What does the sudden reversal of auction house regulation in New York mean for the art market?

The New York City Council recently passed a series of deregulatory measures that eliminate government regulation of the auction industry, among other businesses. Whether this will help or confuse collectors is uncertain, but it could fundamentally change the way auction houses large and small do business in New York’s multi-billion dollar art market. .

These deregulatory measures include eliminating requirements for auction houses to be licensed by the city; the obligation for the auctioneer to disclose the guarantees on the works provided by the auction house or the “irrevocable auctions” of third parties; and that no auctioneer’s bid – called a “chandelier bid” – exceeds the minimum price or shipper’s reserve. Regulations in effect since the 1980s also required that written contracts with shippers disclose all charges and, for the benefit of buyers, that the shipper guarantee title to the “ultimate buyer”. Additionally, auction houses were required to keep written records of auctions for six years in case questions of attribution and title arose.

The action by the city council, which was neither requested nor solicited by the auction industry, has alarmed many in the art world, who fear that the rules of the road for the auction market have been changed without notice.

“The auction system relies on the trust of buyers and sellers that auction houses play by the rules,” says Thomas C. Danziger, partner at Manhattan law firm Danziger, Danziger & Muro, specializing in auction transactions. “Without regulations in place, people could lose faith in the integrity of the New York auction market.”

Leila Amineddoleh, a New York art lawyer, calls the city council’s actions “shocking”. “For years people have been calling for more regulation of the art market, not less,” she says. “If I were a buyer, I would like to know the participation of an auction house in a work. Not only will this affect the lot for sale, but it could affect how the auction house markets other works during the same sale.

The repeal of these regulations took effect on April 10 (with the exception of the elimination of auction house licensing requirements, which takes effect this month) and is intended to help various small businesses that would have been affected by Covid-19. pandemic, including arcades, laundromats and car rental agencies. Why auction houses were included in this group is unclear.

Requests for comment from city council members, as well as the New York City Department of Consumer Affairs, which oversees the auction field, went unanswered.

One of the now-defunct regulations, a Consumer Department rule that came into effect in 1987, allowed an auctioneer to raise the price of a lot up to the reserve price – the amount not declared in below which the shipper will not sell the lot. However, the auction house had been required to disclose this practice. A recent statement of condition of sale from Sotheby’s, for example, says: “The auctioneer is authorized to make consecutive offers or to make offers in response to other offers on behalf of the seller until the reserve placed on the lot, although the auctioneer does not indicate during the auction that he is making such bids on behalf of the seller. Once the auction has reached the lot’s reserve price, the law states that “the auctioneer cannot bid on behalf of the sender”. Without this protection, auctioneers could advertise bids above the reserve when no bid has been placed.

Other practices that are partially revealed at present but could be entirely hidden are guarantees – an agreement between the auctioneer and the shipper promising that, if an item does not sell for at least a minimum sum predefined, the auction house itself or a third party will buy the object – and the fees or discounts offered to certain guarantors if the final sale price exceeds the guaranteed amount. Currently, these actions are brought to the attention of bidders in the sales catalogues.

Changing Relationships

John R. Cahill, an art lawyer, speculates that the concern of buyers and sellers at auction will be whether the clauses of the terms and conditions, which describe the contractual relationship between the business and its customers, are likely to be modified and, if so, whether they will be modified differently for each sale. “It will be interesting to see if what New York has done will spread to other cities,” he says.

A spokesperson for Christie’s New York says such concerns are unlikely to be confirmed. “Christie’s holds itself to the highest ethical standards,” the spokesperson said. “We have not advocated for regulatory changes and continue to operate as we have.”

At least for now, auction houses will continue to do business the same way, according to Michael McCullough, a partner at Manhattan law firm Pearlstein & McCullough, who notes that general consumer protection laws protect buyers and sellers. “The bidding process and the way an auctioneer conducts an auction has been standardized,” he says. “I don’t think that will change.”

However, McCullough adds, “There is one area where even the old rules have fallen short: disclosing an auctioneer’s financial interest in the sale of an item. The very high end of the auction market operates with investor-backed auctioneer guarantees. Expect the creative use of collateral to continue and do not expect greater transparency in these financial arrangements.