Declaration by Owner Importer Consignee or Agent for Fine Art

Art consignment agreements are deceptively simple. This essay goes backside that simplicity to raise issues for art owners, which are non fully addressed (or only imperfectly so) by the text of the usual understanding. Rescission past the auction house (undoing the sale long later on the auction) is one of these problems. In that location are others. See below.

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Consignments of art nowadays special challenges for not-experts, specially when they are not accepted to dealing with auction houses or art dealers. This is oftentimes the state of affairs when someone inherits art or serves every bit executor of the estate, and may not be familiar with the artworks entrusted to their control or with the business of buying and selling art.

An heir or executor may have to liquidate assets reasonably chop-chop to come across the greenbacks needs of an estate, and therefore may wish to enter into a consignment arrangement with a dealer or an sale firm for the unabridged collection, to sell the art as the manor's agent. In these circumstances, there is a great deal at stake in the negotiation of a consignment agreement. This may not be fully appreciated by a consignor who is not experienced in the idiosyncrasies of art transactions.

Most consignors focus primarily on the minimum sale cost and commission pct, and possibly the allotment of costs such every bit insurance and photography of the art. However, at that place are a number of less obvious merely important bug, including significant risks in the standard terms and weather offered by the auction houses. The total impact of these terms may not be obvious to non-experts reading the agreements for the showtime time, but they take been the subject of a number of disputes, and can have significant financial bear on for consignors.¹

1. Warranties Should Be Carefully Reviewed and Tailored to Your Actual Knowledge

Auction house consignment agreements by and large contain warranties past the consignor about the consigned work of fine art. However, fifty-fifty if there is no written consignment agreement with an art merchant—whether auction house or art dealer—sure warranties are implied as a matter of law under the Compatible Commercial Code (UCC), which governs the sale of goods such as art, and the New York Arts and Cultural Diplomacy Law.

Title

Consignees expect consignors to warrant that they accept good title and will transfer the work free from all liens or security interests. Section ii-312 of the UCC creates a warranty of title by sellers to buyers as a matter of law. The UCC does allow the parties to change or waive that warranty, just it is extremely rare that consignors volition do so, and auction houses would be particularly unlikely to practise then. Under New York law, auction houses in New York City must make an unwaivable warranty of title to their auction purchasers.^two

A consignor's proficient faith belief that he or she is conveying title is not sufficient to actually convey good championship. In one recent dispute, the seller was unaware that "her" painting was actually stolen property. Unfortunately, her skilful faith in re-selling the artwork was of no help to her or her buyer. Under New York law, one cannot larn proficient title from a thief.³ The owner (from whom information technology had been stolen) could insist upon the return of the work past the party then in possession, regardless of the skilful faith of the possessor/seller.

Authenticity

Other warranties are less accented. Warranties of authenticity are one example. Unless the consignor personally purchased directly from the artist, the consignor'due south knowledge of authenticity is probable based on the seller's representations, the provenance of the artwork (i.e., the history of its buying and exhibition), or an expert's opinion. A representation regarding authenticity should be tailored to the consignor's knowledge, to minimize the risk of a warranty claim if it is later on discovered that the work was misattributed to the artist. The consignor is most frequently not an expert, just the consignee may very well exist an expert, or at least know how to contact the relevant skilful. Appropriately, it is reasonable for a consignor to warrant that he or she has "no reason to believe" that the piece of work is not past the named artist, or that the consignor relies on a detail expert's opinion for the attribution to the artist. Indeed, the major auction houses typically limit their warranties of authenticity in their auction conditions of sale, stating that they do not apply if the catalogue description was in accord with the opinions of fine art scholars and experts at the date of the auction (so the sale buyer is out of luck if expert opinions modify after the sale). Similarly, interpreting the New York Arts and Cultural Affairs Law, at least two judicial decisions have held that an "art merchant" selling to a non-merchant has not breached its warranty of actuality if the merchant had a "reasonable ground in fact" for its warranty at the time of the sale.⁴ Whenever possible, consignors should seek the same standard for their warranty.

