Red Flags In Art Sales

Collectors and their advisors have been exploring ever more complex and creative art transactions. Traditional sales, consignments and loans are competing with swaps, conditional transfers, secured loans, and undisclosed principal transactions.  From the simple to the complex, one should be on alert.  
 
Undisclosed Principals
While privacy is a legitimate concern, the participation of an undisclosed principal in a transaction can be problematic.  There is the potential that this nondisclosure is a signal of fraud, lack of ownership, lack of authority to sell, money laundering or some other illegal activity.  In the event that the undisclosed party breaches the agreement, the aggrieved party may find it difficult to exercise legal recourse.       
 
Multiple Agents
The presence of multiple agents in a transaction, who are often far removed from the principals, should also put one on alert, particularly where there is also an undisclosed principal. Among other things, multiple agents can trigger scenarios of confusion as to who an agent represents, what authority the agent has, who is responsible for paying the agent and the amount of the agent’s fee. If unaddressed, this issue can generate a myriad of problems for the parties and the agents.
 
Missing Documents
Far too often transactions close without adequate documentation which leaves parties exposed and unprotected.  A party’s refusal to memorialize terms in a written contract and provide chain of title documents/proof of ownership should raise a red flag. As a rule of thumb, an art transaction should be treated akin to a real estate transaction – documented and thoroughly investigated in advance.
 
Refusal to Escrow
In a transaction, one party may find itself performing first and awaiting performance by the counter party at a later time. This can leave one party exposed, particularly where that party is providing funds in contemplation of delivery of art. That delivery may be impeded by a party intentionally, negligently, by force majeure or otherwise. While a written contract is a starting point for addressing this issue, it may not be adequate where a party has concerns about enforcing the contract should the other party not fully perform. 
 
The selection of an escrow agent (e.g. a reputable nonparty, attorney or bank), who operates pursuant to a carefully drafted written escrow agreement and holds the funds pending performance is an underused solution.  A party’s refusal to consent to such an arrangement where there is reasonable risk of breach should put the requesting party on alert. While this layer of protection may add slight cost and delay to concluding the transaction, it should better position the parties and reduce the likelihood of future litigation. 

About the Author
Daniel S. Kokhba, Esq. is a Partner at Kantor, Davidoff, Mandelker, Twomey, Gallanty & Kesten P.C. and focuses his practice on art law advising galleries, collectors, estates, foundations, advisors and agents. He may be reached at Kokhba@kantordavidoff.com or 212-682-8383.
 
Disclaimer
This article is intended as general information, not legal advice, and is no substitute for seeking representation.