Although disputes can arise in any kind of deal making, the legal risk in art purchases lies disproportionately with the buyer. This is because sellers are often reluctant to have detailed documentation and intermediaries such as auction houses have varying standards of self-regulation. Buyers should, therefore, understand their rights and risks involved, if only to avoid a subsequent case of buyer’s remorse.
Thukral & Tagra - art project by Fica Photo: Andy Barnham
A buyer of high value art
primarily seeks to ensure that: a) the piece is authentic b) the seller has good title and legal capacity to sell; and c) the price is fair.
Although good documentation doesn’t guarantee authenticity, it offers protection if the work is subsequently found to be forged. The buyer should obtain detailed representations from the seller regarding authenticity, and the right to rescind the sale if the seller’s undertakings prove false, both during the purchase process and for as long as possible after. Most galleries and auction houses offer a post purchase window where buyers can challenge authenticity – however, standards vary widely and claim periods can range from six months to five years. It is therefore important for buyers to read the fine print and make timely demands.
Buyers should also keep in mind that sellers themselves may not be able to guarantee authenticity. This is more likely with individual sellers but not unheard of with institutions. One way to manage risk is to work with the seller to document provenance (to the extent possible), through a collation of receipts, authenticity certificates, historical documentation etcetera Buyers may also require intermediaries to provide a catalogue vetted by suitable art experts and historians. Exercising diligence and having the paperwork in place may make it easier for buyers to subsequently transfer the piece.
The second requirement (that is, title and capacity of seller) is easier to ensure through adequate documentation. Sellers should provide representations that they have good title and capacity to sell, failing which the seller may be asked to make good the buyer’s loss. Statements of clear title and capacity are particularly important for inherited art, as there may be multiple heirs. Inherited pieces are also likely to be older, and therefore regulated by the Antiquities and Art Treasures Act, 1972. Buyers should check on applicable intimation and registration requirements to ensure the cooperation of the seller and a smooth transfer.
The third requirement, fair pricing, is a tougher problem to solve, as art valuations are widely perceived to be subjective. Both parties may therefore perceive themselves to have gotten a raw deal. A recent international example relates to Leonardo da Vinci’s Salvator Mundi, which was sold by Christie’s New York
for $450 million. This conferred upon it the distinction of being the most expensive art work ever sold. However, the pre-sale estimate for the painting
was a mere one-fourth of the final price. In fact, its seller, the Russian billionaire Dmitry Rybolovlev, had undervalued it so much that he was then engaged in a legal battle with his dealer, who he believed had overcharged him and swindled a significant mark up.
Unlike with authenticity, intermediaries such as auction houses rarely make undertakings regarding pricing. While Sotheby’s and Christie’s have recently returned to guaranteeing art prices, this is still uncommon amongst Indian sellers. One way to plan is for the buyer to conduct an independent valuation before buying a high value piece.
Internationally, buyers also ask for other protections such as the right to inspect the work prior to sale, the right to return or exchange the work either for cash or for other works, payment in instalments with title or possession being transferred upon part payment, a guarantee of condition of the work (particularly important for older artworks or purchase from unacquainted dealers) and lastly, the choice of forum in the event of any dispute between the parties (that is, jurisdiction of the buyer).
Contrary to the above, sellers may push to sell the work with as few undertakings as to authenticity, title, capacity as possible, and no rights of redress to the buyer. In nascent markets which are still grappling with the idea of art as an “investible” asset, sellers sometimes adopt a caveat emptor philosophy and argue that the onus of diligence lies on the buyer. Having said this, institutional sellers who are concerned about their brand and reputation in the long term are increasingly benchmarking to international best practices, particularly when it comes to undertakings regarding authenticity.
Individual sellers should be mindful about the tax consequences of selling art. Basic housekeeping like maintaining adequate records of the dates of purchase and sale of artwork, may help to compute future capital gains liability. Since 2008, the sale of art by individual collectors results in capital gains tax, and pieces held for more than three years are eligible to a lower rate. Sellers can also deduct improvement costs such as money spent on restorations, transport etcetera to compute capital gains. If the artwork was a gift or inheritance, the cost of acquisition carries over from the previous owner. For extremely old works where cost is indeterminable, a historical valuation is required based on which the acquisition cost is determined.
Artist led tour with Jitish Kallat at National Gallery of Modern Art, February 2, 2017
Finding common ground amidst these rival concerns of buyers and sellers is tricky, but important. Some of these issues are yet to see full-fledged legal battles due to the nascent state of the Indian art market. Art is still the prerogative of a small group of avid collectors, and a significant percentage of transactions pertain to artists who are still alive, and who are therefore available to confirm authenticity. As the art market matures, disputes are more likely to arise, and a little prudence will go a long way in ensuring a happy outcome for both parties.
The authors are with Rao Law Chambers, a private client law boutique