Vol. 4, No. 1 SPRING 2013 Spencer’s Art Law Journal Edited by Ronald D. Spencer Editor’s Note This is Volume 4, Issue No. 1 of Spencer’s Art Law Journal. This issue contains two essays, which will become available on ARTNET.com, starting June 2013. As previously noted in this Journal, the legal structure we call art law (an amalgam of personal property law, contract, estate, tax and intellectual property law) supporting the acquisition, retention and disposition of fine art, often fits uneasily with art market custom and practice. The result is that 21st century art market participants are frequently unsure of their legal rights and obligations. The two essays in this Spring Issue deal with sales of visual art. The first essay (“Provenance: Important, Yes, But Often Incomplete …”) looks at the issue of provenance listed in a contract of sale. A lack of clarity about what should be or must be in provenance leads to uncertain legal results for the buyer and seller. CONTENTS Editor’s Note.......................................... 1 Provenance: Important, Yes, But Often Incomplete and Often Enough, Wrong. What Consequence for a Sale? ............... 2 Gary D. Sesser Purchase Price Paid Over Time: “Title Does Not Pass Until Payment in Full”. But the Uniform Commercial Code May Have Other Ideas ...................................6 Aaron R. Cahn The second essay (Purchase Price Paid Over Time: “Title Does Not Pass Until Payment in Full”) addresses a very common provision in contracts for the sale of art with installment payments. But, surprising to many art sellers, the Uniform Commercial Code probably makes this provision unenforceable, with consequences for the seller getting his art back. Three times a year issues of this Journal will address legal questions of practical significance to collectors, dealers, scholars and the general art-minded public. — RDS PAGE 1 7225904.3 Vol. 4, No. 1 SPRING 2013 PROVENANCE: IMPORTANT, YES, BUT OFTEN INCOMPLETE AND OFTEN ENOUGH, WRONG. WHAT CONSEQUENCE FOR A SALE? ● ● ● Gary D. Sesser ● ● ● This essay addresses provenance issues in the context of a sale. Of course the provenance of a piece is an important factor in determining its authenticity, but how important to the seller and buyer is knowing that, for example, there were three private owners between the artist and the current owner. If one of those owners was Paul Mellon or a major museum, it might be very important. And, have the buyer and seller made that importance clear in their sale agreement? — RDS ● ● ● GARY D. SESSER is a partner, and a member of Art Law group of Carter Ledyard & Milburn LLP in New York. He regularly litigates claims of ownership, authenticity and value arising out of art sales. ● ● ● Ask anyone at the next gallery opening or museum exhibition and you will find nearly universal agreement that the provenance (lit. “origin”) of a work of art is important. 1 In fact, a New York federal judge recently observed that “[i]t is a basic duty of any purchaser of an object d’art to examine the provenance for that piece . . .”2 Less clear is whether the standards that exist in the art world about what should be included in the provenance are followed with any regularity or even can be followed as a practical matter. While theoretically intended to be a “chain of title” that should include every owner of the work since its creation, provenance typically tends to be a non-exclusive listing of interesting facts concerning the background of the work, such as notable former owners (at least those who are willing to have their identities disclosed) and the exhibition of the work at prestigious venues. Should galleries which held the work on consignment be listed? Does a seller have potential liability if the provenance provided to the buyer turns out to be inaccurate in any material respect? What if it is merely incomplete? Before addressing those questions, it is useful to consider how provenance is relevant to sales of art. Art litigation generally falls within one of three categories: disputes concerning ownership, disputes concerning authenticity, and, to a lesser extent, disputes concerning value. The provenance of a work may bear on each of those potential areas of dispute. Obviously, to the extent provenance represents a chain of title, it may bear quite directly on a dispute concerning ownership. (If “H.W. Göring, Berlin” is listed in the provenance, that is probably a red flag). 