Enforceability of non-resale clauses [1]
Clever arbitrage is often seen as a positive in other industries but is vilified in the art world [2] and there is a growing trend for galleries and artists to fight back. Galleries, now routinely include resale restrictions in their terms and conditions of sale. [3] Such restrictions ordinarily state that a work cannot be resold for a certain period (usually three to five years) and/or that the gallery must be given the right of first refusal. Enforceability of these non-resale clauses is yet to be tested in the English courts. However, as this article will show, these clauses arguably contravene the Competition Act 1998 and are likely to infringe consumer protection legislation.
This article will first assess the rationales behind resale restrictions and will contend that arguments in their favour are unconvincing. We will then demonstrate that, as a matter of competition law and consumer protection law, such clauses are unlikely to be enforceable.
On the flip side
Distorting the market
Non-resale restrictions have a negative impact on the industry.
First, these clauses allow a monopoly in a particular artist for the gallery that represents that artist. The art market is divided into the primary market and the secondary market. The primary art market refers to the initial sale of an artwork ie, through a direct transaction with the artist or more commonly, with the gallery representing the artist. The moment an artwork is sold for a second time (eg, in a private sale or at auction) it enters the secondary market. Both markets operate independently from one another, but they are interconnected: heightened interest in an artist’s work on the primary market typically fuels demand on the secondary market. Conversely, waning enthusiasm for an artist on the secondary market can dampen their primary market sales. Whilst in recent years the line between primary and secondary art market has become more blurred, with some auction houses allowing artists to consign works directly to auction bypassing a gallery, this only works for artists who are unrepresented by any gallery. Artists who are represented usually have an exclusivity agreement with their gallery, precluding them from selling their artwork independently or through another gallery or auction house. Thus, galleries (who typically receive 50% of each primary-market sale) often have a complete monopoly on the primary market for a particular artist and control the primary market prices. When such art dealers compel buyers to agree to restrictions on resale or else be unable to purchase an artwork, this creates an unfair advantage.
Second, whilst galleries often accuse auction houses of inflating prices and contributing to the formation of an unsustainable market bubble, auction sales are subject to market forces and offer transparency in the way that gallery sales do not. The results of an auction sale are publicly available, and a work of art can sell both above and below the original purchase price subject to the prevailing market dynamics. By contrast, a gallery is free to set whatever price it wants at the point of primary sale and that purchase price will remain secret. The use of non-resale clauses perpetuates opacity of art prices and restricts access to art.
Further, the purported justifications for non-resale restrictions do not withstand scrutiny.
Specullectors
Arguments defending non-resale clauses are manifold; one prevalent view criticises ‘specullectors’ — those who ‘flip’ or quickly resell artworks at auctions for speculative gain — for potentially harming artists’ careers. Yet, ‘flipping’ is “in the eye of the beholder”. [4] The term tends to be used in situations where “there is some informal agreement between a buyer and seller […] where everyone’s expectations were not met, when a work was resold”. [5] Whilst non-resale clauses seek to curb speculation in art (and see below as to our view on whether that is desirable) they will also apply in situations far removed from a typical ‘specullector’.
The “three Ds” – debt, death, and divorce – often necessitate a quick sale. More generally, unless you have unlimited resources to build and house your collection, you will have to sell some works to acquire others. All too often a collector who has consigned a painting to auction is informed at the last minute of a non-resale clause buried deep in the small print he or she never properly read. The collector is then threatened by the gallery (and, sometimes, by the artist) and is forced to withdraw the painting in breach of the consignment agreement with the auction house causing loss to both the collector and the auction house, that spent time and money in preparation for the sale. In this way non-resale clauses do not differentiate between speculative collectors and genuine ones.
Artist’s compensation
Another reason cited in support of resale restrictions is the need to compensate the artist. It is usually said that the art market is different from other industries because the creator of an asset in the art market does not benefit from the price increase when their work is resold. [6] However, this scenario is common to most other industries. For example, in construction, builders do not gain from future house resales. The same is true for any tangible goods – food, wine, clothes, cars, oil etc. Similarly, securities – shares or bonds – get issued at the issue price, and the issuer does not profit from future resale in the secondary market. Art is a commodity and art prices do (and should) fluctuate in the same way the stock market does. In our view, there is nothing in the nature of the art industry that would justify attempts to curb arbitrage.
