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

CONTENTS
Vol. 2, No. 2, Summer 2011

Ronald D. Spencer   Editor’s Note
Aaron R. Cahn   A Funny Thing Happened on the Way to the Gallery: A Bankruptcy Fable (Or Not)
July 2011
Amy J. Goldrich   Is a Right of First Refusal an Offer You Can't Refuse? If it's in Writing, Most Probably
September 2011
   

Editorís Note

This is Volume 2, Issue No. 2 of Spencer’s Art Law Journal. This issue contains two essays, which will become available by posting on ARTNET, starting June 2011.

As noted in Volume 1 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, should (but sometimes doesn’t) mesh comfortably with art market custom and practice.

The essays in this issue continue to deal with ownership of visual art. The first essay looks at the ownership risk involved in consigning art to a dealer for sale. The second essay deals with sale restrictions on dealers and collectors.

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.

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

IS A RIGHT OF FIRST REFUSAL AN OFFER YOU CAN'T REFUSE? IF IT'S IN WRITING, MOST PROBABLY.

Amy J. Goldrich, Esq.

This essay addresses rights of first refusal and other similar restrictions on the sale of art. Courts will enforce these rights, and the party who breaches such an agreement may pay a heavy price. -- RDS

Amy J. Goldrich practices art law in New York, where she focuses on transactional matters and dispute resolution for U.S.-based and international clients. She is also admitted to practice in California.

If information is currency, then practical information is the coin of the art world realm. When we hear of works by well-known contemporary artists being withdrawn from auction at the last minute -- as happened with a work by Takashi Murakami at Christie’s post-war and contemporary auction in June 2008 -- it is often useful to know the details. We learn where the outer limits of the art business are and what caused the damaging event.

The tale of Murakami’s Flower Blood Ball (3-D) V (2007) is an example of what can happen when a buyer of art misunderstands or ignores an important part of certain art world agreements -- a right of first refusal.

A right of first refusal works like this: Assume you sold me a painting, but you reserved a right of first refusal. When I want to sell that painting and a third party is ready to pay, say, $100,000, I cannot sell to the third party before I first give you the opportunity to buy it for the same price. You, as the holder of the right of first refusal, can buy the painting for $100,000, or you may pass on it. If you pass (or do not act within some previously established time frame), then I can sell to the third party for that same price. But if I sell it to the third party without first giving you the opportunity to jump to the front of the line and buy for yourself, I have violated your right of first refusal.(FN† 1)

In fact, the phrase “right of first refusal” is used in a broad sense to refer to a number of different types of restrictions affecting how and when a buyer can later re-sell a work of art.

Courts often refer to a right of first refusal as a “pre-emptive right” because it allows the holder of the right to stop a sale that would otherwise take place. Although it is only one type of pre-emptive right, the term “right of first refusal” is often used more liberally and imprecisely to refer generally to other types of pre-emptive rights. Some examples of these are: the right of “first consignment,” the right of “first choice,” and prohibitions against sale.

The right of first refusal and other related rights are not very common. In the primary market, where galleries make the first sale of new works by artists, it generally occurs only where there is a waiting list for an artist’s work; however, not every gallery with an artist in demand and a waiting list will impose the condition. Some galleries will not use it with collectors they know and trust, but will use it with buyers they do not know well. It is generally perceived as a disruption of an otherwise properly functioning marketplace because it can cause the sale of artwork to somebody other than the person who might otherwise be willing to pay the highest price.(FN 2) The buyer who would pay the most will lose out to another buyer with a higher collector profile, to someone who will donate the work to a museum, or to a collecting institution itself.(FN 3)†

This is counterintuitive for economists, who see price maximization as the ultimate in rational market behavior. But the art world defines “rational” behavior in less pure terms, and instead focuses on longer-term maximization of profit and other intangibles associated with an artist’s overall career, not just on the increased cash that can be generated sooner rather than later from the sale of an individual work. In the primary market, a gallery that cherry-picks buyers off of a wait list, and perhaps imposes a right of first refusal or other pre-emptive rights on that buyer, is making an economically rational decision that is designed to enhance an artist’s longer-term career prospects and earnings. Gallerists may act this way in order to protect a younger artist from the risks of exposure to a larger, open marketplace that auctions represent, or from an oversupply of the artist’s works on the market at any one time.