Provenance is ofttimes considered relevant to actuality and value. Consignors should be careful with representations apropos provenance, especially a warranty that they are providing a "consummate" provenance. In that location is no general understanding in the art world about what must be included, such as whether every prior possessor is expected to exist listed, or every dealer who was involved in a previous sale. The written statement of provenance most oft does not provide a consummate concatenation of title and possession from the artist to the current owner, and does not compensate for the fact that at that place is no title registry for personal property such equally works of art. Nor is a "consummate" provenance even possible in many cases, given the penchant for anonymity among many wealthy collectors, not to mention the confidentiality of private sales.⁵ And when information technology is non clear what should take been included, a dispute over whether the provenance was "complete" tin be manufactured by a disappointed heir-apparent who regrets a buy.

In sum, whenever possible, consignors should warrant merely those facts of which they take actual knowledge. Consignors should be clear and specific about the scope of these warranties, because they can provide the grounds to disengage a sale, even many years later, and a demand for refund of the purchase price.

2. "Rescission" Clauses Allow Sale Houses to United nations-Air current Sales Years Later Without the Demand to Prove in Court that Anything Is Actually Incorrect with the Art

Standard auction house contracts (unlike most contracts with art dealers) invariably include broad "rescission" clauses. These provide the auction houses with authority to undo an auction auction, refund the buy toll to the auction buyer, and need a refund from the consignor if title or authenticity issues ascend even years afterward the auction. The sale firm rescission clauses generally provide the auction houses with "sole" say-so to rescind if the auction sale "may" bailiwick the auction house to liability, or even when they may harm the reputation of the auction house (which, as a practical matter, could be whatsoever claim). In curt, the auction house can rescind without proving in court a breach of any warranty by the consignor, even when the consignor acted in skillful faith based on all data bachelor at the time. Mere doubts about authenticity or negative rumors in the marketplace well afterwards the sale could theoretically be a basis for rescission. In contrast, sales through private dealers generally can be undone simply if the breach of warranty merits is proven in courtroom.

Allowing rescission past auction houses based on the mere possibility of liability is risky with respect to authenticity. Art sale contracts comprise warranties relating to condition, title, and actuality. Discrepancies in a work's condition should be apparent as soon as the buyer takes possession. Title disputes generally involve straightforward legal bug, although the facts may be complex. Questions about authenticity, however, can ascend years after the auction, whenever new information comes to light, when experts change their assessment of the work (perhaps even the same experts who initially supported an attribution), or when new forensic tools of assay are developed. (Moreover, sale consignors are discouraged from challenging the determination that the auction house "may" face liability, because the consignment agreements generally provide that if the consignor fails to pay in response to a demand for rescission, the consignor is responsible for the auction house's legal fees.)

Consignors to auction houses should seek to eliminate such open-ended clauses. Auction houses will be more flexible when the consignment is for a individual sale rather than a public auction, since the terms for a public auction are published in the catalogue and cannot be tailored to each consignor. Sale houses will also be more than flexible when they would like admission to a particularly desirable work or collection. Ideally, consignors should limit rescission to representations by the consignor in the consignment contract, require firsthand notice of a buyer'due south rescission demand to the auction house, seek an opportunity to cure the purported problem, and seek to require "reasonable" decision or substitute an independent method for determining disputed facts in lieu of the auction house's "sole" discretion that the auction firm "may" confront liability.

Ultimately, if consignors are troubled by the run a risk posed by sale house rescission clauses, and do non believe that selling through an auction house is significantly more than probable to result in a sale and a higher selling cost, they may prefer to work with an art dealer, which (usually) does not insist on a rescission correct that tin be triggered by a mere merits or rumor (encounter higher up), before a trouble with the art actually has been proven in courtroom.

3. Guard Against Nonpayment, Because Title Will (Likely) Exist Transferred to the Buyer Upon Commitment Even if the Buyer Has Not Paid for the Artwork

Consignors should be mindful that, under the Uniform Commercial Code,^{half dozen} title more often than not transfers to a purchaser at the time the artwork is physically delivered, regardless of whether the purchaser has paid in full. Furthermore, nether the "entrustment" doctrine, whenever an owner hands over possession to a merchant in that kind of appurtenances (such as an auction house or art dealer), a purchaser from that merchant acquires expert title even if the merchant was non authorized to sell under those circumstances or at that price.⁷ Although the owner may well accept a merits for alienation of his contract confronting the merchant consignee, the owner does not have any right to cancel the sale and reclaim the artwork from the buyer.^viii

Moreover, a buyer could be located anywhere, and the cost of a lawsuit against such a buyer could be prohibitive. Insurance companies have denied coverage in such cases, on the ground that the seller's insurable interest ended upon delivery to the heir-apparent, and, in other cases, on the basis that the loss was caused by breach of contract rather than physical loss of the artwork.⁹ To help baby-sit against the risk of nonpayment, assignment agreements should provide that a consignee may not plow over possession or transfer title until the purchaser has paid in total, and that the consignee is responsible for the purchase price if information technology ignores this requirement.

