Secondary Sales Risks

Caveat emptor is usually translated as ‘let the buyer beware’. Its common use in law and business connotes a doctrine that still operates today, especially in the increasingly lucrative market for secondary sales of contemporary art: caveat emptor, quia ignorare non debuit quod jus alienum emit; ‘let a purchaser beware, for he ought not to be ignorant of the nature of the property which he is buying from another party’. This leads to the frequent trading practice of an item being ‘sold as is’ as a warning to buyers that they have no claim against sellers if the item does not match the buyer’s expectations after the sale. Typical secondary art sale risks include the artwork having been lost by or stolen from the true owner, the work originating from a country whose laws forbid export of such art, the piece being a fake or forgery or otherwise inauthentic.

Sellers invariably have more information about the work offered for sale than buyers. In the secondary art market sellers are often reluctant to disclose to buyers all the information they possess about the offered work, which puts buyers in a vulnerable pre-sale position: buyers should indeed beware. There are many steps buyers can take to avoid or mitigate the consequences of ‘information deficit’ risks before completing a purchase such as: questioning a seller for reliable documentary information about the work’s ownership history leading back from the current seller to the artist/maker; and conducting objective ‘due diligence’ research about the work to corroborate or close gaps in information given by the seller. Such practical steps can be buttressed by buyers requiring sellers to guarantee a work’s provenance of ownership and authenticity in a written purchase agreement or contract of sale.

Many professional traders, agents and dealers in secondary sales of art adhere to the principle and practice of caveat emptor and are reluctant to give written guarantees to buyers, many of whom accept such reluctance and complete purchases knowing or being ignorant of the risks of doing so. However, sellers who know work is illegitimate (stolen or illegally exported or fake/forged) are likely to be violating the criminal laws of most countries throughout the art world, conviction for which may result in a prison sentence. Prosecutions for such crimes usually do not require there to have been a contractual guarantee from the seller, but do require evidential proof of the seller’s dishonest or guilty mind at the time of the sale. Moreover, the legal frameworks of some art market countries permit a buyer to bring a commercial lawsuit alleging fraud by the seller and claiming severe financial compensation and penalties accordingly. A series of landmark cases have unfolded recently and serve to illustrate: The Knoedler Gallery Scandal.

Based in New York City, M Knoedler & Co was one of the oldest commercial art galleries in the US. Founded in 1846, it operated continuously until its closure in 2011 surrounded by rumours of fake abstract expressionist paintings it had sold over the past decade or so. Various criminal investigations uncovered convincing evidence that between 1994 and 2011 the gallery sold as authentic fake paintings by Robert Motherwell, Jackson Pollock, Willem de Kooning, Mark Rothko and others. Knoedler had bought around 30 fake paintings from fellow New York art dealer Glafira Rosales. The fakes had been painted in New York by the notorious art forger Pei-Shen Quian, a Chinese ex-pat who relocated to the US as a student in 1981. Quian sold each of his fakes for a few thousand dollars to Rosales, who resold them for millions of dollars each to Knoedler, which in turn resold them to clients for a reported total amount of $70m.

In 2013 Rosales pleaded guilty to federal crimes of selling fake works to Knoedler plus another New York gallery, conspiracy to commit money laundering, money laundering and tax evasion, and, having been sentenced to prison has now been released on parole. Quian was also indicted for his crimes but escaped prosecution by fleeing to mainland China.

In 2007 a client bought a painting that Knoedler attributed to Pollock as Untitled 1950 for $17m. The buyer wisely secured an undertaking from Knoedler that the work was sold on the basis that it would be ‘included in a supplement to the Pollock catalogue raisonné’, though it later emerged that there was no such supplement and that the work was fake; the resulting lawsuit was settled out of court. In 2004 another Knoedler client bought a Rothko painting, Untitled 1956, for $8.3m. it was a fake and the client sued for fraudulent dealing; the lawsuit was settled out of court in 2015. In 2007 yet another Knoedler client bought what turned out to be a fake de Kooning for $4m and this lawsuit was also settled out of court in 2015.

Sound pre-sale provenance research by buyers is problematic when an art market intermediary negotiates as agent for a seller who wishes to remain anonymous. In Knoedler’s case, Rosales told the gallery that the works/fakes were owned by her anonymous client who had inherited the works from his father, who in turn had bought them directly from the artists. Knoedler did not disclose this information to buyers, who relied on the gallery’s reputation to trust its assertion that anonymity was standard trade practice. One putative purchaser tried to persuade the gallery to sign a written sale contract guaranteeing that the ‘gallery did not know anything putting the work’s authenticity into question’, which the gallery refused to sign on the grounds that this ‘was just not how the art market worked’. Many experts and connoisseurs and academics are reluctant to go on the record about authenticity of works for fear of being sued for professional negligence by sellers or buyers whose asset might be devalued by negative appraisals.

The thread running through this saga suggests that the real culprit is ‘the art market’s notorious secrecy’, which was the conclusion reached by participants at the 2016 annual art-crime symposium recently held at New York University (Art and Cultural Heritage Crime: Fakes, Forgeries, and Looted and Stolen Art). In recent times many art market professionals have publicly acknowledged the nature and extent of this problem, but they cannot agree on solutions.

Constructive and incisive findings and observations were made by the court in the main Knoedler trial (relating to the fake Rothko sale that was recently settled). The judge identified several ‘red flags’ of questionable art trade customs in secondary sales transactions: nondisclosure by sellers of ownership history (because anonymity is widely tolerated in the art world); failure to agree to an express guarantee of authenticity (especially when sought by the buyer but refused by the seller); potentially negative information not disclosed by the seller (who becomes more vulnerable to later fraud allegations the more the seller knows about the art or artist); verbal communications with experts (who should ideally provide written appraisals in writing for pre-sale disclosure to buyers); and a higher standard of professional trade practice for prestigious galleries (because their reputation is more likely to induce buyer’s to trust their expertise and integrity and honesty).

Perhaps the key lesson from the Knoedler fiasco is that both sellers and buyers should beware.

© Henry Lydiate 2017

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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.