Further, artists in the UK and the EU (though not in the US) are entitled to a royalty each time one of their works is resold through an auction house or an art market professional. This is known as the Artist’s Resale Right (ARR) or droit de suite. [7] As the ARR is not payable unless the work is resold on the art market, [8] it would appear to be financially favourable to artists to get resold frequently.
In some mediums, additional compensation is possible through smart contracts. Indeed, one of the drivers for the popularity of NFTs was that it is possible to programme smart contracts so that each secondary sale of the NFT will automatically trigger a royalty payment to the artist. [9]
Finally, at least in the short-term, successful resale at auction will lead to notoriety and increased prices for the artist’s work. Meaning that the artist should be able to sell their next piece at a higher price on the primary market. Whilst there is a risk of creating an unsustainable market boom, that outcome is not certain. For example, Andy Warhol’s prints continue to achieve impressive prices decades after his death. [10] In any case, artists engage in commercial transactions with awareness of risk akin to any creator in a different sector and should not be afforded excessive protections at disproportionate cost to collectors and other market players.
Artist’s reputation
It is further said that flipping causes reputational damage, as the artist’s work is seen as a commodity. Yet, the risk of reputational damage is necessarily subjective. Damien Hurst is perhaps the quintessential example of an artist who embraced auction success. Moreover, quick resale does not provide a legal basis for a claim for damage to reputation. Whilst there can be defamation by action, [11] ‘flipping’ is not likely to constitute something that conveys a ‘defamatory meaning’ at common law, [12] not least something that passes the ‘serious harm’ threshold. [13] Similarly, whilst moral rights give artists the right to object to derogatory treatment of their work, [14] ‘treatment’ means:
“[…] any addition to, deletion from or alteration to or adaptation of the work, other than (i) a translation of a literary or dramatic work, or (ii) an arrangement or transcription of a musical work involving no more than a change of key or register” [15].
‘Flipping’ will not fall within these provisions.
Considering the above, the arguments presented in support of non-resale clauses seem unpersuasive. Furthermore, such justifications cannot exempt these clauses from adhering to competition and consumer protection legislation, to which we now turn.
Competition law
Chapter 1 of the Competition Act 1998 (Chapter 1) prohibits agreements and concerted practices between undertakings which have as their object or effect the prevention, restriction, or distortion of competition within the UK. An “undertaking” covers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed, and any activity consisting in offering goods or services on a given market is an economic activity. [16] Assuming the artists are self-employed, they are in principle “undertakings” and would be bound by competition law alongside the galleries they contract with. [17] Similarly, dealers and other purchasers of art who do so professionally or other than in a personal capacity, will also likely be deemed undertakings.
Compliance with competition law is very important for undertakings as the consequences of breaching Chapter 1 are severe. Not only will any agreements that are found to infringe Chapter 1 be void and unenforceable, but infringements can lead to fines of up to 10% of the undertaking’s worldwide turnover. [18] In addition, in the UK, directors may face disqualification [19] and in the most serious of cases, there may be criminal sanctions. [20]
Having considered the implications of resale restrictions on the art industry generally, there are strong arguments to be made that they infringe Chapter 1 and are therefore void and unenforceable. [21]
As noted above, the art market is divided into the primary market and the secondary market. Galleries compete with each other on the primary market to establish exclusive relationships with artists and then seek to create a ‘brand’ for each artist they represent, by carefully controlling supply and access. The objective in primary market sales is to create an artist brand where works are rarely available, highly sought after and can be sourced from one dealer or gallery only – and the pricing will reflect that. Sales in the secondary market can be through galleries, dealers or auction houses and the choice of how and where to sell an artwork on the secondary market belongs to the owner of the artwork. This leads to intense competition to secure consignments of artworks from relatively limited sources. So-called ‘business getters’ are employed by galleries, dealers and auction houses to foster relationships with collectors in order to be well positioned when the collector decides to sell.
