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Five Art Law Facts that Art Business Professionals Need to Know

Posted on by Judith Prowda

In this series of brief overviews, will distill important art law issues that are often overlooked or misunderstood.  Today’s installment will cover the following five topics:  (i) Protection of artists under New York’s amended consignment law; (ii) Commercial laws that protect collectors who buy art from a dealer; (iii) Importance of written contracts; (iv) Statute of limitations for breach of warranty of authenticity; (v) and Conflict of laws concerning ownership of stolen art.

I.  New Precautions Under New York’s Amended Consignment Statute

Dealers doing business in New York are on notice that breach of the New York Arts and Cultural Affairs Law (NYACAL) consignment provisions can now lead to severe penalties, including criminal sanctions.

Effective November 6, 2012, a New York law protects artists and their heirs who consign works of fine art to dealers by strengthening existing trust property and fund provisions of the NYACAL.

The purpose of the consignment laws is to protect artists in cases where a dealer refuses to return an artist’s work or deliver sales proceeds to the artist.  The law also shields artists against claims by the dealer’s creditors, that is, those people to whom the dealer owes money.

Before the law was amended, there was nothing that prevented unscrupulous dealers, such as Salander-O’Reilly (which filed for bankruptcy in 2007), from comingling sales proceeds with their own funds.  The gallery’s creditors attempted to claim the consigned artworks as assets of the bankruptcy estate.  As a result, many clients, including artists’ children, had to buy back their artwork from the bankruptcy estate.

In response to these egregious problems, the law was amended to provide that works of art (and their proceeds) consigned by artists or their heirs to art dealers are deemed property held in “statutory trust.”  As such, the works (and their proceeds) do not become the property of the dealer or the dealer’s.creditors, or subordinate to “claims, liens or security interests” of a dealer’s creditors.  In certain circumstances, the artist may waive the trust fund protection, but the waiver must be clear and conspicuous and in a signed writing.

In addition, dealers are subject to the fiduciary requirements under New York’s Estates, Powers and Trusts Law with respect to consigned works.  These provisions require the dealer to segregate and hold sales proceeds in trust for the artist.  A dealer who violates this provision may be criminally sanctioned and required to pay attorneys’ fees to artists in civil suits.

II.  Commercial Laws Protecting Reasonable Expectations of Buyers

One of the most important questions to ask when purchasing art is whether the work is free and clear of liens or other encumbrances now and in the future.

In the U.S., the Uniform Commercial Code (U.C.C.), enacted in every state including New York, regulates the transfer of art.  Under the U.C.C., purchasers of art acquire all title (that is, ownership rights) to which his transferor had or had power to transfer.  However, two prominent exceptions exist to protect reasonable expectations of buyers: voidable title and entrustment.

Under the voidable title rule, if the original owner has delivered an artwork to a merchant (for example a dealer), who sells the property to a good faith purchaser for value, that purchaser has acquired good title to the artwork, even if it turns out that the transaction was a result of fraud or deceit.  The key is that the original owner voluntarily relinquished possession and intended to transfer title.  For example, suppose A delivers a painting to Dealer to sell to B, who pays with a bad check.  Or Dealer sells to C instead of B.  In either instance, the buyer keeps the work free and clear and A must seek compensation from Dealer.

Similarly, under the entrustment rule, if a person entrusts (voluntarily transfers) possession of an artwork to a merchant (for example, a dealer), and that merchant sells the work to a “buyer in the ordinary course of business,” the buyer can acquire good title (ownership rights) to the artwork.  The entrustment exception applies only to purchasers who are buyers in the ordinary course of business, that is, persons who (i) purchase in good faith, (ii) without knowledge that the sale violates another’s interest, and (iii) in the ordinary course of business from a person (other than a pawnbroker) in the business of selling goods of that kind.

To illustrate entrustment, let’s say A delivers a painting to Dealer, not intending to consign it, but for another purpose, such as to have it restored, framed, or lent to a museum.  Without obtaining A’s permission, Dealer sells the painting to B, a buyer in the ordinary course of business, who is innocent of any wrongdoing.  B can acquire good title to the painting, even though A never intended to sell the painting.

Buyers of art should exercise caution before purchasing significant works of art even when purchasing through a dealer who represents and warrants that the art is free and clear of all liens and will remain so in the future.  Taking precautions, such as checking with the Art Loss Register, searching the U.C.C. databases, and doing a Google search, can often screen for the most likely claims from prior owners, secured creditors, or gifts promised to institutions.

III.  Oral vs. Written Contracts

Since the art world’s culture is based on trust, agreements between artists and dealers are often sealed with a handshake. However, without the benefit of a written document, there is no record of their arrangement, and even a minor problem can sometimes escalate to a major dispute.

Simply put, oral contracts work well until they don’t.  The possibility of misunderstanding over responsibilities and expectations becomes fuel for discord and may cause the relationship to unravel.  An additional consideration is the statute of frauds, which requires that contracts for promises that cannot be fully performed within one year and for sales of goods (not services) of $500 or more be in writing to be enforceable.

