Southern District Of New York Permits Contract Termination Based On COVID-19, Construes Pandemic As “Natural Disaster” Within Meaning Of Force Majeure Provision
M&A and Corporate Governance Litigation
This links to the home page
  • Southern District Of New York Permits Contract Termination Based On COVID-19, Construes Pandemic As “Natural Disaster” Within Meaning Of Force Majeure  Provision

    On December 16, 2020, Judge Denise Cote of the United States District Court for the Southern District of New York dismissed an art dealer’s breach of contract action alleging that the defendant auction house had improperly terminated the parties’ agreement.  JN Contemporary Art LLC v. Phillips Auctioneers LLC, – F. Supp. 3d – , 2020 WL 7405262 (S.D.N.Y. Dec. 16, 2020).  Plaintiff contended that the auction house was not permitted to terminate the parties’ contract because the pandemic did not constitute a “natural disaster” within the meaning of the agreement’s force majeure clause.  The Court held, applying New York law, that the COVID-19 pandemic is a “natural disaster” and therefore dismissed the action.

    The parties’ June 2019 agreement required the auction house to hold an auction for a certain consigned work in May 2020 and to pay the dealer a guaranteed minimum price.  Id. at *1.  The agreement prohibited changing the auction date without the dealer’s consent, but it also gave the auction house the right to terminate the agreement pursuant to a force majeure clause, 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.”  Id. at *2.  Citing the disruption resulting from COVID-19, the auction house informed plaintiff that it was postponing the auction date and subsequently terminated the agreement.  Id. at *4.

    The Court held that the force majeure provision permitted the auction house to terminate the agreement.  It explained that force majeure clauses “are to be interpreted in accord[ance] 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.”  Id. at *6.  And although such clauses are not to be given expansive meanings, they nevertheless encompass “things of the same kind or nature as the particular matters mentioned.”  Id.

    The Court held that the COVID-19 pandemic and related government restrictions on business activity were “squarely” within the agreement’s force majeure clause, which allowed the auction house to terminate the contract if the auction were postponed due to “circumstances beyond [the parties’] reasonable control.”  Id. at *7.  First, the Court concluded that it could not be “seriously disputed” that COVID-19 constituted a “natural disaster” as the pandemic was an event “brought about by nature” and a “natural event that cause[d] great damage or loss of life.”  Id.  Second, the Court determined that the COVID-19 pandemic was the type of “circumstance” envisioned by the clause because the enumerated examples included environmental calamities and “also widespread social and economic disruptions.”  Id. at *8.  The COVID-19 pandemic fell within that category, the Court noted, as it was “a worldwide public health crisis that has taken untold lives and upended the world economy.”  Id. at *9.

    The Court rejected plaintiff’s argument that the pandemic was not similar to the events enumerated in the force majeure clause, and that termination was therefore not permitted under the principle of ejusdem generis—an interpretive aid under which the meaning of a word in a series of words is determined so as to be consistent with the other words in the series.  Id. at *9. The Court found this argument “unpersuasive” because the pandemic was an event that constituted “a circumstance beyond the parties’ reasonable control,” and the events enumerated in the force majeure clause were expressly stated to be examples “without limitation.”  Id.  Moreover, the Court rejected plaintiff’s assertion that the auction house had to exhaust all efforts to perform prior to invoking the force majeure clause as unsupported by any other provision in the agreement or otherwise by law.  Id. at *9.  Further, the Court concluded that even if the auction house’s reason for the termination were pretextual, it nevertheless was contractually entitled to terminate, and its motives for doing so were, therefore, irrelevant.  Id. at *10.  Finally, the Court held, plaintiff could not invoke the implied of covenant of good faith and fair dealing to impose upon the auction house an obligation to perform when its nonperformance was excused by the contract.  Id. at *10–11.

    This decision appears to be among the first to explicitly hold that the COVID-19 pandemic qualifies as a “natural disaster” under a contractual force majeure clause.  In making this determination, the Court explained that neither the New York Court of Appeals nor the Second Circuit Court of Appeals had yet addressed the issue, although the Pennsylvania Supreme Court had concluded that the COVID-19 pandemic fell within the meaning of “natural disaster” as defined by statute, and the Second Circuit had previously identified “disease” as an example of a natural disaster.  Id. at *7 n.7.
    Category: Uncategorized

Links & Downloads