HISTORIC CARS - A MONKEY BUSINESS?
Few owners of historic cars will be unaware of the activities of Derek Hood and his company, JD Classics. Hood’s bankruptcy, JD Classics’ insolvency and several court cases have brought to light practices that bring little credit to the historic car sector. More recently, the disintegration of Kienle Automobiltechnik GmbH in Germany has provided different examples of monkey business with historic cars, and on a scale that Derek Hood could only imagine.
Image – Classic and Sports Car
1. Dealer or Middleman?
The historic car market tends to work informally and without written terms or conditions. A discussion, a nod of agreement and a handshake might be enough to see the deal done in relation to an outright sale and purchase. But this is a market where many transactions feature brokers or middlemen of one stamp or another. And identifying the nature of the parties’ relationships can mean a difference of substantial sums of money – with the answers turning on the facts of each case, rather than any particular moniker.
Dealer
A dealer will be acting in his own interests. In buying, he will see the price as acceptable for an on-sale at a profit. His seller will recognise that the dealer will be looking for a profit on re-sale, but that seller has made his own sale and is happy with the price he receives. After some car preparation, the dealer agrees a price with a willing punter and the shiny car is sold. The dealer acts as principal in selling and, ordinarily, the buyer acts a principal too.
For the dealer, there were two related transactions. And the dealer’s profit or loss is the difference between the two prices, regardless of their amounts. It is the dealer’s money that is at risk in this model. These are transactions where each party pursues his own interests – and let the buyer beware!
Middleman
For an agent, broker or other middleman, things are different. The middleman has no money at risk in the transaction. Whether acting for a seller or a buyer (or both!), he will perform his work in consideration of a payment called a commission. This might be an agreed sum, or perhaps an ascertainable sum calculated as a percentage of the car’s price. In the second of the Derek Hood cases, the court heard that this percentage is ordinarily between 5% and 15% in relation to historic cars.
On the face of it, this is a business of moderate investment and reasonable reward. Beyond the risk of lost commission, the middleman does not put his money at risk. But his work will be subject to the laws of agency – and all they mean…
2. The First Derek Hood Case
The Transactions
The court was asked to determine the relationship over time between Michael Tuke and Derek Hood in a series of transactions concerning historic cars. Neither Tuke nor Hood seemed to have turned his mind much to the nature and consequences of their relationship, and there were no written terms. The court found the relationship to be set out in several emails and to cover advice regarding the purchase and sale of historic cars as well as their restoration, servicing and maintenance.
The early transactions were straightforward sales by Hood to Tuke as Tuke developed his investment in historic cars. But when the transactions became disposals, Hood was to be paid a commission of 10% of the difference between two sums of money - the price paid by Tuke for each car plus charges for servicing, maintenance and restoration on the one hand, and the price or part-exchange value received on sale on the other hand.
The Court’s View
In relation to the early transactions, the court found these to be a series of sales by Hood where each of Tuke and Hood was acting as a principal - and could legitimately act in his own interests.
But then the court went on to examine some 15 subsequent transactions from the blizzard of sales and part-exchange disposals undertaken for Tuke by Hood. The court found that generally there were no sales contracts or contract notes, that such invoices as were produced were not contractual documents or contemporaneous with the sale, and that each sales document was presented to Tuke on the basis of an unnamed third-party buyer.
In these circumstances Hood was found to be acting as Tuke’s agent.
3. Agency and its Tracklements
This finding of an agency relationship paved the way for Tuke’s judgment of some £12 million against Hood. But before we come to the circumstances of those claims, what was the significance of the finding of agency?
Fiduciary Duties
In addition to whatever contractual terms apply to the relationship of the parties, the middleman will be subject to the duties of an agent, including fiduciary duties. These arise from the agency relationship itself and include matters of honesty, transparency, trust and loyalty. In the words of the leading case:
‘A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.’
Remedies for Breach
A principal’s remedies against his agent are not only those arising from a breach of contract, but also those arising from a breach of those fiduciary duties. These include a liability to account for any profit made from that position. Unusually, the measure of that damage is not related to compensating the innocent principal for loss, but to removing from the fiduciary the whole of the benefit received by reason of the breach of duty.
