England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice, 7 Rolls Building, Fetter Lane, London EC4A 1NL
		7 August 2012

MR ROBERT HAM, QC:

Introduction

1. This claim relates to a painting ("the painting") called Museum Security (Broadway Meltdown) by Jean-Michel Basquiat (1960–88). By the application before me the claimant (whom I will call "Lord Edward") seeks an interim injunction restraining the 3rd defendant (which I will call "Jombihis") from dealing with the painting until judgment in the claim.

The parties

2. Lord Edward is a collector of, and investor in, contemporary art. The 1st defendant ("FFA") is a Mayfair art dealer, and the 2nd defendant ("Mr Faggionato") is a director of and major shareholder in that company. Jombihis is a Cayman company. It appears to be common ground that Jombihis is a corporate vehicle used to hold art for the benefit of the 4th defendant ("Mr Mugrabi") and other members of his family, who are prominent New York art collectors and dealers.

The facts

3. Until late last year Lord Edward was undoubtedly the owner of the painting. In 2010 he decided to sell it and asked Mr Faggionato to help him find a buyer. Lord Edward's case is that he specifically instructed Mr Faggionato that he did not wish to sell to a dealer, and that he did not wish to sell to the Mugrabis in particular, because of some previous dealings with them that he regarded as unsatisfactory.
4. In late August 2011 Mr Faggionato informed Lord Edward that he had received an offer of $6 million for the painting. He said that the offeror was a Floridian collector. Lord Edward was uncertain whether to accept the offer and asked Mr Faggionato to make enquiries of the auction houses to ascertain what estimates they would place on the painting if it were sold at auction, and whether or not an auction guarantee was likely to be available.
5. Shortly afterwards Mr Faggionato told Lord Edward that he had made enquiries of the auction houses and their opinion was that the painting could be offered at auction with an estimate of $4–6 million but with no guarantee. Mr Faggionato therefore advised Lord Edward to accept the offer of $6 million. In reliance on that advice Lord Edward told Mr Faggionato that he would accept the offer. He agreed to pay a commission on the sale of $135,000 and at the same time agreed to purchase another two works (by Enoc Perez and Cy Twombly) from FFA for a combined price of $865,000. As a result, FFA delivered the painting to the buyer and received $6 million. FFA then remitted

$5 million to Lord Edward, being the balance of the $6 million after deduction of FFA's commission of $135,000 and the price of the other two artworks.

6. It has subsequently emerged that:

(1) There was no "Floridian collector". Mr Mugrabi made the $6 million offer to Mr Faggionato. The invoice for the sale was addressed to Jombihis and it paid the purchase money.

(2) Mr Faggionato received secret commissions from Mr Mugrabi or Jombihis in the form of a sculpture by Urs Fischer, a table by modernist designer Jean Prouvé and a payment of $125,000 to Mr Faggionato's personal bank account at Crédit Foncier de Monaco. The combined value of the sculpture and the table is said to have been $275,000, making the total value of those commissions $400,000.

(3) Mr Faggionato did not in fact make enquiries of the auction houses as requested by Lord Edward.

Those points do not appear to be challenged. The Mugrabis have candidly admitted providing the secret commissions, which they regard as normal in the art world.

7. Late last year Lord Edward heard that the painting was being shown in Mr Mugrabi's apartment and telephoned Mr Faggionato to discuss the position. According to Lord Edward, Mr Faggionato "acknowledged the rumour and suggested something along the lines that we had both been 'screwed' by Alberto who unbeknown to us had used the Floridian Collector as a 'front' to acquire the painting".
8. In or about December 2011 Lord Edward also telephoned Mr Mugrabi and "congratulated" him on acquiring the painting. His evidence is that:

I told him that next time he should contact me directly rather than going through the charade of using a 'front' (as I then suspected had been the case). Alberto did not deny the use of a front and added that he 'knew' that I 'would not sell the painting' to him. I then asked Alberto about his plans for the painting and he told me that he intended to keep it.

