The painting, by Joachim Wtewael, a contemporary of Shakespeare, vanished from Germany after the Second World War and was bought by a Panamanian Corporation who tried to sell it in 1989.
But the tiny masterpiece, The Holy Family with Saints John and Elizabeth and Angels, was withdrawn from sale in April 1992 when doubts about its provenance were raised.
Since then the painting, which measures just eight inches by six, has remained in safekeeping at Sotheby's pending the outcome of the dispute between the City of Gotha together with the Federal Republic of Germany and the Panamanian company Cobert Finance SA.
Alexander Layton QC, for the German authorities, told Mr Justice Moses that his decision would be closely watched by the London auction houses at the centre of the art trade.
"There are many thousands of works of art known to exist before this century's wars, which remain hidden, and it is thought that the outcome of this case may have a significant bearing on the extent to which those who now have those lost works of art will sell them for their own profit, without fear of claims by their rightful owners," he said.
The court heard that the story of the painting, believed to be worth at least pounds 700,000, was "like something out of a detective novel". It had been owned by the Duke of Saxe-Coburg-Gotha since 1826 and, from 1928, formed part of a collection known as the Saxe-Coburg-Gotha Ducal Foun- dation for Art and Science.
During the Second World War, it was probably put into storage at a castle in what was to become the German Democratic Republic.
However its fate at the end of the war was in dispute, the court heard. Cobert claimed that Adolf Kozlenkov, a colonel in the Soviet forces from Latvia, took the picture. The German authorities said this story was a fabrication and that military archives showed no sign of a colonel from Latvia called Kozlenkov. They argue that the most likely sequence of events was that the painting was taken from Gotha by Soviet soldiers and kept in the Soviet Union until 1986, from where, it was agreed, it was eventually taken to Berlin. In November 1988, it was acquired by a Mrs Breslav who took it to Sotheby's before selling it to Cobert.
Cobert is expected to argue that the authorities have lost all rights of possession and ownership to the painting. They claim that under the limitation period set out by the German Civil Code, the authorities had only 30 years from the date in the mid 1940s when the painting was removed from the possession of the Foundation in which to bring a claim for its return.
The case continues.Reuse content