Application of Financial Disclosure Laws to Art Purchases in Belgium: Beyond 'Caveat Emptor'.

AuthorLenaerts, Oliver

The regard for art as a luxury acquisition with the sole purpose of enjoying it in your private home, has undergone some dramatic changes over the past fifteen years. Art is being regarded as an accessible investment. The ability to enjoy art is increasingly tangled up with the possibility of reselling it and making a profit. That rise has caused many art dealers, investors, auction houses and economists to regard art not as a luxury acquisition but rather to regard it as a financial asset. (1) And so it can happen that etchings of Picasso are being traded over the counter like coffee futures for millions of euros. The vision of art as an asset has led to an enormous boost on the art market and an increasing financialisation. The manner in which certain artists are being promoted by the press and other media and how their prices are being monitored in indexes and databanks indicates the existence of a market. (2) As a result, the chance that an art dealer turns into an investment consultant who defends the interests of the buyer, increases. The attitude, often unarticulated but persistent, that art is being bought in a context of appreciation for its intrinsic and aesthetic merit, may perpetuate reluctance to regulate the art market. Wrongly. If purchasing art is no longer caused by a spontaneous injection of aesthetics but becomes a calculated risk, then regulation becomes inevitable.

Art transactions, certainly in the higher segment of the market, appear to be, in essence, investment contracts. In this article we shall, first and foremost, describe the predominant types of art transactions. Subsequently, we shall describe the most important preoccupations of an art investor and the existing protection rules. Thirdly, we shall analyse the criteria the Belgian legislator has put forward to determine whether an artwork qualifies as a financial asset and the consequences thereof on the art market.


    1. Auction Houses

      Public auction houses account for a substantial proportion of art transactions. They are the counterpart of trading platforms where stock is being traded, it being understood that art is less liquid: so, to resell you must wait for a suitable auction. (3) As the agent of the owner, the auctioneer solicits offers and determines the final bid. The most obvious characteristic of this sale platform is the unpredictability of the knock-down price. Because the final sales price results from the open bidding, it is accepted as the fair market value. (4) Knowledge of the reserve price would be helpful to the buyer in setting the value of an artwork. If this price is not met during the bidding, the piece will be withdrawn by the auctioneer.

    2. Art Galleries

      Purchases may be made privately through a gallery or an art dealer. A gallery manages a significantly lesser volume of works than an auction house. A transaction through a gallery is ordinarily in the nature of a purchase at a non-negotiable price. This is especially true for commercial galleries where the taste of the consumer determines whether a purchase shall take place. Rarely, such a dealer will disclose information on past sale prices in order to enable the buyer to determine whether the price is fair. The purchase is determined by the aesthetic reaction the buyer has with the artwork.

      A promotion gallery, however, represents artists who are selected on the basis of artistic expertise and market knowledge. In many cases, a promotion gallery represents the artist exclusively and exercises control on the marketing and distribution of the works of that artist. Hence, in the world of contemporary art trading, it is difficult to use the name of promotion galleries without entertaining thoughts of a financial investment environment. An emphatic process for some dealers (thinking from the perspective of the artist), is a technical process for the others (thinking from the perspective of the market). (5)

      Private art dealers operate on the secondary market and offer artworks with provenance. They invest only, at a given point in time, in the value of artworks and are less concerned by the value of an artist's entire oeuvre on the long term.

    3. Art Advisors

      As investing in art gradually grows in popularity over the years, opportunities arise on the art market to address the concerns of investors. Logically, the importance of such advice increases in relation to the growth of the sums invested. In order to consider a transaction as an investment, the advice component must be part of the sales process. The bets on that are greater if advisors assist investors in getting the deal through.

      The advisory function of an art dealer cannot be qualified unambiguously Certainly, one might expect that an art dealer makes certain (price) statements incidental to art purchases. Doing so, however, does not necessarily mean that he acts as an art advisor. A buyer may solicit certain advisory information regarding the investment value of particular artworks, but, if a buyer relies upon such representations and it can be ascertained that the art dealer's representation induced the purchase, there is a potential conflict of interest. (6)

    4. Art Funds

      Since the beginning of the 21st century, there has been a tendency towards financialisation of the art market. In the wake of that tendency, art funds were rising fast. The art funds industry peaked in 2012 and since then has then slowed down. That decline is due to the fact that art funds have certain handicaps. The most important one is sustainability. It is difficult to create an industry around it because there simply isn't the depth in the market. Investible art relates to a very small segment of the market and you can't pour millions into it. Put another way, no significant profits can be made of it. Another burgeoning area is the art lending industry which emerged out of the fund business. Art lending allows the lender to leverage against art and taps into a new business model.


    1. Authenticity

      An art buyer must be convinced that the intrinsic quality of an artwork is actually what it claims to be. That quality will be determined based on its attribution. In case of discrepancy between the description of an artwork and the actual state of affairs, the buyer can annul the sale on the basis of error. A person is in error when he considers genuine that which, in fact, is false or considers to be false that which, in fact, is genuine. It all boils down to the question as to whether the buyer would have bought the artwork if he knew the actual state of affairs at the time of closing the deal. Certainty on the authenticity of an artwork can be obtained through contractual warranties based on expert reports and catalogues raisonnes. (7) Aside from error, a collector can in some very limited circumstances also rely on fraud to annul a purchase where the inauthenticity of an artwork is proven and the seller was aware of that fact. The claim based on fraud is not subject to the same restraints as the claim based on error. However, certain legal commentators provide an explanation as to why the legal concept of error is preferred over fraud. The principal reason is the proof of evidence: fraud requires evidence of fraudulent behaviour. (8) If the ratio between the cost for proving the authentic nature of an artwork and the price of the artwork is not proportionate, the investor can take the chance. After all, purchasing art is often an impulsive act.

    2. Market Value and Appreciation Potential

      Not everyone has the financial leverage to conduct an extensive due diligence prior to an art purchase or to claim damages. A major part of the profitable art trade consists of moderately priced artworks purchased by buyers who do not have enough capital. For those buyers, the question arises to what extent they can rely on a legal rule that allows them to gain insight in the market value of an artwork.

      The value of an artwork is variable according to the market on which it is traded and the importance of the value from the perspective of the buyer is not always clearly understood by the art dealer. Error as to the value of an artwork is not actionable. However, there is another legal basis to claim one has overpaid even if the artwork does correspond to the description given by the art dealer. (9) The application criteria are, however, not for the benefit of the mistaken buyer. The buyer can negotiate the conformity of the sale price with the market through explicit warranties or, in certain circumstances, hold the art dealer liable for gross negligence or for a failure to comply with its duty to inform as a professional seller. (10) Obviously, the investor who acts as a reseller can claim on the same basis. What is at stake in those scenarios is the accuracy of the price set by art dealers or auction houses in the context of a negotiated mandate to sell. (11)

      The Belgian Code of Economic Law also contains certain consumer information duties for companies which must be complied with prior to a sale. An art dealer, in the current state of affairs, qualifies as a company for purposes of the Code of Economic Law. These information duties are laid down in article VI.2 of the Code. This provision stipulates that the information must be provided in a clear and understandable manner. This seems to imply that the art dealer must take a proactive stance--in contrast to the contemporary practices on the art market where sharing of information to anyone other than a privileged group of art collectors is rather limited. It presupposes that the art dealer shares the information without the need of the consumer to ask for it. Article VL2 sums up the subject-matter of the duty to inform (price, identity, characteristics, size and date, etc.). The confirmation of each of these details entails an explicit warranty. Finally, disgruntled buyers can also rely on antitrust...

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