Structuring art deals in the contemporary art market – top tips

Recently, Fred Clark, a solicitor in Boodle Hatfield’s art and corporate team gave a talk on legal issues in contemporary art at Sotheby's Institute of Art.

This article, will guide you through the processes discussed by Fred on how to successfully structure art deals in the contemporary art market. Let’s start by addressing the varying types of contracts.

What are the benefits of having a conventionally written contract in an art deal? A level of certainty is assured when a contractual agreement is written down and it can provide a basis to resolve disputes that might arise later. But, even with a contract, things can go wrong.

Buyers must be wary and conduct proper due diligence beforehand. Written contracts can be drafted to address any nuances that arise from the buyer’s due diligence process.

Alternatively, contracts do not need to be in writing. A dealer could offer an invoice that acts, at least in part, as a contract. Payment terms may be on the invoice itself, but the other terms may be implied by the Consumer Rights Act 2015 and/or the Sales of Goods Act 1979. These statutes give consumers a certain level of protection by affording them the right to return or reject purchases if they are not of satisfactory quality, fit for purpose or match the description that was given to induce the sale. Other terms may be agreed verbally or in writing, such as by email.

The following terms would also be implied into the contract:

• Every seller is deemed by law to guarantee to the buyer that:
  • They have the right to sell the goods.
  • The buyer will get quiet possession of the goods.
  • The goods are free from any charge or encumbrance not disclosed or known to the buyer at the time of the sale.
• The seller also gives an implied warranty of title.
• Unless contract expressly provides, the seller does not automatically warrant authenticity of the item or that the description is correct.

Within the art world, there are numerous complex forms of art transactions. The most uncommon form of transaction is a purchase direct from the owner to a buyer. Instead, intermediaries are often involved in the sale. Intermediaries may be involved in ‘back-to-back’ deals, or they may act on behalf of an owner or a buyer.

‘Back-to-back’ contracts are used when a party buys to resell, making a profit (or loss). Whether written or not, two transactions take place here; artwork is purchased from the owner and the buyer resells it, possibly with the help of agents. When acting directly (or indirectly) for an owner of buyer, the agent makes a commission, rather than a profit.

Agents are commonly used to facilitate transactions and, because they do not generally acquire the artwork, they usually take on minimal risk in the transaction. Agents generally make commission from the sale. Under the laws of agency, they are required to disclose any commission made.

However, the sometimes-ambiguous relationship between an agent and principal can become troubled. An infamous number of international lawsuits commenced in 2015, which alleged that Yves Bouvier, a Swiss art dealer, defrauded his client by overcharging them. His client was the Russian oligarch Dmitry, who is currently under investigation himself. The case centred on whether Bouvier was an agent, who had to disclose his commission to Rybolovlev, or whether he was an intermediary who bought and sold the artworks, making a profit that he was not required to disclose. The position was not altogether clear cut.

Central to the Bouvier affair are questions concerning the contracts; was Bouvier’s relationship to Rybolovlev one of a seller to a buyer (i.e. under a back-to-back deal) allowing him to make an undisclosed profit? Or, was the relationship that Bouvier acted as Rybolovlev’s agent and that he should have taken an approved commission only and no secret commission, as Rybolovlev alleges he did? And if there had been a written contract for each sale and purchase, would that have provided clarity?

As is evident from this case, it is imperative for each party to clearly communicate their roles and intentions to the other party. Written agreements must outline the true scope and capacity of services provided by intermediaries. Simply operating on blind trust with no written agreement should never be an option, particularly at the top end of the market.

And even if an agreement explicitly states that parties act on behalf of the seller or the buyer, the Court may look at the actions of the parties to see if fiduciary duties are owed and if an agency relationships exist to the other parties.

When structuring a deal, a contract in some form is vital. The level of transparency, accuracy and directness of the contract are what can define a deal in the sometimes murky world of selling and buying contemporary art.