Art consignment agreements are deceptively simple. This essay goes behind that simplicity to raise issues for art owners, which are not fully addressed (or only imperfectly so) by the text of the usual agreement. Rescission by the auction house (undoing the sale long after the auction) is one of these issues. There are others. See below.

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Consignments of art present special challenges for non-experts, especially when they are not accustomed to dealing with auction houses or art dealers. This is often the situation when someone inherits art or serves as 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 quickly to meet the cash needs of an estate, and therefore may wish to enter into a consignment arrangement with a dealer or an auction house for the entire collection, to sell the art as the estate’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 price and commission percentage, and possibly the allocation of costs such as insurance and photography of the art. However, there are a number of less obvious but important issues, including significant risks in the standard terms and conditions offered by the auction houses. The full impact of these terms may not be obvious to non-experts reading the agreements for the first time, but they have been the subject of a number of disputes, and can have significant financial impact for consignors.¹

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

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

Title

Consignees expect consignors to warrant that they have good title and will transfer the work free from all liens or security interests. Section 2-312 of the UCC creates a warranty of title by sellers to buyers as a matter of law. The UCC does allow the parties to modify or waive that warranty, but it is extremely rare that consignors will do so, and auction houses would be particularly unlikely to do so. Under New York law, auction houses in New York City must make an unwaivable warranty of title to their auction purchasers.²

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

Authenticity

Other warranties are less absolute. Warranties of authenticity are one example. Unless the consignor personally purchased directly from the artist, the consignor’s knowledge of authenticity is likely based on the seller’s representations, the provenance of the artwork (i.e., the history of its ownership 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 discovered that the work was misattributed to the artist. The consignor is most often not an expert, but the consignee may very well be an expert, or at least know how to contact the relevant expert. Accordingly, it is reasonable for a consignor to warrant that he or she has “no reason to believe” that the work is not by the named artist, or that the consignor relies on a particular 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 accordance with the opinions of art scholars and experts at the date of the sale (so the auction buyer is out of luck if expert opinions change after the auction). 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 authenticity if the merchant had a “reasonable basis 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 often considered relevant to authenticity and value. Consignors should be careful with representations concerning provenance, especially a warranty that they are providing a “complete” provenance. There is no general agreement in the art world about what must be included, such as whether every prior owner is expected to be listed, or every dealer who was involved in a previous sale. The written statement of provenance most often does not provide a complete chain of title and possession from the artist to the current owner, and does not compensate for the fact that there is no title registry for personal property such as works of art. Nor is a “complete” 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 it is not clear what should have been included, a dispute over whether the provenance was “complete” can be manufactured by a disappointed buyer who regrets a purchase.

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

2. “Rescission” Clauses Allow Auction Houses to Un-Wind Sales Years Later Without the Need to Prove in Court that Anything Is Actually Wrong 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 sale, refund the purchase price to the auction buyer, and demand a refund from the consignor if title or authenticity issues arise even years after the auction. The auction house rescission clauses generally provide the auction houses with “sole” authority to rescind if the auction sale “may” subject the auction house to liability, or even when they may damage the reputation of the auction house (which, as a practical matter, could be any claim). In short, the auction house can rescind without proving in court a breach of any warranty by the consignor, even when the consignor acted in good faith based on all information available at the time. Mere doubts about authenticity or negative rumors in the marketplace well after the sale could theoretically be a basis for rescission. In contrast, sales through private dealers generally can be undone only if the breach of warranty claim is proven in court.

Allowing rescission by auction houses based on the mere possibility of liability is risky with respect to authenticity. Art sale contracts contain warranties relating to condition, title, and authenticity. Discrepancies in a work’s condition should be apparent as soon as the buyer takes possession. Title disputes generally involve straightforward legal issues, although the facts may be complex. Questions about authenticity, however, can arise years after the sale, 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 analysis are developed. (Moreover, auction 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 private 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. Auction houses will also be more flexible when they would like access to a particularly desirable work or collection. Ideally, consignors should limit rescission to representations by the consignor in the consignment contract, require immediate notice of a buyer’s rescission demand to the auction house, seek an opportunity to cure the purported problem, and seek to require “reasonable” determination or substitute an independent method for determining disputed facts in lieu of the auction house’s “sole” discretion that the auction house “may” face liability.

Ultimately, if consignors are troubled by the risk posed by auction house rescission clauses, and do not believe that selling through an auction house is significantly more likely to result in a sale and a higher selling price, they may prefer to work with an art dealer, which (usually) does not insist on a rescission right that can be triggered by a mere claim or rumor (see above), before a problem with the art actually has been proven in court.

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

Consignors should be mindful that, under the Uniform Commercial Code,⁶ title generally transfers to a purchaser at the time the artwork is physically delivered, regardless of whether the purchaser has paid in full. Furthermore, under the “entrustment” doctrine, whenever an owner hands over possession to a merchant in that kind of goods (such as an auction house or art dealer), a purchaser from that merchant acquires good title even if the merchant was not authorized to sell under those circumstances or at that price.⁷ Although the owner may well have a claim for breach of his contract against the merchant consignee, the owner does not have any right to cancel the sale and reclaim the artwork from the buyer.⁸

