End of Brick and Mortar: Part II
In Part II of this panel discussion on post Brick-and-Mortar experiences held at Christie's Education New York, Josh Baer provides historical contextualization and market insight, after which Richard Lehun will present on the legal challenges created by hybrid art business practices. Part I with Nicole Klagsbrun and Jay Gorney can be found here.
After running White Columns, I couldn't get a job, I didn't have any money, so I opened an art gallery - because it seemed like a good idea at the time, and the notion of not knowing anybody who bought art didn't seem quite as foolish then. I think part of what's going on with all of us is that was one of the advantages of being young, and sort of inexperienced. Now we're sort of in this more mature, white-hair kind of period. So our changes in life have to do with youth vs. hopefully a little bit of wisdom. So, I opened a gallery much as Andy Warhol would throw a party. I would say that in the mid-eighties, three of maybe the five best galleries in New York for artists of our generation were Nicole, Jay and myself. And of the 20 best galleries in New York at the time, I would say that we were on that list. It’s interesting to see that none of us are doing that now. That's significant. It made me reflect that, wow, if you look back into the 60s, how many galleries are still going that we could name? Not many. 70s not many, 80s fewer, 90s... So though this topic is about the shift of the brick and mortar or the gallery system, I think it's always been a little bit the case that as people got more mature their circumstances change. Personally, I closed my gallery because I was destitute, out of money and the art market had collapsed.
We haven't mentioned money yet, but that's what happened in the 90s and I know that it affected all of us in different ways. But if three of the five best galleries of that period couldn't make it, that's meaningful. If we've got roughly six hundred galleries in New York now, how many of them are really extraordinary? And we don't really talk about that. And how many of them are likely going to be alive, how many are going to be flourishing 5, 10, 20 years from now? I'm going to say not many. And it’s always been that way.
So, I didn't have much choice. I think these guys (Nicole and Jay) had a little more choice. I closed my doors and I went, now what? And I heard of this thing called the fax machine, so I created this newsletter called the 'Baer Fax,' which was a brand-new term. This was 21 years ago. There was kind of a ‘shower idea’ that Jerry Saltz was supposed to be my partner and that’s a long story. And lo and behold people think that it’s a big deal now (or not). But for me, it’s not a very big deal. Running a gallery, representing artists, is a very significant activity that really adds a lot to the world of art. Being a newsletter, or, now I've been an art advisor for twenty years, it’s a very satisfying activity to do. It's not quite as important as running a gallery.
But it’s something that’s probably personally better, and I think that all of us, after thirty or forty years, you start to say, “well what’s best for me vs. what's best for the artists I work with.” It’s a very hard switch to make, because for many years, we were really- you know, as a gallerist, you’re the friend, you’re the psychiatrist, you’re the banker, you’re the mother, you’re the father of all these artists. And it’s a very confusing power position, because that relationship is driven by the artist, and they're not our friends. We’re their friends when they need something; they are not our friends when we need something.
It took a long time to understand that and to understand what was best for us, and I think largely what's happening for all of us is asking the question, well, what works for us as much as for the artist? Now, before we bring it to that question, which I think will be an important part, I think it’s notable that we were also lucky that we came of age in a golden age of art making. The late seventies, early eighties. It’s like, oh my god, there's Cindy Sherman, she's sitting at Artist Bays but here’s this photo, $100 bucks, what a great thing. Wow, I went down to see Jeff Koons, there's Richard Prince, hey, I went to Europe, have you ever heard of this guy named Gerhard Richter? No, but there's this other guy named Polke. It was a magic time to be a young person in this business.
I think today, the people who are running the art galleries are as knowledgeable and talented as we were, they just happened to coming of age in not quite a glory time of art making. So, in the sense that we are talking about the brick-and-mortar and the technical things about art fairs, actually everything to do about the art world and the art business is really driven by the artists. It’s really up to them to be creating such exceptional art that makes so many people want to be involved, and I would argue that we're not at this golden age at the moment. Maybe that's because the art market has been the driving force, maybe we've been over-commercialized. Maybe we're getting too much attention. But it will happen again, where the art will drive it.
