Multi-million-dollar transactions involving real estate, loans, or investments are virtually always governed by thorough and comprehensive contracts negotiated and drafted by lawyers.  Why, then, are such agreements rarely used in connection with the purchase and sale of high-end art?  A recent decision in a federal lawsuit arising from the $17 million sale of a Mark Rothko painting highlights that the art market’s seemingly ubiquitous practice of using one-page invoices, rather than adequate written contracts, invites burdensome—and potentially avoidable—litigation.

When Marguerite Hoffman and her husband bequeathed their art collection to the Dallas Museum of Art, the museum celebrated with an exhibition highlighting the works, including a stunning Rothko.  Soon after the exhibition, Hoffman’s husband passed away untimely, and Hoffman decided to sell the Rothko (as permitted by the terms of the DMA bequest).  For a number of reasons, Hoffman sought to keep the sale strictly confidential, and she thought she had a better chance of doing so if the work were sold privately, rather than at public auction. Hoffman’s agent then contacted the New York gallery L&M Arts emphasizing the need for discretion and confidentiality.  L&M soon identified an undisclosed buyer of the work for $17.6 million, and assured Hoffman that the work would “disappear” into a “very private” collection.  In the one-page letter agreement governing the sale, the parties agreed “to make maximum effort to keep all aspects of this transaction confidential indefinitely.”

Sometime in 2009, the buyer decided to sell the Rothko at auction through Sotheby’s.  Hoffman claims that the head of L&M, Robert Mnuchin, never mentioned to Sotheby’s the confidentiality provision contained in the underlying letter agreement.  In the months preceding the auction, Sotheby’s promoted the Rothko with a press release and other promotional materials, including photos and statements linking the painting to the DMA’s exhibition (although the Hoffmans were never listed by name in the work’s provenance).  As buzz mounted on the eve of the auction and the art world learned that the Hoffmans’ Rothko was being offered for sale, Hoffman sued L&M, the buyer, and others for breach of contract.  The Rothko sold for over $31.4 million ($13 million more than the price Hoffman had received in 2007).

In a recent decision, a federal district court denied the parties’ cross-motions for summary judgment, holding that a reasonable jury could find that L&M’s actions—including its failure to fully inform the buyers of their confidentiality obligations under the letter agreement, and L&M’s failure to inform Sotheby’s of the same—had been a violation of their contractual duties to use “maximum effort” to keep all aspects of the sale confidential.  The court concluded that a reasonable jury could find that the buyer breached the contract by selling and promoting the painting in the manner he did at a prominent public auction.  The court also upheld Hoffman’s theory of damages, finding that she may be able to convince a jury that she could have sold the Rothko painting for more than $17.6 million in April 2007 had it been offered at public auction, rather than privately, including the confidentiality restrictions.

This case brings into stark view the need for buyers and sellers of fine art to insist on sound legal advice and clear, detailed contracts before entering into major art transactions.  Hoffman, for example, placed an extremely high value on maintaining her privacy and keeping the existence and terms of the sale confidential (a difficult goal given the high-profile nature of the work), yet the transaction was governed only by a basic one-page letter agreement, with the vital promise of confidentiality reduced to a commitment “to make maximum effort to keep all aspects of this transaction confidential indefinitely.”  The parties left the drafting and execution of the agreement to their respective agents, who (like most galleries and dealers) probably did not involve legal counsel in the process.  If the art world harbors any lingering reluctance to conduct art transactions with the legal formalities and contractual diligence they require and deserve, this case highlights the need for change.