NY Court Upholds Auction House’s Reliance on Force Majeure Clause to Terminate Contract Amid COVID-19

NY Court Upholds Auction House’s Reliance on Force Majeure Clause to Terminate Contract Amid COVID-19

A New York City auction house was well within its legal rights when it terminated an agreement to auction a painting by artist Rudolf Stingel in May 2020, according to New York district court judge. The court held that the COVID-19 pandemic and the resulting government shutdowns “fall squarely” under the contract’s force majeure clause.

Auction House Relies on Force Majeure Clause

In June 2019, plaintiff JN Contemporary Art LLC (JN) and defendant Phillips Auctioneers LLC (Phillips) entered into two agreements governing the auctioning of two paintings:  one by artist Rudolf Stingel and another by artist Jean-Michel Basquiat. While the Basquiat Painting was sold at a public auction the same day the parties executed those agreements, the Stingel Painting was to be auctioned at an auction then scheduled to occur in New York in May 2020.

The Stingel Agreement provided that the Stingel Painting “shall be offered for sale in New York in our major spring 2020 evening auction of 20th Century & Contemporary Act currently scheduled for May 2020. “Subject to . . . any applicable withdrawal or termination provision,” Phillips guaranteed that JN would receive $5 million from the sale of the Stingel Painting at the New York Auction.  The Stingel Agreement provided Phillips with a commission from JN equal to 20% of the amount by which the final bid price at the auction of the Stingel Painting exceeded the Guaranteed Minimum, among other things.

Paragraph 12(a) of the Stingel Agreement set forth a termination provision , which stated:

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.

In light of the COVID-19 pandemic’s impact on New York in the Spring of 2020, Phillips terminated the agreement to auction the Stingel Painting and refused to pay JN the minimum price it was guaranteed in connection with the auction. JN filed suit seeking an order compelling Phillips to auction the Stingel Painting and pay it in accordance with the terms of the parties’ agreement.

Court Dismisses Breach of Contract Suit

U.S. District Judge Denise L. Cote of the Southern District of New York dismissed the suit. “The COVID-19 pandemic and the attendant government-imposed restrictions on business operations permitted Phillips to invoke the Termination Provision,” Judge Cote wrote.  “The pandemic and the regulations that accompanied it fall squarely under the ambit of Paragraph 12(a)’s force majeure clause. That clause is triggered when the auction ‘is postponed for circumstances beyond our or your reasonable control.’”

In reaching her decision, Judge Cote found that “[i]t cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.” In support, she cited the Oxford English Dictionary’s definition of a “natural disaster” as “[a] natural event that causes great damage or loss of life such as a flood, earthquake, or hurricane.” She also noted that the Second Circuit Court of Appeals has identified “disease” as an example of a natural disaster. “By any measure, the COVID-19 pandemic fits those definitions,” she concluded.

Judge Cote also found 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. As she explained:

The exemplar events listed in Paragraph 12(a) include not only environmental calamities events such as floods or fires, but also widespread social and economic disruptions, such as “general strike[s],” “war,” “chemical contamination,” and “terrorist attack.” The relevant government proclamations buttress this conclusion.  Governor Cuomo’s Executive Orders declared a “State disaster emergency.”  And, on March 20, the Federal Emergency Management Agency issued a “major disaster declaration” under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 et seq., due to the COVID-19 outbreak in New York.

Judge Cote also rejected arguments that the Stingel Agreement required Phillips to exhaust all efforts to perform before invoking the force majeure clause, concluding that the argument is not supported by the terms of the parties’ agreement or by the law. “The parties did not contract for an online auction conducted in July from London. Nor is a party to a contract required to undertake alternative performance before invoking a force majeure clause,” she wrote. “Once the New York auction was postponed for circumstances beyond Phillips’ control, Phillips was entitled to terminate the consignment agreement,” Judge Cote added.

Key Takeaway

The ruling is good news for New York businesses that have been forced to terminate contracts in the wake of the pandemic and those that may be forced to do so as New York grapples with a second wave of the virus. The New York federal court decision is particularly important because it found that the COVID-19 pandemic fell under the agreement’s force majeure clause. In so ruling, the court notably found that the pandemic and the resulting shutdowns qualified as both a “natural disaster” and “social and economic disruptions” under the contract’s termination provision.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Michael Sheppeard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.