If you look through history you'll see very few artists that are remembered through the ages. How many artists do we remember from the Renaissance? I can probably name two, but I didn’t study art, some of you maybe ten, and that's the Renaissance. So meanwhile we have this system of six hundred galleries in New York or eight hundred, and over three million artists in America working. I had a conversation with Jerry Saltz and I said, “Jerry, I'm not interested in a million mediocre, respectable, OK artists.” And Jerry said, “well, I am,” which was interesting and honest. I'm interested in five, or ten, or fifty. And again, I was fortunate that when I was twenty-five there were these people and you could see them. They're still around, and there will be that many, but in this over-convoluted system of ten times as many collectors, ten times as many galleries. “Oh that's good, it’s a nice job, you can tell your mom you became an art dealer, they won't shout at you like they would have forty years ago,” but we're just in a different moment, we have a lot more noise going on.
And I've tried to encourage people, let’s put Bose headphones or something, get rid of the noise and bring it down to the artists that are really going to change everybody’s view of the world, and that might be one we haven't met, or one that Jay went to see in studio today, or one that Nicole is championing. But that's the focus that I want to see. So I'm going to make one more point that's completely opposite to everything that I've said, and that's interesting that no one's really mentioned, which is the Internet.
We're talking of the demise of the brick and mortar, and the internet is a way of communication. Certainly we all email. Right now people don't have a chemical view of art, where you used to smell the painting, look at it, think about it. You get a jpeg and you have ten minutes to decide. Strangely enough for my career, I also work for eBay, and my job is to try to figure out a way for them to bridge these worlds. It’s an interesting challenge, because it’s the exact opposite to what all of us in this room are doing. So, I'll just make these points in general and hopefully we can get to questions soon to find out what you guys really want to learn from all this and we can argue between us. Thank you.
I'm going to be talking about a little more what we need to think about regarding the hybrid gallerist business models. Things are changing really fast and only by coming together today and discussing what the implications of that are can we work together to try to understand it and work through it. This is just a short list of the closures in 2016. The brick and mortar gallery is under serious attack. As is the Leo Castelli artist-gallerist model. Two market pressures account for the shifting tectonic. There are over 300 noted art fairs at this point and gallerists are doing over 40% of their business away from the physical gallery. Rent has entered the stratosphere, with Chelsea costing up to an average of $80 to $100 or even more per square foot.
New business models are however emerging around the classic roles that our three panelists have discussed, as they go through the various stages of their careers, embracing different types of freedoms and opportunities. These models are primarily: gallerist, dealer, and art advisor. This chart shows to whom typically each role owes legal duties. So we have the gallerist in the primary market working on artist consignment, who has disproportionate legal duty to the artist. We have the dealer in the secondary market, I'm just using here the general term of entrustment, which is also a form of consignment, but we're not going there now. And most of the legal obligations are to the seller, obviously. And then in the case of the advisor, where you get your income from the sale, your loyalty is exclusively to the client-buyer.
We had an event on art advising where we went into a little more detail about this. There’s a lot of confusion about this. As an art advisor, if you’re being paid by a client-buyer, you have exclusive obligations to that client, at the expense of all other stakeholders. And we'll go into that a little bit in the coming slides. So, what we have here is a little bit like the five boroughs of art business and what it means in the legal sense. The reason why I'm leaving it in its complexity right now is to give you an idea of the many different sources of liability there are, where you could get hit from.
A gallerist in the primary market will have special fiduciary duties to the artists, even after leaving the physical gallery. The main source of these special fiduciary duties are the consigned artworks, the funds held in trust, and those stemming from the artist representation relationship. A gallerist acting as an art advisor is the agent-fiduciary of the client-buyer. In both these cases, the artist-gallerist relationship and the hybrid gallerist in today's world also functioning as an art advisor, the following duties arise. The duty of loyalty: to have no conflicts of interest, to have transparency, no undisclosed profits; and to exercise prudence in that relationship: prudence in the dealings with the artist, and prudence in the dealings with a dependent client-buyer as an art advisor.
