Though not new, the use of non-resale restrictions in gallery sale contracts has been particularly embraced in the past two to five years by a generation of artists whose work has been the subject of intense speculation—and flipping. The London-based art adviser Sibylle Rochat says “nearly every transaction” she is involved in is now subject to a resale restriction. And yet, in every contemporary auction there are barely dry paintings, made since 2020, whose sale must surely flout such a clause.
What are resale restrictions?
The most basic restrictions state that a work cannot be resold for a certain period (typically three to five years) and/or that the gallery must be given first refusal. Some add that the artist must retain a certain percentage of equity. Sometimes it is even dictated that restrictions be written into the contracts of subsequent buyers. “An interesting question is: how far can you take a resale clause?” says the US-based lawyer Virginia Rutledge, who has drafted many sale contracts. “Can you require that the first buyer pass on all your contractual terms to subsequent purchasers? We have written those terms, and so far have not seen them challenged.”
Rutledge likens resale restrictions in contracts to pre-nuptial agreements
Galleries approached by The Art Newspaper were reluctant to talk about the resale restrictions they employ, a reticence perhaps due to the fact that terms vary from artist to artist, demands that are first set out in their representation contract. Evidently, the more successful the artist, the more prescriptive they can be.
When consigning to auction, sellers should divulge any resale restrictions when asked if the work is subject to any claims. Frequently, however, the auction house only becomes aware of restrictions when contacted by the artist or their gallery. As Jean-Paul Engelen, the Americas president at Phillips auction house, said in a webinar on the subject in 2020: “You generally find out the truth halfway: after it is consigned, just before the auction”. An auction house has the right to remove property from a sale in such instances, or sometimes an agreement is reached whereby the artist (and possibly the gallery) receives a profit share.
Why are they used?
Resale restrictions “are a sensible idea when it protects the career of an artist and their career longevity”, Rochat says. But she adds: “If the clauses are unreasonable, yes, there will be some negotiations. For example, I have received contracts from artists themselves stipulating works cannot be resold [ever], only donated to a charitable organisation, which feels unreasonable for a buyer.” Clients do, she says, “sometimes refuse such restrictions when it’s a secondary market transaction or when the agreement sounds like it has to be signed in blood!”
Rutledge likens resale restrictions and other stipulations in sale contracts (for example, conditions for how a work should be kept or assembled) to pre-nuptial agreements. Discussions of these terms are useful, she says, for establishing each party’s expectations, even if the purchaser ultimately backs out because of the commitment involved—something she has seen happen only rarely.
Handle with care: although there is very little precedent in case law, any “reasonable” resale term is likely to be enforceable © Lefty Kasdaglis
Rutledge also points out that for some conceptual works of art, where there is no permanent physical object, the contract of sale establishes the conditions for the work of art to be realised. She says many stipulations around resale and other contract restrictions may “come out of the conceptual framework because those artists and collectors are interested in thinking about the conditions of the future life of a work”.
Can they be enforced?
In Rochat’s view, non-resale clauses “mainly have a dissuasive effect… the enforceability of these clauses has not yet been tested by the UK courts.”
Few gallerists would start litigation again their clients, preferring ‘softer enforcement mechanisms’
This point of enforceability has been much debated by lawyers. In the June issue of The Art Newspaper, Jon Sharples, an intellectual property and art lawyer at Howard Kennedy in London, quoted the resale agreement for a work he bought from Sadie Coles HQ. It stated that, for a period of five years, “we ask you to agree, as a courtesy to our artists, not to put this work into auction, and not to sell the work to anyone without first offering Sadie Coles HQ the right to first refusal on the same terms and conditions as any bona fide offer you present to us.”
Sharples writes that articles by several “heavyweight lawyers have contributed to a hardening conventional wisdom that these clauses—in legal terms—are probably not worth the paper they are written on”. One of those lawyers is Martin Wilson, the chief general counsel at Phillips, who argued that for consumers (that is, collectors) these clauses are likely to fail the “fairness” test in English consumer law. As for trade buyers, Wilson thinks an English court would find them to be an unfair restraint of trade. And, anyway, what financial “damage” can the gallery or artist really say they have suffered if they are breached, given that the effect is often to establish a higher market price for that artist’s work?
But Sharples points out that Adam Jomeen, the founding partner of Art Law Studio, posits that “until a court decision tells us otherwise, resale restrictions seem perfectly capable of being enforceable under English law when drafted correctly.”
Sharples himself thinks many non-resale clauses, buried in the small print and presented when the deal is already done, “do seem to be unfair and unenforceable”. However, in Sharples’s view, there is a spectrum of enforceability and the “fairer” a gallery can make their terms—and the way they are agreed—“the more likely they are to be upheld by a court”.
Ultimately, few gallerists would ever actually start litigation against their clients, preferring, as Sharples says, to lean on the “softer enforcement mechanism of a gallery’s blacklist and losing access forever in the small and gossipy art world”.
Different principles apply in New York, where case law (rather than consumer law) provides the best guidance. That said, as Megan E. Noh, the co-chair of the art law group at Pryor Cashman in New York, says: “There is very little relevant precedent in US case law—a handful of published decisions on right of first refusal, but almost nothing on the various types of other resale restrictions.”
There is certainly no case law on those sprawling “don’t sell it, ever” restrictions. As in English law, a resale clause has to be clear and specific. It must also be “reasonable”. Noh says: “Under US law, a contract has to reflect consideration—something of value being provided by both parties. If a collector is acquiring a work directly from the artist’s studio without having to work through an intermediary, or is buying from the artist’s gallery but is jumping the waitlist or otherwise getting priority access to a limited supply of works, any of those things are likely to represent sufficient consideration to the collector. And it’s clear what value the artist is seeking in exchange—market protection.”
In Rutledge’s view: “I don’t think there should be any problem drafting an enforceable resale term. Basically, any contract is enforceable providing the primary conditions are met—something of value has to be exchanged.”
How one buyer paid the price
One of the few public cases of contravention of a resale agreement is that of a Cecily Brown painting Faeriefeller, which was bought at Art Basel in Miami Beach in 2019 by the Chinese collector Michael Xufu Huang from Paula Cooper Gallery for $700,000. Huang, the founder of Beijing’s X Museum, sold it on almost immediately to another collector, Federico Castro Debernardi, for $770,000.
The resale agreement (which appeared in court documents when Huang later sued Debernardi for $1.3m in “reputational damages”) stated that Huang should not sell the work for at least three years without first offering it back to Paula Cooper Gallery. If he did, he would be liable to pay the gallery the difference between the original purchase price and the “[auction] selling price of similar artworks”—calculated to be between $500,000 and $1m.
Paula Cooper might never have known that Huang had contravened the agreement had Debernardi not sold the painting to another gallery, Levy Gorvy, in 2020. Judging by court documents, the gallery (which was not involved in the lawsuit) went in hard, warning Huang he could expect to be publicly shamed. How likely it is that a court would have upheld Paula Cooper’s claim is not known. But Huang did settle for a considerable amount, which he told Bloomberg was way over his $70,000 commission. “It was my fault for letting this happen, so I paid it and took responsibility,” he said.