Fair Warning: Phillips withdraw lot over resale restriction
Auction house withdraws work and New York court entertains claim that resale restrictions may encumber title
Leading auction houses will in our experience withdraw recently produced (“wet”) paintings from sale when they are put on notice that the would-be seller is subject to a reasonable resale restriction under US or English law which a sale by the house would breach. Under English law, auction houses will be concerned to avoid potential claims and liability for inducing or procuring the seller to breach its contract with the artist or gallery from whom the work was acquired [1].
A recent dispute before the New York courts - DW Properties v Live Art [2] - reveals that Phillips auction house withdrew a lot from sale in April 2023 after it was notified of a resale restriction. The case charts new territory since the Phillips consignor was not itself subject to the restriction in question. The restriction was instead downstream: the party from whom the Phillips consigner acquired the work had arguably re-sold the work to the consigner in breach of a restriction. The Phillips withdrawal, and the subsequent Opinion of the New York Judge, raise the question of whether a downstream resale restriction might – at least under New York law – impact the ability to transfer good title in the work during the resale period.
Background
A collector called Sacha Daskal had sought advice and acquired a number of works from an art trading platform called Live Art. In November 2021, Live Art informed Daskal of an opportunity to purchase a painting by the Ghanian artist Cornelius Annor (b. 1990) titled “ya tena ase” (the “Painting”). Daskal informed Live Art that he intended to hold the Painting for a limited time before reselling it and asked Live Art a series of questions about the Painting’s marketing potential and estimated resale price. According to Daskal, Live Art advised that he could likely resell the Painting for USD 120,000 and represented to Daskal that he would acquire good title upon payment of the purchase price with no mention of any restriction on resale. Daskal acquired the Painting from Live Art through his Belgian company, DW Properties, on 18 November 2021 for USD 80,000 (including a USD 5,000 commission for Live Art) and the invoice between Live Art and DW Properties (see here) included a number of Terms and Conditions which included the second bullet below:
Live Art had acquired the Painting from Good Lamp LLC, a company owned by the entrepreneur and collector Jeremy Larner, a few days prior on 12 November 2021 for USD 75,000. The earlier invoice between Live Art and Good Lamp LLC placed the following obligation on Live Art:
Live Art did not however include these restrictions in its invoice with DW Properties.
After the acquisition, Daskal asked Live Art multiple times if it would be a good time to sell the Painting. In February 2023, Live Art recommended that Daskal consign the Painting to Phillips. According to Daskal, Live Art assured him that he would be able to break even or profit above his USD 80,000 purchase price and Daskal proceeded to consign the Painting to Phillips. On 13 April 2023, Phillips received an email from Good Lamp LLC stating that the Painting “is restricted from going to auction until November 13, 2024, and that it is also subject to a right of first refusal which has not been given to my company Good Lamp.” Since Live Art had not included the restrictions in its contract with DW Properties, Phillips could have advised Good Lamp that because Good Lamp had no contractual relationship (known as privity of contract) with its fiduciary (DW Properties), Phillips would proceed to sell the Painting and Good Lamp’s remedy would lie in a damages claim for breach of contract against Live Art with whom it had a contractual relationship. Phillips however elected to withdraw the Painting from the auction, raising questions and laying the ground for the legal proceedings which brought the matter into the public arena.
Legal Proceedings
DW Properties filed legal proceedings against Live Art before the New York courts on 28 June 2023 seeking damages for Live Art’s alleged breach of contract. DW Properties argued that the resale restrictions in the contract between Good Lamp and Live Art (which Live Art had not passed onto DW Properties) clouded DW Properties’ title to the Painting and amounted to a breach of the warranty of good title which Live Art had given (see above).
Live Art instructed the seasoned and respected art lawyer John Cahill, a former General Counsel of Phillips auction house, who filed a Motion to Dismiss for failure to state a claim (a procedural mechanism by which Live Art sought to dismiss DW Properties’ claims against it at a preliminary stage). Live Art argued amongst other things that DW Properties had confused a “warranty of title” (which Live Art agreed it had been given but said was not breached) with “resale restrictions”; that the resale restrictions between Live Art and Good Lamp had no effect on DW Properties’ title to the Painting; and that its contract with DW Properties contained no warranty concerning resale restrictions.