3 More typically, provenance will be scrutinized where questions of authenticity arise. A few years back an issue arose concerning the authenticity of a century-old sculpture attributed to a twentieth century artist of iconic stature. The work was sold to a prominent collector through an auction house with a certificate of authenticity from a qualified and appropriately-credentialed scholar of the artist’s work. According to the provenance provided at the time of sale, the work had been acquired in Paris after World War II by an art history professor from an Ivy League university. When questions of authenticity arose several years later, an internet search and a few telephone calls to the university revealed that no such art history professor ever existed. Also left off the provenance was the fact that just months prior to the multi-million dollar sale to the prominent collector, the work had been purchased from an obscure antique store owned and operated by someone who had served jail time for art insurance fraud. Had PAGE 2 7225904.3 Vol. 4, No. 1 SPRING 2013 these “errors and omissions” in the provenance been discovered at the time of the sale, the sale itself and several years of costly litigation would have been avoided. Many works of art acknowledged to be authentic carry some risk that in the future questions of authenticity may arise. After all, experts sometimes change their minds, new experts may disagree with the old consensus, and new facts or technologies may emerge. An impeccable provenance that can be verified serves to mitigate that investment risk. On the other hand, we have seen that a dubious provenance may itself be used as circumstantial evidence that the work is a fake. Thus, even where authenticity is not currently an issue, an inaccurate or incomplete provenance still could give rise to a claim in the future. Recently an art dealer faced a claim that the provenance he provided with a painting was incomplete because it did not include all of the owners going back to the artist. According to the disgruntled buyer, this omission was material because the provenance included a gallery involved in a well-publicized forgery scandal and, therefore, the painting would be hard to re-sell at an appropriate price without a verifiable provenance going back to the artist. Significantly, the painting had been sold at auction a decade earlier and the dealer had provided the current buyer with exactly the same pre-auction provenance as the prominent auction house had provided at the time of the auction sale. The dealer did not think to second-guess or investigate the completeness of the provenance provided by the auction house and did not have the resources to do so. Previous owners of the work did not want their identities disclosed due to privacy concerns (which is not uncommon), so a more complete provenance was not even feasible. Nevertheless, the buyer claimed that he had been promised a “verifiable provenance” and sought to revoke the sale. The buyer did not contend that the work was not an authentic painting by the famous artist, but merely that it would be hard to re-sell without a complete and verifiable provenance going back to the artist. Although the dispute ultimately was resolved without litigation, this episode starkly highlights the potential risks a seller may be assuming by providing -- without qualification -- a provenance that he or she has no real reason to doubt. In seeking to revoke the sale based on an “incomplete” provenance, the buyer claimed that the provenance constituted a warranty under the Uniform Commercial Code (“UCC”) because it was part of the “basis of the bargain.” Under UCC § 2-313(1)(a), “[a]ny affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.” Section 2-313(1)(b) provides that “[a]ny description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.” It is hard to argue that these sections are not worded broadly enough to encompass the provenance of art work, assuming that provenance was considered part of “the basis of the bargain” when the artwork was sold. The bad news for the seller is that determining whether the provenance was part of “the basis of the bargain” in a given transaction will likely be a question of fact for a jury to decide. That means that, absent precautionary measures such as an express disclaimer as to completeness and accuracy, the question of whether the provenance provided by the seller in an art sale constitutes a warranty will not be decided until after a good deal of expensive litigation. And it is certain that if the provenance is arguably misrepresented or incomplete, the buyer will be able to produce an “expert” to testify about the importance of provenance in the art world, all in support of the buyer’s argument that the given provenance was part of the basis of the bargain. Adding to the seller’s risk is the fact that a claim for breach of warranty does not depend on proof of seller’s negligence or other culpability. Under UCC § 2-714 (2) “[t]he measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted PAGE 3 7225904.3 Vol. 4, No. 1 SPRING 2013 and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.” If the provenance is deemed to be a warranty, and the artwork is less valuable because of an inaccuracy or omission in the provenance, the seller may be liable for that difference in value, regardless of his or her good faith or lack of knowledge of the error in question. An example of this risk without fault arose out of an art dealer’s acquisition of a painting by another distinguished twentieth century artist. Again, there was no question concerning the authenticity of the work. The information provided by the seller at the time of the sale noted that the work had