Once on the secondary market, access to the works is unrestricted. If art is resold by a dealer or gallery, the seller can choose the resale price. If sold via auction, any member of the public can bid on an artwork and the price of the work is determined by the market/bidders. The work may fail to sell if there is not enough interest, or it may sell at a price which is below or above expectations. Auction results are posted online so are available to the public. It is therefore in the galleries’ interests to keep artwork off the secondary market for as long as possible, to preserve the exclusivity of the pieces and to keep the prices at a higher level.
The resale restrictions apply to both individual purchasers (collectors) and commercial purchasers (dealers, etc). Where the purchasers are undertakings, competition law will apply. Our view is that the effect of the restrictions is to distort and restrict competition on the secondary market, in breach of Chapter 1, as they unjustifiably exclude the resale of the art to control pricing. It is unclear whether these restrictions are agreed in advance between the artists and the galleries on the primary market, but to the extent that they are, competition law will also apply to those agreements.
Further, the restrictions are not usually negotiable and there is a clear distortive impact on the purchaser’s freedom of ownership of the art that has been acquired. The effect is that art cannot be freely circulated on the market and resale is restricted. Purchasers of art may need to wait significant lengths of time (sometimes anywhere from 18 months to three or five years) before they can resell their works, with no objective justification for doing so. The result is that galleries tightly control the pricing of the art, by keeping work off the market and ensuring that other potential purchasers must wait years before the restriction ends. The owners of the art are unable to exercise true ownership over their products until that time.
The inclusion of resale restrictions has become so common that there is now a network of agreements in place across many galleries in the UK dictating how and when art can be sold. This network effect impacts a significant part of the secondary market, and we understand that great pressure is placed upon the purchasers on the primary market by galleries to prevent any resale outside the restricted time. We have been informed that typical tactics include, threatening injunctions or to rescind the original purchaser agreement, taking legal action and telling the buyer he or she will be blacklisted by the gallery for future purchases. We have also seen T&Cs where galleries also try to oblige the buyer to impose similar restrictions downstream upon any successors in title.
In light of the above, there are strong arguments to be made that the restrictions placed by galleries on the purchasers of their art are an obvious infringement of Chapter 1. The effect on the market is significant and any restriction on the ability of owners to sell their products cannot be reasonable, indispensable and is wholly without benefit to the consumer. Any such restrictions are highly likely to be void and unenforceable. The impact is substantial, and combined with the pressure that is put on purchasers not to resell, means that prices are kept artificially high for extended periods of time for new artwork, in breach of competition law.
Consumer protection
Where a gallery sells to a private collector consumer protection law comes into play. The Consumer Rights Act 2015 (CRA) deals with unfair contract terms and applies to any consumer terms regardless of the method of sale and what is being sold. In the context of art dealings the CRA would, for example, protect consumers buying digital art such as NFT’s, and will protect consumers who are party to a written contract or, as is often the case in the art world, oral contracts or contracts implied from the parties’ conduct.
To engage the unfair terms provisions under the CRA, there must be a ‘consumer contract’. The CRA defines this as a contract between a trader and a consumer. [22] For the purposes of the Act, a ‘trader’ is “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” [23] (eg, an art gallery). A contract between an art gallery and an individual art collector will be a consumer contract, however a contract between two consumers or two traders will not be a consumer contract.
The CRA only protects consumers, defined as: “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession.” [24] The recent decision of the Court of Appeal in Soleymani v Nifty Gateway LLC (CMA Intervening) [25] showed that an individual high-net-worth collector involved in art collecting was a ‘consumer’ for the purposes of applying consumer protection laws to arbitration clauses. Although this case was not about resale restrictions, this decision is useful in indicating that even an experienced collector could potentially garner consumer law protection, protecting them from being taken advantage of by the other contracting party by way of agreeing unfair terms.
Some have argued that many ‘specullectors’ may fall into a ‘grey area’ where a reasonable argument can be made that they are not acting ‘for purposes that are wholly or mainly outside that individual’s […] profession.’ [26] Whilst the question of whether a collector is a ‘consumer’ will be fact sensitive, the Soleymani decision suggests that the ‘grey area’ is likely to be narrow. The Court of Appeal in that case went as far as to say that “[Mr Soleymani was] not a typical consumer, if he be a consumer at all, and the transaction involving the purchase of an NFT for US$650,000 [was] not a typical consumer transaction.” [27] Nonetheless, the court went on to conclude that “the arguments with which we are concerned must be tested by reference to the rights and protections afforded to consumers generally.” [28] Furthermore, section 2(4) of the CRA states that: “A trader claiming that an individual was not acting for purposes wholly or mainly outside the individual’s trade, business, craft or profession must prove it.” And so, in any event, the onus will be on the gallery, not the collector, to prove the buyer is a trader.
