This article first appeared in Entertainment Law Matters, a Frankfurt Kurnit legal blog.
This article first appeared in Cyberlaw Currents, a Frankfurt Kurnit legal blog.
A federal judge has dismissed a lawsuit alleging that Christie's, Inc. ("Christie's) botched an auction of a world-class collection of vintage wines. The court held that the auction house owed no fiduciary duty to the collector beyond the terms of the consignment agreement the parties signed, and that the consignment agreement precluded the collector's damages. The decision is a cautionary tale to collectors, as auction houses are limiting by contract their fiduciary obligations as agent for the seller.
Plaintiff Christen Sveaas is a Norwegian businessman and one of the top wine collectors in the world. In 1997, Sveaas hired Christie's to auction off some of Sveaas's wines in London; that auction was wildly successful, reaping over $11 million in sales. In 2006, Sveaas approached Christie's to host another auction on his behalf – this time to sell some of his very rare and expensive vintage wines from Burgundy and Bordeaux. The parties discussed potential dates and venues for the auction, as well as the selection of wines to be included in the sale. Christie's initially proposed to hold the auction in September 2007, but the auction was delayed to November 3, 2007. Sveaas claimed that Christie's insisted that the sale be held in its new auction house in Los Angeles, even though that was not the best site for the auction.
On July 24, 2007, Christie's and Sveaas entered into a consignment agreement (the "Agreement") to sell the wines that Christie's selected from Sveaas's collection. Under the Agreement, Christie's had "complete discretion" over the manner in which the auction would be conducted. The Agreement authorized (but did not require) Christie's to take such action as it "deem[ed] reasonable to build interest in the Property prior to the sale." The Agreement also provided that "[i]n no event shall Christie's be liable for the failure of any Property to be sold at [Christie's] estimated or expected price or to reach the reserve price [the confidential minimum price below which the Property will not be sold]." Finally, the Agreement provided that neither party was liable for "special, consequential or incidental damages."
At auction, many of the wines did not sell or sold significantly below market value. Sveaas claimed that Christie's failed to promote the sale properly – among other things, it did not send out the auction catalogue to potential buyers on time, resulting in a low auction attendance. Sveaas also claimed that Christie's delayed the auction unnecessarily, holding it at the tail-end of a crowded auction season, and (unbeknownst to Sveaas) just days before another wine auction hosted by Christie's in Geneva.
In 2010, Sveaas sued Christie's, seeking to recover the $5 million he claimed he lost from the auction. His suit alleged three causes of action against Christie's: (i) breach of fiduciary duty, (ii) breach of contract and (iii) breach of the implied covenant of good faith and fair dealing. Christie's moved to dismiss the complaint in its entirety, and on April 20, 2011, United States District Judge Laura Taylor Swain granted that motion.
As to the breach of fiduciary duty claim, Judge Swain held that, prior to entering into the Agreement, Christie's owed no fiduciary duty to Sveaas. The court held that the decisions made prior to the parties' execution of the Agreement – namely, the date and location of the auction – were made at arms' length, rather than by Christie's as agent for the benefit of Sveaas as principal, and thus were not actionable.
The court held that Sveaas sufficiently alleged the existence of a fiduciary relationship between himself and Christie's under the Agreement. Under general principles of agency law, an auctioneer acts as the agent of the consignor, with a duty to act as the consignor's fiduciary as to matters within the scope of the agency. However, the court held that, in this case, the scope of the relationship was circumscribed by several provisions of the Agreement, including the provision that gave Christie's "complete discretion" over the manner in which the auction was conducted, and the provision that permitted, but did not require, Christie's to take such action as it "deem[ed] reasonable to build interest in the Property prior to the sale." The court held that, even if these provisions could be interpreted to somehow leave open the possibility that Christie's could have breached its fiduciary duty by failing properly to promote the sale and failing to disclose the Geneva sale, Sveaas still could not recover because explicit provisions in the Agreement (discussed below) precluded Sveaas's damages claim.
The court next dismissed Sveaas's claim for breach of the implied covenant of good faith and fair dealing on the grounds that it was duplicative of the breach of contract claim. On the breach of contract claim, the court held that, under the Agreement, Christie's had "considerable discretion" in marketing and conducting the auction. Under New York law, where a contract contemplates the exercise of discretion, a party cannot exercise that discretion in a manner that is arbitrary, irrational or in bad faith. The court held that Sveaas's "allegations that Christie's did not promote the auction early enough, widely enough or to the most suitable potential bidders, are insufficient to state a claim that Christie's acted in a manner that was arbitrary, irrational or in bad faith when considered in light of the positive efforts Christie's did undertake to build interest in the auction." Accordingly, the court dismissed the breach of contract claim.
The court also dismissed all of Sveaas's claims on the alternative grounds that he had no viable claim for damages. As to the wines that were not sold, the court held that Sveaas could not recover any damages because he can offer them for sale again. As to the wines that sold below the expected price, no recovery could be had because the Agreement provided that "[i]n no event shall Christie's . . . be liable for the failure of any Property to be sold at [Christie's] estimated or expected price or to reach the reserve price." In making this ruling, the court rejected Sveaas's argument that this provision does not disclaim liability for Christie's breach of its contractual and fiduciary obligations. The court also ruled out any other theories of damages, as the Agreement explicitly disclaimed recovery of "special, consequential or incidental damages."
In light of this ruling, sellers with sufficient bargaining power would be wise to negotiate reserves for individual lots or a minimum guarantee for the entire auction collection with an auction house prior to consignment.
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