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Spencer’s Art Law Journal
Edited by Ronald D. Spencer

CONTENTS
Vol. 1, No. 3, Winter 2010

Ronald D. Spencer   Editor’s Note
Elizabeth C. Black   Entrustment, The Hidden Title Risk of Leaving Your Artwork in the Care or Possession of Others -- Will Your Fine Art Insurance Cover Your Loss? Probably Not
December 2010
Ronald D. Spencer   Trouble Valuing Donated Art for Tax Purposes
December 2010
Ronald D. Spencer   Buyers’ Rescission Rights for High Value Art Purchases - Spreading the Risk
December 2010
 

Editor’s Note
This is Volume 1, Issue No. 3 of Spencer’s Art Law Journal. This issue contains three essays, which will become available by posting on Artnet, starting December 2010.

As noted in Issue numbers 1 and 2 of 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 goal of this Journal is to promote discussion of art law legal issues for lawyers and nonlawyers alike, so as to provide greater transparency, stability and predictability.

The three essays in this Winter Issue continue to deal with two core issues for the ownership of visual art -- authenticity and title (who created it and who owns it?). The first essay looks at the ownership risk involved in entrusting your art to a third party for sale, conservation, framing, etc., and the coverage of your fine arts insurance policy for an "entrustment" loss of title. The second essay deals with the difficult process of valuing art for tax purposes. The last essay addresses protection for the art buyer against post-sale changes in expert consensus on attribution.

Three times a year issues of this Journal will address legal issues of practical significance to collectors, dealers, scholars and the general art-minded public.

For inquiries or comments, please contact the editor, Ronald D. Spencer, at Carter Ledyard & Milburn LLP, 2 Wall Street, New York, N.Y. 10005, by telephone at (212) 238-8737, or at spencer@clm.com

BUYER'S RESCISSION RIGHTS FOR HIGH VALUE ART PURCHASES -- SPREADING THE RISK

Ronald D. Spencer

This essay is about protection for an art buyer against a post-sale change in expert consensus on attribution. In this circumstance, a contractual warranty of authenticity or a claim by buyer that both buyer and seller were mistaken about the authenticity of the purchased art does not offer the buyer legal protection. A contract provision providing for rescission of the sale may help the disappointed buyer.

-- RDS

RONALD D. SPENCER is counsel to the New York law firm of Carter Ledyard & Milburn LLP, where he specializes in art law as Chairman of the Art Law Practice. He is expert in the legal aspects of art authentication issues and has written and edited, The Expert Versus the Object: Judging Fakes and False Attributions in the Visual Arts, (New York, Oxford University Press, 2004).

Attributions of visual art usually result from consensus opinion among art scholars and other experts. Like all opinion, expert opinion can change over time as new facts emerge or the list of experts expands or contracts.

A buyer of fine art in the circumstance where expert opinion has changed post-sale, or where buyer and seller were both mistaken about the consensus of expert opinion at time of sale, has two legal claims, a claim for breach of warranty of authenticity or a claim of mutual mistake-of-fact. The elements of each of these two claims are discussed in this essay. If a buyer brings a breach of warranty or mutual mistake-of-fact claim against the seller, courts look to the consensus of art scholars on the sale date. If the buyer and seller were both mistaken about the expert consensus on the sale date, the buyer can probably recover on a mutual mistake-of-fact claim. If expert consensus agreed with the belief of buyer and seller on the sale date, neither a mutual mistake-of-fact nor a warranty claim will be successful. If the facts will not support one or the other of these two claims the buyer would have been well served to have negotiated a rescission right in addition to the standard contractual warranty of authenticity. It may be possible for buyers of high value art to negotiate a reasonable rescission clause for a limited post-sale time period that could help protect them when expert opinion changes after sale.

Breach of Warranty: Dawson-Malina Standard
Dawson v. Malina held that the standard for determining whether an art seller was “liable for breach of warranty of authenticity is whether the representations furnished. . . can be said to have had a reasonable basis in fact, at the time that these representations were made.”(FN 1) Dawson has been adopted as the standard for breach of warranty claims in art cases.(FN 2)

Mutual Mistake-of-Fact: Feigen
Buyers may also argue a mutual mistake-of-fact theory when a piece of art is determined to be inauthentic. A mutual mistake-of-fact argument was successful in Feigen v. Weil.(FN 3) Both parties mistakenly believed the drawing was by Henri Matisse, although it was, in fact, a forgery.(FN 4) The buyer and seller were mistaken, but not the experts, who would have identified a forgery had they been consulted on the sale date.

