Protecting Artists and Galleries in the Wake of Hurricane Sandy: A Checklist for Artist-Gallery Contracts

As is well known, last year’s Hurricane Sandy had a devastating impact on the New York region, leaving in its wake a wide range of personal and property loss, with over 70 dead and some $50 billion in economic losses. Included in the latter are extensive, but difficult to value, damaged or destroyed artworks, as well as damaged studio and gallery spaces. The widespread art-related losses incurred in the storm, by definition, take a second place to injuries, deaths, and loss of homes. But now that one year has passed and the scope of the damage has become much clearer, we think it would be useful to make some observations concerning ways in which artists and galleries might have been better safeguarded against those losses.

As we explain in this article, absent easily prepared contracts with their galleries, artists are especially vulnerable to loss in the event of damage to their works caused by fire, flood, or other natural events, just as they are vulnerable to losses caused by human acts, whether intentional (as in the case of fraud or theft) or unintentional (as in the case of accidental loss or damage).

While it is difficult to guard against outright fraud or theft—as in the case of the notorious Salander-O’Reilly Gallery scandal, where the dealer simply lied about what works it had or hadn’t sold—all too often artists do not adequately protect their rights vis-à-vis the galleries representing them. This is especially true of younger artists, who may feel afraid to raise standard contract, insurance, or other issues with their gallerist for fear of being branded as “difficult” or possibly even losing a hard-won gallery representation.

But galleries, too, suffered unnecessarily as a result of the flooding in Chelsea and other areas, many having failed to obtain flood insurance despite the warnings occasioned by the preceding year’s Hurricane Irene. Given galleries’ own losses, we believe that virtually all galleries now recognize that their artists remained singularly unprotected and that much of the monetary loss suffered by artists—both young and old—could have been avoided. We thus believe the climate is right for galleries and artists to be more businesslike about their relationship. There can be a certain romanticism at work in that relationship, to the effect that the gallerist is not only the artist’s personal friend, but also the curator of his or her genius as well as the artist’s gateway to the art-critical and art-collecting public. And to the extent that the relationship becomes overly dependent or even paternalistic, there lies a risk, to the artist’s potential disadvantage, when the gallery’s own monetary interests—for whatever reason—conflict with the artist’s.

The artist /gallery tie is, after all, in large part also an ordinary business relationship. We therefore suggest that artists and galleries should be guided by the following basic principles. In doing so, we are far from promoting a further commoditization of art—that lamentable trend will continue no matter what anyone does—but rather that artists and galleries assure that they deal openly and candidly with one another where business is involved, if only as a matter of fairness.

The Contract
The most common artist /gallery relationship is that of consignor (the artist) to consignee (the gallery). Outside the art world, this relationship is nearly always governed by a written contract, clearly defining the parties’ respective rights and obligations under the agreement. But within the art world, there may be nothing but an oral agreement or, if there is a written consignment, one in which the parties do not clearly define their roles at the outset of their relationship. As a threshold matter, artists should therefore enter into written consignment agreements with their galleries, and ideally they should consult with an attorney prior to signing the contract to make sure that it adequately defines—and protects—their rights.

Now, as we have noted, the prospect of suggesting, let alone insisting, on a written agreement of any sort is anathema to many artists, particularly those who are thrilled to obtain a first, or any, gallery representation. Galleries, too, may be reluctant to execute contracts, in part based on their (mis)perception that contracts are unnecessary in light of their inherent positions of power vis-à-vis the artists they represent. Although the major risk of loss arising out of a failure to execute a contract will fall on those least able to protect themselves—that is, the artists—galleries themselves benefit from the existence of written contracts, as should be clear by looking at the following typical elements of any artist /gallery relationship.

Scope of Agency
A gallery is an artist’s agent, in other words, the person or business acting on the artist’s behalf and for the artist’s benefit. In legal terms, the gallery owes fiduciary duties to the artist, which means that it owes the artist a special duty of loyalty and care, including a duty to put the artist’s interests before its own. That will undoubtedly come as a surprise to most people. A written agreement clearly indicating the scope of those duties is thus in the best interests both of the gallery and artist, so that neither party is overly advantaged or disadvantaged by the other, but rather that their mutual responsibilities are known in advance.

