Auction guarantees have become a legitimate tool auction houses have been using in order to secure quality consignments. They do this by guaranteeing the seller a sale at a set price minimum price level. Guarantees have not always been looked at as a positive by bidders, as many feel a lack or transparency and as a way of fixing or manipulating prices in favor of the house.
If you may recall, before the decline in art prices in late 2008 guarantees were used by the top auction houses as a means of gaining a competitive edge in procuring consignments. That is fine in an expanding market, but both Sotheby's and Chrisite's had some substantial loses from using guarantees as prices declined and temporarily backed away from them or altered terms after 2008.
Now that the market has rebounded (although there are signs of concern for the near future) major auction houses are using guarantees again, although they are trying to shift the risk away from the auction house to the third party who is brought into the transaction to pledge the guarantee.
Art Info has a very good article on how and why guarantees are being used again. Art Info states it is an enticement needed in a slow market to get quality art, while others think the use of guarantees are an indicator of strength in the market. I think both are correct and that guarantees can be used both in an expanding or declining art market.
Art Info reports
One drawback to these deals is that they can drive away bidders, who are alerted to their presence in the salesrooms by the auctioneers and in cata- logues by a symbol. These bidders perceive an unfair advantage for guarantors and auction houses, which effectively presell the works, precluding anyone else from getting a better deal. "I just feel there are opportunities for doing slightly underhanded things when you are a third-party guarantor," says one New York dealer and former auction house specialist. "It's like you've got an inside edge."
Guarantors doing business at Christie's have another advantage: a "financing fee," which rewards them for the risk they take and which may be in the form of a reduction in the buyer's premium on lots they back and purchase. Christie's spokesperson Toby Usnik explains that the fee "is processed separately from any purchases. As disclosed in our notices section [in the catalogue], the third party may, for convenience, choose to use the financing fee to offset any amounts the third party may owe Christie's, but the third party can also simply take the payment."
This remuneration deal gives Christie's an edge in attracting backers over Sotheby's, which disclaims such practices. "I can assure clients they are bidding in a fair, transparent, and level playing field," says Sotheby’s CEO William Ruprecht. "I could not offer those assurances elsewhere." The house's legal counsel, Jonathan Olsoff, is even clearer on this point. "Our disclosures about irrevocable bidders say that if successful, the irrevocable bidder will be required to pay the full buyer's premium and will not be otherwise compensated."
What if Sotheby's were to provide such a discount in the future? "We would have to report the price net of the compensation paid to the irrevocable bidder," says Olsoff. "However, we would not, in any event, discount the buyer's premium."
Another aspect of third-party guarantees is perhaps less obvious: The fact that consignors need such incentives suggests that confidence in the art market may not have recovered completely. And that means this special form of insurance will not likely disappear anytime soon.
To read the full article, click HERE.
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