The New York Court interpreted that COVID-19 Pandemic is a natural disaster within a force majeure clause in excusing contract performance

The pandemic had an impact on the contractual performance beyond the parties’ reasonable control, hence the parties were entitled to terminate the agreement.

18 January 2021 | by LexisNexis Hong Kong

Introduction

In JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 U.S. Dist. LEXIS 237085,the United States District Court for the Southern District of New York held that the COVID-19 pandemic is a “natural disaster” within a force majeure clause. The pandemic had an impact on the contractual performance beyond the parties’ reasonable control, hence the parties were entitled to terminate the agreement.

Facts

In June 2019, JN Contemporary Art LLC (“JN”) entered into agreements with Phillips Auctioneers (“Phillips”) for the auctioning of two paintings: one painting by Rudolf Stingel (“Stingel Painting”) owned by JN and another by Jean-Michel Basquiat (“Basquiat Painting”) owned by Phillips. The Basquiat Painting was sold at a public auction and the Stingel Painting was scheduled to be auctioned in New York in May 2020.

Pursuant to the agreements, JN was obligated to bid on the Basquiat Painting and JN did. Phillips guaranteed that JN would receive USD $5 million (“Guaranteed Minimum”) from the sale of the Stingel Painting at the auction house subject to a termination clause (“Termination Provision”), which stated:

“In the event that the auction is postponed for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster … we may terminate this Agreement with immediate effect. In such event, our obligation to make payment of the Guaranteed Minimum shall be null and void and we shall have no other liability to you.”

As the outbreak of the COVID-19 pandemic emerged in New York in March 2020, Governor Andrew Cuomo declared a State Disaster Emergency and imposed a series of executive orders restricting and prohibiting all non-essential business activities until June 2020. As such, Phillips postponed the sale of the Stingel Painting, terminated the agreement and refused to pay JN the Guaranteed Minimum as the circumstances rendered the obligations null and void.

JN sought an order compelling Phillips to auction the Stingel Painting and pay in accordance with the agreement. JN brought several causes of action claims against Phillips for their termination of the agreement, including breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty and equitable estoppel.

In response, Phillips filed a motion to dismiss the action. Phillips contended that the unambiguous Termination Provision provided them, without limitation and liability, the contractual right to terminate the agreement as the auction was postponed due to “…circumstances beyond our or your reasonable control…” in light of the COVID-19 pandemic.

Judgment

The court granted, Phillips, the motion to dismiss the action.

District Court Judge Denise Cote interpreted that the COVID-19 pandemic and the regulation that accompanied fell squarely within the scope of the force majeure clause, which fit into the ordinary meaning of the words “natural” and “disaster” and the phrase of “natural disaster”, by citing references of the definitions in Black’s Law Dictionary and Oxford English Dictionary. By any measure, the COVID-19 pandemic fell within the definitions.

The court also ruled that the COVID-19 pandemic situation in New York and the government restrictions had an impact on and ceased Phillips’ ordinary business operation. Accordingly, Phillips could invoke the Termination Provision, without liability, because these circumstances were beyond Phillips’ reasonable control. The judge rejected JN’s argument on the doctrine of ejusdem generis that pandemic and the governmental restrictions were not similar enough to the other circumstances outside of the parties’ control listed in the Termination Provision. It is a principle of construction that the inclusion of listed items cannot narrow the general definition. The court gave a broad interpretation to the Termination Provision considering that the COVID-19 pandemic fit within the general meaning of this clause. The Termination Provision included “without limitation” a list of force majeure events beyond the parties’ reasonable control but are not conclusive examples or a preclusive list of force majeure situations.

Although neither the New York Court of Appeals nor the Second Circuit Court of Appeals has yet addressed whether the COVID-19 pandemic should be classified as a natural disaster, the Second Circuit has identified “disease” as an example of natural disaster. Other courts have already determined that the COVID-19 pandemic qualified as a natural disaster, as that term is defined by statute. So, it is undisputed that the COVID-19 pandemic is a natural disaster.

Last but not least, pursuant to multiple case precedents, the court dismissed all JN’s several causes of action claims. Accordingly, the court concluded that there was no breach as the Termination Provision entitled Phillips to terminate the agreement following a force majeure event.

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