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Artists & Consignment Issues: What You Should Know
By Richard Stim, Attorney
Consignment sales come with plenty of risks. Luckily, there are three types of legal protection for consignors: the Uniform Commercial Code, state consignment laws, and written consignment agreements. You may, however, find some of the laws difficult to comprehend, inconsistent and expensive to enforce.
The Uniform Commercial Code
Every state has adopted a version of the Uniform Commercial Code (UCC),
a set of uniform business laws that protect consignments. For instance,
under the UCC, if damage to your artwork results from the gallery’s
negligence, the gallery must pay for the loss. If the damage is not the
fault of the gallery—for example, there’s flooding or a fire—the
gallery may or may not be liable, depending on how the courts in that state
interpret the UCC.
The UCC is not always so helpful, however. Under the UCC, if a gallery files for bankruptcy, the gallery’s creditors can seize your consigned goods as payment for the gallery’s debts! In other words, anyone owed money by the gallery can take your artwork as payment. You must stand in line behind the other creditors in bankruptcy court and hope that the judge awards you some compensation for your consigned goods.
You can avoid this unhappy outcome by fulfilling one of following three
requirements under the UCC:
• File a UCC-1 form (known as UCC Form 1) at the time of the consignment
in the county where gallery is located.
• Have the gallery owner post a sign telling the public that the goods
are consigned (in Iowa, artists are provided this option).
• Prove that creditors were aware that the gallery sold consigned
goods.
Although artists rarely use these cumbersome UCC requirements, you may find it worthwhile—in the case of high-ticket, one-of-a-kind items—to file the UCC form. The filing creates a lien (a legal claim over property) elevating you to the level of a “secured creditor” and putting you at the head of the line in bankruptcy court. If you do file the form and obtain the lien, you must remove the lien at the time of any sale.
Having the store or gallery post a sign—the second UCC requirement—may seem like an awkward request, but more and more stores and galleries are complying with such requests. Include a requirement in your consignment agreement that the gallery post a notice such as “Artwork at this gallery is sold under the terms of consignment agreements.”
Many artists will find the third requirement difficult to accomplish since it requires proof creditors of the gallery were aware of the consignment. Some consignors (the artists or crafts workers) have accomplished this requirement by sending the creditors a copy of the consignment agreement. As you can imagine, the average artist—who does not know who the creditors are and who may not have a written consignment agreement—would find this impractical.
State Consignment Laws
Because the UCC has proven to be frightening for artists, many states have
passed special consignment laws to protect them from gallery abuses and
bankruptcy. So far, 31 states have passed art consignment laws—Alaska,
Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia,
Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New
York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Washington,
and Wisconsin. Iowa
Code section 556D.2 deals with consignment issues.
Most of these state laws provide a shield from a consignee’s bankruptcy by eliminating the ability of creditors to seize consigned goods. (In reality, enforcing these laws usually requires hiring a lawyer and filing claims in bankruptcy court.) Half of state laws require a written consignment agreement as a condition for enforcing the law.
Determining whether your artwork qualifies as “art” under state laws can be confusing. Many state consignment laws apply only to “fine art.” Fine art is traditionally defined as a painting, sculpture, drawing of graphic art or print, but not multiples. Other states—for example, Arizona and Ohio—specifically include crafts under consignment laws (defining them as any work made from clay, textile, fiber, wood, metal, plastic or glass).
Consignment Agreements
Traditionally, most artists have used oral agreements to establish consignments.
Today, you should use a written consignment contract, since it can provide
benefits for you, obligations for the gallery and, most importantly, is
required under many state’s consignment laws.
Your consignment agreement should include:
• the store or gallery’s responsibility for damages to the goods
• the retail prices for the goods
• the inventory being consigned
• the store or gallery’s fees for consigned goods
• who pays for shipping
• promotional responsibilities, if any, and
• a requirement the store or gallery post a sign regarding consignment
(a condition that may protect you in the event of the consignee’s
bankruptcy).
Also, if possible, include an attorney fee provision (the loser in a lawsuit pays the winner’s attorney fees) and an arbitration provision (requiring settlement by a private arbitrator, not a judge). These provisions create incentives for rapid settlement of all (non-bankruptcy-related) disputes.
A written agreement provides practical benefits, but using common sense and your business radar provides the best protection. Ask other artists about their experiences with specific stores and galleries. Avoid large orders until you have built a level of trust with an unknown shop. Ask the store for references from other artists. If you’ve got a funny feeling about a shop, trust your intuition and just don’t do it.
Richard Stim specializes in small business, copyright, patents, and
trademark issues. He practices law in San Francisco and has represented
photographers, software developers, crafts people, publishers, musicians,
and toy designers. He is the author of many books, including Whoops
I'm in Business, Music Law, and Profit from Your Idea.
