Escrow services: Trust is good, control is better
Is it a Max Ernst, André Derain, Fernand Léger…or Wolfgang Beltracchi? In countless articles, books and documentaries the famous art forger tells the world his story. What appears as common theme over and over again is how apparently easy it was to create and sell his counterfeit art on the international art market – and earn millions. So-called ‘escrow solutions’ mitigate the risks associated with art transactions. Here is how it works.
Trust is the essential element underlying the art sale.Experienced art dealers regularly act according to this principle when selling and purchasing artworks in the international art market. Furthermore, sellers frequently refer to this guideline when a buyer wishes to purchase an artwork, but is hesitant to pay the purchase price prior to receiving appropriate assurances concerning the condition of the artwork and transfer of ownership.
Buyers, on the other hand, often tend to act in accordance with the Russian saying: ‘Trust is good, control is better.’ Over the years, and as a reaction to the media coverage on art forgers, there has been an increasing demand for due diligence, in particular by art collectors and their advisors, to ensure that the potential risks of art transactions can be mitigated in a professional way. In order to overcome potential issues regarding the sale of an artwork, escrow solutions provide a protective layer and give peace of mind to all parties involved.
Getting started: establishing a contractual relationship
The starting point of an escrow transaction is an existing contractual relationship between two parties. Our seller, Ms. Silverton, lives in London and seeks to market a 1919 Fernand Léger. Our buyer, Mr. Brunswick, lives in Singapore and is keen to purchase the piece to complement his collection. They enter into a purchase agreement regarding the artwork. The contract sets out the typical terms of its sale and purchase, in particular the specifications of the artwork and the purchase price.
The escrow agreement defines the details of the sale procedure
The escrow agreement is an additional, separate agreement in which the details of the sale procedure are determined between the seller, the buyer and an escrow agent.
- The escrow agent must be independent of both Mrs. Silverton and Mr. Brunswick as a trusted third party.
- Generally, Mr. Brunswick’s duty under the escrow agreement is the advance payment of the purchase price to the escrow agent’s bank account. The escrow agent holds the received purchase price as escrow funds in its own name, but exclusively for the account of the buyer.
- Ms. Silverton’sdutyis to deposit the artwork with the escrow agent or to transfer the necessary documentation to the escrow agent, stating the right of disposition of the artwork.
Prior and during the entire transaction the artwork is typically being held in a storage facility for safekeeping. Holding the artwork in such a space is generally the preferred option, as it can remain in safe custody until the transfer of ownership is completed. In our international art transaction, Ms. Silverton and Mr. Brunswick may wish to hold the artwork in a Freeport before and after completion of the transfer of ownership in order to mitigate import taxes and custom duties in connection with the sale.
Does the artwork fulfill the agreed requirements?
The escrow agreement sets out in detail, which documentation the seller Ms. Silverton needs to deliver to the escrow agent such as important storage facility papers as well as all relevant documentation concerning the Léger. Depending on the specific provisions of the escrow agreement, her documentation can include provenance details (e.g. import/export documentation), a recent condition report showing the physical condition of the artwork and an updated certificate from the Art Loss Register evidencing that the artwork was not reported stolen by a previous owner. The escrow agent holds such documentation available to Mr. Brunswick for inspection to secure sufficient assurances that the artwork fulfills the agreed requirements.
Releasing the payment and transferring ownership
Once Mr. Brunswick has inspected Ms. Silverton’s documentation, he will instruct the escrow agent to release the purchase price. Consecutively, the escrow agent transfers the purchase price to Ms. Silverton after deducting the escrow fee in accordance with the terms of the escrow agreement. At the same time, the escrow agent hands Mr. Brunswick over the original documentation as well as the necessary means to access the artwork, in particular the storage facility papers with an instruction letter of Ms. Silverton, evidencing the transfer of ownership from the seller to the buyer. The escrow agent needs to ensure that all relevant persons, in particular the responsible staff at the storage facility manager where the artwork is kept, are adequately informed and instructed with regard to the transfer of ownership.
After completion of the steps set out in the escrow agreement, Mr. Brunswick, who is now the new legal owner of the artwork, can freely dispose of it at the storage facility and arrange for new insurance coverage.
Getting the nitty-gritty right
In addition to the specific details of the procedure described above, the escrow agreement usually contains representations and warranties by the seller and the buyer in favor of the escrow agent. On one hand, Ms. Silverton warrants that the artwork is unencumbered and that she has adhered to all previous export and import duties as well as concluded appropriate insurance coverage for the artwork. On the other hand, Mr. Brunswick warrants that the purchase price transferred to the escrow agent complies with the relevant anti-money laundering requirements.
Arbitration – just in case something goes wrong
As in every contractual relationship, the risk of a potential breach of the parties’ contractual obligations remains despite best efforts by the professional escrow agent and the clearly defined transaction steps in the escrow agreement. Therefore, the escrow agreement often foresees dispute resolution by arbitration in the country of the escrow agent instead of ordinary court proceedings. Arbitration is often preferred for confidentiality reasons, as the public and the media may find interest in disputes over a renowned artwork.
Transferring ownership in a safe, confidential and satisfactory manner
If you wish to sell or buy artworks of considerable value, the use of escrow services is very often a suitable solution as you are equally protected in a safe and confidential transaction. The escrow solution enables both the seller and the buyer to overcome the issue of each party expecting prior performance from the other party. Furthermore, the increasing need in the art world for appropriate due diligence requires the involvement of professional escrow agents who can define the necessary steps and documentation for the satisfactory transfer of ownership in an art transaction.
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About the authors
Raphael Cica and Birgit Gudat are attorneys at law at Kendris Ltd, Switzerland, a trusted partner of Julius Baer, providing family office, trust and fiduciary services, Swiss and international tax and legal advice, accounting, outsourcing and art management.