Nouriel Roubini is a leading world economist, renowned for predicting the world economic downturn of 2007/8 years beforehand. At the World Economic Forum event at Davos in Switzerland in January 2015 he made a significant public attack on the global art market.

‘While art looks as if it is all about beauty, as a business it is full of shady stuff,’ Roubini said. ‘We should correct it or it will be undermined over time … Inside information is considered standard in the art market; in other markets, it is thought of as being illegal … The art market is prone to fads, passions, manias, booms and busts, because art works have no clear financial value and the art market is opaque … Regulation is required in the art market because it suffers from tax evasion, money laundering, price manipulation and trading on inside information.’

Roubini’s remarks were addressed to the most prestigious and influential annual gathering of international business and political leaders, economic academics and journalists. Much media attention has been given to the event by commentators specialising in the art market and/or having a vested interest in it, who in the main have challenged Roubini’s lack of art market knowledge and the absence of specific evidence to support his assertions. Such critics may have a point, but there is room for considering that Roubini’s provocative pronouncements had a broader target in mind: the ‘elephant in the room’ for the international art industry, namely its marked lack of transparency and regulatory oversight compared with other global industries.

Massive 20th century growth of international trade and industry spawned the development of specific industry-governed and funded regulatory frameworks dealing with standards of trading, transparency, health and safety, and dispute resolution mechanisms. Many such measures have been buttressed by national laws and international agreements, treaties and conventions. There are now firmly established regulatory frameworks for international industries such as pharmaceuticals, shipping, air transport, and sports. Is there a need for similar regulation of the international art industry? In other words, is it (as some have put it in recent times) like the old Wild West – a self-built society without law enforcement, just the survival of the fittest?

A first consideration is the nature and extent of the international art industry. Accurate figures for art trading are impossible to divine, because only public auction sales are overt. Private treaty sales by definition are not – unless perhaps purchased by a publicly funded institution or publicly listed company, both of which types of organisation are, or can be, required to publish their expenditures. This leaves us only with educated guesstimates: that the 2013 annual global art sales turnover was probably around $60/70bn, of which contemporary art sales may have amounted to $826m representing a 20-fold increase from $41m in 2000.

There are relatively few publicly accountable organisations in the international art industry. Clearly the hundreds of publicly funded and public-facing museum and gallery institutions worldwide are publicly accountable for their acquisitions budgets, but they represent a relatively minor percentage of the overall art spend. Most of them do not have funds sufficient to compete with far richer high net worth private collectors and investors; and such institutions tend to rely heavily on State laws offering tax incentives to donors, or requiring compulsory purchases/donations of works deemed to be State treasures/cultural patrimony.

In the private sector there are relatively few publicly listed companies involved in the art trade. Sotheby’s is the most prominent: a multinational corporation now headquartered in New York City and listed on the New York Stock Exchange. Best known for its centuries-old public auction business, it also brokers private sales, advises and assists corporate art collecting, and offers financial services to borrowers who pledge artworks as sole collateral. As a publicly listed company its corporate conduct and financial affairs are regulated by law; and especially by the US Securities and Exchange Commission (SEC) whose mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. In other words the SEC oversees and ensures stock-market regulation – not Sotheby’s individual art business transactions, but Sotheby’s as a corporate entity into which the public has invested its money. Like other stock-market regulators around the world, the SEC requires all US publicly-listed companies to disclose meaningful financial and other information to the public, thereby providing a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular stock or share.

Stock-market and other publicly listed company regulators like the SEC are backed by legislation that especially outlaws the following: trading (in publicly listed company shares) on information only known to people inside the company; fixing and manipulation of prices to avoid free market competition; and evasion of corporate taxes on profits. Perhaps Roubini’s recent call for regulation of the art market is actually a call for all art businesses to be overseen by a stock-market regulator like the SEC, because most art-trading businesses are not publicly listed companies. Notably, Christie’s is no longer a publicly listed company: it was listed on the London Stock Exchange from 1973 to 1999, until its public shares were bought by François Pinault’s France-based holding company Groupe Artémis SA. Since when Christie’s has not been required to report profits and other financial information (it would be if it were publicly listed), but voluntarily publishes its sale totals twice a year.

