Where the seller of antique furniture or a work of art provides false information about its authenticity or provenance, and the buyer relies on the statement in acquiring it, the buyer may be entitled to rescind the contract, return the piece and reclaim the price or retain the piece and sue for damages.
To advice the buyer which remedy to choose, one has to pay attention to several factors:
The choice depends on the relationship between the market value of the object supplied and the market value the object would have had, if the statement had been true. If the price paid is high and the difference in values relatively slight, the buyer may prefer to rescind and reclaim the price rather than claim damages. In contrary, if the value of the good supplied is much lower than that of the a genuine item with an impeccable provenance, the buyer may prefer to sue the auction house for damages.
Then again, the choice may depend on the state of mind of the buyer.
In the case of fraudulent misrepresentation by the seller, the buyer can choose between rescision and damages for the tort of fraud or deceit. Damages for fraud cover a wide range of detriments: all loss caused by the fraudulent statement, whether forseable or not will have to be repaid.
In the case of negligent misrepresentation the buyer can also choose between rescision and damages. The action for damages can be made on the ground of the Misrepresentation Act 1967 or on the grounds of the tort of negligent misstatement (Hedley Byrne v Heller & Partners Ltd).
In the case of a purely innocent misrepresentation, the buyer can rescind the contract, there is no legal ground to sue for damages.
The sale of unique art objects at auction has changed dramatically over the past thirty years. Auction houses have grown from wholesale suppliers for art dealers to huge, multinational concerns that market art directly to the public. As the character of auction houses has changed, the traditional agency and sales rules governing auctions have become increasingly inadequate.
At one time, the auctioneer's duty to his principal, the consignor of the goods, was the most important of his duties. Today, the auctioneer's duties extend not only to the consignor, but also to shareholders, bidders at auction, and the public. Laws regulating auctioneers have arisen from numerous sources outside of agency law. For the most part, they derive from basic societal assumptions about the auction process and what it should aspire to be. They rely on a fundamental vision of the auction as a unique market with the ability to generate uniquely optimal prices for its participants if it operates smoothly.
Until the past century, an auctioneer was regarded primarily as an agent of his consignor. As such, he was governed by the rules of agency. Today, however, the rules of agency are insufficient to describe the many legal relationships and obligations in which the art auctioneer is involved. He has duties, not only to his consignor, but also to the bidders at the auction, his own shareholders, and the general public. These new duties
have been inspired by sources as varied as the law of sales, consumer protection law, and corporate law. In effect, this diversity means that no single, explicit, legal theory underlies the regulations governing auctioneers.
Agency law is rapidly becoming an inadequate doctrine for the governance of large art auction houses. Principles of agency, developed in the context of one-on-one relationships between masters and servants, may be inherently inapplicable to the complex market inhabited by modern auctioneers.
The auctioneer's obligations and liabilities to the bidder and to the public have no place in his traditional agency relationship with the seller. The number of regulations governing the auctioneer's behavior toward others brings into question the strength of his duties toward the principal. In many cases, the rules imposed on the auction process harm the consignor in order to benefit potential buyers and the public. For example, the curtailment of loans to buyers ensures that no buyer will have an undue advantage during the bidding. It also means that consignors may not receive as much for their works as they would have received if the bidders were financed by the auctioneer.
The "core legal concept" of an agency relationship implies a relationship "in which the principal retains the power to control and direct the activities of the agent. Typically, the principal sets the ultimate objective and general strategy for the agent to pursue, occasionally specifies details of the agent's behavior, and stands ready to countermand specific acts of the agent."
Modern consignors of art have very little control over the actions of their auctioneer agents. Virtually the only power they retain is that of withdrawing their work before auction and setting the amount of the reserve (usually that suggested by the auctioneer). Each auctioneer serves thousands of consignors each year, and it would be absurd to believe that each consignor is represented with the same "diligence, zeal, and disinterested exertion." This agent is huge, powerful, and far more knowledgeable than most of its principals in the area of the agency. The *731 agent is not even a person, but a multi-national corporation. Art auction houses and their consignors simply do not fit traditional assumptions about agents and principals.
Professor Robert Clark argues that principles of agency law should no longer be applied to modern corporate actors. In his view, corporations have outgrown the "face to face" nature of agency, and have become governed by a body of complex rules and laws which often incorporate agency principles, but do not entirely adopt them. Similarly, the auction industry would be well served by abandoning some of the agency rules which have hindered it.
The proposed set of auctioneer rules in Part VI is based on seven basic assumptions about the auction process in modern society. It does not attempt to apply the individual rules of a pre-existing legal doctrine to the unique auction context. In so avoiding, it seeks to remain truer to the popular vision of an "ideal" auction process.
