactions in which an art dealer engages, he is acting as an agent. He is selling work that is consigned to him either by an artist or collector, or he is buying work on behalf of a client. By law, an agent has a fiduciary duty to his principal.
An agent’s fiduciary duties.
Generally speaking, an agent has strict fiduciary duties of loyalty and good faith. In the art dealer context, this principally means a duty to:
- Care for and manage the principal’s property prudently;
- Deal fairly and honestly with the principal;
- Account to the principal as to dispositions of the property; and
- Disclose to the principal all information relevant to the subject matter of the agency.
Most litigation related to fiduciary breaches by art dealers has involved behavior that is so self-evidently wrong as to require little explanation. For example, a dealer who sells a work of art but does not notify his consignor of the sale or misrepresents the actual sale price cannot be surprised that he is breaching his legal obligations to the consignor (in that case, probably contractual as well as fiduciary). That sort of breach announces itself with neon lights and blaring trumpets that take a conscious act of will to ignore.
Other fiduciary breaches may be more difficult to recognize, even for the most diligent dealer. For example, it is not uncommon for an art transaction to involve a chain of intermediaries who help to locate prospective sellers or buyers, who negotiate the eventual sale, and who each earn a commission on the deal. With each additional link in the chain, the relationship of any particular intermediary with the ultimate principals becomes more attenuated. The more links there are, the less clear it is who is acting on behalf of whom.
It was only a matter of time before this kind of fact pattern led to lawsuit.
Accidia Foundation v. Simon C. Dickinson Limited.
In 2010, the High Court of Justice, Chancery Division, in London issued a decision in the matter of Accidia Foundation v. Simon C. Dickinson Limited. The decision was based on laws of agency that are fundamentally the same in both the United Kingdom and the United States.
In Accidia, collector/seller Accidia Foundation (“Accidia”) contracted with dealer Luxembourg Art Limited (“LAL”) to sell a drawing by Leonardo da Vinci. Under its exclusive agreement with Accidia, LAL was to receive a commission of 10% of the purchase price. LAL in turn sought the help of Simon Dickinson Fine Art to find a buyer from among Dickinson’s Old Master clients. Dickinson and LAL agreed to a so-called “net return price” arrangement, whereby Dickinson would deliver $6 million in sale proceeds for the drawing. Dickinson would be entitled to keep any amount obtained over the $6 million. The letter agreement memorializing this arrangement described Dickinson as acting “in [its] capacity as agent for the Buyer.”
Dickinson eventually secured the sale of the painting for $7 million, forwarding $6 million to LAL, keeping $700,000 as a commission for itself and using the rest to compensate one of its consultants and the buyer’s curator. LAL retained $500,000 as a commission from those proceeds and remitted the remainder to Accidia, who understood that the net sale price (after that commission) was $5,500,000.
While Accidia was aware that Dickinson was involved in the sale to the ultimate buyer, it was unaware of the actual sales price paid and the approximately $1 million retained by Dickinson from the initial proceeds. When Accidia discovered this fact eight months later, it sued Dickinson for the $1 million, asserting that Dickinson had been Accidia’s agent and had breached its fiduciary duty by retaining a secret commission—this, despite the fact that Accidia had no agreement with Dickinson, had never been in direct contact with Dickinson, and had been informed in at least one email from LAL that Dickinson “act[ed] for the buyer.”
However, evidence in the case showed that the sales contract transferring title to the drawing to the buyer was entered into solely between Dickinson and the buyer, and stated that Dickinson acted “as agent for the Owner” and “on behalf of the Owner.” The Court ultimately concluded that Dickinson, as the party to the sales contract, had acted as Accidia’s agent and therefore owed strict fiduciary duties to Accidia as principal. As such, according to the Court, it had a responsibility to assure that its $1 million commission was disclosed to Accidia – a responsibility that it (as well as LAL) had failed to fulfill.