The importance of a written contract is illustrated in cases where artists or dealers have tried to enforce terms of an alleged oral agreement.  Because of the statute of frauds and other obstacles, parties to an alleged oral agreement have encountered difficulties in enforcing the agreement’s terms.

An example of an oral contract that went awry concerned an agreement between the legendary American artist Georgia O’Keeffe (1887-1987) and her long-time sales agent Doris Bry, for the return of artworks and photographs by her late husband, photographer Alfred Stieglitz, as well as an accounting of any monies due on sales.  Bry counterclaimed that O’Keeffe had made a number of oral promises, including the promise to make Bry the exclusive sales agent during O’Keeffe’s lifetime and after her death and to appoint Bry as executor of O’Keeffe’s estate.

O’Keeffe sought dismissal of Bry’s counterclaims, alleging they were barred by the statute of frauds.  The court agreed with O’Keeffe, holding that the alleged promises were unenforceable absent a written agreement. O’Keeffe v. Bry, 456 F. Supp. 822 (S.D.N.Y. 1978)

IV.  Statute of Limitations for Breach of Warranty of Authenticity

When a purchaser of an artwork later discovers that the work is not authentic, the statute of limitations under the U.C.C. for a suit against the seller is four years after the breach of authenticity occurs.  (Major auction houses warrant authorship for five years from the date of sale.)

The problem is that few buyers question the authenticity of a work they have acquired until they are preparing to sell it, exhibit it publicly, have it examined by an expert to be included in a catalogue raisonné or for another purpose – which may occur many years after the statute of limitations has expired.  The key question becomes the date that the statute of limitations begins to run – on the date of the seller delivers the work to the buyer, or at the time the buyer discovers the breach of warranty?  In the majority of states, including New York, the breach of warranty begins to run when the seller delivers the work to the purchaser, unless the warranty explicitly extends to “future performance.”

This principle is well illustrated in Rosen v. Spanierman, 894 F.2d 28 (1990), one of the leading cases on warranty of authenticity involving the statute of limitations.  Here, the plaintiffs purchased a painting entitled The Misses Wertheimer from the Spanierman Gallery in New York for $15,000 in 1968.  The gallery provided them with a full warranty on the painting as an original Jean Singer Sargent, and mailed certificates of appraisal for insurance purposes on five occasions between 1975 and 1986.  In 1987, the plaintiffs decided to sell the painting, then valued between $175,000 and $250,000.  Upon consigning the painting to Christie’s, the plaintiffs were informed that it was a fake.

The plaintiffs commenced an action against Spanierman in 1987 for breach of warranty arguing, among other claims, that the repeatedly issued certificates extended the warranty to future performance.  The court rigorously applied the four-year statute of limitations, holding that the warranty did not extend to future performance, and noted that the plaintiffs could have discovered the defect just as easily immediately after the sale as later.  Requiring a purchaser to obtain an appraisal from an expert other than the seller “is not an onerous burden.”

At present, the District Court of Hawaii is the only court in the U.S. to allow a breach of express warranty of authenticity claim beyond the four-year statute of limitations, which tolls the date “until such time as the defect […] was, or reasonably should have been discovered.”  Balog v. Center Art Gallery-Hawaii, Inc., 745 F.Supp. 1556 (D. Haw. 1990).

Therefore, buyers of works of art in the U.S. should assume they must bring any authenticity claim within the four-year limitations period.

V.  Stolen Art

In an increasingly global art market, one of the most problematic areas of concern is whether a collector has unwittingly acquired a work that was previously stolen. Courts have vastly different approaches to disputes over ownership to stolen property, and cases may (and often do) depend on technical defenses available in different jurisdictions.

In the U.S., a basic principle is that a thief cannot pass good title, not even to a good faith purchaser, nor can anyone further down the chain of ownership.  Therefore, a good faith purchaser can be forced to surrender an artwork without any compensation to the original owner, absent a valid defense, such as the expiration of the statute of limitations.

By contrast, the civil codes in most continental European countries are more favorable to good faith purchasers, who may acquire good title to stolen artwork after a prescriptive period, that is, the passage of time, which can be a short period.

Therefore, as art owners and their heirs (including claimants of art looted during the Nazi era) come forward, sometimes after many decades, to claim property from good faith purchasers, courts are confronted with difficult questions that are complicated by choice of law and statutes of limitation, and must decide legal title to the work as between the original owner and heir on one hand, and a good faith purchaser on the other.

Because there is no central registry to record title to art, independently verifying the provenance and including strong representations and warranties from the seller with regard to ownership are imperative.  As mentioned above, Art Loss Register is one prominent database.  Others include the FBI and Interpol.  To be sure that a work was not stolen during the Nazi era, buyers should check databases, such as http://www.lostart.de/Webs/DE/Start/Index.html, http://www.lootedart.com/ and http://www.artrecovery.com/. Another database, http://icom.museum/spoliation.html, provides links to databases of individual countries for the identification and return of looted or stolen Jewish property.  Another way for collectors to reduce risk is to obtain title insurance, which is now available for fine art and other important collectibles.