The Auctioneer's Duty to the Buyer
The auctioneer's agency duty to the buyer has traditionally been considered subordinate to that owed to the seller. Courts and commentators seldom mention fiduciary obligations or duties of disclosure to the buyers of goods at auction.
Buyers suffer from having less choice about entering the auction market than sellers. In a market for unique objects, the potential purchaser must deal in the market the seller has chosen. If that market is an auction house, then the buyer is subject to the vagaries of auction practice whether he likes them or not. Sellers, on the other hand, enjoy more
freedom. They may consign their unique works to an auctioneer, sell through a dealer, or conduct a sale on their own. Because buyers are thus channeled into the auction arena, they may deserve some measure of protection beyond that of sellers.
Moreover, the auctioneer's agency duty to the seller is often coincident with the auctioneer's own best interest. Both are concerned with receiving the highest prices on as many works as possible. The buyer, on the other hand, is concerned with precisely the opposite: paying the lowest possible price. These two opposing tendencies cause the auction process to work by reaching an optimal price between their limits. Naturally, the auctioneer will desire to operate in his own best interest, contrary to his optimizing function stated by Assumption 1 (optimal price). As a result, the buyer may be short-changed by the auction process. Assumption 1b (ceiling price) responds to this threat, and recognizes that the buyer should receive legal protection against auctioneer misconduct.
The earliest buyer protections included restrictions on the conduct of auctions, such as the prohibition against by-bidding, and the limited agency of auctioneers to buyers. Today, they include sellers' warranties of title and authenticity, obligations of disclosure, and post-auction reporting. These protections, when taken together, form a substantial body of legal rights. Because bidder protections have arisen mainly from the basic assumptions about the auction process, many of them are retained in the set of proposed rules of auctioneer conduct set forth in Part VI.
A. Double Agency
The first attempt at protecting bidders at an auction arose as an extension of agency law. Until the fall of the hammer signifying the completion of an auction sale, the auctioneer is exclusively the agent of the consignor. Once the hammer falls, however, the auctioneer becomes an agent of the buyer as well. This double allegiance to parties with apparently adverse and divergent interests is one of the most unusual aspects of auction law.
Once the auctioneer becomes an agent of the buyer, he can no longer act adversely to the buyer's interests. For example, the auctioneer can not re-open the bidding and buy the property once the hammer has fallen on the buyer's lot. As agent to the buyer, the auctioneer theoretically owes the buyer duties of obedience, diligence, accounting, and fiduciary loyalty, just as he owes the seller. Courts, however, have reconciled these possibly conflicting duties by treating the auctioneer's duty to the buyer as more restricted than that owed the seller. Some courts have limited *733 the auctioneer's agency duty to the buyer to representing him in drawing up the sale memorandum and overseeing the transfer of goods to him.
B. Restrictions on By-Bidding
Assumption 1b (ceiling price) demonstrates the general public dislike of any practice that deceives. The ideal view of the auction process is one in which "each bid is an independent, bona fide offer by a person willing to purchase the item at the bid price, and bids are not entered on behalf of a consignor (or other person) to raise artificially the prices at which the item will be sold."
Among the "deceptive" techniques forbidden the auctioneer is the practice of "by-bidding," or entering fictitious bids to continue the upward spiral of prices on an object. This practice, also termed bidding "off the chandelier," "off the wall," or "out of the air," conflicts with Assumption 1b (ceiling price). It deceives bidders into thinking that others are vigorously competing for the same goods, inducing them to bid higher. The Supreme Court has roundly condemned by-bidding, stating that it "deceives, and involves a falsehood, and is, therefore, bad." The buyer is said to have been bidding "against a man of straw falsely set up by the auctioneer." Contracts induced after by-bidding are void or voidable by the buyer.
*734 C. Warranties
1. Warranty of Title
In addition to agency principles, rules of warranty impose duties on auctioneers. Section 2-312 of the Uniform Commercial Code provides that in a contract for the sale of goods, the seller warrants that the title conveyed is good. If a seller fails to give good title, the contract for sale can generally be voided by the buyer. Because the contract for sale is usually between buyer and seller, the auctioneer, acting only as an agent to both parties, is generally not liable for defects in the title of goods conveyed.
When an auctioneer fails to disclose the identity of the principal whose goods he is selling, however, the auctioneer becomes liable to the buyer under the warranty of title. This liability attaches even if the auctioneer acts in good faith or did not know of the title defect. The rationale for such liability is grounded in protection for the buyer while maintaining confidentiality in the agency relationship. With both an undisclosed seller and his agent immune to suit, the buyer would have no recourse if he received goods with defective title. Holding the auctioneer liable shifts the burden of the defective title away from the buyer. The auctioneer is held liable rather than the undisclosed seller in order to preserve the principal's confidentiality in the agency relationship.
