It would be a truism to note that COVID-19 has had a profound impact on many sectors globally. The art industry, which relies considerably on the human interaction between art dealers, artists, and members of the public, is no exception, and will have to rethink its practices. And to add salt in the wound, the unexpected and unprecedented halt to travel and transportation during the shutdown has presented its players with new challenges. This note provides some guidance and ideas on how to manage the impact of COVID-19 on the art industry, even after the lifting of the various lockdown measures.
The art industry is by nature international. As such, it is suffering more than many sectors from both the outbreak of the COVID-19 pandemic and the myriad of governmental measures put in place to combat it (which we shall group together as the "COVID-19 Pandemic").
Further, art auctions, art exhibitions, and art fairs are generally considered as non-essential activities and therefore may not meet the standards set for exceptions in the various emergency measures adopted by governments around the world. At best, art businesses may have benefited from the general relief provided by the recent COVID-19 regulations adopted in several countries, such as the suspension of the repayment of loans,2 payment of rent,3 or the possibility to place employees on furlough schemes.4
Crucially, the government measures adopted in the wake of the pandemic have created a number of new issues in the trade of artworks. In that context, this client alert will discuss certain contractual and statutory remedies typically available to the parties when a transaction has changed in such a fundamental fashion as to become something very different to that intended at the start, and/or where the other side intends (rightly or wrongly) to rely on the disruptions to withdraw from the deal.
The COVID-19 Pandemic creates a number of issues relating to contractual relationships between intermediaries, artists, and collectors, both in the primary and the secondary art market.5 Difficulties are particularly acute because most art transactions involve goods that are by their very nature unique. Therefore, unlike other markets involving standard, commercially manufactured goods (performance for which, a seller might in certain cases be able to mitigate by sourcing the items from a different supplier), the economic impact of any attempt to mitigate performance may well be in vain. An art piece often has no replacement.
Art is traded essentially under two models: private sales, and auctions. Auction houses typically have their standardized contract forms for auction sales;6 most have standardized forms also for consignment contracts, but these are of course often amended for commercial reasons. Thus, the relationships of many auction houses with their clients present isolated but somewhat commonly occurring problems. Many private transactions, however, take place without a written contract (so-called "handshake deals"), usually upon a desire of the parties to keep the details of the transaction private (at their own risk and peril). The lack of regulation of the relationship may readily cause uncertainty when differences occur between the parties.
Assuming that there is no written contract (or, if any, that it does not specify a forum for disputes), the situation in which the parties find themselves), the claimant will typically have two options:
The courts identified as above will then consider conflict of laws rules of their jurisdiction to identify the law applicable to the transaction.
If the applicable law identified as above is the law of one of the 84 signatories to the U.N. Convention on Contracts for the International Sale of Goods ("CISG"), the special rules provided by this international treaty may apply.10 There are, however, some important caveats:
The CISG does generally not apply to sales of goods directly to "consumers" pursuant to Art. 2(a) CISG.11 However, it can potentially apply to sales from consumers, which could occur in the secondary market for example.12 Having said this, to determine whether a collector is a consumer may sometimes be problematic.13
It does not apply to auction sales, due to the specific exclusion contained in Art. 2(b) CISG.
The United Kingdom, one of the major hubs for art,14 has not ratified the CISG. Concretely, this means that, most of the times, the Convention will not apply when the seller is in the UK, but may still apply if (even if the buyer is in the UK and) the seller resides in a Contracting State.15
The CISG provides the parties with the basic regulation of their transactions, as well as a powerful tool for adapting the contract to unforeseen circumstances such as the COVID-19 Pandemic: the force majeure rule (on which, see next section).16 This is particularly relevant when the law applicable to the transaction does not include such tools (as it is often the case in art sales and notably in common law jurisdictions).
The fact that many art transactions involve intermediaries adds an additional layer of complexity to the assessment of the remedies available to the parties. In fact, it is customary for the intermediary not to disclose to the seller and to the buyer each other's identities, with the effect that the seller may "neither [know] nor ought to [know] that the goods [have been] bought" by a consumer. This can be considered an exception to the rule stated in Art. 2(a) CISG, with the effect that the CISG could apply when it otherwise would not.17 In many private deals, the role of the intermediary can take many shapes or forms (e.g. consultant, agent, or re-seller). The professional ethics of art dealers have recently been at the center of the much-discussed Rybolovlev saga.18
The potential uncertainty and (arguably) decrease in value of artworks because of the current financial turmoil19 could prompt buyers to rescind the underlying transactions. Whether such rescission is possible largely depends on the law applicable to the transaction and, of course, the particular circumstances of the transaction.