 

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Decision: Calder Estate Lawsuit against Klaus Perls

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Calder Estate Lawsuit dismissed by Judge Kornreich: “In other words, plaintiffs are attempting to litigate issues that necessarily stretch back decades without any personal knowledge or contemporaneous records, where nearly all of the people who had personal knowledge of the facts are dead. Rarely has the court encountered a better justification for the statute of limitations.”

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US Copyright Office on Artist Resale Rights: Full Text

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Artist Resale Rights in the US?

“In general, visual artists do not share in the long-term financial success of their works. […] Instead, the financial gains from the resale of their works inure primarily to third parties such as auction houses, collectors, and art galleries. Moreover, the income typically available to other authors through reproduction and derivative uses of their works is more limited for artists. […]  The Copyright Office agrees that these factors place many visual artists at a material disadvantage vis-à-vis other authors, and therefore the Office supports congressional consideration of a resale royalty right, or droit de suite, which would give artists a percentage of the amount paid for a work each time it is resold by another party.”

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Judge Block’s reasons for not saving 5Pointz.

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“Although the works have now been destroyed—and the Court wished it had the power to preserve them—plaintiffs would be hard-pressed to contend that no amount of money would compensate them for their paintings; and VARA—which makes no distinction between temporary and permanent works of visual art—provides that significant monetary damages may be awarded for their wrongful destruction.”

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5pointz painted over.
5pointz painted over. Image via @thisistim712
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15 Minutes on Starting a Non Profit Gallery

Posted on by admin

 

presents a pithy summary of things you need to know about starting your non-profit gallery. Click here for the Stropheus YouTube Channel

Transcript:

This presentation will focus on two main issues; forming your non profit gallery and keeping the tax exempt status.

I manage the nonprofit tax compliance practice at Wegner CPAs. We work with over 700 tax-exempt organizations annually. I have also helped numerous organizations get tax exempt status over the 9 years of my career. In this presentation, I would like to share with you my experience in helping organizations obtain tax-exempt status and what needs to be done to maintain this status.

I will go over the benefits of nonprofit galleries, talk about the steps needed to get your tax exempt status, and finally, discuss the filing requirements to maintain the tax exempt status.

How can the artists and the art community benefit from this additional funding? Nonprofit galleries do not primarily depend on sales for funding. This means that they can show more experimental work. This opens many doors for emerging artists or artists with edgier work. Nonprofit galleries can be an excellent way to network for the artists. Spending time at these galleries gives artists opportunities to meet other artists and invite them to their studios. Finally, fundraising auctions can be a great marketing tool for the artists. They can donate their work to be sold to benefit the gallery. This will give them the ability to show their work to the community.

Now the technical and boring part! What steps are required to get access to all these great benefits?

First, you need to file Articles of Incorporation with the State of New York. You have to file as a nonstock nonprofit corporation. You must also list a registered agent who has a physical address in New York.

Second, you need to obtain an Employer identification number from the Internal Revenue Service. This can be done online and it only takes a few minutes.

Third, you need to create bylaws of the organization.

After these steps, you will be ready to file IRS Form 1023, application for recognition of exemption under section 501 c 3 of the Internal Revenue Code. This form is your key to obtain the tax exempt status. Please keep in mind that only nonprofit galleries that have a tax exempt status can enjoy all the benefits discussed earlier. Finally, you need to register with the State of New York as a charity.

Since it is the most important form for obtaining a tax exempt status, I would like to give you an overview of Form 1023. This is a 12 page form with 12 parts and generally requires a few pages of attachments. I will mention the 6 more important parts. The form asks general questions about the applicant entity such as name, address and organizational structure. Detailed narrative description of activities needs to be provided for the IRS to determine whether you have an tax exempt purpose. You will also need to report compensation and other Financial Arrangements for the directors and employees of the organization. It asks about your planned specific activities such as lobbying or methods of fundraising. It also requires past financial data and projections to cover a total period of 3 years. For example, if the organization has been in existence between one to two years, you will need to report the financial data for the past year and project financials for the next 2 years.

Now, let’s talk about the common mistakes made in the formation process. Organizations not getting professional help would be risking both their time and money. The first common mistake is forming the wrong type of entity. The organization needs to be formed as a non-stock nonprofit corporation. Keep in mind that the employer identification number and articles of incorporation applications are irrevocable. Any major mistakes may require the organization to be dissolved which means more time and money down the drain. Not having a specific enough charitable purpose statement in the bylaws is the number one rejection reason of a form 1023 application. It is very important that this statement is prepared very carefully. The other common mistake is filing an incomplete Form 1023. If the organization has a specific enough charitable purpose and if the form 1023 is completed accurately, the application will get in the fast track to be processed by the IRS. Incomplete application will result in a correspondence from the IRS. Each correspondence will delay the process by approximately 6 weeks. If you are like most people, any IRS correspondence creates some stress. It will also take from your valuable time from doing the work you have the passion for.  Having a complete form 1023 may save you up to a year in the approval process. Finally, there is a great advantage to file the form 1023 within 27 months of formation of your entity. If you file within 27 months of formation, your tax exempt status takes effect from the formation date. This means that all donations you receive since the formation will be tax deductible. If the filing is made after 27 months of formation without a reasonable cause, the tax exempt status will take effect on the form 1023 filing date. In addition, you will need to file an additional schedule with your Form 1023.