4. The Second Derek Hood Case
The second case concerned Mike Tuke’s demands totalling more than £40 million and included claims for an account of profits and breach of fiduciary duty. The court examined all the transactions between Tuke and Hood, this time in the presence of Derek Hood, by now bankrupt. The judge did not warm to Hood (‘…not a witness on whose evidence I can rely…’) or the evidence he produced and provided.
Woven in with findings of Hood’s deceit and misrepresentation were findings of an agency relationship. And breaches of the resulting fiduciary duties including Hood’s making undisclosed profits from the trusted position, acting for his own benefit, and failing to disclose the true circumstances of the transactions. And in his comments about Hood’s practices in the context of his fiduciary duties, the judge said:
‘It is one thing to think that you are dealing with an interested third party. It is quite another to know that you are dealing with the person who is purporting to act as your agent.’
5. Gregor Fisken, Bernie Carl and Joe Macari
Intention and Expression
In contrast to the Hood cases, when Bernie Carl came to sell his Ferrari 250 GTO for $44 million in 2017, a bespoke, written contract was prepared by lawyers. But that did not prevent a dispute over who were the contract’s proper parties, or a requirement in 2019 and 2021 for the court to consider questions of agent or principal.
After some time seeking to sell his car, Carl had entered into negotiations with Gregor Fisken, who described his business as:
‘…acting as an agent for buyers and/or sellers with high value classic automobiles or buying these cars ourselves as principal with a view to then selling them (hopefully) for a profit.’
In some of their previous dealings Fisken had acted as a middleman and earned a disclosed commission, and at other times Carl and Fisken had dealt with each other as principals.
Terms of Sale
In the case of the Ferrari 250 GTO, the sale and purchase agreement identified Carl as the seller and Gregor Fisken Limited (Fisken’s company) as buyer, ‘acting as agent for an undisclosed principal’. But the agreement was signed without reference to any agency, and without reference to a sub-sale.
Fisken’s purchase from Carl was related to a sub-sale though, to a third-party as the ultimate purchaser. Although the identity of that sub-purchaser and the car’s price were redacted from the court papers, it was known that this sub-purchaser had been introduced by another dealer/broker, Joe Macari.
But who was acting for whom, and in what capacities?
Bernie Carl’s Understanding
Carl understood Fisken to be acting as a middleman and to be receiving a commission of $500,000 from the unidentified buyer. It was important to him to know that Fisken was not trading as a principal for an equity profit:
‘I wanted to know that the car was going to an end user and was, to use simplistic language, therefore paying the retail price for the car rather than was a dealer trying to get hold of the car and see how much he could mark it up for in a resale…What I was unwilling to let him do is to have an agreement where he took no risk and could in effect mark up the car and sell it to someone else…But for him to come and say, “I am going to remarket the car to make not a commission but in effect equity profit and I am not paying you anything for that option and I am not telling you I am doing it” is a course of conduct I would never have agreed to…’
The Court’s View
Given the written terms and the context of the arrangements, the court found otherwise. Whatever the intention of Carl and his lawyers, Fisken was acting as a principal. The existence of the related on-sale contract supported that finding even though the buyer’s identity was not disclosed. Whatever the difference between Fisken’s purchase price from Carl and his sale price to the end-purchaser, that was Fisken’s to keep.
But in a tangled set of relationships, the court did find an agency relationship. And that was of Macari as agent for Fisken in relation to the on-sale to the end-purchaser. So, from Fisken’s profit, he had to bear the expense of this agency arrangement – an expense the court learned to be a commission for Macari of some $1 million.
