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Rothko Revisited

Earlier this year, we wrote about the claim brought by Dallas art collector, Marguerite Hoffman, against three defendants, L&M Arts, Studio Capital and David Martinez. The subject of the claim was the purported breach of a confidentiality clause in the contract for the sale of Hoffman’s 1961 Mark Rothko oil painting, Untitled. The contract was in the form of a letter agreement, dated April 24, 2007 which provided that it would serve as “an agreement between Greenberg Van Doren Gallery on behalf of the seller and L&M Arts on behalf of the buyer for the sale of the [painting].”  Studio Capital and Martinez were the undisclosed buyers.

Hoffman sold the Rothko after her husband’s death and wanted to avoid any public speculation about her financial situation at that time. In addition, she did not want to draw attention to the fact that following the sale, the Rothko would no longer form part of the Hoffman’s bequest to the Dallas Museum of Arts (DMA). Thus, the letter agreement included a strict confidentiality clause requiring that “all aspects” of the transaction be kept confidential indefinitely, and Hoffman sold the Rothko privately as opposed to at auction where it would arguably have commanded a significantly higher price.

In May 2010, the Rothko was auctioned at Sotheby’s and this gave rise to the dispute: Sotheby’s reported that the Rothko had once been displayed in the Fast Forward exhibition at the DMA which featured works from the Hoffman, Rachofsky and Rose families, who in 2005 gifted their private collections to the DMA. In other words, Sotheby’s disclosed that Hoffman had sold the Rothko.

At trial (before a jury), Hoffman sought to prove that the three defendants had breached the confidentiality clause of the letter agreement and that she had suffered damage as a result.  She claimed that by selling the Rothko privately, she had forfeited the further millions of dollars that it would have brought if sold at public auction, in exchange for the promise of confidentiality.  Notably, the Rothko fetched $31,442,500 at auction in 2010, a price more than $13 million in excess of what Hoffman had received when she sold it privately in 2007. The Texas jury found in Hoffman’s favour and she was awarded $1.2 million in damages plus interests and costs.

The defendants filed a motion for judgment as a matter of law on the grounds that the evidence presented at trial was legally insufficient to allow a reasonable jury to reach the verdict it had.

Studio Capital and Martinez contended that L&M did not have actual or apparent authority to enter into the letter agreement on their behalf and it was therefore not binding on them, accordingly Hoffman had no action against them. L&M contended that there had been no breach of contract and that Hoffman was not entitled to the damages that she had elected. In the second decision, considered below, the court held that Hoffman did not have a claim against Studio Capital and Martinez.  The Court upheld her claim against L&M but ruled that the issue of damages should be revisited.

First, the court considered whether there was legally sufficient evidence for a reasonable jury to have found that Studio Capital and Martinez conferred actual or apparent authority on L&M to enter into the letter agreement on their behalf.

To find that L&M had actual authority, the court had to be satisfied that there was sufficient evidence that through spoken or written words or conduct, Studio Capital or Martinez had vested authority in L&M to bind them to the terms of the letter agreement.  Studio Capital and Martinez argued that L&M acted as an intermediary, and not as their agent in the April 2007 sale.  In other words, there were two separate transactions: L&M had bought the Rothko from Hoffman, and sold it to Studio Capital.  L&M did not act as agent, but as principal in both purchase and re-sale.  In addition, Studio Capital and Martinez relied on the fact that L&M did not show the letter agreement to Martinez and that he was unaware that L&M had signed the letter agreement on his behalf.

The court considered the evidence. Martinez, on the one hand, and Robert Mnuchin and Dominique Levy, the principals of L&M, on the other, each testified that despite the language of the letter agreement, they did not actually believe that L&M was authorized to enter into a contract with Hoffman that would be binding on Studio Capital or Martinez.  Further, Dominique Levy testified that in this kind of situation, there were typically two transactions, one with the seller and the other with the buyer.  The court concluded that there was insufficient evidence for a reasonable jury to have found that L&M had actual authority to enter into the letter agreement on behalf of Studio Capital or Martinez.

The court then considered whether L&M had apparent authority to bind Studio Capital or Martinez to the letter agreement.  To find that L&M had apparent authority, there must be evidence pointing to the principal (here, Studio Capital or Martinez) affirmatively holding out L&M as possessing the authority to bind them to contractual terms.  The principal’s conduct (Studio Capital or Martinez’s) must have led Hoffman to believe that L&M was authorised to agree the disputed confidentiality agreement on their behalf.  The court noted that neither Studio Capital nor Martinez had any direct interaction with Hoffman or her agent.  Nor was there evidence sufficient for a reasonable jury to have found that Studio Capital or Martinez knowingly and voluntarily permitted L&M to act in the manner it did.  Accordingly, the court found that L&M did not have apparent authority.

