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Dealer or agent? And why it matters.

'Agents and Dealers in Fine Art': the websites of the leading players in the London art market explain that they buy and sell works of art, they represent particular artists and also act for and advise clients who are collecting art. From a commercial point of view, offering all these services is understandable. But from a legal viewpoint, the multiplicity of roles carries an inherent risk. The danger arises from the fact that 'dealer' and 'agent' are separate legal concepts with very different attributes. Unless both the art market professional and the client are clear about their respective positions and what they expect from any transaction, problems can arise as shown by the recent High Court decision of Accidia Foundation v. Simon C. Dickinson. (1)

INTRODUCTION

The fundamental issue underlying the Accidia case is that 'dealership' and 'agency' are mutually exclusive concepts. A dealer buys and sells on his own account. He serves his own interests, carries his own expenses and is remunerated by the profit, if any, made on his deals. An agent, on the other hand, is someone who acts on behalf of another person (the agent's principal) and has the power to change the principal's legal relations with third parties. The agent is entitled to remuneration from his principal and to be indemnified for reasonable expenses and liabilities incurred for the principal.

Since a dealer acts in his own interests and an agent acts in the interests of his principal, to avoid any conflict of interest, the law provides that a person cannot act in both roles at the same time except with the full knowledge and approval of the principal.

Expressed another way, because an agent has undertaken to act on behalf of and in the interests of another person, the law attaches certain duties and restrictions ('fiduciary duties') to the agency relationship to ensure that the fiduciary (the agent) acts only for the benefit of the other party without any distraction. So, a fiduciary owes his principal duties to

* act in good faith in the interests of the principal; keep the principal informed of everything relevant to the principal's interests;

* keep the principal's affairs confidential;

* avoid any situation where his personal interests could come into conflict with the principal's interests and

* avoid any conflict of interest between his duty to one principal or client and his duty to another principal or client.

To enforce these fiduciary duties, the law imposes an obligation on a fiduciary to disgorge any benefit which he receives as a result of his position unless he has the principal's fully informed consent to him retaining the benefit. This obligation to disgorge (to 'account' in the language of equity) covers not only buying from or selling to the principal but any benefit or gain attributable to the agent's position or derived from any opportunity or knowledge gained in that position. The obligation to account is strict: it does not matter that the agent acted honestly or that the principal has not suffered any loss or has benefited by what the agent did. (2) The purpose of the obligation is not to compensate the principal but to deter the agent from putting his own interests ahead of those of the principal.

The upshot of these legal rules is that an art 'dealer' who is, as a matter of law, an agent will be treated as owing fiduciary duties to his client. That can have unhappy consequences for the dealer as the Accidia case demonstrates.

THE SALE OF THE DRAWING

The Accidia Foundation was the owner of a drawing attributed to Leonardo da Vinci entitled The Madonna and Child with St Anne and a Lamb (3) ('the Drawing'). On behalf of the Foundation, Mrs Gheri Sackler asked Ms Daniella Luxembourg, an international art dealer and consultant, to assist with the sale of the Drawing. Ms Luxembourg agreed and said that she would approach Mr Simon Dickinson of Simon C. Dickinson Limited ('SCD') for assistance. SCD carries on business as fine art agent and dealer. Mr Dickinson is a great expert in Old Masters. Ms Luxembourg asked him to help find a buyer from amongst SCD's clients.

With hindsight, the ambiguity in SCD's position can be seen. For whom was it acting? It had been approached on behalf of the seller to assist with a sale but on the basis that it might be able to find a purchaser from its contacts. The potential confusion was demonstrated by an email sent by Ms Luxembourg to Mrs Sackler which referred to Mr Dickinson 'who acts for the buyer'. SCD relied on that email as showing that Accidia knew of SCD's involvement in the proposed sale and, since Accidia had not appointed SCD as its agent and could not have thought that SCD was acting for free, Accidia must have known that SCD would be getting a commission from the sale to the buyer. Mr Dickinson's evidence was that he discussed with Ms Luxembourg that the sale would be on a 'net return price' basis with SCD taking anything obtained over the net return price paid to the seller. On the other hand, Accidia's case was that, since Ms Luxembourg had decided to involve SCD, it expected that she would share her commission with SCD.