The vast majority of public auction houses, art dealerships, art fairs, private collections, art investment vehicles, art consultants and advisers – the private sector of art-market professionals who operate nationally and internationally – are constituted as private limited liability companies or partnerships, whose shares are not publicly listed and which are not therefore overseen by stock-market regulators and laws. Such private companies and partnerships are subject only to laws regulating their corporate governance in the State where they are registered, which laws essentially require them to pay taxes on company profits and to remain solvent. So perhaps Roubini’s call is not only for regulators like the SEC, but also for individual art-business transactions to be regulated as if they were publicly listed company share transactions.

Is such regulation of all art-business transactions desirable and realistically achievable on an international scale? Sale of personal property is the most prevalent art business transaction: it is a transfer of ownership, supported by the laws of most states.  Most art sales are private treaty transactions where the sale price is negotiated and agreed privately, the terms and conditions of which may (and ideally should) be recorded in writing. A significant number of art sales are publicly transacted at auction where the sale price is determined by the highest publicly declared and accepted bid, the terms and conditions of which are published in advance to all bidders in the auction catalogue (and online) and are recorded in writing with the highest bidder/buyer.

In relation to both private-treaty and public-auction sales the true legal ownership of an artwork may be a problem before the sale, or become one afterwards. Buyers should secure written proof of purchase of the work/lot.

But many private sales are not documented sufficiently or at all. And even if there is good proof of purchase, the seller’s ownership may have been legally tainted for many reasons including: before the sale (and often unbeknown to the seller) the work/lot had been stolen, illegally exported, war looted, jointly owned with another whose consent to the sale was not given, pledged as collateral for a loan that had not yet been repaid, or only loaned but not given outright to the seller by the true owner. Such problems often manifest themselves only years later when a bought work/lot is subsequently consigned for resale at public auction, and is noticed by the true owner or joint true owner/s or country of origin.

Buyers in good faith (who have no knowledge or reason to suspect they are buying or have bought a tainted ownership work) may avail themselves of laws to defend their ownership, or seek compensation for legal re-possession by the original true owner. Laws providing solutions for such buyers vary from state to state, country to country, and success usually depends on a buyer’s ability to prove to a court’s satisfaction that they were indeed a good-faith purchaser. Buyers might fight legal actions against the original true owner to resist re-possession; or against the tainted-ownership seller – or seller’s agent (dealer or public auction house) – for return of purchase money and/or compensation for loss of possession.

Such legal actions inevitably involve expenditure of significant resources for both parties, the more so if the allegedly tainted sale involved cross-border legal elements. For example: a work is stolen from an original true owner located in state A, years later it is bought by a good faith purchaser located in state B, who consigns it for sale by an agent dealer located in state C, who takes it to an art fair in state D, where it is bought by a good faith purchaser located in state E. Four parties might be involved in this wrangle, which could involve a series of legal claims lasting years, and involving potentially the laws of five States, with losing parties being ordered by courts to pay legal fees of the winning party. The mind boggles; but this is not an academic artlaw exam question, it is a realistic art-transaction scenario. Could international regulation of art-business transactions help such parties?

The current position is that art-business transactions are treated by laws of most states like most other commodity transactions. Put another way, there are few if any states that have enacted laws dealing specifically with art sales: they are sales of goods; and art objects are treated in law as goods, in most cases second-hand. Accordingly in states where art is sold art-business traders are required to comply with general trading laws, such as: collection of sales tax from the purchaser on top of the purchase price paid (usually with special provisions for agents selling art on consignment); consumer protection rights to return goods/art bought ‘off-premises’ (eg online); and setting off necessary business expenditure against income from sales to produce taxable profits. There is an exceptional art-specific law operating throughout the EU (and scores of countries beyond) requiring art-market traders to collect a small percentage on top of the purchase price and pay it to artist’s collecting societies: artist’s resale right (droit de suite).

