It Takes Two to Tango: The Importance of Artist-Gallery Contracts

By Scotti Hill*

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Creative Commons.

Of course galleries are venues of intellectual engagement and social activity, but it can be easy to forget that they also act as hubs for commercial exchange. The same mechanisms that govern relationships between blue-chip artists and mega-galleries ought to be in place to protect emerging artists and pop-up galleries as well. Beneath the veneer of originality and artistic merit lie monetarily-driven representation agreements and consignment contracts. The status quo is driven by mutual interest: galleries need artists to create their inventory so their clients have something to buy, and artists need galleries for their infrastructure and access to art buyers. By creating a roadmap that enables both parties to navigate their working relationships, contracts are at once practical and imperative. So, given the importance of a well-drafted and carefully negotiated contract in almost all areas of commerce, why do artists and galleries often fail to formalize the nature of their relationships in contractual form?

On July 19, 2016, Center for Art Law hosted an art law mixer entitled “Good Fences Make Good Contracts” to explore the question of contracts between artists and galleries. As a follow up, this article examines the intricacies of standard representation and consignment agreements, while also delving into the legal basis for such contracts–namely the Uniform Commercial Code Sect. 9-102 and the New York Arts and Cultural Affairs Law §12.01, Artist and Merchant Relationships. To illustrate benefits of having carefully crafted contracts between artists and galleries, some high-profile relationships, such as the representation and the rumored split between Richard Prince and the Gagosian Gallery highlight select  issues that may arise in an artist-gallery relationship.

Introduction to the Standard Artist-Gallery Contract

Screen Shot 2016-08-15 at 1.04.59 PMWhen entering into a commercial relationship, an artist or gallery may choose to draft a standard representation agreement whereby the gallery agrees to work as an agent on the artist’s behalf. The scope of this agency is negotiated by the parties, as some galleries hope to serve as an artist’s exclusive agent in a geographic area (New York City, for example), while others agree to serve as agent for one specific medium or collection the artist produces. Such agreements set provisions for matters like how revenue is shared after a sale, whether the gallery receives commissions on work sold from the artist’s studio, and the duration and scope of consignment. The following items are also commonly included in artist-gallery contracts:

  • Duration of contract including renewal and termination clauses;
  • Commission structure, terms of payment and other accounting procedures;
  • Transportation procedures;
  • Gallery promotion, marketing and copyright;
  • Coverage and provisions of insurance policies.

After establishing representation with a gallery, artists then consign their artwork to them for safekeeping with the expectation the gallery will sell their inventory. By definition, consignment is the act of assigning the property of one party (consigner, be it an artist or a collector) to that of another (consignee, here a gallery), for sale under contract. As part of the larger representation contract, a consignment agreement should list all the works given to a gallery by the consignor, with an authority to sell a specified group of the artist’s work and providing an indexical record of works in the gallery’s possession.

Uniform Commercial Code (UCC) Sect. 9-102, and New York Arts and Cultural Affair Law §12.01, Artist and Merchant Relationships

While the Uniform Commercial Code is the overarching body of laws concerning the sale of goods and commercial transactions federally, each state has adopted its own commercial code. UCC Section 9-102 sets guidelines for parties engaging in commerce regardless of the existence of a written contract. As it relates to the consignment relationship between artist and gallery, the UCC dictates important provisions that have been upheld over time by case law, namely the criteria and value of goods classified under ‘consignment’ and consignor’s rights in the event of bankruptcy. See Jacobs v. Kraken Inv. Ltd., (In re Salander-O’Reilly Galleries, LLC), 506 B.R. 600 (Bankr. S.D.N.Y. 2014)

In addition to the UCC, thirty-one states have adopted statutes to address the specific circumstances governing art transactions. In New York, for example, the New York Arts and Cultural Affairs Law (NYACAL), Article 12, provides a governing structure for interpreting contracts between artists and galleries. On November 6, 2012, New York’s consignment law was updated to include additional protections for artists by imposing stricter measures on galleries and dealers as consignors. The updated NYACAL addresses three fundamental weaknesses in earlier consignment law: requiring dealers and galleries to place sale funds in a protected trust, awarding attorneys fees for successful petitioners and requiring that critical sections of the consignment agreement be memorialized in writing. The 2012 amendment directly addresses the UCC’s problematic rendering of consigned artwork eligible for seizure by creditors, which is perhaps one of the UCC’s most controversial points.

