Updated: Jan 17
No-resale clauses have become increasingly common when buying art from galleries or directly from the artist’s studio. Often buried in the small print of invoices, these clauses seek to restrict or prohibit the ability of the new owner to resell the work for a fixed period. Justifications for such clauses include a desire to avoid short-term speculation over the artist’s work (known as “flipping”), a wish to maintain control over the artist’s market and pricing, or an effort to ensure that the artwork remains in the “right” collections which will further the artist’s long-term development.
As argued in the linked article, no-resale clauses are likely to be viewed as “unfair” in the UK and Europe and so not enforceable, especially where consumers are involved. To date, neither the US nor UK courts have been asked to give a view, but the increasing use of these clauses and the often heavy restrictions imposed upon the buyer’s ownership rights make it likely that we will see the fairness of these clauses challenged in court soon. Until we have some judicial guidance both buyers and sellers may be unsure about how to approach these clauses. In the meantime both buyers and sellers should take legal advice when considering these clauses. While much will depend on the particular circumstances of a transaction here are some general thoughts which may be helpful.
Galleries and Dealers: What should you do if you are a dealer, gallery or artist and you want to incorporate a non-resale clause in your sale agreement, but you are worried that it might not be enforceable?
As we have said above, the increasingly accepted view in the UK is that no-resale clauses are very unlikely to be enforceable – particularly against consumers. It is not usually advisable to include clauses which are or may be unenforceable in a contract as doing so can have unintended consequences. Also, as we will see below, there are in our view better ways of approaching the problem. However, as a gallery or artist, you may nevertheless be tempted to include such a clause in the hope that it will serve as a deterrent. If you do that it is important, if the clause is to serve its purpose as a deterrent, to ensure that the clause is not patently unenforceable and that it at least appears fair and reasonable on its face. It will otherwise at risk of being disregarded and threats to enforce the clause will not be taken seriously.
To give the clause legal credibility requires a light rather than heavy touch. Using the analogy of restrictive covenants in the employment field it should be no more restrictive than absolutely necessary to protect the rights of the person relying on the clause. The clause should also be specific about what legitimate rights it is seeking to protect and why. It should avoid long periods of restriction and the restriction should be limited in geographical effect. Ideally, rather than preventing the buyer from reselling the work altogether, it should allow the buyer to do so subject to taking clearly defined steps.
A ban on sales by particular channels such as auction, private sale or online may also be problematic because it allows the new owner to argue that by limiting the sale channel the clause is unfair because it compromises his or her ability to get the best price for the work on resale. It may therefore be safer to include a complete ban on resales, rather than resales by particular methods.
The clause should also be prominent – in bold or capitals – in any document you provide to the buyer. It should never be buried in the small print. And the buyer should be required to indicate somewhere in writing that this restriction is understood and agreed to.
A further precaution could be to include wording which states that if the clause is found to be unfair and unenforceable by the court, the court shall have the power to revise or amend the clause so that it is fair and enforceable.
But even with these precautions it should be noted that the clause may well fall foul of consumer fairness rules because, in the end, the stark truth is that when buying an artwork, the buyer is usually entitled to presume that he or she is buying the right to do what they wish with the artwork and there has to be a compelling reason, in the case of consumers, for this presumption to be displaced without being unfair. You may therefore want to consider further measures. One additional way of redressing the imbalance could be to offer the buyer a significant discount in return for accepting the restriction. This allows an argument that the clause is a fair bargain where both sides are getting something valuable from the transaction. The buyer gets a big discount and in return the seller gets the comfort of knowing the work won’t be resold. To classify as a “fair bargain”, however, it is likely that a major financial concession would be required to compensate for the buyer’s compromised ownership rights. Certainly, it would need to be something substantially beyond the traditional discounts off the asking price offered by dealers and galleries. One way of highlighting the extent of the discount could, for instance, be an option to buy without the restriction at a full price or with the restriction but at a substantial discount.
However, even with these measures it is worth repeating that in the UK and Europe as against a consumer, the risk remains, however carefully drafted, that the clause will be unenforceable if tested in court. It may therefore be wise to think instead about alternative, less problematic, ways of achieving a similar aim.
Galleries and Dealers: If non-resale clauses are unlikely to be enforceable are there any alternative clauses which could be used?
I. Right of First Refusal
An alternative to a non-resale clause could be a contractual provision requiring a buyer to offer the seller a right to buy the artwork back. In other words, the buyer is allowed to resell the artwork, but before doing so, must give the dealer, gallery or artist who sold it to him or her the opportunity to buy it back. The clause will usually provide that the artwork can be bought back by the gallery or artist at a price which matches the best offer the owner has received for the resale. This clause is often found (and more likely to be enforceable) in primary (i.e., first sale) rather than secondary market (i.e., subsequent sales) sales, where the rationale is to help a gallery develop and protect the market of a living (and newer) artist.
To be sure of being enforceable, the right of first refusal clause should be limited in time and include consideration for the right. In other words, the gallery or artist must provide something, such as a discount, to the buyer in exchange for the right. The clause must also provide a clear mechanism for exercising the right. How and when will the gallery or artist be notified when the right becomes exercisable? How long will they have to decide whether or not to exercise the option? How will the price be calculated? Failure to provide such clarity could risk making the clause void for uncertainty.
Such clauses also often encounter difficulties in their practical application. The new owner will want to achieve the best price on resale, so it is difficult to know what that price will be until it has actually been negotiated and agreed. Pausing the negotiations at that point to go back to the original seller can endanger the deal. Such clauses are also usually unworkable where the resale is by auction, because the resale price is only known when the sale is concluded. All these practical issues can affect the determination of whether the clause is enforceable and/or fair. For these reasons, particular attention should be paid to how the right of first refusal clause will work in practice.
