Are non-resale clauses in gallery contracts enforcing artistic integrity or manipulating market dynamics?
Galleries routinely include resale restrictions in their T&Cs, typically preventing buyers from selling an artwork for three to five years and/or granting the gallery right of first refusal. Enforceability of these clauses is yet to be tested in the English courts. However, they arguably contravene the Competition Act 1998 and are, in our view, likely to infringe consumer protection legislation.
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[1]. Assuming the artists are self-employed, they are in principle “undertakings” and would be bound by competition law alongside the galleries they contract with[2]. 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 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[3]. In addition, in the UK, directors may face disqualification[4] and in the most serious of cases, there may be criminal sanctions[5].
Having considered the implications of resale restrictions on the art industry generally, there are strong arguments to be made that they infringe Chapter 1[6].
The art market is divided into the primary market (the first sale of an artwork by an artist/gallery) and the secondary market (resale, including through auction). It is 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 prices higher.
The resale restrictions apply to both individual purchasers (collectors) and commercial purchasers (dealers, etc). Where the purchasers are undertakings, competition law will apply. 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. To the extent that these restrictions are agreed in advance between the artists and the galleries, 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. The effect is that art cannot be freely circulated on the market. Purchasers of art may need to wait significant lengths of time before they can resell their works, with no objective justification for doing so.
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, and great pressure is placed upon the purchasers on the primary market by galleries to prevent any resale outside the restricted time. 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. Some galleries also try to oblige the buyer to impose similar restrictions downstream upon any successors in title.
There are strong arguments to be made that these resale restrictions are an 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.
Consumer protection
The Consumer Rights Act 2015 (“CRA”) deals with unfair terms in consumer contracts and applies to any consumer terms regardless of the method of sale and what is being sold. A ”consumer contract” is defined as a contract between a trader and a consumer[7]. A contract between an art gallery and an individual collector will be a consumer contract, however a contract between two consumers or two traders will not be.
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[8].” The recent decision of Soleymani v Nifty Gateway LLC (CMA Intervening)[9] showed that even an experienced high-net-worth collector could potentially be a ”consumer”. In any event, the onus will be on the gallery to prove the buyer is a trader.
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 […] to the detriment of the consumer[10].” The court will likely weigh-up any potential justification for imposing the term as against the consumer's rights; it will also look at whether the consumer was fully aware of the restriction, or the term was buried in the contract small print[11].
Consequently, it is likely in our view that non-resale clauses would be deemed unfair under the CRA and would not be binding[12].
The Digital Markets, Competition and Consumers Bill (“DMCC”), which received Royal Assent in May 2024, could also potentially affect resale clauses in art sales, as the reforms will make it easier for the Competition and Markets Authority (“CMA”) to challenge unfair practices and bolster enforcement powers.
Conclusion
The legal framework should establish equilibrium between safeguarding the interests of artists and promoting a culture of inclusivity that facilitates public engagement with art.
Whilst enforceability of resale restrictions remains unchartered in English courts, they are in our view likely in most cases to infringe both competition law and consumer protections, making them void and unenforceable. Anyone affected by this issue should consider complaining to the CMA.
This is an abridged version of an in-depth article which can be found on Taylor Wessing’s website: https://www.taylorwessing.com/en/insights-and-events/insights/2024/06/artistic-control-or-market-manipulation
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.
Authors:
Natalia Faekova: Senior Associate, Disputes and Investigations, Taylor Wessing LLP.
Louisa Penny: Senior Counsel, Corporate Finance, FS Regulatory and Competition, Taylor Wessing LLP.
Danielle Owusu: Trainee Solicitor, Taylor Wessing LLP.
Oz Watson: Senior Associate, Technology, IP, and Information at Taylor Wessing LLP.
Andi Terziu: Senior Associate, Technology, IP, and Information at Taylor Wessing LLP.
Paolo Palmigiano: Partner, Head of Competition, Trade and Foreign investment, Taylor Wessing LLP.
Laurence Lieberman: Partner, Disputes and Investigations, Taylor Wessing LLP.
[1] Case C-41/90 Höfner & Elser v Macrotron [1991] ECR I-1979 ('Höfner & Elser'), paragraph 21.
[2] Guidelines on the application of Union competition law to collective agreements regarding the working conditions of solo self-employed persons (2022/C 374/02).
[3] Section 36(3) of the Competition Act 1998.
[4] Section 9B of the Company Directors Disqualification Act 1986.
[5] Section 188 of the Enterprise Act 2002.
[6] 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.
[7] Section 1(1) Consumer Rights Act 2015.
[8] Section 2(3) Consumer Rights Act 2015.
[9] [2022] EWCA Civ 1297.
[10] Section 62(4) Consumer Rights Act 2015.
[11] Director General of Fair Trading v First National Bank plc [2001] UKHL 52: 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]).
[12] Although some commentators argue that carefully drafted clauses might be binding. See Aaron Taylor, 'Resale Restrictions in the Contemporary Art Market', Art Antiquity and Law, vol. 28, no.4, pp. 275-297 (2023).
Blogs are written by Art Lawyers Association members and reflect their personal views. They do not represent the views of the Association
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