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Thinking the unthinkable: constructive pessimism and the orchestration of claims.

Two modern cases indicate the perils that can confront parties to bailments of cultural objects who neglect to provide in advance for potential areas of conflict. Although neither case involved a museum, the issues in dispute could equally have arisen under (for example) a loan of a painting for exhibition or following some other type of bailment to a cultural institution.

THE CASE OF THE ANCIENT EMBROIDERIES

Background

In Spencer v S Franses Ltd (1) the Claimant Spencer had possession of two ancient embroideries. He claimed to have acquired them lawfully in the course of performing a 'broom clean' of the fiat of a deceased woman. Spencer claimed that the cleaning was conducted on the authority of the New York lawyer administering the estate, who consented to his retaining the embroideries. It was inherent in Spencer's position that property in the embroideries had passed to him. (2)

Spencer wished to know the value of the embroideries and to have them researched and marketed. To that end he delivered them to S Franses Ltd ('SF') in June 2003. With Spencer's consent Mr Simon Franses performed research work on the embroideries over several years. As time progressed Spencer gave various accounts of the circumstances in which he acquired them and other matters. There were sporadic attempts to reach a written agreement but the judge held that none of these resulted in a contract.

In March 2009 SF alerted Spencer to its doubts about Spencer's title and expressed concern about returning them to Spencer without confirmation of Spencer's right to them. Spencer refused to give an indemnity and SF asserted the right to retain the embroideries till Spencer's title was confirmed. The parties fell into serious disagreement. Following demands for the return of the embroideries, Spencer sued for conversion in April 2009, asserting inter alia a fight to aggravated damages.

A Contractual Right to Retain Pending Investigation of Title?

Thirlwall J. rejected SF's defence that SF had an implied contractual right to retain the embroideries for investigation on the point of title. There was no contract between the parties and, even had one existed, "there was simply no basis upon which it can be said that the term ... could be implied."

Evidently such a term was not essential to lend business efficacy to the contract and could not be justified by reference to what the contract 'meant'. (3) One might question however whether an implied term is wholly without warrant in a case such as this. Section 327(1)(d) of the Proceeds of Crime Act 2002, for example, makes it an offence to transfer criminal property and section 329(1)(c) of the same Act makes it an offence to be in possession of criminal property. A bailee who reasonably suspects that the bailed goods are criminal property might also reasonably expect that the terms of the bailment will entitle him to check the legal status of the goods before transferring them (to the bailor or anyone else) or agreeing to remain in possession. The foundation for this argument would be a general implied agreement that the bailment should not require the bailee to do anything that the bailee reasonably suspects might involve the commission of a criminal offence, and that under the terms of the contract or bailment the bailee is entitled to a reasonable time in which to clear up that suspicion. The law would thus be encouraging the bailee to act responsibly in the face of a developing suspicion.

A Common Law Right to Retain for Purposes of Investigation?

SF also failed in its defence that, being on notice as to the rights of third parties from early 2009, it had thereafter--and regardless of contract --a common law right to retain the embroideries for a reasonable period from that date to investigate title under the principle in Clayton v. Le Roy. (4)

In SF's favour, the judge agreed that there was no absolute prohibition on a bailee's exercising a right to detain and investigate the provenance of objects where doubts arise about the bailor's title. Though the arguments from principle do not point in a single direction, the authorities indicate on balance that "a bailee should have a reasonable opportunity to protect himself from a claim by the rightful owner" The judge also agreed that there were substantial matters that might have caused SF to doubt Spencer's title (and his story at large). These included Spencer's unwillingness to provide an indemnity when SF raised the point.

In the event, however, SF failed on this point. It had ample time before March 2009 (about five years six months) to make appropriate inquiries, and it had, long before March 2009, ample cause from its actual and available state of knowledge to believe that Spencer's title was open to question. Had SF inquired earlier it would have gleaned the March 2009 information much earlier and both could and should have acted on it earlier. (5)

The judge's overall conclusion was that no right to detain for inquiry ever existed in this case or (which amounted to the same thing) that any such right could have run only for a reasonable time, which time had long since expired. There was no case where a defendant had held possession of goods for five and a half years before asserting the right to reasonable investigation.

