The intermediate appeals court in New York affirmed last week the dismissal of Ronald Perelman’s lawsuit against Larry Gagosian (the initial dismissal was earlier this year). Although we did not analyze the underlying dismissal when it happened (Donn Zaretsky wrote a terrific recap at the time, here). The result, while not terrible surprising at this point, does underscore some important points to remember about the parties’ rights and duties in an art transaction.
The claim concerned the sale of a Jeff Koons work, that at the time of the agreement had not yet been created. Perelman agreed to pay $4 million for it, in addition to a $12.6 million sculpture and a $10.5 million painting. In the lawsuit, Perelman argued that the sculpture was actually worth more, but that Gagosian refused to let him (Perelman) resell it for a higher price because of a side agreement with Koons himself, such that Gagosian would have to pay the artist a higher commission if his work sold for a higher price. Gagosian, for his part, filed a countervailing lawsuit arguing that Perelman had simply failed to pay.
Perelman argued that in agreeing to the transaction, he relied on Gagosian as an advisor, such that a position of trust was created. The Appellate Divisision was unpersuaded:
Plaintiffs contend that, when plaintiff MacAndrews & Forbes Group, LLC (MacAndrews) and defendant Gagosian Gallery, Inc. (the Gallery) entered into a contract whereby MacAndrews bought a sculpture from the Gallery (the MacAndrews Purchase Agreement), defendants knew that plaintiffs expected to resell the sculpture. Plaintiffs allege that defendants breached the covenant of good faith and fair dealing implicit in the MacAndrews Purchase Agreement by entering into a subsequent agreement that decreased their incentive to be involved in resales of the sculpture, because without defendants’ involvement, plaintiffs would not realize as high a price on the resale. However, the essence of the MacAndrews Purchase Agreement was that MacAndrews was going to buy a sculpture, not that it would later resell it. As important as defendants’ involvement in the resale was to plaintiffs, the parties did not include it in the MacAndrews Purchase Agreement, and we will not interpret the agreement as impliedly stating it.
This relates to the “covenant of good faith and fair dealing,” a term that is implied as a matter of law in all contracts. The covenant dictates that even arms’ length negotiating parties cannot secretly intend not to perform what they have agreed to do.
But the courts in succession did not agree that the implied terms went so far as to require Gagosian to hold Perelman’s interests above his own beyond the terms of the agreement.
This is also an important reminder about what is, and what isn’t, a statement by a seller that can give rise to enforceable rights later. A statement of fact in the course of a transaction (“this is for a Jeff Koons work”) is a warranty under U.C.C. § 2-313 (“any affirmation of fact or promise made by the seller to the buyer which relates to the goodsand becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.”).
By contrast, a statement of value is not an actionable warranty. So, “this Koons is worth $4 million” is a statement of opinion and not generally enforceable, unless the person making the statement is in a position of trust. Buyer beware remains good advice.