6. Another Derek Hood Hearing
More recently, in 2022 the Court of Appeal readily dismissed Derek Hood’s application to reduce the damages previously awarded in favour of Mike Tuke, saying:
‘There are no doubt many honest and reputable secondhand car dealers plying their trade in this country. Unfortunately for Mr Tuke, Mr Hood was not among their number. [T]he judge found that Mr Hood had deceived Mr Tuke on a very large number of occasions over many years, in flagrant breach of the trust that had been placed in him. He also found Mr Hood to be a mendacious witness who had attempted to mislead the court in earlier proceedings…to prevent disclosure of damaging internal records which were subsequently used to prove the frauds on Mr Tuke…He had even fabricated and backdated a letter in an attempt to deceive the court…Mr Hood tried to conceal his dishonesty, and did his best to impede Mr Tuke’s claim…Such a defendant deserves no sympathy from the court.’
So, what would one of those ‘honest and reputable secondhand car dealers plying their trade in this country’ look like? The answer to that question may not be so easy – in the following imagined example, is Mr Middleman acting as a principal or as an agent? What do you think?
7. ‘Honest and Reputable Secondhand Car Dealers Plying their Trade in this Country’?
The Appointment
Mr Seller decides to sell his Glitterati RS. Having taken soundings among friends and motoring buddies, he contacts Mr Middleman, who is well-known in the historic car business. He has fine showrooms in the right area of town and is to be seen at the leading exhibitions, race meetings and concours d’elegance. He sponsors a number of high-profile tours and concours events and he maintains a successful presence in historic racing. He enjoys membership of the right clubs and access to the right people.
‘I could buy it outright as you suggest, but I think we could make more money for you in the market. There are so few of these and this is such a nice one. You can be sure I will get the best coverage for you – and the best price. I am with you on this, and you can trust me to leave no stone unturned.’
Brief terms are discussed under which Mr Middleman will test the market for the best price and refer back to Mr Seller. The asking price is settled between them as £900,000. Mr Middleman suggests this pricing is something of a ‘come and get me’ signal and this will be helpful in agitating interest. Mr Middleman’s commission is agreed as 10% of the sale price.
Mr Middleman loads the Glitterati RS on to his transporter and takes with him the extensive books and records for the car as well as the car’s V5 registration document. With an admonition to Mr Middleman to take the very best care of her, Mr Seller waves what he expects to be a last farewell to his car. Following arrival at Mr Middleman’s showroom, the car is prepared for display. Mr Middleman’s team is among the best in the business – the car looks marvellous. Mr Middleman reports periodically about sniffs of interest.
The Negotiations
A couple of months after the car’s arrival in the showroom, Mr Buyer arrives to see another car at a price of £1.45m. But he has his head turned by the Glitterati RS – a rare car and a model that he has had on his subconscious lust-list for some years. Mr Buyer is clearly smitten, and Mr Middleman can already see that Mr Buyer is not going to let the car escape him.
‘What price are you after for the Glitterati?’ asks Mr Buyer, with as much insouciance as he can muster.
‘Oh, the Glitterati RS? Lovely, isn’t it? Very, very rare and I can’t imagine we will see another one like this for a very long time. It sold as soon as it arrived.’
‘You mean I’ve missed it?’
‘Well, yes, I’m afraid so. The chap was actually more interested in something else but couldn’t quite stretch to that so, for him, this was a bit of a second choice, really.’
Mr Buyer havers regretfully for a while before Mr Middleman takes the initiative.
‘Now that I think about it, though, you might be in luck. I know the chap well and I’m sure that, with the right incentive, I could put him into the car he really wanted, leaving this one for you. It would have to be a full price for this lovely RS, though.’
‘What would it take?’ asks Mr Buyer, his feigned nonchalance by now vanished.
‘Look, I’m on your side in this,’ says Mr Middleman. Then a long pause. ‘I would love you to have the car.’ A longer pause. ‘Who knows when another one might come up?’ A seemingly endless pause now.
‘Well?’
‘Hmmm… If we are looking at doing the deal now and you are prepared to have a 20% deposit to me today and the rest by the end of the week then I could let it go for £1.375m.’
‘It’s a deal!’ gushes Mr Buyer. ‘I’ll have the deposit to you within the hour, I’ll have the balance to you tomorrow morning and I’ll be taking her away tomorrow afternoon.’
