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.

Tuesday, September 21, 2010


Monday, September 20, 2010

Explaining the recent record-breaking prices paid at auction

Here's an article from The New York Times art section also related to investing in art, this time about attempting to reconcile the record-breaking prices recently paid at auction ($106.5m at Christie's for Picasso's "Nude, Green Leaves and Bust" and $104.3m at Sotheby's for a Giacometti sculpture) with the current economic climate.

Sunday, September 19, 2010

Numbers don't lie: the wisdom of investing in art

Below are the links to two interesting articles on the risks and potential returns associated with investing in art, the "passion investment." Although neither piece says anything new as such, I nevertheless decided to post the links because their scrutiny of the actual numbers and statistics involved in art investments seemed enlightening. After all, numbers don't lie... though of course, they don't paint the whole picture either. 

Both articles also illustrate how the key is timing and doing the research necessary to mitigate as far as possible the unpredictability of collector demand. For example, despite being a "very appealing image from Monet's early period," according to Nicholas Maclean (dealer and former co-head of Christie's Impressionist and Modern Art department), the sale at auction of Monet's La Plage à Trouville in 2000 resulted in a loss of £2.9m due to the market having "moved towards later works, in particular the series paintings." Irrespective of the quantity or quality of the research undertaken, however, there is always a certain art to foreseeing future trends in demand for works and/or artists not least because the global art market lacks a comprehensive price register of each and every transaction purported to be "investment grade." The introduction of this much-needed price register would increase market transparency and subsequently reduce (but by no means eliminate) the risks involved in acquiring art for investment purposes. Collectors would be able to draw more accurate conclusions and cast more reliable forecasts by studying such publicly available information. But even then substantial risk would remain because investors are not just guided by potential returns when they acquire art- they are also guided by the intangible and often unforeseeable force that is their own, personal taste in art. The truth of the matter is that, unlike gold bars or stock certificates, you can hang art on your walls and so even those who buy art as a way of hedging the volatile stock or real estate markets are still likely to buy what they love. As they should.

Friday, September 17, 2010

Deaccessioning frenzy in New York

Contrary to the outcry in the media this week, the New York State Board of Regents' decision on Tuesday to allow the deaccessioning "emergency" regulations to expire on October 8 is not going to result in the monetization of museum collections. The temporary regulations, in effect since December 2008, enjoined museum sales of collection artworks to cover operating costs and the Board of Regents had been expected to make the rule permanent, partly as a result of the Brodsky Bill (which outlawed such sales) collapsing in the state Legislature.

The news may have come as a surprise but the impact of the decision on deaccessioning practices is likely to be minimal (i.e. no mass exodus of art from "public trust to private hands"). This is because the existing regulations already stated that museums may only use the proceeds derived from deaccessioning "for the acquisition, preservation, protection or care of collections" and explicitly "in no event shall proceeds be used for operating expenses..." To be fair, the emergency regulations did restrict museums' options to sell collection pieces more sharply but as Donn Zaretsky posted, the existing regulations follow the deaccessioning guidelines of the American Association of Museums ("AAM") and the Association of Art Museum Directors ("AAMD") which the vast majority of people consider to be adequate deaccessioning policies.

UPDATE: "Judge rejects AG's plan for Fisk art"

How did this happen, you might ask, given that AG Cooper did pretty much exactly what Chancellor Lyle told him to do? She'd previously rejected the Crystal Bridges Agreement as written and instructed the Tennessee Attorney General to come up with an alternative that would "enable the public- in Nashville and the South- to have the opportunity to study the Collection...," which the Court of Appeals had determined was O'Keeffe's intent and the Chancery Court had subsequently adopted. Apparently Fisk just happened to be the Nashville institution randomly chosen as the recipient and it was never O'Keeffe's intention to actually benefit Fisk itself. The proposal to relocate the Collection to the Frist Center in Nashville should therefore have been music to the Chancellor's ears.

Not so.

In yet another turn of events in the ongoing saga, it now appears that O'Keeffe did care about Fisk after all (!) and that by not mentioning Fisk the Court of Appeals had not necessarily meant to imply that O'Keeffe's intention was solely to benefit Nashville and the South. I'm glad to see that the Court has come to its senses and acknowledged that O'Keeffe didn't randomly choose Fisk as the recipient of a collection estimated to be worth $74 million simply because it was in Nashville. But I'm amazed at the Court's reluctance to admit its change of heart and the fact that it is exceedingly difficult for courts to determine a donor's intent with any kind of certainty. The latest decision states that the Court of Appeals had not decided or instructed the Chancery Court on "what the donor's intent was with respect to Fisk" (pages 4-5) which completely contradicts what the Chancellor said in her previous decision at page 13: "the Court has been instructed by the Court of Appeals that the purpose of the gift is clear. That purpose is to "enable the public- in Nashville and the South- to have the opportunity to study the Collection [....] Using this purpose as the benchmark, the Court must next compare the Crystal Bridges solution to see if it closely approximates Ms. O'Keeffe's purpose." The Fisk saga is now the perfect case example for illustrating the shortcomings of cy-près relief and the evidentiary issues related to donor intent.

