Bankrupt Galleries: A Cautionary Tale

Art galleries too are not recession-proof, but what happens to the stock, the artwork, when they cease trading may be more complicated and certainly is unnerving for the artists involved.

Auctions of liquidated stock from bankrupt companies can be found everywhere in these recessionary days. Tales of bargain purchases, of £30 stereo systems and £20 cameras abound. Art galleries too are not recession-proof, but what happens to the stock, the artwork, when they cease trading may be more complicated and certainly is unnerving for the artists involved. Here’s a cautionary tale – recently a ceramicist was delighted when asked to display her work in the studio/shop of an interior designer. It seemed a good idea at the time; an excellent “shop window” for her architectural tile panels and so she placed her artwork with the designer on a sale or return basis. The good idea ended in chaos when the interior designer could not pay his bills and the bailiffs seized goods including the tile panel. The ceramicist knew she wanted her artwork back, but she didn’t know if she had any legal rights. The legal position of the artist who exhibits work in a gallery/shop which ceases trading will depend on the contract between the artist and the gallery.

Artist-gallery contracts, oral and written vary from the simplest to the most complicated. The simplest will probably be a sale contract where the gallery buys an artwork outright from the artist. More complicated are “sale or return” (also known as consignment) contracts where the artist loans work to a gallery on the basis that the gallery will either sell it to a third party or will return it to the artist. Yet more complicated are arrangement whereby the artist is paid a retainer (or stipend) to produce work exclusively for a particular gallery. Under both agreements the aim is the same: when, or if, the artwork is sold the artist and gallery will share the proceeds in agreed proportions.

All of these legal relationships will be affected if a gallery goes out of business so what can happen and where does the artist stand if it happens? If a gallery is unable to pay its debts there are a variety of possible outcomes. A creditor can obtain a court order authorising bailiffs to seize and sell property belonging to the gallery; this is what happened to our ceramicist. Where the gallery is a company unable to pay its bills creditors may take action to “wind up” (or liquidate) the company. The liquidator will then be responsible for selling the company’s assets, including artworks it owns, and paying the creditors. In certain circumstances an Administrator or Receiver may be appointed by the court, both have the power to run the company and their appointment will not necessarily mean that the company ceases trading. Where does the artist stand in all of this? The answer is simple – it depends on the terms of the contractual agreement (the contract) struck between artist and gallery. In “sale or return” contracts, although the artwork is physically in the hands of the gallery, the artist is still the legal owner and, if she or he can prove it, will be able to get their artwork back. The artwork cannot be sold to pay off the debts of the company. If the gallery has actually bought the artwork outright then, save for copyright and moral rights, the artist will retain no legal rights in the artworks and they can be sold.

The position of the artists paid a retainer (or stipend) may be more complex; much will depend on the terms of the agreement between the gallery and the artist. However it is very unlikely that the gallery will actually own the artwork. The gallery probably paid the artist in return for the (exclusive) right to represent him/her and a share of the price of the artwork when sold; the gallery will not have paid for ownership of the artwork itself. If the gallery does not own the artwork then it cannot be seized by a bailiff.

Where a liquidator has been appointed he/she is likely to have authority to sell artworks created by a gallery artist unless the contract between gallery and artist states otherwise. English law still gives galleries and artists freedom to make legally binding and enforceable contract in any manner they choose. There is no need for lawyers, for red tape or even for the contract to be in writing. Most contracts are oral, or even simply by conduct (e.g. when a car driver puts petrol into his/her car at a self serve petrol pump and then pays). If two consenting adults make an agreement, intending to be legally bound and considered (legal jargon meaning something of value – e.g. the promise to pay the price) it is given that that is enough to create a valid and enforceable contract. A written contract is simply a statement, a ‘”laundry list” of what the two parties have agreed encapsulating the details, the terms and conditions of their agreement

Many legal problems occur because the parties have not considered the terms and conditions of the contract fully and agreed them; or because the contract was oral and the parties have different memories of what was agreed and neither can confidently prove their version. Time spent in negotiating and writing down the terms and conditions of a contract will save anxiety, confusion and possibly money if a gallery ceases trading or the bailiff seizes the artworks.

Artists placing work with galleries should always have documentary evidence of the agreement. A written contract would be documentary evidence and could take the form of a joint statement, alternatively there could be an exchange of letters. The agreement, and the documentary evidence, should state who owns the artworks; how and when the deal can be terminated (brought to an end). Such simple precautions would really help if bailiffs were to seize artwork or if other disasters were to occur such as the gallery being sold or the gallery owner dying.

Uncertainties and anxieties which arise in the event of a gallery ceasing to trade can be simplified by including two terms in the deal/agreement – an ownership term and a termination term. The ownership term should state that the artist is the owner of the artwork until the full purchase price has been paid. The termination term should say that the deal will automatically end if the gallery ceases trading, becomes insolvent or a liquidator, receiver, administrator or similar official is appointed or where, if the gallery is run by a single proprietor not a company, the proprietor dies or goes bankrupt. Termination clauses like these should also agree that both parties have the right to end the agreement by giving the other notice in writing. Well thought out contracts can save worry and expense. Before committing themselves to a deal artists and galleries must hesitate and negotiate; they must then notate (put the agreement in writing), indelibly communicate the agreement to each other and keep a duplicate copy.

Our ceramicist was lucky. She was able to prove to the bailiffs that the artwork belonged to her and not to the interior designer. If she had not been able to, her tile panel would have become just another item in a bargain basement auction of bankrupt stock.

© Henry Lydiate and Nathalia Berkowitz 1993

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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.