BUYING INVESTMENT ART: AUTHENTICITY, RISK AND A FOUR-PROOF FRAMEWORK.
| Author | Thomas, Rod |
"The King turned pale, and shut his note-book hastily. "Consider your verdict", he said to the jury, in a low and trembling voice.
"There's more evidence to come yet, please your Majesty", said the White Rabbit, jumping up in a great hurry: ..." (1)
INTRODUCTION
There is an impenetrable fug in determining who carries the risk of authenticity when investment art is sold. Fine art is a tangible asset and legally subject to the same general legal principles that apply to the sale of other tangible assets, such as cars, real estate, and so on. (2) By statute, these require the seller to describe the asset being sold and to be in a position to pass good title. Further, under consumer protection legislation, the artist, the dealer and the auctioneer will all be 'in trade' and members of the buying public will normally fit within the requisite statutory definition of being a 'consumer'. Under a combination of these provisions, the transactional risk in terms of selling investment art to consumers is placed firmly with the seller, and not the buyer, at least for sales made to consumers. However, this understanding appears not to be appreciated for transactions that currently occur on both the secondary market and at auction.
Four proof requirements are suggested in the discussion that follows. These are proof of identity, proof of authenticity, proof of ownership and proof of authority to deal. They are first used as a tool to discuss historical and present problems arising with current proof requirements used to establish authenticity and the ability to pass good title. They are then promoted as a useful framework for future transactions, enabling the parties to better focus on key indicia to ensure authenticity and credible transactions that properly reflect where the risk lies.
FRAMEWORK FOR DISCUSSION
The analysis is presented in three parts. Part A discusses current problems in the operation of the primary and secondary art market related to authenticity and the transfer of legal title for investment art. Existing proofs to establish authenticity are shown to be inadequate as they transfer risk to consumers. Whilst it is acknowledged that this may reflect the law where the buyer is a connoisseur or a party educated in the working of the art world, it fails to appreciate legal obligations when the sale is to a member of the public. Part B discusses the applicable legal principles regarding authenticity and title that show the risk is placed on the seller and not the buyer, particularly when a sale is made to a person who is not an art market professional. This leads to Part C which introduces four suggested proof requirements. (3) First, these proofs provide a framework to discuss the problems that have been identified and how current market practices on these issues are not in alignment with legal requirements. Those same proof requirements are then suggested as a means of guaranteeing a better standard of future commercial transactions. This analysis extends to a brief discussion concerning the sale of non-fungible tokens (NFTs) as investment artwork, although that analysis is not a key feature of this article.
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CURRENT PROBLEMS WITH INVESTMENT ART TRANSACTIONS
Transactions with investment art are invariably explained as a manifestation of the caveat emptor principle, (4) where risk of the transaction is placed on the buyer. This perception refers back to bygone days where most buyers were predominantly either connoisseurs or buyers experienced in the fine art market. Such buyers relied upon their own experience or knowledge in buying, rather than the description of artworks provided by either the seller or the auctioneer. (5) This approach is argued to not reflect the current legal regime where the sale is made to members of the public inexperienced in the art world, who have a legitimate expectation that sellers' descriptions of artwork will confirm the identity of the artist, the authenticity of the artwork, and even the reasonableness of the sale price.
The disparity of these two approaches is argued to be particularly striking in New Zealand, which displays a combination of a relatively new market, together with sales of works by recently active artists. Together, these encourage a public expectation that works sold on either the primary or the secondary market will be original and offered for sale at some semblance of market value. (6) No doubt, this expectation of fair dealing has been encouraged over the last 40 years or so by the enactment of consumer protection measures. These measures require those 'in trade' to comply with minimum standards of disclosure and fair play when transacting with members of the public. This may be contrasted with European and North American markets where investment art may easily be some hundreds of years old and buyers are more likely to be more experienced in the operation of the marketplace.