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 buyer, and, in other cases, on the ground that the loss was caused by breach of contract rather than physical loss of the artwork.⁹ To help guard against the risk of nonpayment, consignment agreements should provide that a consignee may not turn over possession or transfer title until the purchaser has paid in full, and that the consignee is responsible for the purchase price if it 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 However, this is less clear in practice. Fiduciary duties can be limited by contract. And, art merchants may sometimes regard the buyers as their real clients and primarily take their interests into account. There is a heightened potential for conflict of interest when the consignor is a one-time customer of the art merchant and the buyer is an important collector or dealer and a repeat 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 language have taken the view that the auction house was properly acting on its own behalf and owed no duty to the consignor when it made a particular decision, notwithstanding the case law concerning the fiduciary duty of the auction house to its consignor. In one recent case, the auction house mailed the auction catalogue from a country that was in the middle of a postal strike. The catalogue was sent to potential buyers worldwide, and the auction 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 not reach the potential buyers until after the auction. To make matters worse, the auction house failed to inform the consignor about the problem. Unfortunately for the consignor, this was not viewed as a breach of contract by the court, in view of the broad discretion given to the auction house to determine the appropriate marketing for the auction and the fact that the catalogue was available on line. Unless the decision 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 make “reasonable determinations.” Finally, if the consignor expects the auction house to undertake certain specific marketing tasks, such as the inclusion of a color image of a work in a particular catalogue for a particular auction, these tasks should be spelled out as explicitly as possible in the agreement. If there is an auction house “marketing plan,” it should be incorporated into the consignment contract.

5. Specify Choice of Law

Consignors should also be sure that the contract specifies the applicable law that will govern the contract. The law governing art sales may vary significantly from state 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 enhance the rights of artists, artists’ estates, and artists’ heirs who consign works to art merchants. Such art merchants are deemed fiduciaries; art and proceeds from the sales of art are deemed 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 find the amended New York law’s benefits so compelling that they will want to choose a consignee who is bound by New York law. Absent an explicit agreement to that effect, consignors should not assume any particular law applies based on their own location or their consignee’s. A consignee could have multiple locations, could be incorporated in another state, or could move, and may claim any of these as potential grounds for a different choice of law. Consignors therefore should specify the choice of law in the contract to avoid litigating a time-consuming and expensive issue later.

6. Limit Sub-Consignment

Consignors should always know the location of their artwork and who has possession of it. Consignment agreements, especially for a large estate with a number of objects, can run for years, and art may be moved among various locations, or even as a series of consignments from one art dealer to others (whose identity may not be known to the consignor) over the course of several years.

Consignors, therefore, should limit the authority of an art dealer to re-consign artwork to another art merchant without written prior approval of the consignor. This is critical because of the so-called “entrustment doctrine” under the UCC, mentioned above, which provides that when an owner of property entrusts goods to a merchant, defined by the UCC as someone “who deals in goods of that kind”¹ (e.g., an art merchant), the merchant can transfer all of the owner’s rights—even if the owner did not actually authorize the sale or the terms. Prohibiting sub-consignment by the art dealer ensures that the only one who can physically transfer the artwork is the dealer the consignor has personally selected. If the consignment is a large collection being consigned for sale over a number of years, the consignor should require annual inventories that specify the location and status (for example, on loan) of each work.

7. Know Your Consignee

Finally, and most critically, there is no substitute for knowledge and a level of comfort about the consignee. Written contracts can only memorialize that the parties are in agreement on the contract terms. However, a breach of contract claim is ultimately only as sound as the consignee. If a consignee improperly disposes of artwork and does not have the resources to back up his obligations, or is not inclined to honor his obligations, the consignor’s contractual rights will be cold comfort.

Consignors need to perform due diligence on their art dealer consignees. They should inquire with colleagues and other professionals they work with, including asking their lawyers to check court dockets for lawsuits against the art dealer. The process of negotiating a consignment agreement can 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 opposite extreme are art transactions worth millions or tens of millions of dollars that are unaccompanied by any documentation spelling out the terms of the consignment. Many sales are documented only with a simple invoice, and consignment terms sometimes are not even discussed by the parties.

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

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

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

⁵ See Gary D. Sesser, Provenance: Important, Yes, But Often Incomplete and Often Enough, Wrong. What Consequence for a Sale?, Spencer’s Art Law Journal, May 30, 2013, available at http://news.artnet.com/market/provenance-important-yes-but-often-incomplete-and-often-enough-wrong-29953#.UtNh6ShpY20.

⁶ UCC § 2-401.

⁷ UCC § 2-403.

⁸ See, e.g., Brown v. Mitchell-Innes & Nash, Inc., No. 06 Civ. 7871(PAC), 2009 WL 1108526 (S.D.N.Y. April 24,  2009) (owner had no claim against purchaser who bought painting from dealer in breach of consignment agreement).

⁹ See, e.g., Zurich Am. Ins. Co. v. Felipe Grimberg Fine Art, 324 Fed. Appx. 117, 2009 WL 1269439 (2d Cir. 2009); Philadelphia Museum of Art v. AXA, No. 2010 Civ. 587 (D. Md. July 6, 2011) (order granting insurer’s motion to dismiss).

¹⁰ See, e.g., Cristallina S.A. v. Christie, Manson & Woods Int’l, Inc., 117 A.D.2d 285 (1st Dep’t 1986).

¹¹ New York Arts and Cultural Affairs Law § 12.01.

Editor’s Note

This is Volume 5, Issue No. 1 of Spencer’s Art Law Journal.

As noted in earlier volumes of this journal, the legal structure we call art law (an amalgam of personal property law, contract, estate, tax, and intellectual property law) supporting the acquisition, retention, and disposition of fine art, often fits uneasily with art market custom and practice. The result is that 21st-century art market participants are frequently unsure of their legal rights and obligations.

The two essays in this Spring/Summer Issue deal with selling your art by consignment. The first 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