Buyer Beware!

The cavalier approach in the art market to signing contracts is a matter that causes constant dismay to lawyers who observe the industry. Most people would never dream of purchasing a piece of real estate for a seven-figure sum without a written contract. They would invariably appoint lawyers, undertake a title search and other detailed due-diligence steps, and ensure their rights are protected through a detailed sale contract. Yet, when it comes to purchasing a piece of artwork for a similar sevenfigure sum, the same person is often content to rely on a handshake or, at most, a one-page invoice.

The importance of comprehensive written contracts between art dealers and collectors for the purchase of high-value works of art was highlighted by a recent New York case involving the world’s most prominent gallerist, Larry Gagosian, and high-powered collector Ronald Perelman. The case also contains some valuable—and surprising—practical lessons for all collectors purchasing from galleries.

The dispute in the case centered around the purchase by Perelman from Gagosian of a selection of artworks, including in particular a Jeff Koons Popeye sculpture and a painting by Cy Twombly. Perelman purchased the Koons from Gagosian, the artist’s primary dealer, for USD 4 million, apparently with an intention of “flipping” the work for a quick profit—most likely by returning the work to Gagosian for a resale at some point in the near future. However, Perelman was not aware that Gagosian had entered into a resale-rights agreement with Koons, which would give Koons a significant share of any profit if Gagosian resold the piece. This, therefore, gave Gagosian little incentive to facilitate a sale of the Koons.

Perelman then wanted to purchase a Cy Twombly painting that had an original price of USD 8 million, and began haggling about the price with Gagosian. By the time Perelman had made up his mind and returned to the gallery to purchase the Twombly, he was told the piece had already been sold to the Mugrabi family, and was now only available at an increased price of USD 11.5 million. After some further negotiation Perelman ultimately agreed to buy the painting for USD 10.5 million. Perelman had wanted to finance the purchase by swapping some other works with Gagosian, including the Koons, but Gagosian refused to take the Koons in light of his resale arrangement with the artist. After this fact came to light, relations deteriorated between Perelman and Gagosian.

As a result, Perelman sued Gagosian, alleging that Gagosian had committed fraud by artificially inflating the price of the Twombly painting, essentially alleging that the sale to the Mugrabis was “fake.” Perelman also argued—given the long-term “trusted advisor” relationship he enjoyed with Gagosian, and the gallerist’s superior knowledge of the art market—that Gagosian was in a position of fiduciary vis-.-vis Perelman.

A fiduciary relationship is a special relationship in law, and is generally limited to relationships of reliance and trust such as between trustee and beneficiary, lawyer and client, or in the art world, between an artist and their dealer. The fiduciary relationship carries with it onerous duties, including the duty to avoid conflicts of interest, to avoid making a secret profit, and duties of loyalty, good faith and full disclosure.

Perelman argued that, at the time Perelman bought the Koons work for USD 4 million, Gagosian knew that Perelman intended to resell it at a higher price. Perelman claimed that, in entering into the side deal with Koons, and failing to notify Perelman of this arrangement in advance, and by profiting at Perelman’s expense as a result, Gagosian had breached these fiduciary duties.

Given the personalities involved, it was inevitable that the case would attain notoriety, and indeed the case produced plenty of fodder for the tabloid media concerning the lifestyles of rich and famous art collectors and their gallerists. But it was the outcome of the case that proved most interesting.

In a judgment announced at the beginning of this year, the New York court threw out Perelman’s case. The court ruled that the transactions in question were negotiated at arm’s length, by a sophisticated buyer with long experience of dealing in the art market, and therefore the rule of “caveat emptor” (or “buyer beware”) should apply. In addition, the court found that there was no fiduciary relationship between the collector and his dealer—an important outcome, as a finding that the relationship carried with it fiduciary obligations would have called into question numerous aspects of common market practices for gallerists.

The court also highlighted a number of important lessons for collectors in purchasing valuable artworks from galleries and dealers.

The most crucial takeaway is that collectors cannot rely on statements about the value of art made by an art dealer. The court held that such statements were “non-actionable opinion” and could not support a fraud claim. This may come as a surprise to many collectors who rely on dealers to tell them what a particular piece is “worth”—and more importantly, what it might be worth in the future. Buyers be warned! Such statements are, as the saying goes, not worth the paper they are written on.

Collectors should conduct their own detailed due diligence investigation into any major purchase. Consider consulting with an independent professional, such as an art appraiser, to obtain a reliable assessment of the piece’s value.

The matter of Perelman vs. Gagosian serves as a reminder to all market participants involved in highvalue art transactions that a comprehensive contract is essential. In this case, Perelman’s underlying assumptions and motivation for the purchase (that he could resell the Koons work quickly through Gagosian) could not form the basis of a legal claim because they were not stated clearly in the contract. Only when a contract clearly states the expectations and understandings of all parties will their rights and interests be fully protected by the law.