Art + Law + Blog : Art Law Lawyer & Attorney : Bryan Cave Law Firm : Chicago IL Consignment & Art Dealer Agreements

But, there are things people can do to narrow the risk.

1. Get A Contract. When people give possession of art to anyone – even their mothers – they often write a contract. In the contract, people often identity (a) the work; (b) the reason to give possession of the art; (c) the conditions of selling the work - for instance, a minimum sale price or a minimum amount paid to the owner; (d) who is responsible for safekeeping and insuring the work; and (e) a grant of a security interest.

2. Pick the Right Dealer. People often do a little research on the art dealer before they sign the contract, looking for a pattern of lawsuits or complaints.

3. Get Own Art Insurance. Art collectors often get their own insurance, even if their art dealers are also covered. This allows collectors a second recourse if they get swindled or the work gets damaged and the dealer’s insurance proves to be inadequate.

4. Get a Right to Status Reports. Some people demand that the art dealer keep the art owner informed on the whereabouts of the art.

5. Check Up. Nothing beats continuing vigilance. Periodically check up on an art dealer, visiting their works and asking for reports of sales activity. Just showing energy and attention could make the difference in how an art dealer does business.

Most art dealers are honest, ethical, professional and dedicated business people who will take good care of you and your art – only a small minority are not. The value of art, and the presence of bad apples mixed in with the good, means we often need to take precautions. This is not always easy. A gallery owner may identify a request for a contract and protections as an inaccurate accusation of dishonesty. A gallery owner may also claim that contracts are time consuming, expensive and rarely needed. Both claims are correct.

Most of the time, the dealer can be trusted, the contract is too expensive and too long and the parties never pull it out of the file once signed. But, we take these precautions for the moments when the gallery owner is a fraud, the contract had just what you needed and it acts as your sword in the fight with the gallery.

Doing business on a handshake is essentially a bet in favor of the gallery owner’s integrity. When you bet wrong, you lose, not just money, but an irreplaceable work of art and piece of mind. How you proceed is up to you.

Here are a few things to think about if you want to monetize your art and keep it too.

Paperwork. Make sure insurance, appraisal and provenance documentation is up-to-date. To protect their interest in the collateral and protect against fraud, lenders take several steps, including:

- requiring recent appraisals from approved appraisers or auction houses (which often include evidence of provenance),

- being named on the borrower's insurance policy (in case the collateral is stolen or damaged), and

- UCC filings (to put other potential lenders on notice that the collateral is encumbered).

What Counts. Lenders active in this market typically make loans against specific works, multiple works, or a whole collections. And, not just works of fine art – we have also helped people borrow against books, maps and antiquities. Not every bank will lend against art, but those that do usually offer a variety of financing options, including term loans (which become due on a specific date) and revolving loans or lines of credit (which allow money to be paid back and reborrowed during the life of the loan). The amount of the loan varies but is usually somewhere between 45-60% of the market value of the collateral.

Keep Possession If You Can. Often, the art owner can keep the art on the wall or the pedestal, as long as restrictions are followed limiting when a work can be moved (e.g., only following prior approval), where it can be moved (only to approved locations - usually domestic, but sometimes to galleries or museums), and how it can be moved (only in approved manners). When a borrower is up-front and clear what they want to do with their art, lenders can often make accommodations.

More Common Than You’d Think. Of course, like all secured debt, the bank will insist on a filing with the state under the Uniform Commercial Code. Some borrowers are particularly sensitive to public filings that show they have used their art as collateral, however, there are ways to avoid including individuals names in the filings and most lenders will work with a borrower if this is a particular concern. One banker we've worked with confided that while borrowers are sometimes afraid of what their peers would think, they'd be surprised to find out how many of their peers are have already done exactly the same thing.

A business is assumed to be a general partnership or sole proprietorship if it isn’t legally formed as another type of entity. So if you do nothing to create an entity, you will be presumed liable for any debts or liabilities of the festival, which puts your nest egg and inventory on the line.

We recommend you choose an entity that offers limited liability. Limited liability is the right of shareholders to be free from value already invested or promised to invest in a company. The most common entities offering limited liability are corporations and limited liability companies. Setting up one of these entities requires filing a form with an appropriate state government and paying a fee (usually between $150 and $750).

An advantage of both entities is that they can be set up and managed by just one person or by a team of people. Consult a good corporate attorney and accountant for help deciding which form best suits your needs, and assistance in preparing the necessary paperwork to register with the state.

Step Two: Follow the Rules
Once you’ve organized as a business, act the part! Follow the tax rules and state filing requirements, and keep funds and bookkeeping for the entity separate from your own and other entities’. If the company is run as a sham to obtain tax advantages and insulation from liability, those advantages will be lost. If run properly, the entity will shield the festival owners from liability for losses, mistakes and accidents that may upon the festival entity.

Whether you choose a public or a privately-owned location, you will have to deal with local government. You’ll need to deal with sales tax and business licenses, as well as permits for serving food or alcohol. Parks and other public spaces are often the most appealing locations because they appeal to pedestrian traffic. Unfortunately, reserving a public space usually requires obtaining government-use permits, which often come with requirements about security, parking, electricity, water, waste disposal and restrooms. All of these might require dealing with bureaucratic departments, and more fees.

