On 4 December 2014, Larry Gagosian won a protracted, hostile, and expensive court battle against his long-time friend and client Ronald Perelman. The dispute arose in connection with a series of transactions between the parties involving works of art by Jeff Koons, Cy Twombly, and Richard Serra. In MAFG Art Fund LLC and MacAndrews & Forbes Group LLC v. Larry Gagosian and Gagosian Gallery, Inc., Index No. 653189/2012, two New York courts dismissed the claims brought against the Gagosian defendants. The decisions rendered by the trial and the appellate court, interpreting New York law, reinforce some important principles that govern art transactions: (i) where key terms are not incorporated in an agreement between the parties, courts will not interpret the agreement to read such terms into it; (ii) there cannot be any fiduciary obligation between parties when they transact at arm’s length and there is no evidence of control or dominance by one party over another; (iii) sophisticated parties cannot demonstrate reasonable reliance when they fail to conduct the necessary due diligence before entering into a transaction; and (iv) a statement about the value of art constitutes a nonactionable opinion that provides no basis for a fraud claim.
On 12 September 2012, MAFG Art Fund LLC and MacAndrews & Forbes Group LLC (collectively, “Perelman”) commenced legal proceedings against Larry Gagosian and Gagosian Gallery (collectively, “Gagosian”) in New York state courts, asserting claims of (i) breach of contract; (ii) breach of the covenant of good faith and fair dealing; (iii) breach of fiduciary duty; (iv) fraud; (v) unjust enrichment; (vi) deceptive business practices under N.Y. business law. Perelman sought compensatory and punitive damages, and also requested sanctions against Gagosian. The dispute arose from a purchase agreement between MacAndrews & Forbes LLC and Gagosian Gallery, and a series of “Exchange Transactions” between the MAFG Art Fund LLC and Gagosian Gallery.
The MacAndrews Purchase Agreement
In or around 12 May 2010, MacAndrews & Forbes Group LLC and Gagosian Gallery entered into a purchase agreement for a sculpture to be created by artist Jeff Koons entitled Popeye. MacAndrews noted in their claim that “Koon’s works of art appreciate immediately after delivery to the first purchaser, often by multiples of the original price”, and it is clear that they were buying Popeye as an investment. Pursuant to the terms of the agreement, MacAndrews purchased the sculpture for a price of $4,000,000 to be paid in five instalments of $800,000, with the final instalment due when Popeye was completed, which was estimated to be on 15 December 2011. In the agreement, Gagosian undertook that “upon delivery . . . of the Work and after Seller’s [Gagosian] receipt of the Purchase Price, good and marketable title and exclusive and unrestricted right to possession of the Work, free of all Claims (as defined below) will pass from the Seller to Buyer [MacAndrews].”
MacAndrews alleged that Gagosian had no right to sell Popeye at the time it entered into the MacAndrews purchase agreement, as evidenced by a subsequent, separate purchase agreement between Gagosian Gallery and the Sonnabend Gallery, Inc., dated 1 June 2010, under which Sonnabend sold Popeye to Gagosian Gallery. The Sonnabend agreement also listed the purchase price as $4,000,000 to be paid in five equal instalments of $800,000, and the final payment was due upon completion of the sculpture, which was estimated to be December 2011. According to MacAndrews, Gagosian derived the right to sell Popeye under the Sonnabend agreement made on 1 June, accordingly Gagosian did not have the right to sell Popeye to them two and a half weeks earlier on 12 May.
In the Sonnabend agreement, Gagosian accepted that “the estimated completion date for the Work is not firm and may be changed from time to time by [Sonnabend] due to delays in fabrication or other reasons.” MacAndrews argued that the right to delay completion did not feature in the MacAndrews purchase agreement. Gagosian informed them that the sculpture would not be completed until July 2012, approximately seven months after the estimated completion date. MacAndrews claimed that failure to comply with the estimated completion date ‘materially and detrimentally affected the value of the investment opportunity for [them]’.
Notably, and perhaps more relevantly, the Sonnabend agreement provided that: (i) if, within two years of the date of the agreement, Gagosian or any of its affiliates sold Popeye to a third party (a “Secondary Sale”) for a profit (i.e., for more than $4,000,000), then Gagosian would pay 70% of such profit to Koons, and (ii) if, within five years of the date of a Secondary Sale, Popeye was resold in a transaction brokered, facilitated or otherwise involving Gagosian or its affiliates and Gagosian or its affiliates earned a fee or a commission, 50% of any such fee or commission would be paid to Koons (the “Profit-Sharing Arrangement”). MacAndrews alleged that by entering into the Sonnabend agreement, Gagosian “abrogated [their] ability to resell Popeye for full market value”, citing the fact that Gagosian was unwilling to be involved in any future sales of Popeye as long as the Profit-Sharing Arrangement remained in force. MacAndrews contented that the Profit-Sharing Arrangement in the Sonnabend agreement encroached upon their rights under the MacAndrews agreement by preventing them from exchanging or reselling Popeye for its fair market value. This was based on the premise that given the course of dealing between the parties, Gagosian knew that it was MacAndrews’s right and expectation that Gagosian would resell Popeye or exchange it for other works of art, and MacAndrews could not derive full market value through Gagosian if Gagosian declined to get involved in a resale or exchange for 5 year whilst the Profit-Sharing Arrangement applied.
MacAndrews brought claims of breach of contract and breach of fiduciary duty and fair dealing in relation to the MacAndrews purchase agreement. MacAndrews asserted fiduciary obligations on part of Gagosian citing many reasons, primary of which were Gagosian’s “unparalleled and superior knowledge regarding contemporary art” and Gagosian’s longstanding position as Perelman’s advisor and friend.