The court concluded that ‘a reasonable jury could not have found that Studio Capital or Martinez ever communicated to L&M or otherwise implied through their conduct that L&M was authorized to enter into a contract with Hoffman that would be binding on Studio Capital and/or Martinez, or intentionally or negligently allowed L&M to believe it possessed this authority’.  If Studio Capital and Martinez are not bound by the letter agreement through L&M, they cannot be in breach of contract vis-à-vis Hoffman, and her action against them must fail.

Second, with respect to L&M’s arguments, the court concluded that a reasonable jury could have found in Hoffman’s favour on her breach of contract claim but that she was not entitled to recover damages representing the amount L&M received in connection with the transaction. On the breach of contract claim, the court concluded that the jury could reasonably have found that the goal of the confidentiality clause was not achieved and further, that L&M did not use its best efforts to keep all aspects of the transaction confidential indefinitely. The court added that it was necessary for all aspects of the transaction to be kept confidential, which included the sale itself. Even if L&M did not disclose to anyone that the transaction had occurred, it was still necessary that it uses its best efforts to keep it confidential indefinitely and it did not do so: it did not show the letter agreement to Studio Capital/Martinez, nor did it advise them as to the confidentiality clause.  Further, it did not inform Sotheby’s of the terms of the agreement when it found out that Studio Capital and Martinez were intending to auction the Rothko, nor did it try to persuade Sotheby’s or Martinez to stop the auction of the Rothko from going ahead. L&M was therefore in breach of the confidentiality clause.

On the issue of damages, the court found that because Hoffman accepted a lower sale price in exchange for L&M’s agreement to make maximum efforts to keep all aspects of the transaction confidential indefinitely, Hoffman’s damages were caused by the fact that she did not get the benefit of her bargain. As to the type and amount of damages, the court held that as a matter of law, Hoffman was not entitled to recover the sums that she had elected and which she was awarded in the first judgement. However, the court held that Hoffman could recover damages representing the difference between the sum for which she actually sold the Rothko for in a private sale and what she could have sold the Rothko for at public auction.  The court further held that it would award Hoffman these damages in a separate judgment, once Hoffman moves to amend or alter the court’s judgment, as required by federal procedure.

As this second Hoffman decision shows, the role of the art dealer in a sale and purchase transaction is not always clear.  There are two main scenarios.  In the first scenario, the art dealer acts as an agent.  He may be agent for the seller, or agent for the buyer.  He takes a commission, typically paid by the principal (note that this is not always the case, e.g. auction houses typically take a commission from the seller, their principal, and also from the buyer).  In this case, the first court held that L&M were agents for the buyer.  The second court disagreed and held that on the evidence, L&M had bought the Rothko from Hoffman and re-sold it to Studio Capital.  In that second scenario, the art dealer buys from the seller, and re-sells to the buyer.  In other words, the art dealer takes a principal position.  The difference between his purchase price, and his resale price, is his profit.  In a purchase and re-sale scenario, the art dealer is expected to assume a degree of commercial risk.

There are references in the judgment to L&M acting as an intermediary.  That word can cause confusion, because an intermediary can be an agent, or a dealer buying to resell.  The art dealer can also act as “intermediary” by introducing seller and buyer, and taking an introductory commission.  A dealer simply effecting an introduction is typically not a party to the sale and purchase transaction itself.

Some dealers contend that they act as an intermediary in the sense that they put the transaction together.  They take a commission from the seller, the buyer, or both, for arranging the transaction.  They neither buy nor sell, nor do they act as agent.  They say that they act on their own account.  This is problematic.  The law (at least in England) struggles with the concept of an art dealer engaged in a sale and purchase acting for himself without buying and selling, and without acting as agent for either party.  The courts will seek to characterise the dealer’s role in the transaction either as principal (buying to resell for his own account), or as agent for the buyer or the seller.  If the dealer’s role is unclear, and a dispute arises, the court may assign him a role which he had not intended to play, on occasions resulting in unexpected and unattractive consequences.  For that reason, art dealers would be well advised to select the role they play at the outset of any transaction, and ensure that the transaction is documented in a manner consistent with that role.

Pierre Valentin and Caroline van den Bergh