Non-Resale Clauses in Art Sales

Empty Threat or Enforceable Right?

A growing phenomenon over the past decade is the use by artists and dealers in the primary art market of restrictive covenants. Artworks are sold to buyers with a legal clause, sometimes buried in the terms printed on the back of the invoice, which restricts the ability of the buyer to re-sell the work by auction or sometimes imposes a complete ban on any form of resale for a fixed period. Some include an obligation on the buyer to re-offer the artwork back to the original seller before reselling it. While there are many variants, the covenant will typically say something along the following lines:

"For a period of 5 years from the date of the purchase the Buyer agrees not to offer the Artwork for sale at auction"

The justification for such clauses include policing the ethical duties and responsibilities of purchasers towards the artwork and the artist, the need for price transparency, a wish to maintain control over the market in the artist's work and the desire to ensure that the artworks are sold to buyers who appreciate rather than speculate.

Interestingly, and perhaps also tellingly, the enforceability of these clauses has not yet been tested by the UK Courts. Once they are tested we will know for sure whether or not they are enforceable - and in what circumstances. In the meantime, because this is a question which is increasingly raised in the art market, I thought it might be helpful to give my view: I do not believe that in the UK these clauses are generally likely to be enforceable. This is particularly the case where consumers are involved.

I am often asked whether I think such non-reselling covenants are generally enforceable under UK law. My answer is that in most cases I do not believe that they are.

The reason for my conclusion is that such clauses seem in almost all cases to be for the overwhelming and sole benefit of the seller of the artwork and, correspondingly, to the detriment of the buyer. Unless the buyer is getting a substantial concession in return for agreeing to such a restriction on his or her ownership rights it seems to me that such clauses are at risk of being viewed by the Courts in the UK as unfair. And this is particularly the case where the bargaining positions of the parties can be argued to be unequal.

What follows is a more detailed explanation of the reasons for that conclusion and some of the considerations if you are seeking to rely on such a clause or if you have bought an artwork which is subject to such a clause. 

Full disclosure - as an in-house lawyer for an auction house I do of course have a commercial perspective on such clauses. I have however tried to steer clear, in this article, of discussing the desirability or otherwise of the clauses - focussing instead on how they might be viewed by the law.

If the Buyer is a consumer

I have said that restrictive covenants are unlikely to be enforceable against consumer buyers in consumer contracts.  This is because in the UK the Consumer Rights Act 2015 provides for the protection of consumers from unfair terms in ‘consumer contracts’.  

In the UK the Consumer Rights Act 2015 provides for the protection of consumers from unfair terms in ‘consumer contracts’.  

Is it a Consumer Contract?

The starting point is to establish whether the contract is a consumer contract, and therefore benefits from the protection of the Consumer Rights Act 2015 against unfair terms. A consumer contract is defined in the 2015 Act as a contract between a trader and a consumer. 

A ‘Trader' for the purposes of the 2015 Act means a person acting for purposes relating to that person's trade, business, craft or profession, whether acting personally or through another person acting in the trader's name or on the trader's behalf; 

A 'Consumer' means an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession. 

A sale of a work of art between an art gallery, dealer or an artist on the one hand and an amateur art collector on the other will therefore be a consumer contract. A sale between two amateur art collectors or between two art galleries, dealers or an artist and an art gallery or dealer will not be a consumer contract. 

It is also worth noting that even experienced collectors who trade art will be consumers provided that trading art is not their trade, business or profession.  

Is the Restriction unfair?

If the contract is a consumer contract then the restriction must satisfy the test of ‘fairness’ under the 2015 Act to be enforceable. A term will be deemed to be unfair under the Act if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer.

A term will be deemed to be unfair under the Act if..... it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer.

There will be significant imbalance if a term is so weighted in favour of the trader as to tilt the parties' rights and obligations under the contract significantly in the trader’s favour by imposing (i) an onerous burden, risk or duty on the consumer, (ii) which is to the detriment of the consumer and (iii) which is to the advantage of the trader.

When an artwork or indeed any asset is purchased, whether in the primary or secondary market, the buyer usually expects that, having paid the purchase price, he or she will be free to do with the asset what he or she wants. Indeed, the ability of the buyer to own his purchase free of all rights and claims is one of the key warranties expected by buyers in art purchases. In practice also, where art is concerned it is in the nature of collections that collectors expect to be free to buy, sell and exchange as value, taste and interests fluctuate. So, on the face of it a major restriction on that ability to sell or otherwise dispose of the artwork is likely to be a duty which is out of the ordinary and both onerous and potentially detrimental to the consumer. It is no small matter.

