Southern District of New York: COVID-19 Can Constitute A Natural Disaster Justifying Force Majeure Defense, But The Contract Matters

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Case law is beginning to take shape on the relationship among the COVID-19 pandemic, related government-mandated shutdowns, and force majeure clauses in contacts. There have been very few reported decisions in this arena, with courts coming out both ways on whether the COVID-19 pandemic and related shutdowns constitute a force majeure event sufficient to excuse performance under a contract. But a recent opinion from the Southern District of New York answered that question with a strong “yes.”

The case is JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 WL 7405262 (Dec. 16, 2020), and it concerned a dispute between an art dealer and an auction house regarding the sale of two prized paintings. The parties entered into an agreement governing the sale of the paintings in June 2019, whereby the defendant-auctioneer agreed to pay the plaintiff-art dealer a guaranteed minimum price in connection with the sale. One painting sold the same day the agreement was signed. The other painting, however, was set to be auctioned in May 2020–as the pandemic was in full force in New York.

Given the economic climate, the defendant-auctioneer terminated the agreement unilaterally on May 31, 2020, and refused to pay the plaintiff the guaranteed minimum. Days later, the plaintiff filed suit, and the court denied its motion for a preliminary injunction and a temporary restraining order compelling the defendant to offer the painting at the next auction. The defendant then moved to dismiss based on the agreement’s “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, 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.

Despite being labeled as a “termination” provision, the court effectively treated it as a force majeure clause. Particularly, the court noted that the pandemic and the attendant government-imposed restrictions on business operations permitted the defendant to invoke the termination provision because it constituted a circumstance “beyond [the defendant’s] reasonable control.” The court also paid particular attention to the breadth of the termination clause, noting that it included natural disasters, environmental calamities, and “widespread social economic disruptions” such as war, chemical contamination, and terrorist attack. With that in mind, the court stated in no uncertain terms that the pandemic qualified as a “natural disaster” under the termination provision: “It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster,” citing not only Governor Cuomo’s and FEMA’s emergency orders, but also the common meaning definitions of the words according to Black’s Law and Oxford dictionaries. Accordingly, the court concluded that there was no breach because the termination provision excused the defendant’s performance; it then dismissed the case.

This case marks a notable departure from New York’s traditionally narrow interpretation and application of force majeure clauses. Although not explicit in the opinion, the court’s decision seems to have been motivated, at least in part, by the narrow construction of the underlying contract (or the performance thereunder). Specifically, the contract required the defendant to list the painting only at a specifically identified auction rather than imposing on the defendant a broader obligation to sell the painting, period. Nonetheless, litigants will undoubtedly leverage this opinion to invoke force majeure defenses, especially where the provision explicitly lists “disaster” or “natural disaster” as a force majeure event. Clients should therefore carefully examine any existing force majeure clauses in their contracts and consider the potential impact of this opinion in drafting (or agreeing to) such clauses in the future.

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