What then, are the problems or shortcomings evident from the current operation of the fine art market? For the purpose of the following discussion, these perceived shortcomings of current practice are separated into two discrete areas. First, the issue of establishing authenticity for sales of investment art on the secondary market. Secondly, the rather opaque operation of the market leading to confusion on key issues, including the question of where commercial risk lies.
The Issue of Authenticity for Sales on the Secondary Market
For sale of art on the secondary market, attribution of authorship is almost invariably a matter of opinion. This is because visual artworks are painted or sculpted as expressions of originality, with the result varying in terms of success, style, materials, and originality. (7) Thus, the issue of authenticity becomes a hearsay issue. Consequently, when connoisseurs, or those experienced in the operation of the art market buy, the law holds that, given their expertise, it is not reasonable that they should be able to place reliance on the seller's given description of authenticity. However, this perception has become the accepted normality in terms of the general operation of the marketplace. Accordingly, even if the seller provides an undertaking as to authenticity, so long as the seller had a good reason for giving this opinion, a court may find that there is no breach.
The problems this causes are illustrated by two authorities, the first originating from the late eighteenth century with the second in the first part of the nineteenth century. These are Jendwine v. Slade (8) and Power v. Barham. (9) Both have since slid into obscurity in so far as English case law is concerned but continue to be cited as authority in both US and Canadian courts. (10) The reasoning in each provides contrasting arguments on how the legal consequences could flow from a seller making an incorrect attribution of authenticity.
In Jendwine, two works were sold by the defendant to the plaintiff, one described as a work by 'Claud (sp) Loraine', and the other by 'Teniers'. The artists had been dead for centuries so "eminent artists and picture dealers" were called to give evidence on the issue of originality, resulting in differing opinions. This enabled the defendant to argue that the seller's statement of authenticity could not amount to "an absolute warranty", and required the buyer to "exercise his own judgment". (11) Lord Kenyon C.J. agreed. He is reported to have stated: (12)
[i]t was impossible to make this a case of warranty; the pictures were the work of artists some centuries back, and there being no way of tracing the picture itself, it could only be a matter of opinion whether the picture in question was that the artist whose name it bore, or not. Lord Kenyon then turned to the pleading that the sale was a fraud. On this, he is reported to have opined:
[i]f the seller only represents what he himself believes, he can [also] be guilty of no fraud. (13) A similar view has been more recently reiterated by Nourse L.J. in Harlingdon & Leinster v. Christopher Hull Fine Art Ltd. (14)
We can contrast this result with Power v. Barham, decided some 3 8 years after Jendwine. Here, the plaintiff instructed the defendant to source and buy for him four Canalettos. Having completed his work, the defendant invoiced the plaintiff, describing the works on his invoice as 'Canalettos'. Subsequently, their authenticity was questioned, causing the plaintiff to seek a refund. Relying on Jendwine, the defendant argued that authenticity was only capable of being an expression of opinion and, given there was no fraud, there was no liability. Coleridge J. summed up to the jury on this issue as follows: (15)
... there is no rule of law by which a representation contained in [an invoice] acquires a different force from any other representation attending a sale [...] Lord Kenyon ... did not mean to lay down any rule of law ... The representation of the catalogue in that case could not be considered necessarily decisive of the question, nor can the [invoice] in this [...] The question is one of fact, and the jury are to say whether, on the whole, the words of the bill of parcels meant a warranty, or a mere expression of opinion. The jury found for the plaintiff. This caused the defendant to apply for a new trial, arguing that on the authority of Jendwine, the issue of authenticity should not have been put to the jury. However, the appellate court upheld the lower court. Williams J. justified the result in the following terms:
[i]f a person will undertake to sell these things as the productions of a particular master, he must take the consequences. (16) The third member of the Court was Littledale J., who commented: (17)
The case was rightly sent to the jury; though, as to their decision, I think that all the auctioneers in London would be alarmed if they thought that such words as these were to be understood as a warranty. The Court held that Jendwine was distinguishable as the...
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