So after all this time and energy spent to obtain the tax exempt status, how do you maintain it? Well, you have to comply with the annual filing requirements of the IRS and state of New York.

Let’s go over the IRS form 990 filing requirements. The type of the form 990 to be filed depends on the gross receipts of the entity. Gross receipts generally equal revenue of an organization. If your gross receipts are under $50,000 you can file a form 990-N. This is a very short form and can be completed online. If your gross receipts are under $200,000 and total assets are under $500,000, you can file a 990-EZ. If the gross receipts are over $200,000 or assets are over $500,000 you will have to file a Form 990. These thresholds are the minimum filing requirements. Please keep in mind that you can choose to file a 990-EZ if the gross receipts are under $50,000 or you can file a form 990 if your gross receipts are under $200,000. Should your gallery have any unrelated business income such as advertising, you will need to file a 990-T to report this taxable activity.

In addition to filing a form 990 with the IRS, you need to file form Char500 with the State of New York. The state requires an independent review report to be filed if the total support and revenue is between $100,000 and $250,000. If the total support and revenue is over $250,000 you will need to file an independent audit report. The state is currently discussing increasing the thresholds for the audit and review requirements.

There are also large penalties involved for failing to comply with NY’s filing requirements. Your registration would be revoked if the reporting requirements are not complied with. Attorney General may also seek civil penalties of $1,000 per violation and up to $100 per day for noncompliance.

Forming a nonprofit organization and maintaining tax exempt status is not a very hard job. However, you need to plan it right and have a strategy. You must create a charitable purpose and be dedicated to it. You need to be patient. The process may take over a year. You need to dedicate resources and get professional help in the formation process. If you rely on inexperienced volunteers or generalists to get the non profit law job done, you may end up with delays in your application process or large penalties.

 

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15 Minutes on Emerging Artist Survival

Posted on by Richard Lehun

 

Talk given by at the Presentation Party Night at Bat Haus in Bushwick

Click here for the Stropheus YouTube Channel

Transcript:

In this post I am going to be talking about survival as an artist in 2014 – Below are five main points that you should have in the back of your mind as you are trying to make your art capable of having a sustainable career.

1. An Emerging Artist Is More Than Just The Work.

I am going to start with the premise that while everything you are doing as an artist may appear like purely play and enjoyable, there’s a lot of significance going on with what you are carrying forward with your work. There are two aspects, two memes here that I want you to bear in mind.

The first thing: both your life and your work are obviously valuable. But for your life and your work to be carried out through situations that could be ambivalent or difficult you’d better be prepared. You’d better have some equipment on and you better know what you’re doing with that equipment in order to carry those things that are really important to you forward.

So what I’m going to try to do here is work in a metaphor, Some minimum knowledge, some minimum capacity, some minimum equipment that you will want to bear in mind before you continue to deal with the process of being an artist in a world that is at times both ambivalent or at best agnostic to your efforts.

2. An Invoice Can Mean A Lot

Here I’m going to go through the notion of ‘an invoice’.  All of you who are artists produce works – works you are going to be giving to other people at some point for money – for less money, for more money, for whatever it is that you want to have for those works in some type of exchange, or some type of compensation – as opposed going into the world of contracts.

Everybody hates contracts, that sounds very legal and very demanding.  I’ll just talk about the notion of always doing something on paper in the form of an invoice. It could be on a serviette or in any form possible. You will want to put a couple of things on that simple piece of paper which will help you as an artist moving forward, which will give you agency, give you the equipment to carry your work forward – carry the things you value forward.

2.1 Title

For example, if you put in an invoice that until you see the money, the title to the work stays with you, that means you have the legal rights over it.  Even if you give the artwork over to somebody until you have received the full amount or whatever you are asking for, you retain title.  You write that on the invoice

An invoice, which is a contract, can be a simple piece of paper on which rests the contingency: the title of the artwork passes after payment. That means that if that is simply there, and it accompanies your artwork, the artwork is still yours officially until you are compensated. It means it’s comparatively easy to get your artwork back if full compensation isn’t made.

Think of it as if you’ve got your baby’s on a leash.  They’re not going anywhere until that money is paid.  Metaphorically, they’re not going to get lost, or run out into traffic.  You got your work on a leash, until you’re compensated or until such time as you decided that you’ve been adequately compensated and you can move forward.

