When, in 2007, Marguerite Hoffman, a prominent Dallas art collector, decided to sell a major painting by Mark Rothko (Untitled, 1961), she insisted on confidentiality. Her husband had died the year before. She did not want to draw attention to her finances.
The painting was well known. So was the fact that the Hoffmans owned it. At the time of the sale, it was hanging on the walls of the Dallas Museum of Art, as part of an exhibition called Fast Forward: Contemporary Collections for the Dallas Museum of Art. The exhibition celebrated the Hoffmans’ promise to give their art collection to the Museum upon their death. There are photographs taken at the time of the exhibition showing them in front of their painting by Rothko. The Dallas exhibition was another reason behind Mrs Hoffman’s insistence that the sale remain confidential: it could be embarrassing for the Museum (of which she was a trustee) if it became known that she was selling the painting during the exhibition.
Mrs Hoffman contacted Robert Mnuchin, then a partner in a prominent New York art dealership known as L&M Arts, from whom the Hoffmans had originally bought the Rothko. She asked Mnuchin if L&M might have a buyer for the painting. They did. The buyer, they told her, was an extremely private collector. The painting would ‘disappear’ into his collection. As is common in this type of transaction, the identity of the buyer, whom L&M were representing in the sale, was not disclosed. By letter agreement dated 24 April 2007, L&M, acting on behalf of the undisclosed buyer, agreed to buy the painting for a price of USD 19 million, of which USD 17.6 million would go to Mrs Hoffman after commissions. The contract required L&M and the buyer to ‘make maximum efforts to keep all aspects of this transaction confidential indefinitely’. The confidentiality obligations placed on L&M and the buyer were far-reaching. ‘All aspects of [the] transaction’ should be kept confidential. Arguably, this required them to keep the sale itself confidential, not just the parties to it, its terms and the circumstances surrounding it. They should make ‘ maximum efforts’ to keep the transaction confidential. This suggested that their standard of care was very high indeed. Finally, the obligation of confidentiality would last indefinitely.
Mrs Hoffman was shocked when three years later, she discovered that the painting was included in a Sotheby’s auction in New York. The painting was one of the trophies of the sale and Sotheby’s marketing revealed that she had once been the owner. Her shock turned to anger when, on 12 May 2010, the painting sold for USD 31.4 million, nearly twice as much as she had received for it three years before. She sued L&M and her buyer for breach of confidentiality. The buyer turned out to be a Belize company called Studio Capital, behind which (apparently) stood David Martinez, a Mexican-born billionaire art collector.
According to Mrs Hoffman, L&M failed to convey to the buyer the full scope of the confidentiality undertaking. It is alleged that L&M’s invoice to the buyer simply provided that ‘the terms’ of the transaction were confidential. This fell short of the confidentiality obligation in the sale contract. Nonetheless, as a matter of law, the Belize company was bound by the terms of the sale contract through its agent L&M, including the far-reaching confidentiality undertaking.
Mrs Hoffman argued that, by consigning the painting for sale at public auction, Studio Capital and David Martinez, assisted by L&M, had violated their obligation of confidentiality. She had sold the painting privately, to maintain the sale confidential, thereby foregoing the significant premium that the painting would have achieved had it sold at auction. In fact, Tobias Meyer of Sotheby’s is reported to have suggested that had the painting sold at auction in 2007 when Mrs Hoffman sold it privately, it could have fetched between USD 30 million and USD 40 million. In her complaint she argued that the Sotheby’s auction was designed to procure for David Martinez the premium from a public sale that she had sacrificed in return for confidentiality, which Mr Martinez failed to honour.
The defendants argued that they had not violated the confidentiality provision, pointing to the lack of an explicit prohibition of reselling the painting at auction. A true resale restriction, they claimed, would have resulted in a significant discount in the price agreed with Mrs Hoffman. Instead, they said, Mrs Hoffman was paid the then full market value. Finally, they argued that Mrs Hoffman had suffered no damage.
At trial in December 2013, the jury found that the three defendants, L&M, Studio Capital and David Martinez had breached the confidentiality clause of the contract. On the issue of damages, the jury only awarded Mrs Hoffman the sum of USD 1.2 million in damages, plus interest and her costs. Under the laws of Texas, the loser in an action for breach of contract pays the winner’s costs. Mrs Hoffman is reputed to have spent USD 10 million in legal fees.
As this case illustrates, committing to confidentiality can have unwanted consequences. When instructing the jury, the judge in the case stressed that the confidentiality undertaking in the contract ‘did not prevent the buyer of the painting from reselling or displaying the painting, provided that, in doing so, the buyer complied with the confidentiality clause’. This is true, up to a point. Arguably, the scope of the confidentiality undertaking in the contract meant that Studio Capital could not, ever, sell the painting or display it in way that might lead the public to conclude that it no longer belonged to Mrs Hoffman. A private sale could be envisaged, but to what extent was Studio Capital required under its contract with Mrs Hoffman to seek from its own buyer an equally strict (and probably un-obtainable) confidentiality undertaking? The breadth of the confidentiality undertaking meant that, in practice, the buyer’s right to dispose of the painting was significantly impaired. This might have been acceptable, provided that the undertaking was limited in time. An undertaking in perpetuity was simply unmanageable.
This case also illustrates another point. Collectors selling or buying through agents may be well advised to ask to see the terms of the contract their agent proposes to agree on their behalf. Relying on the agent to paraphrase the contract in a separate document after the event is not without risk. The agent may, in good faith, fail to grasp the nuances of a contract. Or it may suit him to tell the collector a few half-truths.
Articles published on this blog reflect the opinion of the stated author of the article only. The information they contain does not constitute legal advice.