On 22 April 2024, the US District Judge of the Southern District of New York issued its Opinion and Order largely denying Live Art’s Motion to Dismiss and allowing most of DW Properties’ claims to advance. The Court held that although DW Properties was not a party to the contract between Live Art and Good Lamp containing the resale restrictions, Live Art’s failure to comply with those requirements “may have affected its ability to pass good title to DW Properties”. The Court questioned whether a seller’s breach of a contractual resale restriction might create an “encumbrance” sufficient to invoke section § 2-312(1)(b) of the N.Y. Uniform Commercial Code which implies into all sale of goods contracts a “warranty by the seller that . . . the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge”. A similar “no encumbrance” provision is implied into sale of goods contracts under English law: see for example section 12(2)(a) of the UK’s Sale of Goods Act 1979. The District Court opined: “DW Properties’ allegations that Phillips declined to auction the Painting because of Live Art’s failure to comply with the requirements of its contract with Good Lamp suggests that such failure may constitute a continuing encumbrance on the Painting.”
DW Properties and Live Art settled their dispute in principle on 28 October 2024 and the court file indicates that Live Art has agreed to make an undisclosed settlement payment to DW Properties by 31 December 2024.
Comment
There is growing consensus amongst art lawyers not employed by auction houses that contractual resale restrictions will be enforceable under both US and UK law when drafted reasonably and properly incorporated [3]. Prior to the present case, conventional legal wisdom in the US and UK was that whilst a party selling a work in breach of a contractual resale restriction risks liability for breach of contract (typically damages or an injunction to prevent a sale), it was nevertheless capable of transferring title in the work to a buyer; and that the buyer would not be bound by the earlier downstream restriction. The Phillips decision to withdraw the Painting, followed by the Opinion of the New York Judge, raises and leaves open the question of whether downstream contractual resale restrictions are capable of encumbering title in a work under New York law.
It is unfortunate that the case settled with this question outstanding. Since it may be some time before the question is revisited by the US courts, prudent secondary buyers of recently created contemporary art would be well-advised to seek written warranties that the seller (a) did not agree to resale restrictions when acquiring the work; and (b) has no knowledge of downstream resale restrictions which previous owners may have agreed. Those buying by private sale through auction houses and other agents might seek express warranties of both title and the absence of direct and downstream resale restrictions.
For artists and their galleries, the case demonstrates that resale restrictions are taken seriously by both auction houses and the courts and offer a valuable line of defence to speculative “flipping”. And for owners of work subject to primary market resale restrictions, the case opens up a new risk. Those reselling in breach of resale restrictions have always risked claims from the beneficiary of the restriction (the artist or their gallery). A failure to disclose the restriction to the buyer may now expose the seller to a claim from the buyer alleging breach of the seller’s warranty of good title.
[1] For a cogent analysis of the legal risks to the “inducing” dealer or auction house, see Aaron Taylor, ‘Resale Restrictions in the Contemporary Art Market’ (2023) 28 Art Antiquity and Law 275.
[2] DW Properties v. Live Art Mkt., Inc., No. 23-CV-7004 (JPO), 2024 WL 1718688 (S.D.N.Y. Apr. 22, 2024).
[3] See, for example, ‘Enforceability and Effectiveness of Art Market Resale Restrictions’, The Art Law Podcast, 8 October 2024; Aaron Taylor, ‘Resale Restrictions in the Contemporary Art Market’ (2023) 28 Art Antiquity and Law 275; Pierre Valentin, ‘The right of first refusal in art sales in New York’, Linked In, 14 August 2024; Adam Jomeen, ‘On the Flip Side: Resale Restrictions under English Law’, Art Law Studio Ltd, 31 March 2023.
This Insight and any information accessed through the links is for information only and does not constitute legal advice. Please contact us if you need advice on your particular circumstances.
