2. Loyalty
Fiduciary concept's central rationale is
“nurturing and enforcing commitments to act
loyally toward the interest of others […]”
De Mott, Fiduciary Obligation Under Siege: Contemporary Challenges to the Duty to be Loyal
(1992)
“The principle of altruism requires that any
conflict of interests between the parties [...]
must be resolved in favour of the
beneficiary, who is entitled to the "single-
minded loyalty" of the fiduciary.”
Hoyano,The Flight to the Fiduciary Haven (2011)
3. Inequality
“The one feature […] which is "considered to be
indispensable to the existence of the relationship
[...] is that of dependency or vulnerability.”
Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 57
“Two components associated with the use of
vulnerability
1.The inability of a party to protect its own interests.
2.The law has no other means of protecting those
interests ”
Hoyano,The Flight to the Fiduciary Haven (2011)
4. Control Over Property
“Before a fiduciary duty arises, an existing
property right or equitable interest
supporting such a duty must exist.”
Simons v. Cogan 549 A.2d 300 (Del Ch., 1988)
5. Fiduciary Relationships are
Imposed
“A fiduciary responsibility, ultimately, is an
imposed not an accepted one […]The factors
which lead to that imposition doubtless involve
recognition of what the alleged fiduciary has
agreed to do. But equally public policy
considerations can ordain what he must
do, whether this be agreed to or not.”
Finn, “The Fiduciary Principle” in Fiduciaries andTrusts (1989)
“Ultimately, fiduciary relationships are imposed
by equity, not by agreement of the parties.”
Hayton, Fiduciaries in Context (1997)
7. CONSIGNMENT
In the US a dealer typically accepts works from
the artist on consignment.
Title to the artwork remains with the artist until
sale.
By law the dealer becomes the artist’s agent and
the law of agency applies.
Consigned artwork is trust property and
proceeds of sale must be held in trust and not co-
mingled with the dealer’s other assets.
This fiduciary duty imposed by law continues
until sales proceeds reach the artist.
8. Consignment Fiduciary Duties
To deal fairly and honestly with the artist.
To disclose to the artist all information
relevant to the subject matter of the agency.
To account periodically to the artist as to
dispositions of the property.
To care for and manage the consigned
property prudently.
Art Law,Third Edition Ralph E. Lerner and Judith Bresler
9. Typical Conflicts of Interest
Can a dealer buy work outright from the
artist?
Fiduciary accounting requires full disclosure
of all the circumstances relating to the
purchase, and the artist’s informed consent.
Consignment of two artists from the same
school, or those competing for the same
buyers?
A fiduciary duty requires that an agent should
not act for two or more competing principals
10. Agency
Agency is the fiduciary relation which results
from the manifestation of consent by one
person to another that the other shall act on
his behalf and subject to his control, and
consent by the other so to act.
11. Liability of Dealer as Agent
Artist-dealer agreement should make the
principal-agent relationship explicit.
The gallery has a fiduciary obligation to act
exclusively in the artist’s interest and must
scrupulously give up all advantages beyond
the contractually defined compensation for
its services as agent.
12. Agent’s Duties and Liabilities
DUTIES OF LOYALTY
General Principle
§ 387. Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all
matters connected with his agency.
§ 388. Duty to Account for Profits Arising Out of Employment
Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the
principal is under a duty to give such profit to the principal.
§ 389. Acting as Adverse Party Without Principal's Consent
Unless otherwise agreed, an agent is subject to a duty not to deal with his principal as an adverse party in a transaction
connected with his agency without the principal's knowledge.
§ 390. Acting as Adverse Party With Principal's Consent
An agent who, to the knowledge of the principal, acts on his own account in a transaction in which he is employed has a duty
to deal fairly with the principal and to disclose to him all facts which the agent knows or should know would reasonably
affect the principal's judgment, unless the principal has manifested that he knows such facts or that he does not care to
know them.
§ 394. Acting for One With Conflicting Interests
Unless otherwise agreed, an agent is subject to a duty not to act or to agree to act during the period of his agency for
persons whose interests conflict with those of the principal in matters in which the agent is employed.