Dickinson did not directly dispute its agent status but argued that net return price arrangements are common practice in the London art market and that the $1 million commission was in any event fair. Despite the fact that the Court found Mr. Dickinson to be a straightforward, honest witness acting in a way he thought honorable and in accordance with customary practice, it held that the failure to disclose the net return price arrangement to Accidia and obtain Accidia’s consent amounted to a breach of fiduciary duty. Addressing the net sale price in particular, the Court said,
“I am…not satisfied that any custom or practice exists whereby art dealers agree with principals or their agents for a return price on the basis that the dealer may sell the piece at any price without informing the principal or his agent of that ultimate price or of the level of commission the dealer thereby receives after passing on only the return price…. Moreover, such arrangements would be objectionable as being unreasonable and unlawful, unless they were concluded with the fully informed consent of the principal seller or the dealer accounted to that principal for the secret profit.” [Emphasis added.]
The Court held that because Dickinson was acting as an agent for Accidia through LAL, and Accidia had contracted to pay only a 10% commission, Dickinson’s $1 million commission was unauthorized and unlawful. The court held, however, that Dickinson was entitled to fair compensation for its role in the transaction. Because the seller had agreed in its contract with LAL that 10% was a fair commission, the court determined that the total commission for both dealers should be $700,000. LAL having already received $500,000, the court permitted Dickinson to keep $200,000.
There but for fortune.
The judge in the Accidia case was not “satisfied” that net prices are common in the art market. Many art market participants know otherwise. They also know that it is not at all uncommon for one dealer to seek the assistance of another in the sale of a work of art. In most cases, the seller is not aware of the chain of intermediaries between him and the buyer. Accidia found out about Dickinson’s commission only when the buyer of the work rescinded the sale because of doubts as to the work’s authenticity, and Dickinson sought reimbursement from the seller.
The fact is that many art transactions are structured in a way that makes them fertile ground for fiduciary breaches. Dealers and advisors in the secondary market make a living buying and selling art for their clients. The availability of product is limited and unpredictable; works of art are sold only when their owners choose to sell them. When a work of art comes on the market, there is incentive to get involved in its sale. And the way to get involved (and earn a commission) is to have access to a potential buyer – or even just to “know someone who knows someone.” Relationships matter. And, because the relationships are critical to a dealer’s business and clients tend to want their affairs to remain private, it is not at all uncommon for the principals in a transaction not to know who is on the other side of the deal.
This is not necessarily as nefarious as it may appear. Sellers and buyers of art benefit from market networks that make it possible for them to find each other. Where it can become a problem is where the intermediaries forget that even though the art may be their stock in trade, they do not own it and they have a responsibility to the person who does. What the Accidia case establishes is that if you forget that very fundamental fact – that you are meant to be serving the interests of the principals to the transaction – you may be subject to significant legal liability.
How it can be done better.
Have a written agreement consignment agreement. The agreement should be clear about how the dealer will be compensated and whether and how the dealer can compensate intermediaries in the course of the sale.
Be Forthcoming. The dealer should diclose all material information to the principal and make sure that the principal understands the ultimate selling arrangement. If the arrangement with the principal is a “net price” sale, the dealer should be sure that the agreement with the principal makes clear that the dealer will be entitled to retain all of the money received from the buyer in excess of that net price, regardless of how much that might be. The dealer should keep the principal informed of any developments in the transaction, and get the principal’s written approval for any changes in the way the sale is being handled
Be clear who the client is. If a dealer is not dealing directly with the principal, the documentation should be very clear from the beginning who the dealer is working for. The dealer should ask the person or persons with whom he is dealing to warrant to the dealer in a written agreement that the dealer’s role and commission have been disclosed to and approved by the principal, or, at least, that the payment of the dealer’s commission is not inconsistent with the arrangement by which the person is acting for the principal.
Account Separately for Consigned Property and Sales Proceeds. A dealer should maintain detailed, accurate records of consigned artwork and sales proceeds. By the same token, it is wise to keep separate inventory lists for consigned work and gallery-owned art, and use one or more dedicated accounts for consignment proceeds, segregated from the gallery’s general operating account.
Report Completed Sales Promptly. The dealer should inform the principal of the closing of a transaction promptly after its occurrence (generally the same day or next business day) and disclose all material information about commissions, fees, or expenses. If the dealer has a large number of consigned works from a particular client, he should report aggregate sales to the client on a regular basis. A dealer should never sit on sales proceeds without informing the seller of their receipt.