There are hundreds of states worldwide that have enacted their own general legal framework for business transactions, which includes art sales. In most States there have been few if any serious and substantial calls from its art industry and customers for there to be art-specific business transaction laws and regulations. There have been some notable efforts to harmonise and regulate international business transactions, the provisions of which are not aimed at art-specific transactions, but which may embrace them.

In 1964 The Hague Convention for the Uniform Law on the Formation of Contracts for the International Sale of Goods provided that the common law (Anglo) doctrine of offer/acceptance without the need for formal documentation would apply to transactions where parties were located in countries that had signed the Convention: a worthy and interesting idea, but which was adopted by the UK and only 11 other countries. Only nine countries signed the 1983 Geneva Convention for the laws of Agency in the International Sale of Goods, aimed at harmonising the legal relationships between sellers, their agents, and buyers – but specifically did not embrace auction sales. In 1995 the Unidroit Convention on Stolen or Illegally Exported Objects provided for legal restitution/repatriation claims to be made in the courts of signatory countries where the lost work was now located; only 34 countries signed the Convention including China and Italy (but notably not the US, Canada, UK, France, Germany, Russia, and India).

Given the nature and extent of such international efforts it is unsurprising that in recent times there have been few if any serious and substantial calls at world trading forums for the enactment of international art-specific business transaction regulation. Roubini’s intervention at Davos is a notable exception, and stimulates consideration of a possible solution that addresses some of Roubini’s criticisms. Most countries have enacted laws regulating the ownership of real estate within the State, essentially requiring the recording in a national registry of the ownership and changes of ownership of property located within the country; and of any pledges of such registered property as collateral for mortgages or loans and so on. Searches of the registry are required by law to be conducted before acquiring registered property, and any rights to use or occupy it via leases and so on. The establishment of an art-ownership register performing a similar function has often been mooted amongst art lawyers and others interested in finding solutions to such problems as: provenance of true ownership, joint ownership, inheritance by multiple beneficiaries, legal right to sell and lend and pledge art as collateral.

Unlike a country’s national real-estate registry, an art-ownership registry could be established on global basis, using digital technology and the world wide web to record national and international art transactions. Such a registry need not be imposed by national and international laws and treaties, but be established as an independent legal entity financed and maintained voluntarily by the international art industry – in the same way that other international industries have established and maintained their self-regulatory and arbitration facilities beyond legislative and government oversight and control. If the international art industry adopted the use of such registration as the trade norm, competing art businesses would be operating on a level playing field with each other, and their customers (buyers who become sellers who become buyers, and so on) and future generations would benefit from certainty of true ownership knowledge.

The international art industry might view an art-ownership registry – or something along such lines – as being an unrealistic utopian pipe-dream; but consider the following.

In the 1970s curator Seth Siegelaub and Bob Projansky, a New York City lawyer, created the Agreement of Original Transfer of Work of Art. This included provisions giving the artist a right to be paid 15% of the profit on any resale of the work for life plus 21 years, plus 50% of the fees from any hiring of the work. Furthermore, it sought to bind subsequent buyers of the work to the terms of the agreement, as well as binding the artist’s heirs. This bold document was signed by very few buyers. Other attempts have been made over the past 40 years or so to introduce an artist’s resale right by way of a primary sale contract: they too failed to gain interest and support from art market professionals and collectors.

Failures to introduce artist’s resale right by way of sale contracts was a powerful argument that persuaded the EU to introduce the right via compulsory legislation in 2006. In other words, the art market might choose to regulate itself before states decide to introduce their own regulative legislation.


© Henry Lydiate 2015




This article is from the Artlaw Archive of Henry Lydiate's columns published in Art Monthly since 1976, and may contain out of date material. The article is for information only, and not for the purpose of providing legal advice. Readers should consult a solicitor for legal advice on specific matters. Artists can get free online legal information from Artquest.