A Charitable Spin on Sale Agreements of Art

October 21, 2020

By Louise Carron.

In June 2020, the San Francisco- and Paris-based KADIST nonprofit organization released a new model agreement, which artists and collectors may use to ensure that part of the profits received from the resale of their artwork benefit a cause or charitable organization that they support. Reminiscent of the 1971 “Artist’s Reserved Rights Transfer and Sale Agreement” drafted by artist Seth Siegelaub and lawyer Robert Projansky’s^[1] and prepared by a group of artists, lawyer, and scholars, the 2020 “Agreement of Original Transfer of Work of Art, with Resale to Benefit a Charitable Organization” (“the 2020 Model Agreement”) puts a charitable twist on typical secondary market contracts for the sale of art.

Resale Royalties in a Nutshell

In the European Union, Directive 2001/84/EC (“the Directive”) regulates resale royalties owed to artists from member states and establishes thresholds for amounts owed to living artists up to 70 years after their deaths, based on the value of their artworks.^[2] The Directive is “intended to ensure that authors of graphic and plastic works of art share in the economic success of their original works of art.”^[3] In the United States, despite various efforts by states and federal representatives and numerous organizations such as The Royalties for Artists Coalition, there is no meaningful law on resale royalties. One of the recent federal efforts was a bill introduced in 2018 before the 115th Congress under the name of the American Royalties Too (“ART”) Act, but no progress has been made since.^[4] That same year, the California Resale Royalty Act (“CRRA”) of 1977^[5] was virtually struck down as unconstitutional by the Court of Appeals for the Ninth Circuit, on the basis that it was preempted by federal law under the Copyright Act of 1976.^[6] The CRRA is now only applicable to the sales of a small number of artworks sold between January 1, 1977 and January 1, 1978.

For lack of public legislation, US-based artists have had to rely on the willingness of collectors to privately agree on paying a resale royalty, the amount of which may be heavily negotiated. In 1971, conceptual artist and art dealer Seth Siegelaub, along with New York attorney Robert Projansky, came up with a model agreement known as the “Artist’s Reserved Rights Transfer and Sale Agreement,” intended to be both an artwork and a legal document to inspire others (“the 1971 Model Agreement”). Written in accessible language and with clear instructions for creatives to fill it out, the 1971 Model Agreement “has been designed to remedy some generally acknowledged inequities in the art world, particularly artists’ lack of control over the use of their work and participation in its economics after they no longer own it.”^[7] The 1971 Model Agreement guarantees that the artist would receive 15% of the increase in value of their work each time it is transferred. Few examples are known of artists using the 1971 Model Agreement.

The 2020 Resale Agreement laid out by KADIST aims at proposing an alternative and sustainable system that simultaneously supports the arts and a nonprofit of the artist’s choosing. Although this concept of redistributing wealth within the art market is not novel––as art historian Joan Kee points out that it had been used by artist Cady Noland in the 1990s––the model aims at making this practice more widespread and easier to implement.^[8]

The New Resale Agreement’s Mechanisms

Founded in 2011 by tech investor Vincent Worms and with offices in Paris and San Francisco, KADIST is a non-profit contemporary arts organization dedicated to “exhibiting the work of artists represented in its collection, encourages this engagement and affirms contemporary art’s relevance within social discourse.” KADIST’s “Agreement of Original Transfer of Work of Art, With Resale to Benefit a Charitable Organization” is accompanied by an essay written by art historian and researcher Lauren van Haaften-Schick and envisions to empower artists “to have a say over how the value produced by their work circulates, and who benefits from that value.”^[9]

Designed with the help of attorney Laurence Eisenstein, the 2020 Model Agreement is an online fillable form which contains a charitable donation clause that gets activated when the collector who purchased the work directly from the artist sells the work on the secondary market (herein referred to as “the Artist” and “the Collector”).

As per Article 2(b) of the 2020 Model Agreement, the Collector is responsible for donating 15% of the appreciated value of the work (as defined in Article 4) to an agreed-upon charitable organization, or to “such other charitable organization as might be later designated by Artist.” Note that this percentage is significantly higher than in the EU, where the Directive’s sliding scale allots between 0.25% and 4% of the work’s resale price back to a living artist and is caped at €12,500.^[10] However, where the 2020 Model Agreement’s resale is based on the profits made by the seller, the EU Directive’s resale scheme is based on the work’s selling price.

Similar to what the 1971 Model Agreement outlines, the Collector is also responsible for notifying the Artist of the sale or transfer of the artwork within 30 days by executing a “Transfer Agreement and Record” for each subsequent sale or transfer.

The method for evaluating the baseline value of the artwork and subsequent donation to the charitable organization is exactly the same as in the 1971 Model. Defined in Article 3, the value is based on the following:

1. the actual selling price if the Work is sold for money; or
2. the money value of the consideration if the Work is bartered or exchanged for a valuable consideration; or
3. the fair market value of the Work if it is transferred in any other manner––which would most likely require an appraisal by a certified appraiser.