2.2 Copyright

What else can go on the invoice?  Don’t forget, we’re entering a period where a significant amount of visual art will be consumed online, will be consumed in various electronic forms in the future. You produce a visual piece of art today and you give it away to somebody, on the invoice point out the fact that they can have the object, they can enjoy the object, but you enjoy the copyright. Copyright includes all the things related to making reproductions of your work, adapting it, assigning the rights, exploiting the work, Make the work available by technological etc.

So, even a serviette with just these two phrases written on it will facilitate the value of your work and your career.

2.3 Availability

At some point, if you struggle long and hard enough you are going to have a body of work. Interestingly enough, the first works you do even though they may not mean much to you, in the course of time they will to people who want to understand your work. You may have emotionally moved on, but somebody, whether it’s a gallerist, a curator or someone else will really, really, want to know where your first works are, or the first works of significance that you’ve made. Why? Because they provide context, they provide history to your production.

A lot of what you are doing is just what you’re doing in the moment and that may be fantastic and that might work for you, but a lot of cases it won’t be enough for the people who want to support you and be behind you.

So, your invoice should contain at least as much information about the buyer as possible, in order for your gallerist, a curator, a museum – anybody you are professionally dealing with to later be able to find your work.  And also, it this ensures the person you’re giving the work to is made aware of the fact that you may want to get that work back – want it loaned back to you in the future for maybe a retrospective or some kind of contextualization of your work. So you should include these terms in the invoice – that the buyer agrees to make the art available upon reasonable request For exhibition at the artist’s studio, galleries and museums. Remember, if all your works gone, the people who care about what you are doing can’t bring the work back, can’t reconstruct your narrative.

2.4 Right First Refusal

So, your work goes out. You’re five years, maybe ten years later in your artistic career now. You may have representation or something similar at this point.

You don’t want works that are meaningful to your body of work, just randomly floating out there in space. This can be very, very disruptive for your gallerist’s or your representation’s ability to work well with your career, Stabilize your career, ensure you have a solid footing beneath you.

Again, metaphorically, do you want your work speeding of along the highway, or do you want it taking the off ramp, perhaps to your current gallerist?

So, if you include another provision in your invoice, again on that serviette with one line, to say something like this:

“For the artwork held by the buyer or any transferee of the buyer may be sold or otherwise transferred, the artist has the right of first refusal.”

What does that mean? It means that the person who has the work comes back to you, and asks you, “do you want to match the price I can get for this or should it go onto the highway of commerce?”

These are the four elements that – if they are included in any type of documentation, which you should for your own interest, will be very helpful for the people who want to help you.

3. Gallery Representation

How do you get representation? Here is the top ten list of where and how you can recruit representation:

1.   Artist recommendation

2.   Curator recommendation

3.   Solo or group show

4.   Art fair

5.   Slide registry or flat file

6.   Submission or open call

7.   Other Recommendation

8.   Social Event

9.   Open Studios

10. Jurying a show.

As you can see, the number one way is to get representation in a gallery is to be recommended by an artist already at the dinner table. So, unless you are going to galleries familiarizing yourself with the people at the table and you have legitimate organic overlap with them, you are most likely not to get representation.

If you look at where solo or group shows is (position of three). Now, that doesn’t mean that 1 is maybe forty or fifty percent of recommendations lead to representation, but that number 3 does offer a significantly lower chance than you’ll get with number one 1 and so on.

To succeed with your career as a sustainable artist, it is very important not to confuse production of high quality work with the path to representation.  You must understand how the world works in this way and respect it.  It’s not just about being a sycophant and just hanging around and being a pest. It means finding community who are at the table already and seeing whether it’s a good fit, or developing that fit organically

So this is the notion of recruiting. So what don’t we want to do? Don’t send in blind submissions, this is probably not known to a lot of people, but there’s nobody out there wanting to see stuff. If there’s no connect created organically by hard work, nobody wants to see it typically.

Also, don’t to walk into a gallery with your portfolio asking for “just five minutes”, don’t bring your portfolio to someone else’s opening.  Don’t ever approach a gallerist at a fair, don’t interrupt a gallerist while he’s working and don’t harass people

If you can’t build up the relationship organically, don’t try to impose yourself.

4. The Consignment Relationship

When you as an artist give an artwork to a gallerist, that gallerist does not have title (as discussed in ‘invoices’.  As an example, in New York state the artwork is yours, and you only lend it, effectively, to the gallerist for the purpose of sale

That means that you ‘consign’ it.  The artwork itself is what’s called ‘trust property’, and the profits from the sale of the artwork are trust property.  They do not belong to the gallerist, they belong exclusively to you, the artist, without question by law.

It is almost impossible by contract to change that, whether you’re signing in terms contracts or with the verbal agreements that you may or may not make with the gallerist.