To begin with, oral contracts for the sale of goods of a certain value may not be valid in certain jurisdictions and notably in jurisdictions in the United States, so the buyer could simply disaffirm the contract due to the absence of a written form.20
If the buyer is a consumer, he or she will likely have special protections in many jurisdictions. In Europe, the Consumer Rights Directive ("CRD") regulates a sale made by distance or off-premises to a consumer.21 In particular, consumers can withdraw from a sale within 14 days of receiving the goods, at will. In addition, EU law provides that sellers must provide consumers with certain information concerning their rights (i.e. their right of withdrawal). Failure to do so results in the consumer having 12 additional months to exercise his or her right of withdrawal.22
If the buyer is not a consumer and the CISG applies, a party can be excused from liability if it proves force majeure, involving the following general principles:
This corresponds to the classic definition of force majeure in many civil law jurisdictions.23 For example, from an art dealer's point of view, shipping art works during a shutdown was extremely difficult: many shipping operators were not accepting shipments; many warehouses and freeport facilities were closed; and, in case of shipment outside a customs union, the export license could not always be readily obtained because the relevant government agency was closed. And a buyer may argue that the transaction could not be completed because its trusted expert could not travel to assess the authenticity of a painting.
Further, in many civil law jurisdictions, if one party's performance is still possible, but has become excessively onerous or burdensome because of extraordinary unforeseen events, that party may seek to modify or (more often) terminate the contract for hardship.24 In art transactions, the performance of consignment, shipment, or auction of an artwork may become more difficult and expensive due to government restrictions, thus it may in appropriate circumstances be invoked by a dealer who is not able to perform its undertaking.25
These rights are largely untested in an art-related context: for instance, the hardship (or imprévision) provision was introduced into the French Civil Code only in October 2016 (in the sense of commercial dealings) and thus many aspects of its application are generally untested. In Italy, on the other hand, an equivalent statutory provision exists since 1942 and has been tested extensively (although in different contexts). Here, the courts normally refer to the allocation of risk and to the existence of an understanding between the parties that the price agreed is subject to fluctuation.26 It must be noted that both the Italian and the French notion of hardship focus on the performance becoming "exceedingly onerous" for a party. Thus, under a strict reading of the language of the French and Italian provisions, the case of a buyer "simply" overpaying for the item might not be considered hardship.27 Others may argue that it would be wrong to seek to limit the application of the principle in this fashion; it will likely ultimately turn on the facts.
Under German law, by contrast, the COVID-19 Pandemic could – depending on the circumstances of the case – qualify as an unpredictable event that fundamentally altered the basic circumstances of the agreement (Störung der Geschäftsgrundlage). This gives each party the right to adapt or terminate the transaction, if maintaining the status quo of the contract is no longer acceptable to the aggrieved party.28
As regards contracts under English law, the doctrine of frustration is of particular relevance.
Under English Law, the general assumption is that contractual obligations are prima facie binding and absolute, and there is no concept of force majeure or hardship without contractual language to that effect. English law recognizes instead the doctrine of frustration, coming into play when something occurs after the formation of the contract, which radically change the obligations under the contract compared to those contemplated by the parties to the contract.
Two classical references in English law are the famous coronation cases Krell v Henry  2 KB 740 and Herne Bay Steam Boat Company v Hutton  2 KB 683. These cases arose from the cancellation of coronation events due to King Edward VII's ill health. The contemporaneity of these cases is evident in Vaughan Williams L.J.'s statement from the latter case:
"I see nothing that makes this contract differ from a case where, for instance, a person has engaged a brake to take himself and a party to Epsom to see the races there, but for some reason or other, such as the spread of an infectious disease, the races are postponed. In such a case it could not be said that he could be relieved of his bargain."29
While the principle sounds suspiciously like a hardship argument, in practice, the conditions for its application are extremely strict and courts are generally reluctant to allow the remedy. There is some movement in English law in the context of what are sometimes called relational agreements, but it seems unlikely that the principle would readily apply to one-off art sales.30
Regarding auction houses' operations, there is typically less uncertainty in that most of them adopt standard contract forms, often providing for applicable law and forum. These usually involve two forms: the auction sale contract (with the winning bidders) and the consignment contract (with the sellers). The CISG does not apply to auction sales,31 and certain courts and commentators have said it likely does not apply to consignments either.32
As many (notably physical) auctions have been cancelled during the peak of the pandemic, many houses have found their warehouses full of items consigned weeks or months earlier, which could not be put up for sale. Some have opted for online auctions, although historically online auctions were used for less important (and cheaper) art works. It can also happen that the consignment contract has been signed, but the items have not been shipped due to the shutdown.
In some instances, there may be particular reasons due to which time was of the essence for the seller. For example, the seller may need to cash out due to insufficient cash flow to meet its financial commitments; the items may have been acquired with a bridge loan which must be repaid by a certain date, or the work has been declared to the customs as a temporary importation, and as such enjoying total or partial relief from import duty.33 These scenarios may very well prompt second thoughts in sellers who have already consigned their items to an auction house.
