Wheels of Fortune

Murray Armes

General Information

Rare and classic cars have become a commodity that is bought, sold and traded just like any other investment. In fact in times of low interest rates such rare and exotic vehicles are seen as a better investment than stocks and shares or cash in the bank and for the very best cars the market is buoyant.

Alex is an auctioneer based in New York and a senior member of staff in an auction house which has been specializing in the sale of rare cars for the last 10 years. The auction house has built up a reputation for the highest quality vehicles and for reliability in establishing the provenance of the vehicles it sells. Provenance is one of the key features that distinguishes the very best classic cars. Provenance is the evidence of history of the ownership and includes any documentation that provides evidence of originality. There are two main ways provenance is established. The first is an accurate record of ownership. The second is the originality of the mechanical parts. The main way to establish originality is to ensure the main components, such as the engine, gearbox, transmission, suspension, etc., all have matching numbers. This is a sign the car is in as original condition as it can possibly be. The numbering normally takes the form of serial numbers stamped on the car’s mechanical parts by the original manufacturer.

Such is the reputation of Alex’s auction house that it is considered to be one of the best places in the world to buy a classic car and therefore it attracts only the best cars to sell. Alex has also personally gained an international reputation for being one of the foremost auctioneers of classic cars and s/he regularly achieves some of the highest prices with vehicles sold to the wealthiest and most discerning clientele. Alex has helped the company expand with additional offices in London, Dubai and Beijing.

Pat is a mechanic who buys classic cars and specializes in their restoration. Pat runs a small family business that started as a local garage and over the last 30 years has slowly evolved to be one of the UK’s most respected restorers. The family business does not have much cash available as most of it is tied up in restoration projects. Alex and Pat have built up a good and lucrative business relationship over the last 10 years. They are both classic car enthusiasts themselves and they have become good friends.

Since restoration is an expensive business, an arrangement that has been established over the years is that Alex provides Pat with an interest-free loan to cover the estimated cost of parts, materials and labour. In return Alex has the exclusive right to sell the restored car.

The interest-free loan from Alex’s auction house to Pat is to be repaid on completion of the sale. As the auction house does not charge interest it does take a larger than normal share of the profits from the sale to compensate for this. Until the sale is concluded the car is owned by Pat who is liable to repay the interest-free loan if the car is not sold. Since Alex and Pat have been doing business together no car has ever remained unsold.

Last year Pat discovered a rare “Speed 90” in a very poor state in a barn in rural England. Despite its poor state the car appeared to possess all the main mechanical components although the bodywork and engine required a complete rebuild and the interior a complete refit. Pat was not able to determine whether all the main mechanical components had matching numbers because the car was in a poor state and not all of the numbers were legible, but in any case as far as Pat was aware this was the only Speed 90 that was known to have been built. Pat bought the car from its ageing (and not very knowledgeable) owner for £20,000. Pat approached Alex to see if Alex was interested in selling the car at auction.

Alex carried out detailed research and discovered that the car was once owned by a famous racing driver Rusty who won the world racing championship for this class of car in 1932. If a classic car was once owned by a famous person this increases the value substantially.

Alex and Pat entered into a contract whereby Pat would restore and deliver the car to the auction house for Alex to sell at auction. To help finance the restoration of the Speed 90 Pat asked Alex for an interest-free loan of £300,000, which Alex’s auction house paid. On completion of the restoration and sale at auction of the Speed 90, Pat is to repay the interest

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free loan and Pat and the auction house are to calculate their respective costs of restoration and sale and any resultant profits would be split 60/40 in favour of Alex’s auction house.

Pat restored the car to a pristine condition and the car was delivered to Alex three months ahead of the Annual International Classic Car Auction (“AICA”), which is due to be held in six weeks’ time. That event will attract some of the world’s best-known collectors and will be attended by the elite of the motoring press and TV. The car has been widely publicized and is due to be the centrepiece of the sale, with bids expected in the region of £1.5 million.