Before the 2012 revision to the law, creditors could legally seize artworks in a consigner’s possession in order to fulfill unpaid debts. Although galleries do not own artworks on consignment, the creditor exists as a third party outside of, and therefore not bound by, the terms of a contract forged between the artist and gallery. The lack of solid legal remedies for consignors is what has propelled many states to revise their laws to deal specifically with the consignment of art, while in New York, the mammoth Salander-O’Reilly Galleries lawsuit became a catalyst for the amendment.

As such, an important provision exists in many amended state laws: that the gallery be rendered trustees to the artist’s property, which necessitates they hold revenue from the sale of an artwork in a special trust–apart from other gallery funds–that will be paid in full to the artist at an agreed upon time. This amendment works to 1) prevent creditors from seizing consigned art because the value of such works is protected in a trust, and 2) protect trust funds from being improperly used by the galleries to fulfill other financial obligations.

Indeed both parties may take advantage of vague contractual terms or actively work against the creation of a contract. Amended laws aim to prevent this by adding specific fiduciary responsibilities for both parties. Ultimately, if the artist-gallery partnership exists in a state without a comprehensive consignment statute, the parties can, and should, provide through contract the provisions missing from state law.

Richard Prince and Gagosian Gallery Split

After more than a decade and a string of highly successful exhibitions together, news broke in June 2016 that Richard Prince and Gagosian Gallery were going their separate ways. Neither the  veracity of the news nor the details of the alleged split are known, but if true may be explained by the mounting costs from legal battles involving the pair in recent years, which implicate and name Larry Gagosian and his gallery as a contributory infringer.  See Graham v. Richard Prince, Gagosian Gallery, Inc., and Lawrence Gagosian, Cariou v. Prince, Gagosian Gallery, Inc. and Lawrence Gagosian, and Dennis Morris v. Richard Prince, Gagosian Gallery, Inc. and Does 1 through 10 inclusive.

As part of his famous appropriation work, Prince takes the copyright-protected work of other creators and repurposes it in new contexts. While critics and collectors have repeatedly lauded this process, photographers whose work has been used without permission have taken a different approach. From 2014-2016, three copyright infringement lawsuits were filed against Prince by photographers Patrick Cariou, Donald Graham and Dennis Morris. In Cariou v. Prince, 714 F.3d 694 (2nd Cir. 2013), the Second Circuit Court of Appeals held that Prince did not infringe the copyright of 25 of the 30 images he appropriated from Patrick Cariou’s collection of photographs under the fair use exception of copyright law. For his use of the remaining five images in the collection, Prince settled out of court. The infringement cases brought by Graham and Morris are ongoing.

As agents working on the artist’s behalf, galleries accompany artists through creative peaks and declines. While much is made about how important contracts are for artists, galleries are wise to incorporate a termination clause in the contract in order to guard themselves from potential problems that may arise in the course of the relationship. A well-drafted termination clause, for example, is helpful in providing a protocol for the  manner in which the parties can terminate their professional relationship; a termination clause affords the party on the receiving end of the “breakup” adequate time to prepare for the transition. This is particularly important in instances where the gallery has crafted an exhibition or otherwise made plans with specific artworks. A typical clause of this kind would require the party initiating the split to give notice of anywhere from one to three months to the other party.

We do not know if Prince had a contract with Gagosian, but at the very least, it is likely the two agreed upon such critical provisions as payment and consignment of inventory. Despite news of the split earlier this summer, Prince is still featured on Gagosian’s website, which may indicate the two have yet to part ways. And even then, the separation may only be temporary.  After all, artist Damien Hirst reunited with the Gagosian Gallery for 2016’s Frieze New York following a three year split.

Conclusion

Although many states have amended their consignment laws, still other states have yet to follow suit. In areas of the nation where art represents a decidedly small segment of the larger economy, less incentive exists to add in the necessary protections that have been greatly appreciated in large art markets. On a practical level, however, artists can protect themselves by being vocal about their desire for a consignment contract. Contracts create a roadmap for the artist-gallery relationship and can offer clarity  if/when any unforeseen grey areas arise in the course of doing business together. When entering into a business relationship with a gallery, artists are wise to seek out feedback from their peers about the gallery’s reputation and its willingness to negotiate mutually beneficial terms at the outset. Various resources exist online, most important of which are copies of the standard representation and consignment agreements that can serve as a starting point for both parties. Ultimately, if an artist is faced with unique circumstances relating to their practice or needs, they may wish to seek legal representation before, and oftentimes during, their formal acceptance of a gallery’s offer of representation.

