Force Majeure And The Coronavirus Pandemic A Case Law Update
I have previously written about the impact of the coronavirus (COVID-19) pandemic on force majeure provisions in a commercial contract. A force majeure clause may excuse a party from performing its contract because of an unforeseen disaster. Whether it does depends on what the clause says and the particular facts and circumstances of each case. See “Does Your Contract Have a Force Majeure Clause and Can You Get Out of It Because of the Coronavirus Pandemic?”
The unique circumstances created by the COVID-19 pandemic have raised legal issues that are relatively new, barely a year in the making, and difficult to analyze without the guidance of case law. Case law is made up of published court decisions that tell parties in a lawsuit who is right, who is wrong, and why. Lawyers cite these court decisions to argue that their case is the same or different, depending on which side they are on. Going to court and getting a decision, however, takes time, sometimes years. Unfortunately, the courts have not had time to catch up to COVID-19 pandemic, and so many of the legal issues I previously wrote about have not been resolved by case law.
One of the first cases in the country to do that is JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 WL 7405262 (S.D.N.Y. Dec. 16, 2020). In the JN case, an art dealer had a contract with an auctioneer to sell paintings at an auction in New York City. The auctioneer canceled the auction and terminated the contract after Governor Cuomo declared a state of emergency and issued executive orders that prohibited non-essential businesses to operate due to the COVID-19 pandemic. The art dealer sued the auctioneer to enforce the contract, but the court summarily dismissed the case as a matter of law based on the contract’s force majeure provision.
You may recall that a central issue in any force majeure litigation is whether the event that disrupts a party’s contract performance is a force majeure event contemplated by the contract. The contract force majeure termination provision in the JN case said:
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…..
Note that this force majeure provision does not specifically list “pandemic,” “epidemic,” “pestilence” or a public health crisis of any kind as a force majeure event. Also note that the “catch-all” introductory language preceding the list, “as a result of circumstances beyond our or your reasonable control, including, without limitation …,” is very broad.
As I said in my previous article, whether an event qualifies as a force majeure event that triggers a contract force majeure clause is divined from the parties’ intent at the time they entered into the contract. The parties’ intent is primarily determined from the words they use. And words matter. If only the force majeure provision at issue in the JN case had specifically listed “pandemic” as an intended force majeure event.
Despite the lack of a specific reference, the court in the JN case found that the parties did intend to include a “pandemic” as a force majeure event in the force majeure provision of their contract by broadly interpreting the words “natural disaster,” which was specifically referenced. It relied on dictionaries and other sources to find “It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.” 2020 WL 7405262, at *7; see also, Friends of Danny DeVito v. Wolf, 227 A.3d 872, 889 (Pa. 2020), cert. denied, 141 S. Ct. 239 (2020) (COVID-19 pandemic was unquestionably a “natural disaster” that supported the Governor’s authority to issue emergency shut-down orders).
The court also broadly interpreted the “catch-all” introductory language preceding the list to include any circumstances that were beyond the parties’ reasonable control, including “a pandemic requiring the cessation of normal business activity,” which circumstances were not limited by the examples specifically listed. 2020 WL 7405262, at *7-8.
Although it is not binding precedent in Arizona – which means Arizona courts may, but do not have to, follow its lead – the JN case is persuasive authority and answers two of the questions I asked in my previous article.
First, rather than equivocate or dive into a lengthy legal analysis, as many courts have done in the past, the JN court said that, without question, the COVID-19 pandemic and the government shut-down orders it spawned fell “squarely under the ambit” of the parties’ force majeure provision. The court’s broad interpretation of the words “natural disaster” and “circumstances beyond [the parties’] reasonable control” are seemingly limitless.
Second, although severe economic impact alone has been denied force majeure status in past case law – cases arising out of the 2008 Great Recession, for example – the JN court had no trouble bundling the COVID-19 pandemic with the economic impact of Governor Cuomo’s shut-down orders as essentially concurrent circumstances beyond the parties’ reasonable control. The court did not engage in a “chicken or the egg” causation analysis. Nor did it care that, like “pandemic,” the parties’ did not specifically list “government shut-down order” as a force majeure event in their contract. It cared only that one event triggered the other that triggered the force majeure provision. See Friends of Danny DeVito, 227 A.3d at 890 (concluding the pandemic triggered the Governor’s authority to issue shut-down orders that was triggered by the pandemic).
I secretly suspect that the JN court’s exceedingly liberal interpretation and application of the parties’ force majeure provision is driven by the current dire circumstances that for many have made it impossible to perform their contracts. The facts shape the law, and the law follows the facts. The facts in the JN case were that, regardless of what the parties’ force majeure provision said or didn’t say or what event caused the other, the auctioneer could not perform its contract with the art dealer because of circumstances beyond their control, which is exactly the reason why contract parties draft such provisions. The JN court and the case law followed those facts.
Once again, these are complicated issues. It is important to consult with experienced and competent legal counsel if you need guidance navigating the unprecedented financial obstacles of doing business or staying in business in the midst of a global pandemic.
About the Author: David N. Farren is an attorney at the Phoenix law firm of Jaburg Wilk who practices employment law, contract and business disputes, and complex commercial litigation. He can be reached at 602-248-1000 or at email@example.com.
This article is not intended to provide legal advice and only relates to Arizona law. Always consult an attorney for legal advice for your particular situation.