Peter Friedman
Lawyer
Ruling Imagination: Law and Creativity
Buying art? Buyer beware!
I teach Contracts. One funny thing about the topic is that the “law” that applies to any given transaction is the contract itself. In other words, if the words of the agreement (which can be written and/or oral) determine the outcome of a given situation, those words almost always control. There are very few “immutable” contract rules — that is, rules that cannot be changed by agreement of the parties to the contract.
Thus, much of teaching contract law concerns the interpretation of contracts and “default” rules — that is, rules that apply to situations the parties have not agreed about. Perhaps that is why I so often like using cases involving the sale of art in my classes — they so often require the understanding of the default rules. As Joshua Kaufman, a lawyer in D.C., recently pointed out in a talk at the Smithsonian Museum, art transactions typically involve the least paperwork of any sort of commercial transaction:
“The art business is unique,” Kaufman said, “in terms of paperwork and due diligence. It has the least amount of paper of any commercial transaction.” That means you go into a gallery, buy what you like, and the dealer hands you a receipt for your purchase. Perhaps you even get a little paper describing the provenance. But buyer beware! The art market is filled with complexities, especially when it comes to auction houses.
Buying art and then refusing to pay
The New York Times on Friday ran a story explaining that “Sotheby’s has filed a $16.8 million lawsuit against the art collector and Internet entrepreneur Halsey Minor for refusing to pay the auction house for three paintings he bought in May” (including “The Peaceable Kingdom and the Leopard of Serenity” by Edward Hicks (left)). According to the story, “Diana Phillips, a spokeswoman for Sotheby’s, said that Mr. Minor had told the auction house that he had not paid for the works because hewas owed money by other parties and could not afford to.” Halsey strenuously objected to the suggestion he couldn’t afford the paintings, explaining instead that he refused to go through with the sale because he didn’t know at the time of the sale that Sotheby’s had an interest in maximizing the amount he would bid because the paintings’ seller owed $11.5 million to Sotheby’s. According to the Art Law Blog, Mr. Halsey explained:
Did they have an economic interest in the painting they were showing me privately and touting, or did they not? Who knows, I still may have paid $9.6 mm for the painting, but at least I would have been able to take their scholarship/marketing in context and with a grain of salt.
When a broker shows you a home and sells you on its merits and you find out later the broker owned the home, the law has been broken and the process has been tainted. I am going to bet that when they have to finally cough up the documents and stop spouting nonsense they will have served in the dual role of auctioneer and secret undisclosed owner. And all else will have been long forgotten.
There are several problems with Mr. Halsey’s position. The first is that generally, unless a broker (of art or real estate) is acting as an agent of the buyer, the broker owes no duties to the buyer. In other words, the broker does not have any duty to explain its financial interest in the transaction. In fact, generally when you buy from a broker you know the broker is acting on behalf of the seller and that the broker’s fee will be depend on how high the selling price is. In short, a broker acting on behalf of a seller very often, if not almost always, has an interest in maximizing the sale price. He’s a salesman, and we know how to take the words of a salesman. Sotheby’s may be high end, but the truth of the matter is that it’s full of salesman whose products happen to be very expensive art.
In addition, according to the Times story, the sale of the paintings by Sotheby’s attracted a lot of attention at the time because of the financial problems of the paintings’ owner. It doesn’t stretch the imagination to suppose, therefore, that Mr. Halsey knew at the time of the sale that Sotheby’s had an even greater interest in the painting than a broker’s fee based on a percentage of the sale price.
Of course, whether he has the money or not Mr. Halsey may be trying to back out of a deal for an asset that, like most other assets these days, isn’t what it was worth at the height of the market (not that long ago, but a time that is rapidly fading from memory).