Without the issue of SCD's position being resolved, Ms Luxembourg arranged for the Drawing to be consigned to SCD's premises in London. SCD did research on the provenance and background of the Drawing. As hoped, SCD identified a possible buyer--a client who had previously purchased works through SCD--and approached him through an intermediary who looked after his art collection. Having visited SCD's gallery, the buyer made an offer of US$7 million. On receiving the offer, Mr Dickinson asked Ms Luxembourg if 'a return price of US$6 million' was acceptable to her, saying that he had some third parties to take care of. She confirmed that $6 million was acceptable. It was SCD's case that by using the formula of a net return price, it would have been obvious to Ms Luxembourg that the price paid by the buyer was higher and that the difference was going to SCD and the third parties mentioned by Mr Dickinson as remuneration for their part in bringing about the transaction.

Again, looking back, we can see that, at this stage of the transaction, insufficient thought was given to the nature of the transaction and the role of SCD: was it acting for the buyer or for the seller or on its own account as dealer? While it is entirely understandable that art dealers, not being lawyers, do not undertake a legal analysis when trying to get a transaction completed, it does mean that they can be exposed if things go wrong. In this case, Mr Dickinson accepted in court that he was not buying the Drawing in order to resell it but had been approached to assist the seller. However he had also agreed with Ms Luxembourg that the sale would be on a net return basis. As will be seen, the essential question raised in the case was whether those two positions could stand together.

Unfortunately, the lack of clarity as to the roles of the parties was carried through into the paperwork drawn up to implement the transaction.

There were three contracts.

* The first contract ('the Accidia Agency Agreement') was made between Accidia and Luxembourg Art Limited ('LAL'), the Jersey company through which Ms Luxembourg trades. LAL agreed to act as Accidia's sole and exclusive agent to sell the Drawing by private treaty for the agreed upon net price to seller of US$5.5 million. It was agreed that LAL would charge a commission of up to 10 per cent beyond and above the agreed net sale price and that the sale contract would be between Accidia and the buyer. There was no mention of SCD.

* The second contract was made between SCD and the buyer ('the Sale Contract'). SCD, described as the agent for an undisclosed principal which owned the Drawing, agreed to sell the Drawing to the buyer for US$7 million. The problem with this contract is that although SCD is referred to as agent for the seller, in fact, (as noted in the previous paragraph) SCD had not been appointed as agent by Accidia. SCD was therefore not able to pass title in the Drawing to the buyer.

* The third contract was made between SCD and LAL ('the SCD/LAL Contract'). (4) It stated that SCD in its capacity as agent to the buyer had agreed a private treaty sale of the Drawing and agreed to return to LAL 'net US$6 million'.

The transaction completed by the payment of $7 million by the buyer to SCD as stipulated by the Sale Contract. SCD remitted $6 million to LAL in accordance with the SCD/LAL Contract. LAL sent on $5.5 million to Accidia being the agreed net price to seller under the Accidia Agency Agreement, keeping the difference of $500,000 as commission. Out of the $1 million retained by SCD, it made payments to third parties, leaving SCD with approximately $700,000 as its remuneration.

Subsequently the purchaser claimed that there were doubts about the authenticity of the Drawing and asked SCD to refund the purchase price or buy the Drawing back. In due course SCD agreed to buy back the Drawing from the buyer.

However, in the course of discussions following this claim, Accidia saw the Sale Contract between SCD and the buyer and so discovered that the purchase price had been $7 million of which it had received (gross) only $6 million. It therefore started proceedings against SCD claiming return of the $1 million which SCD had retained.

The lack of clarity as to SCD's role coupled with the legal principles mentioned at the beginning of this article resulted in SCD being in a very unfortunate position. If SCD had been a dealer on its own account, it would have been exposed to claims from the purchaser about the Drawing but entitled to the profit on the sale. On the other hand, if it was an agent for Accidia, it would not be liable on the contract with the buyer but would have to account to Accidia for the purchase price without keeping any of it. In fact, as will be seen, having refunded the price, it ended up having to disgorge the profit as well.

THE LEGAL CASE

Accidia's claim relied on the fundamental principle that an agent is liable to account for any benefit arising from the agency. The problem was that Accidia had not appointed SCD as its agent. Accidia met that problem by relying on SCD's assertion that it was agent for the seller in the Sale Contract (with the buyer) coupled with Accidia's subsequent confirmation of the sale5 by keeping the purchase price and acquiescing in the buy-back from the purchaser. Accidia's argument, which was accepted by the court, was that title could only have passed to the buyer if SCD had been authorised to sell on behalf of Accidia. Although SCD had not been initially authorised to sell, Accidia's subsequent acceptance of the sale bestowed retrospective authority on SCD. That retrospective authority made SCD the agent of Accidia so that it was liable to account to Accidia.

