The COVID-19 pandemic has affected the art world in many ways, including making it difficult, if not impossible, for art businesses to meet their contractual obligations. To protect their bargaining position, many auction houses include a force majeure provision in their agreements which, depending on its phrasing, may allow one or both parties to terminate the agreement upon the occurrence of a force majeure event as defined within the agreement. Does COVID-19 constitute a “natural disaster” to invoke the force majeure clause? One federal district court recently said that it does, at least in the context of the agreement between the parties.
Finding in favor of Phillips Auctioneers LLC (Phillips), Hon. Denise Cote of the Southern District of New York dismissed JN Contemporary Art LLC’s complaint against Phillips, holding that:
(1) “[i]t cannot be seriously disputed that the COVID-19 pandemic is a natural disaster;” and (2) Phillips, therefore, didn’t breach its consignment and guarantee agreement with JN Contemporary when it invoked the force majeure provision1 in the agreement to terminate the parties’ relationship.2
The court’s categorization of the COVID-19 pandemic as a natural disaster enables similarly situated contracting parties, who are unable to (partially or fully) perform their obligations under an agreement, to invoke the force majeure provision in the agreement to potentially walk away from their contractual obligations and terminate the parties’ relationship.
Under New York and English law, whether a party can invoke force majeure to be protected from liability for failing to, partially or fully, perform their contractual obligations will depend on the wording of the provision in the contract addressing force majeure, if there is one. This decision underscores the importance of paying close attention to the fine print, as it can, and often does, impact a business’s bottom line.
Key Facts
In June 2019, JN Contemporary, a New York dealership affiliated with the Nahmad family, and Phillips entered into two agreements governing the public sale of two paintings: one by artist Rudolf Stingel and another by artist Jean-Michel Basquiat. According to the court documents, JN Contemporary owned the Stingel painting, while Phillips (or its principal) owned the Basquiat.
Pursuant to the Basquiat agreement, JN Contemporary agreed to place an irrevocable auction bid of £3 million on the Basquiat painting being publicly auctioned by Phillips London in 2019. In consideration for JN Contemporary’s irrevocable bid, Phillips agreed to pay JN Contemporary a financing fee of 20% of the sale price above £3 million (also known as “overage”) if JN Contemporary or an unrelated third party purchased the Basquiat at a price exceeding £3 million. The Basquiat sold for £3.2 million plus premium, and JN Contemporary received their financing fee.
The Basquiat agreement was conditional on the parties executing the Stingel agreement. The Stingel agreement was a consignment agreement with a guarantee, whereby JN Contemporary consigned the Stingel painting to Phillips New York for sale in their New York spring 2020 evening auction, scheduled at the time for May 2020, and in consideration for the consignment, Phillips agreed to pay JN Contemporary a guaranteed minimum amount of $5 million (the guaranteed amount) for it. The Stingel agreement also provided Phillips with a commission from JN Contemporary equal to 20% of the amount by which the final bid price at auction of the Stingel exceeded the guaranteed amount.
As is standard in auction consignments agreements, the agreement contained a force majeure provision that, in relevant parts, 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 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.
The Stingel agreement was governed by New York law.
To make matters more complex, but not uncommon in practice, JN Contemporary used the Stingel painting along with one other painting as collateral to get a $5 million loan from Muses Funding LLC. Phillips, JN Contemporary and Muses entered into a tripartite security agreement that granted Muses a first priority security interest in the Stingel painting and provided that Phillips would pay the proceeds of the auction sale of the Stingel, including the guaranteed minimum and any overage (minus Phillips’ commission) to Muses.
In March 2020, as the COVID-19 pandemic rippled through the world, including New York City, one of the hardest hit cities, Phillips decided to postpone its May 2020 auction in which the Stingel was due to be auctioned. Phillips kept in touch with JN Contemporary and initially took the position that it would honor its contractual commitments to JN Contemporary, including raising the possibility of selling the Stingel in its November 2020 sale. In early June, however, Phillips notified JN Contemporary that it was terminating the Stingel agreement by invoking the force majeure clause quoted above, that its obligation to pay JN Contemporary for the Stingel was null and void and that it shall have no liability to JN Contemporary for its decision to terminate.
JN Contemporary took the view that Phillips terminated the agreement because it had determined that the market for the Stingel had weakened. It’s worth noting that, in July 2020, Phillips did hold a virtual auction entitled “20th Century and Contemporary Art Evening Sale New York Auction.”
JN Contemporary sued Phillips, asserting claims of breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duties and equitable estoppel.
Court’s Ruling
In December 2020, Hon. Denise Cote dismissed the entirety of JN Contemporary’s complaint and ruled in favor of Phillips. In relevant parts, the court held:
Phillips didn’t breach the Stingel agreement. The court held that Phillips properly invoked the force majeure provision in the Stingel agreement, which ended Phillips’ obligations to JN Contemporary, including the obligation to auction the painting and to pay JN Contemporary the guaranteed amount.
According to the court, Phillips couldn’t be said to be in breach of the agreement if it did what the agreement permitted it to do. The court confirmed that the COVID-19 pandemic constituted a force majeure event that compelled Phillips to postpone its auction considering the “circumstances beyond the parties’ reasonable control.” The court further emphasized that examples of circumstances provided in the termination provision included “without limitation” a “natural disaster,” holding that:
[i]t cannot be seriously disputed that the COVID-19 pandemic is a natural disaster. One need look no further than the common meaning of the words natural disaster. Black’s Law Dictionary defines ‘natural’ as ‘[b]rought about by nature as opposed to artificial means,’ and ‘disaster’ as ‘[a] calamity; a catastrophic emergency.’ Natural, Disaster, Black’s Law Dictionary (11th ed. 2019). The Oxford English Dictionary likewise defines a ‘natural disaster’ as ‘[a] natural event that causes great damage or loss of life such as a flood, earthquake, or hurricane.’ By any measure, the COVID-19 pandemic fits those definitions.3
Flagging the phrase “without limitation” before the list of examples that constituted a force majeure in the relevant provision of the Stingel agreement, the court made clear that “[i]t is also a principle of construction that the inclusion of listed items cannot narrow the general definition, in particular when the contract indicates that the listed items are not given to limit the definition.”
Phillips didn’t breach the Basquiat agreement. In examining this claim, the court reiterated that Phillips did nothing wrong by exercising the rights available to it in the Stingel agreement. The court opined that while the Basquiat agreement was conditioned on the parties executing the Stingel agreement, it didn’t require Phillips to auction the Stingel and pay JN Contemporary the guaranteed amount.
Phillips didn’t breach the implied covenant of good faith and fair dealing. The court held that it can’t be a breach of the implied covenant of good faith and fair dealing “to do what a contract explicitly authorizes a party to do”4 and that JN Contemporary has failed to adequately plead that Phillips acted in bad faith when it chose to exercise its contractual rights to terminate the Stingel agreement.
Phillips didn’t breach its fiduciary duties. While the court acknowledged that Phillips did owe JN Contemporary fiduciary duties, including a duty of loyalty, it found that the scope of such duties was circumscribed in the agreement between the parties. The court held that Phillips simply exercised its contractual rights available to it in the agreement, which couldn’t possibly constitute a breach of its fiduciary duties.
The claim of equitable estoppel shouldn’t stand. The court held that Phillips’ initial assurances to JN Contemporary that it would abide by its contractual obligations didn’t extinguish Phillips’ ability to exercise its rights and terminate the agreement. The court pointed out that Phillips hadn’t assured JN Contemporary that it would offer the Stingel painting at a rescheduled auction with the Stingel agreement’s guaranteed minimum in full force and effect and that JN was on actual notice since March 2020 that the relevant Phillips auction wouldn’t be going forward.
Possible Appeal
On Jan. 6 2021, JN Contemporary filed a notice of appeal with the U.S. Court of Appeals for the Second Circuit. On Feb. 9, 2021, the parties were scheduled to attend a mandatory mediation ordered by the Second Circuit. On that same day, Phillips filed a motion in the lower court withdrawing its earlier motion seeking attorney’s fees after prevailing in its defense. It’s possible that the parties may reach an out-of-court settlement, but the appeal hasn’t yet been withdrawn.
