13 June 2018
A recent decision of the New York State Supreme Court has been read as a warning to auction houses that if they publish fraudulent misrepresentations about the authenticity and provenance of artworks in their catalogues, their liability may extend beyond buyers at auction to subsequent purchasers of the artworks. The issue would be whether the auction house could “reasonably anticipate” that the subsequent purchaser of the artwork had relied upon the published information.
The Court in Shafrazi and Orsi v. Christie's decided to permit the claimants to continue an action against Christie's for alleged fraud and fraudulent inducement though it struck out the claimants' other causes of action (including breach of contract) against Christie's as being time barred.
The dispute arose when Guido Orsi purchased a painting described as being by Jean Michel Basquiat from the Tony Shafrazi Gallery in 2001. The Gallery had itself acquired the painting from Christie's (New York) in a 1990 auction. When the Gallery sold the painting to Mr Orsi it is alleged that it was described as “Purchased from Christie's Contemporary Art, Friday 23, 1990, Lot 176”, and that Mr Orsi relied on Christie's representation in the catalogue that the painting was an authentic work of Basquiat.
In 2006, the Basquiat Committee advised Mr Orsi that the painting was counterfeit. Mr Orsi and the Gallery proceeded to sue Christie's. They alleged that Christie's fraudulently represented the painting to be an authentic Basquiat, despite requests by two members of the Basquiat Committee to withdraw the painting from the 1990 auction because, the Committee members claimed, the painting was counterfeit. The claimants seek damages of $2 million from Christie's – the alleged current value of an authentic Basquiat painting.
The New York State Supreme Court observed that the claimants had submitted evidence that “art purchasers rely on the expertise of prestigious auction house[s]” which have been termed “market maker[s]” and that “when Christie's provides a warranty concerning the authenticity, or provenance of a painting, the custom and practice of the art industry is that the provenance of the work of art has been firmly and permanently established”. The Court concluded that reliance by Mr Orsi on Christie's warranties of authenticity and provenance was therefore “sufficiently alleged” as was the claimants' allegation of fraud.
Significantly, the Court ruled that the potential remedies available for fraud include recovery of the current fair market value of the artwork as well as traditional measures of damage for fraud, which are normally limited to the actual pecuniary loss sustained by the claimant – the so-called ‘out of pocket' rule. The Court also suggested that punitive damages against Christie's might be available if the claimants prevailed on their claim of fraud. The case continues.
It is rare for galleries and art collectors to allege acts of fraud by auction houses and even rarer for them to succeed on such an allegation at trial. It remains to be seen whether the claimants will be able to convince a jury (should the claim go to trial) that Christie's acted fraudulently in their sale of the painting. Whatever the outcome of the proceedings, the New York State Supreme Court's decision would seem to widen the potential liability of auction houses, where fraudulent misrepresentation is involved.