Editor’s Note
This is the first issue of Spencer’s Art Law Journal which will appear three times a year on Artnet. This issue contains four essays, which will become available, one essay each month, April through July 2010.

It’s been said that art market custom and practice remain much as they were in the 19th century. 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 archaic custom and practice. The result is that 21st century art market participants are frequently unsure of their legal rights and obligations.

This Journal proposes to promote discussion of art law legal issues for lawyers and nonlawyers alike, with the goal of providing greater transparency, stability and predictability.

The first four essays in our series deal with two core issues for the ownership of visual art -- authenticity and title -- who created it and who owns it? The first essay addresses a typical but often overlooked provision of an auction house consignment agreement allowing the auction house to rescind a sale over authenticity concerns. The second essay deals with ownership disputes with insurance companies over art stolen and recovered years later. A third essay raises the fraught question of changes in the attribution of visual art. The final essay of this issue of the Journal addresses the process of determining who owns art stolen between 1933 and 1945.

Three times a year future issues of the Journal will address legal issues of practical significance to collectors, dealers, scholars and the general art-minded public, such as (1) appropriate due diligence on the part of the buyer when provenance is incomplete or unclear, (2) the relevance of catalogues raisonné for due diligence, and (3) what to do if one suspects a piece in a collection of visual art is incorrectly attributed, or, indeed, an outright forgery.

YOUR ART SOLD AT CHRISTIE’S OR SOTHEBY’S AUCTION.
CAN THE AUCTIONEER UNDO YOUR SALE YEARS LATER?
PROBABLY, YES.

Judith Wallace

This essay concerns the under-appreciated contractual right of major auction houses to force their seller/consignor to rescind an auction sale (seller returns money against return of art) many years later over concerns about the authenticity of the work sold.

JUDITH WALLACE practices art law and environmental law at Carter Ledyard & Milburn LLP and has assisted dealers, artists, foundations, and scholars in authenticity disputes in state and federal courts.

Every consignor to a major auction house should be aware of the potentially devastating consequences of rescission clauses -- an often overlooked feature of the standard consignment agreements of the major auction houses. Because rescission clauses are rarely included in contracts with private art dealers, the extraordinary reach of these clauses can take consignors unawares. This essay describes the risks for consignors and offers suggestions for consignors wishing to minimize their exposure to a rescission demand.

The Standard Rescission Clause
Rescission clauses give an auction house broad discretion to undo an art sale transaction years after the sale. The standard text in one auction house’s contract provides:

Rescission of Sale. [Auction House], as Consignor’s agent, is authorized to accept the return and rescind the sale of any lot of Property at any time if [Auction House] in our 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. In such event, [Auction House] is further authorized to refund or credit to the buyer the purchase price of such returned Property. If [Auction House] has already remitted to Consignor any proceeds of the rescinded sale, Consignor forthwith shall pay [Auction House] upon request an amount equal to the remitted proceeds.

In other words, the auction house can rescind with its auction buyer, years after the original sale, based on its own determination that there is a possibility of liability, and then demand a refund of the sale proceeds from the consignor, even if the consignor acted in good faith based on all information available at the time of the sale and there is a strong argument that the artwork is correct in every way.(FN 1)

Distinguishing Contractual Rescission from Other Remedies
The critical difference between the rescission clauses in consignment agreements and a breach of warranty claim or a rescission claim under common law is that without a contractual rescission clause the auction house would need to actually prove its claim (such as that a work is not authentic) by a preponderance of the evidence, rather than citing its own determination that there is a risk of liability.

In contract disputes, including disputes arising from art sales, the remedy for a breach of contract, such as a breach of warranty of authenticity, is typically an award of money damages. Alternatively, under the common law of contracts, one party can seek rescission by proving a mistake of fact by both parties at the time of the contract so profound that a "meeting of the minds" did not take place. Rescission restores the pre-contract status quo, meaning that the buyer returns the work and the seller returns the purchase price.

When the claim is that artwork is not authentic, the difference between a refund on the ground of a breach of warranty or the return of the purchase price through common-law rescission may seem academic. In either case, the buyer must prove to a preponderance of evidence standard (i.e., that it is more likely than not) that the work is not authentic. The distinctions are fairly subtle: proving a mutual mistake of fact may be more difficult, as one New York court has held that sophisticated art dealers are always aware of the inherent risk regarding authenticity;(FN 2) however, the statute of limitations for mutual mistake is longer than for warranty claims (in New York, six years as opposed to four).

In contrast, there is a vast difference between either breach of warranty or common-law rescission claims and the standard contractual rescission clause in auction house consignment contracts, which requires only that the auction house show that it determined that it "may" be subject to liability.

Allowing rescission based on the possibility of liability is particularly risky with respect to authenticity. Art sale contracts contain warranties relating to condition, title, and authenticity. Discrepancies in a work’s condition would be apparent as soon as the buyer takes possession. Title disputes involve comparatively straightforward legal issues. Questions about authenticity, however, can arise months or years after the sale, whenever new information comes to light, when experts (perhaps even the same experts who initially supported an attribution) change their assessment of the work, or when new forensic tools are developed.

