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What now for art businesses? Thoughts from an art lawyer in a time of crisis

2 April 2020

It all started with questions from clients regarding art fairs. What happens from a legal perspective if the organisers need to cancel or postpone the fair? What happens if an art fair that the client has paid for cancels their stand and they can’t exhibit, despite all the associated costs they have already incurred? We reviewed force majeure clauses, supplier and exhibitor terms and conditions, sponsorship agreements and insurance policies. We helped clients negotiate where there was scope to do so. One thing is certain: whatever legal position art businesses find themselves in, this is no fun for anyone.

Furthermore, contractual legal considerations are only part of the picture. Another consideration in all the decisions that art businesses have made, and will have to make, must be health and safety. All businesses have a duty of care to their employees, and they are required to do whatever is reasonably practicable to protect the health, safety and welfare of both their employees and other people who might be affected by their business. Failure to take proportionate action to protect employees could expose the business to negligence- or health and safety-related claims, and could invalidate insurance policies.

Moreover, we have seen the reputational damage done to TEFAF by the decision to proceed with the art fair and the alleged spread of Covid-19 among both exhibitors and visitors to the fair. Then again – and I have not been involved in the situation – some might say that TEFAF could be commended for its efforts to honour its commitments. Since the start of the Covid-19 outbreak, art businesses have been exposed to a heightened risk of legal issues. In particular, there have been instances in which counterparties have sought to delay and/or avoid performance of their contractual obligations (or liability for non-performance of them) and/or to terminate contracts, either because coronavirus has legitimately prevented them from performing their contractual obligations, or because they have sought to use it as an excuse to extricate themselves from a bad deal. Parties have also cited coronavirus as a basis for renegotiation of price or other key contractual provisions.

Now, understandably, most art fairs in the next quarter have been cancelled (such as Masterpiece) or postponed (such as Art Basel), and the art world is adjusting to the new norm of working from home. But can the world of art business successfully operate remotely? Paddle8 filed for bankruptcy just a few weeks ago – by no means the first art-tech business to fall by the wayside. Is it perhaps more of a case of sitting out the next few months? In any event, dealers will no doubt be looking to do what they can now to cut non-essential costs and shore up cash flow.

The UK government’s recent measures to protect jobs and businesses are unprecedented and extremely welcome; albeit much of the detail is still being devised. Rather than make employees redundant, art businesses should consider which of their staff are required in the immediate term, and which employees are no longer able to undertake their roles on a remote basis. Where employees are not able to carry out their roles from home, the new Coronavirus Job Retention Scheme allows employers to apply for a grant from HMRC to cover 80 per cent of the salary of retained employees (up to a total of £2,500 per month, per employee), plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that salary.

The employees covered by this scheme – termed ‘furloughed workers’ – must have consented to it (and any reduction in salary), and they remain on the payroll but must cease to carry out any work for the employer. Employers can choose whether to top up the 80 per cent salary. If the alternative to these arrangements is redundancy, possibly in circumstances in which the employer may not be able to meet their obligations to pay statutory or enhanced redundancy pay or notice pay, employees may readily agree. However, employers should also remember that the scheme remains subject to existing employment law and contracts of employment.

Legislation is also being passed for statutory sick pay (‘SSP’) to be paid from day one of absence (rather than day four) if a member of staff is absent from work or needs to stay at home due to Covid-19. This will apply retrospectively from 13 March 2020. SSP is currently £94.25 per week for up to 28 weeks. Employers will need to check that staff are eligible for SSP. The staff member should where applicable obtain an isolation note from NHS 111, which replaces the need for a sick note in relation to Covid-19. Employers with fewer than 250 employees will be able to reclaim costs of SSP for sickness absence due to Covid-19; this refund will cover up to two weeks’ SSP per eligible employee.

Another important development has been the UK government’s confirmation that it will suspend (for three months from 1 March 2020) the operation of the law relating to ‘wrongful trading’ (with a possible extension). Wrongful trading law can make directors of companies personally liable to contribute to the assets of an insolvent company where the director knew or ought to have concluded at some point before the commencement of the liquidation/administration that there was no reasonable prospect that the company would avoid going into insolvent administration/liquidation and failed to take every step to minimise the potential loss to the company’s creditors. The suspension is designed to allow directors of companies to pay staff and suppliers even if there are fears the company could become insolvent. Art businesses should, however, take note that the business secretary also cautioned that ‘all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force’.

In terms of other cost savings or cash flow assistance that might be relevant to art businesses, the chancellor, Rishi Sunak, has announced various tax-related developments during the course of March, including:

• Expanded business rates reliefs (and an announcement of a review of business rates);
• A £2.2 billion grant scheme for small businesses;
• A coronavirus business interruption loan scheme to support up to a further £1 billion lending to small- and medium-sized enterprises;
• Deferring the payment of value-added tax from 20 March 2020 to 30 June 2020 (with taxpayers being afforded until the end of the 2020/21 tax year to pay any liabilities that have accumulated during the deferral period);
• Deferring the payment of income tax due in July 2020 (under the self-assessment system) to January 2021; and
• HMRC will waive late-payment penalties and interest for businesses experiencing administrative difficulties contacting HMRC or paying taxes.

If art businesses can manage to ride out the next few months, where will the UK art market be? Art businesses do have advantages over other industries: they are not sitting on perishable goods withering in storerooms; they are not dependent upon complicated and disrupted international supply chains; and unique artworks cannot be replicated by a supplier in another jurisdiction that has already come through the crisis. On the face of it, art dealers with high-quality stock may be well placed after a hiatus.

That said, the art market is of course reliant upon collectors. What will the new world order be when things eventually settle down? With oil prices and stock markets at record lows, and ever-increasing reliance on IT, will wealth shift to those in different countries and/or different demographic groups? If so, will tastes and buying habits change? Will prices of fine art remain buoyant, as in 2009 with the flight to alternative asset classes?

Nobody has a crystal ball, and the best that art business owners can probably do at present is to focus on keeping families and staff healthy, and to take all necessary steps to ride out the storm for (at least) the next three to six months. If there is scope to do so, art businesses may choose to spend some of this quieter time putting in place systems and documentation that will help them to trade better when art sales do come back. Indeed, some galleries are using this time to focus on drafting/updating their terms and conditions of sale (physical and online), consignment agreements and AML policies.

It has been fortifying to see numerous online shows opening (among my favourites is Lyndsey Ingram’s virtual exhibition of works by Georgie Hopton and Gary Hume, with its prescient title ‘Hurricanes Hardly Ever Happen’) as well as Art Basel’s Online Viewing Rooms (born out of another recent crisis). I for one am hopeful that human ingenuity and tenacity will continue to bolster this ever-imaginative sector.

Sarah Barker is a Partner and Head of the Art Group at law firm Lee & Thompson LLP

This article does not constitute legal advice and should not be relied upon. If you require legal advice in relation to any of the issues raised in this article, then specific legal advice should be sought on a case by case basis.

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