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Faithless Servants and the Law: Fine Art Dealers Beware

On 27 February 2017, a New York State Court[1] held that Lisa Jacobs, a fine art dealer and private curator, breached the fiduciary duties she owed to the seller of an artwork entitled Future Sciences Versus the Man by artist Jean Michael Basquiat (the “Work”).  As a result of her disloyalty, the Court ordered Jacobs to pay to the seller the $1 million in secret profits plus $50,000 compensation she earned for the sale of the Work along with interests, costs and disbursements.

By way of background, in or around late 2011, Jacobs had brokered the sale of the Work on behalf of Mr Michael Schulhof, who was acting as an executor of the estate of his mother Hannelore B. Schulhof.  Previously, Jacobs had worked as a curator and advisor for the art collection owned by the deceased.  Jacobs also ran her own business, Lisa Jacobs Fine Art, where she bought and sold art and worked as a curator and advisor.

On 25 October 2011, Jacobs entered into an agreement with the seller (the “October Agreement”), agreeing to sell the Work on the estate’s behalf for a minimum purchase price of $6 million.  Upon completion of the sale, she was entitled to receive a $50,000 fee.  The October Agreement clearly stipulated that Jacobs was “not to accept any fee from the purchaser, in cash or in kind”, that Jacobs was to contact the seller prior to approaching any prospective purchaser and that Jacobs would not present or seek purchase offers below $6 million without written confirmation of a lower price.

Jacobs swiftly found a buyer for the Work, who also happened to be a dealer, and reached an agreement with the dealer for the sale of the Work at $6.5 million.  Shortly thereafter, Jacobs informed the seller that she had found a buyer for the Work, that she was able to get the buyer up to a price of $5.5 million for the Work and that she had a firm deal.  Jacobs also told the seller that for the purposes of maintaining anonymity, which was important to the buyer, she would have to buy the Work from the seller and then sell it on to the buyer.  Relying upon Jacobs’s representations, the seller agreed to sell the Work to Jacobs for $5,450,000 (taking into account her $50,000 fee).  Jacobs in turn sold the Work to the buyer for $6.5 million, making a total of $1,050,000 in profit from the sale of the Work.

A year later, the seller discovered that Jacobs had sold the work for $6.5 million and, in 2013, sued Jacobs for breach of fiduciary duty, fraud, breach of contract, restitution and unjust enrichment.  After years of discovery, the seller moved for summary judgment (asking the court to decide the case based on the facts at hand).  Finding no triable issues of fact, the court ruled in favour of the seller.

The court held that the record clearly establishes that Jacobs made a series of misrepresentations to the seller.  The long-standing relationship between Jacobs and Mrs Schulhof, combined with the terms of the October Agreement meant that Jacobs owed a fiduciary duty to Mr Schulhof as executor of Mrs Schulhof’s estate.  The Court concluded that “Jacobs, as a faithless servant, must account to [the seller] for the $1 million of secret profits for the sale of the Work” and considering her disloyalty she must also “forfeit the $50,000 in compensation earned for the sale of the Work” along with interest, costs and disbursements.

General Remarks

As this case shows, the risk is not simply the liability to account for the secret commission.  Another risk is that the agent must forfeit their fee, resulting in them having provided a valuable service to the seller without compensation. Moreover, a finding of fraud can seriously prejudice the intermediary’s reputation.

In the English case of Accidia Foundation v Simon C. Dickinson Limited[2], a London High Court held that whilst the art dealership Simon C. Dickinson Ltd. was not entitled to retain the undisclosed commission they had made on the sale of a drawing attributed to Leonardo da Vinci as agent for Accidia, it was entitled to keep its compensation.  The High Court, considering the facts at hand, dismissed the accusation of fraud aimed at Dickinson by Accidia and awarded Dickinson a sum of money as compensation for their services to Accidia in relation to the sale.  By contrast, in Imageview Management Ltd v Kelvin Jack[3], an English Court of Appeal held that Imageview Management Ltd., as agent to footballer Kevin Jack, had acted dishonestly by taking a secret commission and was thus not entitled to any compensation for his services.  The Court opined that “[t]he law imposes on agents high standards.  Footballers’ agents are not exempt from these.  An agent’s own personal interests come entirely second to the interest of his client.  If you undertake to act for a man you must act 100%, body and soul, for him.  You must act as if you were him.  You must not allow your own interest to get in the way without telling him.  An undisclosed but realistic possibility of a conflict of interest is a breach of your duty of good faith to your client.”  The court in Imageview Management Ltd. further held that “[t]he complete remedy is disclosure, and if an agent wishes to receive any kind of remuneration from the other side and wishes to test whether it is honest or not, he has simply to disclose the matter to his own employer and rest upon the consequences of that.”

Jacobs may have been advised that if she bought the Work to resell it, she would act as principal in the sale and accordingly, she would no longer owe a fiduciary duty to the seller.  Whilst it is true that a dealer who buys an artwork, then resells it, is less likely to owe a fiduciary duty to her seller, the history of the relationship between the seller and the dealer, as well as the dealer’s representations to the seller prior to the sale and the circumstances surrounding the dealer’s purchase and resale, cannot be ignored.  If the circumstances of the case point to the existence of a fiduciary relationship between seller and dealer, the fact that the dealer buys from the seller to resell, is unlikely to suffice to override the dealer’s fiduciary duty.  If the parties to an agency relationship intend to alter the terms of their relationship, for example by turning a dealer-agent into a dealer-buyer on an arm’s length basis, the new relationship should be carefully and unambiguously recorded in writing, with the expressed intent that it should override and replace the agency relationship, and clearly, the new relationship between dealer and seller should not be brought about by misrepresentations by the dealer to the seller.

The fundamental principles of agency law are similar in the UK and the US, and the agent owes similar fiduciary duties to his principal on both sides of the pond, including but not limited to the duty of loyalty and transparency.  If Schulhof v Jacobs were tried in an English court, the outcome would likely be the same.  Determining whether an agency relationship exists and whether the agent has breached his fiduciary obligations to his principal are fact-intensive enquiries.  As no two cases share the same facts, the many cases on agency law in the US and the UK yield different outcomes.  There is no magic formula available to determine whether an agency relationship exists, but the key ingredients include analysing the parties’ relationship, reviewing any written or oral agreements between them and examining the actual conduct of the parties throughout the course of their dealings.

By Azmina Jasani

Published 6 June 2017

[1] Schulhof v Jacobs, 2017 N.Y. Misc. Lexis 690 (N.Y. Sup. Ct. Feb 27, 2017).

[2] [2010] EWHC 3058 (Ch).

[3] [2009] EWCA Civ 63.