While artists will have differing abilities to negotiate refinements to any agreement and there is no “one size fits all,” it may be reasonable for some artists to seek the inclusion of a “minimum sales” provision permitting the artist to terminate the agreement if the gallery has not achieved a certain level of sales over a specified period of time. And a gallery may correspondingly seek to have the artist commit to show exclusively with the gallery for at least some minimum agreed time period, or be prepared to commit to provide a minimum number of works during that timeframe. Of course, neither party is obligated to exercise these rights, but including these provisions may protect galleries and artists alike in the event that their relationship does not materialize as hoped, which can happen for any number of reasons.

The agreement can likewise provide how the gallery and the artist will deal with shows at, and sales through, other galleries, something that commonly results in some percentage going to the “primary” dealer. And where it is not an exclusive gallery relationship, the parties should agree in advance on some way to determine what priority, if any, the gallery has in selecting and obtaining access to works for consignment. In that vein, the agreement can also specify geographic limits on the agency relationship. For example, an artist may want one gallery to represent her in California, and a different gallery to represent her on the East Coast, or elsewhere.

As a general matter, an agency relationship in the consignor-consignee context terminates upon the artist’s death. The contract therefore should specify the length of the contract term, including whether the gallery will have a right to deal in the artist’s works after his death.

The Consigned Works
What was especially evident after Hurricane Sandy was that many galleries, and indeed many artists, had no written record of what works had been consigned, and thus no reliable way to determine for insurance or other purposes what works had been destroyed by flooding or structural damage. Any consignment agreement should thus at a bare minimum include adequate information about the artworks being consigned: (1) a complete description of each work, including details about the title, size, and composition; (2) the sale price for each work, to be determined jointly by the artist and the gallery; and (3) a requirement that each artwork be covered in an agreed amount by the gallery’s insurance policy. As to the latter, artists in New York, and elsewhere, should now insist that galleries be covered for flood damage. Of course, the gallery and the artist can later amend the sales or insurance prices, but it is important to have a written record at each stage.

Importantly, the agreement should make clear that the ownership of the works remains with the artist during the consignment period, and that title will not pass until the work has been paid for in full. Absent such provisions, the artist has little protection against a gallery’s bankruptcy or, as unfortunately occurs, outright fraud. To protect an artist’s ownership interest in his works, the agreement should authorize the artist to file what is known as a Form UCC-1 Financing Statement, a simply prepared form evidencing the artist’s secured interest in the works being consigned. Again, it is recommended that the artist consult with an attorney in connection with UCC-1 and related filings to ensure that the security interest is properly protected.

Payments
The heart of the contract will of course have to do with payments. Typically, a gallery is entitled to a fixed commission on works sold. The surrounding contractual provisions essentially detail what the gallery provides the artist to justify that commission.

It is unfortunately often the case that artists do not learn of sales at the time they are made; do not learn, sometimes ever, who acquired the works; and do not know when, or if, the works have been paid for by the purported buyer. Similarly, artists are often not told when they will be paid. The experience of galleries selling works and getting paid, but then using the money to pay their rent, salaries, or other expenses are, sadly, too well known for us to have to detail with examples. Galleries may justify the practice by telling themselves something to the effect that the artist will be paid out of “the next sale,” but that’s not what the artist bargained for or should expect. And, at least under New York law, a gallery generally is required to hold proceeds from the sale of an artist’s consigned work as trust funds, considered property held in statutory trust, for the benefit of the artist. Moreover, with respect to the typically opaque nature of gallery sales, we suggest that artists in fact have an inherent right to know where their works have gone, for possible use in future exhibitions, inclusion in catalogs raisonné, or for other art-historical purposes.

It is in fact ordinary business practice—outside the art world, that is—for a party selling consigned goods to provide the consignor with a periodic statement of account, detailing what goods were sold, when, to whom, and for how much. The parties will have agreed in advance on how soon after the buyer makes payment the consignee must pay the consignor. Absent an accounting agreement, the consignor is subject to the risks of a “trust me” relationship, and experience teaches that in constrained economic times, what results is often a breach of trust. It is worth noting that in the context of art auctions, the auction houses invariably use a standardized form of agreement containing payment terms (although not revealing the identity of the ultimate buyer, something not relevant to most auction consignors). But this is rarely true in the case of gallery sales. Yet there is no good business reason it should not obtain in this context as well. The artist /gallery agreement should thus provide for a regular accounting as to works in inventory, sales, payments, etc., including, of course, the time within which payment must be made to the artist for works sold. Absent this, the artist simply becomes an involuntary banker for the gallery.

