Sell-side introductory commissions
To win consignments, auction houses sometimes pay introductory commissions to individuals who can influence which house the consignor selects to handle the sale. For example, suppose a collector is thinking about selling part of their collection. Having not sold many works before, she is uncertain about how to proceed. If someone close to her offers to introduce her to the right auction house to handle the sale, the seller is likely to take them up on the friendly offer. The introduction takes place, and sometime later the collector signs a consignment agreement with that auction house.
However, that person may have been sharing information with the auction house without the collector’s knowledge. Such information could inform how the auction house approaches and negotiates with the collector—e.g., what is motivating them to sell, whether they are savvy deal negotiators, or what type of specialist team will impress them. The go-between may also have an agreement with the auction house to be paid a success fee, perhaps two percent of the final hammer price. The more important their contribution to the auction house in winning the consignment, the higher the IC they may receive. From the perspective of the auction house, the IC is yet another cost to be netted against the buyer’s premium they earn on the sale.
Sometimes the payments are for legitimate services the consignor is aware of. But each auction house has its own policy on who is responsible for disclosing to the consignor that ICs related to the sale of their property are being paid. Some stipulate that the IC recipient is solely responsible for disclosing this fee, absolving the auction house of any responsibility. Others may include a reference to a third-party payment in the consignment agreement, without mentioning its size or value. As a result, consignors may not be aware of the existence or magnitude of introductory commission payments, nor that information they may have presumed was confidential was being shared with an auction house. In these types of situations, the consignor is effectively paying the third party for services they may never have agreed to pay for, had they been informed Moreover, the IC payment warps the economics of the deal, because the collector and auction house could have elected to share the go-between’s fee in some other way.
Given these limited disclosure practices, what should collectors do to protect themselves? First, tell the auction house that any third-party fee arrangements related to the sale of their property must be fully disclosed. Since an auction house is an agent for the seller with an implied fiduciary duty, there should be no pushback on this request. If there is, the collector should immediately stop discussions. Second, this disclosure should be incorporated into the formal consignment agreement. The auction house should provide representations and warranties that it has informed the consignor of all the names and payments that will be made to third parties related to the sale of their property.