The judge's conclusion was in her view fortified by the ability of a defendant in conversion to invoke section 8 of the Torts (Interference with Goods)Act 1977 and to bring other interested parties before the court in accordance with rule 19.5(a) CPR. She cited this as a supplementary reason for not allowing the particular bailee to invoke Clayton v Leroy. One might argue, however, that the rule 19.5(a) procedure is valuable only if a defendant has sufficient confidence in the interests of third parties to identify them for the purposes of joining them to the proceeding, and that a bailee needs the Clayton v Leroy power in order to have a reasonable chance of activating rule 19.5(a)(2) by which a defendant "may ask for direction that another person be made party to the claim." (6) A power to investigate title might therefore be asserted as a necessary adjunct to rule 19.5(a) rather than as incompatible with it or made redundant by it.

A Common Law Right to Retain by Way of Lien?

Though having no contract with Spencer, and no right to detain the embroideries for the purpose of verifying title, SF was entitled to a quantum meruit for its work. Furthermore, the work was an improvement of the embroideries for purposes of generating a common law lien. 'Cultural improvement' sufficed for this purpose and such improvement had clearly occurred.
   ... where, as here, the increase in value is both financial and
   cultural it is inescapable that the embroideries have been improved
   .... Mr Franses had physically worked on the embroideries in
   inspecting and analysing them macro and microscopically. In
   addition he had showed them to other experts who did the same thing
   with the benefit of significant expertise. The expertise was added
   to the physical examination ... The embroideries and what is known
   about them are (and as of 2005 were) effectively indivisible; the
   Defendant could not return the embroideries without giving Mr
   Spencer the benefit of the work he had done ... The embroideries
   will never again be considered 19th century or stage props ... In
   my judgment, subject to [the Claimant's] other arguments, the
   Defendant was entitled to a lien over the embroideries."


It followed that SF did not commit conversion by declining to return the embroideries in response to Spencer's demand. SF was entitled to withhold them until paid a reasonable sum. The judge quantified this at 300 [pounds sterling] per hour for Mr Simon Franses and 100 [pounds sterling] per hour for his assistant, totalling 80,750 [pounds sterling] plus VAT. SF had sufficiently particularised the sum due and had never waived the lien. Spencer had never made a sufficient tender.

Summary of Findings

1. The right to detain for reasonable investigation of title can be exercised by a bailee. (7)

2. But a bailee has no such right in respect of matters of which he had notice for an unreasonably long period before he sought to exercise the right.

3. And he must in any event exercise the right in good faith and with reasonable pertinacity.

4. Here there was no contractual or common law right of detention for purposes of inquiry.

5. SF was however entitled to retain the goods on the alternative ground of a common law possessory lien till their fees were paid.

6. In this respect the 'cultural improvement' resulting from SF's establishment of the true nature and vintage of the embroideries counted as an improvement for the purposes of engaging the common law of lien.

7. Being entitled to retain pending payment, SF had committed no conversion by refusing to surrender up the embroideries without payment.

Some Lessons to be Noted

Anticipate and seek to provide for potential bones of contention

The main moral to be drawn from Spencer v Franses is that bailees should confront in advance all potential points of doubt that might arise from their possession of the bailed chattel and from their relations with their bailors. In particular, contracts should be put in place to govern questions of title regarding valuable cultural objects. Mr Franses testified that he was accustomed to dealing on a handshake. Such gentlemanly informality can lead to corrosive conflict, copious correspondence and costly consultations with lawyers.