The greater the length and extent of the restriction the greater the detriment. But is it to the advantage of the trader? The fact that the trader has inserted it in the agreement means that it almost certainly will be. Unless the trader has made a very significant and genuine concession (significantly beyond the usual price discounts) to the consumer in return for the consumer’s agreement to the restriction it is likely that the advantage to the trader is simply at the expense of the consumer.

It is also easy to imagine that a Court looking at such a clause will consider whether, objectively, the trader's justification for imposing the clause is reasonable, when balanced against the restriction of the consumer's rights.

The difficulties in enforcement increase further if there is room for the purchaser to argue that he or she was unwary or an inexperienced consumer and was taken advantage of. This will depend on the particular circumstances but relevant considerations will include the level of experience of the consumer, whether the consumer is able to purchase a similar artwork from another source, where the clause is prominent or buried in the small print, whether prior to the sale it was highlighted, drawn to the attention of and discussed with the consumer, whether the clause was added as a last minute afterthought - or even after completion of the transaction and whether the restriction has been acknowledged in writing by the consumer.

With all this in mind it seems to me that where consumers are concerned there is a risk and in many cases a likelihood of the Courts concluding that the clause is unfair.

If the Buyer is a Trader

Contracts between traders or contracts between a consumer seller and a trade buyer which include a non-resale clause will not benefit from the protection of the Consumer Rights Act 2015. So, does this mean that in these non-consumer contracts such restrictive covenants will be enforceable? Only up to a point.

It should be said at the outset that the courts are generally reluctant to interfere in contractual relationships between businesses. However there is also caselaw establishing that the UK Courts will not generally enforce clauses which amount to an unfair restraint of trade. 

The UK Courts will not generally enforce clauses which amount to an unfair restraint of trade.

Most cases over the enforceability of restrictive covenants arise in the context of employment relationships, where an employer seeks to prevent a departing employee from  competing with his or her ex-employer. In such cases the person relying on the restrictive covenant will be required to satisfy the Court (i) that they have legitimate business interests requiring protection and (ii) that the restriction is no wider than is reasonably necessary for the protection of those interests. The Courts have acknowledged that the same underlying principles apply in business to business relationships. 

"The mere fact that parties of equal bargaining power have reached agreement does not preclude the court from holding the agreement bad where the restraints are clearly unreasonable...." Kores Manufacturing Co. Ltd v Kolok Manufacturing Co. Ltd [1959]

What are legitimate business interests?

Whether or not the Seller is able to convince the Court that the clause protects legitimate business interests will depend upon the particular circumstances in each case. Most examples of legitimate business interests are based in a need to prevent unfair competition. This includes the protection of trade secrets, prevention of poaching of customers or staff, or unfair competition by ex-staff.   It is therefore important to look at the motivation for the restriction in each case. 

Restrictions which seek to prevent the resale of the work tend in many cases to be motivated by a desire on the part of the seller to have control over an artist’s ‘brand’ through quality and supply control and pricing. This is a worry for artists and dealers who fear that a re-sale market or an auction market is outside of their control. There is also a concern that a work bought from a dealer may, possibly to the embarrassment of the dealer, be ‘flipped’ by a buyer who is able to resell the artwork at a much higher price.  Conversely, artists may be unhappy that their works begin to change hands at price points which are unaffordable to their traditional client base.  Or the artist may disapprove of their work being treated as a commodity. These may well be genuine and understandable concerns, but from a legal perspective are they business interests which the Courts will agree it is legitimate to protect by imposing legal restrictions? 

We have seen earlier that such restrictive covenants are considered by the Courts to be legitimate where used to prevent unfair competition. However they may not be seen as legitimate where they seek to prevent any competition at all. Essentially, the person relying on the restriction must show that there is some aspect of their business that they own and and they are therefore entitled to protect from unfair use by a competitor. An example might for instance be a trade secret or a list of clients. It would be unfair for a competitor to make use of something which is confidential and proprietary, such as a client list so it is legitimate to use a restrictive covenant to prevent such unfairness. With this in mind there is also a risk that non-resale clauses might fail to satisfy the legitimacy test as it could be argued that they are not designed to protect any proprietary interest – but rather to prevent competition, particularly around pricing. 