Expenses
The costs and expenses associated with the creation, exhibition, and sale of artwork can be shared by the gallery and the artist. These arrangements can be as simple as specifying which party is responsible for crating and shipping, or as complex as whether the gallery provides an artist with a regular stipend and/or pays for all materials. But whatever the arrangement, the parties’ agreement should spell out clearly how those costs will be divided and/or recovered. Whether receiving a stipend or having materials paid for is ultimately a benefit to the artist or simply a very expensive loan is something to be addressed artist by artist and gallery by gallery.

As noted above, artists ideally should negotiate the contract terms concerning the exhibition of their works. Among other things, the agreement can not only specify a target number of solo and/or group exhibitions per year, but also the party (generally the gallery) responsible for costs of the exhibition, including the marketing and promotion (i.e., catalogs, paid advertisements, and photographs of the works). The artist may consider seeking artistic control over the exhibition, including the

installation of the works; and the agreement should reflect the degree of artistic control to be retained by the artist.

While it is common for the gallery to provide insurance for any consigned works, the artist and the gallery should come to terms on the amount and type of insurance coverage, and identify the parties to be named as beneficiaries under the policy. The aftermath of Hurricane Sandy highlighted the impact of inadequate (or no) insurance on galleries and artists alike. While many artists have been fortunate to receive assistance from programs like the Warhol, Rauschenberg, and Lambent Foundations’ “Sandy Grants,” the absence of adequate insurance protection can be devastating.

Warranties and Indemnification
The gallery and the artist may seek additional mutual protections in the form of warranties and/or indemnification. For example, to protect itself against potential litigation concerning the sale of the artist’s works, the gallery might want the artist to warrant, or promise explicitly in the agreement, that the artist is the sole owner of the works being consigned to the gallery for sale and that no other party has any ownership or other interest in those works. In that same vein, the gallery also may seek to be indemnified by the artist for any breach by the artist of those warranties.

The artist, too, may look to the gallery to warrant explicitly that the gallery will act solely in the interests of the artist with respect to the artist’s works, and that the gallery will not make any false statements to third parties concerning the value of those works. The artist also may seek to be indemnified by the gallery for breaching any such warranties. This protection may be especially important considering the increasing number of lawsuits (many of them frivolous, to be sure) being filed against art experts based on their opinions and valuations of artworks, because under certain, albeit limited, circumstances, the gallery’s misconduct may be imputed to the artist whom it is representing.

Termination Provisions
While people have an aversion to forecasting the termination of their relationship, artists and galleries part ways all the time. An artist may outgrow a gallery. A gallery may find that an artist doesn’t honor his or her commitments. Or the relationship may turn out to be unprofitable in non-monetary as well as monetary ways. It therefore always is worth including provisions that make clear when and under what circumstances the parties can end the relationship. Sometimes there are notice periods; sometimes there aren’t. But any termination provisions should outline how a final accounting is done and how any unsold works are to be handled, including who bears what expenses. Although artists should continually monitor their inventory throughout the consignment period, these provisions are essential to protect their rights in the event of termination.

Other Considerations
Various additional provisions may be included in the artist/gallery agreement, as with any commercial contract, to address specific contingencies, including dispute resolution. While the parties in every case hope that those provisions will never need to be invoked, they are important so that the parties’ rights are clearly understood. For example, the agreement may include terms specifying, among other things: (1) which state’s laws will govern a dispute; (2) the appropriate forum (i.e., arbitration or court) to decide a dispute; and (3) the appropriate venue (e.g., New York, Missouri, or California) in which to litigate or arbitrate claims. Of course, circumstances vary, so artists are encouraged to consult a lawyer prior to executing the agreement to determine which of these provisions will best protect their rights.

No one gallery or artist is the same as another, so as we noted above, there is no one-size-fits-all or “boilerplate” contract that artists and galleries should use to govern their relationships. What is universal, however, is the principle that in every case the artist-dealer relationship should be governed by a written contract. Lawyers can play a constructive role (yes, honestly, that’s true!) in ensuring that adequate and enforceable agreements are in place; but artists and galleries will be well served if they keep the foregoing considerations in mind as they enter into agreements governing their working relationship.