27 September 2022 - Article
Properly Invoked to Terminate Auction Consignment Contract
On December 16, 2020, Judge Denise Cote of the United States District Court for the Southern District of New York issued an Opinion and Order holding, as a matter of first impression, that the Covid-19 pandemic was a “natural disaster” within the meaning of a force majeure clause. Therefore, the Court held, an auction house was excused from performing a consignment contract. See JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 WL 7405262 (S.D.N.Y. 2020).
In June 2019, JN Contemporary Act LLC (“JN”) and Phillips Auctioneers LLC (“Phillips”) entered into a consignment agreement, in which Phillips agreed to auction a painting by Rudolph Stingel (the “Painting”), for a guaranteed minimum of $5 million. The agreement specified that the Painting “shall be offered for sale in New York in our major spring 2020 evening auction of 20th Century & Contemporary [Art] currently scheduled for May 2020.” 2020 WL 7405262, *2. The agreement was governed by New York law. The agreement contained a force majeure clause, 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.
Id. *2 (emphasis by the Court).
On March 7, 2020, Governor Cuomo declared a disaster in New York State, due to the Covid-19 pandemic. On March 14, 2020, Phillips announced that it was postponing all of its sales and auctions worldwide due to the impact of the coronavirus. On March 20, 2020, Governor Cuomo issued an executive order essentially prohibiting non-essential in-person business activity, including any in-person art auctions, until June 2020.
Thereafter, for some period of time, Phillips allegedly reassured JN that it would honor its contractual obligations to consigners. In May 2020, Phillips allegedly raised the possibility of offering the Painting for auction in November 2020, although apparently the parties did not agree on terms for doing so. On June 1, 2020 Phillips sent JN a termination letter, invoking the force majeure clause, and asserting that its obligation to auction the Painting, and pay the guaranteed minimum, were excused.
On July 2, 2020 Phillips held an on-line, or virtual, auction entitled “20th Century and Contemporary Art Evening Sale New York Auction.” Phillips stated in its Memorandum of Law that it had postponed the May 2020 auction to July 2, 2020, and decided to hold the auction in a different, never-before-used format in which the auctioneer would call the lots from a showroom in London that would be live-streamed to potential bidders online, and bidding would be permitted online, absentee, and by telephone.
JN sued, alleging that Phillips had breached the consignment agreement, that the force majeure clause was inapplicable, and that, in any event, Phillips was required to offer the Painting at the July 2, 2020 auction, or at another auction, with the same applicable guaranteed minimum. Phillips moved to dismiss, and on December 16, 2020, Judge Denise Cote granted the motion.
The Court’s Decision
Judge Cote held that the force majeure clause applied because the May 2020 auction had been postponed due to circumstances beyond the parties’ reasonable control, namely a natural disaster. Relying primarily on (i) Black’s Law Dictionary and the Oxford English Dictionary, (ii) cases in different contexts describing disease and pandemics as natural disasters, and (iii) disaster declarations issued by FEMA and Governor Cuomo, the Court found that, “it cannot be seriously disputed that the Covid-19 pandemic is a natural disaster.” 2020 WL 7405262, *7. The Court further held that, in any event, the words “including without limitation,” meant that the listed items were not intended to limit the meaning of the general term “circumstances beyond our or your reasonable control.” Id. *9.
The Court determined that because the force majeure clause, as written, applied not only to environmental calamities, but also to widespread social or economic disruption, the force majeure clause was properly invoked by the postponement of the May 2020 auction, and Phillips was not required to seek a method for alternative performance (including options suggested by JN, such as an on-line auction in New York in May 2020 or a later on-line auction):
- A properly invoked Termination Provision ended Phillips’ obligations to JN. Phillips was no longer required to offer the Stingel Painting at a subsequent auction or to pay JN the Guaranteed Minimum. It therefore did not breach the Stingel Agreement when it failed to auction the Stingel Painting at the Virtual Auction in July.
- Once the New York Auction was postponed for circumstances beyond Phillips’ control, Phillips was entitled to terminate the consignment agreement.
Id. *8. Thus, Phillips was apparently protected, in part, by the language of the contractual trigger for the force majeure clause, which was the mere postponement of the May 2020 New York contemporary art auction for reasons beyond the parties’ reasonable control, rather than its outright cancellation, or an inability to hold auctions of any kind.
The Court also rejected JN’s argument that Phillips took too long to notify JN of its invocation of the force majeure clause, finding that Phillips had done so within a reasonable time, and that JN should have known that this was possible once the May 2020 auction was postponed. Id. **11, 13. The Court rejected claims of breach of the implied obligation of good faith and fair dealing, breach of fiduciary duty, and equitable estoppel, finding that none of these claims could overcome Phillips’ proper invocation of its force majeure clause. See, e.g., id. *10 (“where nonperformance is excused by a contract’s force majeure provision, the implied covenant does not require substitute performance”).
What is most notable here for future cases is the Court’s determination that a pandemic is a “natural disaster” within the meaning of a force majeure clause. While it is unclear whether this reasoning will be adopted by other courts, for now this determination will give additional ammunition to parties whose force majeure clauses list natural disasters, but not disease, epidemics, or pandemics as reasons for invocation. This case underscores the need for consignors to engage counsel to assist in the negotiation of their agreements to ensure that their expectations are properly reflected.