9. Lord Edward emailed Mr Faggionato on 14 March 2012 asking him to provide him with a copy of the invoice that he sent to the buyer and a copy of the relevant bank statement showing receipt of the funds. The response was an email attaching what purported to be a copy of an invoice for $6 million issued by FFA to Jombihis. It was marked "FAO Alberto Chehebar". He also sent a bank statement confirming the receipt of $6 million by FFA from Jombihis. Lord Edward spoke to Mr Faggionato who said that Alberto Chehebar was the Floridian collector who had acquired the painting. Lord Edward found this suspicious because he knew from his previous dealings with the Mugrabis that Jombihis was a Mugrabi company (and suspected that Mr Faggionato knew this too). Subsequently, in May 2012 the Mugrabis disclosed the copy of the invoice that they had received from Mr Faggionato, which did not refer to Mr Chehebar.
10. Lord Edward also asked Mr Faggionato to disclose a copy of the shipping documents and export materials so that he could see where the painting had been delivered after the purported sale. Mr Faggionato initially ignored this request and when pressed by further emails on 27 March and 12 April 2012 said:

We are looking into sending you the export papers but as I am sure you understand they are confidential papers to do with the buyer. I do take my business very seriously and I am not sure you would not [sic] appreciate me sending information about your transaction to another party.

In response to a further request Mr Faggionato again ignored the issue and instead tried to persuade Lord Edward that he had done a very good deal. Eventually, on 23 April 2012 Mr Faggionato admitted to Lord Edward that he had shipped the painting to New York, but according to Lord Edward he implied that it was done on the instructions of Mr Chehebar.

11. In another email of 14 March 2012 Lord Edward wrote to Mr Faggionato: "This invoice is for $6m. Presumably you got paid more than this. Can you send any invoice for commission/other arrangements". Lord Edward says in his affidavit that the statement "Presumably you got paid more than this" was designed to "test the water"; his evidence is that he considered it would have been highly irregular for FFA or Mr Faggionato to receive a commission from the buyer, and he did not authorise FFA or Mr Faggionato to receive such commission at the time of the purported sale. Mr Faggionato replied the same day saying "the only way I could do the deal was by including the Twombly and the Perez and make it on the commission on both. As you can imagine it was not a good deal for me". Mr Faggionato did not mention the Fischer sculpture, the Prouvé table or the $125,000 paid to his Monaco bank account.
12. In early 2012 Lord Edward heard a rumour that the painting was to be sold at auction by Christie's in New York, with a guide price of $9 million and a guarantee in place. The rumour turned out to be correct. The painting was to be included in a sale of Post-War and Contemporary Art on 8 May 2012 with a guide price of $9 to 12 million, and a guarantee from a third party for $9 million.
13. In an email of 27 March 2012 Lord Edward asked Mr Faggionato to provide "the precise details of the people at the auction houses consulted on the question of guide price and possible guarantee". Following a chaser on 12 April Mr Faggionato responded:

The person at Christie's I spoke to was Brett Gorvy and at the time was not bullish on the painting I think his estimate was $4M to $6M and no possibility of a guarantee. The markets do change quickly but I still think Brett behave [sic] very unprofessionally not even asking to view the painting to give an accurate estimate. Christie's probably received a serious enquiry and thought that Museum Security would be suitable.

Lord Edward therefore contacted Mr Gorvy, and asked him to confirm what Mr Faggionato had told him. Mr Gorvy denied that he had provided any estimate for the painting in 2011: in a conference call with Christie's in-house counsel in attendance, he said that the only time he had any contact with Mr Faggionato regarding the painting was around 2007.

14. On 4 May 2012 Lord Edward's solicitors, Herbert Smith LLP, wrote to Christie's, Mr Faggionato and Jombihis notifying them of Lord Edward's claims but saying that he did not wish to prevent the proposed sale on 8 May 2012. It was suggested that escrow arrangements should be put in place in respect of the net proceeds of sale above $6 million, and that on that basis Lord Edward would not dispute the title of any purchaser. Herbert Smith said that Lord Edward intended to commence proceedings very shortly.
15. However, on the day of the sale Christie's withdrew the painting. Among other reasons, they said they were facing the threat of litigation from the third party backer providing the $9 million guarantee, and had increasing concern about rumours swirling in the marketplace about the dispute.
16. Christie's agreed to hold the painting for a further 60 days, and that agreement was later extended in the hope that there could be some agreement on what to do with the painting and the money Jombihis paid for it.
17. On 10 May 2012 Herbert Smith met Mr Mugrabi and his father, who disclosed the existence of the secret commissions. In the following days further information was provided.
18. On 7 June 2012 Herbert Smith wrote again to Jombihis and Mr Mugrabi demanding the return of the painting and outlining a claim based on the secret commissions.
19. On 13 June 2012, Jombihis commenced proceedings against Lord Edward in New York seeking (a) damages for (i) tortious interference with contract arising out of the withdrawal of the painting from the Christie's sale and (ii) slander of tile and (b) a declaratory judgment to quiet title to the painting. Those proceedings were served on Lord Edward on 20 June.
20. These proceedings were issued on 3 July 2012 and on 5 July Lord Edward issued applications for:

