Gregor Kleinknecht and Petra Warrington discuss private treaty sales

Malcolm Taylor writes on mediation and how it fits into the world of art and cultural heritage.
12 February 2020
Petra Warrington examines online auctions during Covid-19 in Private Art Investor
18 April 2020

Originally published by Hunters and accessible here.

Despite auction houses and galleries being forced to close their doors for the time being, there will still be plenty of business transacted behind the scenes. Private treaty sales are likely to be a principal means of buying and selling artworks.

Unlike public auction sales, private treaty sales offer the parties to the transaction privacy, flexibility and control. That does not mean, however, that they should be entered into without an appropriate level of due diligence and a proper written and enforceable contract in place.

That contract needs to incorporate effectively any applicable terms and conditions of business. All too often, we find that terms and conditions are presented to a buyer only on the back of an invoice after a contract has already been entered into which, if a dispute were to arise, would be likely to lead to expensive and time-consuming satellite litigation over what the terms of the contract were, whether the terms and conditions of business were validly incorporated into that contract, and whether the buyer agreed to them. In order for terms and conditions of business to take effect, the buyer needs to be alerted to them before the contract is entered into and accept them when the contract is entered into.

Given the current closure of auction house and gallery premises, and a reliance on telephone and electronic communication while face-to-face dealings are not possible, a sale entered into in those circumstances may well be classified as a ‘distance’ or ‘off-premises’ sale for the purposes of The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. If the regulations apply, the trader is required to provide a prescribed list of information to his consumer clients, including in relation to their right to cancel the contract, return the artwork, and receive a refund within 14 days of receipt of the artwork. Non-compliance with these statutory requirements has the effect of extending the cancellation period and is also an offence that may result in a fine.

Care needs to be taken in determining whether the regulations apply in the first place and whether a transaction can be structured in a way that avoids their onerous requirements.

Another important consideration in relation to private treaty sales, and especially sales concluded without the auctioneer or art dealer meeting his customer in person, is ensuring compliance with the latest anti-money laundering and anti-financial crime rules in the form of The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 that entered into force earlier in the year.

Art market participants became part of the ‘regulated’ sector for anti-money laundering purposes on 10th January 2020 and any high-value private treaty sales will be caught by these new regulations. This means, among other things, that art market participants must conduct risk-based client due diligence on their clients, whether acting for buyers or sellers (as well as any brokers or agents involved in a transaction), and satisfy themselves about the legitimacy and purpose of the transaction and the source of wealth of the persons involved.