Accurately meter both time and money

As with other areas of potential dispute, fees and losses should also be crystallised and recorded in advance rather than reconstructed from battle positions after the event. This is true even where the bailee is on a result percentage, because if that basis for payment fails the bailee will need to show facts from which a quantum meruit can be figured. As the judge said of Mr Franses:
   Having observed Mr Franses over many days I have no difficulty in
   accepting that his record keeping does not measure up to his
   enthusiasm for research. (8)


Inquisitorial retention: activating Clayton v. Le Roy

Bailees wishing to assert the Clayton v. Le Roy power should be careful to activate it early, give timely notice of their position to the clamant, pursue their investigations keenly, consider rival methods of disengaging themselves (9) and avoid taking inconsistent positions. The invocation of Clayton v. Le Roy may lack conviction, for example, in the mouth of a possessor who is also claiming a lien and who might have released the goods, regardless of any title concerns, had the money been forthcoming. More generally, it could appear unconvincing to invoke Clayton v. Le Roy if one has previously and falsely said that one does not know where the object is, or if it is clear that one would have detained the chattel regardless of title, or if one has given no original reason as to why one is detaining the object and now seeks to recruit Clayton v. Le Roy as an afterthought. Clayton v. Le Roy is not a rabbit to be pulled out of the hat when every other pretext for withholding the goods has failed.

What's sauce for the goose ...

Bailors of cultural chattels can also learn from this case. They should get a written agreement with their bailees, determine in advance the fees payable in every contingency, tender the correct amount, formalise the bailee's estoppel into an explicit and overriding commitment on the part of the bailee, and commit the bailee to return on demand regardless of whatever emerges from other quarters. Careful consideration should also be given to the grant of indemnity or a guarantee of title where a reasonable bailor would offer that comfort to a bailee concerned about the ownership history of the chattel.

THE CASE OF THE SALT WATER PEARL

Issues of Value

Questions of credibility and proof occupied the court in Jabir v. H Jordan & Co. (10) The claim arose from the loss of a valuable pearl by the defendant jewellers to whom it had been bailed to be set into a ring. The defendants admitted liability but took issue on the question of damages. According to the Claimant these consisted of the $500,000 that he had paid for the pearl plus $150,000 profit that he would have made on a pre-agreed onward sale to a Mr Sathak.

Discretion and Informality

Again, the prevailing atmosphere was one of trust and informality. The Claimant testified, and the judge accepted, that:
   his was a business in which privacy and discretion, not to say
   secrecy, were of great importance, and that deals were commonly
   done faceto-face with other dealers and sealed with a handshake,
   often without documentation. The ultimate customers of dealers like
   himself are people of great wealth who will be anxious to preserve
   their anonymity.


In part the atmosphere of discretion prevailing in this particular milieu stemmed from the almost 'village' character of the market and the pervasive sense of honour among its practitioners and their clients. According to the trial judge, pearls of this nature are dealt with by:
   a very small number of astute and experienced men, most of whom
   will be known to each other and who will have traded or whose
   families will have traded with each other over many years. They
   rely on their considerable personal skill and judgment and they
   negotiate and deal with each other face-to-face in the light of
   their hands-on evaluation of the goods in question. As used to be
   the case in the City of London, they reach agreement with each
   other by word of mouth and handshake. Trust in each other is
   essential and I think it unlikely that a man would not have the
   confidence of those he deals with.


Upholding the Claimant's Valuation

Taking account of every relevant circumstance the judge upheld the claim, and the Court of Appeal upheld his decision. As Longmore L.J. observed, the Judge

(10) 13 Dec. 2010, upheld by the Court of Appeal [2011 ] EWCA Civ. 816.

was entitled to hold that the pearl was a saltwater pearl and he had found as fact that the Respondent had entered into genuine agreements. In the absence of any pleading of dishonesty, and where the bailee had made no application for specific disclosure of further documents, the Judge was entitled to form his own view of the claimant and those of his witnesses whose evidence was accepted. In Longmore L.J.'s words:

