Article
Artworks on tour
Is security interest also along for the journey?
Nowadays, highly specialized, global art logistics companies move masterpieces of art all over the world with incredible speed. But does the security interest in these artworks also accompany these journeys?
Given the international nature of the art business, demand for artwork transport is high: art houses, galleries, auction houses, art dealers, collectors or even family offices trade in artworks worldwide, loan them for exhibitions across borders, and exhibit them for sale at international art fairs. However, these artworks often also serve as loan collateral for art-based financing. Whenever works of art encumbered with security interests embark on a journey, secured parties often ask whether their security interests are still valid abroad. For creditors of secured receivables, and lenders in particular, it is vital they retain their security interest when an artwork serving as collateral is exhibited abroad and, if necessary, can claim this collateral item.
National law: law of the host state
Most of the world's legal systems allow contracting parties, especially those engaged in entrepreneurial activities, to freely define their mutual rights and obligations in a contract following the law of a country of their choice. For example, within the EU, Article 3 of the Rome I Regulation states that contracting parties residing in an EU Member State may select the governing law of any EU Member State or third country for their contracts. The same also applies to persons that have their habitual place of residence or registered office in a third country.
However, regarding the rights that exist in a movable thing, the decisive principle of almost the entire world is that the law of the place where the object is located applies, and the parties may not, by way of contractual agreement, replace this law’s applicability with the law of another country (lex rei sitae).
In practice, this means the parties can only agree on a security interest in an artwork that is governed by the law of the country where the artwork is physically located. Therefore, they cannot agree on a valid right of pledge in a painting stored in Stuttgart governed by Swiss law, nor create any security interest in a sculpture exhibited in London in favor of the secured party under German law.
Converting security interest after artworks cross the border
The cross-border transport of movables serving as collateral follows the principle of lex rei sitae—the security interest arising in the home country continues to exist after the border is crossed, but only if and to the extent the destination country’s law also recognizes such a security interest. Therefore, the home security interest can be transformed into the destination country’s security interest, which must be examined in advance when preparing to transport an artwork with a security interest.
For example, Germany’s “Sicherungseigentum” (ownership transferred by way of security) enables the secured party to obtain a security interest against a movable thing without having to take possession of that thing. Therefore, despite a security interest in favor of the secured creditor, owners can leave their paintings hanging on the walls of their homes and continue to admire them—or exhibit the art in their galleries.
However, many legal jurisdictions do not recognize a security interest where the secured party is not required to possess the thing and the securing party retains the possession of the thing itself. For example, if art lovers want to take their artwork to their vacation homes abroad, creditors or their attorneys must check whether the destination country’s law recognizes the Sicherungseigentum as a means of security and, if yes, what are the differences in application.
If the artwork moves through several countries in its journey, the rule that applies in principle, at least for transport by air and sea, is that for the transport’s duration, the security interest in the thing is governed by the law of the country under which the boat or airplane transporting the artwork is registered.
Requirements of contractual provisions
To maintain the security interest in the destination country with legal certainty, secured parties should also obtain legal advice about whether their security interest will continue to be valid in that country, and with what differences. If possible, a separate contractual agreement between the parties should stipulate that the security interest created in the home country is also valid abroad. If the security interest’s prerequisites are identical in both countries, as a general rule, clauses confirming and clarifying the applicability of the foreign security interest should suffice.
If the security interest abroad differs, the contract must include appropriate clauses to ensure the initially created security interest is validly converted into that of the destination country. If the destination country’s legal system allows the security interest to be registered in public registers, this option—at least if the artwork remains in the destination country for an extended period—should be considered.
Summary
Organizing the transport of an encumbered artwork not only requires planning its logistics and insurance, but also examining whether the security right survives when arriving in the destination country. Usually, the parties involved can agree on contractual provisions at a reasonable expense, so that a creditor's security interest in works of art can remain in force abroad.
However, since the transport of artworks is often connected with the special situations of an exhibition or a possible sale abroad, additional provisions between the parties involved that are specific to these circumstances are required.
Published: December 2023
This article has been published in the 8th. Deloitte und ArtTactic Art & Finance Report.
