As the ever-evolving COVID-19 pandemic is no longer considered “unprecedented” and the restrictions associated with the pandemic have become a part of “the new abnormal,” district courts nationwide are beginning to grapple with the business fears that came to life in March 2020: “Will my contract’s force majeure provision protect me when COVID-19 and its consequent regulations prevent me from doing business as usual?”

For those in the Southern District of New York, the answer may be “yes,” which brings relief to contractual obligors and dread to contractual obligees. The Southern District’s December 2020 ruling in JN Contemporary Art, LLC v. Phillips Auctioneers LLC sheds light on how COVID-19 could be classified as a “natural disaster” that triggers a force majeure clause. The decision also provides insight into the Southern District’s shift in what constitutes a force majeure, which, for some, could become a contractual quandary.

Case facts

The facts of the JN Contemporary case are fairly straightforward, and are boiled down here for clarity:

• JN Contemporary Art, LLC (JN) buys, sells, and exhibits works of art in its Manhattan art gallery.
• Phillips Auctioneers LLC (Phillips) hosts private and public auctions for works of art on consignment. 
• June 2019: Phillips agrees to consign two pieces of JN’s artwork: the “Stingel Painting” and the “Basquiat Painting” under two separate agreements (the Basquiat Agreement and the Stingel Agreement).
  • The Basquiat Painting sells the same day of the Basquiat Agreement. JN receives its commission.
  • The Stingel Painting is set to be auctioned in May 2020. 
• December 2019: JN obtained a $5M loan from Muses Funding using the Stingel Painting and another work as collateral.
  • In connection with that agreement, JN, Phillips, and Muses executed a Security Amendment granting Muses a first-priority lien on the Stingel Painting. 
    • Phillips agreed to pay Muses the $5M Guaranteed Minimum Payment and net auction proceeds under the Stingel Agreement.
• March 2020: Governor Andrew Cuomo declared a State Disaster Emergency and issued a series of executive orders which ultimately barred all non-essential business activities through June 2020. 
• March 14, 2020: Phillips announced a postponement of auctions.
• June 1, 2020: Phillips terminated the Stingel contract with JN, claiming COVID-19 restrictions which caused the auction to be postponed past May 2020 constituted a force majeure.
• June 8, 2020: JN sues Phillips seeking to force Phillips to sell the painting at its next virtual auction and alleging breach of contract, among other claims.
• July 2, 2020: Phillips holds a virtual auction and does not place the Stingel Painting for auction.

JN Contemporary’s force majeure analysis

In deciding the case, the Southern District of New York faced two critical questions:

1. Is the Stingel Agreement ambiguous, i.e., open to more than one objective, reasonable meaning? Or, does the language have a “definite and precise meaning about which there is no reasonable basis for a difference of opinion?” 
2. If the Stingel Agreement is not ambiguous, do its terms allow Phillips to terminate the contract due to COVID-19?

After reviewing the Stingel Agreement, the court determined its provisions were not ambiguous. Critically, the Southern District found that the pandemic constituted a “natural disaster” and therefore fell within the scope of the Stingel Agreement’s termination clause, which read:

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, fire, flood, general strike, war, armed conflict, terrorist attack or nuclear or chemical contamination, 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.

JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20CV4370, 2020 WL 7405262, at *2 (S.D.N.Y. Dec. 16, 2020).¹

Under New York law, “[f]orce majeure clauses are to be interpreted in accord with their purpose, which is to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties.” Constellation Energy Servs. of New York, Inc. v. New Water St. Corp., 46 N.Y.S.3d 25, 27 (1st Dep’t 2017) (citation omitted). Therefore, “when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.” Id. (citation omitted). Although force majeure clauses “are not to be given expansive meaning,” they nevertheless encompass “things of the same kind or nature as the particular matters mentioned.” Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902-03 (1987).

Notably, the Southern District was unpersuaded by JN Contemporary’s argument that Phillips should have placed the Stingel Painting for auction in the July 2020 virtual auction. The court noted that the Stingel Agreement required Phillips to offer the painting for sale at an identified, regularly held, established auction for works of contemporary art, which was the Phillips’ New York Auction of 20th Century & Contemporary Art scheduled for May 2020. The Court noted that Phillips’ refusal or failure to do so would have been a breach of the parties’ contract as Phillips did not have the unilateral right to offer the Stingel Painting at an internet auction or to postpone the auction of the painting beyond the time of New York Auction.

How did COVID-19 qualify as a “natural disaster?”

In determining whether the COVID-19 pandemic and its regulations constituted a force majeure, the JN Contemporary court analyzed the force majeure clause through the lens of several external sources, including Black’s Law Dictionary, government orders, and case law. In doing so, the Southern District reasoned that “[o]ne need look no further than the common meaning of the words natural disaster,” which means ‘[a] calamity; a catastrophic emergency…[b]rought about by nature as opposed to artificial means.” JN Contemporary, 2020 WL 7405262 at *7 (quoting Black’s Law Dictionary (11th ed. 2019)).

