Recent press releases, sales reports and news articles, have been filled with announcements of the expanding global art market that continues to reach new heights. The Art Market Monitor reported that during The Armory Show, a number of galleries sold works priced at tens and hundreds of thousands of dollars. Those are high prices and if you’re buying something for that much money you should be aware of a number of legal issues surrounding art purchases. We covered some of them in part one of our interview. Here attorney Richard Lehun answers questions about buyers’ and sellers’ responsibilities, titles and title warrantees for secondary market purchases, UCC filings, statutes of limitations and online information resources available to collectors.
GI: How would a collector know if the title for the art work he/she is getting on the secondary market, like the art fairs, is valid?
Richard Lehun: The first important thing to understand when buying art is that it is considered a form of goods, which are subject to the Uniform Commercial Code (UCC) in the USA. Trading in art does not rely only on the terms of any contract, but is subject to and embedded in a mesh of UCC provisions. If the art were being acquired outside of the USA it would be subject to another regime. For this reason, it is imperative to seek knowledgeable legal counsel that can identify what set of rules apply.
The UCC imposes the following statutory title warranties on the seller: (i) that the title to the work or works being conveyed is good; (ii) that the seller has the right to transfer title; (iii) that the works are delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contract has no knowledge. In addition, if the seller is in the business of selling art there is an implied warranty that the goods will be delivered free any claims by third parties.
If a buyer can prove that the goods are subject to a security interest that was not known to the buyer or seller, or if the seller did not have the right to deliver good title, the buyer can return the property and recover damages. If a rightful property owner sues the buyer to recover the property, the buyer in turn can recover from the seller or require the seller to defend the action.
A seller who is unable to deliver title may also be liable for the loss occasioned by depriving the buyer of the benefit of bargain. This means that if a work appreciates in value and the buyer loses the work because a rightful owner successfully sues for it, he or she may be able to recover the appreciated market value from the seller. Courts in the US consider the seller to be in a better position to ascertain title, or when appropriate, to be under an obligation to use unambiguous disclaimers. Curiously, if the buyer was fraudulently induced to buy a work they will only recover the purchase price paid.
Beyond the specific warranties regarding title, the UCC has a complex system of explicit and implicit general warranties and disclaimers that can have an impact on the liabilities for both buyers and sellers. It is imperative to consult a competent attorney to ensure that the buyer knows what they are actually paying for, and what recourse they have in case of default.
Furthermore, the second most important thing to understand about title is that any uncertainty regarding it should be explicitly negotiated at the time of sale. A contract is an agreement about who assumes risks and obligations. This means that any bill of sale should make explicit what warranty of title the seller is offering. Even if a seller cannot avoid liability for bad title with a vague disclaimer, warranty of title can be avoided or modified by legal provisions in a sales contract, or by circumstances that give the buyer reason to know about faulty or incomplete title.
Continue on page 2.