These duties exist even if a contract says the opposite, or even if there's no contract at all. A gallerist acting as a dealer, however, in the secondary market, works entirely differently. Buying and selling secondary artworks is largely a commercial transaction subject to what's called the Uniform Commercial Code, which is a body of law across the United States to try and make buying and selling things easier. And make it so that people in different states in different situations can rely on each other. Then you have also tort law, which is basically a default liability where you have to behave in a way that you're taking reasonable care in a situation, not exposing someone unnecessarily to risk. That exists completely independent of contract. And then you have the layer of contract itself, if you have one.
And in some rare cases, as a secondary market actor, you have an issue of bailment and agency law. That means when your sales don't reach the level of you actually being an art dealer, you're considered by the law to be a more private person, and in that situation there are other duties that can arise. And if they arise, they can go in the direction of these fiduciary duties that I just mentioned, that we're going to cover in a little more depth.
Let’s look a little closer at what these fiduciary duties mean, because they are not very well known. Fiduciary duties change the nature of obligations that people owe to each other in very unexpected and dramatic ways. Instead of equal parties to a contract, fiduciary obligations create two distinct roles: the fiduciary, that’s the gallerist or the art advisor, the person who has power; and the person who's dependent or has to rely, the entrustor. It’s really important to understand that whenever you have the word agent, whenever you’re acting as an agent for something or somebody, you have some degree of fiduciary duties. Agency and fiduciary duties are inseparable. Any time you are acting on somebody's behalf, and it’s considered an agency relationship before the law, you have special obligations. Whether you have a contract, whether you contemplate these things, whether you've even heard about this, whether you even think that you don't possibly by virtue of what you’re doing have such obligations, the law has those obligations in place and will enforce them against you.
And again, when agency-fiduciary duties are present, they can trump any contract or non-legally binding agreement. Even in the case when you have a discussion, and you come to some kind of agreement over something, but you aren't necessarily ready to create legal obligations, but yet you think you understand each other, the fiduciary duties can trump all of that.
Fiduciary obligations legally order uniquely valuable social relationships. We find fiduciary obligations in doctor-patient relationships, lawyer-client relationships, amongst partners in a business venture, and in corporate governance. Fiduciary duties are imposed by society to balance power differentials.
Relationships of trust in the art context - if there's one thing that any veteran in the art context will agree to it is that without trust, without having a high degree of reliance on other actors, it’s impossible to really function. And so interestingly enough, the law has regimes in place that mirror these types of experiences, these types of expectations that we have. So, relationships of trust in the art context are in fact inseparable from these fiduciary obligations.
It is important to understand that fiduciary obligations are imposed by courts. So again, it’s not what you think it should be in that relationship, it’s not what you think is right, it’s not even necessarily what is in your contract. If you are an art advisor, if you’re a gallerist dealing with an artist, and you do something that makes business sense to you. or even might be fair from a business point of view, but can be understood as abusing your power, a court, through the vehicle of fiduciary obligations, can basically claw back profits, or force you to perform, or perform differently. So courts are effectively the source of these fiduciary obligations, not our expectations, or our contracts, etc.
To understand what these fiduciary duties largely consist of, there are two primary duties, loyalty and prudence. The gallerist must be loyal, the art advisor must be loyal, which means they must be free of conflict of interest. He or she must act only in the interest of the artist or the advisory client, and also in the dealings there must be prudence, you must use your experience, your reasonable reflection and your professional capacity in order to make decisions that generally reflect the interests of your artists and your clients.
Loyalty require that the gallerist or art advisor cannot act for the benefit of a third party whose interests are in conflict of with those of the artist or the advisory client. The hybrid gallerist cannot act for his or her own benefit to the detriment of either without being transparent about this. That means you can’t engage in dealings that are lacking in transparency. Let us remember that the consignment relationship with primary artworks and the art advisor relationship create this special relationship.
