Saturday, January 08, 2011

"The case reveals the casual approach to the legal concept of agency"

Buyers and sellers of art in the private market (and to a lesser extent at auction) often overlook the fundamental question of "who acts for who," otherwise known as the legal concept of agency.

The distinction is crucial because an agent is a "fiduciary" of its principal and as such the highest standards at law are imposed on him. An agent owes his principal strict "fiduciary duties" including the duty of loyalty which entails not only acting in good faith in the best interests of the principal but also the duty to avoid conflicts of interest (the art world being a breeding ground for conflicts). Similarly, only an agent acting on behalf of its principal has the authority to sell an artwork and the legal title to pass ownership to the buyer (although where authority is lacking, a principal can ratify the conduct retroactively).

An article in The Art Newspaper does well in bringing attention to this subject because clearly one's legal rights and protections w/r/t a transaction for the sale or purchase of art are integrally bound-up with the principles of agency. The private market is characterized by the lack of disclosure and the prevalence of undocumented transactions where parties are often unaware of who owes them what duties. At auction this is less of a problem as there is far greater transparency and the terms and conditions of sale published by the major auction houses unequivocally state that the auction house is an agent for the consignor (i.e. seller) of the art (see Sotheby's "Terms of Use"). Furthermore, the law itself imposes fiduciary duties on auction houses whereas it generally does not on dealers which means the parties themselves must create agency relationships, preferably in writing. The article points out some of the art world conventions that do genuinely represent an obstacle to achieving increased transparency and documenting transactions but my mantra remains unchanged: disclosure and contract are indispensable to protect your legal rights when buying and selling art (though to be clear, a contract, oral or written, is not required to form an agency relationship).

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