24 April 2020

Art in the time of Coronavirus: Disputes in the Art World

With one third of the global population living under lockdown, we are witnessing the dawn of a new, and hopefully temporary, normal. We are all having to adapt to significant changes to our daily lives, social interaction and the operation of our businesses.

As the virus has spread, so has the closure of galleries and museums, the cancellation of art fairs and auctions and the shutting of borders, thwarting the movement of art works and the completion of international sales. Like most (if not all) other industries, the art world is feeling the effects of the pandemic.

There are specific legal issues arising from the UK government measures designed to combat the pandemic that affect clients operating in the art world. These include matters relating to tax, employment, financing, tenancy obligations and charities, which are discussed in our articles on these topics.

In the same way, there will be (and already are) disputes that arise as a direct result of the pandemic (for example, because parties are defaulting on their contractual obligations or due to copyright issues concerning virtual exhibitions and online viewing rooms). As litigators specialising in this area, we also need to consider how pre-existing or traditional art disputes may be managed and resolved in these unusual circumstances.

Disputes arising directly as a result of the pandemic

Defaulting on contractual obligations

The cancellation of auctions, exhibitions and fairs, together with the interruption to cross-border travel and shipping, has made it very difficult, and in some circumstances impossible, for clients (and / or their contracting counterparties) to comply with contractual obligations. This is a breeding ground for disputes since people and companies will want to look to defaulting parties to recover their losses.

We do not yet have any certainty as to when lockdown in the UK is likely to end, and indeed what the "end" of lockdown will look like (and this will differ from country to country). Accordingly, clients find themselves having to balance the risk of crystallising, but hopefully reducing, their losses by terminating contracts now (if the contract in question allows them to do so), or holding off in the hope that the restrictions will be lifted or the other party will be the one to default.

Further, in circumstances where only "key workers" are encouraged (or in some countries permitted) to go to work, we are seeing the security capabilities of storage facilities, museums and galleries being heavily (and worryingly) reduced. Notwithstanding the admirable displays of altruism that are arising in response to the crisis, unfortunately, public spiritedness does not appear to be all-encompassing. On the first day after the French "self-confinement" measures came into force, thieves took advantage of the halt in the restoration of Notre-Dame and took stones from the cathedral to sell on the black market. In Holland, a Van Gogh was stolen from a museum closed because of the virus.

Theft is first and foremost a matter for the police and the criminal courts. However, where for example art is stolen from warehouses where security has been reduced as a by-product of lockdown measures, victims may want to seek recourse from the party who had agreed to store their works safely. Whether this is feasible will depend on the provisions of the contracts in place.

Under English law, the absolute nature of contractual obligations that require ongoing performance means that parties are still required to carry out those obligations regardless of the effects of the pandemic and are liable to their contractual counterparty for any failure to do so. There are, however, two exceptions to this rule: force majeure clauses in contracts and the common law doctrine of frustration.

Force Majeure Clauses

These clauses provide that where events outside the control of the contracting parties prevent the performance of contractual obligation(s), the relevant party will not be liable for its failure to comply with relevant contractual obligation(s).

The wording of the particular clause will determine whether it is applicable to Covid-19; some provisions set out the events to be covered (e.g. war or natural disasters) and particularly where these are non-exhaustive, careful scrutiny of the drafting, taking into account the governing law and the relevant circumstances (including industry and trade practices), will be required. It is worth noting that some force majeure clauses expressly exclude government measures taken in response to an event, in which case parties will need to analyse whether performance of the contractual obligations was thwarted by the virus itself or the restrictions put in place to prevent its spread.

Usually, these clauses are only triggered where performance of an obligation has been rendered impossible (not merely difficult) and the burden of showing that the clause is applicable is on the party seeking to rely on it. Practically speaking, parties will also need to consider whether and what duties of mitigation and notification apply.

Frustration

In the absence of a force majeure clause, in some circumstances, parties may be able to rely on the common law doctrine of frustration.

Parties seeking to invoke frustration will need to demonstrate that a change in circumstances has made it physically or commercially impossible to perform the contract, or that performance of the contract would be radically different under the changed circumstances.

If frustration is successfully invoked, the defaulting party will be discharged from their contractual obligations. However, case law demonstrates that the circumstances in which this doctrine will apply are extremely limited.

Given the severity of the restrictions in place and the significant and in some cases devastating impact that these are having on businesses, it appears highly likely that the UK Courts will soon be examining the applicability of both force majeure clauses and common law frustration. The individual circumstances will come into sharp focus and the outcome of such cases will therefore turn on the specific facts. Further, in view of the potential volume of such claims, the Courts may also need to bear in mind relevant policy considerations.

The counterparties against whom a force majeure clause or common law frustration is successfully invoked will no doubt want to seek compensation from their insurers. However, it may be that typical business interruption policy wording does not cover losses arising from Covid-19 on the basis that loss of income does not stem directly from physical damage. However, this will obviously depend on the precise terms of the policy. Nevertheless, looking at the aftermath of 9/11, even where policy wording provides good arguments for non-payment, in reality, it may be a political necessity for insurers to pay such claims. Indeed, recent tweets from the US President, as well as comments from the Financial Conduct Authority in the UK, indicate that the insurance sector may be under significant pressure to pay out on business interruption policies.

