We recently reported on the denial by the U.S. District Court for the Southern District of New York of an art seller’s motion to dismiss a buyer’s claim for breach of contract arising out of the seller’s alleged failure to comply with resale restrictions contained in a contract governing the seller’s acquisition of the artwork at issue in DW Properties v. Live Art Market.[1] As we previously reported, the court found that, although the buyer was not a party to the contract containing the resale restrictions, the seller’s failure to comply with those requirements could undermine the title that the seller passed to the buyer, giving rise to the seller’s potential liability to the buyer for breach of warranty of good title. In reaching that determination, the court did not address the underlying—and hotly debated—question of whether the resale restrictions at issue in that case were actually enforceable.
Resale restrictions implicate the common-law rule against unreasonable restraints on alienation, which has its origins in the law of real property (i.e., land), but also applies to transfers of personal property (including works of art). As a general matter, the rule invalidates resale restrictions that are unreasonable; New York courts consider the restriction’s duration, price and purpose when making this determination.[2]
Although the use of resale restrictions is increasingly common in the art world, New York courts have tested their validity in the context of the sale of artworks only once, in a 1992 case entitled Wildenstein & Co. v. Wallis,[3] which involved movie producer Hal Wallis’s agreement to grant to art dealer Wildenstein & Co. rights of first refusal and exclusive consignment over Wallis’s collection of Impressionist and Modern paintings. Wallis granted the rights to Wildenstein in exchange for Wildenstein’s return of certain paintings to Wallis in settlement of a dispute that arose out of Wildenstein’s acquisition of the paintings from a third party that—unbeknownst to Wildenstein—lacked authority to sell them.[4]
Wildenstein filed suit to enforce its first refusal and exclusive consignment rights when it learned that Wallis’s foundation intended to consign paintings from his collection to Christie’s auction house.[5] The first refusal right required Wallis’s foundation to give Wildenstein at least 30 days prior notice of the terms of any proposed sale of a painting and granted Wildenstein the option to purchase it within 20 days on the same terms as the triggering purchase offer. The exclusive consignment right required Wallis, if he wished to sell any painting at auction, to first consign it exclusively to Wildenstein for six months.[6]
New York’s highest court found that the resale restrictions to which Wallis agreed were not unreasonable restraints, and therefore upheld them.[7] In doing so, that court found that the 30-day first refusal period and six-month exclusive consignment period were reasonable in duration, noting an art gallery expert’s testimony that the six-month exclusive consignment right was unusually short.[8] The court further found that the method of price-setting was reasonable, as the first refusal right was conditioned on payment equal to a third party’s offer, and the exclusive consignment right called for Wallis’s input on the price, which, absent agreement by the parties, would be set by a major international auction house representative.[9] The purpose was also reasonable—in exchange for helping Wallis recover a valued part of his collection, Wallis assured Wildenstein that, in the event of sale of one or more of the paintings, Wildenstein would have the opportunity to realize the profit or commission it hoped to earn when it originally acquired them.[10]
While the validity of resale restrictions on the sale of an artwork is ultimately a fact-specific question of reasonableness depending on their duration, price and purpose in each case, the Wildenstein case provides useful guidance. As for the art studio’s 3-year no-auction and first refusal rights at issue in the pending DW Properties v. Live Art Market litigation (which is still in its early stages), it remains to be seen if the New York district court will have the opportunity to determine whether the rule against unreasonable restraints on alienation invalidates those restrictions. Live Art has not yet posed that challenge.
[1] Docket No. 1:23-cv-07004 (JPO) (S.D.N.Y. Aug. 9, 2023).
[2] See, e.g., Metropolitan Transp. Auth. v Bruken Realty Corp., 67 N.Y.2d 156, 167 (1986).
[3] 79 N.Y.2d 641 (1992).
[4] Id. at 646.
[5] Id. at 646-47.
[6] Id. at 646.
[7] Id. at 651-52.
[8] Id.
[9] Id. at 652.
[10] Id. at 653.