David Farnell and Ben Lowans untangle the transactions on a rare car and look at how funders can protect themselves
Last month Mr Justice Cooke, sitting in the Commercial Court, made judgment in the case of Gray v Smith & Others, which concerned conflicting proprietary claims to a rare McLaren F1 GTR Longtail.
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As the connoisseurs (or asset managers) may know, McLaren built 28 of its 100 F1 cars for racing in the FIA GT series or 24 Hours of Le Mans and of those 28, stretched just 10 into the 1997-specification Longtail model.
The one fought over in Gray had originally been priced at £1m. Before he could arrive at a decision, the Judge had to consider a series of transactions involving the Longtail, many of which were recorded by incomplete or contradictory documents. It was a test of endurance almost as challenging as Le Mans itself.
However, the resulting judgment provides a useful reminder of the law which applies when several parties dispute a car’s ownership.
Background
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By GlobalDataMr Gray invested in high-value cars and frequently lent money to various individuals so that they could purchase such cars for him.
One such individual was Mr Edwards, who (according to the evidence of various witnesses who appeared before the court) was disorganised and often unreliable when presented with an invoice for payment.
Unaware of Edwards’ reputation, Gray paid him millions of pounds with a view to acquiring several high-value cars over a two-year period, one such car being the Longtail for which Gray paid Edwards £1m.
Edwards purchased the Longtail from a Californian company called Symbolic. Because he owed money to Symbolic, Edwards concealed his identity by assuming the alias Williams.
He negotiated a price of £950,000, which he paid to Symbolic from Gray’s money, the rest of which he kept.
Later, unbeknown to Gray, Edwards pledged the Longtail to another funder called Asphaltic, in return for which it lent him money to purchase a BMW 328 and a BMW 507 (which the supplier later substituted for a Delahaye 135S). Asphaltic had done business with Edwards before and knew that he used the alias Williams, but knew nothing of Gray. Edwards and Asphaltic shipped all three cars to England.
After their arrival, Edwards paid Asphaltic and deposited the Longtail with Joe Macari Performance Cars Sales (JMPCS) on a "sale and return" basis. JMPCS
subsequently sold the Longtail to Mr Smith for £1.2m.
Unusually, Smith appointed a solicitor to investigate the Longtail’s history and draft a written contract of sale. This approach contrasted starkly with the rapidity and informality of the previous transactions.
When Gray found out that Smith had bought the Longtail, he brought court proceedings against him. Smith defended the proceedings and sought an indemnity from JMPCS, which in turn denied liability and sought an indemnity from Edwards.
Chain
The main transactions may be summarised as follows:
(1) Gray advanced £1m to Edwards so that he could purchase the Longtail on Gray’s behalf
(2) Symbolic sold the Longtail to "Williams" (Edwards) for £950,000
(3) Edwards pledged the Longtail to Asphaltic (which advanced funds to Edwards, so that he could purchase two other cars)
(4) Edwards repaid Asphaltic, which released the Longtail to him
(5) Edwards supplied the Longtail to JMPCS, on a sale or return basis, for £950,000
(6) JMPCS sold the Longtail to Smith for £1.2m
Issues
The Judge had to decide whether Gray had legal title to the Longtail. Gray alleged that Edwards had purchased the Longtail as his agent, so that he was the undisclosed principal in Edwards’ purchase from Symbolic.
Should the Judge not find for Gray, he had to decide whether Gray nonetheless retained an equitable interest in the Longtail, which would then entitle him to a remedy against Smith.
Decision
As Edwards had purchased the Longtail on his own account, the Judge decided that Gray had not been Edwards’ principal when he purchased the Longtail from Symbolic.
Immediately after that purchase, Edwards had held the legal title, but he had breached the terms of his agency with Gray, so that while in possession, Edwards held the Longtail on trust for him. Had Gray moved against Edwards at that stage, Gray would have been entitled to possession of the Longtail over Edwards.
Unfortunately, Symbolic and Gray were unaware of Edwards’ deception. Neither took action and when he sold the Longtail to JMPCS, Symbolic lost its right to avoid the original contract of sale and Gray his right to possession. Edwards had been entitled to pledge the Longtail to Asphaltic and, after discharging his indebtedness to that company, sell it to JMPCS.
The Judge also found that JMPCS and Smith had both acted in good faith and without actual or constructive notice of Gray’s equitable interest when acquiring the Longtail.
Smith therefore acquired a legal title which was free of Gray’s interest.
Implications for funders
This case highlights the intricacies of legal title passing between the parties involved in a chain of sale contracts.
Given the value and mobility of rare high-performance cars, not to mention the international character of many transactions, a funder in this niche market may run a greater risk of failing to acquire title or, if they acquire title, losing it later on.
The market is dominated by wealthy individuals, who may be resident and/or used to transacting business in different territories, and specialised suppliers. Know Your Customer is obviously important, but it may be especially helpful to find out whether he uses an intermediary and whether he is a collector or someone who buys and sells cars regularly for profit.
Inspecting the car before you commit to purchasing it is essential. You should also consider inserting special conditions into the finance agreement, eg. requiring the customer to make the car available for inspection during the life of the agreement, inform you of changes to the registration number and limit the engine hours (so as to preserve its value) in addition to more commonplace provisions restricting use outside the UK and prohibiting disposal, all of which may reduce your risk.
A tried and trusted supplier network is also important. Should you plan to purchase a car from a supplier outside that network, consider drawing-up a written supply
contract containing express warranties about title and the supplier’s knowledge of his seller. If the supplier is overseas, stipulate that English law applies and the English courts have jurisdiction if there is a dispute.
David Farnell is a managing associate and Ben Lowans is a partner in the finance litigation team at Addleshaw Goddard