As with no-resale clauses, the right of first refusal clause will, in order to limit the risk of being deemed to be unfair, need to be drafted in a measured way with regard to the duration of the restriction, and the calculation of the buy-back price. It will also need to be prominent and clearly accepted by the buyer.
Finally, where the clause is used in the context of a dealer or gallery representing the artist it is worth stating clearly whether the clause is intended for the benefit of the dealer/gallery or for the artist. This may be important in the context of justifying the fairness of its purpose but also in determining which party is the beneficiary of the right of first refusal if the artist moves to another gallery. Galleries might consider getting their artists to give express consent to the gallery being the beneficiary of a right of first refusal clause to avoid having to transfer this right to the artist’s new gallery upon “divorce”. However, even where the artist’s consent has been obtained, such a provision could be at risk of being deemed unenforceable.
II. Resale Commission
As another option, the gallery or artist selling the artwork may include a clause in the sale document which permits resales by the buyer, but requires payment to the artist or gallery of a commission fee. which may be fixed or calculated as a percentage of the resale price for any resales which occur within a certain time frame.
Such a clause is more likely to be found to be fair because it does not prevent the buyer from reselling and merely imposes a cost upon the buyer should he or she choose to do so. And if the fee is linked to the resale price, the fee will be proportionate to the benefit earned by the owner upon resale – and so more likely to be seen as fair.
It is wise – as with the non-resale clause and the right of first refusal clause – to ensure that there is consideration for the inclusion of the clause such as a discount. For example, an artist or gallery could offer the buyer the work at a substantial percentage discount but, in return, the buyer has to pay the gallery and/or artist an equivalent percentage amount of the resale price if the buyer decides to resell the work within a defined number of years. This fee would be payable in addition to any applicable Artist Resale Rights.
There is currently no case law in England & Wales testing such a clause in the context of art transactions. The issue here is also one of enforcement. How would a gallery and/or artist ensure that they receive this fee? Monitoring every single sale may prove difficult, especially where the value is not significant.
III. Consultation Obligation
Another approach is to impose on the Buyer a contractual obligation to consult with the artist or the gallery in the event of a resale. This may appear to be a weak option in comparison to an outright resale ban or a right of first refusal, but it has the advantage of being more likely to be seen as fair – and arguably also more likely to be complied with. Crucially it will give the gallery or artist advance notice of a resale and allows them to have some constructive input into the presentation and manner of the resale – which may be important if the resale is a public sale.
Buyers: What should you do if you are buying an artwork and the dealer sends you an invoice with a resale restriction on the back? Should you just ignore it? Or should you challenge it? And if so, how?
The first advice for any buyer is to read the small print and ensure that there are no restrictions which apply to the ownership and use of the artwork.
If you find that the terms contain a no-resale clause, and do not want to agree to the restriction, you should not ignore it. If you do ignore it and proceed with the transaction anyway, you could be deemed to have accepted the clause. (Although even if deemed accepted, this may not necessarily deprive you of the opportunity to argue later that the clause is unfair and unenforceable.)
The better approach, however, is to ask the dealer, before completing the sale, to amend or remove this clause, explaining, preferably in writing, that you consider it to be “unfair” and unenforceable.
If the dealer agrees to your request to remove the clause, then no post-sale resale restriction will apply. If, on the other hand, the dealer is not willing to amend or take out this clause, you have the option of either walking away from the transaction, or proceeding with the transaction despite the clause. If you decide to proceed with the transaction, the fact that you told the dealer before proceeding with the transaction that you considered the clause to be unenforceable and unfair could assist in any future dispute over the enforceability of the clause. It is worth keeping notes of these conversations or putting it in an email as a record in case of a future dispute.
Buyers: What should you do if you intend to resell an artwork which is subject to a resale restriction?
The best advice is to abide, if possible, by any restrictions in the purchase agreement. This will avoid conflict and preserve your relationship with the gallery and the artist.
If, on the other hand, you are contemplating a sale in breach of post-sale restrictions, you should take legal advice on whether or not the clause is enforceable. While the guidance above should give you some idea of the factors which will apply in determining enforceability, it is important to note that each clause is different and should be reviewed by a lawyer with expertise in this area. The following may however be useful considerations in deciding, with the benefit of legal advice, what approach to take.
The reason there is no case law on the enforceability of these clauses is that galleries and artists have not to date taken legal action to try to enforce them. This may be because they too are concerned that the clauses are unlikely to be enforceable, or they may wish to avoid the costs, time and stress of litigation, where the outcome is uncertain.
The fact that an artwork is sold in breach of a non-resale clause is unlikely in most cases to affect the validity of the sale. Ownership will pass to the new buyer but a claim for damages may be made against you for breach of contract. In most cases, it is difficult to see what financial damage would be suffered by the seller through such a breach – particularly if the artwork sells for more than it was bought for, as explained in more detail in this article.
The cost of litigation in most countries is often a powerful disincentive to galleries and artists considering enforcement, where the outcome is uncertain. The likelihood of action being taken to enforce a non-resale clause rises and falls in line with the amount of money at stake.
Until the courts have weighed in on the enforceability of these clauses it is difficult to say with any certainty whether any of the guidance above will be effective - but as with all restriction clauses facing enforceability challenges the likelihood is that less is more. The more effort is made in the drafting to be fair and reasonable, the less likely the courts are to strike it out.