When it is the gallery’s or dealer’s right --Murakami v. Cerulean and Wildenstein v. Wallis
Not many court decisions directly address the enforceability of these clauses when the gallery or private dealer claims the right of first refusal. Most often, if an issue arises from such a clause, the dispute is handled out of court. However two cases provide important clues for anyone who would consider participating in a sale that is subject to a dealer’s right of first refusal.

In Kaikai Kiki v. Cerulean,(FN 4) Cerulean, a Japanese real estate company, attempted to sell Takashi Murakami’s Flower Blood Ball at the June 30, 2008 post-war and contemporary art auction at Christie’s in London. Although the case ultimately settled on confidential terms, it is well-known that the work was withdrawn from auction. There are important lessons that can be inferred from the facts that are publicly available.

The pre-emptive right at stake in this case was an outright prohibition against resale -- the requirement that a work of art may not be sold for some period of time. If the buyer wants to sell the work within that time period of prohibition, the buyer must come back to his seller and obtain the seller’s permission to sell to the third party.

According to Yayoi Shionoiri, Legal Advisor for Kaikai Kiki New York LLC, Murakami’s work sells predominantly through galleries, but on occasion the artist’s company, Kaikai Kiki Co. Ltd., acts as a primary market seller.(FN 5) When it does, Kaikai Kiki uses an agreement that imposes certain restrictions: (1) the buyer may not sell the work for 10 years from the date of sale; and (2) after that 10-year period expires, that buyer must give Kaikai Kiki advance notice of the intent to sell. If Kaikai Kiki does not respond to the notice within 30 days, the buyer may then freely sell the work. However, if Kaikai Kiki does respond, then the parties will engage in an exclusive 30-day good faith negotiation of a sale price at which Kaikai Kiki will repurchase the work. If the parties are mid-negotiation when the 30-day exclusive negotiation period ends, Kaikai Kiki nonetheless reserves the right to continue in good faith the exclusive negotiations.

Cerulean had purchased Flower Blood Ball in early 2008 under Kaikai Kiki’s direct sales agreement, which contained Kaikai Kiki’s standard restrictions. However, in mid-June 2008, when Kaikai Kiki received Christie’s auction catalog, Flower Blood Ball was included at a pre-auction estimate of £300,000-£400,000.

Kaikai Kiki notified Christie’s in London of the restriction, and simultaneously sought an injunction from a Tokyo District Court preventing the sale of the work at the June auction, and pleading a claim against Cerulean for breach of contract. Christie’s withdrew Flower Blood Ball from sale,(FN 6) and the Tokyo District Court issued a preliminary injunction.(FN 7) A statement on the Kaikai Kiki website indicates that its case against Cerulean has been settled(FN 8) and, because of the confidential terms of settlement, we do not know whether the injunction preceded Christie’s decision to withdraw the work from auction, or whether Christie’s decision came first.

The fact that the Tokyo court issued an injunction allows us to infer that a prohibition against sale is probably enforceable in Japan, and that the artist and his company might have prevailed on the merits of claims against Cerulean. Under Christie’s standard consignment agreement, the penalty to the consignor for withdrawal of a work from auction is 20% of the reserve of £300,000, or £60,000. In hindsight, it clearly would have been better for Cerulean to go back to Kaikai Kiki rather than to test the terms of the purchase agreement by consigning Flower Blood Ball to auction within mere months of its purchase.

Another contractual restriction case -- this one in the United States, under New York law -- upheld a different form of right of first refusal. In Wildenstein & Co., Inc. v. Wallis,(FN 9) New York’s highest court upheld a contractual agreement granting pre-emptive rights of potentially unlimited duration, even when it was coupled with another restriction: the exclusive first right of consignment. Under a settlement agreement resolving a prior dispute, Wildenstein obtained a 30-day right of first refusal should Wallis, his successors, heirs or assigns choose to sell two particular paintings, plus a 6-month exclusive right of first consignment to Wildenstein should Wallis choose to sell any of 15 other paintings.(FN 10)

Given that, at least in theory, Wallis would have to pay somebody a commission to help sell the other paintings, it would not appear to have been a particularly oppressive condition to require that Wildenstein receive the consignment and first chance to sell the works. (The agreement allowed Wallis, his heirs and assigns to donate any of the pre-empted works to a 501(c)(3) charitable organization without restriction.) Yet after the death of Wallis and his wife, and the transfer of title to the works to a family trust, their son attempted to sell restricted work through Christie’s without first giving Wildenstein either the right of first refusal or first consignment.(FN 11) Wildenstein found out in time, and sued.