In practical terms, this means it's back to the drawing board with respect to the Crystal Bridges Agreement which needs to be revised to more closely approximate O'Keeffe's purpose. At least the Chancellor was proactive and instructed the parties as to what revisions are required (see pages 2-4 and Exhibit 2 of the decision). Essentially, the proposed revisions to the Joint Ownership Agreement between Fisk and Crystal Bridges boil down to minimizing the risk of divesting Fisk and Nashville of the Collection. The Collection will go to Arkansas for 6 months of the year but there's little doubt it's coming back to Nashville for the other six.

Wednesday, September 15, 2010

Is the Russian initiative to regulate art securitization and art funds merely a ploy to make them seem investment grade?

That was the suggestion made by Artworld Salon as it commented on Russia's newly-implemented art funds regulation introduced last month as part of a modernization program designed to make Russia an international financial center rivaling New York, London and Hong Kong. The allegation that the regulation is merely form over substance is not unfounded given "the relative lack of oversight of the opaque and enthusiastically “managed” system that is the Art Market." Indeed, regulating art securitization and art funds appears to be at odds with a distinctly investor-unfriendly market characterized by "private dealing, auction pumping, the ability to cellar works that aren't selling and [the] lack of any form of reliable pricing register." Surely transparency must precede oversight. The bases for the suspicions gain even greater strength when one learns that the implementation of the regulation was in sync with the creation of two closed end art funds by Leader, "a powerful local asset management firm controlled by Putin loyalists." It's more likely than not then that the regulation is above all a marketing tool.

The author also takes this opportunity to discuss one of the most significant problems afflicting the global art market and its component individual markets: the difficulties associated with pricing acquisitions and disposals of art due to the lack of publicly available information on transaction prices. I have previously discussed the need for increased disclosure in the context of droit de suite and how its introduction in New York would be a highly undesirable way to achieve greater market transparency. In my view, the proposal of "a price register for each and every work of art that someone tries to promote as “investment grade,” with NO exceptions and NO omissions" is far more compelling than Edward Winkleman's case in favor of droit de suite, which suffers from the serious risk of shrinking the New York market ultimately to the detriment of all artists.

NOTE: "with an exception of perhaps only India, no country of any significant domestic investment market has a well defined regulatory framework for art funds," reported Skate's. "We are not aware of any regulatory framework anywhere in the world defining how art assets can be put into mutual funds and such funds can be offered to [the] general public [and/or] qualified investors."

Tuesday, September 14, 2010

Fisk and the perennial problem of "donor intent"

Donn Zaretsky recently posted that he couldn't get his head around how moving the Stieglitz Collection to the Frist Center as per the Attorney General's proposal announced last Friday would more closely approximate O'Keeffe's purported intent than keeping it at Fisk six months of the year in accordance with the Crystal Bridges arrangement. The real problem, however, is not determining which of the two alternatives is closer to O'Keeffe's charitable "intent." Rather, the problem as I see it is the fact that cy-près relief is grounded in a notion as malleable as "donor intent" (especially a late donor's intent) and that donors freely and frequently attach a plethora of conditions to their public donations.

Monday, September 13, 2010


Sunday, September 12, 2010

Tennessee AG's Nashvillian proposal for the O'Keeffe donation to Fisk University comes as no surprise

At the end of last month, the Chancery Court for the State of Tennessee denied Fisk cy-près relief in respect of the Alfred Stieglitz Collection donated to the University by Georgia O'Keeffe because the proposed sale to the Crystal Bridges Museum in Bentonville, Arkansas, did not "closely approximate" O'Keeffe's intent for making the charitable gift. However, the Court did not rule out the sale all together- it merely rejected the Crystal Bridges Agreement as written at the time and ordered the Attorney General "to file a proposal with the Court for the display and maintenance of the Alfred Stieglitz Collection." Fisk would then be given an opportunity to respond and/or make any additional proposals.

Friday saw the deadline for the submission of the AG's proposal which called for the Collection to remain in Nashville and be displayed at the Frist Center for the Visual Arts until Fisk is in a financial position to care for and display the Collection. Given the Court of Appeals' instruction that the purpose of O'Keeffe's gift was to "enable the public- in Nashville and the South- to have the opportunity to study the Collection..." and the Chancery Court's finding that Bentoville fell outside the definition of "the South," it's hardly surprising that Attorney General Cooper's proposal is Nashville-based.