After delivery Alex had the car inspected by an expert for any damage incurred in transit. The expert was concerned that the serial number of the gearbox was not very clear and thought it might have been tampered with. The expert was not certain of this but she advised Alex that the car should not be auctioned at the AICA until further checks were carried out. With just a few weeks to go before the AICA this will be a disaster for Alex who not only stands to lose the profits from the sale but is also likely to damage his reputation. The value of the car without its matching number gearbox is likely to be around £500,000.

Alex thinks it is too risky to try to sell the car which is still in his/her possession and three weeks ago demanded that Pat repay the £300,000 interest-free loan and take the Speed 90 back. Pat immediately explained s/he was unable to do so, saying that s/he had already spent £350,000 on parts and labour costs, that in his/her view the gearbox was original, and in any case Pat does not have the money.

The Parties have agreed to have the matter dealt with by ICC mediation in Paris pursuant to the ICC Mediation Rules in accordance with the contract between them, with Alex being the Requesting Party. Both Alex and Pat will bring their respective lawyers to the mediation and both have full settlement authority.

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Wheels of Fortune

Murray Armes

Confidential Information for Alex

Requesting Party

Alex’s expert cannot be sure the gearbox is the correct one. The expert has carried out detailed research in conjunction with Rusty’s family and found out that Rusty in fact had two Speed 90 cars, one of which was a spare. Rusty’s family have put Alex in touch with the last-known current owner who has informed Alex that Pat has just bought the second car. However, the risk of selling the first car which might have the wrong gearbox and therefore be misrepresented would be immensely damaging financially and could severely damage Alex’s career. Alex could accept that the gearbox may not be the correct one and make potential buyers aware of this but without the matching gearbox it would be worth much less than its previously estimated value of £1.5 million at auction.

Alex is aware of another car, from an alternative restorer, a Super 66 that has already been restored and which might be available to sell at AICA if Alex moves quickly. Alex could substitute this car in the auction for the Speed 90, but it will sell at most for about £1 million. In addition, the owner, who has restored this car, has been approached by a number of auction houses and knows that Alex would like to secure this car quickly in time for the sale at AICA. The owner wants an advance payment of £150,000 to secure the car for sale by Alex who needs the loan money back from Pat for the Speed 90 to pay the advance payment on the Super 66.

Alex is aware that Pat probably cannot repay all of the £300,000 unless Alex sells the Speed 90 because Pat probably spent more than this amount on the restoration.

The classic car business is a small world and Alex has heard some gossip that Pat might be considering dealing with a rival auction house that is trying to get into the car market and that this rival is offering Pat as much as 50% of the profits on future sales, although Alex cannot be sure the rumours are true. Alex is anxious to maintain a good working relationship with Pat.

Alex is interested in the possibility of securing the second Speed 90 and auctioning both at the same time because the value of the pair would exceed the value of the two sold separately by about 30%, which would mean a sale price of about £3.9 million for the two cars. If Alex could secure the right to sell this second car, s/he could legitimately postpone the sale of the first car and sell the two at a special event celebrating the life of Rusty that would increase Alex’s prestige still further. This is an exciting prospect, but Alex’s lawyer has advised that, because Alex demanded repayment of the interest-free loan, Pat could argue that Alex has repudiated the contract and therefore no longer has the right to sell the first car. Alex needs somehow to overcome this problem in order to stand any chance of securing and selling both cars. But if Pat learns that Alex knows Pat has already bought the second Speed 90, Pat may insist the contract is over and try to find the money to restore the second car him/herself.