13. Agency Costs
Agency problems arise whenever the
principal engages an agent to undertake
discretionary but imperfectly observable
actions that affect the wealth of the principal.
In exercising this discretionary authority, the
agent could favor his own interests over
those of the principal.
14. Important Social Relationships
“The fundamental purpose of this equitable
concept must be kept in mind […] to protect and
foster the integrity of important social
relationships and institutions where one party is
given power to affect the important interests of
another.“
2475813 Nova Scotia Ltd. v. Mi (2001)
“The fiduciary obligation exists in order to
maintain the integrity of trusting relationships.”
Flannigan,The Fiduciary Obligation, Oxford J Legal Studies (1989)
Editor's Notes
The focus of this brief presentation is the nature of fiduciary duties in artist-gallery relations. This presentation was originally given at Sotheby's Institute of Art in New York on April 8th, 2013
Fiduciary obligations requirethe fiduciary to give up their own interests and devote themselves to outcomes for a beneficiary. In this sense, fiduciary duties are based on relationships that are very different from the concept of equality before the law that we expect.It is therefore central to understand that even if individuals come together under the premise of a contract (that is, an agreement that needs to benefit each party) if fiduciary duties are found, they can trump any foregoing agreement. The beneficiary becomes the only person entitled to receive a benefit in the relationship.
A contract is a relationship of mutual duties, and depends generally on the consent of the parties involved. A fiduciary relationship recognizes an apposite relationship. The fiduciary and the beneficiary never have the same duties or roles. In fact, in many cases if a fiduciary duty is found to exist, the beneficiary has no obligations towards the interests of the fiduciary at all.Fiduciary duties have two foundations: (i) a legally protected relationship of inequality (ii) and an obligation on the part of the fiduciary to act only to the advantage of the beneficiary, that is to be explicitly free of any conflicts of interest.
Although not an absolute pre-requisite, discretionary control over the rights or property of another is one of the factors that can lead a court to find and impose fiduciary duties. In the art context, dealers, gallerists, and auction houses all take possession of art as agents for the benefit of others. The fact that they hold another’s property, as well as having a material and often uncontrollable impact on how benefits are created or not through its disposition, creates obligations far beyond those contained in the contracts signed.
It is important to remember that fiduciary obligations can be made by judges and courts, and can consequently trump contracts and non-legal agreements. Fiduciary obligations can even be found when people explicitly agree to disclaim them. Not only do the courts determine when fiduciary duties exist, but they also can determine their breadth and depth. This can be represented by the concepts of proscriptive vs. prescriptive duties. If a fiduciary has merely the duty from refraining from things like self-dealing, then the standard of care is largely proscriptive. If on the other hand, a fiduciary must be pro-active in producing outcomes for a beneficiary, then the duties are more prescriptive in nature. It is of vital importance to everyone subject to fiduciary duties to understand how their obligations map onto these distinctions.
Fiduciary duties abound in the art context. I focus briefly here on two that are ubiquitous in the art world. Although the traditionally informal agreements between artists and dealers often conflate these two layers, there are good reasons to differentiate them - particularly because they involve different kinds of fiduciary duties.
On the one hand, we have in the primary market (typical practice in North America) the consignment of an artist’s work with a gallery. The artwork is in many jurisdictions trust property, as are the proceeds from any sales. A gallerist not only breaches any express or implied contract when they fail in their obligations, but they also open themselves up to significantly more liability by virtue of the breach of a proscriptive fiduciary standard of care. Some art consignment statutes, such as the recently amended law in New York, now have criminal sanctions.
Consignment duties are primarily prescriptive in nature. The gallerist must fulfill a list of duties to the artist. Most of these involve the sequestering of trust property and proceeds from their sale, as well as transparency and accountability. The important thing to remember here is again, even if there is a contract between the artist and the gallerist, fiduciary duties may take precedence over any agreement. Both Artist and Gallerist are advised to understand their relationship through the fiduciary obligations that can be imposed at any time, potentially even long after the fact of the dissolution of their active relationship.