been part of a celebrated 1960s exhibition of the artist’s work at a well-known New York museum. The inclusion of the work in this exhibition was acknowledgment of the work’s value and its importance to the artist’s oeuvre (not to mention further corroboration of its authenticity). Unfortunately, the exhibition history was not correct. The work was not included in the exhibition; the work was supposed to be included, but due to various circumstances another work was selected instead. There were even documents indicating that the work was in the show and it took some investigation to determine that it was not. Even though the seller had not intended to deceive or mislead the buyer / dealer, that did not change the fact that the work was measurably less valuable than the dealer thought at the time of the purchase, based on the information provided. Because the case settled before any lawsuit was filed, no court had the opportunity to address whether the erroneous exhibition history gave rise to a valid breach of warranty claim. In fact, we are not aware of any judicial decisions addressing whether an error or omission in the listed provenance or exhibition history,4 standing alone, gives rise to a breach of warranty claim under the Uniform Commercial Code. This absence of reported cases has likely given rise to a certain complacency in the art world concerning the legal significance of provenance in connection with art sales. Nevertheless, the art world is not getting less litigious as art values escalate, and it may not be long before the courts are called upon to address this issue. It plainly makes sense for sellers and buyers to get ahead of the curve and finally reach a clear understanding about what is at stake when provenance or related information such as exhibition history is provided. Is the provenance really intended to be a complete chain of title and possession, given that there is no title registry for personal property such as works of art? Is that even possible, given the penchant for anonymity among many wealthy collectors, not to mention the confidentiality of private sales? Further complicating research into ownership is the fact that many art transactions are documented with simple invoices, rather than detailed contracts; often it is unclear from the face of the documents, particularly in multi-party back to back transactions, whether a dealer is acting as a principal or as agent for one of the parties. Fraudulent misrepresentations are one thing, but do sellers who proudly “stand behind the works they sell” really intend to be strictly liable (i.e. without fault) for any error or omission in the provenance or exhibition history? Do sellers undertake to do independent investigations of the provenance, or do they just pass along the same information they received when the work was acquired? In practice, more sophisticated art market participants, such as the major auction houses, include disclaimers (in fine print) in their terms and conditions of sale, but when smaller galleries and dealers sell art they rarely incorporate such protections against liability for faulty or inaccurate information. Whether the seller agrees to take full legal responsibility for the accuracy of the provenance is crucial information for buyers in terms of their own due diligence obligations and their ability to rely on information provided by sellers. Making all of this clear in the sales contract is unquestionably in PAGE 4 7225904.3 Vol. 4, No. 1 SPRING 2013 everyone’s interest, even if – much like a prenuptial agreement – it spoils some of the romance associated with the purchase of fine art. New York, New York May 2013 (The assistance of Alexandra Z. Kleiman, New York University, B.A. Art History, in the preparation of this essay, is gratefully acknowledged.) Gary D. Sesser Carter Ledyard & Milburn LLP Two Wall Street New York, NY 10005 Email: sesser@clm.com Website: www.clm.com NOTES 1 “Provenance” derives from the French provenire meaning “to originate.” International Foundation for Art Research (“IFAR”) Provenance Guide, at www.ifar.org/provenance_guide.php. 2 Davis v. Carroll, ___ F.Supp.2d ___, 2013 WL 1285272 *35 (S.D.N.Y. March 29, 2013) (Oetken, J.). 3 Sotheby’s was recently sued in San Francisco for failing to disclose that a painting Sotheby’s had sold in 2004 had been owned by Hermann Wilhelm Göring, rendering it unmarketable based on the refusal of reputable auction houses or dealers to accept its questionable title. Brooks v. Sotheby’s, 2013 WL 1156067 (Cal. Super. 2013). 