Without any refund from Pat, Alex thinks it is possible to get a loan from the bank to secure the already restored Super 66 to sell at the AICA and, if the rights to sell the second car previously belonging to Rusty could be secured in time, his/her auction house could publicize the future sale of both Speed 90 cars at the AICA event and still realize a handsome profit on the Super 66. The bank would charge £7,500 for a short-term loan to cover the cost of securing the Super 66. Wheels of

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Wheels of Fortune

Murray Armes

Confidential Information for Pat

Responding Party

Pat has for some time been dissatisfied with the profit split with Alex and thinks the deal should have been closer to 50/50; after all it was Pat who took the time and effort to find the cars in the first place. In fact Pat has been in discussions with another rival auction house and although no deal has been finally agreed, the profit split would more than likely be around 60/40 in favour of Pat. This rival though has no established track record in selling rare and classic cars and there is a risk the cars may not make as much profit. The rival auction house has refused to have any dealings with Pat unless s/he severs all ties with Alex and his/her company, which means s/he would not be able to sell any more cars through Alex, but nonetheless the future deal with them looks attractive to Pat.

Pat’s lawyer has advised that Alex repudiated the contract for the Speed 90 when s/he asked for the return of the interest-free loan without having first tried to sell the car at auction. Perhaps if Pat were to engage the rival auction house to sell it, the renown of that car would immediately establish an excellent reputation for that auction house and Pat might even be able to secure the promised 60/40 split in his/her favour. The only problem with this idea is the issue over the authenticity of the gearbox.

Pat uses a specialist subcontractor to refurbish and rebuild gearboxes and after notification by Alex about the possible problem with the Speed 90 gearbox, Pat discussed the matter with him. The subcontractor admitted that he had found the serial number to be damaged and indistinct, so he had repaired it on the basis that, as far as he was aware, this was the only Speed 90 that had ever been made and so this could only ever have been the gearbox for this car. So he had “refurbished” the serial number plate by carefully re-engraving it to match the rest of the car.

Just last week, through a very reliable contact, Pat has, much to his/her surprise, found another Speed 90! Although it requires restoration this car is in a better condition than the car Pat refurbished and passed to Alex for auction and the restoration will cost less. The owner said it was a second car that Rusty had in reserve, in which case this could be the car that won a famous race in the world racing championships in 1932. Pat carefully inspected the car, finding that it appears to have a serial number plate for the gearbox that matches the car that was to be auctioned by Alex (so the gearboxes must have been swapped over at some point). Pat thinks that the existence of two cars might devalue the car Alex was going to sell because that one is no longer unique. Pat believes that if the existence of the second car becomes known, the expected price of £1.5 million at auction for the first car might not be achieved, no matter who auctions it. Pat is also concerned about the serial numbers being on the wrong cars and about the re-engraving done by Pat’s subcontractor and is hesitant to disclose these matters to Alex because the reputations of them both might be at stake. On the other hand, news travels fast in the restoration business and Pat would not be surprised if Alex has already found out that the second Speed 90 exists and that Pat has bought it.

When Pat approached the owner of the second car the media coverage related to the original car meant that the owner had a better idea of its value and he wanted £100,000 for it, in its unrestored state. Nonetheless, Pat thinks s/he can restore this car for about £175,000 so has paid the asking price. This is the main reason Pat cannot repay £300,000 to Alex for the original car.

Pat is attracted to the possibility of working with the rival auction house in the future but is aware that if s/he auctions the second Speed 90 via Alex this will almost certainly be the end of what would be a much better deal in terms of profit share, unless Pat can renegotiate her/his existing profit share with Alex.

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Wheels of Fortune

Colin J Wall

Case Analysis

This role-play involves the relationship between Alex, the auctioneer, and Pat, the restorer, who are not just business partners but friends of 10 years standing. Together they have established a good and lucrative relationship up to this particular dispute. This is vital information for the mediator, as it should enable him/her to concentrate on past successes and carefully discover just what has now gone wrong in this otherwise successful relationship.

