Be Wary of Confidentiality Clause in Art Deal Agreements

A recent case, Hoffman v. L&M Arts, et al., No. 15-10046 (5th Cir. Sept. 28, 2016), provides key lessons for drafting and construction of confidentiality provisions for the sale of artwork.

The case involved a claim for breach of confidentiality provision in the Agreement between Marguerite Hoffman and L&M Arts. Hoffman was a wealthy art collector seeking to sell her “Untitled” 1961 Mark Rothko oil painting after her husband’s death. L&M Arts was a broker acting as an intermediary between Hoffman and the buyers, Studio Capital, Inc. and David Martinez. In order to sell the work, Hoffman had to remove the painting from Dallas Museum of Art where it was on display. To safeguard her from a public sale of the painting, Hoffman decided to make a private sale of the painting, which took place in 2007.

The confidentiality language in the Agreement was as follows: “All parties agree to make maximum efforts to keep all aspects of this transaction confidential indefinitely.” Furthermore pursuant to the Agreement the buyers were prohibited to display or hang the painting for six months after the sale.

In 2010, the buyers auctioned the painting, which sold for more than $31 million. This appeared on the cover of the Sotheby’s catalog. Consequently, Hoffman sued L&M Arts, and the buyers for breach of the confidentiality provision of the Agreement.

On appeal, the Fifth Circuit Court of Appeals, among other things, found that the Letter Agreement was not breached and ruled in favor of L&M and the buyers.

The following factors were discussed and are lessons to be learned for drafting confidentiality provisions in art deals:

First, although confidentiality provision may be used to keep the sale of artwork secret, it has to be limited in scope so as to not be an unreasonable restraint on the sale of property. A significant factor regarding enforceability of such provisions is the length of the restriction.
Second, confidentiality provisions should clearly define the period of time and, in some cases, the geographic restrictions imposed as a result of the confidentiality provisions and what each party to the transaction can and cannot do.
Third, the parties to a transaction should always ensure that every party is bound by the confidentiality provisions, or, at the very least, include an indemnity provision for the breach of a third-party buyer when an intermediary is used.
Finally, in case of breach of the confidentiality provisions, parties should clearly draft the remedies and damages that may follow.

 

By Dorisa S. Hanrahan, Esq.

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