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Photo by Luis Nieto Dickens | @vla_newyork

On July 19, 2016, Center for Art Law (the “Center”) hosted “Good Fences Make Good Neighbors,” a Summer Art Law Mixer made possible with support from the New York Volunteer Lawyers for the Arts. The event focused on contracts between artists and galleries and how attorneys negotiate on behalf of their clients. Moderated by the Founding Director of the Center, Irina Tarsis, the panel featured three speakers, all attorneys specializing in art law. Dean Nicyper, a litigator with Withers Worldwide, and involved with revising the NYACAL law, provided a general overview of the legal considerations of artist-gallery contracts, Amelia Brankov of Frankfurt Kurnit Klein & Selz, spoke about the ways in which artists can advocate on their own behalf in forging contracts with galleries and Katherine Wilson-Milne of Schindler Cohen & Hochman, commented on what considerations galleries have when drafting contracts with artists. Attendees, including practicing attorneys, students and artists, asked questions ranging from the appropriate etiquette of negotiating such contracts to how to best situate oneself to prevent and later reconcile potential legal issues that arise from this union. One main take-away from the evening was that that clear terms of a consignment agreement between artists and dealers make for good symbiotic relations between the two key players in the art market.

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About the author: Scotti Hill is a J.D. Candidate, 2018 from the S.J. Quinney College of Law at the University of Utah. She serves as a summer 2016 legal intern for the Center for Art Law, and works as an art critic and curator. Prior to law school, she received a Master’s Degree in art history and visual studies. She can be reached at scottiaustinhill@gmail.com

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

Fine Art Storage Services v. Insurance Companies: A Cautionary Tale

By Scotti Hill*

Hindsight is 20/20, however, art storage facilities are supposed to be forward looking to make sure that property entrusted to them for safekeeping remains protected and unaltered while in their custody. Elements such as temperature, humidity and pest control are vital to preserve artworks from any damage or total loss. Certain mediums like paper, canvas, plaster, metal, and clay are of course particularly vulnerable to temperature and humidity fluctuations.

Christie’s Fine Art Storage Services (CFASS), an owned subsidiary of Christie’s auction house, has been named a defendant in multiple lawsuits for damage, incurred during 2012’s hurricane Sandy, to artworks housed at its Brooklyn facility. In late October 2013, three insurance companies: XL Specialty, Axa and Starnet, mounted suits against CFASS, for gross negligence, breach of bailment, negligence, breach of contract, negligent misrepresentation, and fraudulent misrepresentation stemming from CFASS failure to prepare for the storm’s onslaught.

The Storm of the Century

In the fall of 2012, weather prognostic reports warned of a superstorm headed for New York. Ultimately, artworks in many studios, galleries and storage facilities were severely damaged when Sandy, a tropical storm that was updated to a hurricane, hit the tri-state area on October 29, 2012.

The Red Hook area of Brooklyn, where CFASS’ storage facility is located, was labeled a high-risk flood area, securing the New York City Office of Emergency Management’s rating of a “Zone A evacuated flood zone.” With media reports circulating about the impending storm, CFASS, as alleged in the complaints, began reassuring clients that appropriate measures were being taken to protect their property from damage.

Unfortunately, certain works of art stored at CFASS were damaged during the hurricane. In the aftermath of the storm, some pieces were unsalvageable, others resulted in complete loss, while others still were sent to conservators for restoration. In such cases, damaged artwork claims require owners to report losses to insurance companies, who would seek compensation from the entity responsible for the damage.

The damages incurred to such an enormous concentration of wealth in one space resulted in significant losses for insurers. In a few instances when the insurance companies reviewed the circumstances that resulted in such unprecedented level of claims and sought to mitigate their expenses by refusing to pay claims resulting from gross negligence. After all, with 27,000 people per square mile, New York is the most densely populated city in the United States, with damage or full compensation for losses to multimillion-dollar property having the potential to increase premiums or drive out many of the insurance carriers.

