Throughout the ongoing COVID-19 crisis, one of the biggest challenges facing businesses and the legal community has been the lack of clear judicial direction addressing the pandemic’s impact upon contract performance obligations. Few agreements prepared before the pandemic began likely included provisions expressly providing for such an event. Now, contracting parties are wondering whether they or their counterparts are excused from performing under those pre-existing agreements, and how new agreements should be drafted in an ever-uncertain state of the market. The easy but unhelpful answer so far has been “it depends.”

Given that courts and clerk’s offices have been, like many businesses, operating at limited capacity, case law here in the D.C. metropolitan area remains sparse on the subject. However, a recent decision from the U.S. District Court for the Southern District of New York could serve as an indicator of where other courts may lean as more cases run their course.

In JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 U.S. Dist. LEXIS 237085 (S.D.N.Y. Dec. 16, 2020), the owner of a valuable painting composed by artist Rudolf Stingel entered into two contracts with an auctioneering company. Among other things, the owner agreed to place a bid on a separate painting in a 2019 auction, in exchange for the auctioneer placing the owner’s painting up for bid at a May 2020 auction and paying a guaranteed multimillion dollar sum to the owner. But after the COVID-19 pandemic ran rampant across the country in early 2020, the auctioneering company notified the owner that it would be postponing the May 2020 auction, terminated the contract which called for the auction of the owner’s painting, and refused to pay the owner the guaranteed payment.

The District Court ultimately decided that the auctioneering company was entitled to terminate the contract and avoid its payment obligations under a termination clause which the court read as a “force majeure” provision and dismissed the painting owner’s legal claims. The court emphasized the language in the termination clause, which read as follows:

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.

Clearly, this provision did not specifically list “pandemic,” “health emergency,” “government restriction” or the like in the list of exemplary events which authorized termination and excused performance. Still, the court decided that the COVID-19 emergency and related governmental orders constituted “circumstances beyond the parties’ reasonable control,” reasoning that the necessary cessation of normal business activities resulting from the disease’s outbreak required the May 2020 auction date to be postponed. The court drew striking comparisons from the impact of the pandemic to other “widespread social and economic disruptions” cited in the provision, such as “general strike[s],” “war,” “chemical contamination” and “terrorist attack.”

The court also declared unequivocally that the COVID-19 pandemic was, beyond any serious dispute, a “natural disaster” as referenced in the force majeure provision, citing the Black’s Law Dictionary and Oxford English Dictionary definitions of the same, existing New York case law defining “disease” as a natural disaster, and even a recent opinion from the Supreme Court of Pennsylvania in a 2020 election lawsuit which made similar proclamations of “natural disaster” status for the pandemic.

But reader beware, the court in JN Contemporary Art also ruled that these findings were not the only determining factor, and that the underlying circumstances and other language in the force majeure provision were crucial in rendering the auctioneer’s contract termination appropriate. Specifically, the court found that the parties’ intent was for the painting to be auctioned at a specific event in May of 2020, and the language in the termination provision placed the right of termination upon the auction being postponed, as opposed to a more general reference to “performance” being excused. It was for all these reasons that the court decided that the auctioneer’s actions were authorized, not simply because the pandemic qualified as a natural disaster or other force majeure event. The decision has been appealed to the Second Circuit Court of Appeals.

While not binding upon courts here in Maryland, D.C. or Virginia, or any other courts for that matter, this decision is one of the first in a likely long line of cases relating to contract performance obligations in the COVID-19 era that could be used as persuasive authority in both active contract litigation and in new contract negotiations. The key takeaways are threefold:

(1) other courts may similarly decide that a force majeure provision need not specifically reference COVID-19 or a pandemic to support excused performance,

(2) at least one court has equated the coronavirus outbreak to other (and more typically cited) force majeure events like war, terrorist attacks, and natural disasters, and

(3) the surrounding circumstances, and how a force majeure clause is creatively drafted, can make all the difference.

We will continue to monitor developments in this and other cases on the subject. If you are a contract party experiencing or anticipating performance issues due to COVID-19 or a business party negotiating a new contract and wondering how to best protect your interests, our qualified business attorneys are available to answer your questions. Please do not hesitate to contact Zack Andrews at (703) 525-4000 or zandrews@beankinney.com if you need assistance.