Owners of artworks who are interested to sell these will typically sell at auction or through a dealer. One option is to "consign" a work for sale to a dealer, who provides his services against charging the seller/consignor a commission.
On 26 November 2010, the UK High Court rendered a judgment dealing with the obligations of an art dealer/consignee vis-à-vis the seller/consignor. Transparency is key. The art dealer paid a heavy toll for failing to observe sufficient transparency. He was required to pass on approximately USD 800,000 of an amount that he previously retained as commission to the seller/consignor. The case serves as a warning to dealers who operate in a world where seller and buyer often do not meet, and are unaware of each other's identity.
In 2006, the owner of a Leonardo da Vinci drawing, a foundation based in Liechtenstein (the seller), decided to sell its work of art. The seller commissioned Luxembourg Art Ltd. ("Luxembourg") in London to find a buyer. Luxembourg in its turn commissioned London dealer Simon C. Dickinson ("Dickinson") to assist in the contemplated sale. The seller estimated that the drawing could be sold for GBP 7,000,000, whereas Luxembourg and Dickinson rather estimated a price of GBP 3,000,000 was more feasible. Luxembourg was the point person for the seller, and broked a deal that provided that the drawing could be sold for USD 5,500,000 exclusive of a 10% commission, i.e. approximately USD 6,000,000 in total.
Dickinson found a buyer who was willing to pay USD 7,000,000 (approximately GBP 3,500,000) for the drawing. He notified Luxembourg accordingly. Dickinson indicated that he proposed to pass on USD 6,000,000 (approx. GBP 3,000,000) and retain the remainder as commission and to cover expenses. Luxembourg agreed to this proposal, but apparently failed to consult the seller. On 8 August 2007, Dickinson sold the drawing for USD 7,000,000. USD 6,000,000 was passed on to Luxembourg, and Luxembourg, in its turn, passed on USD 5,500,000 to the seller. After the sale was concluded, an issue arose in respect of the sales contract. The buyer questioned the authenticity and demanded a refund. The seller was notified and demanded to receive a copy of the sales contract that it had not seen before. At that time, the seller found out that the drawing had been sold against a price of USD 7,000,000, rather than USD 6,000,000. The seller refused to refund the buyer, and objected against the amount of commission retained by Dickinson, arguing that Dickinson's commission was included in the commission agreed with Luxembourg. The seller demanded the excess amount retained by Dickinson.
The UK High Court (Justice Vos) held that the documentation showed that Dickinson had acted for the seller as its agent. The court held that the seller had authorized a sale for a specific amount of USD 5,500,000, exclusive of a maximum of 10% as commission. When it became apparent that the prospective selling price deviated from the authorized selling price, the seller should have been consulted. That failed to happen. The court, furthermore, held that the seller should have been consulted in relation to the amendments to the commission agreement originally agreed with Luxembourg, for Dickinson to have validly retained the amount of commission he did.
In this respect, the UK High Court held that it was not satisfied that any custom or practice exists whereby are dealers agree with principals or their agents for a return price on the basis that the dealer may sell the piece at any price without informing the principal or his agent of that ultimate price or of the level of commission the dealer thereby received after passing on only the return price. Rather, the seller should have been informed about any reasonable offer.
The UK High Court held that a pricing arrangement carrying an undisclosed commission is unreasonable and unlawful. This would only be possible if it had been concluded with the fully informed content of the seller or the dealer accounted to the principal for the secret profit secured. It becomes apparent form the UK court's findings that Luxembourg in particular was held to have failed to observe the necessary transparency. Dickinson, on the basis of the arrangement with Luxembourg, had no authority to enter into the sale against a higher sales price - undisclosed to the seller - , and retain the excess as commission. In view of the fact that the sale had already taken place, the seller was entitled to ratify the sales agreement, without owing Dickinson the full amount of the commission. Dickinson was ordered to pass on to the seller the commission originally retained, with the exception of an amount of USD 200,000 for its own services.
The judgment is understandable, and can also be reconciled under Dutch contract principles. The seller who commissions an art dealer as an intermediary should be able to rely on the fact that the dealer operates under properly recorded terms, including clear terms in relation to sales price and commission. The case represents a cautionary tale for dealers to ensure clarity around their business arrangements. Dutch law imposes certain obligations on persons who accept a commission to sell an object (lasthebber met een opdracht tot verkoop). The dealer is well advised to assess which rules apply, and whether and to which extent alternative arrangements are permissible. Particularly in dealings with consumers/private individuals, who enjoy particular protection under Dutch law. The case about the Leonardo da Vinci drawing also illustrates that a conflict of interest can easily occur. The court was first required to establish in which capacity the dealer had acted: as agent for the seller or for the buyer. Disputes like these can be limited, when the dealer ensures that the arrangements are valid and properly considered, explained and properly recorded.
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