Dealing Differently

In 1976 this column looked at the case of a London-based artist who sent work to a New York gallery for exhibition and sale in the US: the works were sold and the gallery sent the artist a cheque which bounced (Artlaw AM2). This was the first of many columns exploring legal and business problems commonly involved and arising in the relationship between artists and commercial galleries representing them: ‘Artists leave works with galleries under the most flimsy and informal arrangements. Rarely are written agreements used to tell both sides where they stand, and as a result serious problems can and do arise: work is sold at the wrong retail price, agreed gallery commissions increase and artists are charged “extras” for unforeseen gallery costs; unsold work is not returned when requested, gets lost, damaged or destroyed, and the major question which then arises is: who owns the work?’ (Artlaw AM11).

This state of affairs has substantially continued over subsequent decades to date, despite valiant attempts made – chiefly in the US – to tackle perennial problems manifest in the commercial relationship between artists and galleries. In the US most states have enacted laws regulating respective rights and obligations when artwork is consigned for primary sale to gallery dealers by artists (and their estates after death). Because of the high concentration of art market transactions and of artists based there, it is unsurprising that the first such legislation was New York State’s Arts and Cultural Affairs Law (NYACAL), which was used as a model for enactment firstly in California then in states elsewhere. Such laws impose on gallery dealers stringent duties of fiduciary care towards their artists (and estates after death) and consigned artworks. So far, so good; but did these regulations work to improve artist/gallery relationships?

In the wake the bankruptcy of the New York-based contemporary dealership Salander-O’Reilly in 2007, and the subsequent imprisonment of its principal director for fraud and theft, flaws in NYACAL were exposed. As a result, in 2012 NYACAL was significantly amended to provide stronger law enforcement sanctions against galleries that fail to fulfil their duties of fiduciary care. In effect the amended law automatically makes the gallery dealer a trustee of unsold consigned artwork, and then of the artist’s share of the proceeds of sale. In other words, whether or not there is a written representation and consignment agreement between artist and gallery, unsold consigned artwork or the artist’s share of proceeds of its sale are not stock or cash assets of the gallery, but are owned by the consigning artist/estate. This means that if the gallery becomes bankrupt or insolvent, it or its creditors cannot use the artist’s assets to clear gallery business debts. The law was also amended to strengthen its enforcement provisions, making galleries liable to criminal prosecution and penalty, and/or commercial lawsuit by artists/estates for recovery of financial compensation and legal costs from offending galleries. So far, so good; but have these new sanctions worked over the past four years? Not according to a prominent collector.

Peter Hort is the New York based heir of the Hort Family Collection of over 3,000 contemporary artworks acquired during the past 40 years. He is a contemporary art collector and a founding member of the Rema Hort Mann Foundation that awards grants to emerging artists. Hort is also a lawyer who has recently initiated a pilot scheme aimed at addressing what he believes is the failure of fiduciary provisions of NYACAL, especially the requirement that ‘any proceeds from the sale of primary market work are trust funds in the hands of the consignee [gallery] for the benefit of the consignor [artist/estate]’. Hort’s experience is that ‘Most galleries don’t do it, but most galleries haven’t even heard of this law’, and compares such non-observance with the failure of New York galleries to comply with another requirement of NYACAL to display prices for work exhibited for sale to the public. Hort says: ‘There’s a lot of things that, because of tradition, galleries just don’t do and this is one of them … and many artists, successful artists that have to come into the gallery, hat in hand, to ask for their “weekly allowance” from their parents … it’s humiliating.’ Another driver for Hort’s innovation is his knowledge and experience as a lawyer that artists rarely (if ever) sue galleries for non-payment, because lawsuits ‘are not worth it for sums up to $15,000 because of the associated legal fees.’

Hort has labelled his new scheme RISBE, a strange acronym derived from his children’s initials. RISBE’s primary aim is to ensure that galleries pay artists, and do so on time – not a high priority for many galleries, according to Hort. RISBE operates as a business service that acts as intermediary between selling gallery and buyer, who pays the purchase price to RISBE, which then ensures that the artwork is received by the buyer, and shares the sale proceeds between the gallery and artist. Thus the gallery only ever receives its share of the proceeds of sale, avoiding the possibilities of delay in payment to the artist, or of creditors seizing the artist’s cash share of sale proceeds. Artists receive their share of sale proceeds ‘immediately and they get it in full’. For this ‘escrow’ service of safekeeping and distribution RISBE charges 2% of the overall purchase price it receives.

Galleries are not required by NYACAL to use a service such as RISBE, but doing so would facilitate their compliance with the spirit and letter of the law – and deliver ethically sound professional practice. A convinced user of RISBE is Quang Bao, who recently established a contemporary art gallery, 1969, on the Lower East Side. Bao says ‘What I liken it to is getting a pay cheque with the savings and the healthcare costs all subtracted out of it already … it’s a mechanism that you don’t have to worry about … most collectors are put off by galleries that are rumoured not to pay artists.’

But it is perhaps understandable that Bao should subscribe to the RISBE service because he was until recently an employee of the Hort Family Collection. It remains to be seen whether other galleries will do likewise – not only in New York but further afield. In the UK, for example, although there is no legislation akin to NYACAL imposing stringent fiduciary duties of trust on galleries, this column has regularly suggested that general business laws of agency and of trust do apply to relationships between artists and commercial galleries. In particular, whether or not there is a written agreement for representation of artists by galleries for receiving and exhibiting and selling consigned artworks, galleries are agents required to act not in their own self-interests but in the best interests of artists to whom they are accountable for sound dealings with consigned artwork and artists’ share of proceeds of sale.

Above all, galleries are not owners but trustees of consigned artwork and artists’ share of sale proceeds. Relevant innovative schemes such as RISBE offer a modestly priced practical method of fulfilling dealers’ legal and ethical obligations to the artists they represent. Indeed, galleries may prefer such an approach to the imposition of legislation.

© Henry Lydiate 2016

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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.