Expert opinion about a painting changed several years after sale in Firestone & Parson, Inc. v. Union League of Philadelphia.(FN 5) In Firestone the buyer had purchased a painting which expert opinion believed to be by Albert Bierstadt.(FN 6) Five years later an article appeared in an art journal which called into question the painting’s attribution, and this view became prevailing expert opinion.(FN 7) The court said that “[p]ost-sale fluctuations in generally accepted attributions do not necessarily establish that there was a mutual mistake-of-fact at the time of the sale. If both parties correctly believed at that time that the painting was generally believed to be a Bierstadt, and in fact it was then generally regarded as a Bierstadt, it seems unlikely that the plaintiff could show that there was a mutual mistake-of-fact.”(FN 8)

Even where a seller had a reasonable basis in fact for his warranty of authenticity, a mutual mistake-of-fact claim by the buyer might prevail. Thus, for example, when a paint test at the sale date would have revealed anachronistic paint, a buyer could successfully bring a mutual mistake-of-fact claim because expert opinion (had it been consulted) would have disagreed with the contracting parties on the sale date. But, so long as the test was not one which was performed regularly or commonly by art sellers, the seller probably would be able to successfully argue that he had a reasonable basis in fact, and thus defeat a claim based on seller’s warranty of authenticity. However, if the technology for the paint test was developed only post-sale, so that it was impossible (by means of paint testing) to have known about the mistaken attribution on the sale date, the buyer could not establish a mutual mistake-of-fact.

Currently Unprotected
Neither a reasonable basis in fact standard nor a mutual mistake-of-fact claim protect a buyer from a post-sale change in expert opinion. In order for the buyer to prevail under either standard, expert consensus on the sale date must have been contrary to buyer’s and seller’s. How to give buyers reasonable protection? Buyer protection could come in the form of a clause in the sale contract allowing a buyer to rescind the sale if certain conditions are met.

The major auction houses include broad rescission clauses in their consignment agreements for art. The standard language allows rescission when the auction house “in [its] sole judgment determines that the offering for sale of any Property has subjected or may subject [Auction House] and/or Consignor to any liability, including liability under warranty of authenticity or title.”(FN 9)

Although an individual art buyer might be able to negotiate a rescission clause, it will be much more limited (because of bargaining strengths of the parties) than those included in the auction house contracts. A buyer could suggest that, in the event of a dispute concerning authenticity, both buyer and seller would be entitled to consult two experts who would opine as to the artwork’s authenticity, with a “tie” broken by a third expert picked by the two. Such provisions would give the seller some protection and would ensure that the rescission clause is only available to the buyer when there has been a true post-sale shift in expert consensus, rather than non-serious buyer worries or simply vague art market concerns about authenticity.

If the chosen experts agree that the piece is “probably” but not certainly, by the named artist, there will need to be some consideration given to the degree of “probability” required in rescission clause. The standard of proof in civil cases in court is simply “more likely than not” -- not a very high bar for determining authenticity. But it is hard to imagine that absolute “certainty” should be required. Perhaps, it should be by the hand of the named artist with a high degree of probability.

The standard rescission clause for auction houses is also lacking a time limit, conceivably allowing the auction house to rescind the sale many years after the sale. An individual buyer should include a time period in the rescission clause. The time period needs to strike a reasonable balance between protecting the buyer’s investment, while respecting the finality of sale for the seller and the inherent risk involved in purchasing art. A period of two years might be reasonable as it protects the buyer from changes in expert opinion that might have been foreseeable, or in any event, occurring relatively soon after the sale.

Drafting a rescission clause between an individual buyer and seller will require balancing their competing interests. By including a rescission clause the buyer is essentially buying insurance from the seller against the risk of future deattribution. A buyer might need to pay a premium for the security of a rescission clause, especially if the art is considered to be at high risk of reattribution. Because the buyer is shifting the risk associated with a change in expert opinion from himself onto the seller (at least for a short period of time), it is likely that the seller will insist on compensation for the added future risk.

If a seller is understandably reluctant to agree to rescind the sale if the artwork is deattributed, the risk of such an event might be shared. The seller might refund a portion of the sale price upon a post-sale change in expert opinion within, say, two years of sale.

Conclusion
Current law only protects buyers when expert doubts about the artwork’s authenticity could have been or were known on the sale date. In order to protect themselves in a high value (or high risk) transaction buyers might negotiate rescission clauses in contracts for sale of art, just as major auction houses have done. However, buyers should be prepared to pay a premium for the extra security and recognize that a rescission clause in an individual contract will require a much finer balancing of competing interests between buyer and seller than the clauses that are currently in place for auction houses. Buyers in strong negotiating positions on a major work of art may be able to insist on reasonable clauses that at least partially protect them from post-sale shifts of expert opinion.

New York, New York
December 2010

Ronald D. Spencer
Carter Ledyard & Milburn LLP
Two Wall Street
New York, NY 10005
email: spencer@clm.com
website: http://www.clm.com

 

NOTES
(1) 63 F. Supp. 461, 467 (S.D.N.Y. 1978).

(2) See Ronald D. Spencer, When Experts and Art Scholars Change Their Minds, 1 Spencer’s Art Law Journal 8 (2010).

(3) Index # 13935/90 (NY Sup. Ct. 1992).

(4) Id. at 4.

(5) 672 F.Supp. 819 (E.D.P.A. 1987).

(6) Id. at 820.

(7) Id. at 820-21.

(8) Id. at 823.

(9) See Judith Wallace, Your Art Sold at Christie’s or Sotheby’s Auction. Can the Auctioneer Undo Your Sale Years Later? Probably, Yes., 1 Spencer’s Art Law Journal 2 (2010).


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