The Waiver of Subrogation and Limitation of Liability Clause

In lawsuits resulting from damages to art stored at CFASS, the point of contention is the manner by which liability is allocated in CFASS’ storage contracts. Some contracts between the storage facility and its clients required clients to obtain an art insurance policy.  In other instances there may have been waivers of subrogation or a limitation of liability clause.

A waiver of subrogation relinquishes an insurer’s right to assert claims against the company responsible for the damage. Alternatively, a limitation clause generally limits the companies liability based on the weight of the goods.

According to U.C.C. § 7-204(2), a warehouse is bound by a reasonable duty of care when storing property in its space, however such clause cannot negate the elementary duty of care required. In the case of New York State law,  NY UCC § 7-204 (2014) (a), “a warehouse is liable for damages for loss of or injury  to  the  goods  caused  by  its failure to exercise care with regard to the goods   that  a  reasonably  careful  person  would   exercise   under   similar  circumstances.  Unless otherwise agreed, the warehouse is not liable for  damages that could not have been avoided by the exercise of that care.

Does Gross Negligence Alter Waivers of Subrogation and LLC’s?

In XL Speciality Ins. Co. v. CFASS, filed on October 29, 2013, petitioners sought reimbursement for a $700,000 payment to the damaged gallery, Chowaiki & Co. In this case, the New York supreme court granted CFASS’ motion to dismiss the complaint due to the adequate consideration provided by both XL Specialty Insurance Corporation and their client Chowalki. Similarly, in Starnet Ins. Co. v CFASS, filed on October 28, 2013, the estate of LeRoy Neiman brought suit to recover damages resulting from harm to 277 artworks. Plaintiffs in AXA insurance sued on behalf of Jacqueline Piatigorsky’s trust seeking $1.5 million, in which case the trust alleges that CFASS failed to alert them to a lack of safety measures and personnel in place to protect their art from damage.

Petitioners’ claims of gross negligence were based on evidence that art was left in staging areas on the warehouse’s ground floor and that despite a reassuring email stating otherwise, no action was taken to protect this property from imminent danger. In its March 17, 2016 decision to reverse the lower court’s dismissal of petitioner’s complaint, the court in XL Specialty noted that in 2011, CFASS took extra precautions, such as moving art above the ground floor and hiring extra personnel, to prepare for the arrival of hurricane Irene, a storm that largely avoided the city.

In all suits, Petitioners argue that CFASS’s gross negligence arose when, despite assurance that they would do so, they failed to raise artworks from the ground floor of the warehouse, leaving them in the direct path of flooding. Such failure to act, therefore constituted a material breach to the storage contract, as both the parties and their respective insurance companies reasonably relied on CFASS to safely house the art and provide accurate and reliable status updates about its condition. So far, CFASS points to the liability waivers and labels Sandy an ‘Act of God’ in rebuffing claims of negligence.   

While the plaintiffs in each case allege gross negligence, breach of contract and bailment, and fraudulent and negligent misrepresentation, the lower courts have maintained that subrogation waivers often negate claims for gross negligence. In response, the plaintiffs in each suit argue that the subrogation provision unfairly excuses CFASS gross negligence. Judge Saliann Scarpulla, who presided over each of the three cases, refuted this claim, arguing that instead of exempting CFASS from liability, the provision simply requires “one of the parties to the contract to provide insurance for all the parties.” Board of Educ., Union Free School Dist. No. 3, Town of Brookhaven v. Valden Assocs., 46 N.Y.2d 653, 657, 389 N.E.2d 798, 416 N.Y.S.2d 202 (1979); Abacus Fed. Sav. Bank v. ADT Sec. Servs., Inc., 18 N.Y.3d 675, 684, 967 N.E.2d 666, 944 N.Y.S.2d 443 (2012).

In all three cases, the New York Supreme Court, New York County, initially upheld the validity of such provisions in judgments in favor of CFASS. On appeal, however CFASS’ motion to dismiss XL Specialty’s complaint was reversed. Holding that the contract’s waiver of subrogation was unenforceable, the New York Supreme Court, Appellate Division, held “provisions purporting to exempt the bailee from liability for damage to stored goods from perils against which the bailor had secured insurance, even when caused by the bailee’s negligence have been held to run afoul of the statutory scheme of UCC Article 7.” XL Specialty Ins. Co. v. Christie’s Fine Art Storage Servs., Inc., 137 A.D.3d 563, 566, 27 N.Y.S.3d 528, 530 (N.Y. App. Div. 2016).

