Secret commissions in the art world

I first wrote about dealers taking secret commissions in art transactions two years ago. Less than a year later, a New York state court held that Lisa Jacobs, a fine art dealer and private curator, breached the fiduciary duties she owed to a seller of an artwork entitled Future Sciences Versus the Man by Jean-Michel Basquiat, by pocketing a secret profit.

In or around late 2011, Jacobs had brokered the sale on behalf of Michael Schulhof who was acting as an executor of his mothers estate. Previously, Jacobs had worked as a curator and adviser for the art collection owned by the deceased Mrs Schulhof. On 25 October, Jacobs and the seller entered into an arrangement, the October Agreement, to sell the work for a minimum purchase price of $6m. On completion of the sale Jacobs was entitled to receive a $50000 fee.

Jacobs swiftly found a buyer for the work who was also a dealer, and reached an agreement for its sale at $6.5m. Soon after, Jacobs informed the seller that she had found a buyer prepared to pay $5.5m and she had a firm deal. Jacobs also told the seller that she would have to buy the work from Schulhof to maintain anonymity, which was important to the buyer, and then sell it on to them. Relying on Jacobss representations, Schulhof agreed to sell to her for $5.45m, taking into account the $50000 fee. Jacobs in turn sold the work to the buyer for $6.5m, making a $1.05m profit.

A year later the seller discovered the price for which Jacobs had sold the work and in 2013 sued her for breach of fiduciary duty, fraud breach of contract restitution and unjust enrichment. During the following years the seller unearthed more information and moved for summary judgment. Finding no issues of fact that would be liable to a judicial trial the court ruled in favour of the seller.

It held that the record clearly established that Jacobs made a series of misrepresentations to the seller: the long-standing relationship between Jacobs and Mrs Schulhof combined with the October Agreement meant that the broker owed a fiduciary duty to Mr Schulhof as executor of his mothers estate. It concluded that 'Jacobs, as a faithless servant, must account to [the seller] for the $1m of secret profits for the sale of the work' and 'forfeit the $50000 in compensation earned for the sale of the work'. Jacobs unsuccessfully appealed the trial courts decision. The Appellate Division affirmed the lower courts decision in all respects confirming that Jacobs's actions were those of a 'faithless servant'.

Unfortunately, the facts and outcome of this case are not unique. There is ample litigation on both sides of the Atlantic pertaining to secret commissions collected by agents who, when found out are held liable. As this case shows, the risk is not simply the liability to account for the secret commission. A finding of fraud can seriously prejudice the agent's reputation. Another risk is that the agent must forfeit their fee.

In the English case of Accidia Foundation v Simon C Dickinson EWHC 3058 (Ch), the High Court held that although Dickinson,s art dealership was not entitled to retain the undisclosed commission as agent for Accidia on the sale of a drawing attributed to Leonardo da Vinci, it was entitled to keep its compensation. The court dismissed the accusation of fraud aimed at Dickinson by Accidia and awarded the former compensation for its services in relation to the sale.

By contrast in Imageview Management v Kelvin Jack EWCA Civ 63 the Court of Appeal held that the former, as agent to footballer Kelvin Jack, had acted dishonestly by taking a secret commission, and was thus not entitled to any compensation for his services. The court opined that: 'The law imposes high standards on agents. Footballer's agents are not exempt from these. An agents personal interests come entirely second to the interest of their client. ... 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 further held that: 'The complete remedy is disclosure, and if an agent wishes to receive any kind of remuneration from the other side, and test whether it is honest or not, they have simply to disclose the matter to their own employer and rest on 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. Although it is true that a dealer who buys then resells an artwork is less likely to owe a fiduciary duty to the seller, their relationship history the dealers representations to the seller before the sale and the circumstances surrounding the transactions cannot be ignored.

If the parties to an agency relationship intend to alter the terms, for example by turning a dealeragent into a dealerbuyer on an arms-length basis, then the new arrangement should be recorded unambiguously. It should clearly state that this should replace the previous agency relationship and the new arrangement between dealer and seller should not be brought about by misrepresentations by either side.

The fundamental principles of agency law are similar in the UK and USA and the agent owes similar fiduciary duties to the principal on both sides of the pond, including but not limited to, loyalty and transparency. If Schulhof v Jacobs were tried in an English court, the outcome would likely be the same.

Determining the existence of an agency relationship, and whether the agent has breached their fiduciary obligations to their principal, are fact-intensive enquiries and as such the many cases on agency law in the USA and UK yield different outcomes. There is no formula to determine whether an agency relationship exists, but the main ingredients, include analysing the parties relationship, reviewing any written or oral agreements that have been made between them and examining their actual conduct throughout the course of their dealings.

Azmina Jasani is senior associate Art & Cultural Property Law Group writing on behalf of Constantine Cannon LLP ajasani@constantinecannon.co.uk