What we are about to share could mean the difference between a successful art acquisition and a costly legal dispute. In a market where handshake deals are still surprisingly common, knowing how to structure and negotiate art sale agreements has never been more important.
More than just fine print: essential contractual terms
A successful gallery/collector relationship is much like a marriage, built on mutual trust. The key to success is a well-drafted contract which makes clear both party's rights and obligations.
The most important matters to focus on are financial arrangements (prices, commissions, allocation of costs etc), authenticity and dispute resolution.
Fake or fortune: authenticity guarantees
Just because your invoice says you are buying a "Rembrandt" does not mean that you have contracted to buy a "Rembrandt". The judge will look at the entire course of dealings between the parties to determine whether they intended to make description a contractual term (as Buckley J did in the case of Drake v. Thos Agnew & Sons Ltd [2002] EWHC 294 (Q.B.)). There will be no warranty of authenticity if the references to authenticity are mere opinions. Therefore, insist on the inclusion of an express authenticity warranty in a sale agreement.
If buying at auction, read the small print. While authenticity guarantees are routinely included in an auction house's T&Cs they vary greatly and are usually subject to strict conditions (eg typically valid for five years, restricted to purchaser not assignees).
Importantly, authenticity guarantees are also usually qualified by the 'state of the art' defence – the guarantee will only come into play if the description in the catalogue was out of line with the "generally accepted views of scholars and experts" at the time of sale.
Following the case of Sotheby’s v. Mark Weiss Ltd and Fairlight Art Ventures LLP and Ors [2020] EWCA Civ. 1570, there continues to be ambiguity as to what that means and an auction house may deploy this clause to avoid rescinding a sale.
Resale restrictions: best practices
Non-resale and right of first refusal clauses are common in contemporary sales to prevent arbitrage. Galleries assert that quick auction resales for profit harm artists' careers and create unsustainable market bubbles.
Typical clauses may prohibit resale for 3-5 years, grant the gallery rights of first refusal or appoint the gallery as an agent in any resale. More creative approaches may structure the purchase price as "x" if the work is not resold but as "x+y" if the work is resold within a specified period. There may also be liquidated damages for non-authorised resale.
There have been no court cases in England on enforceability of such clauses and there is a heated academic debate as to whether they are enforceable (read more here). In the UK, depending on the factual circumstances, such clauses may be challenged under the Competition Act 1998, the Consumer Rights Act 2015 or the common law doctrine of restraint of trade. Liquidated damages clauses may be challenged as penalty clauses.
However, in the art market, which relies heavily on trust and personal relationships, breaching a contractual clause—even if legally unenforceable—can damage a relationship with the gallery or the artist. Communication is crucial. As a collector, ensure you are aware of any non-resale clauses in your agreement and negotiate the terms.
Artist's resale right
Artists are entitled to a percentage of the sale price each time their works are sold on the art market. This entitlement, known as the Artist's Resale Right (ARR), originated under the European Parliament and Council Directive (EC) 2001/84 (OJ L272, 13.10.2001). Despite Brexit, this right continues to apply in the UK as per the 2021 EU-UK Trade and Cooperation Agreement, which includes an undertaking by the UK to maintain an ARR scheme.
The right only applies when the sale price reaches or exceeds £1,000 and is calculated on a sliding scale, starting at 4%. The calculation is cumulative, similar to income tax. The total royalty paid for any single sale of a work cannot exceed £12,500.
The seller and their agents (or in the absence of the seller's agent, the buyer's agent or, in the absence of the buyer's agent, the buyer) are jointly and severally liable for payment of the ARR. The sale contract can reallocate the burden by, for example, requiring the buyer to pay it or indemnify the seller against the expense.
Sales between private individuals, without the use of an art market professional, or to public, non-profit making museums do not attract royalty payments. The ARR also does not apply to situations where the seller has acquired the work directly from the artist less than three years before the resale, and where the resale price does not exceed £10,000 (The ARR Regulations 2006, 12(4)).
In the UK, ARR is administered by collecting societies that distribute royalties to artists.
Managing disputes
Litigation should always be a last resort, and parties ought to consider resolving disputes via ADR (eg mediation, arbitration), which offers a more flexible, cost-efficient and confidential process for resolving disputes and can assist in preserving long-term relationships. Read more here.
For more information about how we can help you, please contact the authors.