It is also worth bearing in mind that when considering the legitimacy of a business interest that the Courts may look at the negotiating positions of the parties. The Courts are more sympathetic to such restrictions where the person agreeing to the restriction is receiving a concession from the person requiring the restriction in return. So, for instance where the buyer of a business is prepared to pay a higher price for the business in return for the seller’s agreement not to complete with the buyer – the courts would be likely to see this as a legitimate bargain. The reverse analogy might be where the buyer agrees to pay a genuinely and substantially discounted price in return for agreeing to restriction on his right to resell.

The extent of the limitation 

Even if the Seller were to overcome the ‘legitimate business interests’ hurdle, the restriction would need to be drafted in a way which is no wider than is reasonably necessary for the protection of those interests. It would need to be limited in time and territory to a strict minimum. Clauses which seek to impose lengthy periods of restriction and/or which are not limited to a particular territory are more likely to fail the test. 

A Right against whom?

For those relying upon non-resale clauses it is important to remember that the restriction is a contractual right. So, even if it is enforceable, it can usually be enforced only against the buyer who was a party to the original sale. In other words, it is not generally enforceable against an auction house or a dealer handling the resale - or against the buyer in the resale. It is of course open to the person relying on the clause to sue the original buyer and apply to the Court for an injunction to prevent the breach of the clause by stopping the resale but such injunctions are as difficult to obtain as they are expensive to apply for.

"..it is not generally enforceable against an auction house or a dealer handling the resale - or against the buyer in the resale."

It is sometimes suggested that the auction house or dealer handling the resale could, in doing so, be liable to the original seller for inducing a breach of contract by the original buyer. Such claims, while superficially attractive to the original seller seeking to bring pressure to bear in order to stop a resale, are unlikely to have any legal merit for a host of reasons. The most important of these is that such a claim is dependant on the enforceability and validity of the restriction, which as we have seen is itself highly doubtful. Second, they require proof of actual knowledge by the reselling agent or auction house of the restriction - which is rarely the case. Third, there needs to be a deliberate intent on the part of the reselling agent or auction house to encourage the original buyer to breach the restriction. This is a major problem because if the reselling agent or auction house reasonably believes the the contractual term to be ineffective there can, by extension, be no such intent. Finally, as we will see below, the original seller is also likely to encounter problems demonstrating that he or she has suffered loss as a result of the breach. For all these reasons such claims of inducement to breach a contract do not usually stand up to close scrutiny.

"...claims of inducement to breach a contract do not usually stand up to close scrutiny."

What is the Damage?

The challenges for the person seeking to enforce the non-resale clause do not end there. As the usual remedy for a breach of contract is a right to damages the person relying upon the non-resale clause will need to demonstrate that he or she has in fact sustained a quantifiable financial loss as a result of the breach of the restriction. That may also be difficult.

If the work is resold for more than it was originally sold for, then that serves only to increase the value of the artist's work - which can only be to the financial benefit or the artist and anyone owning works by the artist. If on the other hand the work is resold for less than the original price or fails to sell, then that is likely to suggest only that the price paid by the original buyer to the seller was more than the actual market value of the artist's work. In a real estate analogy if Houseowner 'A' believes his house is worth ￡500,000 he cannot claim that the sale by his neighbour Houseowner B of Houseowner B's house for ￡400,000 - or a failure by Houseowner B to sell his house - has caused Houseowner A an actionable loss. The market has merely determined that the actual value of houses on the street is less than Houseowner A's expectations. That is not a loss, but an overvaluation.

Go in with your eyes open

Every case is different and, as I have said above, the Courts have not yet expressed a view on this question - so until that happens we cannot say for certain whether these clauses are enforceable, and if so under what conditions. However there are so many legal reasons why such clauses are problematic that my personal view is that if you are thinking of incorporating a non-resale clause into your contract you should be aware that there is a significant risk that the UK Court will not enforce it – particularly if the person agreeing to it is a consumer. You should therefore also not be surprised if, as a result, it is viewed with scepticism by lawyers. And if you have signed a non-resale clause and are worried about the consequences it might be worth taking some legal advice as it may well be that the clause’s bark is worse than its bite.