Bear in mind the law is not terribly interested in such agreements. Instead, it has imposed a very high standard on that relationship by law. This means you do not give your artwork up. It does not belong to the gallery, does not belong to the gallerist, it belongs to you. You have title. If that person sells that artwork, that money by law has to go to a separate account for your benefit. It cannot be commingled with the gallerists other moneys.

If that money is commingled, it is considered a crime, for example, in New York. It’s a misdemeanor, but is still a crime as of a year or so ago.

4.1 Fiduciary Obligations

There is a big F word in the art word that many of you will never have heard of, ‘fiduciary’ obligations A gallerist is your fiduciary. That means the gallerist owes you a very high standard of care, in terms of accounting to you and transparency.  In the real world, however, this doesn’t seem to be the case; the gallerists choose you. They may in the obstructed of the relationship be making all kinds of decisions.  Ultimately, however, by law, they are obligated to do what you instruct.

It sounds counter-intuitive, but that’s the law.  They are your agents. That is what the law says about that relationship.  So if you if you find yourself in a relationship where you get into a conflict with a gallerist – I’m not saying that you should seek conflict or try and lord over the agency factor against them – you have significant recourse. And if you have the right vocabulary to articulate that, the law is on your side immensely.

Typical things that the fiduciary duties include:  to deal honestly, to disclose information, to account of any profits and to manage the consigned artwork prudently.

This is the consignment relationship. You must distinguish as artists in a representation between consignment, which means a trust – your artwork is trust property to the gallerists, but you are also in a relationship that is often representation.

That means the meme is: The gallerist must sacrifice their best interests to serve your best interests. That is the law.  That means that if a gallerist can be proven to be serving their interests over your interests, they are actually breaking the law.  That’s not going to help you in all instances, because the law is not going to rush in to save you, but you must be aware that the gallerist, as a professional has to have an understanding of these standards of care for which the law will obligate them.

For example, in the case of the liability of the dealer as an agent or the gallerist as an agent, when the gallerist has undertaken in some form to propel your career forward, to shape your career, to decide your career steps, to place you on the marketplace; that person is an agent of you.  Just like when somebody represents you in any other matter.  They are subject to very high standards of accounting and having your best interests, and all of that is capable of being looked at by the court or by the legal system

Again, this is not the goal, but you just have to bear in mind that the de facto power relationship is not the legal relationship

In short, the gallerists’s fiduciary obligations is to act exclusively in the artist’s interests And must scrupulously give up all advantages beyond the contractually defined compensations for his services. That’s imposed by law and it’s almost impossible to contract out of.

5. You and Art Fairs

Now, imagine a riot at an Apple Store as a meme for art fairs.  Art fairs are a place – you have probably been to one – where thousands and thousands of artworks are shown, hundreds and hundreds of artists are represented, and collectors from all over the world descend to buy the artworks, to the extent that they are available at the art fair, on the spot.

Art fairs are the new normal.

The point here is – a significant part of turnover for galleries, if not the majority of money earned by galleries is earned at art fairs.  Galleries themselves are loss leaders to prop up the brand  So, you have to keep in mind that if you are not selling at art fairs, whether you like it or not, you can’t possibly be contributing – as a rule – to the galleries bottom line.

So, as much as the art fairs are the scourge, they are the economic savior of most of the galleries out there trying to lord their relationships over you.

Bear that in mind, and don’t think just because you are going to get a solo show in a gallery that that’s going to be your career. Your interest to the galleries will depend, now and moving forward, on how much of your stuff is selling at the art fair.

That’s it.  Questions?

 

 

 

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Judith Prowda on the Artist-Dealer Relationship

Posted on by Judith Prowda

Redacted excerpt from ‘s forthcoming book, “Visual Arts and the Law: A Handbook for Professionals” with permission of the publisher Lund Humphries

Artist–Dealer Agreements

Artist–dealer representation agreements are sometimes confused with simple consignment agreements. Each form creates different legal obligations. A consignment agreement ordinarily addresses particular works for a limited transaction (for example, a specific gallery exhibition), whereas an artist–dealer agreement usually includes general provisions that pertain to consigned works and a separate consignment agreement or rider identifying specific works. Thus, an artist–dealer representation agreement is more comprehensive than a simple consignment agreement, and tends to establish the terms and protocols of the business arrangement.

The Dealer’s Fiduciary Duty to the Artist

Whether the parties enter into a simple consignment agreement or an artist–dealer representation agreement, the arrangement involves the entrustment of works by the artist to the dealer, who acts as the artist’s legal agent. The law of agency governs this relationship. As the artist’s agent, the dealer is considered a fiduciary acting on behalf of the artist, who is the principal. Therefore, the dealer is required to act only in the interest of the artist and to forego all personal advantage aside from just compensation. The dealer also owes the artist a duty of loyalty and is obligated to avoid conflicts of interest.

Fiduciary relationships are common in the art market. By law, a fiduciary acts on behalf of the principal. Similar to the dealer, who acts as a fiduciary to an artist he represents, auction houses are fiduciaries to their consignors. Museum directors and trustees act as fiduciaries to their institutions.

