The Southern District Of New York Finds That COVID-19 Is A “Natural Disaster”

Cole Schotz

Cole Schotz

The Southern District of New York has recently issued a decision that could ultimately have a significant impact on the enforceability of contracts that required performance during the COVID-19 pandemic.  In JN Contemporary Art, LLC v. Phillips Auctioneers LLC, (20-cv-04370), the Honorable Denise Cote, U.S.D.J., ruled that COVID-19 constituted a “natural disaster,”—thus falling within the ambit of a force majeure clause contained within the parties’ contract—and excused the defendant’s performance under the contract by dismissing the breach of contract case.  This decision, if ultimately upheld, will have implications that will trickle down to the likely thousands of cases that will be filed as a result of the pandemic.

In brief, in JN Contemporary Art, LLC, the plaintiff, the owner of a painting by artist Rudolf Stingel (hereinafter, “JN”), contracted with an art auction house – the defendant, Phillips Auctioneers LLC (hereinafter, “Phillips”) – to (among other things) grant Phillips the right to sell the painting at a specific, live, New York auction that was to be held in May 2020 in exchange for a guaranteed minimum payment to JN of $5 million.  Of note, the contract contained a force majeure clause within the contract’s termination provision that stated, “[i]n 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. . .[Phillips] may terminate this Agreement with immediate effect.  In such event [Phillip’s] obligation to make payment of the Guaranteed Minimum shall be null and void…”

After an adjournment of the auction as a result of the pandemic, Phillips terminated the contract and sent a termination notice to JN citing its inability to conduct the live New York auction at its planned May 2020 date.  JN thereafter sued for, among other things, specific performance and alleged that Phillips terminated the contract without cause and was, in actuality, using the pandemic as a pretext to avoid its contractual obligations because of the weakening market for the painting.

In a 36-page decision, the Court rejected JN’s arguments (among others), and agreed with Phillips that the COVID-19 pandemic constitutes a “natural disaster” that excused Phillips performance under the contract pursuant to the force majeure clause in the termination provision.  Specifically, the Court held, in relevant part, that:

It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.  One need look no further than the common meaning of the words natural disaster.  Black’s Law Dictionary defines “natural” as “[b]rought about by nature as opposed to artificial means,” and “disaster” as “[a] calamity; a catastrophic emergency. . . .”

The Court further noted that:

[A] pandemic requiring the cessation of normal business activity is the type of “circumstance” beyond the parties’ control that was envisioned by the Termination Provision.  The exemplar events listed in Paragraph 12(a) 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.”

By interpreting COVID-19 as a “natural disaster” that excused contractual performance within the ambit of this specific force majeure clause, the Court may have opened an avenue of relief to many parties to contracts that could not be performed as a result of the multitude of Government orders related to the COVID-19 pandemic.  Contracting parties should therefore study their contracts closely to determine and assess their rights and whether they are entitled to relief as a result of the ongoing worldwide crises.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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