The Court of Appeal has ruled on an appeal by Fairlight against a first instance decision relating to the sale of a painting entitled "Portrait of a Gentleman", allegedly by Frans Hals (see here). The issues on appeal surrounded the question of whether Fairlight was bound by Sotheby’s rescission of the sale contract.

In summary, Sotheby’s could accept a buyer's rescission of a contract for the purchase of the painting because of doubts about the painting's authenticity. Sotheby's could not have relied on a proviso preventing rescission where the description of the painting accorded with "generally accepted views of scholars and experts" because there was no generally accepted view on the authenticity of the painting at the time it was sold.

In 2011, Sotheby’s facilitated the sale of the painting by Fairlight and another party, MWL, to EPC Nevada LLC. The sale contract contained provisions allowing for rescission and return of the painting and the purchase price if it turned out to be a counterfeit. In 2016, Nevada actioned the rescission provisions after expert opinion found the painting to be inauthentic. Sotheby's returned the purchase price to Nevada, and Nevada returned the painting.

The parties disagreed on the question of whether Fairlight and MWL, were obliged to reimburse Sotheby's for the returned purchase price. MWL settled and paid $4.2 million. Sotheby’s subsequently recovered $6.55 million from Fairlight at trial. Fairlight appealed the first instance decision on the four grounds considered below, and generally argued that the judge made substantive errors of law; repeatedly failed to give adequate reasons for his conclusions; and reached perverse conclusions on the facts or failed properly to weigh relevant evidence.

Ground 1: Sub-agency and privity

Fairlight contended that Sotheby’s was its sub-agent for the purposes of the sale, and because of this, there was no privity of contract between them. Fairlight also alleged that MWL had delegated authority to Fairlight to sell the painting to Sotheby’s.

Nevertheless, the Court of Appeal upheld the first instance decision that both owners of the painting, Fairlight and MWL, were committed as principals to the consignment of the painting to Sotheby's. Although Fairlight was not named in the contract concerned, it did not matter because it is often the case, particularly in the art world, that parties are keen to remain anonymous. The parties were themselves familiar with such an arrangement. As such, there was no agency relationship.

Ground 2: Partnership

The trial judge agreed that Fairlight and MWL were carrying on a statutory partnership for the purchase and onward sale of the painting.

The Court of Appeal doubted, based on the material it had seen, that it would have concluded that there was such a partnership. In particular, there was little or no clear evidence of a "business in common" between the parties. The Court of Appeal did not need to consider this ground any further, as it had already explained that facts did not support “the idea that Sotheby's was a sub-agent to which MWL delegated functions within an agency between MWL and Fairlight.

Ground 3: GAV Proviso and expert evidence

The concerned the trial judge’s construction of the GAV Proviso in the contract between the owners of the painting and Sotheby’s. The GAV Proviso was a proviso for Sotheby’s protection, as it narrowed the circumstances in which Nevada could rescind. The Court of Appeal did not consider that the first instance judge erred in his construction of the GAV Proviso or that his finding on the evidence was perverse.

The wording was:

"This offer to rescind does not apply if, at the date of this Agreement, the Property description in this Agreement accords with generally accepted views of scholars and experts or indicates that there is a divergence of such views …."

The trial judge had held that the words "generally accepted views of scholars and experts" were to be given their ordinary meaning in context. The drafting was quite poor and invited argument. However, the ordinary meaning of the words showed that the question was whether the description of the painting was one that would be generally accepted by scholars and experts at the time. Further, was there a consensus (i.e. a generally held view not requiring unanimity) among scholars and experts at the time? There may be an absence of consensus either because of a divergence of views or because there has been insufficient time for a generally accepted view to have formed. The judge had also said that the words did not set a "headcount or a majority" or require "a weighting between one scholar and another or between a scholar and an expert". The views that were material were views that were considered and the result of the application by scholars and experts of their expertise.

It can take time, after first discovery of a work, to reach the point where there are "generally accepted views of scholars and experts". There was no generally accepted view of the authenticity of the painting at that time. Therefore, the proviso did not apply.

The Court of Appeal pointed out that this produces a commercially sensible method of risk allocation for parties dealing with a newly discovered work: the buyer does not take on the risk of the description of the work being inaccurate and the work being a counterfeit. The seller has the benefit of Sotheby's guarantee to attract buyers.

The first instance judge's finding of fact was made by reference to the extensive material and evidence heard and considered by him and therefore was not perverse.

Ground 4: Nevada as subsequent purchaser

Nevada had transferred ownership of the painting from it to a third party after it had purchased it from Fairlight and MWL, but had subsequently transferred title to the painting back into its ownership. Because of this, Fairlight contended that Nevada had not been entitled to rescind the sale contract.

Two GAV provisions respectively stated:

"This guarantee will not be assignable and will only be applicable to the original buyer and not to any subsequent owner or owners who acquire an interest in [the painting]."; and

"This offer to rescind is only made to you personally and may not be transferred or assigned in any way by you."

Nevada invoked the guarantee in 2016. It was and remained the "original buyer". The Court of Appeal said that those words were clear and unqualified: there was no suggestion that the "original buyer" only had that status for so long as it remains the owner. The first guarantee was for the personal benefit of the party first purchasing the painting, (i.e. Nevada), which was then fully entitled to rely on it. It conferred a (limited) personal (non-assignable) right on Nevada. The "subsequent owner" provision sought to prevent a third party to whom the original buyer had sold the painting from subsequently invoking the guarantee against Sotheby's. That was not the case here and the Court of Appeal dismissed this ground of appeal.

As is often the case, the decision illustrates the need for tight drafting of contracts, especially when dealing with artworks about which provenance challenges may be made, and drew out some important principles when establishing a sub-agency in the context of the sale of goods.