Auction house rescission clauses also allow for rescission and return of a work that may very well be authentic. Nevertheless, the fact that the auction house has raised questions about authenticity and invoked its rescission clause can then render the work much less marketable. Even if the challenge did not play out in public, the consignor would probably need to disclose the authenticity challenge to any new buyer. And even if there is litigation over the rescission clause, the issue of whether the work is in fact authentic can remain unresolved. A court will be reluctant to weigh expert testimony and determine the work’s authenticity when all that the contract requires is a showing that the auction house "may" be liable.

Recommendations for Consignors

When it is impossible to simply delete a rescission clause, the following steps can minimize its impact:

1. Shorten Deadline.
The standard auction house rescission clause contains no deadline, authorizing rescission "at any time." A consignor could argue that the statute of limitations period for contract claims, which in New York is six years, is the deadline. Still, this is longer than the statute of limitations for claims for torts such as negligent misrepresentation or fraud (three years) or statutory warranty claims (four years). Consignors should limit the deadline for claims under the rescission clause to one year from the date of sale. This will allow sufficient time for buyers to perform a thorough investigation of the artwork. There is no reason that consignors should be liable for a longer period for changes in attribution -- which are an inherent risk that any art collector should anticipate -- than they are for wrongdoing.

2. Limit Rescission to Representations in the Consignment Contract .
A rescission clause that allows rescission for "any liability" can create obligations beyond the specific representations and warranties that the consignor makes in the contract. For example, an out-of-state consignor that warrants that it has "no reason to believe that a work is not authentic" might not be aware of a New York statute that, in some circumstances, deems a certificate of authenticity from a third party expert to constitute an express warranty by the consignor that the work is authentic.(FN 3) (The consignor might not even know what state or national law governs the auction house’s sale.) The consignor might also be unaware of an auction house’s additional warranties, representations, or promises to buyers, especially if the work is sold in a private sale subject to separately negotiated terms of sale. Thus, consignors should limit any rescission right to the representations in the consignment contract and explicitly authorized to be passed along to the ultimate buyer, and should disclaim warranties not explicit in that contract.(FN 4)

3. Require Immediate Notice and Opportunity for Consignor to Cure.
Rescission does not truly return consignors to the pre-contract status quo because the reputation of the work can be destroyed in the course of the investigation or rescission. Therefore, consignors should require immediate notice when questions about authenticity are raised. This will give the consignor the opportunity to obtain appropriate expert opinions, or even to reacquire the work, before the work is irreparably devalued by a buyer or auction house building a case for rescission.

4. Require Independent Determination of Fact.
The standard clause allows rescission at the auction house’s "sole discretion" that it "may" be liable. The only limitation on the auction house’s sole discretion is that the determination must be made in good faith.(FN 5) Consignors should require both an independent arbiter agreed upon by the parties and an actual determination by that arbiter that the work is not (or probably not) as described by the consignor. This will reduce the risk that a consignor will be asked to take back an authentic, but thereafter a much less marketable, work.

5. Obtain Parallel Rights Against Predecessor in Interest.       
Consignors should ensure that any rescission rights they grant to an auction house are paralleled in the consignor’s own contracts with their predecessors in interest (usually the person from whom consignor purchased). Consignors should be aware that auction houses auction works with a five-year warranty of good title and authenticity, and thus will remain liable for claims from auction buyers during that period.

Conclusion
Broad rescission clauses (even those requiring the auction house to act "reasonably") provide auction houses with tremendous leverage to unwind art transactions, even when it is likely that the work conforms in every way to the description in the contract and the consignor has not misrepresented any information. Consigners of artwork should therefore understand the risks inherent in the rescission clauses in standard auction house contracts and either limit that rescission right or plan ahead and seek parallel protections from their predecessors in interest to reduce their exposure.

New York, New York
January 2010

Judith Wallace
Carter Ledyard & Milburn LLP
Two Wall Street
New York, NY 10005
wallace@clm.com
www.clm.com

NOTES
(1) The author represented one defendant in litigation of a rescission clause in Christie’s Inc. v. SWCA, 867 N.Y.S.2d 650 (N.Y. Sup. Ct. N.Y. County 2008). (granting partial summary judgment).

(2) Compare Findley v. Zaplin-Lampert Gallery, Inc., No. 603118/01 (Sup. Ct. N.Y. County, Dec. 19, 2001) (no mutual mistake because sophisticated art dealers understood the inherent risks regarding authenticity) with Uptown Gallery, Inc. v. Doniger, No. 17133/90 (Sup. Ct. N.Y. County, Mar. 9, 1993)(allowing rescission because both parties mistakenly assumed that a work was authentic); Richard L. Feigen & Co. v. Weil, No. 13935/90 (Sup. Ct. N.Y. County Feb. 18, 1992) (same).

(3) See New York Arts & Cultural Affairs Law § 13.01.

(4) See, e.g., T.T. Exclusive Cars Inc. v. Christie’s, Inc., No. 96-Civ.-1650, 1996 WL 737204, at *6 (S.D.N.Y. 1996).

(5) See, e.g., Kohler v. Leslie Hindman, Inc., 80 F.3d 1181, 1187 (7th Cir. 1996); Mickle v. Christie’s Inc., 207 F. Supp.2d 237, 247-48 (S.D.N.Y. 2002); Greenwood v. Koven, 880 F. Supp. 186, 197 (S.D.N.Y. 1995).

contact