The return of the auction guarantee suggests we're in a boom market (for now)

NEW YORK/LONDON. The return of the auction guarantee has prompted The Art Newspaper to report on the history of this feature of the auction sale (first introduced by Sotheby's in 1971), its complexities, the possible legal ramifications and the mixed feelings of the market towards it (is it insurance for the seller or a form of market manipulation?). An empirical look at guarantees over the past forty years revealed that their resurgence coincided each time with an upturn in the market (e.g., in the 80s and then again after 9/11 with Sotheby’s issuing $902m-worth of guarantees in 2007, double the 2006 amount and up from $131m in 2005, according to Noah Horowitz’s book "Art of the Deal"). And so their return (together with irrevocable bids) at the London impressionist, modern and contemporary art evening sales last month to the level of £34.2m must mean that we are, once again, in a boom market.

But as with so many comebacks, what was once familiar re-emerges in a modified form. In this case, "rather than playing with their own money," auction houses are increasingly selling off the risk to third parties, who, according to Emmanuel Di Donna (of gallery Blain Di Donna and formerly of Sotheby's), are either collectors who want to own the work or "to play a little bit on the market." A shift away from the auction-backed guarantee towards the third-party guarantee would be a good thing for it would reduce the risk of auction houses breaching the fiduciary duties (in particular, the duty of loyalty) they owe their clients (i.e., those consigning art for sale at auction). The risk of breach lies in an auction house favoring (e.g., in terms of promoting) the guaranteed work over the non-guaranteed work as a result of its financial stake in the first but not the second sale. Were this to happen, it would likely adversely affect the sale of the unguaranteed work and constitute a breach of the duty of loyalty owed to that consignor.

Essential are disclosure of the fact that a work is guaranteed (already market practise) and auction houses not favoring guaranteed works at the expense of those that are not (clearly, third-party guarantees are preferable to auction house ones); otherwise, guarantees provide flexibility, increased liquidity and insurance for the seller. But what about disclosure of the actual value of a guarantee? Failure to disclose the exact value does, to some extent, make the reserve price and high estimate somewhat artificial. Plus, the highest bidder at auction could be left empty-handed if his bid is less than the amount guaranteed. At the very least, such bidders should be given an opportunity following the auction to increase their winning bids to a price exceeding the value of the guarantee so that the work does ultimately go to the highest "bidder" (question- does this occur?). The counterargument of course is that the person bidding at auction could have made a guarantee himself if he had really wanted the work. One final remark: the article makes a reference to the fact that much of the disclosure materials are "buried" at the back of auction catalogues but this is not something I am sympathetic to. Just like an investor should read not only the "description of notes" but also the indenture, so too a prospective buyer of an artwork should read the entire catalogue for the relevant lot. The art market is, contrary to popular opinion, a sophisticated, complex and highly competitive market and it is up to the buyer to do his homework before he decides to place a bid (in case this helps, here are the lot symbols for Sotheby's). The burden cannot be placed entirely on the intermediary.

UPDATE: An article by Art Market Monitor says Sotheby's has a "self-imposed" ban on giving guarantees themselves.