The JN Contemporary court also agreed with the Oxford English Dictionary’s definition of “natural disaster” as “[a] natural event that causes great damage or loss of life such as a flood, earthquake, or hurricane.” Id. (quoting the Oxford English Dictionary). “By any measure,” the Southern District concluded, “the COVID-19 pandemic fits those definitions.” Id. at *8. Because the pandemic qualifies as a natural disaster, the court ruled that Phillips was contractually permitted to terminate the Stingel agreement and that its obligation to make the $5M Guaranteed Minimum Payment for the Stingel Painting was null and void.

In support of its decision, the Southern District held that “a pandemic requiring the cessation of normal business activity is the type of ‘circumstance’ beyond the parties’ control that was envisioned by the” contract. Id. The Southern District explained that the exemplar events listed in the Stingel Agreement’s termination provision “include not only environmental calamities events such as floods or fires, but also widespread social and economic disruptions such as ‘general strike[s],’ ‘war,’ ‘chemical contamination,’ and ‘terrorist attack.’” Id. Pointing to Governor Cuomo’s COVID-19 executive orders, the JN Contemporary court also noted the government’s use of terminology such as a “State disaster emergency” and “major disaster declaration” to further expand the definition of “natural disaster.” Id.

Because neither the Second Circuit nor the New York Court of Appeals previously addressed whether the COVID-19 pandemic qualifies as a “natural disaster,” the Southern District turned to other jurisdictions for authority, such as Pennsylvania Democratic Party v. Boockvar, 238 A.3d 345, 370 (Pa. 2020) (“We have no hesitation in concluding that the ongoing COVID-19 pandemic equates to a natural disaster.”) and Friends of Danny DeVito v. Wolf, 227 A.3d 872, 889 (Pa.), cert. denied, 141 S. Ct. 239 (2020). In Wolf, the Pennsylvania Supreme Court held that “[i]t is beyond dispute that the COVID-19 pandemic is unquestionably a catastrophe that ‘results in ... hardship, suffering or possible loss of life,’” which fit within the definition of "natural disaster" in Pennsylvania's Emergency Code. Id. at 888.

A departure from pre-COVID-19 rulings

The JN Contemporary decision signals a significant departure from pre-COVID-19 case law. In fact, New York courts generally have excused performance based on a force majeure clause “only if the force majeure clause specifically includes the event that actually prevents a party’s performance.” Rochester Gas & Elec. Corp. v. Delta Star, Inc., No. 06-cv-6155, 2009 WL 368508, at *7 (W.D.N.Y. Feb. 13, 2009) (quoting Kel Kim Corp. v. Cent. Mkts., Inc., 519 N.E.2d 295, 295 (N.Y. 1987)); see also Avila v. Travel Dynamics, Inc., No. 5631/2001, 2002 WL 31056702, at *2 (N.Y. Sup. Ct., Sept. 5, 2002) (rejecting force majeure defense from cruise operator on basis of inability to procure and maintain insurance where force majeure provision, despite including catch-all “or other circumstances beyond the Company’s control”—did not specifically include cancellation of company’s insurance within specified definitions of force majeure events).

Previously, New York courts found that the specific descriptions used in the force majeure clause are critical. For example, on March 3, 2020—nine months before the JN Contemporary ruling—the Southern District of New York confirmed a final arbitration award that rejected application of a force majeure clause where the non-performing party claimed force majeure because local authorities failed to issue an export permit, but the clause only covered “withdrawal by the local authorities of any required export permit.” Pioneer Navigation Ltd. v. Chem. Equip. Labs, Inc., No. 1:19-cv-2938, 2020 WL 1031082, at *3 (S.D.N.Y. Mar. 3, 2020) (emphasis added).

New York courts construe any catch-all language, such as “and other similar causes beyond the parties’ control,” narrowly and, before JN Contemporary, would confine events covered by such language to the same types of events as the events specifically defined. See Kel Kim, 519 N.E.2d at 296–97 (citing 18 Williston, Contracts § 1968, at 209 (3d ed. 1978)) (rejecting force majeure clause applicability where failure to procure and maintain public liability insurance was not specifically listed as a force majeure event, and was materially different from the listed events, which all related to a party’s ability to conduct day-to-day commercial operations).

Impact of JN Contemporary

The JN Contemporary decision may open the floodgates for businesses and individuals who were unable to meet their contractual obligations due to COVID-19 and its related restrictions. Because force majeure clauses typically reference “natural disasters” but not “global pandemics,” the JN Contemporary ruling appears to loosen the previously strict contours of contractual interpretation, which could become a legal quandary for those relying on pre-pandemic interpretations of force majeure provisions. For more information about New York and other state’s pre-COVID-19 force majeure rulings, see our Comprehensive Guide to Navigating Contractual Non-Performance and US Force Majeure Laws, published in August 2020. 

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^1. Although the Stingel Agreement technically contained a “Termination Clause” rather than a “Force Majeure Clause,” the Southern District focused on the force majeure language within the termination clause. For ease of reference, the terms “termination clause” and “force majeure clause” are used interchangeably here.

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