4. Limit Discretion Afforded to Art Merchants

Consignors generally view art merchants as their agents. New York courts have repeatedly held that auction houses have a fiduciary duty to their consignors.¹⁰ Nevertheless, this is less clear in exercise. Fiduciary duties can be limited by contract. And, art merchants may sometimes regard the buyers as their real clients and primarily have their interests into account. There is a heightened potential for conflict of interest when the consignor is a 1-time customer of the art merchant and the heir-apparent is an important collector or dealer and a echo buyer.

Consignors should carefully scrutinize any provisions that purport to grant an art merchant "sole discretion" to carry out any of its contractual responsibilities. Courts construing such linguistic communication take taken the view that the auction house was properly interim on its own behalf and owed no duty to the consignor when it fabricated a particular conclusion, notwithstanding the instance law apropos the fiduciary duty of the sale house to its consignor. In ane contempo example, the sale house mailed the auction catalogue from a country that was in the heart of a postal strike. The catalogue was sent to potential buyers worldwide, and the sale was to be held in a country that was not experiencing a mail strike. Unsurprisingly, the catalogue did not reach the potential auction attendees on time. Some did non accomplish the potential buyers until after the auction. To make matters worse, the auction house failed to inform the consignor well-nigh the problem. Unfortunately for the consignor, this was not viewed as a alienation of contract by the court, in view of the wide discretion given to the auction firm to determine the appropriate marketing for the sale and the fact that the catalogue was bachelor on line. Unless the conclusion involves a technical issue on which the auction house has unique expertise, consignors should avoid giving the auction house "sole discretion" and require any consignee to brand "reasonable determinations." Finally, if the consignor expects the auction house to undertake certain specific marketing tasks, such as the inclusion of a color epitome of a work in a particular catalogue for a particular sale, these tasks should be spelled out as explicitly every bit possible in the agreement. If there is an auction house "marketing plan," it should be incorporated into the consignment contract.

5. Specify Choice of Constabulary

Consignors should also exist certain that the contract specifies the applicable law that volition govern the contract. The constabulary governing art sales may vary significantly from country to state and from country to country. For example, in 2012, the New York legislature amended the New York Arts and Cultural Affairs Law¹¹ to raise the rights of artists, artists' estates, and artists' heirs who consign works to fine art merchants. Such fine art merchants are deemed fiduciaries; fine art and proceeds from the sales of art are accounted trust property of the consignor; trust funds must be kept in segregated accounts separate from the art merchant's general operating fund, and artists and their estates and heirs are entitled to attorneys' fees in an action to enforce the law's requirements.

Some consignors may notice the amended New York constabulary's benefits so compelling that they will want to choose a consignee who is bound by New York law. Absent an explicit understanding to that outcome, consignors should not assume whatever item law applies based on their own location or their consignee'southward. A consignee could have multiple locations, could exist incorporated in some other state, or could move, and may claim any of these as potential grounds for a different choice of constabulary. Consignors therefore should specify the choice of police in the contract to avoid litigating a fourth dimension-consuming and expensive issue later.

6. Limit Sub-Consignment

Consignors should always know the location of their artwork and who has possession of information technology. Consignment agreements, especially for a large manor with a number of objects, can run for years, and art may exist moved among various locations, or fifty-fifty as a series of consignments from ane art dealer to others (whose identity may not exist known to the consignor) over the class of several years.