Many common practices unwittingly fall squarely within the categories of self-dealing and conflicted representation. This does not mean that the parties, even in the event of conflict, will automatically face the consequences of a fiduciary accounting. For example, the vast majority of contract breaches are not litigated. Parties have a host of vested interests that make litigation prohibitive. However, in light of the increasing financial stakes and sophistication of the market actors, it is important to factor in the duties and risks that fiduciary obligations create.
Beyond consignment, many artists are obviously represented by galleries. The very power differential that this involves, coupled with the law surrounding the role of the gallery as an agent of the artist, can impose significant prescriptive duties. It is not enough that a gallerist avoid conflicts of interest, he or she may have obligations to make good faith efforts on the artist’s behalf that uniquely respond to an artist’s needs. A gallerist who fails to understand the fiduciary obligations and disequilibrium in an agency relationship may encounter legal hardship when the representation runs into difficulties. Equally, an artist must be familiar with the extent of express or implied fiduciary duties that are imposed by law to understand the scope of mandated obligations that a gallerist owes.
Although long established practice has the gallerist as the initiator of the representation, from a legal perspective it is the artist who confers upon the gallerist any authority he or she may have. The gallerist is an agent of the artist. In being an agent, the gallerist is by law obligated to act on and actualize the will of the artist. A a fiduciary, a gallerist may potentially be obligated not only to what an artists agrees to, but also to producing results that result from the gallerist’s special knowledge or extent of prerogative regarding the artist’s affairs. By law, a principal-agent relationship requires the agent to be fully transparent regarding any advantages gained by the relationship, and to relinquish those not agreed to by the artist. It is becoming increasingly important for both parties to identify what the agency relationship entails, on the one hand to render transparent the exposure that a dealer may unwittingly be assuming, and on the other to encourage artists to embrace an understanding of what their representation entails. Left up to the court, both the artist and the dealer may find the outcome they face undesirably outside the confines of what each presumed to exist. Fiduciary duties, in contrast with contractual agreement, require more specialized knowledge and understanding. For this reason, both parties need to map out their explicit expectations and formally recognize the fiduciary duties that circumscribe their relationship.
When we review a list of agent’s duties and liabilities, we can see that many nominate duties are default in nature. That is to say, that unless the parties define a legally binding agreement, their relationship can be bound by terms they are not even aware of. In addition, even if, for example, more obvious conflicts of interest can be avoided, such conflicts are sources of default liability for the agent.Theonly way they can be overridden is by explicitly confronting them.
The purpose of fiduciary duties is to confront agency costs. Where an individual, acting upon and for the interests of another, has significant discretion, fiduciary obligations increase the risks of disloyalty. Whereas an agent may have the prerogative of initially seizing a benefit, fiduciary duties increase the courts’ ability to return any illicit gains to the beneficiary. In the art context, it is common for gallerists to be seeking their own gain while at the same time as being in an agency relationship with their represented artists. Such agency costs are increasingly coming under fire from the most sophisticated and successful artists, who are are reducing the scope of gallerist fiduciary prerogative and remuneration.
It is in the nature of fiduciary relationships that they apply in situations in which individuals may be unable to articulate or express their needs. They allow for the beneficiary to rely, as the court is empowered to hold the fiduciary to account if it finds that it needs to. Consequently, fiduciary relationships allow for certain types of relationships that would otherwise not be possible. The relationships of trust in the art context are implicitly and explicitly connected to fiduciary questions. As the art market increases continues to evolve, some of this development will depend on an accompanying growth in the differentiation and sophistication of the fiduciary regimes that it already depends on. One ignores this development at one’s own peril.
![Loyalty
Fiduciary concept's central rationale is
“nurturing and enforcing commitments to act
loyally toward the interest of others […]”
De Mott, Fiduciary Obligation Under Siege: Contemporary Challenges to the Duty to be Loyal
(1992)
“The principle of altruism requires that any
conflict of interests between the parties [...]
must be resolved in favour of the
beneficiary, who is entitled to the "single-
minded loyalty" of the fiduciary.”
Hoyano,The Flight to the Fiduciary Haven (2011)](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)