Under Article 4 of the 2020 Model Agreement, the Collector and subsequent sellers must donate 15% of “the increase, if any, in the value or price of the Work” since the last sale. As such, the following formula allows us to calculate the amount for the donation owed to the charitable organization upon the first resale:

x is the value of the artwork as defined in the contract
y is the selling price on the secondary market.

(y – x) x 15 / 100

If the value as agreed upon in the contract is x = $100, and the Collector sells the work for y = $110, the increase in value is $10 and the charitable organization will receive $1.50. That same formula can be used for all subsequent sales, where x represents the previous sale price and y is the most recent sale price.

Under Article 5 and Article 6 of the 2020 Model Agreement, the Collector/seller is responsible to ensure that subsequent purchasers (1) are made aware of the Agreement, (2) ratify it, and (3) are bound by its terms, including making the charitable donation and executing a Transfer Agreement within 30 days of the sale. This raises questions under the doctrine of privity of contract, according to which only parties to a contract can be bound by its terms. Could the Artist sue a third-party buyer who has not signed or been made aware of the contract before acquiring the work?

Advantages and Shortcomings

Undeniably, the 2020 Model Agreement put forth by KADIST is a great baseline to use in negotiations and a step towards turning art market investments into community support, filling a gap that federal US law has failed to address to this day. As explained by the drafters of the 2020 Model Agreement, “between 2008 and 2018 the number of works sold [on the secondary market] for over $10 million increased by 133%. These developments diagram an art market that functions by accumulating and recirculating wealth at the top.”^[11] The 2020 Model Agreement allows for redistribution of funds to art and charitable organizations.

What’s In It for Collectors?

Admittedly, this contract imposes a series of responsibilities on collectors and subsequent buyers, which begs the question of how artists can convince a patron to sign it to begin with. One of the biggest incentives is the potential tax-write off that collectors would get from donating 15% of the appreciated value of the work to an IRS 501(c)(3) nonprofit.^[12] This encourages a Collector to resell the work at the best price possible: the higher the sales price, the more the work appreciates in value between the first and the second sale, and thus the Collector will be able to deduct more from their taxable income. This might also encourage collectors to keep the work for a substantial amount of time while the market for the Artist rises.

What’s In It for Artists?

Artists are less likely to have disposable income available to make donations to foundations or other nonprofits. Professional artists can donate art, but may only deduct the price of the materials from their taxable federal income as business expenses.^[13] This 2020 Model Agreement allows established artists to indirectly support a cause they believe by leveraging the fair market value of their work and encourages artists to develop their careers to ensure that their works appreciate in value over time. This Agreement might also be a tool for artists who have established foundations or nonprofits as a way to redirect funds to continue to sustain the arts.

Why The 2020 Agreement Might Need Fine-Tuning

All in all, both the 1971 and 2020 Model Agreements are what they are: templates from which artists can draw inspiration and find points of negotiation with a potential buyer who agrees to sharing sales profit with artists. As with every template, neither is “one size fits all”: parties may consider discussing dispute resolution, governing law, insurance, and other exciting clauses that lawyers are too familiar with. The 2020 Model Agreement is also substantially more limited in its content than the 1971 Model Agreement, as it does not touch upon exhibition, restoration, reproduction, copyright, or any other event that might affect the artwork once it leaves the artist’s hands.

Further, collectors are bound by this contract but they or subsequent transferees may refuse to honor the terms, which could result in costly litigation if the Artist or nonprofit wish to pursue that route. Additionally, what happens if the secondary buyer does not agree with the mission of the chosen charitable organization? Can the buyer chose a different nonprofit? Can one force a donation? Who can enforce the contract? These questions may be answered under US contract law, which varies from state to state.

Who can enforce the contract?

If the subsequent parties decide to change the terms of the contract, such as the nonprofit beneficiary, the amount of the donation, or even refuse to make the donation itself, could the Artist or the named organization sue for its enforcement? Under the aforementioned common law principle of privity of contract, only parties to a contract may request that it be performed as planned.^[14] With respect to the Artist, seeing as the Collector and transferee must ratify the terms of the Agreement to be bound by it (under Article 6 of the 2020 Model Agreement) and file a Transfer Agreement and Record with the Artist (Article 5), this might be sufficient proof that the Artist is a party to contract and may enforce it. On the other hand, the nonprofit named in the contract but not a direct party, may be considered a third-party beneficiary. Under the “intent to benefit” test set out in the Restatement (Second) of the Law of Contracts,^[15] when the parties (i.e., the Artist, the Collector and subsequent transferees) decide to share a part of the sales proceeds with the identified nonprofit, the latter will likely be considered as an intended third-party beneficiary who can then enforce the terms of the Agreement.

Can one force a charitable donation?

Can one sue someone who refuses to make a charitable donation? What if the nonprofit was not even aware of the contract until its breach? Under the Restatement (Second) of the Law of Contracts, a charitable pledge, i.e. when a person makes a promise to donate to a charitable organization, is binding upon the parties without proof that the promise actually induced any action or forbearance on part of the organization.^[16] Under this theory, the nonprofit that was due to benefit from the donation could potentially sue if the secondary seller refuses to donate the agreed upon percentage of the sales profits, regardless of whether the organization relied on that promise or not. However, that cause of action may only work against sellers who (1) were aware of the charitable donation clause and (2) agreed to it before reneging on their promise.