The matter came to New York’s highest state court, the Court of Appeals. Wallis challenged the enforceability of the restrictions on the grounds that New York law did not allow restrictions that could prevent the sale of property for a potentially unlimited period of time. To do so would be an unreasonable restraint on alienation.(FN 12)

The Court of Appeals addressed the reasonableness of both types of pre-emptive rights by examining the duration, price and purpose of the restrictions. The Court’s analysis focused on the 30-day period in which Wildenstein could exercise its pre-emptive right, and the 6-month duration of the exclusive consignment right (but not on the fact that these rights lasted so long as either party to the agreement had heirs, successors or assigns on which such an agreement could be binding). In the Court’s opinion, Wallis suffered no loss as a result of the restrictions, and “pre-emptive rights conditioned upon payment equal to a third party’s offer are generally reasonable.”(FN 13)

When it is the Collector’s Right --Robins v. Zwirner and Lehmann v. Haye
The right of first refusal and other pre-emptive rights may also be held by collectors.

In both Robins v Zwirner and Lehmann v. Haye, we have a glimpse into this high-stakes game played by collectors who are not accustomed to being told that they cannot purchase certain art immediately.† Presumably, a collector who holds a pre-emptive right will be the person atop the list.

In Lehmann v. Haye, more famously known as Jean-Pierre Lehmann’s case against the now-defunct gallery, The Project, it became apparent that a gallery could only give a “right of first choice” for works by Julie Mehretu to one collector at a time. Mr. Haye needed an infusion of cash in late 2000/early 2001, and Lehmann loaned The Project $75,000, to be repaid by giving Lehmann a 30% discount on purchases until Lehmann received a total of $100,000 in discounts, plus a “right of first choice” of works by gallery artists.(FN 14)†

The parties reduced their agreement to a writing. Haye later claimed he verbally made it clear to Lehmann that certain other lenders -- among them Jeanne Greenberg Rohaytn and Dennis Scholl -- also lent money under the same terms. Omitted from the agreement as well was the unspoken assumption that museums must have first choice before collectors. Although Lehmann purchased work by other gallery artists, and was given the promised discount, he was unable to buy work by Julie Mehretu, an artist he was interested in at the time he made his investment and who may have been the reason why Lehmann made the loan in the first place.(FN 15)†

When Lehmann found out that he was not offered as many Mehretu works as he thought he was owed under the agreement, he sued. Judge Ira Gammerman (New York Supreme Court) found that Haye and the gallery had breached the agreement granting Lehmann first choice of new works by Mehretu, and awarded $1.73 million in damages.(FN 16)

In Robins v. Zwirner,(FN 17) the Miami collector, Craig Robins, claimed to possess a right of first refusal or right of first choice to purchase works by Marlene Dumas from David Zwirner Gallery, New York. Robins argued that he was given the right by Zwirner to resolve a dispute that arose between them when Zwirner allegedly breached a promise not to tell Dumas that Robins had sold one of her paintings. Dumas had a reputation for maintaining a “blacklist” of people who sold her work on the secondary market. To be on her blacklist meant a collector would not be allowed to buy artwork from Dumas’ primary market dealers.(FN 18)

Robins claimed Zwirner verbally agreed to give Robins “first choice, after museums, to purchase one or more” of Dumas’ works whenever Dumas had an exhibition at Zwirner’s gallery, and to have Robins removed from Dumas’ blacklist. When Dumas had a show of new works at Zwirner’s gallery in March 2010, Robins attempted to exercise the right of “first choice,” but Zwirner claimed there was no agreement granting Robins that right.(FN 19) Robins sued, seeking an injunction for specific performance, requiring Zwirner to honor the alleged agreement.