4 Exhibition history is often conflated with provenance, although they are distinct concepts. PAGE 5 7225904.3 Vol. 4, No. 1 SPRING 2013 PURCHASE PRICE PAID OVER TIME: “TITLE DOES NOT PASS UNTIL PAYMENT IN FULL.” BUT THE UNIFORM COMMERCIAL CODE MAY HAVE OTHER IDEAS. ● ● ● Aaron R. Cahn ● ● ● This essay is about a common provision in contracts for the sale of art, namely, that legal title does not pass to the buyer until the purchase price is paid in full. The drafters of the Uniform Commercial Code, always concerned to facilitate the free flow of goods, provide that legal title passes when the art is delivered to the buyer – probably, even if the parties say otherwise. –– RDS ● ● ● AARON R. CAHN, is a member of Carter Ledyard & Milburn LLP’s Insolvency and Creditors’ Rights Group where he often advises on art-related matters. ● ● ● In the art world as in many other areas of commercial activity, it is not uncommon for works to be sold on a so-called “conditional sale” basis; i.e., in which the purchase price is not fully paid on or before delivery of the work, but rather is made in periodic installments. It is customary for conditional sale agreements to provide that legal title will not be transferred to the buyer until the full contract price has been paid, but what has appeared to escape notice by many art sellers, among others, is the fact that a specific statute (Article 2 of the Uniform Commercial Code) effectively negates that provision. Section 2-401 of the Code provides that title passes to a buyer upon delivery in a conditional sale transaction, even where the sale agreement specifically provides that title isn’t transferred until all payments have been made.1 In place of title, the Code gives the seller a security interest, which means that the seller has the right to repossess the piece from his buyer if the payments are not made as specified. As close readers of Spencer’s Art Law Journal are no doubt aware, almost any transaction in which an art owner or consignor parts with possession of a work prior to receiving payment in full presents the owner who relinquishes possession with the risk that subsequent events may impair the owner’s rights. A conditional sale is no exception. What could happen? For example, a conditional sale buyer with title to the work, even though he may have paid only a fraction of the purchase price, can then legally resell the piece. While the original (owner) seller retains a security interest in the work as against his buyer, a subsequent purchaser with no notice of the nature of the original sale transaction will take free of that security interest, and if the original (conditional sale) buyer then defaults on his installment obligation to his seller, the seller may no longer have any right to recover the work and may be left with a worthless claim for the balance of the purchase price against his (conditional sale) buyer. How then does a seller guard against this possibility? The answer is to perfect the security interest by filing a financing statement – Form UCC-1 - with the appropriate state authorities. A UCC-1 may not be filed without having an underlying security agreement, but the conditional sale agreement will suffice for that purpose. If this rather simple step is taken, then all subsequent purchasers will be deemed to have notice of the original seller’s security interest. PAGE 6 7225904.3 Vol. 4, No. 1 SPRING 2013 Major caveat: if the buyer in the original conditional sale is a dealer or someone else who could be considered a “merchant” under the Code, even filing the financing statement will not protect the original seller by giving him a security interest in the art, since a buyer from a merchant in the normal course of that merchant’s business will take title to the art free of even a perfected security interest. A financing statement should nevertheless be filed, since perfection protects secured parties in many different circumstances, but that topic has been treated in other issues of Spencer’s Art Law Journal and is beyond the scope of this essay. New York, New York May 2013 Aaron R. Cahn Carter Ledyard & Milburn LLP Two Wall Street New York, NY 10005 Email: cahn@clm.com Website: www.clm.com NOTES 1 Although many provisions of the Uniform Commercial Code are designed to be “default” provisions, subject to variation by agreement between the parties, it appears that this is not one of them. While the statute is hardly a model of clarity here and can be subject to different possible interpretations, it appears, upon a close reading, that once the piece is delivered to the buyer, regardless of the financial terms, legal title will pass and the seller will be left with only a security interest. We should note that the statute (2-401(2)) does provide for the possibility that a carefully-drafted provision can delay the passing of title post-delivery, but case law interpretations are sufficiently muddled that a seller cannot depend on contract drafting alone to protect his or her interests. The cases are Subaru Distributors Corp. v. Subaru of America, Inc., 2002 WL 188473, NYSD 2002; Diesel Props S.R.L. v. Greystone Business Credit II LLC, 07 Civ. 9580(HB), NYSD 2008, At Last Sportswear, Inc. v. Newport News Holding Corporation, 2010 New York Slip Opinion 32792(U), Supreme Court, New York County 2010. SPENCER’S ART LAW JOURNAL is available three times per year on ARTNET, at www.artnet.com. For inquiries or comments, please contact the Editor, Ronald D. Spencer, at Carter Ledyard & Milburn LLP, Two Wall Street, New York, NY, 10005, by telephone at 212-238-8737, or at spencer@clm.com. PAGE 7 7225904.3