Shift to the virtual realm

Thanks to technological advancements combined with a new generation of buyers who grew up in the internet age, the development of an online art market was already underway. Indeed, in March 2019 the Gagosian gallery sold a painting for a record-breaking $6 million through an online viewing gallery after just three hours of its display and without the purchaser having seen the painting in person.

That said, the headline grabbing nature of this sale exemplifies that the art market's shift to the virtual realm has thus far been limited. However, the current crisis appears to have accelerated development in this regard; as people are gradually adapting to the new normal, online sales appear to be gathering momentum. A recent online sale of 25 prints by Banksy totalled $1.38 million (i.e. approximately $70,000 over the high estimate) and Sotheby's online sale on 3 April (which was originally planned to be a live auction at their NYC headquarters) reached a total of $3 million, with several works out-performing their estimates.

This increase in online sales will likely shape, or at least impact, the types of art-related disputes that arise in a post Covid-19 world, not least because in the UK different statutory provisions govern the terms and conditions of such sales. Therefore, we are likely to see an increase in disputes arising under the different applicable provisions and it is important that both vendors and purchasers are aware of the discrepancies. From a UK perspective, several of the rules applicable to the international art market are subject to change following the end of the Brexit transition period.

Advantages of the move online

Without downplaying the potentially devastating effect of the pandemic on some aspects of the art market (for example, several museums and galleries may find themselves unable to reopen after government restrictions are lifted), there is no doubt that the shift online could offer opportunities. For example, as we see people become more comfortable transacting in the virtual realm and the relevant technology develops further as a result, it may be that the post Covid-19 world gives rise to a more fluid and efficient art market.

Separately, it is anticipated that shifting the art market further online could eventually have a positive impact on issues concerning questions of provenance, which account for a significant portion of art-related disputes. To date, establishing a work's provenance has required reliance on paper-based systems and the word of single authoritative bodies; transacting through online platforms (and specifically via blockchain) leaves permanent and accessible records of a work's provenance from initial authenticity to present ownership. As such, if the art market's transition to online sales and auctions continues to gain momentum, it may be that one of the legacies of this challenging period is a gradual change (and improvement) to how we record and establish provenance and therefore eventually to a reduction in disputes connected with authenticity.

Resolving disputes in the current climate

Enforcing liabilities and recovering losses

The restrictions put in place by the UK Government mean that the Courts are not operating normally. Alternative dispute resolution (including arbitration and mediation) has also been affected. Our commercial dispute resolution articles discussing these issues can be found here.

In relation to cases that have settled, it is worth noting that we are also likely to see an increase in defaults on contractual obligations under settlement agreements, with parties failing to comply with payment obligations as a result of cash flow difficulties resulting from the interruption or suspension of their business activities. Clients therefore need to consider how best to react, e.g. whether extensions can be agreed or security obtained.

Regulation

This global crisis is dominating the UK Government's agenda (as well as those of Governments worldwide) and has therefore inevitably interrupted the oversight and enforcement of laws. Government bodies are therefore unlikely to be in a position to issue guidance in relation to legal and regulatory frameworks. For example, there is a backlog of queries concerning the new anti-money laundering rules that came into force in January this year following the implementation of the European Union's fifth anti money laundering directive ("5AMLD").

It is inevitable that the effect on the UK economy of the suspension of business activities will be significant. Governments worldwide are facing economic downturn and economists are projecting that mitigation will be a lengthy process. Following the crisis, Governments will be looking for ways to balance the requirement to service and repay debts that have arisen as a result of the crisis with that of protecting taxpayers from heavy taxation in order to encourage economic recovery. As such, among other targets, Governments may consider the scope to increase their revenue from the wealth lodged in the international art market.

The art world's well-publicised lack of transparency has historically been regarded as a useful cloak for money launderers and tax evaders. Now that regulation is in place in the form of new compliance obligations imposed on art dealers under 5AMLD, the UK Government (and others, no doubt) are likely to focus their efforts on pursuing such avenues (whilst being careful to maintain the UK art market's position globally).

Players in the art market must not mistake the Government's current distraction as reflective of a lack of inclination to enforce the new rules. It is perhaps more important than ever for art dealers and others involved in the art market to review their activities and ensure that they are compliant with the new regime.

Conclusion

The impact of this unprecedented global crisis is and will be significant, with every aspect of people's lives and businesses affected.

Nonetheless, the art market remains active (albeit in different forms), and careful attention should be paid to the new challenges and opportunities that are arising.

As the situation develops and the restrictions are modified, clients operating in the art world should ensure that they are aware of any relevant changes and take legal advice where necessary.

If you require any advice in relation to contentious, or potentially contentious, art-related issues that you or your business are facing, whether arising from the COVID-19 crisis or otherwise, please contact Rebecca Welman.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.


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