The Court found that although injunctions are appropriate in disputes concerning works of art,(FN 20) Robins’ demand for relief had to be rejected because there was no writing expressing the agreement. The New York Statute of Frauds, common to many states of the U.S., mandates:

A contract for the sale of goods for the price of $500 or more is not enforceable without a contemporaneous writing sufficient to indicate that a contract for sale has been made between the parties and signed by the parties against whom enforcement is sought.(FN 21)

New York law requires that a right of first refusal, or first choice to purchase artwork, must be expressed in a writing with sufficient particularity, and that writing must be signed by the party who granted the right.

Buyers of art often complain about pre-emptive rights generally, and rights of first refusal specifically, feeling they are designed primarily to give the dealer a share in the appreciation of the art on resale. That may or may not be true.† But a buyer who does not want to honor a right of first refusal is advised to “just say no” to an agreement containing the term.

Rights of first refusal, so long as they are expressed clearly in writing, and even in combination with other related pre-emptive rights, are enforceable, and a breach of an agreement for pre-emptive rights can result in legal liability for substantial damages.

New York, New York
June 2011

Amy J. Goldrich, Esq.
Law Office of Amy J. Goldrich
420 Lexington Avenue, Suite 300
New York, New York 10170
E-mail: ajg@amygoldrich.com
Website:† www.amygoldrich.com

NOTES
(1) If, after you, as the holder of the right of first refusal, have declined to exercise it and allow me to sell the painting to the third party for $100,000, and the third party buyer then lowers the offer, I must return to you and give you the opportunity to buy the work at the new, lower price, or to pass on it again.

(2) Olav Velthuis, “Accounting for Taste: Olav Velthuis on the Economics of Art,” Art Forum, April 2008.

(3) These things actually happen even when there is no right of first refusal.

(4) Though the case is Japanese, I have referred to it with a customary US-style legal caption for the sake of discussion.

(5) For purposes of this essay, both companies will be referred to together as “Kaikai Kiki”.

(6) Judd Tully, “Wranging Over Resales,” Art + Auction, October 2008.

(7) In Japan, courts may order provisional remedies or injunctions, including attachment (kari sashiosae or keisŰbutsu ni-kansaru Kari-shobun), which temporarily freeze the status of or seize certain property so that it may not be disposed of/sold/transferred while ownership of it is in dispute. The legal standard for these orders is similar to the standard for preliminary injunctive relief in the United States:† a reasonable chance that a favorable judgment for plaintiff would lose its practical effect unless the provisional remedy is ordered (like the U.S. concept of irreparable harm); and reasonable grounds on which plaintiff can win the case (the U.S. concept of likelihood of success on the merits). See Hiroyuki Tezuka and Masako Yajima, “Country Q&A: Japan” in Cross-Border Dispute Resolution Law Handbook 2005/06. See also Guide to Judicial Proceedings in Japan, Outline of Civil Litigation.

(8) http://english.kaikaikiki.co.jp

(9) 79 N.Y.2d641 (N.Y. Ct.App. 1992).

(10) The settlement allowed Hal Wallis, the producer of Casablanca, to recover two paintings Wildenstein bought from a third-party dealer who did not in fact have the right to sell.

(11) This of course begs the question of whether Christie’s might have offered Wallis attractive enough terms (e.g., waiving the seller’s commission, sharing the buyer’s commission, etc.) to induce what Wallis might have thought was an “efficient breach” of Wildenstein’s right of first consignment.

(12) In fact, Wallis argued that the conditions in the Wildenstein agreement violated the New York Rule Against Perpetuities.

(13) Wildenstein & Co., Inc. v. Wallis, 79 N.Y.2d 641, 651 (N.Y. Ct. App. 1992).

(14) Christopher Mason, “She Can’t Be Bought”, New York Magazine, May 21, 2005.

(15) Lehmann was invited to preview Mehretu’s first show at The Project, but he was traveling and unable to take advantage of that opportunity. By the time he returned, the two paintings he was interested in had already been sold. Id.

(16) Brian Appel, “Dealer Hit With Lawsuit for Blocking Access to Art”, artcritical.com, April 2005.

(17) 713 F. Supp.2d 367 (S.D.N.Y. 2010)

(18) Id. at 371.

(19) Id. at 373.

(20) “Original works of art are within the small category of intrinsically unique goods for which specific performance remedy is appropriate.” Id. at 374, quoting N.Y. U.C.C. ß2-716 & cmt. 2.

(21) Id. at 375, quoting N.Y. U.C.C. ß2-201(1).

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