By: Edward Seglias, Kathleen M. Morley, and Paul Felipe Williamson
The coronavirus pandemic is giving rise to new legal issues across the country that courts are only just beginning to address. One of those unique issues is the application of force majeure clauses commonly found in construction contracts. In general terms, a force majeure clause acts to excuse a party from performing its contractual obligations due to an unforeseen disaster. Individual cases often depend on a specific clause and particular facts and circumstances. But whether the COVID-19 pandemic and related restrictions and shutdowns can constitute a force majeure clause triggering event is a new and recurring question before the nation’s courts. A recent decision out of the U.S. District Court for the Southern District of New York appears to be among the first reported decisions to address whether the pandemic constitutes a basis for excusing performance due to a “natural disaster” under a contractual force majeure clause.
New York Federal Court Concludes COVID-19 Pandemic Constitutes a “Natural Disaster” to Trigger Force Majeure
In JN Contemporary Art LLC v. Phillips Auctioneers LLC, a dispute among an art seller, the plaintiff, and an art auctioneer, the defendant, arose from the art auctioneer’s refusal to hold an in-person auction to sell one of the art seller’s paintings. The parties had entered into two contracts in which the defendant agreed to auction particular paintings by two different artists for the plaintiff. While the defendant successfully completed its obligations under one of the contracts, restrictions on in-person gatherings and business operations and the ensuing state government orders presented challenges for the defendant to hold an in-person auction for the sale of the other painting under the second contract. The defendant ultimately terminated that contract, arguing that its performance should be excused due to the COVID-19 pandemic. In so arguing, the defendant relied upon the contract’s force majeure clause, which included things such as natural disasters, fires, floods, wars, and terrorist attacks as force majeure events. In upholding the application of the contract’s force majeure clause to excuse the defendant’s performance, the court found that the pandemic and related government shutdown orders constituted circumstance beyond the parties’ control, and even a “natural disaster,” as contemplated by the contract’s clause force majeure clause.
The JN Contemporary decision is one of the first judicial opinions to explicitly hold that the COVID-19 pandemic qualifies as a “natural disaster” under a contractual provision excusing performance on that basis. In addition, the decision reflects a departure from the traditional, narrow interpretation of force majeure provisions, especially in New York. Traditionally, the term “natural disaster” is most commonly applied in the context of weather and environmental disasters, and courts strictly construe and interpret language in contractual force majeure provisions under New York law. The Southern District of New York’s more expansive view of the term “natural disaster” in the JN Contemporary decision may signal courts’ willingness to reconsider the traditional invocation and interpretation of force majeure clauses given the unprecedented impacts of the pandemic on businesses and individuals alike.
A few other reported decisions, including those issued by the Pennsylvania Supreme Court and the Circuit Court of Virginia, likewise showcase the courts’ inclination to find the pandemic to constitute a natural disaster.
While courts have not directly addressed whether COVID-19 constitutes a natural disaster in the construction context, the growing acceptance of COVID-19 as a “natural disaster” may provide construction contractors facing delays or stoppages in work due to the pandemic the ability to excuse the delay or non-performance under an applicable force majeure clause.
Continued Evolution of COVID-19 Force Majeure Litigation and Takeaways for Contractors
COVID-19 force majeure litigation will continue to evolve as more courts render decisions. The past year has spawned a resurgence of questions surrounding the application of force majeure clauses in commercial contracts as a result of the ongoing pandemic. While case law will vary by jurisdiction, specific contractual language, and the facts of each case, courts may find the JN Contemporary decision and others like it to be persuasive and follow suit. In doing so, courts may expand the traditional interpretation and application of force majeure clauses to excuse contractual performance based on impacts caused by the COVID-19 pandemic in other contexts and contracts, such as construction contracts. This could have significant implications for contractors and subcontractors who may be involved in ongoing or impending disputes over performance under contracts signed prior to the onset of the pandemic.
Regardless of how case law continues to evolve, contractors should evaluate delays and other impacts to performance from pandemic-related causes and restrictions on projects that are underway to ensure all rights and remedies are adequately preserved and pursued to best protect their businesses. Aside from excuse of performance clauses, it is important to seek extensions of time for delays caused by or related to the pandemic, and follow any and all claim notice provisions. In entering into new contracts, contractors should ensure they negotiate terms to appropriately account for any lingering effects of the pandemic impacting the construction industry. Ultimately, these issues are complex in nature and it is important to consult with experienced legal counsel for individual guidance in navigating contractual rights and protecting your business.