New York—one of the cultural capitals of the world—has a well-developed body of law that governs the buying and selling of artistic works as well as the relationship between artists and dealers. It is important for anyone involved in the art world to understand these rules since, in some instances, they may differ from those that apply to other types of transactions.
What Legal Rules Apply to Transactions Involving the Sale of Artwork?
The sale of art is governed by Article 2 of the New York Uniform Commercial Code (UCC), which applies to the sale of goods. Section 2–401 provides that ownership of art passes from the seller to the buyer in any manner and under any condition explicitly agreed to by the parties, with one limitation; that the seller can only reserve a security interest in art that has been shipped or delivered to the buyer. Where there is no explicit agreement regarding when title passes to the buyer, the UCC default provisions apply.
Neither party is required by law to conduct due diligence, but it is recommended. A failure to conduct due diligence by the buyer may limit available remedies in a future lawsuit. Accordingly, where a significant purchase is contemplated, buyers should seek to verify authenticity, title, provenance, valuation, and the condition of the work, to protect their investment.
Sellers should also perform due diligence. New York law provides that sellers make an implied warranty of title and express warranty of authenticity in selling art unless modified or excluded.
Implied Warranty of Title
The UCC establishes an implied warranty of good title, which includes a warranty that the work is free from security interests or other encumbrances unknown to the buyer. However, the warranty can be modified or excluded with specific language or circumstances that puts the buyer on notice that the seller does not claim good title.
The statute of limitations for breach of the warranty is four years after the cause of action accrues, which is generally when the artwork is delivered. The limitations period can be reduced to one year, but not extended beyond four years.
Can Buyers Void a Purchase of Forged Artwork?
Several laws establish a warranty of authenticity, which give buyers a remedy in the event they purchase forged artwork.
New York Arts and Cultural Affairs Law (NYACAL)
This law is designed to protect laypersons or non-art merchants. When a layperson purchases art from an art dealer and receives a certificate of authenticity or a similar document stating the work is by a named artist, it creates an express warranty that the work is authentic and is actually made by that particular artist.
New York UCC
The UCC express warranty applies to sales to both laypersons and art merchants but requires a different standard of proof than the NYACAL; whether the seller made an express warranty in its documentation to the buyer is a fact issue for the court to decide. The burden is on the buyer to establish the warranty and that the seller lacked a reasonable basis to make the warranty. However, a dealer’s statement on an invoice indicating the artist’s name is generally deemed to be a warranty that the work is by that artist.
Under certain circumstances, buyers may also bring an action to rescind the purchase of forged artwork based on mistake, fraud, or negligent misrepresentation. However, these can be difficult to prove.
Statute of Limitations for Breach of Warranty of Authenticity
Under the UCC, the statute of limitations is four years from when the breach of authenticity occurs. The limitations period begins to run when the seller delivers the work to the purchaser unless the warranty explicitly extends to “future performance.”
What Is the Relationship Between Agents and Artists?
Artists and agents typically have a principal-agent legal relationship, which, under New York law, means the agent owes fiduciary duties to the artist. A fiduciary duty is an obligation that one person act in the best interests of another person or an entity. Agents have a duty of honesty and loyalty to the artist and must disclose all material facts related to their relationship. They cannot put their personal financial interests ahead of the artist or receive an undisclosed advantage. As a result, agents must disclose to the artist any commissions or other compensation they receive related to their agency with the client. Agents can only retain compensation with the full knowledge and consent of the artist. In the absence of this, agents are in breach of their fiduciary duty and may be liable for direct damages, indirect damages, and legal fees, and subject to other remedies as provided under the law.
What Is the Relationship Between Art Merchants and Artists?
Under the NYACAL, when artists give their work to an “art merchant” or art dealer to exhibit and/or sell the work on behalf of the artist, it creates a consignment relationship. In a consignment, the consignor (artist) entrusts the art to the consignee (art merchant) for sale under agreed-upon conditions. This relationship is automatic regardless of whether there is a written or oral agreement to consign the work. The consignment does not give the art merchant ownership rights. The consigned work and any proceeds from its sale are held as trust property on behalf of the artist or the artist’s estate. As a result, it is protected from any claims by the art merchant’s creditors.
Right to Enforce
Artists are not the only party protected. The law expressly applies to works consigned by artists, craftspersons, or their “successors in interest,” including personal representatives, testamentary beneficiaries, trustees of a trust, or heirs. This is particularly important because it allows enforcement of the consignment by the artist’s estate and those who inherit the artwork.
The NYACAL defines an “art merchant” as “a person who by his occupation holds himself out as having knowledge or skill peculiar to such works, or to whom such knowledge or skill may be attributed by his employment of an agent or other intermediary who by his occupation holds himself out as having such knowledge or skill.” The definition focuses on the knowledge or skill of the party holding the art and applies even where the merchant has a financial interest in the artwork.
Responsibilities of Art Merchants
The trust relationship between a consignor and consignee means that the art merchant owes both contractual and fiduciary responsibilities to the artist. Fiduciary duties include a heightened duty of care and loyalty to artists. Regardless of the terms of a consignment agreement, art merchants have specific obligations including:
- Not commingling or misusing sale proceeds. Funds must be segregated in a trust account for the artist to protect them from claims by the art merchant’s creditors.
- Paying artists their share of the sale proceeds on demand.
- Providing artists with an accounting of sales of their art, including supporting documentation, the sale price, and the name and address of the purchaser.
Damages for Breach
An art merchant’s failure to meet this obligations under the law may constitute both a contractual and fiduciary breach of duty. Where artwork is missing, there is a presumption of liability and the burden is on the art merchant to prove the art is not missing or the cause of the loss was not within the art merchant’s control.
An artist can obtain monetary damages, injunctive relief, and attorneys’ fees in a lawsuit to enforce the law’s requirements. Art merchants may also be subject to criminal penalties for commingling or misusing funds.
Art transactions are subject to several different laws which create responsibilities and potential areas of liability. Parties should seek legal advice before entering into any contract whether for the sale of artwork or involving an agency or consignment relationship.
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