February 8, 2021

Southern District of New York Holds COVID-19 Pandemic Constitutes a Natural Disaster

Ruling Affirms Art Auctioneer's Right to Invoke Contract's Force Majeure Clause
Holland & Knight Alert
Jessica Ragosta Early | Eric Ray | Judy R. Nemsick

Highlights

  • Applying New York law, the U.S. District Court for the Southern District of New York rules that a party can invoke a contractual force majeure provision to terminate a contract on the ground that the COVID-19 pandemic and resulting government-imposed restrictions on business operations fit within the meaning of a "natural disaster."
  • The court's ruling joins the growing list of jurisdictions that have interpreted "natural disaster" to extend beyond weather-related and environmental disasters.

"It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster." This seemingly straightforward conclusion has only been reached in a small number of reported court decisions since the start of the pandemic. In JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20cv4370 (DLC), 2020 WL 7405262 (S.D.N.Y. Dec. 16, 2020), Judge Denise Cote of the U.S. District Court for the Southern District of New York appears to be among the first judges to explicitly hold that the COVID-19 pandemic falls under a contract provision excusing performance due to a "natural disaster." The JN Contemporary court's ruling is important and represents a significantly more expansive interpretation of the term "natural disaster," which is frequently cited by litigants to excuse performance of a contract, but has most commonly been applied in the context of weather and environmental disasters. The decision also is a notable departure from the usual narrow interpretation and strict construction of force majeure provisions under New York law.1 The ruling may also signal that U.S. Courts — recognizing the unprecedented financial impact the pandemic has had on individuals and businesses — are reconsidering the manner in which force majeure clauses have traditionally been invoked.

Case Background and Court Ruling

In JN Contemporary Art LLC, an art dealer, JN Contemporary Art LLC (JN), sued an art auction house, Phillips Auctioneers LLC (Phillips), after Phillips terminated the parties' contract, in which Phillips had agreed to auction off JN's painting at a May 2020 New York auction. Phillips moved to dismiss JN's breach of contract claim on the ground that Phillips' performance was excused because it had validly invoked the contract's Termination Provision when the auction had to be postponed because of the COVID-19 pandemic and related government shutdown orders. The Termination Provision permitted Phillips to terminate the agreement without having to make a guaranteed $5 million payment to JN if the auction was "postponed for circumstances beyond [either party's] 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 . . . ."

Applying New York law, the court held that "[t]he COVID-19 pandemic and the attendant government-imposed restrictions on business operations permitted Phillips to invoke the termination provision." Id. at *7. In so holding, the court observed that "[b]y any measure, the COVID-19 pandemic fits" the common meaning of the words "natural disaster" found in dictionary definitions; the pandemic was a "disaster," defined as "[a] calamity; catastrophic emergency," that was "natural," i.e., "brought about by nature as opposed to artificial means," and it was a "natural disaster," defined as "[a] natural event that causes great damage or loss of life such as a flood, earthquake, or hurricane." See id. at *7.

While the court recognized that neither the New York Court of Appeals nor the U.S. Court of Appeals for the Second Circuit has addressed whether the pandemic qualifies as a natural disaster, the latter has identified "disease" as one. See id. at n.7, citing Badgley v. Varelas, 729 F.2d 894, 902 (2d Cir. 1984). The court also relied upon two Pennsylvania Supreme Court decisions finding that the COVID-19 pandemic qualified as a natural disaster under a Pennsylvania statute. See id. (citing Penn. Dem. 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. 2020) (holding COVID-19 pandemic "unquestionably" qualified as a "natural disaster" under the statutory definition's catchall "other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life")).2

Observing that the applicable Termination Provision included more than environmental calamities, the JN Contemporary court further concluded 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." Id. at *8.

The court notably rejected JN's argument that, per the principle of ejusdem generis, the pandemic and resulting government restrictions were not sufficiently similar to the other circumstances outside the parties' control listed in the Termination Provision. Rather, the court explained, the list of circumstances beyond the parties' reasonable control permitting termination was expressly "without limitation" and, in any event, that list included "natural disasters," such as the pandemic. Id. at *9. As noted by the court, "[i]t is a worldwide public health crisis that has taken untold lives and upended the world economy." Id.

Other Decisions Interpreting "Natural Disaster" to Include COVID-19

In addition to the two Pennsylvania decisions cited by Judge Cote, only a handful of other reported decisions have concluded that the pandemic constitutes a natural disaster. See, e.g., Desrosier v. Governor, 486 Mass. 369, 378–79 (2020) (holding governor's COVID-19 orders were permitted because statutory catchall "other natural causes" "encompasses a health crisis on the level of the COVID-19 pandemic," which is "naturally caused" and for which action is needed to "protect the public peace, health, security and safety, and to preserve the lives and property of the people of the commonwealth"); AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, C.A. No. 2020-0310-JTL, 2020 WL 7024929, at *58 (Del. Ch. Nov. 30, 2020) (interpreting Material Adverse Effect representation exception in Sale and Purchase Agreement, court concluded that "pandemic fit[] within the plain meaning of the term 'calamity,' and "arguably" also fit the definition of "natural disaster," i.e., "a sudden and terrible event in nature (such as a hurricane, tornado, or flood) that usually results in serious damage and many deaths"); Comm. v. Vila, No. FE-2019-0000939, 2020 WL 1643379, at *4 (Va. Cir. Ct. Mar. 30, 2020) (continuing jury trial due to pandemic and concluding "there is no question but that the coronavirus pandemic is a 'communicable disease of public health threat' and, therefore, constitutes a 'natural disaster,'" as defined by statute).

Conclusion and Takeaways

As COVID-19 continues to wreak economic and public health havoc around the globe, and generate litigation over contract performance, case law determining the extent to which the pandemic qualifies as a force majeure event will continue to evolve. The developing body of case law may indicate that — in recognition of the unprecedented financial impact that the COVID-19 pandemic has had on so many individuals and businesses — some U.S. courts are revisiting and expanding the traditional manner in which these clauses have been interpreted, including with respect to our understanding of the term "natural disaster." Case law may vary by jurisdiction and the outcome of any particular dispute will depend largely on the specific contractual terms and factual circumstances at issue.

For questions about your pandemic-related contractual rights and obligations, please contact the authors who have been monitoring the evolving state of the law throughout the United States.

Notes

1 See Kel Kim Corp. v. Central Mkts., Inc., 70 N.Y.2d 900, 902-03 (1987) ("[O]nly if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused."); Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 (1st Dep't 2009) ("[i]nterpretation of force majeure clauses is to be narrowly construed").

2 For more information on Friends of Danny Devito, see the authors' previous Holland & Knight alert, "Pennsylvania High Court Ruling May Have Far-Reaching Impact on COVID-19 Disputes," (April 22, 2020), predicting the court's holding in that case would have implications in COVID-19 force majeure litigation.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.


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