Specifically, the law of agency, which governs the fiduciary relationship, requires the dealer to: (i) care for and manage the consigned property prudently; (ii) deal fairly and honestly; (iii) account periodically to the artist as to the dispositions of the property; and (iv) disclose all relevant information to the artist.

Typically, the artist retains title to the work while it is on consignment with the dealer. The work is considered trust property and the proceeds of the sale are considered trust funds belonging to the artist, and must be kept in a separate account. Dealers do not have discretion to use those proceeds for their own purposes, such as, for example, to pay a gallery’s operating expenses. Once a sale is consummated, the dealer will pay the artist an agreed-upon percentage of the sale price and keep the remainder as a commission. Depending on the nature of the agreement with the artist, a dealer may pay the artist advances against future sales.

The dealer’s legal status as fiduciary means that he may not avail himself of any advantage at the expense of the artist, or engage in selfdealing, such as purchasing the artwork for himself, without the consent of the artist. For example, if a dealer purchases a work outright from an artist, without disclosing that he had previously agreed to resell the work to a third-party, the dealer would be in breach of his fiduciary duty and could be liable to the artist for damages resulting from that breach. In contrast, if the dealer is not the artist’s agent and buys work outright from the artist, there is no fiduciary relationship, and hence no breach. However, a dealer who knowingly defrauds an artist could be held criminally liable.
[…]

Artist–Dealer Legislation

The majority of states in the US, as well as the District of Columbia, have passed legislation applicable to the consignment of artworks to dealers by artists, their heirs, and their personal representatives. New York was the first state to enact an art consignment statute, the New York Arts and Cultural Affairs Law (NYACAL), in 1966. In 1975, California followed, using New York’s statute as a model. The purpose behind these laws is to protect artists from the misappropriation of consigned property or sales proceeds. In addition, the law shields artists from unscrupulous dealers who attempt to abdicate their fiduciary responsibilities to the artist by using contractual waivers and disguised purchase agreements that render the relationship one of debtor and creditor. Since criminal intent is difficult to prove, most artists resort to civil proceedings. These statutes apply only to artists who consign their works to dealers, not to collector-consignors in the secondary (resale) market.

These consignment laws impose upon dealers the highest level of fiduciary care under a trusteeship established by operation of law, which covers the artwork and sometimes the sales proceeds held by the dealer in trust for the artist. Thus, a dealer may be strictly liable (that is, regardless of negligence or intent to harm) based on an absolute duty owed to the artist, whether the dealer purchased works outright or sold the works. In either scenario, the dealer does not have the right to his commission until the artist is paid in full for the agreed-upon percentage of the sale. Some states allow the artist to waive such provisions in writing—for example, by permitting installment payments to be divided equally between the dealer and artist. New York permits a limited waiver, excluding the first $2,500 of proceeds received in any 12-month period, starting with the date of the waiver. Other states, such as California, nullify any attempt at a waiver. Therefore, prudent practice dictates that a dealer segregate the artist’s share of the sales proceeds and create a trust account separate from the dealer’s operating account. In 2012, New York Governor Andrew M. Cuomo signed into law a long-awaited amendment to the NYACAL. The amendments sought to strengthen the existing trust property and trust fund provisions of Articles 11 and 12 of the NYACAL and prevent unintended interpretations from interfering with the purpose of these Articles. Effective November 6, 2012, the consignee art merchant became subject to significant new duties and liabilities. Galleries that disregard their obligations under the statute may now be criminally sanctioned, and may be required to pay attorneys’ fees to artists in civil suits.
[…]

Undoubtedly, the most critical aspect of the amended statute is that it explicitly states that the artwork and proceeds are considered property held in a statutory trust and are not, and will not become, the property of the art merchant or the art merchant’s bankruptcy estate. The amended statute also includes a provision specifying that the trust property and trust funds shall not be subordinated to any claim, lien (that is, a legal right or interest a creditor may have in the property), or security interest “of the consignee’s creditors.”

Accordingly, if the gallery consignee is insolvent and sells an artist’s work, neither the gallery nor the gallery’s creditors can legally touch the artist’s share of sales proceeds, which are held in a trust for the artist. Both the consigned artwork and proceeds held in the trust are beyond the reach of the gallery and the gallery’s creditors. New York’s amended artist consignment protects artists by making it difficult to waive their rights under the statute prospectively, and fortifies the law’s provisions on trust property by including civil enforcement and criminal penalty provisions. Furthermore, the amendments clarify the dealer’s fiduciary obligations to the artist and increase the artist’s awareness of her rights. Finally, the amended statute’s Section 3 further specifies that an artist may seek injunctive relief, recover actual damages and reasonable attorneys’ fees if the artist is successful in an action against the gallery for breach of fiduciary duty.

