Is It Risky to Sell Art or Craft Work on Consignment?

Consignment sales are a common way for artists to sell their work and make money. Consignment is essentially an arrangement in which artists provide their work to a central store, and that store then sells the work to customers. The artists are paid only if and when the works sell.

The artist-seller remains the owner of the goods until they are sold, at which time the store is entitled to a percentage of the proceeds. This allows artists to sell their work without the expense of a large brick-and-mortar store, and it allows stores to have inventory without buying large quantities of goods that may never sell.

However, consignment arrangements are not without their legal and financial risks for artists. For example, what happens when your work is damaged? Or when the store that holds your goods ceases operations?

There are three types of legal protection for consignors: (i) the Uniform Commercial Code (UCC); (ii) state consignment laws, and (iii) written consignment agreements. You may, however, find some of the laws difficult to comprehend, inconsistent, and expensive to enforce. Below is a brief summary of these legal protections.

How the Uniform Commercial Code Protects Consignors

The UCC is a comprehensive set of rules governing the sale of goods and other commercial transactions. Every state has adopted a version of the UCC, and while there are important differences among the states, most of the basic norms are the same. Parts of the UCC serve to protect and regulate consignments, among other commercial sales.

For instance, under the UCC, if damage to your artwork results from the gallery's negligence, the gallery must pay for the loss. If the damage is not the direct fault of the gallery because of an event such as a flood or a fire, the gallery may or may not be liable, depending on how the courts in that state interpret the UCC.

The UCC is not always so helpful, however. Under the UCC, if a gallery files for bankruptcy pursuant to the U.S. Bankruptcy Code, the gallery's creditors can seize your consigned goods as payment for the gallery's debts! In other words, anyone owed money by the gallery can take your crafts as payment. You must stand in line behind the other creditors in bankruptcy court and hope that the judge awards you some compensation for your consigned goods.

You can avoid this unhappy outcome by fulfilling one of following three requirements under the UCC:

• File a UCC-1 form (known as "UCC Financing Statement") at the time of the consignment in the county where gallery is located.
• Have the gallery owner post a sign telling the public that the goods are consigned (this option is not available in all states).
• Prove that creditors were aware that the gallery sold consigned goods.

Although artists rarely follow these cumbersome UCC requirements, you may find it worthwhile. This is particularly true if you are consigning high-ticket, one-of-a-kind craft items. The filing creates a lien (a legal claim over property) elevating you to the level of a "secured creditor" and putting you at the head of the line in bankruptcy court. If you do file the form and obtain the lien, you must remove the lien at the time of any sale.

Having the store or gallery post a sign, the second UCC requirement, may seem like an awkward request, but more and more stores and galleries are complying with such requests. Include a requirement in your consignment agreement that the gallery post a notice such as "Crafts at this gallery are sold under the terms of consignment agreements." As noted above, this may not be effective in all states.

Most artists would find the third requirement difficult to accomplish, since it requires proof that creditors of the gallery were aware of the consignment. Some consignors have accomplished this requirement by sending the creditors a copy of the consignment agreement. As you can imagine, the average artist, who does not know who the creditors are and who may not have a written consignment agreement, would find this impractical.

Protection From State Consignment Laws

Because the UCC requirements can be a tough fit for the artist culture, many states have passed special consignment laws to protect artists from gallery abuses and bankruptcy. So far, 31 states have passed art consignment laws: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Washington, and Wisconsin.

Most of these state laws provide a shield from a consignee's bankruptcy by eliminating creditors' ability to seize consigned goods. In reality, enforcing these laws usually requires hiring a lawyer and filing claims in bankruptcy court. This process can be expensive, sometimes more expensive than the value of the artists' goods. Moreover, many of the state laws require a written consignment agreement as a condition for enforcing the law.

Determining whether your artwork qualifies as "art" under state laws can be confusing. Many state consignment laws apply only to "fine art." Fine art is traditionally defined as a painting, sculpture, drawing, graphic art, or print, but not multiples. Some states, like Arizona and Ohio, specifically include crafts under consignment laws (defining them as any work made from clay, textile, fiber, wood, metal, plastic, or glass).

Drafting a Consignment Agreement to Protect Your Works

Traditionally, most artists have used oral agreements to establish consignments. Instead, you should insist on using a written consignment contract, since it can provide benefits for you, obligations for the gallery, and, most importantly, is required under many state's consignment laws.

Your consignment agreement should include:

• the store or gallery's responsibility for damages to the goods
• the retail prices for the goods
• the inventory being consigned
• the store or gallery's fees for consigned goods
• who pays for shipping sold merchandise to consumers
• promotional responsibilities, if any, and
• a requirement that the store or gallery post a sign regarding consignment (a condition that may protect you in the event of the consignee's bankruptcy).

Also, if possible, include an attorney fee provision (saying that the loser in a lawsuit pays the winner's attorney fees) and an arbitration provision (requiring settlement by a private arbitrator, not a judge). These provisions create incentives for rapid settlement of all (non-bankruptcy-related) disputes.

A written agreement provides practical benefits, but using common sense and your business radar provides the best protection. Ask other artists about their experiences with specific stores and galleries. Avoid large orders until you have built a level of trust with an unknown shop. Ask the store for references from other artists.

Asking for this sort of agreement might seem overly formalistic for an arts-related endeavor. But by discussing and clarifying these important points prior to giving over your work, you will sidestep many potential landmines.

Next Steps in Your Arts Business

Take care of the legal and business side of things now, so you can focus on creating your crafts. For help sorting out the legal issues involved in the ownership, protection, and transfer of visual artworks, get Protect Your Rights as an Artist by Richard Stim (Nolo).