Legal issues in the booming arts industry – what you need to know28Jan2021
This article was originally published in the Dutch Chamber of Commerce in Hong Kong’s DutchCham magazine.
As investors all over the globe are looking to diversify beyond the volatile and uncertain stock and bonds markets, they increasingly turn to alternative investment classes such as wine, watches, classic cars, whiskey and art. If considered and structured properly, these asset classes not only offer solid returns that rival stocks and bonds, they are also much more fun to own.
However, the unregulated landscape of this diverse and complex industry can lead to legal questions and complicated disputes. Fraud and forgery are also common issues. Below we highlight some of the current legal topics in the industry.
Investing in art
Art is comfortably in the top three of any list of popular alternative investment categories and no longer the exclusive domain of high net worth private collectors, large corporations and museums. Because of the high entry prices for individual works of art and the risks associated with forgery, theft, damage and volatility in respect of specific categories of art or individual artists, there has been a real surge in so-called ‘art funds’. Art funds are collective investment schemes dedicated to generating returns through the acquisition and disposal of works of art. Often managed by professional investment managers and/or advisors, privately offered and unregulated, they are both applauded for offering retail investors access to this market and criticised for giving these investors unregulated exposure to a very risky asset class.
Financing investment in art
Another development on the back of the rise of art as an alternative investment class is art finance. Because of the high value of individual works and the general lack of liquidity in the arts markets, investors are increasingly interested in “leveraging” their existing art collection to obtain finance, either for further acquisitions or for other purposes like general liquidity and/or working capital purposes in difficult times.
Or sometimes just to benefit from the potential upside of financing relatively high potential returns with a relatively low and stable interest rate – similar to how private equity funds and other professional investors have in the past few decades financed their investments in companies. Nowadays, there are even specialist lenders who offer loans to private consumers to acquire art in the same manner in which banks offer mortgages to buy property. They will usually finance up to 50% of the value of the work of art with the object charged or pledged to the lender as collateral for the loan – ideally with the flexibility to have it on display rather than in a bank’s vault!
With the current pandemic and other disrupting factors (such as the geopolitical tensions and climate change) expected to keep traditional markets volatile, it appears the burgeoning arts markets and related products and services such as retail art funds and secured art-based lending will continue to grow.
Protecting your art
Unfortunately fraudsters are also seeking to take advantage of this booming market. In recent years and especially during the COVID-19 pandemic we have seen a significant increase in many types of fraud including within the arts industry. This includes old-fashioned forgery of works of art but also tax fraud, insurance fraud and the sale of art to launder money. Our fraud and asset recovery team was instructed to advise on legal issues in the well-publicised Bouvier Affair; a US$2 billion art fraud which ranks as one of the largest frauds of its kind in recent history. It involved a number of international law suits in Hong Kong, Monaco, Switzerland, France, Singapore and the United States. It was alleged that Swiss art dealer Yves Bouvier misrepresented the original cost of his art works and subsequently appropriated a secret commission from his client. We assisted Mr Bouvier in successfully discharging a series of injunctions in Hong Kong and Singapore, and in repatriating the dispute to its natural forum, Switzerland.
A further difficulty clients may experience is establishing their right to recover property stolen from them. In a recent case, involving a high value watch, a major auction house was found to be in possession of property stolen from our client. As the auction house had come into possession by apparently legal means of property that had been acquired by illegal means, we were unable to proceed through conventional claims in conversion, and were obliged to proceed on the basis of claims in detinue and retrover. Notwithstanding that these centuries old causes of action are seldom used, they were effective in enabling us to recover our client’s stolen property from the auctioneers.
Resolving disputes in the art industry
Despite the market opening up to a broader public, disputes in the art industry are still likely to involve highly sensitive information and high net worth individuals who appreciate their anonymity. To avoid lengthy court battles being played out under the gaze of the public eye, a popular option for art dealers, collectors and art houses is to choose arbitration as the method of dispute resolution. Arbitration does not involve the courts and is a confidential and often efficient method of resolving disputes while maintaining the privacy and dignity of all involved.
Jeff Lane/ Kevin Warburton
For more information on the above, please contact our team: