In a recent decision from the United States District Court for the Southern District of New York, JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 WL 7405262 (S.D.N.Y. Dec. 16, 2020), Judge Denise Cote read "natural disaster" within a force majeure clause to include the COVID-19 pandemic and its resulting impact on performance and termination clauses in a consignment agreement to sell a high-end piece of art. We provide an analysis of the instant decision below. We will see additional decisions on this issue which will help shape precedent, but Judge Cote's does signal the likelihood that courts will be more willing to read the COVID-19 pandemic into general catch-phrases like "natural disasters" or "Acts of God" within existing force majeure clauses.
In this case, the plaintiff consignor of a painting by Rudolf Stingel contracted with defendant auction house in June 2019 to sell the painting at the auction house's major spring auction in May 2020. In the applicable agreement, the auction house guaranteed that plaintiff would receive a minimum of $5 million from the sale of the painting at the auction, subject to the contract's termination provision (the "Termination Provision"), which provided: "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 [defendant] 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." (Emphasis in decision.)
Following the onset of the COVID-19 pandemic in the New York area in March 2020, and the resulting state and federal restrictions that were then implemented in New York and nationwide, the auction house terminated the consignment agreement with plaintiff on June 1, 2020, citing the "severe restrictions" placed on all non-essential business activities by city and state authorities.
Thereafter, and as relevant to the force majeure issue, plaintiff sued defendant, alleging multiple breach of contract claims, equitable estoppel and breach of fiduciary duty for defendant's termination of the agreement without going ahead with the auction of the painting when defendant scheduled auction events later that summer. Defendant moved to dismiss, arguing, among other things, that the contract unambiguously gave defendant the right to terminate the agreement, without any liability, in the event the May auction had to be postponed due to "circumstances beyond our or your reasonable control, including, without limitation, as a result of a natural disaster…" The court agreed and dismissed the action.
In reaching its decision, the court took judicial notice of the magnitude of the COVID-19 pandemic, as well as the governmental orders that were issued to severely curtail non-essential business activities (like art auctions) and noted that the pandemic was precisely the type of event that fell within an ordinary reading of "natural disaster." Citing Black's Law Dictionary, Judge Cote defined "natural disaster" to include the current pandemic: "One need look no further than the common meaning of the words natural disaster… 'natural' as '[b]rought about by nature as opposed to artificial means,' and 'disaster' as '[a] calamity; a catastrophic emergency.'" The court also noted that the Termination Provision "provides examples of circumstances beyond the parties' reasonable control. Those circumstances include 'without limitation' a 'natural disaster.' It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster." The court reasoned that the Termination Provision includes "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 court rejected plaintiff's contention that the doctrine of ejusdem genesis precluded inclusion of a "pandemic" within the general term "natural disaster" and, therefore, that defendant could not terminate the agreement due to the unforeseen events resulting from the outbreak of COVID-19. While noting that the principle of ejusdem genesis "is an interpretive guide according to which 'the meaning of a word in a series of words is determined by the company it keeps," 242-44 E. 77th St. LLC v. Greater New York Mut. Ins. Co, 815 N.Y.S.2d 507, 510 (1st Dep't 2006)(citation omitted), the court expressly found that the principle did not apply where — as here — the list of force majeure events is given "without limitation" so that the listed events are merely examples and not a definitive and otherwise preclusive list of circumstances. Accordingly, the court concluded that the current pandemic fell easily within the term "natural disaster," thereby permitting defendant to terminate the agreement without any liability.
Judge Cote's rejection of ejusdem generis would at first blush place her interpretation of force majeure clauses at odds with such seminal New York precedents as Kel Kim v. Central Markets, Inc., 70 N.Y.2d 90 (1987), which had validated the longstanding use of ejusdem genesis to limit the events excluded by a force majeure clause to those specifically listed: "The principle of interpretation applicable to such clauses is that general words are not to be given expansive meaning; they are confined to things of the same kind or nature as the particular matters mentioned." (Citing 18 Williston, Contracts sec. 1968, at 209 (3d ed. 1978).
But perhaps the different outcomes more likely rest on what the events in question were and less on how the two clauses were drafted. In the Kel Kim case, the force majeure clause excused performance for a list of specific acts, including things like "riots, insurrection, war, adverse weather, Acts of God, or other similar causes beyond the control of such party" (emphasis added). The New York Court of Appeals there rejected the failed attempt by one party to obtain insurance as falling within the catch-all "or other similar causes beyond the control of such party" language in the force majeure clause: "We agree with the conclusion … that the events listed in the force majeure clause here are different in kind and nature from Kel Kim's inability to procure and maintain public liability insurance."
In Judge Cote's recent decision, the list included — "without limitation" — "natural disaster." Judge Cote did not attempt to distinguish Kel Kim or the types of force majeure clauses that cases like it have interpreted narrowly, consistent with the principle of ejusdem genesis. The decisions, however, may not be at all inconsistent. It is likely the District Court's interpretation of "Acts of God" — defined in the American Heritage Dictionary as "an occurrence, such as natural event, that is beyond human control and whose consequences are therefore not a basis for legal liability" — would similarly include the COVID-19 pandemic.
Judge Cote's decision, nonetheless, does signal the likelihood that courts will be more willing to read the COVID-19 pandemic into general catch-phrases like "natural disasters" or "Acts of God" within existing force majeure clauses, rather than rely on a rigid application of ejusdem genesis to negate force majeure clauses that do not expressly list "pandemic" as an event that will excuse the parties' performance obligations under a contract.
Ed O'Toole has been writing and speaking on force majeure clauses and how courts are treating them during the COVID-19 present since March 2020, including co-authoring Five Interesting Force Majeure Cases from Around the Country and May Restaurants Rely on Force Majeure Clause to Abate Rent in the Wake of COVID-19 Closures? One Court Rules Yes.