Much as I hate to admit it, this may well be as good as it gets for the 101-piece Collection. If Chancellor Ellen Hobbs Lyle were to decide the fate of the Collection on behalf of art lovers (we should be so lucky), I'd expect she'd go for the Crystal Bridges sale over Cooper's plan: the $30 million deal would rescue Fisk from the brink of closure and allow a far wider audience to view the Collection in a state-of-the-art museum while still partially complying with O'Keeffe's wishes by displaying the Collection in Nashville six months of the year. But she's not "free to move charitable assets from one institution to the next to maximize the utility of those assets in some broad sense." Oh no. She has to comply as closely as possible with the wishes of the late O'Keeffe, whatever they may actually be, even if it means perpetuating the current trend of only 10,000 visitors viewing the Collection in a typical year.

I get it- courts have fashioned cy-près so that it affords some relief without discouraging charitable donations. It is for the "greater good," the Chancellor said, that the law allows donors to tie-up cultural assets in this way. So I'm buying my ticket to Nashville to go see the gifted works because as long as the law lets donors control their donations indefinitely from their graves (others think this is fine), I can't imagine how the Crystal Bridges Agreement can possibly be revised to triumph over the Frist alternative. I just hope it is ultimately all about art as donors rejoice and make generous donations to celebrate.

Friday, September 10, 2010

Resale right extension to deceased artists will have a "devastating impact" on the British art market

Back in 2006 when the UK implemented Directive 2001/84/EC of the European Union, the Artist's Resale Right ("ARR"), also known as droit de suite, it entered a derogation limiting what are effectively royalty payments to resales of works by living artists only. However, the derogation merely delayed the application of droit de suite to deceased artists' works and for contracts entered into on or after January 1, 2012, ARR will apply to the resale of works by artists who died less than 70 years before the date of the sale (i.e. artists of the likes of Francis Bacon, Matisse and Picasso).

Auctioneers and art dealers concur, as does the government, that this will have a "devastating impact" on the British art market. The extension of the right to the estates and heirs of deceased artists will greatly increase the risk that the UK will be bypassed in the valuable market for 20th century art, especially given that the UK's main rivals in the global art market- the United States, Switzerland and China- have not (with the exception of California) thus far introduced droit de suite. According to an article in the Antiques Trade Gazette, the British Art Market Federation ("BAMF") is of the view that "extending ARR to the estates of dead artists after 2012 poses a serious threat to the 60,000 jobs the UK art industry supports." Based on a report by Dr. Clare McAndrew of Arts Economics, the leading industry analyst and statistician, the article goes on to say the following:

"ARR affects Modern and Contemporary art sales, which account for just under 40 per cent of the value of the British art market, the report explains. With the derogation in place, only a fifth of such sales are affected, but if the ARR is extended to the estates of dead artists, it would encompass around 80 per cent of the Modern and Contemporary market. What makes it worse is that it is exactly this sector of the market that is most mobile, as it is not subject to the export controls that affect Old Masters and other areas."

It should also be noted that the BAMF has identified the UK as "the most vulnerable art market in Europe to competition from markets outside Europe" because "global cross-border activity has been the key factor underpinning the UK's dominant position." It remains to be seen whether the UK will be able to sustain after 2012 the current scale of art imports accounting for its status as "an entrepôt market for international art" but most would predict it will not.

A lesson from London: oppose droit de suite in New York at all costs!

A few months ago, Edward Winkleman used the Robins-Zwirner lawsuit as a case example in support of introducing droit de suite, or artist resale rights ("ARR"), in New York on the basis that such legislation would put an end to the secret handshake culture that dominates the art market and avoid the blacklist response by some artists to the flipping of their work. While I agree in principle with the need for a more open and transparent market (how else does one accurately calculate the market price of a work?), collectors enter into confidentiality agreements for reasons other than the fear of reprisals by the artist and in any case, droit de suite is not the answer.

Droit de suite is about redistributing resale profits from collectors to artists much more than it is about market disclosure and the costs are far too great for it to be championed as the remedy for an opaque market. An independent study on the impact ARR had on the British art market in the first two years since its implementation highlighted how detrimental ARR is to the competitiveness of a market and serves only to shift sales of qualifying artists' works to jurisdictions that have not enacted ARR. This means that ARR ultimately does not even benefit the relatively "successful" artists whose works sell for more than the minimum qualifying threshold under any given ARR regime (€1000 in EU Member States). The study also showed how the scheme not only fails to benefit younger, emerging artists- the intended beneficiaries of ARR- but even works against their interests as galleries become less willing to take on the commercial risk of promoting the work of unknown artists "as a result of the complications of processing ARR payments and the impact of royalty payments on low margin sales."

Finally, if artists like Rauschenberg are so keen to participate in the upside when a collector profits from a resale should they not also contribute to a portion of the losses when a work depreciates in value? Of course not you say, and so would I, but then nor can collectors, whether speculative or not,  justifiably be expected to bear the entire risk associated with buying art only to later be penalised for making a profit. Especially since the most significant economic gain made by the artist is not from any applicable droit de suite (under Directive 2001/84/EC, royalties are calculated on a sliding scale from 0.25-4% depending on the resale price and capped at a ceiling of €12,500) but rather from the much higher prices the artist can command for primary sales of works created at or around the time of the resale of the earlier work.