Once it has been established that there is a consumer contract, the resale clause can be considered for unfairness. Under the CRA, a clause is unfair if, “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.” [29] The court will take into account (a) the nature of the subject matter of the contract, and (b) all the circumstances existing when the terms were agreed and all of the other terms of the contract or of any other contract on which it depends. [30] If a term is found to be unfair, that term of the consumer contract is not binding on the consumer. [31] In circumstances where a gallery seeks to place a resale restriction in a consumer contract, such a term is likely to be detrimental to the consumer because the restriction is likely to create an onerous obligation on the buyer, as it would limit their freedom to resell the artwork at their discretion. In most cases this clause will be included to the advantage of the trader and to the detriment of the consumer. As discussed above, galleries can dominate the primary market and use non-resale terms to greatly limit the secondary market. In assessing consumer contract terms, the court will likely weigh-up any potential justification for imposing the term as against the consumer’s rights, however consideration will also be given to whether the consumer was taken advantage of by not being fully aware of the restriction – for example, if the term was in the contract small print or if the consumer did not acknowledge the term in writing. [32] In our view, in the absence of specific negotiations regarding the non-resale clause, and where such clause has not been specifically brought to the attention of the buyer, it is unsafe to assume that the purchaser must have known about and agreed to the clause simply because it is common practice in the market.
It has also been argued that a non-resale clause will rarely create a “significant imbalance in the parties’ rights and obligations” since a gallery is not obliged to sell the work to a customer with whom it cannot agree terms and “the purchaser suffers not at all (other than perhaps in a non-legally-protected social sense) if he does not or cannot purchase the work. On the contrary, he will be free to take his custom elsewhere, and to buy any of the vast number of artworks that are available for purchase without any such restrictions”. [33] Yet, this argument ignores: (i) the reality of the art market where galleries have a monopoly on new works by a particular artist; (ii) the fact that the buyer will have difficulty finding a gallery willing to sell art without any restrictions, given the prevalence of non-resale clauses in the industry; and (iii) the widespread practice of galleries to debar customers who push-back against these restrictions, all of which illustrate a significant imbalance in bargaining power between the two parties.
Although it has yet to be tested in the courts, and any such test will turn on the facts of the case and specific language, it is likely that non-resale clauses would be deemed unfair and trigger the protection offered by the CRA, and both galleries and art collectors should be aware of the potential risks of including such terms in their contracts.
Breaches of consumer law are enforced through the courts, however the UK Government has identified this as a potential weakness in the consumer protection regime, and has sought to address procedural difficulties for enforcers and weak sanctions for breaching the law.
The Digital Markets, Competition and Consumers Act (DMCA), which received Royal Assent in May 2024, introduces a range of consumer protection reforms that could potentially affect resale clauses in art sales, as the reforms aim to make it easier for the Competition and Markets Authority (CMA) to challenge unfair practices and bolster enforcement powers.
Part 3 of the DMCA introduces two regimes for the enforcement of consumer protection law: (i) a court-based system based on the existing Enterprise Act 2002; [34] and (ii) a direct enforcement framework that the CMA will supervise, which aims to eliminate the necessity for drawn-out legal proceedings. [35] Instead, the reforms will vest the CMA with new powers to adjudicate on breaches of consumer law and impose significant fines for the first time – giving the CMA sharp teeth when it comes to enforcement.
