Wednesday, September 29, 2010

Ensuring dealers get paid is not as simple as "tightening up" a contract

When The Arts Newspaper reported on a growing contingent of collectors "who take longer to pay, or worse yet, cancel sales," my initial lawyerly reaction was slight disbelief given the wide array of relatively straightforward provisions that can be inserted in a written contract to ensure, as far as possible, timely payment for a purchased artwork. The following contractual provisions sprung to mind:
  • Delivery against payment. A collector would obtain possession of the purchased artwork upon the dealer receiving full payment or immediately thereafter.
  • Risk of loss/damage. The risk of loss/damage would pass to the collector at the time of sale rather than payment such that if combined with a delivery against payment provision, a collector has a strong incentive to make full payment immediately.
  • Purchase price discount. Any dealer discount offered would be contingent on the collector making either full payment or payment within a certain timeframe (usually within 30 days of sale). In all other cases, the discount would be forfeited.
  • Interest on late payment(s). Interest on any outstanding amount owed would be charged at the rate negotiated and specified in the contract (e.g. around 1.5-2% but no greater than 10% or else it may be deemed an unlawful penalty).
  • Non-possessory security interest in the artwork. As a last resort, should the collector possess the artwork beyond a specified period and continue to resist paying in full, the dealer could acquire a security interest in the artwork. Such security interest could be perfected in the original contract as long as it was for value (i.e. monetary), in writing and passed title to the collector. Nevertheless, the dealer should also make a U.C.C. filing to ensure his security interest has priority over any other interests the collector may grant to other third party creditors.
Any combination of the contractual provisions above and others could help ameliorate many a dealer's financial condition. Indeed, the idea of "tightening up" terms of sale is familiar to most of the bigger players navigating the art market in the capacity of intermediary. As the article mentions, Christie's currently requires buyers to make full payment prior to obtaining possession of a work (i.e. essentially "delivery against payment") and Sotheby's' "Conditions of Sale" (entitled "Conditions of Business" in the UK) provide, among other things, that a buyer must immediately pay in full and the auction house reserves "the right to impose from the date of sale a late charge of 1.5% per month of the total purchase price if payment is not made in accordance with the conditions [of sale]."

The article doesn't mention whether young, primary market dealers, who represent the intermediaries most affected by late or non-payment for works, have followed in the footsteps of the auction houses and major secondary market galleries but I think it's safe to assume that they have not. As a commercial lawyer, my gut reaction was to advocate that dealers side-step the "handshake" mentality of the art world (an invoice typically constitutes the sole written evidence of a sale) and enter into written contracts of sale replete with commercially-sound provisions. However, I then stopped to think about how this is the art market we're discussing- it's not as simple as drafting or revising a contract. To prescribe a contractual remedy for the financial woes of dealers as the most natural or obvious would be somewhat misguided for it is premised on an overly neoclassical view of the art market as being no different to any other market. Such a view, which likely attributes dealers' financial troubles to their lack of business acumen and bargaining power, fails crucially to appreciate and respond to the complex and unique architecture of the art market.

As Velthuis wrote, art market intermediaries operate to the beat of "two contradictory or conflicting logics: a logic of art and a logic of capitalist markets," each logic or sphere being characterized by its own rituals, laws and understandings of what constitutes legitimate and acceptable behavior. The tension between these two socially distinct worlds is felt, in my opinion, most acutely by primary market dealers because they, above all others, are perceived as "cultural institutions" serving as "gatekeepers to the art world: they elect and select artists from the many that seek to be represented, and promote new, innovative values that may go against the grain." Whether dealers actually define their identity or the extent to which they might do as "disinterested promoters and patrons rather than merchants and marketeers of art," my understanding is that the art world convention deems it unacceptable for their economic interests to be aired openly and unabashedly profit-maximizing behavior, contractual or otherwise, is ultimately detrimental to a dealer as it may drive away a purported majority of collectors pursuing (or pretending to pursue as the convention would have it) a pure, almost sacred, artistic experience free from the corrupting effects of money and mass consumption. If young and emerging galleries began selling art like a broker sells securities ("delivery against payment," for example, is a common procedure in the securities industry) or even like the Gagosians or major auctions houses of this world sell art, the art world would perhaps reject them. Of course this denegation of commercial pursuits is, to use Bourdieu's term, no more than a layer of "cultural camouflage" but that doesn't change the fact that it exists and dealers have to grapple with it. At the end of the day, these are the rules of the game and dealers knew that to be the case when they voluntarily chose to enter the market. They are, however, wholly justified in expecting collectors to hold their end of the deal and abide by the unwritten ethical code of buying art. Hence why the very title of the article points a finger directly at unethical collectors rather than lecturing unsavvy dealers.

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