What if the charitable organization does not exist anymore?

In the event that the terms of the contract cannot be performed as planned, if, for example, the nonprofit has closed, this might be sufficient grounds to invoke the doctrine of impossibility to excuse a party’s non-performance due to an unforeseen event. If the Artist is still alive, the parties may be willing to discuss alternatives together and amend the Agreement; if not, would they be able to assume the Artist’s intention and donate to another organization with a similar mission?

Parties should therefore consider discussing all these points and adding clauses to resolve potential issues.

Finally, in practice, the 2020 Model Agreement may only be significant in the long term. The amount of the charitable donation being based on the increase in value rather than on the actual sale price, the work will have to notably increase in value between two sales for the donation to be meaningful for the nonprofit organization. As KADIST’s International Director Joseph del Presco points out: “the monetary impact of this contract wouldn’t be immediate. To see them, you have to peer into a world ten or so years into the future.”^[17] This might work for top-grossing living artists, such as David Hockney whose “Portrait of an Artist (Pool with Two Figures)” (1972) sold at Christie’s for $80 million at the hammer, creating a new auction record for a living artist.^[18] He was quoted saying that his dealer originally sold that piece in 1972 for $18,000 and that the work reached $50,000 six months later.^[19] With those numbers in mind and had Hockney signed the 2020 Model Agreement at that time, at least $4,800.00 could have been donated to a nonprofit, and probably more each time the painting changed hands. However, the 2020 Model Agreement expects emerging artists to find art collectors willing to bet on their careers and would only make sense if the artwork is sold more than once––thereby relying on “art flippers” for the Agreement to take its full effect. In that span of time between two sales, the designated nonprofit may have closed its doors or the Artist may have passed, thereby creating some uncertainty. Some may also argue that this Resale Agreement diverts the attention from the disparities in artists rights and that efforts should be geared towards passing a US resale royalty law.

Conclusion

Until artists’ resale royalties become the law of the land in the United States, or any new initiative comes to fruition, KADIST’s 2020 Model Agreement, used in conjunction with the Siegelaub and Projansky’s 1971 Model Agreement and tailored to the parties’ intentions, is a solid alternative to uniform resale royalties and equitable distribution of sales proceeds on the art market.

Endnotes:

1. Seth Siegelaub and Robert Projansky, Siegelaub / The Artist’s Reserved Rights Transfer And Sale Agreement, Primary Info. ↑
2. Directive 2001/84, of the European Parliament and of the Council of 27 September 2001 on the resale right for the benefit of the author of an original work of art, 2001 O.J. (L 272) 32-36. ↑
3. Id. at (3). ↑
4. H.R.6868 – American Royalties Too Act of 2018, Congress.gov. ↑
5. California Resale Royalty Act of 1977, Cal. Civ. Code § 986. ↑
6. Close v. Sotheby’s, Inc., 894 F.3d 1061 (9th Cir. 2018). See also, Ethan T. Ashley, Case Review: Droit de suite… not so sweet, Center for Art Law (Sept. 27, 2018). ↑
7. Seth Siegelaub and Robert Projansky, The Artist’s Reserved Rights Transfer And Sale Agreement, 1 (1971). ↑
8. Joan Kee, Models of Integrity: Art and Law in Post-Sixties America, University of California Press (2018), n. 64. ↑
9. Kadist, The Agreement of Original Transfer of Work of Art with Resale to Benefit a Charitable Organization, Artistcontract.org. ↑
10. Directive 2001/84, 2001 O.J. (L 272) 32-36, art. 4. ↑
11. Id. ↑
12. See id.. See also Vanessa Thill, New artist resale rights contract in the US has a charitable twist, The Art Newspaper (June 10, 2020). ↑
13. Hannah Tager, Art Donations 101: a Guide for Artists, Collectors, and Nonprofits, Center for Art Law (Sept. 18, 2019). ↑
14. See David M. Summers, Third Party Beneficiaries and the Restatement (Second) of Contracts, 67 Cornell L. Rev. 880 (1982). ↑
15. Restatement (Second) of the Law of Contract, § 302. ↑
16. Id. at § 90(4). ↑
17. Joseph del Pesco, How a New Kind of Artist Contract Could Provide a Simple, Effective Way to Redistribute the Art Market’s Wealth, Artnet News (July 27, 2020). ↑
18. Christie’s, David Hockney (b. 1937), Portrait of an Artist (Pool with Two Figures), Lot No. 9C (Nov. 15, 2020). ↑
19. Nick Glass, David Hockney painting sells for $90M, smashing auction records, CNN (Nov. 16, 2018). ↑

About the Author: Louise Carron is the Executive Director of the Center for Art Law and a practicing attorney. Her research mainly focuses on copyright issues, new technologies, artists’ rights, and comparative law.