Consignor’s counsel should review and revise the Consignment Agreement with the worst-case scenario in mind, bearing in mind that the auctioneer’s draft is designed to protect the auction house, not the consignor, if a dispute arises over title, authenticity, condition, casualty, termination, withdrawal or otherwise. Keep in mind that prior experience is not always predictive because of the artwork’s uniqueness and changing market conditions. The mechanisms and methodologies used by the auction house to address issues with prior consignments may not be appropriate or favorable to subsequent consignors. Prudent consignors are well-advised to review and negotiate the standard terms and conditions of auction house drafts because if a dispute arises and the lot is withdrawn or the sale is rescinded, then the lot’s value and marketability can be permanently impaired. The risks of a broken consignment and burned property are not hypothetical—we represent frustrated consignors with distressing frequency. Note that consignments to a dealer or gallery for private sale on the secondary market raise many of the same issues addressed below.
Consignment Agreements for Public Auction
Let’s assume that the consignor is negotiating the terms and conditions on which it will consign multiple lots across different market categories or genres with each lot estimated to sell between six and eight figures and that the auction house has agreed to pay a guaranteed minimum sale price for the entire consignment. Let’s also assume that the auction house intends to sell the lots in a stand-alone auction and to promote the auction in New York, London, Hong Kong, and elsewhere with traveling exhibitions. In short, let’s assume a $100 million blockbuster auction of a prominent collection owned by a single institution or family, with a mix of blue-chip, investment-grade Contemporary, Modern, and Impressionist paintings and sculptures. Let’s leave Renaissance and ancient art out of this discussion because they pose a different set of problems and need to be considered separately.
Due Diligence Issues Relating to Fine Art. Due-diligence issues specific to fine art may include the following:
- Condition. The auction house may insist on preparing baseline condition reports for the objects. These serve as a benchmark to identify condition issues that arise before the auction due to casualty from care and handling, climate or otherwise. Certain lots may require special care in handling in connection with any traveling exhibition.
- Authenticity. The auction house usually requires that each lot be included in the definitive catalogue raisonné for the artist’s oeuvre to assure authenticity. However, some material may not be included in the catalogue raisonné and certain artists might not have a definitive catalogue. For example, Picasso and Cristian Zervos together prepared a catalogue raisonné that includes most but not all of Picasso’s paintings and none of Picasso’s ceramics. We recently represented a consignor where the auctioneer insisted that several lots outside the Zervos catalogue had to be authenticated by the Picasso Committee in France prior to the auction, even though the lots were well-known to the market and had been previously auctioned (which facilitated the authentication).
- Title. The art world is notoriously lax about documentation. We have encountered situations where the consignor has inherited its art collection from a prior owner where there was no documentation governing the transfer of the consigned lots from the original owner, sometimes through corporate change-of-control transactions. It may be necessary to prepare transfer documents to cure the defect retroactively so that the consignor can make the required title representations in the consignment agreement.
Significant Drafting Issues.
- Representations and Warranties; Indemnity.
- The auctioneer’s draft consignment agreement requires the consignor to make customary representations as to the consigned lots (including title, authenticity, condition, non-contravention, legality of export and import) and as to the consignor itself (organization, authorization, due execution, etc.). However, the language found in the auctioneer’s draft is often not consistent with that found in customary transactional documents used in mergers and acquisitions or private equity transactions. The consignor’s counsel must consider appropriate revisions, including qualifiers as to “knowledge” and “materiality” customary in other markets. Negotiating a survival period on indemnity shorter than the UCC’s four year default limitations period may be an appropriate “ask” by the consignor, but negotiating “baskets” and “caps” on indemnity claims is generally not appropriate for the art market, in part because any material claim as to title, authenticity, attribution and condition of the property may be fundamental to its value and marketability and may not be curable by an indemnity payment.
- In a public auction, the consignor is not in direct contractual privity with the buyer. Instead, the consignment agreement between the consignor and the auctioneer creates an agency relationship whereby the consignor empowers the auctioneer to sell the consigned property to the buyer for the consignor’s benefit. The buyer is then bound by the auctioneer’s standard “terms and conditions of sale,” which give the buyer certain rights if the limited warranties contained in the auctioneer’s lot description are breached. The question arises as to which of consignor’s representations and warranties run to the auction house and which run directly to the buyer. In other words, must the buyer bring claims regarding the lots against the auction house or can the buyer bring claims directly against the consignor and, if so, on which representations? Can the consignor be sure that the choice of law and jurisdiction/forum are acceptable in the case of litigation? It is one thing to be sued in federal court in New York City; it is another if a U.S. consignor can be sued by in Hong Kong or London.
- The auctioneer’s draft consignment agreement requires the consignor to indemnify the auction house for breach of representations and covenants but often fails to require the auction house to indemnify the consignor for its breach of representations and, more importantly, covenants. In the absence of a contractual right to demand indemnity, the consignor’s remedy for breach is limited to threatening litigation and then actually suing for breach. The absence of a contractual right to demand indemnity thus tilts the field in favor of the auctioneer, as the effort and expense of litigation can be a significant hurdle to the consignor bringing an otherwise meritorious claim. Thus, in our view, indemnity for breach of contract should be mutual. Again, this issue is not merely hypothetical. In a recent negotiation, auctioneer’s counsel replied to a request for mutual indemnity by daring the consignor to “go ahead and sue us if we breach.” (This was not well-received by the consignor, which was a public-company larger than the auctioneer).