(1) a freezing injunction against Mr Faggionato;

(2) permission to serve the claim form and other documents in the proceedings out of the jurisdiction on Jombihis and Mr Mugrabi;

(3) an interim injunction to restrain Jombihis from dealing with the painting until final judgment or further order.

Roth J heard the applications for a freezing injunction and for permission to serve out without notice on 5 July. An injunction against Jombihis was not sought on that occasion, as Lord Edward accepted that it would not be appropriate to make that application without notice. The judge granted permission to serve out on Jombihis and Mr Mugrabi, but refused the application for a freezing order against Mr Faggionato.

21. However, Lord Edward successfully appealed against the refusal of the freezing order to the Court of Appeal, which granted that order on 19 July 2012. The freezing order was served the next day. The original intention had been to give notice of the application to Jombihis immediately after the hearing on 5 July, but I was told that because of the perceived risk that Mr Faggionato would be alerted to the application for a freezing injunction this was delayed while the appeal was still pending.
22. Notice of the application was however given on 20 July 2012, the day the freezing order was served on Mr Faggionato. On the same day Jombihis issued a motion in the New York proceedings, returnable on 7 August, for a order directing Lord Edward to withdraw any extant requests to Christie's addressed to withhold returning to Jombihis the work of fine art that Jombihis consigned to Christie's and to cease and desist any further requests or, alternatively, (b) directing him to apply for injunctive relief pursuant to Article 63 of the New York Civil Practice Law and Rules and give an appropriate undertaking as set out there. It appears that under New York the applicant for a preliminary injunction has to post a bond as security for what in English terms would be described as the cross undertaking in damages.
23. In the meantime there had been correspondence between solicitors with a view to agreeing a satisfactory arrangement to maintain the status quo. Since no agreement was reached, it is unnecessary for me to go through this. But I note that in a letter dated 13 July 2012 Herbert Smith on behalf of Lord Edward agreed to undertake to maintain $6 million in liquid assets while the proceedings were on-going.
24. Jombihis served evidence in response to the application on 25 July 2012 and the matter came before the court on 27 July when the parties agreed that Christie's should release the painting to Jombihis on its agreeing to hold it in New York and not to sell, pledge, purport to sell or pledge or otherwise deal with or dispose of it until after 7 August 2012 – the return date for the New York motion.

Lord Edward's case against Jombihis: is there a serious question to be tried?

25. Following the guidance given by Lord Diplock in the leading case of American Cyanamid v Ethicon [1975] AC 396, the first question I have to consider is whether there is a serious question to be tried: in other words, on the material currently available, does Lord Edward have any real prospect of succeeding in his claim?
26. I have no doubt the answer to those questions is Yes.
27. In outline, Lord Edward's case against Jombihis is (so far as relevant) that title to the painting remains vested in Lord Edward because the purported sale was unauthorised and therefore void:

(1) Lord Edward says that the applicable law on this issue is English law, because that is the law applicable to the putative contract of sale. FFA's invoice includes an express choice of English law. (Para 46 of the New York complaint suggests that it is common ground that the terms of the invoice are incorporated in the contract though Jombihis says that New York law would not respect the choice of law because it was not expressly agreed.) Lord Edward suggests that applicable law would be English law anyway, since England is the place of residence of the person who was to effect the performance characteristic of the contract, namely the seller: see article 4(2) of the Rome Convention, incorporated into English law by the Contracts (Applicable Law) Act 1990.

(2) As a matter of English law, the purported sale was outside the authority of FFA in two separate respects:

(a) FFA was specifically instructed not to sell the painting to the Mugrabis.