With regards to the CMA’s direct enforcement framework, a trader will carry out a commercial practice which constitutes a relevant infringement of consumer law if the practice: [36] (a) harms the collective interests of consumers; (b) takes place in the UK (or the trader has a place of business/carries on business in the UK); and (c) meets the specified prohibition condition by being in breach of a relevant enactment (eg unfair terms under the CRA). [37] As such, the CMA has the power to investigate suspected infringements, provided it has reasonable grounds for suspecting that a trader has “engaged, is engaging or is likely to engage in a commercial practice that constitutes a relevant infringement, or is an accessory to such a practice.” [38]
Further to the CMA conducting an investigation, it may give the trader a ‘provisional infringement notice’ setting out the grounds of the infringement, proposed directions for compliance, inviting them to make representations to the CMA with regards to the notice, and specifying a deadline for such representations. [39] Following this, the CMA may be permitted to give a ‘final infringement notice’, subject to the requirements under section 182 of the DMCA. The final notice may impose a requirement to comply with such directions as the CMA considers appropriate for the purpose of ensuring that the trader complies with relevant obligations under the notice, [40] or the CMA may require it to pay a monetary penalty.
Alternatively, the CMA may accept an undertaking from a trader who has engaged in an infringing practice requiring it to cease or not repeat the infringing practice, amongst other directions. [41]
If a resale clause is found to be a relevant infringement of consumer law for the purposes of section 148 of the DMCA, this may well lead to enforcement action being taken by the CMA against the gallery. So whilst we might not see non-resale clauses in gallery contracts being contested in the courts (or, at least, not to the point of a judgement being handed down in such a case) any time soon, the CMA’s enhanced powers under the DMCA may lead to the CMA adopting a position on this issue that will be indicative of how the court may approach a decision.
Conclusion
It is essential for the legal framework to establish equilibrium between safeguarding the interests of artists and promoting a culture of inclusivity that facilitates public engagement with art, rather than creating an echo chamber where art circulates within a closed network. Galleries exerting influence over primary market sales for certain artists can potentially hinder the principles of free trade by monopolising artist representation whilst restricting price transparency — a stark contrast to auction houses where sale results are public record. A transparent and accessible art market can engage a broader audience, enriching cultural discourse and granting more individuals the opportunity to participate as collectors.
Whilst enforceability of resale restrictions remains unchartered in English courts, they are very likely to be deemed to infringe both competition law and consumer protections, making them void and unenforceable. In our view, anyone affected by this issue should consider complaining to the CMA.
References
- Taylor Wessing LLP has been advising an auction house on the competition law compliance aspects of non-resale clauses, and this is what led us to consider and write about this issue. An abridged version of this article can be found on the Art Lawyers Association blog.
[Back to section] - See for example: Christopher Glazek, ‘The Art World’s Patron Satan’, The New York Times Magazine, 30 December 2014 for an account about the notorious flipper Stefan Simchowitz. [Back to section]
- Anna Brady, ‘Resale Rules Have Become the Art World Norm: What are They and are They Enforceable?‘, Art Newspaper, 13 June 2023. [Back to section]
- Max Kendrick, co-founder and CEO of Fairchain, ‘The Art Angle Podcast: Can Artists Ever Beat Flippers at Their Own Game?’, The Art Angle Podcast, 21 October 2022. [Back to section]
- Ibid. [Back to section]
- Julia Halperin writes: “Here’s one key difference: the creators of assets do not benefit directly when their work is resold for a much higher price.” Editor’s Letter, Artnet Intelligence Report for the Fall 2022, 27 October 2022.[Back to section]
- European Parliament and Council Directive (EC) 2001/84 (OJ L272, 13.10.2001). Droit de Suite was incorporated into the United Kingdom law through the Artist’s Resale Right Regulations (ARR) 2006 SI. The 2021 EU-UK Trade and Cooperation Agreement contains an undertaking by the UK to operate an Artist’s Resale Right scheme, despite Brexit. The right only applies when the sale price reaches or exceeds £1,000 and is calculated on a sliding scale. Royalties are also capped so that the total amount of the royalty paid for any single sale of a work cannot exceed £12,500 (The Design Right, Artist’s Resale Right and Copyright (Amendment) Regulations 2023). [Back to section]
