It is a busy fall for consignment law in New York. News has been making the rounds this month about a decision by the Appellate Division of the New York Supreme Court, New York’s intermediate appeals court. The Appellate Division ruled that an auctioneer must disclose the name of any owner who has consigned the work for sale, or a sale against a successful bidder cannot be enforced. The auction world is in an uproar, but the result actually derives from a version of a very old law called the Statute of Frauds about what has to be in writing for a contract to be enforceable, for reasons that have nothing to do with art or auctions.
A few years ago, the William J. Jenack auction house in Chester, New York, auctioned for sale an object described as “Fine Russian Silver/Enamel Covered Box with Gilt Interior, Signed I.P. Khlebnikov, 19th Century. Height 1½”; Top 2½” x 3 5/8″,” which apparently came to be seen as the work of renowned silversmith Ivan Petrovich Khlebnikov. The high bidder was a man named Albert Rabizadeh, but after the sale Rabizadeh did not pay.
A recap of the typical auction/payment process is informative: after a buyer goes to cash out with the auction clerk, the buyer gets an invoice. That invoice will ordinarily include details like the date, the bidder’s name/number, and the winning bid. If the work was sold on consignment, sometimes the owner’s name will be included too. Rabizadeh’s invoice stated only that the consignor was “consignor #428.”
Jenack sued Rabizadeh, presumably on the argument that he breached the contract to buy the object. Jenack won, and after some procedural wrangling over the damages to be paid relative to the subsequent resale, the case was appealed again.
The Appellate Division focused on New York General Obligations Law § 5-701, the New York version of what is known as the Statute of Frauds. Dating to medieval England, the Statute of Frauds is in fact the statute actually designed to prevent fraud, codifying what kinds of agreements have to be in writing to be enforceable. Until enacted in American states, it was not even a statute, but a doctrine of English common law. The most common (in other states as well) are the sale of land, or agreements that cannot be performed within a year. New York, as elsewhere, has added certain other kinds of agreements the legislature determined are better enforced only in writing, ostensibly because it reduces confusion over what the agreement was.
Here, § 5-701(a)(6) is at issue, governing agreements for “goods sold at public auction.” The statute requires that where the auctioneer makes a record at the time of the sale with ”the name of the purchaser, and the name of the person on whose account the sale was made, such memorandum is equivalent in effect to a note of the contract or sale, subscribed by the party to be charged therewith.” In other words, an auction record that contains the name of the seller and the name of the buyer is a contract that can be enforced consistent with the Statute of Frauds.
The Appellate Division considered the implications of this, and ruled that by extension, an auction record that does not contain the name of the seller (the consignor) is not a contract consistent with § 5-701(a)(6). Whether or not it is “common practice” to name the auctioneer rather than the consignor, the former is not the “party to be charged”, the owner/consignor is.
Auctioneers are understandably taken aback by this as it relates to what everyone in the case agreed was common practice, particularly given the central place New York holds for auctions. Commentators have urged on an appeal to the Court of Appeals on the grounds that this result is a major threat to the way auction houses do business. They should not necessarily expect a reversal, however. The Court of Appeals will not be considering the practical consequence of the lower ruling, it will consider only if the Appellate Division applied the statute correctly (if the Court of Appeals even takes the case at all, which is purely discretionary). The other side of the coin from idea that a winning bidder can be compelled to pay for and buy an object under a contract is that the seller is on the hook too. But for that to be a binding agreement, it has to satisfy the contract, and that reasoning seems unlikely to change.
Clearly, anyone selling art (or other objects) on consignment should review their policies and practices and, if concerned by the result, consider legal advice on how to move ahead.