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NY Federal Judge Rules COVID-19 Pandemic Constitutes ‘Natural Disaster’ in Excusing Contract Performance

December 23, 2020

The coronavirus (COVID-19) pandemic constituted a “natural disaster” under a contract’s force majeure provision, Judge Denise Cote of the US District Court for the Southern District of New York recently ruled in JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20-cv-4370, 2020 WL 7405262 (SDNY Dec. 16, 2020). This decision appears to be one of the first by a federal judge concerning such contractual language. Other courts may look to Judge Cote’s lengthy analysis of the meaning of the phrase “natural disaster” in this context when interpreting similar contractual language.

By way of background, the plaintiff art trader and the defendant art auction house entered into a contract in June 2019 governing the auctioning of a painting. The painting was to be auctioned by the defendant in New York in May 2020, subject to a guaranteed minimum payment of $5 million to the plaintiff. The contract contained a termination provision stating: “In the event that the auction is postponed for circumstances beyond [the defendant’s] control or [the plaintiff’s] reasonable control, including, without limitation, as a result of natural disaster … [the defendant] may terminate this Agreement with immediate effect. In such event, [the defendant’s] obligation to make payment of the Guaranteed Minimum shall be null and void….” Id.,*2.

The defendant cancelled the auction, terminated the contract to auction the painting, and refused to pay the plaintiff the minimum price that was guaranteed to the plaintiff in connection with the auction, relying upon the COVID-19 pandemic as grounds for invoking the contract’s termination provision.

The plaintiff sued and the defendant moved to dismiss.

Applying the typical canons of contract interpretation under New York law, Judge Cote found that “[t]he COVID-19 pandemic and the attendant government-imposed restrictions on business operations permitted [the defendant] to invoke the Termination Provision.” Id., *7. Judge Cote reasoned that the termination provision provides examples of “circumstances beyond” the parties’ control, including a “natural disaster,” and that “[i]t cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.” Id.

Judge Cote acknowledged that “neither the New York Court of Appeals nor the Second Circuit Court of Appeals has yet addressed whether the COVID-19 pandemic should be classified as a natural disaster,” but found persuasive that “[o]ther courts have already determined that the COVID-19 pandemic qualifies as a natural disaster,” citing two decisions of the Pennsylvania Supreme Court. Id., *7 n. 7.

Judge Cote further analyzed the ordinary definitions and usage of the words “natural” and “disaster,” and of the phrase “natural disaster,” and concluded that “[b]y any measure, the COVID-19 pandemic fits those definitions.” Id., *7.

Other courts interpreting the meaning of “natural disaster” or similar phrases in other contracts (such as contracts for the supply of services or products; contracts related to specific events such as sporting events, concerts, conferences, and weddings; construction contracts; or insurance policies) may look to Judge Cote’s analysis when doing so.

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