- Sales between private individuals, without the use of an art market professional, or to public, non-profit making museums do not attract royalty payments. [Back to section]
- Martin Wilson, Art Law and the Business of Art (2nd edn, Elgar Practical Guides, 2022) p. 28. [Back to section]
- The highest price ever paid for a Warhol painting was achieved in May 2022, when Shot Sage Blue Marilyn (1964) sold for a US$195,040,000 at Christie’s New York. [Back to section]
- For example, hissing at the theatre (Gregory v Duke of Brunswick (1844) 6 Man. & G. 953); or placing a lamp in front of a person’s house, to signify that it was a brothel (Jeffries v Duncombe (1809) 2 Camp. 3), have been held to convey a defamatory meaning. [Back to section]
- According to the test set down in Thornton v Telegraph Media Group Ltd [2009] EWHC 2863, something is defamatory if it “substantially affects in an adverse manner the attitude of other people towards him, or has a tendency so to do”. [Back to section]
- Under section 1(1) of the Defamation Act 2013, a claimant must show that publication “has caused or is likely to cause serious harm to [his or her] reputation”. [Back to section]
- Section 80(1) of the Copyright, Designs and Patents Act 1988: “The author of a copyright literary, dramatic, musical or artistic work, and the director of a copyright film, has the right in the circumstances mentioned in this section not to have his work subjected to derogatory treatment.” [Back to section]
- Section 80(2)(a) of the Copyright, Designs and Patents Act 1988. [Back to section]
- Case C-41/90 Höfner & Elser v Macrotron [1991] ECR I-1979 (‘Höfner & Elser’), paragraph 21. [Back to section]
- Guidelines on the application of Union competition law to collective agreements regarding the working conditions of solo self-employed persons (2022/C 374/02). [Back to section]
- Section 36(3) of the Competition Act 1998.[Back to section]
- Section 9B of the Company Directors Disqualification Act 1986. [Back to section]
- Section 188 of the Enterprise Act 2002.[Back to section]
- We have not considered restraint of trade in this context as we are concerned with the wider implications on the market, rather than bilateral agreements. [Back to section]
- Section 1(1) Consumer Rights Act 2015. [Back to section]
- Section 2(2) Consumer Rights Act 2015. [Back to section]
- Section 2(3) Consumer Rights Act 2015. [Back to section]
- [2022] EWCA Civ 1297. [Back to section]
- Aaron Taylor, ‘Resale Restrictions in the Contemporary Art Market’, Art Antiquity and Law, vol. 28, no.4, pp. 275-297 (2023), at p. 279. [Back to section]
- [2022] EWCA Civ 1297. Lord Justice Popplewell at para. 6. [Back to section]
- Ibid. [Back to section]
- Section 62(4) Consumer Rights Act 2015. [Back to section]
- Section 62(5) Consumer Rights Act 2015. [Back to section]
- Section 62(1) Consumer Rights Act 2015. [Back to section]
- Director General of Fair Trading v First National Bank plc [2001] UKHL 52 remains the authority for assessing contractual terms for fairness in which the House of Lords held that for a term to be fair, it must not only be expressed in plain and intelligible language but also brought to the consumer’s attention in such a way that an average customer would be aware of the term (Lord Bingham at paragraph [17]). [Back to section]
- Aaron Taylor, ‘Resale Restrictions in the Contemporary Art Market’, Art Antiquity and Law, vol. 28, no.4, pp. 275-297 (2023), at page 281. [Back to section]
- Section 153 The Digital Markets, Competition and Consumers Act (See Digital Markets, Competition and Consumers Act 2024). [Back to section]
- Section 180 The Digital markets, Competition and Consumers Act. [Back to section]
- Section 148 to 150 The Digital markets, Competition and Consumers Act. [Back to section]
- Section 150(2) The Digital markets, Competition and Consumers Act provides that a commercial practice meets the specified prohibition condition for the purposes of section 148 as it applies for the purposes of Chapter 4 (direct enforcement powers of the CMA) if it is in breach of an enactment listed in Schedule 16 (to the extent specified), and the schedule enacts Part 2 of the Consumer Rights Act 2015 (unfair terms). [Back to section]
- Section 180 of the Digital markets, Competition and Consumers Act. [Back to section]
- Section 181 of the Digital markets, Competition and Consumers Act. [Back to section]
- Section 182(4) of the Digital markets, Competition and Consumers Act. [Back to section]
- Section 185 of the Digital markets, Competition and Consumers Act. [Back to section]