It’s also imperative in these two relationships that all profits be discussed, that everything be disclosed, that any benefit that would accrue to you, be very clear to the artist or to the client, in the case of being an art advisor. These are things that are often not understood. The difficulty is that when these things are not properly disclosed, if the matter ends up in court, the default fiduciary obligations will force full disclosure and disgorging of any profits. The artist or art advisory client is not obligated to even ask for this, or to provide for this, or even know that this exists legally. It’s simply imposed externally by the law. Exposure, fiduciary exposure, lasts a very long period of time, and is not very easy to get out of.
In closing, fiduciary duties on art advisors and gallerists who are in relationships with artists balance agency costs. Agency costs arise when the art advisor or gallerist in this sense takes discretionary but imperfectly observable actions that impact those stakeholders. So despite being not well known, fiduciary obligations and agency relationships are at the core of post-brick and mortar practice.
So the solution is: get good contracts! At no other time has it been as important as now to know where risks are coming from. Having no contract does not mean that there is no law. It just means that you are playing Russian Roulette. Much of this law that we're talking about is directed towards holding you accountable in ways that may or may not have anything to do with you. They may not be fair at all. But these sources of law will be determinative. The only way to deal with legal risks, especially fiduciary duties post-brick and mortar, is to have the right contracts in place. I’m going to spend two slides on non-fiduciary legal issues, because in some senses they are less complicated and generally better understood.
Selling secondary involves a very different palette of obligations. The most important thing to remember, just as I mentioned a moment ago, even when there's no contract there is a ton of law imposed on you. Secondary sales are largely controlled by the Uniform Commercial Code, UCC for short. Then there's tort law, I mentioned, which we will reduce to negligence here. Long before you even think of a contract, every secondary market deal is determined by a web of default laws.
The UCC sees you before you see it. All the default warranties that listed here, are in place to protect the buyer and ensure speed of transactions. We have express warranties, I'll just read them thorough: warranty by affirmation of fact, warranty by description, the implied warranties, which means even if nothing exists, no comment is even made regarding an artwork, there are warranties implied by the UCC. Disclaimers for warranties. That means the ability to say, no, I'm not sure, or I'm not going to hold out anything, is difficult. Generally speaking there is a bias regarding you as a seller having knowledge, having the artwork and holding it out to the world in a way, and there’s a legal bias against you. So, the ability to disclaim these warranties, get out of these warranties without being very sophisticated about it is very limited. So, disclaimers for warranties can be ineffective and require drafting by very competent legal counsel.
Tort is another source of liability if you are in the secondary market. Any time the hybrid gallerist engages in secondary markets sales they confront the risk that something they are doing or saying is based on false or inadequate information. The standard of care you need to maintain is directly proportionately to your sophistication. That means the further you are in the game, the more capacity you bring to the table, the more weight the law will give to your statements, opinions, or position vis-à-vis provenance, title, quality, qualities of an artwork, etc. That is something to bear in mind, that the legal obligation that comes from fraud or negligent representation is directly proportional to being a competent art context actor. So, the better you are, the more likely a mistake can be held against you.
So, yes, you do need a contract, and if you do one thing long enough and well enough, maybe luck will stay with you, you won't get blindsided. The more diversified your hybrid practice is, the more likely it is that something can fail. The underlying message here is that along with the tremendous opportunities that exist in the present, we have to be cognizant that all of these opportunities go back into various directions of legal obligation. And it’s not as simple as stepping out into the free-zone. There has to be an awareness of what that changed model will mean to you in terms of legal risks. So, when you are exposed to such a complex web of largely invisible default obligations, you need to be on the right footing. Yes, you need a contract, and no, it won't kill you to get one. In fact it might be the one thing that will allow you to keep going, even if you are forced to read it thoroughly. Thank you.