COVID created circumstances beyond parties' reasonable control, court finds
However, the ruling didn’t resolve the question of whether COVID-19 is a natural disaster within the meaning of the force majeure clause.
The U.S. Court of Appeals for the Second Circuit upheld a district court’s ruling granting a defendant auctioneer’s motion to dismiss, finding the COVID-19 pandemic created “a circumstance beyond the parties’ reasonable control” as outlined in the force majeure clause of an agreement for the sale of a painting.
The appellate panel further declined to consider plaintiff JN Contemporary Art’s claims that it was entitled to discovery regarding whether “COVID-19 escaped from one of two labs in Wuhan working on coronaviruses or whether such labs genetically engineered” the COVID-19 virus.
“We need not address these arguments to decide this appeal,” Judge Rosemary S. Pooler wrote in the opinion. “We hold that the COVID-19 pandemic and the orders issued by New York’s governor that restricted how nonessential businesses could conduct their affairs during the pandemic, constituted ‘circumstances beyond our or your reasonable control.’ Thus, we affirm the district court’s dismissal of the second amended complaint on that ground without resolving the question of whether COVID-19 is a natural disaster within the meaning of the force majeure clause.”
In the case, JN Contemporary Art v. Phillips Auctioneers, the defendant agreed to consign two pieces of art from JN, ahead of an art auction scheduled for May 2020 in New York, according to the appellate court’s opinion. However, March 2020 shutdown orders in response to the COVID-19 pandemic limited nonessential activity, including art exhibitions and auctions, the opinion said. Phillips had to reschedule its planned May auction.
On June 1, 2020, Phillips invoked the force majeure clause to terminate its agreement to sell a Rudolf Stingel painting on behalf of JN, citing COVID-19 restrictions.
In response, JN filed a lawsuit in U.S. District Court for the Southern District of New York against Phillips for breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and equitable estoppel.
Phillips moved to dismiss the complaint for failure to state a claim. U.S. District Judge Denise L. Cote of the Southern District of New York granted the motion, concluding that the COVID-19 pandemic fell within the agreement’s force majeure clause, and thus there was no breach of the agreement.
JN appealed, arguing that Phillips should have held the auction in another format or delayed the live auctioning of the artwork.
The appellate court disagreed, finding that the language of the agreement obligated Phillips to auction the painting for at least the guaranteed minimum at the May 2020 New York auction.
“Nothing in the agreement obligated Phillips to sell the Stingel Painting at a different auction, at a later time, or via different format,” Pooler wrote. “It is true, as JN argues, that Phillips could have chosen to offer some sort of alternative performance, but that is not the same as the Stingel Agreement requiring Phillips to provide anything other than the bargained-for performance.”
Pooler cited the Second Circuit’s 1993 ruling in Harriscom Svenska, AB v. Harris, which held that when a defendant was excused from performance by force majeure, the defendant was not required to “provide substitute performance.”
In the district court, Cote found that “‘[i]t cannot be seriously disputed that the COVID-19 pandemic is a natural disaster,’” according to the appellate court’s decision. JN argued on appeal that whether COVID-19 is a naturally occurring virus or a manmade one is unsettled and that the district court erred in deeming the pandemic a natural disaster as a matter of law, the opinion said.
But Pooler said “the COVID-19 pandemic, coupled with the state government’s orders restricting the activities of nonessential businesses, constitute an occurrence beyond the parties’ reasonable control, allowing Phillips to end the Stingel Agreement.”
“The pandemic and government shutdown orders are the same type of events listed in the force majeure clause, which include, ‘without limitation,’ natural disaster, terrorist attack, and nuclear or chemical contamination,” Pooler wrote. “Each of the enumerated events are of a type that cause large-scale societal disruptions, are beyond the parties’ control, and are not due to the parties’ fault or negligence.”
Judges Reena Raggi and Denny Chin concurred with Pooler.
The appellate court also agreed with the district court that ”JN fails to raise a question of material fact on the issue of whether Phillip’s decision to invoke the force majeure clause was pretextual.”
“As the district court aptly held, because Phillips properly ‘exercise[d] its contractual right to terminate the Stingel Agreement, its motives for doing so are irrelevant,’” Pooler wrote.
On Monday, Phillips’ attorneys Luke Nikas and Maaren Shah, both of Quinn Emanuel Urquhart & Sullivan, said they were happy with the court’s decision.
“Phillips kept its promise and followed the letter of the agreement,” the attorneys said in a statement to Law.com. “We are very pleased the Second Circuit recognized Phillips’ good faith and affirmed the dismissal of this case.”
A message seeking comment from JN’s attorney, Nehemiah Salomon Glanc of Aaron Richard Golub was not immediately returned.
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