JN Contemporary Art LLC v. Phillips Auctioneers LLC: A Slightly Forced Major Force Majeure Decision
In a decision with potentially significant repercussions for commercial contracts governed by New York law, a judge in the Southern District of New York appears to have opened the door to using force majeure clauses more broadly to excuse performance as a result of the pandemic.
On December 16, Judge Denise Cote issued an opinion granting Phillips Auctioneers LLC’s motion to dismiss a breach of contract case filed by the art dealer JN Contemporary Art LLC concerning the auctioning of paintings by Rudolf Stingel and Jean-Michel Basquiat. Judge Cote ruled that Phillips’ obligation to auction a painting pursuant to its contract with JN was excused according to the terms of the contract’s “force majeure” clause in light of the Covid-19 pandemic.
The relevant facts are fairly simple: Phillips was to present a Stingel painting owned by JN for auction “in New York” at its annual “20th Century & Contemporary Art” auction “currently scheduled for May 2020.” Phillips guaranteed that JN would receive a minimum of $5 million from the sale.
In March, New York became the global epicenter of the pandemic and everyday life and commerce was drastically and quickly disrupted. Governor Cuomo issued a series of executive orders restricting and then outright banning all non-essential business activity until at least June. On March 14, Phillips announced that it was postponing the New York 20th Century & Contemporary Art auction until June. (Although the court did not seem to think it was relevant to its decision, Phillips’s announcement came more than a week before Governor Cuomo instituted a complete ban on non-essential business activity). On June 1, Phillips sent JN a letter informing JN that, as a result of the pandemic, Phillips “had no choice but to postpone” the New York auction. Referring to the “force majeure” clause in their contract, Phillips informed JN that it was terminating their agreement.
The force majeure clause read as follows:
“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.”
On July 2, Phillips held a virtual auction, streamed from London but open to bidders remotely, that it called “20th Century And Contemporary Art Evening Sale New York Auction.”
The key issue on Phillips’s motion to dismiss JN’s breach of contract claim was whether Phillips could rely on the force majeure clause to terminate the agreement as a result of the Covid-19 pandemic. Judge Cote had no trouble finding that the pandemic constituted a triggering event under the force majeure clause. Interestingly, she found support for her conclusion in both the general and specific wording of the clause. Judge Cote primarily relied on the clause’s catch-all language permitting Phillips to terminate if the auction were to be “postponed for circumstances beyond our or your reasonable control,” finding that the pandemic and accompanying regulations “fall squarely” within that language. She also found that the pandemic constituted a “natural disaster,” which was one of the enumerated triggering events listed in the clause. Accordingly, Judge Cote found that Phillips’s obligation to offer the Stingel painting for auction in New York in May 2020 was excused according to the terms of the parties’ contract.
Judge Cote’s opinion is sure to generate much discussion in legal and commercial circles, and there is much in it to discuss. Given its import and potential for criticism, I would expect JN to appeal. An opinion of the 2nd Circuit in this case would have a profound impact on what will surely end up being a mountain of force majeure litigation under New York law (and beyond) stemming from the pandemic.
JN may very well question a number of conclusions drawn by Judge Cote, but none more than her finding that Phillips had no obligation to make any accommodations to try to salvage the intent of the parties in light of the pandemic. To its credit, Phillips decided fairly early on that the safest course of action would be to postpone its in-person auctions. Phillips made the announcement while many other New York businesses continued to operate as usual, and before New York schools had been closed to in-person teaching. Yet, while others moved swiftly to adapt to changing conditions, Phillips was somehow unable to organize an online auction within a month and a half, when eBay has been doing it for 25 years. April 2020 was a terrible time in New York, but I still managed to remotely close on an apartment (despite the contract of sale saying that closing was to take place in a lawyer’s office), and educators around the city still somehow (and amazingly) managed to move their entire schools online in a single week. Another judge might very well have concluded that a party seeking to rely on a force majeure clause to excuse its performance should make some effort to honor the material terms of the contract. Was the date and location of the auction truly material to the purpose of the contract here?
JN might also take issue with Judge Cote’s finding that the pandemic constituted a force majeure event at all under the contract. While Judge Cote wrote that “it cannot be seriously disputed that the COVID-19 pandemic is a natural disaster,” I’m not so sure she’s right. When I think of “natural disasters,” I think of floods, wildfires, hurricanes, tornados, blizzards, earthquakes. It does nothing to downplay the horror of the Covid-19 pandemic in any way to acknowledge that it is a disease, not a “natural disaster” as that term is commonly understood. Are heart disease, cancer and malaria “natural disasters”? Maybe, but it’s not accurate to say that the question “cannot be seriously disputed.” In any case, Covid-19 is not the first pandemic in history, nor is it even the first one in recent memory. While nobody could have predicted the current pandemic in June 2019, when the parties executed the contract, they could have predicted that a pandemic was about as likely to impact their contractual arrangement as a “war” or a “nuclear or chemical contamination,” yet they decided to specifically list those as force majeure events in the contract. Another judge could have concluded that the parties’ decision to not also list “pandemics” or “disease” as triggering events was an important piece of the contractual interpretation puzzle.
One interesting takeaway from this case is whether it will have any impact on how force majeure clauses are drafted. Since Judge Cote found that the pandemic satisfied the catch-all language of the clause at issue (“…circumstances beyond our or your reasonable control”), is there any point in listing specific events that trigger the clause as well (e.g. natural disasters, war, terrorism)? Might doing so only increase ambiguity, as it seems to have done here, despite Judge Cote’s strained insistence that a pandemic is actually analogous to a “general strike,” “war” or “terrorist attack”?
JN Contemporary Art is a must-read for anybody interested in the interpretation of force majeure clauses as they relate to the pandemic. If it stands, it could considerably expand the availability of force majeure defenses under New York law, by recognizing the pandemic as a triggering event even when not specifically enumerated in a force majeure clause, by finding the time and place of an event to be material terms of a contract, even if the event was able to be conducted remotely, and by not requiring a party seeking to rely on a force majeure clause to take reasonable steps to accomplish the purpose of a contract.