Broader Definition
The most interesting aspect of this decision is the court’s categorization of COVID-19 as a natural disaster. By not limiting its categorization to terms such as a “pandemic,” “infectious disease,” “epidemic” or “public health crisis,” Judge Cote has arguably made it easier for parties to rely on the force majeure provisions in their agreements, even when such agreements may not contain the “right buzz words.” It remains to be seen whether the Second Circuit will affirm this decision and, if so, on what grounds. The business community will closely monitor this appeal, as its outcome will have serious implications well beyond the facts of this case and the art trade.
Going forward, terms such as “pandemic,” “epidemic” and “infectious disease(s)” will likely appear as examples of a force majeure event in contracts, and parties are likely to engage in negotiations over the wording of force majeure clauses.
Force majeure doesn’t have a default legal meaning under English or New York law. In the United States and in England, unlike in some Continental European countries, force majeure can’t be invoked unless the contract includes a force majeure clause, and whether a party can invoke force majeure to either terminate a contract or protect themselves against a claim of breach of contract depends strictly on the wording of the clause. Force majeure won’t come to your rescue if the contract doesn’t contain a force majeure clause or if the wording of the clause doesn’t allow the courts to consider the pandemic as being within its scope. Both English and New York courts often construe and interpret force majeure clauses in a restrictive manner and infer limitations in such clauses.
In fact, in a recent English High Court decision, Fibula Air Travel Srl v. Just-US Air Srl,5 in considering whether a force majeure event took place, the court examined the text of the force majeure clause and the factual matrix at play. In this case, an aircraft charterer, Fibula, attempted to terminate a wet lease claiming an incident of force majeure under the lease the day before the first installment of the payment in respect of the lease was due and before any flights had taken place. Finding against Fibula, the court held that a force majeure event hadn’t occurred because the COVID-19 restrictions weren’t yet in force and the relevant clause in the parties’ contract required the force majeure event to continue for
10 days before a party was free to terminate the contract.
These judgments emphasize that the applicability and scope of enforcement of a force majeure provision heavily depends on the way in which it’s drafted. Even when a force majeure event has occurred, it doesn’t necessarily mean that the parties will be protected from liability for failing to perform or delaying performance of their obligations contained in an agreement. Much of this will be dictated by the language of the provision, which is yet another reminder for parties to carefully negotiate the fine print.
Five Issues to Consider
As a helpful, but by no means an exhaustive guide, here are some issues/questions you may want to consider when reviewing the force majeure clauses in your clients’ agreements:
1. Determine whether the agreement has a force majeure clause. See an example of such a clause quoted above from the consignment agreement between Phillips and JN Contemporary. If it doesn’t, then your client can’t rely on force majeure, a purely contractual remedy, for recourse. There may be other common law doctrines you may be able to consider.
2. If the agreement contains a force majeure provision, consider how a force majeure event is described/defined in the agreement. That is, what constitutes a force majeure event? In the context of the ongoing pandemic, does the provision envisage a pandemic? Does it contain phrases such as “infectious diseases,” “pandemic,” “epidemic,” “public health crisis,” etc. or other broader events outside the parties’ control such as a “natural disaster”? If not, does the clause include catch-all phrases such as “without limitation” or “including, but not limited to”? Ejusdem generis is an interpretive guide according to which the meaning of a word in a series of words is interpreted/determined by the company it keeps. If sufficient examples of force majeure events are provided, phrases such as “including without limited” help to demonstrate the types of events the parties envisaged as constituting a force majeure event without having to spell out each and every such event in the provision.
3. Does the contract language require that a force majeure event can only be said to have occurred if it makes performance under the contract impossible versus commercially impractical? Are there any exceptions or exclusions that would prevent the triggering of a force majeure clause in an agreement?
4. Pursuant to the pertinent language in the agreement, what does it mean for parties if a force majeure event has occurred? Does the provision allow parties to terminate their contracts or simply delay performance?
5. Must notice be given before invoking a force majeure provision? If so, what form of notice is required, and can the notification formalities be readily met?
Endnotes
1. A force majeure clause is a provision in a contract that anticipates some supervening or extraordinary event outside the parties’ control, which would prevent them from performing, in whole or in part, obligations set out in the contract.
2. JN Contemporary Art, LLC v. Phillips Auctioneers LLC, (2020 WL 7405262 (S.D.N.Y. Dec. 16, 2020)).
3. Ibid., at p. 7.
4. Ibid., at p. 11.
5. Fibula Air Travel Srl v. Just-Us Air Srl, [2020] EWHC 3048.