As a fiduciary, you may be tasked with selling an art collection that’s owned by a trust or estate. And you may have to do so quickly to meet the cash needs of your client. One way to accomplish this goal is by entering into a consignment arrangement with a dealer or auction house to sell the art as the trust’s or estate’s agent, putting you in the role of consignor. This situation presents a challenge because, as a fiduciary, you may not be familiar with the artworks entrusted to your control or with the business of buying and selling art.
Most consignors focus primarily on the minimum sale price and commission calculation 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 that you should keep in mind when acting as a consignor, including hidden traps in the standard terms and conditions offered by auction houses. The full impact of these terms may not be obvious to non-experts reading the agreements for the first time, but they’ve been the subject of a number of disputes and can have significant financial impact for consignors.1 Here are seven tips to keep in mind when you’re negotiating a consignment agreement.
Carefully Review Warranties
Auction house consignment agreements generally contain warranties by the consignor about the consigned work of art. In fact, even if there’s no written consignment agreement, certain warranties are implied as a matter of law under the Uniform Commercial Code (UCC), which governs the sale of goods, including art.
Title. Consignees expect consignors to warrant that they have good title and will transfer the work free from all liens or security interests. UCC Section 2-312 creates a warranty of title by sellers to buyers as a matter of law. The UCC allows the parties to modify or waive that warranty, but auction houses are unlikely to agree to do so. For example, 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’s conveying title isn’t 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 can’t acquire good title from a thief.3 The owner (from whom it had been stolen) could insist on the return of the work by the party then in possession, regardless of the good faith of the possessor or the seller.
Authenticity. Some warranties (for example, warranties of authenticity) are less absolute. Unless the consignor purchased directly from the artist, the consignor’s knowledge of authenticity is likely based on the provenance of the artwork (that is, 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’s later discovered that the work was misattributed to the artist. A fiduciary consignor often isn’t an expert, but the consignee may very well be one or, at least, know how to contact the relevant expert. Accordingly, it’s reasonable for a consignor to warrant that he has “no reason to believe” that the work isn’t 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 don’t apply if the catalogue description was in accordance with the opinions of art scholars and experts at the date of the sale. Similarly, interpreting the New York Arts and Cultural Affairs Law, at least two courts have held that an “art merchant” that sells to a non-merchant hasn’t breached its warranty of authenticity if the merchant had a “reasonable basis in fact” for its warranty at the time of the sale.4 Consignors should seek the same standards for their warranties.
Provenance is often considered relevant to authenticity and value. Consignors should be careful with representations concerning provenance, especially a warranty that they’re providing a “complete” provenance. There’s no general agreement in the industry about what must be included in a statement of provenance, such as whether to list every prior owner or every dealer who was involved in a previous sale. The written statement of provenance often doesn’t provide a complete chain of title and possession from the artist to the current owner or compensate for the fact that there’s 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
Whenever possible, the consignor should warrant only those facts of which he has actual knowledge. Consignors should take care with the scope of these warranties because they can provide the grounds to undo a sale, even many years later, and for refund of the purchase price, long after assets have been distributed from the estate or trust.
Avoid Rescission Clauses
Standard auction house contracts (unlike most contracts with private art dealers) invariably include broad rescission clauses. These clauses 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 certain issues arise, even years after the auction. Such clauses generally provide the auction houses with “sole” authority to rescind if the auction sale “may” subject the auction house to liability. In short, the auction house can rescind without proving 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.
Allowing rescission 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, when new information comes to light, experts change their assessment of the work (perhaps even the same experts who initially supported an attribution) or new forensic tools of analysis are developed.
Consignors should seek to eliminate such open-ended clauses. If that’s not possible, they can shorten the deadline for rescission, perhaps allowing a 1-year period for the auction purchaser to thoroughly investigate the work. Consignors should also limit rescission to representations by the consignor in the consignment contract, require immediate notice of a buyer’s rescission demand to the auction house and preserve the right to cure the purported problem, if possible. Ideally, the consignor also should seek to substitute an independent method for determining disputed facts in lieu of the auction house’s “sole” discretion that it “may” face liability.
Consignors should be mindful that, under the UCC,6 title generally transfers to a purchaser at the time that 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 subsequent purchaser from that merchant acquires good title, even if the merchant wasn’t authorized to sell under those circumstances.7 Although the owner may have a claim for breach of contract against the merchant consignee, the owner doesn’t have any right to cancel the sale and reclaim the artwork from the buyer.8
Moreover, a buyer could be located anywhere in the world, 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 on 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 guard against the risk of nonpayment, consignment agreements must 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.
Consignors generally view auction houses as their agents. New York courts have repeatedly held that auction houses have a fiduciary duty to their consignors.10 However, this relationship is less clear in practice. Fiduciary duties can be limited by contract. Furthermore, auction houses often regard the buyers as their real clients and, primarily, take their interests into account. There’s a heightened potential for conflict of interest when the consignor is a one-time customer of the auction house and the auction buyer is an important collector or dealer and a repeat buyer.
Consignors should carefully scrutinize any provisions that purport to grant auction houses “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 negligently mailed the auction catalogue from a country that was in the middle of a postal strike. The catalogue was sent to potential buyers worldwide. Unsurprisingly, the catalogue didn’t reach the potential auction attendees on time. Some didn’t 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 failure wasn’t viewed as a breach of contract by the court, in light 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 online. 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 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.
Specify Choice of Law
Consignors should also be sure that the contract specifies which jurisdiction’s law will govern the contract. The law governing art sales may vary significantly from state to state and from country to country. For example, last year, 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 consignors are deemed fiduciaries; art and proceeds from the sales of such 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’s bound by New York law. Absent an explicit agreement to that effect, consignors shouldn’t assume any particular law applies based on their own location or their consignee’s. A consignee could have multiple locations, be incorporated in another state or move its location 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.
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 merchant to others (whose identity may not be known to the consignor) over the course of several years.
Consignors, therefore, should limit the authority of the consignee to re-consign artwork to another art merchant without prior approval of the consignor. This limitation 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”12 (for example, an art merchant), the merchant can transfer all of the owner’s rights—even if the owner didn’t expressly authorize the sale or the terms. Prohibiting sub-consignment ensures that the only party who can physically transfer the artwork is the party whom 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 and accountings that specify the location and status of each work.
Know Your Consignee
Finally, and most critically, there’s no substitute for knowledge and a level of comfort about the consignee. Written contracts can only memorialize that the parties are in agreement on specifics of the terms. However, a breach of contract claim is ultimately only as sound as the consignee. If a consignee improperly disposes of artwork and doesn’t have the resources to back up his obligations or isn’t inclined to honor his obligations, the consignor’s contractual rights will be cold comfort.
The bottom line is that consignors need to perform due diligence on their consignees. They should ask their colleagues and other professionals they work with, including their lawyers, who can check the court dockets for lawsuits against the consignor. The process of negotiating a consignment agreement can provide valuable insight into the responsiveness of the proposed consignee. There’s no substitute for selecting a trustworthy and financially sound consignee with a solid commercial reputation.
1. At the opposite extreme are art transactions worth millions of dollars that are unaccompanied by any documentation detailing the terms of the consignment. Many sales are documented only with a simple invoice, and consignment terms sometimes aren’t even discussed by the parties.
2. Rules of the City of New York Section 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).
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, www.artnet.com/insights/spencers-art-law-journal/provenance-important-yes-but-often-incomplete.asp#.UtNh6ShpY20.
6. Uniform Commercial Code Section 2-401.
7. UCC Section 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 Section 12.01.
12. UCC Section 2-104.