UK: Commissions – The Best Kept Secret?

Last Updated: 28 May 2013
Article by Adil Essajee

It is not uncommon in the art trade for the parties to a sale and purchase to remain anonymous and for there to be a number of agents/art dealers involved in the transaction. Of course, the agents/art dealers expect to receive a commission for their efforts. However, as recent cases show, problems can arise when there is a lack of transparency between the various parties and secret commissions are paid or received.

In the case of Spencer-Churchill v. Faggionato1, the seller, Lord Edward, instructed Mr Faggionato, an art dealer, to market his painting. Lord Edward specifically told Mr Faggionato that he did not wish to sell the painting to a dealer and, in particular, to a family of New York dealers known as the Mugrabis. In due course, Mr Faggionato informed Lord Edward that he had received an offer for the painting for US$6 million from a Floridian collector, whose identity was not revealed. Lord Edward was uncertain about accepting the offer and asked Mr Faggionato to make enquiries of the auction houses to ascertain what auction estimate they would put on the painting and if they would be willing to provide an auction guarantee. Mr Faggionato told Lord Edward that he had been provided with an auction estimate of US$4-6 million with no guarantee. Relying on what he had been told and following Mr Faggionato's advice, Lord Edward accepted the offer of US$6 million from the Floridian collector and paid Mr Faggionato a commission of US$135,000.

It subsequently transpired that contrary to what Mr Faggionato had told Lord Edward, (1) he had not made any enquiries of the auction houses, (2) there had never been a Floridian collector, (3) the offer had, in fact, been made by Mr Mugrabi and (4) Mr Faggionato had received a commission (comprising a cash payment of US$125,000, a sculpture by Urs Fisher and a table by Jean Prouve with a combined value of US$400,000) from Mr Mugrabi, which he had kept secret from Lord Edward.

On the basis that the sale of the painting by Mr Faggionato's dealership was unauthorised and therefore void, Lord Edward applied for an injunction in order to prevent Mr Mugrabi's offshore art holding company from dealing with the painting until the dispute between the parties was determined. The judge found in favour of Lord Edward and granted the injunction on the basis that he had real prospects of succeeding in his claim.

A similar issue arose in the case of Accidia v. Simon C. Dickinson Ltd 2. In this case, the issue before the court was whether a dealer, Simon Dickinson, could keep a secret commission of US$1 million for arranging the sale of a drawing by Leonardo da Vinci between parties who wished to remain anonymous.

The agreement between the seller, Accidia, and its agent, Daniella Luxembourg, provided that the seller should receive a net return of US$5.5 million and allowed its agent to make a commission of up to 10% on top of this amount. The agent approached a dealer, Simon C Dickinson Ltd, in order to help with finding a buyer. At the time of the transaction, the seller was not told (a) the identity of the buyer, (b) what price the buyer paid, or (c) the fact that the dealer would be paid a commission which would be deducted from the sale proceeds. At trial it was argued, on behalf of Simon C Dickinson Ltd, that it was standard practice in the art market for the seller to be paid a 'return price' on the basis that a dealer might sell at any price above the return price and retain the difference as his commission without having to inform the seller (or the seller's agent) of the actual price paid by the buyer. The Judge, Mr Justice Vos, rejected this argument and held that Simon C Dickinson Ltd would have to account for the US$1 million commission plus interest (subject to an allowance of US$200,000 plus ÂŁ2,500 for its reasonable remuneration and expenses) on the basis that it was acting as an agent for the seller (its principal) and could not make a secret commission in circumstances where it had not been disclosed to the seller or authorised by it.

These cases highlight the problems inherent in the practice of paying large commissions in connection with the sale and purchase of art. The judges in both cases were reluctant to consider whether secret commissions were a standard practice in the art market on the basis that it was unlawful and unreasonable unless the agent/dealer had obtained the seller's consent, or the agent/dealer accounted for the secret profit to the seller. Indeed, in the Accidia case, Simon C Dickinson Ltd was even refused permission by the court to adduce expert evidence on whether such practices were standard in the art market.

These cases serve as a cautionary tale of the issues that can arise where there is a lack of transparency between the parties involved. The problem is that many dealers regard receiving a secret commission as acceptable practice and are oblivious to the fact that it is illegal not to disclose this to their principal. This is illustrated by the Spencer-Churchill case, where Mr Mugrabi (an art dealer) openly admitted to paying the secret commission, which he regarded as the norm in the art world. By contrast, the evidence of Lord Edward (a collector) was that he considered the secret commission to be highly irregular.

In legal terms, the practice of paying and receiving secret commissions carries huge risks for those involved with the transaction. Not only can the dealer be ordered to repay the secret commission to his principal if he is found liable, but paying an undisclosed commission could also be construed as a bribe and lead to criminal sanctions (imprisonment or a fine) under anti-bribery legislation. If it can be shown that the party paying the commission knew that it was being paid to an agent who would keep it secret from his principal, that party may be ordered to repay the amount of the commission to the agent's principal, and the transaction could be void on the basis that the agent had no authority to act on terms where he would receive a secret commission.

Transparency between the parties about commission (preferably recorded in writing) can prevent such problems from arising and minimise the risk of costly litigation. As the judge noted with some sympathy in the Accidia case, two 'innocent parties', namely the art dealer and seller, had been forced to litigate the matter because of the fact that the seller's agent had failed to disclose the commission arrangements to the seller.

Footnotes

1. Lord Edward Albert Charles Spencer-Churchill v. Faggionato Fine Arts Limited & Ors [2012] EWHC 2318 (Ch).

2. [2010] EWHC 3058 (Ch).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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