The above considerations on force majeure, change of basic circumstances, frustration, and hardship would still be matters to consider here. In this case, the disruption, however, is more evident in that there is a specific triggering event where the auction for which the items were consigned has, for example, been postponed (or replaced by an online auction). The seller may argue that once the auction has been postponed or cancelled, the purpose of the consignment contract with the auction house has been frustrated. While often these cases involve bona fide legal concerns, buyers may suspect that In such circumstances, the seller has a hidden agenda: for example, it may have received a good offer from another collector, or another auction house may have offered better terms (i.e. a lower commission).The consigning seller may also argue that in cancelling or postponing the live auction of the items, the auction house has made the contract obsolete.
Under French law, a party may refuse to perform its obligation or suspend their performance, if the other party does not perform its own and if this non-performance is sufficiently serious.34 A party may also terminate the contract, subject to establishing the seriousness of the non-performance.35 A similar remedy is available under Italian law, subject to the condition that the breach relates to a term that is essential to the contract and without which the deal has no utility whatsoever for the creditor.36
Under German law, a party may also refuse contract performance if the contract provides for reciprocal duties of the parties,37 the other party fails to perform its duties, and the aggrieved party does not have to perform first.38 If the aggrieved party has set an additional deadline for performance and the non-performing party still fails to perform, it may even rescind the contract.39 Such deadline may not be necessary if (i) the other party seriously and conclusively refuses to perform, or (ii) the contract provided for a specific deadline and the performance by that deadline was of essential importance to the aggrieved party. Moreover, the aggrieved party may rescind the contract before performance is due if it is obvious that the requirements for a rescission will be met. In addition to that, the aggrieved party may seek damages for non-performance.40
Under English law, such scenarios may qualify as a repudiatory breach. In English law, a repudiatory breach occurs where a party has committed a sufficiently serious breach of contract (given the importance of the term and the nature of the breach), or has indicated by words or conduct an intention not to perform the contract in the future. A repudiatory breach entitles the other party to treat itself as discharged from further obligations under the contract, instead of or as well as claiming damages. In case of a repudiatory breach, the non-defaulting party is entitled to resolve or affirm the contract.
In the U.S., § 2-610 of the U.C.C. provides that Anticipatory Repudiation occurs when either party repudiates the contract with respect to a performance not yet due, the loss of which will substantially impair the value of the contract to the other.
But consider also the opposite scenario, where the parties want to successfully implement the art transaction initiated before the COVID-19 Pandemic. This raises its own issues: for instance cash-flow problems and risk of insolvency of auction houses, dealers, and shipping and warehouse operators may cause the items in their custody to be seized by third parties.41 This is a problem common to both private and auction sales.
In addition, in difficult times there is always an increased risk of fraud (see our other alert on fraud/corruption allegations). These can take many forms in the art world: sale of forged or stolen artworks, or allegation of fraud on the part of art dealers.
Who is responsible if the buyer notices damage upon receiving the artwork? This depends on when the passage of risks on the goods took place.
Under the CISG, Article 67 provides that the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale. If the seller is bound to hand the goods over to a carrier at a particular place, the risk passes to the buyer once the goods are handed over to the carrier at that place. The fact that the seller is authorized to retain documents controlling the disposition of the goods does not in and of itself affect the passage of the risk.
Under German law, the default rule is that the risk of accidental destruction and accidental deterioration passes to the buyer upon delivery of the sold goods.42 When goods are to be shipped, the risk passes to the buyer on dispatch of the goods to the shipping company.43 When the buyer is a consumer and the seller/dealer, at the request of the buyer, takes responsibility for the shipment (rather uncommon in the art world), the risk passes to the buyer only upon receipt of the artworks.44 However, consumer rules do not apply to second-hand items that are sold at auctions.45 Finally, risk passes to the buyer when it is in default of acceptance of delivery.46
In France and many other jurisdictions following the Napoleonic code, ownership (and risk) passes – subject to the parties' agreement – as soon as the parties conclude the contract (doctrine of consent).47 This rule is of course frequently varied by agreement.
In the UK, the default place for the passage of risk is the sellers' place of business or residence.48 However, if the parties have agreed that the seller will ship the goods to the buyer, delivery of the goods to a carrier (whether named by the buyer or not) is prima facie deemed to be a delivery of the goods to the buyer.49 In doing so, the seller must make such contract with the carrier on behalf of the buyer as may be reasonable having regard to the nature of the goods and the other circumstances of the case. Otherwise, the buyer may decline to treat the delivery to the carrier as a delivery to him/herself or may hold him/her responsible in damages.50