(b) In any event, FFA had no authority to sell the painting on terms that FFA or Mr Faggionato would receive a secret commission from the buyer. This is because according to Bowstead op. cit. para 3-007 "authority to act as agent includes only authority to act for the benefit of the principal".

(3) Lack of authority in the agent means (so the argument runs) that the transaction is void, in the absence of ratification, apparent authority, or one of the exceptions to the nemo dat rule such as that embodied in section 2(1) of the Factors Act 1889. Mr Edwards who appeared for Lord Edward took me through that section and explained why Lord Edward said that it did not apply.

28. I need not go into any of this in detail, because as I understood it the only point taken by Jombihis under this head is that the sale was ratified "in the clearest possible terms" when Lord Edward telephoned Mr Mugrabi to congratulate him about having succeeding in purchasing the painting through a "front". I do not accept that submission. At the time of the conversation relied upon Lord Edward does not appear to have known that Jombihis (a Mugrabi company) was the purchaser, as opposed to the stooge, Alberto Chehebar. Lord Edward does not therefore appear to have known that FFA had not complied with the instruction not to sell to the Mugrabis. Still less did Lord Edward know of the secret commissions apparently paid to Mr Faggionato; they were not discovered until some months later, in May of this year. Ratification calls for full knowledge of all the material circumstances in which the act was done (see Bowstead op. cit., para 2-067), and there must at least be a serious question whether Lord Edward had the required knowledge at the time in question.
29. I should mention that in relation to the secret commissions Jombihis says that the effect of a breach of fiduciary duty is merely to render the sale voidable at the instance of the principal and accordingly it stands at least until the principal seeks to rescind it. But I did not understand Mr McGhee, QC, who appears on behalf of Jombihis to challenge the existence of a serious question to be tried on this ground. On the basis of the discussion in Bowstead I am, in any case, satisfied that Lord Edward's point in an arguable one. Moreover, Lord Edward must in my judgment be taken to have sought to rescind the contract of sale by the correspondence from Herbert Smith and by bringing these proceedings. I reject any suggestion that it is a precondition to proceedings for rescission that the purchase money should have been returned in advance.

Balance of convenience

30. Turning to the balance of convenience, the position of both sides strikes me as more than a little paradoxical:

(1) Lord Edward frankly acknowledges that his concern is only to maximise the amount of money that he receives for the painting, yet seeks an injunction restraining Jombihis from dealing with the painting.

(2) Jombihis, on the other hand, disclaims any present intention to dispose of the painting. Mr McGhee told me that it has not decided what it wants to do. Yet despite this, Jombihis opposes the injunction sought, and is insistent that Lord Edward's cross- undertaking in damages should be fortified by security in the sum of $6 million.

During the hearing, I said that the parties seemed to be shadowboxing. But it might be more accurate to say they are manoeuvring for tactical advantage.

31. In my judgment, the reality is that while there is a dispute about the ownership of the painting, its marketability is bound to be impaired unless the parties can agree to market it in concert with one another and argue about the proceeds of sale. A prospective purchaser might feel that he was buying a lawsuit as much as a painting. This will be case whether or not I grant an interim injunction. In the circumstances, it seems unlikely that Jombihis will attempt to dispose of the painting without the agreement of Lord Edward. Jombihis has adduced evidence, which I regard as credible, as to the volatility of the art market and the risk that if marketed after the trial of this claim the painting will fetch less than it would have if sold sooner. But to the extent that Jombihis suffers loss as a result of being unable to sell the painting it will be because of the dispute rather than because of any interim injunction.
32. At first sight there is a good deal of force in the submission made by Jombihis that there is no reason why the court should grant an injunction to prevent the sale of the painting because Lord Edward wants the painting to be sold and his claim is properly a money claim only for its value. But a sale in present circumstances would be unlikely to be at the best price reasonably obtainable if there were no dispute as to ownership. Damages would not in my judgment be an adequate remedy, because of the obvious difficulties of valuing a work of art.
33. I also take into account the fact that on Lord Edward's case he has already been the victim of wrongful conduct on the part not only of FFA and Mr Faggionato, but also of Jombihis. It is evident they do not regard secret commissions as wrongful. An analogous defence was run in Accidia v Simon C. Dickinson Ltd [2010] EWHC 3058 (Ch), where the defendant relied on an alleged "custom or practice … whereby art dealers agree with principals or their agents for a return price on the basis that the dealer may sell the piece at any price without informing the principal or his agent of that ultimate price or of the level of commission the dealer thereby receives after passing on only the return price." On the evidence, Vos J found that there was no such usual practice, but he added:

Moreover, such arrangements would be objectionable as being unreasonable and unlawful, unless they were concluded with the fully informed consent of the principal seller or the dealer accounted to that principal for the secret profit secured.

