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Galleries’ Management of Artists’ Funds – a Sub-Standard Status Quo

The art market’s generational, cultural and technological shifts have inspired artists to reconsider the gallery model in its traditional form. Yet, this trend is not only attributable to recent waves of change in the market. The market has become all too familiar with news of artists who suffered significant financial loss when their gallery went out of business. What has cost artists the most in these situations is not the gallery’s downfall under the pressures of a ruthless market, but the gallery’s failure to protect the artist’s share of sale proceeds. When a gallery goes insolvent and the artists’ funds are mingled with the gallery’s own, artists often find themselves treated as an unsecured creditor and if so, their chances of recovering anything become close to nil. Several leading galleries have gone insolvent in the last few years and in every case, artists have lost out. The losses suffered by artists after the Simon Lee Gallery entered administration last July is the most recent case in point.

Both the art market and English courts favour a laissez-faire approach to the terms of any business relationship including those of artists and galleries. However, the nature of the relationship between artists and galleries is far from just business. The collaboration can be as intellectual, creative and emotional as it is transactional. Importantly, trust is carefully earned to fuel ambitious projects, and, when the collaboration is successful, the relationship lasts in time and becomes an essential source of income for the artist. From a legal perspective, the gallery typically acts as the artist’s agent. English law treats an agency relationship as a special construct that has been the subject of centuries of case law and debate because of the vulnerability created by the trust and confidence that lies at its core. When it acts as agent, a gallery owes an array of duties to an artist under contract, equity and common law. Several of these duties frame the standard of care agents are expected to apply in the treatment of the artist’s property.

Co-mingling the principal’s funds with the agent’s own is permissible in some agency relationships where practice indicates that it is commercially sensible and/or market standard to do so. This could be the case where the agent manages the principal’s funds and is entrusted to make payments out of them. It can be justified where it is in fact anticipated that the principal’s funds can be temporarily used as part of the agent’s cash flow so long as payment is only withheld for reasonable amounts of time until funds are paid to the principal. In a primary market context where the artist and gallery traditionally split profits down the middle after deducting costs and there is no practical justification for the artist’s funds being used by the gallery as cash flow, the mixing of funds is potentially open to legal challenge.

There is no statutory obligation for galleries in the UK to segregate funds belonging to artists from the gallery’s own. Instead, both the law and the market tolerate the co-mingling of the artist’s share of sale proceeds with the gallery’s own funds in a general account, but only to an extent. This is of course not a carte blanche for the misuse or undue withholding of money owed to the artist. From a legal perspective, that runs counter to several duties owed by galleries to artists under equity and common law. When a gallery abides by its duties as agent by providing regular, accurate and diligent accounting to the artist and pays them promptly, as many galleries do, the mixing of funds is not by its nature harmful to the artist’s interests. Co-mingling becomes an issue when it enables galleries to retain the artist’s share of profits for unduly long periods of time and to spend it on general gallery expenses either inadvertently, negligently or in bad faith. It becomes especially harmful when a gallery goes into liquidation at a time when it owes funds to the artist.

English law, in theory, offers remedies to artists seeking to recover funds owed to them by a gallery that has misused them for its own benefit. In addition to contractual remedies if breach of contract by the gallery can be established, personal and proprietary remedies can be sought by the artist. An artist can, depending on the circumstances, seek an order for an account of profits, make a claim for compensation against the gallery, and/or seek an order for compound interest. Equitable tracing of funds and restitution are also possible avenues. Crucially, however, remedies are by their nature reactive tools that might do too little too late. Personal remedies, for example, can easily become of no use if the gallery has already entered insolvency proceedings. The evidential processes that precede the granting of some remedies can be complicated by a lack of segregation of funds. In addition, the development of agency law in the UK has made the framework of remedial actions fragmented and far from procedurally straightforward. At its simplest, enforcement of remedial action involves court action, months if not years of escalating legal costs that are out of reach for many artists, and no guarantee of a full recovery, especially once a gallery has gone into liquidation and its assets have been claimed or seized by higher-ranking creditors.

The New York legislator intervened to rectify the market standard over ten years ago. Until 2012, New York law recognised that the percentage of sale proceeds owed to an artist belong to them and should be held in trust by the gallery who should not exercise any discretion to use them for its own purposes. Yet, the law did not include measures to enforce this principle nor penalties if the gallery failed to hold proceeds in trust. Shortly after history repeated itself one too many times with the collapse of Salander O’Reilly Galleries that left dozens of artists unpaid, the New York legislature amended the law to strengthen the position for artists by amending articles 11 and 12 of the New York Arts and Cultural Affairs Law. Under these rules, galleries are now required to hold sale proceeds on trust for artists separate from their own funds and may not deposit such funds on a bank account in their own name. When the artist’s funds are segregated and protected in this way, their misuse is prevented, more readily traceable where it occurs, and funds become easier to recover in the event of liquidation.

UK law does not afford artists the same protection. Given the limited efficiency of remedial action due to its reactive nature, artists are left to contractual devices. Artists can require that their contract with a gallery stipulates that the gallery should segregate funds, that funds owed to them cannot be interfered with, that they must be paid promptly, that they are held in trust and that the parties do not intend a debtor/creditor relationship to arise between them. This assumes that artists have sufficient bargaining power to do so, and that a written contract exists. Whilst written contracts are becoming more common, they remain the exception rather than the norm in relationships between artist and galleries. Yet, well-written contracts can be a key preventative tool for artists to avoid finding themselves entirely disarmed when a gallery enters a period of financial distress.

Imbalances in bargaining power have been in the art market’s DNA for centuries. This honest ruthlessness is often over-simplified as an evil trait of the market, yet it has more often spurred than scared market players. It is no secret that no market likes interference from outside parties seeking to redefine the rules of the game, least of all the art market. Yet, when the standards to which the market holds galleries expose artists to significant risks, and evidence continues to show that those risks are not theoretical but real, is it not time for market standards to shift? Although the law could be slow to catch up, galleries can do right by their artists by making the segregation of funds the norm. The alternative of letting history continue to repeat itself by leaving artists significantly out-of-pocket after the downfall of a gallery can only harm the reputation of the British art market.

Pierre Valentin and Mona Yapova


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