‘Congratulations,’ says Mr Middleman. ‘A marvellous car and a good price. I’ll have all the papers boxed up and the V5 ready for you for tomorrow afternoon.’
The Good News
Mr Middleman is quickly in touch with Mr Seller to let him know the good news. The car is sold and he has got the full £900,000 for Mr Seller. He explains that there are some works to be done and some things to attend to – and that, as a matter of goodwill, he will absorb those costs in his commission fee. He is expecting to have things tied up within two weeks or so and will then be sending the proceeds, being the price of £900,000 less his agreed commission of £90,000 and tax on that of £18,000. That leaves a net sum of £792,000 to Mr Seller, just as agreed. Mr Seller says a grateful farewell and pours himself a contented tiddly. He reaches for the phone again.
‘A thought. Do I need to come down to sign up the paperwork?’
‘No need. I can do that for you. In fact, I should have mentioned. The one thing the buyer insisted on was anonymity – costs you nothing but it seemed very important to him. So, it will be important for mine to be the name on the papers. It’s a small point and, given the full price, I took a bit of a flyer and agreed that with him. Makes it easier for you, anyway. Now all you have to do is concentrate on how to spend the money!’
Mr Buyer is as good as his word. The deposit of £275,000 arrives that afternoon and the balance of the agreed purchase price of £1.375m arrives in Mr Middleman’s account the next day. Some three weeks later and after a few chasing calls and emails, Mr Seller receives a call from Mr Middleman.
‘Good news. The deposit is in. I will have that to you, less my commission of course, within a week or so. Then I will have the balance of the price to you as soon as that is in.’
A transfer of £72,000 arrives in Mr Seller’s account some ten days later. After further chasing calls and emails from Mr Seller, and cheery assurances from Mr Middleman, the balance does arrive some three weeks later.
The Recriminations
Overall, a sweet transaction for Mr Seller. But he can’t escape a bitter aftertaste and a sense of unease at Mr Middleman’s prevarication about sending the money. Unease becomes disquiet some weeks later when Mr Seller receives a call from his friend, Mr Chairman at the Glitterati RS Owners’ Club.
‘Crikey, well done you! Just got off the phone with the chap you sold your car to. Nice guy and very chatty. Anyway, he is really chuffed with his purchase and he got in touch to join the club. Also seemed unbothered that he had just paid the highest price we have ever seen for an RS!’
‘But the price wasn’t so remarkable,’ suggests Mr Seller. ‘Mr Middleman and I agreed an intentionally moderate price since I was keen to see the car moved on.’
‘Well, you must be out of touch with the market. Or rich beyond Croesus. £1.375 million is anything but moderate!’
Disquiet turns to gyp and crystallises to anger. With a perfunctory goodbye to Mr Chairman, Mr Seller’s finger moves to the number of Mr Middleman.
Whose Car is it Anyway?
Dispensing with pleasantries, Mr Seller demands an explanation – and the rest of his money.
‘But you’ve had your money,’ explains Mr Middleman. ‘You wanted 900 and I got 900 for you. You agreed 10% for me out of the deal and that’s what was deducted. That was our deal.’
‘That was our deal, but you have deceived me and cheated me,’ responds Mr Seller. ‘You lied to me, you withheld information from me, and you used my property as your own without telling me. You were my agent, my fiduciary. And you have betrayed that trust. You have made a secret profit out of the trust I placed in you. Instead of acting in my interests and being content with the generous commission you were earning from me, you have traded-up by treating my car as your own – and dealing as a principal rather than as my agent.’
‘But you got the money you wanted for the car! I delivered what you said you wanted. You’ve not lost anything. In fact, you’ve got exactly what you said you wanted. You know as well as me that this is how the business works. What’s the problem?’
‘That is not the point. It is not about a loss on my part. I am happy for you to have the commission we agreed. But it was my car, not yours. To do your deal you have used my money, not yours. The money you made beyond your proper commission is not yours, it is mine. You owe me the profit you have made.’
Principal or agent? You be the judge…
Paul Griffin