Consignors, therefore, should limit the authority of an fine art dealer to re-export artwork to another art merchant without written prior approval of the consignor. This is disquisitional because of the so-called "entrustment doctrine" under the UCC, mentioned in a higher place, which provides that when an possessor of property entrusts goods to a merchant, defined by the UCC as someone "who deals in goods of that kind"¹ (due east.thousand., an fine art merchant), the merchant tin can transfer all of the owner'southward rights—even if the possessor did not actually qualify the sale or the terms. Prohibiting sub-consignment by the art dealer ensures that the only 1 who tin physically transfer the artwork is the dealer the consignor has personally selected. If the consignment is a large collection existence consigned for auction over a number of years, the consignor should require annual inventories that specify the location and status (for instance, on loan) of each work.

7. Know Your Consignee

Finally, and nearly critically, in that location is no substitute for knowledge and a level of comfort well-nigh the consignee. Written contracts tin can merely memorialize that the parties are in agreement on the contract terms. However, a alienation of contract merits is ultimately just as sound as the consignee. If a consignee improperly disposes of artwork and does non accept the resource to back up his obligations, or is non inclined to honor his obligations, the consignor's contractual rights volition be cold comfort.

Consignors need to perform due diligence on their art dealer consignees. They should enquire with colleagues and other professionals they piece of work with, including asking their lawyers to check court dockets for lawsuits against the art dealer. The process of negotiating a assignment agreement tin provide valuable insight into the responsiveness of the proposed consignee. There is no substitute (legal or otherwise) for selecting a trustworthy and financially sound consignee with a solid commercial reputation.

New York, New York
August 2014

Gary D. Sesser
Judith Wallace
Carter Ledyard & Milburn LLP

Notes

¹ At the contrary farthermost are art transactions worth millions or tens of millions of dollars that are unaccompanied past any documentation spelling out the terms of the consignment. Many sales are documented only with a simple invoice, and consignment terms sometimes are non even discussed by the parties.

² Rules of the City of New York § ii-124.

³ Solomon R. Guggenheim Fdn. v. Lubell , 77 N.Y.2d 311 (1991).

⁴ Dawson v. M. Malina, Inc., 463 F.Supp. 461 (S.D.N.Y. 1978). This warranty defense is not available in the auction of works produced in multiples. See NYACAL § 13.05.

⁵ Meet Gary D. Sesser, Provenance: Important, Yes, Simply Often Incomplete and Oftentimes Enough, Wrong. What Consequence for a Sale?, Spencer's Art Law Journal, May thirty, 2013, available at http://news.artnet.com/market/provenance-of import-yes-simply-often-incomplete-and-often-enough-wrong-29953#.UtNh6ShpY20.

^vi UCC § 2-401.

⁷ UCC § 2-403.

⁸ See, e.m., Brownish v. Mitchell-Innes & Nash, Inc., No. 06 Civ. 7871(PAC), 2009 WL 1108526 (S.D.Northward.Y. April 24,  2009) (owner had no merits confronting purchaser who bought painting from dealer in breach of consignment understanding).

^ix Meet, e.g., Zurich Am. Ins. Co. v. Felipe Grimberg Fine Fine art, 324 Fed. Appx. 117, 2009 WL 1269439 (2nd Cir. 2009); Philadelphia Museum of Art v. AXA, No. 2010 Civ. 587 (D. Doc. July half-dozen, 2011) (order granting insurer'southward motion to dismiss).

¹⁰ See, e.yard., Cristallina S.A. five. Christie, Manson & Wood Int'l, Inc., 117 A.D.second 285 (1st Dep't 1986).

¹¹ New York Arts and Cultural Affairs Constabulary § 12.01.

Editor's Notation

This is Volume 5, Issue No. one of Spencer's Art Police force Journal.

Equally noted in earlier volumes of this periodical, the legal construction we phone call art constabulary (an constructing of personal property police force, contract, estate, taxation, and intellectual belongings law) supporting the acquisition, retention, and disposition of fine art, often fits uneasily with art market custom and practice. The outcome is that 21st-century art market participants are frequently unsure of their legal rights and obligations.

The two essays in this Bound/Summer Effect deal with selling your art by consignment. The showtime essay looks at the issues involved with consigning your art to a dealer or auction house. The second essay deals with making sure to get your art back if your consignee gallery goes bust.

Three times a year, issues of this journal address legal questions of practical significance to collectors, dealers, scholars, and the general art-minded public.

— RDS

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Source: https://news.artnet.com/market/art-consignments-are-deceptively-simple-130042

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