02 Nov 2017

Secret commission

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A recent case from the US is a reminder of the risks of art dealers making secret commission.

Lisa Jacobs, a fine art dealer, acted as agent for Michael Schulhof, a former head of Sony America. He was acting as executor of his late mother’s estate.

Jacobs brokered a deal in October 2011 whereby she agreed to sell an artwork called Future Sciences Versus the Man by Jean Michael Basquiat for a minimum purchase price of US$6 million. She was entitled to a US$50,000 fee when the sale completed. The agreement also provided that Jacobs was not entitled to “any fee from the purchaser, in cash or in kind.”

In November 2011, Jacobs found a buyer, another art dealer called Amy Wolf, who was willing to purchase the artwork for US$6.5 million. Jacobs informed Mr Schulhof that she had managed to get the buyer up to a price of US$5.5 million. He accepted this. Jacobs suggested that the deal be structured in two stages, stating that the buyer wished to remain anonymous. Mr Schulhof sold the work to Ms Jacobs for US$5.45 million. He believed that Jacobs would resell it immediately to the buyer for US$5.5 million (with Jacobs retaining her agreed fee of US$50,000). That was not the case. Jacobs had agreed with the buyer to sell the artwork for US$6.5 million meaning she pocketed a total of US$1,050,000.

In 2012, Mr Schulhof discovered that Jacobs had sold the work for US$6.5 million. In August 2013, he sued her for fraud, breach of fiduciary duty, breach of contract, restitution and unjust enrichment due to Jacobs’ misrepresentation that the purchase price was US$5.5 million, therefore allowing her to pocket an additional US$1 million.

After a long period of discovery, Mr Schulhof sought summary judgment. Jacob’s defence rested primarily on there being no fiduciary relationship between her and Mr Schulhof, presumably because she argued that she acted as principal in the sale and so would no longer owe a fiduciary duty to Mr Schulhof. The Court found in his favour on all claims, save for the unjust enrichment claim which was held to be duplicative of his breach of contract claim. Judgment was entered against Jacobs in the sum of U$1,050,000.

The decision is a reminder that courts (in this case, the US courts) are willing not only to make an art dealer liable to account for secret commission, but also that they repay the fee that was payment for their work.  In Schulhof v Jacobs there was also a finding of fraud which would likely impact upon a dealer’s reputation.

This case has echoes of an English case from a few years ago, Accidia v Simon C. Dickinson Ltd [2010] EWHC 3058 (Ch). The English court had to consider whether a dealer, Simon Dickinson, could retain a secret profit of US$1 million for brokering a sale of a Leonardo da Vinci drawing between two parties who wished to remain anonymous. The court found that Mr Dickinson was acting as agent for the seller and could not make a secret profit in circumstances where this had not been disclosed to the seller and had not been authorised.

Whilst the use of a net return price mechanism and hence the opportunity for an agent to make an additional return have been commonplace, there are legal risks. Legal proceedings could be commenced to repay the commission to the principal and there are questions over whether an undisclosed commission could constitute a bribe. The more transparent the deal, the better.

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Roland Foord

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