The warranty of title may be avoided in a number of ways. First, it may be specifically disclaimed in the contract language. Second, it may be vitiated by circumstances which give the buyer reason to know that the seller or auctioneer does not claim to pass valid title. Third, an auctioneer may often avoid liability under the warranty simply by disclosing the name of the principal.
2. Warranty of Merchantability
An auctioneer is generally not liable for the condition of the goods he sells on consignment. If goods are advertised for sale "as is," then any claim the buyer has arising from the non-conformity of the goods must be brought against the seller, not the auctioneer. Courts have held that *735 an auctioneer has no duty to inspect or service "as is" goods, or to require the seller to do so.
An auctioneer can be held liable for defective goods, however, if he makes some express claim as to their quality or condition independent of the claims of the seller. For example, an auctioneer who pledges his own responsibility for goods or makes a claim as to their quality during the auction becomes liable for them if they do not conform. Likewise, claims which appear in an auctioneer's advertising or catalogs can often be interpreted as express warranties. The auctioneer has an affirmative duty to ascertain that the information contained in its sales catalog and announcements is accurate and comprehensive. Some courts have also held that an auctioneer can be held liable for breach of the implied warranty of fitness when the seller is undisclosed.
Provenance and authenticity are included in the condition of goods sold by an art auctioneer. Although not physical features, these attributes of a work are often essential to their value. In many cases, the warranty of merchantability covers the provenance and authenticity, as well as the physical condition of art works.
The historical position of auctioneers with regard to warranty policies has been one of strict disclaimer and caveat emptor. Sotheby's traditional Conditions of Sale provided that, "All lots are sold as shown with all faults, imperfections, and errors of description . . .[Sotheby's is] not responsible for errors of description or for genuineness or authenticity of any lot . . . Messrs. Sotheby make no warranty whatever."
*736 Until recently, such disclaimers were considered to be binding on all parties. With the adoption of Article 12-D (now Article 13) of the New York Arts and Cultural Affairs Law in 1966, however, doubt was cast on the effectiveness of such broad disclaimers. Article 12-D provided that giving a buyer of a work of fine art a certificate of authenticity amounted to an express warranty of the material facts of the certificate. The lower court decision in Weisz v. Parke-Bernet Galleries, Inc. further buttressed the buyers' position against auctioneers. That decision, reversed on appeal, held that the auctioneer's superior bargaining position obligated it to disclaim only in the clearest and most emphatic language.
That decision, among other factors, influenced Sotheby's, and later Christie's, to alter their warranty policies. In 1973, Sotheby's introduced a new authenticity policy for its New York sales. It automatically extended a five year guarantee of authorship for post-1869 works; and offered a five year guarantee that pre-1870 works were not counterfeits. Today, both Sotheby's and Christie's warranty policies retain this form.
Warranty rules create a presumption of deception on the party held liable. When a seller is held liable under a warranty, he is responsible for a condition of the goods about which the buyer was not aware. Whether the condition relates to the title or condition of the goods, the buyer is deemed to be cheated through a lack of information about his purchase. When a warranty is imposed on the seller, or he is prevented from disclaiming one, the cost of that misinformation is shifted away from the buyer as the deceived party. This aversion to deception is incorporated in our assumptions about the auction process. The perceived need for full disclosure (Assumption 4: disclosure) and the auctioneer's honesty (Assumption 1b: ceiling price) support the enforcement of strict warranty rules. Sotheby's and Christie's new warranty policies reflect these assumptions.
D. Obligations of Disclosure
Various doctrines govern the obligations of auctioneers to reveal information to buyers and potential buyers. As discussed above, rules of warranty govern an auctioneer's liability for facts relating to the title and *737 condition of goods. Other laws govern an auctioneer's duty to disclose facts about its sales and auctions.
For example, the New York City Consumer Code requires an auctioneer to state immediately after striking down a lot whether that lot was sold to a purchaser, or bought in for the owner. Such a requirement presumably allows buyers to gauge the demand for works similar to those they plan to bid on, further refining the price optimization process (Assumption 1: optimal price). To assist buyers before auction, the New York Consumer Code also requires auctioneers to disclose in their sales catalogs whether lots are subject to reserves, what their loan policies are, and whether guaranteed prices are to be used.
Post-auction reporting is also subject to regulation under consumer protection and fraud statutes. Auctioneers generally issue lists of works sold and their prices after each auction. The New York Administrative Code imposes criminal penalties for fraudulent announcements of this information. Such sanctions were imposed on Christie's after it issued a false press release in connection with the Cristallina case. The auctioneer reported that three, instead of only one, of the principal's Impressionist paintings were sold at auction. The New York City Consumer Affairs Department fined Christie's $80,000 and suspended the licenses of the Christie's officials responsible for the announcement.
(1990) 154 J.P. 997, 10 Tr.L. 1.