It seems to me that Lord Edward is entitled to protection against further possible wrongdoing.

34. Nevertheless, I do not propose to grant the application as sought, namely for an unqualified interim injunction restraining Jombihis from dealing with the painting. Subject to considering the impact of the foreign element on the case, what I would propose to do is instead to restrain it from doing so without first giving (say) 28 days notice of any proposed dealing with the painting. Unless it can satisfy Lord Edward that the proposed dealing is beneficial, he will be able to return to court for an injunction restraining Jombihis from carrying the proposal into effect. The court will then have to consider an actual proposal rather than tactical manoeuvring or shadowboxing.
35. At that stage it might be appropriate to require Lord Edward to fortify his cross-undertaking in damages. But I would not propose to do so at this stage. He has considerable means and as already explained I do not think it likely the grant of an injunction will itself cause loss, particularly if it is qualified as I propose.

The foreign element

36. Turning to the foreign element, Mr McGhee submitted that New York is the appropriate forum for the hearing of the dispute concerning title to the painting. He told me that Jombihis intended to make an application to set aside the permission to serve out of the jurisdiction or stay the English proceedings on the ground of forum non conveniens. If I were satisfied that such an application would be likely to succeed, that would a factor to be taken into account in considering the balance of convenience.
37. It is not for me to prejudge the intended application. But I am not satisfied that it is likely to succeed. If anything, the reverse is true.
38. According to the leading case of Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460, 477 Jombihis would have to show that the New York is "clearly or distinctly" a more appropriate forum than England; and it seems unlikely Jombihis can satisfy this test:

(1) The case raises issues as to commissions paid to an English- resident agent acting for an English principal, to induce the purported sale of property situated in England at the time under a contract that appears to be governed by English law. At least two of the main witnesses (Lord Edward and Mr Faggionato) are resident in England. There is clearly a substantial connection with England.

(2) I think little weight is to be attached to the fact that Jombihis happened to start proceedings first. The New York proceedings are still at a very early stage, they involve only two of the five parties to the English action, and they have clearly not "developed to the stage where they have had some impact upon the dispute between the parties". In those circumstances, the fact that there are pending proceedings in New York can have little or no relevance to the question of forum conveniens.

(3) Mr McGhee submitted that there was bound to be a trial in New York because of Jombihis's claims against Lord Edward for tortious interference with contracts and slander of title. I do not agree. There is no reason why Jombihis should not counterclaim in the English proceedings, and if it can show that the events constituting those torts occurred in New York it will be able to rely on New York law under Part III of the Private International Law (Miscellaneous Provisions) Act 1995.

39. Jombihis goes on to say that an injunction here will serve no purpose because it will not be enforceable in New York without a further hearing on the merits. That may be true. But Jombihis is a Cayman company, and is no less susceptible to the court's personal jurisdiction in England than it is in New York. An injunction is an order in personam not in rem and in my judgment the fact that the painting itself is currently in New York is not of decisive significance.
40. Moreover, as Mr Edwards pointed out if Jombihis does not obey the court's orders then it may find itself unable to defend the English proceedings: see Derby v Weldon (Nos 3 and 4) [1990] 1 Ch 65 at 80-81.

Conclusions

41. I shall grant an injunction restraining Jombihis from dealing with the painting without first giving 28 days notice to Lord Edward of any proposed dealing with the painting.
42. In the draft of this judgment that was circulated yesterday, I indicated that I would consider any submissions the parties wished to make about the length of the period of notice. I went on to express the provisional view that the costs should be costs in the claim, though I would consider any submissions the parties wished to make about costs.
43. I have received submissions from both sides on these points and I will hear counsel further on the handing down of this judgment.