SCD's case was that it had never been appointed Accidia's agent but if it was held to be an agent, then the agency was on the terms of the SCD/LAL Contract under which it was permitted to arrange the sale on a net return price basis. In other words, SCD argued that it could rely on the exception to the obligation to account which arises where the principal has given informed consent to the agent making a gain.

The difficulty with SCD's argument was that it had no direct agreement with Accidia. The SCD/LAL Contract which provided for a sale on a 'net return price' was only with LAL. It is a basic principle of agency law that an agent can bind a principal only within the limits of the agent's express or implied authority. So SCD could succeed only if it could show that LAL's authority from Accidia (under the Accidia Agency Agreement) was wide enough to allow LAL to agree a net price basis with SCD. If LAL did not have that authority, Accidia would not be bound by the arrangements between LAL and SCD in the SCD/LAL Contract.

In support of its argument, SCD relied on the wording of the Accidia Agency Agreement which referred to 'net price to seller' and on Mr Dickinson's evidence that 'net return price' arrangements were common in the London art market as showing that Accidia had given LAL implied authority to arrange the sale on that basis.

However the court held that Accidia had not given such authority to LAL. Although that decision was reached on the court's assessment of the evidence and the language of the Accidia Agency Agreement, it is clear that the court felt uneasy about the practice of agents taking commissions based on an ultimate price that was not disclosed to the seller. At this level, the decision shows a conflict between market practice and the strict legal principles governing the behaviour of people who are held to be fiduciaries. As the judge said:
   He [Mr Dickinson] found it hard to understand the problem with his
   being the arbiter of whether his own commission was fair. As
   appears below, however, equity lawyers may take a different view.


The court's conclusions that SCD had acted as agent for Accidia but that Accidia had not agreed to a sale on a net return price basis made it inevitable, as a matter of law, that SCD would be found liable to return the $1 million on the basis that it was an unauthorised benefit (6) received by SCD as agent.

However the court recognised that the additional $1 million which Accidia received as a result of its decision had been achieved only through the skill and effort of SCD in achieving an advantageous sale. The law provides that in appropriate circumstances a fiduciary will be entitled to remuneration and reimbursement, even if he has acted in breach of duty, where his conduct has benefited his principal. (7) The judge held that SCD was entitled to remuneration but limited it to $200,000 because Accidia had stipulated a 10 per cent commission in the Accidia Agency Agreement and had already paid $500,000 to LAL and also because, in the judge's words, SCD "could and should have done more to ensure that Accidia understood the less than usual arrangement it had reached with Ms Luxembourg". Again that comment shows the court adopting a view of the situation very different from that taken by the market: the basis on which LAL and SCD dealt was designed to keep the identities of the seller and the buyer confidential. Since SCD did not know that Accidia was the vendor, it is not clear how it would have explained matters to Accidia as envisaged by the court.

FINAL THOUGHTS

Although the outcome of Accidia Foundation v. Simon C. Dickinson turned on the particular facts and language of the contracts, it represents a cautionary tale for art dealers accustomed to doing deals on the basis of trust and confidentiality with contracts not drafted by lawyers. The severe consequences of being held to be an agent with fiduciary obligations means that more attention needs to be given to ensuring that transactions are properly considered, explained and recorded.

(1) [2010] EWHC 3058 (Ch.), Vos J.

(2) As explained later, the agent may be awarded 'an equitable allowance' which is set against the obligation to account if his breach of duty has in fact benefited the principal.

(3) Also known as The Geneva Drawing.

(4) Referred to in the judgment as 'the 9th August Agreement'.

(5) Usually called 'ratification' in the context of agency.

(6) Often referred to as 'a secret profit' in the case law on fiduciaries.

(7) See Boardman v. Phipps [1967] 2 A.C. 46 at 104, 112.

Elizabeth Weaver, Barrister, XXIV Old Buildings.
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Title Annotation:Accidia Foundation's lawsuit against Simon C. Dickinson Limited
Author:Weaver, Elizabeth
Publication:Art Antiquity & Law
Article Type:Case overview
Geographic Code:1USA
Date:Dec 1, 2011
Words:2701
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