For some time, Pat has been dissatisfied with the profit split but has, for reasons we are not told, not yet voiced these concerns to Alex. However, as Alex seems to have now rejected Pat’s restoration of the first Speed 90 because of doubts regarding the authenticity of the gearbox and might well have repudiated the contract with Pat, Pat is naturally hurt by Alex’s actions and is exploring the possibility of a new relationship with a rival auction house. Pat appreciates that while a rival auction house might offer him/her a greater percentage split of the profits on the sale, that auction house does not possess the knowledge and reputation that Alex has and might not achieve the best selling price at auction. Is it better for Pat to stay with Alex if the current dispute can be resolved and for Pat to negotiate an increase in the percentage of profit that s/he receives?

Alex also faces a dilemma. Should s/he sell the Super 66 car at auction, instead of the Speed 90, or try for the best of both worlds and auction the Super 66 at the forthcoming AICA and delay the auction of the Speed 90 car or cars to a later date? The latter plan will only work if Pat agrees to cooperate with Alex, as Alex does not have possession of the second Speed 90 and the first Speed 90 is in Alex’s possession but is owned by Pat. Will Pat demand that Alex return the first Speed 90?

A further twist to the plot involves Pat and Alex having entirely different views as to what the selling price at auction might be of two Speed 90 cars together as opposed to auctioning each separately. Pat is of the view that as the first Speed 90 is no longer unique, it will not sell for the estimated £1.5 million. Alex believes that selling both Speed 90 cars together will enhance the price by about 30% and give a combined sale price of £3.9 million. Whatever happens, it is important that the gearbox in the first Speed 90 is swapped for the gearbox in the second Speed 90, so as to allay the expert’s and Alex’s concerns regarding provenance, which would undoubtedly affect Alex’s reputation as well as the auction price of the car.

Should Alex make this opinion known in the mediation that the cars are worth much more together than if auctioned separately? How should Alex go about revealing this, given that Pat owns both cars and could use this information as an opportunity to sell both cars via a rival auction house? This means that Alex must try and “sweeten the deal” by offering Pat a greater percentage split of the profits in any future relationship. That way both parties will receive the maximum benefit.

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Wheels of Fortune

Greg Bond

Commentary for Training

What If? Conflict as Opportunity

What if Alex were able to present the Super 66 at the upcoming Annual International Classic Car Auction, with Pat’s agreement and financial and moral support? What if Alex and Pat were able to renegotiate their profit spilt and other terms of their agreement amicably? What if Alex and Pat were to join forces and sell both Speed 90s together? What if Alex and Pat were able to envision 10 more years of partnership, as the best team of classic antique car auctioneer and restorer in the business? What if they were to be known to this exclusive world as the expert team of first choice? What if their business partnership and love of classic cars were to cement their friendship?

What if Alex were somehow able to raise the money to buy and present the Super 66 at the upcoming Annual International Classic Car Auction, without Pat’s knowledge? What if Alex and Pat terminated their partnership, with Alex demanding return of the outstanding interest-free loan? What if that repayment could be negotiated and agreed, as well as all other outstanding differences between Alex and Pat? What if Pat contracted with the other rival auction house? What if Pat and Alex agreed to each keep and sell one Speed 90, or that Alex could sell both after compensating Pat, or vice versa? What if the two agreed to end their partnership?

What if ending their partnership were amicable and all mutual claims were settled? What if it were acrimonious and the claims were outstanding? What if they were to meet on opposite sides in court, not once but several times?

Conflict is an opportunity to redefine working relationships and partnerships and to ask yourself what you want. This mediation is about this kind of redefinition. A powerful mediator intervention is to ask: What if? What would the world look like to you if that happened? How would you feel if things went that way? If you wake up tomorrow morning, and this has happened, how would that be?

In this mediation, asking the parties to imagine various scenarios might be an effective technique. It might work initially in caucus, since the discussion about the second Speed 90 might be difficult in joint session to start with. By envisaging various imaginary scenarios for the future and the effects these would have, the parties might be empowered to work in the present towards designing a scenario for real — whether together or apart.

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