COVID-19: A “natural disaster” force majeure in New York?

We have been covering commercial litigation involving COVID-19 issues since the outset of the pandemic. Although questions as to whether the impact of the coronavirus could justify not performing a contract continue to wind their way through New York courts, a recent Southern District of New York decision takes the notable position that COVID-19 constitutes a “natural disaster” for purposes of a force majeure clause. This key decision provides an opening for parties to argue that a force majeure event has taken place even if a given force majeure clause does not expressly identify epidemics, pandemics, diseases, or other events that one might consider to be more closely akin to COVID-19.

Background

In JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20-cv-4370, 2020 WL 7405262 (DLC) (S.D.N.Y. Dec. 16, 2020), an owner of a painting entered into a consignment agreement with an auction house in June 2019 to auction the painting at an event in New York in May 2020.  As the court recounted, New York Governor Andrew Cuomo issued executive orders restricting (and then barring) all non-essential business activities until June 2020 and the auction house proceeded to postpone all of its events in the Americas, Europe and Asia, although it did hold a virtual “New York Auction” streamed from London in July 2020 without the painting at issue. The auction house ultimately relied on, among other items, the following termination provision (styled as a force majeure clause) to terminate the agreement to auction the painting:

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.

2020 WL 7405262, at *2 (certain emphasis added).

The SDNY Court’s decision

The JN Contemporary court had no qualms concluding that “[i]t cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.” In order to do so, the court first turned to the definitions of “natural” and “disaster” from Black’s Law Dictionary and the Oxford English Dictionary. The former defined “‘natural’” to mean “‘[b]rought about by nature as opposed to artificial means,’ and ‘disaster’ as ‘[a] calamity; a catastrophic emergency,’” while the latter defined “‘natural disaster’ as ‘[a] natural event that causes great damage or loss of life such as a flood, earthquake or hurricane.’” The court stated that “[b]y any measure, the COVID-19 pandemic fits those definitions.”

With respect to caselaw, the court noted that a Second Circuit decision “identified ‘disease’ as an example of a natural disaster” and cited two Pennsylvania Supreme Court decisions for the proposition that “the COVID-19 pandemic qualifies as a natural disaster, as that term is defined by statute.”

The court also stated 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.” It added that “[t]he exemplar events listed . . . include not only environmental calamities events [sic] such as floods or fires, but also widespread social and economic disruptions such as ‘general strike[s],’ ‘war,’ ‘chemical contamination,’ and ‘terrorist attack.’”

Finally, the court observed that “Governor Cuomo’s Executive Orders declared a ‘State disaster emergency’” and that FEMA “issued a ‘major disaster declaration’” on March 20, 2020 due to the COVID-19 outbreak in New York.

Impact

The SDNY’s decision in JN Contemporary serves as a reminder that COVID-19 contract litigation will continue to evolve as decisions start to come down. Here the court provides a window for parties to assert force majeure claims or defenses when the given clause identifies “natural disasters” as a force majeure event, even if the clause omits references to epidemics, pandemics, diseases, or the like.