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Consignments: Getting to Win-Win

Art Consignments 500

By , Senior Underwriter

Want to sell something but lack the means to do so directly? What to do? Turn to someone else and consign it.

Consignment refers to transactions in which a consignor transfers possession of an item to a consignee, usually to sell it. The term – or “memo risks” in the jewellery trade – also refers to a variety of other situations where custody is temporarily entrusted to someone else.

Dealers, for example, often consign works on to another dealer who they believe is in a better position to sell the works. Another form of consignment is when artworks or jewellery are sent to restorers for cleaning and repairs or to researchers for authentication. Or when a dealer allows a potential customer to take a piece home for a few weeks on a trial basis.

 

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I occasionally come across consignment “agreements” covering works with values into the millions that are nothing more than an email between an owner and dealer listing the works to be offered, the target prices and how the proceeds will be split. That’s it.

 

Regardless of the circumstances, a consignor always retains ownership until the items are sold.

For fine art & specie, consignments can offer owners and dealers numerous advantages. This approach, however, is also not without pitfalls.

With caveats

Consignments
enable dealers to build inventory without tying up a lot of capital, and owners to sell something via dealers with the expertise and contacts to sell the works successfully. Also, dealers commonly offer consigned works for a higher price than may be obtained via an auction and wait for buyers who are willing to pay that amount. When that occurs, it’s a win-win for both consignors and consignees.

A less pleasant outcome, especially for the consignor, is when something doesn’t sell within a reasonable period. That can sometimes happen, and when it does, the owner may have to re-start the sales process with different dealers or via other channels, and may also have to re-price the works at a discount.

Caveat
venditor

Consignments have many legal nuances and come with a variety of risks. In my experience, however, these transactions sometimes are conducted casually with little acknowledgment of the many ways they can go awry. I occasionally come across consignment “agreements” covering works with values into the millions that are nothing more than an email between an owner and dealer listing the works to be offered, the target prices and how the proceeds will be split. That’s it.

Consignors
and consignees should recognize that the arrangement is a partnership in which each side has certain expectations and responsibilities. Based on those, both parties should discuss the details of the consignment, and formalise the provisions in a written contract. Some dealers and trade associations have standard contracts outlining the terms and conditions for a consignment.

And in my experience, having a clearly written contract setting out each party’s obligation will substantially lessen the possibility of a dispute.

For consignors – including dealers who are sub-consigning to another dealer, auction house, exhibition or fair – the most important consideration is: Know your consignee. That can include:

  • Assessing a dealer’s or gallery’s experience in selling similar items. And reviewing how they plan to market/promote the works.
  • Confirming their creditworthiness and financial position. In some jurisdictions, if the consignee goes bankrupt, creditors can still lay claim to inventory held in consignment. And even in jurisdictions where consignments can’t be claimed by creditors, successfully retrieving your works from a bankrupt dealer can be time-consuming and uncertain.
  • Reviewing their record-keeping and inventory control practices to ensure that consignments are tracked separately from works owned directly. There have been many cases where an item on consignment was sold, but the dealer mistakenly believed it was part of their owned inventory. And once the consignor learned this, often long afterward, they had to spend considerable time and effort getting paid.
  • Confirming their reputation and legitimacy. Although insurance can indemnify you for losses and damages, it can’t protect your reputation if you inadvertently become embroiled in a money laundering or criminal scandal.
  • Checking the security systems and handling/transport practices at all the locations where the works will be stored or displayed to ensure they will be held securely, will not be handled carelessly or exposed to undue risks.

In addition to confirming critical details about the consignee, as mentioned above, having a written contract setting out the terms of the consignment in advance can help lessen the potential for disagreements between the various parties: 

  • Agree in writing whose insurance will cover what, both in transit and in the consignee’s custody. If the consignee’s insurance is to cover damages/losses, review the terms and conditions, and exclusions or limitations, with your broker. This is also particularly relevant for high-value pieces sent to restorers or researchers. While they may carry insurance for items in their custody, this is often at low levels that may not be adequate for higher value objects.
  • Include a full “catalogue description” of the items on the consignment notes, preferably with photographs.
  • Establish criteria for sub-consignments, including works given to potential clients on a trial basis, and conduct the same level of due diligence with sub-consignees.

Caveat emptor

As the above indicate, dealers should be prepared to demonstrate their plans for selling the works, as well as how they will safeguard consigned items in their custody. At the same time, it’s good practice for dealers to scrutinize the consignor and the merchandise to be consigned:

  • Confirm that the consignor owns the works outright or has the authority to offer them for sale on behalf of the actual owner(s). If it is a sub-consignment, confirm that the owner(s) is aware of and has approved this arrangement, or it is permitted under the terms of the contract between the owner and consignor.

  • Verify the legitimacy and provenance of the works.

  • Review the values assigned to the merchandise and, as importantly, confirm with your insurance broker that there will not be a problem with your insurance if you agree to those values. Complications can arise if an item carries an insured value much greater than its actual value.

Our claims experience shows that objects on consignment are more vulnerable than when they are in the custody of their owners. Many potential unpleasantries can be avoided, however, by clarifying and confirming the expectations and responsibilities of all parties – owners, consignees and sub-consignees. And in the event something does go amiss, the fewer uncertainties there are surrounding a claim, the quicker and more satisfactorily it can be resolved.

Sources:

Art Market Tips for Consigning Art (n.d.).

Retrieved from http://www.artbusiness.com/consignart.html

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