Am I not already protected because I only purchase art at auction and from reputable dealers?
Auction houses – both leading, international houses and second-tier, regional auctioneers – as well as galleries and dealers including those that are members of ADAA (the Art Dealers Association of America) attempt in good faith to reduce the legal title risks in the global art market. However, they are not able to avoid these risks any more effectively than individual collectors can avoid them.
Because auction houses, galleries and dealers are not in the business of insuring legal title, they do not actually assume the legal title risks. To do so for countless sales each year, year after year, is not part of their business models. Even the best, largest auction houses cannot and do not undertake the necessary due diligence to identify and prevent exposure to all title risks.
The law imposes on auction houses, galleries and dealers the obligation to guarantee legal title of the objects they sell for a limited number of years. However, these intermediary sellers instead rely on the representations that their sellers or consignors (which might be another dealer) give about the legal title of the work. When a title problem arises, the intermediary looks to their seller or consignor for recourse, placing the buying collector in a “downstream” or “upstream” fight with other parties against which the collector has little or no effective recourse. The seller or consignor might be judgment-proof for any number of reasons, for instance, deceased or no longer in business, located in another country or have no money.
Auction houses also retain by contract the right to unwind or “rescind” an auction sale if in their opinion a real or potential title claim later arises without time or other limitation. This auction house right is based on the auction house’s reliance on the consignor’s representation of clear legal title and its role of being only an intermediary.
Ultimately, traditional art transactions and art industry practices leave collectors at financial risk, because no one except a title insurer is in the position actually to assume the risk of defective legal title.
This means that collectors can lose their precious fine art or other collectibles long after buying them and relying on the assumption of clear legal title including for tax and estate planning. Their only recourse may be to secure reimbursement of the purchase price through costly and time-consuming litigation. Conversely, collectors who have sold art may have to refund the proceeds from the sale long after the money has been spent or defend the clear legal title to their art.