With the relief of knowing that one of their main grievances has been acknowledged Axa and Starnet are hoping that appeals will generate similar reversals in their cases.

Conclusion

The immeasurable cultural significance of art renders its destruction not only economic, but also sentimental. The unfortunate events surrounding the CFASS lawsuits provide stark lessons about the costs of collecting, which extends far beyond purchase and insurance premiums to include storage, shipping and when necessary-conservation. While there is a strong drive to preserve artifacts as assets, all artworks have inherent vices and are vulnerable to the elements, incentivizing collectors to perform due diligence when acquiring items and finding spaces to house them.

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About the Author: Scotti Hill is a J.D. Candidate, 2018 from the S.J. Quinney College of Law at the University of Utah. She serves as a summer 2016 intern for the Center for Art Law, and works as an art critic and curator. Prior to law school, she received a Master’s Degree in art history and visual studies. She can be reached at scottiaustinhill@gmail.com

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

WYWH: Legal Primer for Artists: Leasing Commercial and Residential Space & Dealing with Tax Issues

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Preoccupied with their work, artists often neglect reaching out to accountants and attorneys for advice on how best to brace themselves for possible issues they may encounter. Among an artist’s various legal considerations, contracts are perhaps the most important. Contracts can be forged for consignment agreements with galleries and auction houses or for the rental of commercial and personal leases. Although contracts are invaluable for artists, a litany of complications accompany the process of facilitating, signing and executing them.

On Thursday, June 9, 2016, New York Foundation for the Arts (NYFA), in cooperation with the New York State Bar Association’s Entertainment, Arts, and Sports Law Section (EASL) and EASL’s Committee on Fine Art, gathered a panel of attorneys to offer basic legal information to artists. Attendees also included attorneys and students. The two-hour information session featured three speakers, all of whom shared valuable insights into issues pertaining to leasing commercial space, the rights of artists as residential tenants, and income and sales tax issues. The discussion was moderated by the co-chairs of EASL’s Committee on Fine Arts: Carol Steinberg, Esq. and Judith Prowda, Esq.

The first panelist to present was Jill A. Ellman, Esq. She is currently an Associate at M. Ross Associates, LLC, a law firm that handles all aspects of complex commercial litigations as well as transactional matters. Ellman focused on commercial leasing and how artists can ensure that they are protected from predatory practices such as exorbitant rent hikes, unauthorized changes to the lease and liability.

The second panelist to speak was David Frazer, Esq., Of Counsel to Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP. Having dedicated much of his career to advocating the rights of tenants, Frazer offered important advice concerning how artists can obtain the best leases while also protecting themselves. Frazer took great care to stress that artists “should not cut corners,” as record keeping is crucial to protecting one’s own personal interests. If a landlord or tenant requests any modifications to the lease, artists are encouraged to have the alterations signed by the landlord in writing and corroborated by all affected parties. Creating a paper trail of alterations to consignment agreements or real estate transactions helps protect the artist/tenant from possible abuses and in the event of future litigation.

Patricia Pernes, Esq., a Tax Consultant in the Business Tax Services sector and Art & Finance Group of a Big Four accounting firm, echoed Frazer’s sentiments regarding an artist’s responsibility to exercise due diligence in all formal transactions. Pernes, however, shifted the conversation from leasing issues to tax deductions applicable to artistic labor and the pieces themselves. Throughout her presentation, Pernes emphasized the distinction between a business and hobby, with the former classification being adequate for the deduction of materials and work-related expenses and the latter not receiving such protection. The principle element is whether the work is created in furtherance of a profit-driven business, in which case tax deductions can be used to incentivize growth. As with contracts, good record keeping is important for tax deductions as well.

The formal discussion was followed by a lively questions and answers session where attendees were able to ask the attorneys about legal provisions specific to their craft. Questions ranged from deductions that can be claimed by musicians for research to leasing for art nonprofit organizations. Ellman, Pernes and Frazer took the time to delve into each question’s nuance, applying their expertise to a motley of hypothetical situations and concluding what was, indeed, a priceless evening.

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. Instead, readers should seek an attorney.