It is crucial to understand the requirements and risks associated with your permits and local laws before structuring your insurance and drafting contracts with vendors and exhibitors. For instance, if the municipality can cancel the permit because of weather, a conflicting event or other reasons beyond your control, you will want to get similar escape clauses from your vendors.

Keep in mind that visitors retain certain First Amendment rights in public spaces, which could reduce your control over what your exhibitors and visitors can display or express. When the organizer of a street art festival in a Columbus, Ohio, park asked police to remove a man for peacefully distributing leaflets, displaying signs and speaking with visitors about his religious beliefs, it became a federal case. A federal appeals court rightly found that the street was a public forum regardless of the festival’s permit to use the area, and therefore the police had violated the man’s constitutional rights by removing him (Parks v. City of Columbus, 395 F.3d 643 (6th Cir. 2005)).

If you prefer to avoid the municipal red tape and the need to provide for bathrooms, water and other needs, paying an expo center or private exhibition hall can simplify things. For cheap and visible private venues, you may even want to consider under-utilized parking lots. Privately-owned locations will require you to sign a lease or get a license, and obtain insurance and a city permit. Any space you use might also require you to use union workers in the construction or transport of your festival, for instance if the owner of the facility has entered into a collective bargaining agreement.

Step Three: Protect the Fest
Your new entity has assets and risks of its own, and needs to have insurance to protect it against the unforeseen or chaotic.

For instance, in 2007, a sudden, violent hail and wind storm slammed an art festival in Evanston, Illinois. Exhibitor tents, artwork, merchandise and chairs flew across a city block. Several people were injured; four were hospitalized. Much of the artwork was destroyed, and buildings were damaged. The festival shut down, and artists and vendors lost expected sales. Legal issues are still being sorted out, but ultimately the festival could be liable for some or all of these losses.

Bad weather is far from the only risk. Theft, personal injury, contract disputes, bad weather, loss of power and breakage — even disputes over the content of artwork — can have drastic consequences for the festival. However, these can be limited and managed beforehand, through well-drafted contracts and insurance coverage.

To determine what insurance coverage the festival is likely to need, brainstorm the risks. Workers’ compensation is generally required for every employer, and commercial general liability coverage is essential and often required to get a permit or lease a space. Beyond these, an attorney and a trusted insurance broker can help with the perplexing array of choices. Policies can usually be purchased on an event-specific basis, reducing the premium. Before signing, ask the broker to explain (and, optimally, an attorney to review) the policy coverage along with any confusing endorsements and exclusions.

While insurance deflects certain risks to an insurance company, contracts can be used to allocate risks among the festival and its participants. When buying insurance, you balance the cost of coverage versus the likelihood and magnitude of the covered risk. Risk-allocation by contract is not so formulaic — risks should be placed as much as possible upon each individual exhibitor without frightening them away. See sidebar for an explanation of the four most commonly-used risk allocation tools — warranties, waivers, indemnities and limitation of liability.

The theft of two Chagall lithographs from a New York expo in 1984 illustrates how insurance, liability waivers and warranties interact. The Chicago gallery that owned the Chagalls had signed an exhibition contract stating that the organizer would provide security, but warning that exhibitors should provide their own insurance. When the Chagalls, worth $38,000, were stolen at the expo, the gallery’s insurer paid the loss, then tried to recoup it by suing the organizer for not providing enough security. The organizer argued back, successfully, that the gallery had agreed in the exhibition contract to waive lawsuits against the organizer for any stolen artwork. Although the organizer was obligated by the contract to provide security, it was not obligated to provide perfect or even good security. In other words, there was no warranty about security and, accordingly, the organizer had not done anything in violation of the contract (Unigard Mut. Ins. Co. v. Int’l Art Exposition, Inc., 1986 U.S. Dist. LEXIS 29767 (N.D. Ill.).

Like the expo in the Chagall case, if you encourage exhibitors’ confidence by describing the security to be provided, be clear about who is financially responsible for losses due to crime.

The level of security you provide to protect festival-goers is defined by state negligence law. Translation: If someone is injured, a judge or jury will decide whether security was adequate, based on a fuzzy legal standard and guided by previous cases, at the end of expensive litigation. Accordingly, security personnel should be selected carefully, be well-versed in the festival’s rules, and have good communication skills.

Besides physical damage and injury, there are tax and copyright issues to handle in the exhibitor and vendor contracts. Unless all sales will be shared by the festival as a collective, the exhibitor agreements should require each seller to show proof of their own sales tax number, and state that the seller is responsible for sales taxes.

If an artist displays or sells a work that infringes someone’s copyright, the festival might be held vicariously responsible, even if it doesn’t know about the copyright infringement or make any commission on the sale (Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F3d 788, 802 (9th Cir.2007) and Fonovisa, Inc. v. Cherry Auction, Inc., 76 F. 3d 259, 263-64 (9th Cir. 1996)). To deflect this, exhibitor contracts should include each exhibitor’s warranty that its works are not infringing, and indemnification of the festival for vicarious infringement liability.

Of course, there are many other things to cover in your contracts: rules and consequences for their violation, fees, competition rules, display specifications, and hazard restrictions. It is impossible to predict every problem, so consider a provision that says each display is subject to inspection at all times, and that exhibitors must comply with reasonable requests for the protection of the festival or the public.

Finally, art, like life, has risks. Be comfortable with the risks, manage and limit them, and get a good lawyer who you trust to guide you through the maze.