The Exchange Transactions
In April 2011, MAFG Art Fund LLC entered into two other transactions with Gagosian, apparently in an effort to mitigate Perelman’s damages resulting from Gagosian’s alleged breaches of the MacAndrews purchase agreement (the “Exchange Transactions”). In each of the Exchange Transactions, MAFG Art Fund LLC acquired an artwork from Gagosian, and paid for the artwork with a combination of cash and a transfer or consignment of other artworks to Gagosian. In the first Exchange Transaction, the Art Fund acquired an acrylic on canvas, which was later identified by Gagosian in its court papers as Cy Twombly’s Leaving Paphos Ringed with Naves for $10.5 million, which Perelman described to be “an artificially high price for the work set by [Gagosian]”. In return for the Twombly, Perelman agreed to exchange four works of art, including the Popeye sculpture, and paid $250,000 in cash. According to Perelman, Gagosian intentionally undervalued the four works of art which Perelman used to purchase the Twombly artwork. In the second Exchange Transaction, the Art Fund acquired a steel sculpture for $12.6 million, which was later identified by Gagosian as Richard Serra’s Junction 2011. In return for the Serra sculpture, Perelman paid $4.75 million in cash and exchanged five works of art. Perelman again argued that Gagosian fraudulently undervalued those five works.
The trial and appellate court overwhelmingly sided with Gagosian, and dismissed all claims by Perelman. There are four important takeaways from this case.
First, where a party makes certain assumptions when entering into a transaction, or harbours certain expectations, it is essential that these assumptions and expectations be recorded as terms of the agreement. The trial court held that the change in the completion date of Popeye cannot constitute a breach of the MacAndrews agreement, as the agreement expressly provided that the completion date as “estimated” rather than firm, and nowhere in the agreement did MacAndrews provide that time was of the essence. The court held that a mere delay of performance does not amount to a breach of contract. The trial court also did not find any breach of the MacAndrews agreement by Gagosian as a result of the Profit-Sharing Arrangement between Gagosian and Sonnabend. The court pointed out that first, the Profit-Sharing Arrangement was binding on Gagosian only, not on MacAndrews, and secondly, the MacAndrews agreement did not contain any obligations on part of Gagosian to help MacAndrews resell Popeye. The court was unwilling to read such an obligation into the agreement. Accordingly, said the Court, Gagosian’s refusal to be involved in future sales of Popeye did not constitute an encumbrance detrimental to MacAndrews, nor was it a breach of any express or implied term of the MacAndrews purchase agreement. The appellate court echoed the trial court’s findings and held that the duty of good faith and fair dealing is not without limits, and no obligations can be implied that would be inconsistent with the other terms of the contractual relation. The appellate court added that “as important as [Gagosian’s] involvement in the resale was to [Perelman], the parties did not include it in the MacAndrews purchase agreement and we will not interpret the agreement as impliedly stating it.”
Second, where parties deal at arm’s length in a commercial transaction, subjective claims of reliance on a party’s expertise do not give rise to a fiduciary relationship, which needs a high degree of dominance and reliance. Citing Perelman’s description of themselves, the court held that Perelman were not “static collectors of art”, but “[r]ather they bought, sold and exchanged [art] frequently” as investment, making them experienced and sophisticated business investors who entered into an arm’s length transaction with Gagosian, which did not give rise to a fiduciary relationship. The court made it clear that a “longstanding relationship of fifty years” is insufficient to establish a fiduciary relationship where parties deal at arm’s length in a commercial transaction.
Third, sophisticated parties should conduct their own due diligence before entering any transactions. Perelman contented that Gagosian possessed unique and superior knowledge concerning the value of the artworks included in the Exchange Transactions, and that he fraudulently misrepresented the value of theses artworks. The trial court denied Gagosian’s motion to dismiss the claim of fraud against it, reasoning that the Perelman may have relied on Gagosian’s superior and unique knowledge of the art market, given Gagosian’s “enormous power to influence and set the market for artists it represents . . . and [Gagosian’s] access to and knowledge of the largest private art collections in the world.” However, the appellate court reversed the trial court’s ruling on the fraud claim, and held that Perelman failed to demonstrate “justifiable reliance”, a vital component of a fraudulent misrepresentation claim. The appellate court held that “[a]s a matter of law, these sophisticated plaintiffs [Perelman] cannot demonstrate reasonable reliance because they conducted no due diligence; for example, they did not ask defendants [Gagosian], ‘[s]how us your market data.’”
Fourth, statements about the value of an artwork are a matter of opinion. As to the claim that Gagosian misrepresented the value of certain works, the appellate court dismissed Perelman’s claims and reiterated a well-established principle of law, which is that “statements about the value of art constitute nonactionable opinion that provide[s] no basis for a fraud claim”.
An important lesson from this case is that it is imperative that buyers of art conduct their own due diligence, irrespective of their long-standing relationship with the seller or the seller’s agent. “Buyer beware”, as they say. The Courts will not readily treat the seller as owing fiduciary duties to the buyer, even if the buyer has a longstanding and trusting relationship with the seller, or the seller is especially knowledgeable in a given field. This is particularly so if the buyer neglects to conduct due diligence, and/or the buyer is a sophisticated operator. It is also crucial that if there are terms or conditions upon which the artwork is purchased, then those terms and conditions should be explicitly recorded in the agreement between the parties. Nothing should be left out in the name of trust or a longstanding friendship, and no assumptions should be made.