© Judith Prowda 2013

Artist-Dealer Excerpt

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Anatomy of an Artist Invoice

Posted on by Richard Lehun

For many emerging artists, the invoicing of direct or studio sales is a hastily filled out form (if there is any invoice at all). This is not as good an idea as it seems. In the absence of a more formalized sales contract, the invoice can define many important obligations between the buyer and the artist. This text will review a few of the critical terms that a relatively simple invoice can contain.

When does the Buyer actually own the Work?

The artist invoice can make clear that the buyer does not actually own the artwork until the artist is fully paid. An invoice containing words to the effect that, “title to the artworks remains in the artist until the artist has received the full amount owing for the artworks,” can make recovery of the work in the case of non-payment significantly easier.

Title is an important legal category. It means that a court can, on the face of it, recognize that someone has a collection of exclusive rights as against other interests. Someone who has retained or acquired legal title has a court enforceable right to exclusively possess, use, sell, or otherwise dispose of an artwork. If an artist retains title, but allows the buyer to possess the work until being fully paid, then the exclusive rights listed above remain with the artist.

The fact that an artist has a strong legal right does not mean that one need to go to court to enforce it. The overwhelming majority of  contract disputes are settled out of court. The best way to prevent litigation (that is, the full process of having a court reach a decision on a matter) is to create and maintain clear legal distinctions around key questions. By doing so there is pressure on a non-performing party (in this case, a buyer who is not living up their side of the agreement) to respond without a court’s intervention. A letter from a lawyer demanding the full payment or return of the works has a significantly higher chance of success if an artist has retained title in the manner described on the invoice. In the case where a problem needs a court’s intervention, the issue of title will be key to an efficient and cost-effective proceeding.

Title does not mean Copyright

Even though copyright is created by law when the artwork takes on a tangible form, it is important to remind buyers that they are not acquiring rights to the creative content.  Copyright is a collection of rights, including making reproductions, adapting the work, selling or assigning rights to exploit the work, or making it available to others by technological means. A buyer can enjoy the unique physical iteration of the work, and has all of the rights associated with title mentioned above, but  may not appropriate the unique creative expression.

There are a number of reasons why an artist should communicate about copyright with a buyer. Copyright gives the artist the exclusive right, for example, to make use of copies of the original work for professional purposes. It is important that the buyer understand that the work is acquired subject to limitations. This effectively means that for the length of the copyright anyone must ask the artist for explicit permission to use the artwork in any way other than simply enjoying its possession. Typically this can be included in the invoice by stating that the artist reserves all rights to the artwork, and that the work may not be reproduced in any form without prior permission.

In the US, copyright is typically life of the creator plus seventy years. This means that not only does the creator have rights until the end of his or her life, but that the creator’s estate continues to have control over the works for decades. In expectation of the increasing value that the electronic reproduction of works will generate, it is important to ensure that a buyer understands what they are getting, and that the artist understands and manages the value of works created.

Let the Buyer know that Works may be needed for Future Exhibitions

Keeping a record of who buys artwork will be imperative as an artist’s career evolves. Gallerists, dealers, and museums will want to show the evolution of an artist’s work and the historical context of production. Every early work that leaves the artist’s hands is a puzzle piece that may have a lot of meaning to future professional partners. For this reason it is imperative that an artist keep records of what they have produced, but even more importantly, who the work has gone to. The invoice should contain as much unique identifying and contact information as possible.

In addition, it is valuable to signal to buyers that they take the piece subject to its use in future exhibitions. The invoice can include a term like “buyer agrees to make the artwork available upon reasonable request for exhibition at the artist’s studio, and in galleries and museums, provided that such does not incur costs for the buyer, or that any such expenses are in the name of the borrowing party.” While not a legal right that can be easily enforced against a buyer, it will put the buyer on notice that this can happen, and that they should be prepared to cooperate in good faith if they want the piece.

The Right of First Refusal

It is a longstanding practice that gallerists carefully control price increases to prevent radical shifts in the market which could be disastrous to an artist’s career. To an emerging artist, this may or may not appear relevant. However, it is important to keep a watchful eye out for the moment when it is preferable to have a collector bring works back to an artist or gallerist before disposing of them on the open market.

The right of first refusal is a contractual provision, and does not enjoy the same kind of statutory protection that copyright has. This means that a court can look at the provision and balance it along and against other contractual claims. Nonetheless, an invoice could include a provision that states that “before the artwork held by the buyer or any transferee of the buyer may be sold or otherwise transferred, the artist or his or her assignee(s) shall have a right of first refusal to purchase the artwork.”

Because it is impossible to predict when the re-sale of works could impact on an artist’s career, there is no harm in including a right of refusal provision in invoices. You can always decline to exercise the right if there is no prejudice in doing so. If a buyer feels uncertain about the clause, an artist can point out that he or she only has the right to make the first offer or match any offer that the buyer has. It will not typically prevent the buyer from selling the work.

Conclusion

These are just a few invoice elements that can have a significant impact on an evolving career. As I tried to stress in the section on title transfer, applying the law does not mean a more confrontational relationship with buyers, but rather that important questions be discussed in a transparent and timely fashion.

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