- Contractual Outs; Adjustment of Guaranty. If the consignor negotiates for a guaranteed minimum amount of net proceeds from the auction, the consignor must limit the auctioneer’s discretion to terminate the consignment agreement or remove individual objects from the guarantee to avoid or reduce the guarantee. We recently reviewed a first draft from an auction house that was so riddled with unilateral termination and withdrawal rights and other contractual “outs,” that the consignment looked more like an option than a guarantee. Contractual termination rights arise in various contexts in the consignment agreement:
- Voluntary withdrawal of lots by the consignor.
- Withdrawal by the auctioneer for condition, casualty or title issues.
- Breach of representation. One auctioneer insisted on fresh representations of authenticity for three lots that it had previously sold in prior auctions.
- Force majeure. Going forward, this will continue to be a sensitive issue given the ongoing Covid pandemic/endemic and the risk of regulatory shut-down. In a recent decision, Phillips terminated a consignment agreement based on a broadly drafted force majeure clause and avoided its guaranty to a consignor (which owed its art-lender the purchase price for the guaranteed lot).
- Partial withdrawal raises various issues relating to the reduction of the overall guaranteed amount.
- How does the withdrawal of one or more lots affect the level of the overall guaranty?
- If one or more lots are withdrawn, what is the floor below which the auction can be cancelled?
- If a lot is withdrawn or damaged, then is the object re-valued or does its value remain the initial valuation? It may make sense to assign a fixed portion of the global guaranty to each of the lots initially, to avoid confusion and dispute later.
- Title Claims. A consignor’s ability to defend a title claim against one or more of the lots (or the proceeds of the sale of those lots) may be compromised by the auctioneer’s standard clauses regarding title claims and dispute resolution. A balanced result should protect the consignor’s right to control the defense of any claim against the lots while protecting the auction house against any liability to the third-party claimant.
- Other Drafting Issues. Small drafting points can become significant in a $100 million consignment:
- What is the effective date of the consignment agreement where both parties have separate signature lines with different dates?
- How is the number of days counted for purposes of determining deadlines for notice or action?
- How are the parties required to give notice for contractual purposes when there are parallel lines of communication at the executive, curatorial and legal levels? How is notice given? When is it deemed received?
- These and other mechanical issues are easily addressed in transaction documents customarily used in other fields and markets. But the auction houses persist in using standard forms that create vexing drafting issues where none should exist.
Consignment Agreements for Private Sale
In a consignment for private sale, the consignor engages the auction house to sell the work privately and not at public auction.
Agents vs. Introducers. The consignment agreement creates an agency relationship between the auction house and the consignor and imposes fiduciary obligations on the auction house that can only be modified by the express terms of the consignment agreement. By contrast, an introducer (or finder) is engaged on arms’ length contractual terms and has no fiduciary obligations to the consignor. Thus, there is a tension between the auction house’s desire to be treated like a broker with limited liability and its potential exposure as the consignor’s agent with broader obligations.
A threshold question for the consignor is thus how to structure the relationship: is the seller better off engaging the auction house as an introducer and paying them a broker’s fee on closing while negotiating a purchase agreement directly with the buyer that the auction house identifies? On the other hand, the auctioneer generally prefers to control the relationship with both seller and buyer and to keep them apart and ignorant of each other’s identity. Consignors should note that it is possible to address the auctioneer’s concern by protecting the identity of the seller and the buyer until after the closing through structural mechanisms such as escrow and powers-of-attorney as well as non-disclosure covenants (which can be breached).
Contractual Issues driven by the Agency Relationship. The transactional structure under a private sale consignment agreement between a seller/consignor and the auction house is that the consignor engages the auction house to act as its agent to negotiate a separate, back-to-back, purchase agreement between the auction house and the buyer. As in a public auction, this structure, where the buyer is not in direct privity with the seller, raises issues driven by the triangular relationship among the seller, the agent, and the buyer, which are addressed (or not) in the separate agreements between seller and agent and agent and buyer. These issues relate, among other things, to representations and warranties, indemnity, enforcement of rights and remedies, inspection, funding, and closing mechanics.
- For example, if buyer fails to pay or breaches its other obligations, can seller enforce its remedies directly against buyer, with whom it is not in privity, or must seller rely on the auction house as its agent, with which buyer is in privity? Can buyer enforce a claim for breach of representation against seller, with which it is not in privity, or against the auction house as seller’s agent, with which the buyer is in privity? How does seller ensure that the agent’s representations to buyer conform to seller’s representations to agent? (This last concern is only partially addressed if the sale by the auction house to the buyer is “as is” with all representations as the property disclaimed (other than title, which is difficult to disclaim under the UCC).
Conclusion International auction houses are extremely good at what they do, which is to actively market the consigned property to potential bidders, stimulate competing bids, and maximize the hammer price. In the ideal scenario, all the lots will sell at or above the estimates, counsel’s hard work will be rewarded, and all the fancy drafting for contingencies will go untested. But on occasion, usually, when care is not taken in advance, the reverse can be true: lots are withdrawn under a cloud and their value and marketability are permanently impaired. We advise prudent consignors to be proactive in protecting themselves against adverse contingencies by carefully negotiating the legal and basic economic terms (such as reserves, estimates, and guaranty levels) in the consignment agreement.