(2) The genuineness of Mr Jabir's agreements to buy and sell the pearl

16. The judge found as a fact that Mr Jabir did make genuine agreements to buy and sell the pearl. Jordans made no specific allegation of dishonesty but they were entitled to put Mr Jabir to proof and he surmounted that hurdle. Mr Jabir said (and the judge believed him) that there were other documents evidencing the sum of money he eventually received from Mr Ruff, but that there was no documentary evidence of legal export from Switzerland. The judge found that both transactions were genuine. Ms Day submits that the judge should not have found that the agreements were genuine because there was insufficient documentation evidencing the sales and because the prices in both the agreements were completely out of line with the evidence of comparable transactions given by the experts. She also submits that the judge never explained why the absence of proper documentation was not fatal to Mr Jabir's case when Jordans, as they were entitled to do, had put him to proof of the genuineness of the transactions.

17. As far as the absence of documentation is concerned, it is noteworthy that no application was ever made for specific disclosure of any documents evidencing the eventual payment by Mr Ruff to Mr Jabir which took account of the $500,000 due for the pearl which Mr Jabir said Mr Ruff had sold to him. The judge accepted in paragraph 9 of the judgment that more documentation could have been produced. Nevertheless he concluded that the transaction with Mr Ruff had taken place and the pearl had been paid for on the basis of the oral evidence of Mr Jabir and Mr Sathak. He declared himself satisfied that "in practice" pearls could be carried between countries in the EU without any customs declaration or other formality. His reasoning is set out in paragraph 10 of the judgment which I have read out. It is not, in my view, defective reasoning. Judges can often say little more than that having seen and heard a witness give evidence they believe him. This court cannot possibly reverse the judge and say that it is satisfied that the transactions were not genuine.

Avoiding the hair's breadth finish

The outcome in Jabir was favourable to the bailor but victory must have seemed a close run thing. Future bailors of valuable objects would do well to consider how, if the necessity arose, they would be able to prove the value of those objects, whether by reference to some onward sale or otherwise, following a loss by the bailee. In Jabir the bailee's receipt recited only the words "Intense orangey-pink pearl" together with the date of receipt, and the counsel for the bailee understandably cross-examined the bailor on what the judge described as "a suspicious paucity of paperwork". One wonders what result would have followed had Mr Sathak sued the Claimant for some onward-sale profit that Mr Sathak had expected to make. No less interesting is the possibility that the sale value of a jewel like this might be gauged on the strength of its ownership history or other 'celebrity value'. As the trial judge observed, "The provenance of a pearl, for example if it is royal or romantic, may considerably affect its price". But no court will take such matters on trust.

(1) [2011] EWHC 1269 (Q.B.). A full analysis of this case, including a detailed examination of its facts, will appear in a future issue of Art Antiquity and Law. The present account gives a holding summary of the salient points considered by Thirlwall J.

(2) On hearing the evidence Thirlwall J. accepted the Claimant's version of the circumstances in which he had come into possession of the pearl.

(3) Belize Attorney General of Belize & Ors v. Belize Telecom and Anor (Belize) [2009] UKPC 11, per Lord Hoffmann

(4) [1911] 2 K.B. 1031.

(5) In so deciding, Thirlwall J. held that SF was wrong to contend that the time available to a possessor for inquiry into a claimant's title is deferred for as long as the defendant has or believes it had a lien. Lien is distinct from title. Quaere whether this conclusion might be displaced where the bailor is deemed to warrant his/her title in support of the lien.

(6) In addition, the claimant must state the name and address of all known holders of interests.

(7) This conclusion was tentative and obiter. Quaere whether the right can be consensually excluded even where it might otherwise operate.

(8)[2011] EWHC 1269 (Q.B.) at para. 241. See also Jabir v. Jordan [2011 ] EWCA Cir. 816.

(9) E.g. by resort to CPR 19.5(a) (joining other parties with an interest in the goods) or to interpleader. A bailee can interplead without forfeiting its lien.

Norman Palmer, Q.C., C.B.E.; 3 Stone Buildings, Lincoln's Inn.
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Date:Oct 1, 2011
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