Art Law Self Help: Contracting without a Contract

In the previous edition of “Fine Print,” we saw how a recent New York court case between gallerist Larry Gagosian and collector Ronald Perelman exposed the risks of entering into high-value art transactions without the protection of a comprehensive written contract. Unexpected situations do arise: a deceased artist, a bankrupt gallery, a divorced collecting couple or any of life’s other vicissitudes can cause sudden changes to previously trusted relationships, leading to disputes and the involvement of third parties. In such cases, a contract setting out clearly the rights and obligations of the parties and serving as evidence of their intentions in entering into the transaction can save much time, expense and heartache, sometimes even avoiding the problem altogether. However, even if you understand the importance of a contract and have the best of intentions in wanting to use one, you may encounter resistance in the face of entrenched customs and market practices.

In the art world, the arguments against contracts are well rehearsed. Contracts are “intimidating” or “unfriendly,” we are told. They are overly formal and not necessary in a world where relationships should be based on “mutual trust,” whether between artist and dealer or dealer and collector. I would suggest there is probably another, less high-minded force at work here. The reality is that the ambiguity of vague, undocumented arrangements is invariably to the benefit of the powerful side of any relationship. For example, it may be to a gallery’s advantage to keep its relationships with artists as unstructured as possible, as this permits optimum commercial flexibility in favor of the gallery.

What’s more, inequality of bargaining power in art-market transactions often means that the party who most needs the protections of a written contract—namely, the weaker party—also often finds they are not in the position to ask for one. A young artist dealing with a prominent gallery, an individual collector wanting to obtain a new work by an in-demand artist from a major gallery, a small private dealer representing an artist in connection with a commission for a major corporate or government entity: all of these people may find it difficult to demand a written contract, especially when given the choice to either “take it or leave it.”

However, the good news is that when faced with an intransigent counterparty offering you a “take it  or leave it” situation, there is a third way: neither take it nor leave it, but resort to self-help. Let me suggest a few options.

The first thing to bear in mind is that a contract does not have to be in fancy legal language. A very plain statement of the terms of the deal written down and signed by both parties is just fine. You don’t even have to use full sentences—bullet points in the form of a “term sheet” would be just as legally valid as the most finely crafted prose.

Paper is not necessary either. Most jurisdictions around the world have laws recognizing the validity of “electronic contracts,” such that an exchange of emails in which both parties confirm and agree to the terms of a contract should be sufficient to form a legally binding contractual relationship without the need for ink and dead trees.

However, you may encounter cases in which the other side does want to cooperate at all in the process, refusing to sign even a simple written contract or confirming an agreement over email.  In such cases, you can resort to the “one way” letter. Write (a letter or an email) to the other side, setting out your understanding of the key terms of the deal. This will at least serve as evidence of your intention in entering the transaction, and unless the other party raises any objection in response, they may be deemed to have agreed to the terms you have presented to them.

A practical example of how this approach might work is in a consignment situation, whether you are an artist or a collector consigning works to a gallery for sale. Consignments are a common source of risk for disputes, often coming down to the simple question of whether or not an artwork exists and who possessed it. When a gallery goes bankrupt, the presumption will be that the pieces of artwork it holds in its stockroom belong to the gallery’s creditors unless it can be proved otherwise. Of course a written contract would be the best evidence, or failing that, at least a written receipt from the gallery to the consignor identifying the works consigned and setting out the terms of the consignment. However, if no written document is forthcoming from the gallery, then a simple self-help measure will be better than nothing: as consignor you should take a photograph of each work consigned, and then email it to the gallery with a simple statement confirming that these are the works you have delivered to the gallery, and setting out your understanding of the consignment terms, such as sale price, commission and a statement that you retain title until the work is sold. At the very least, you will have some evidence that the property belongs to you.

Finally, it would be remiss of me (even if somewhat self-serving) not to mention the necessity of obtaining good legal advice. You would not dream of entering into a high-value transaction for a property or business without the advice of a lawyer, and the same goes for high-value art transactions. While the above self-help measures are better than nothing, a good lawyer can help you do a lot better than that.