26 - Frustration and force majeure
How Clubs and Players deal with issues of frustration, and force majeure
The world is presently responding to a pandemic, one that has significantly affected the sporting community. Since top tier football in England and Wales has been suspended for three months in response to the crisis, the football industry has faced unprecedented challenges. Despite the 19/20 season resuming, with matches taking place behind closed doors, Mills and his club, Paddington United face problems with sponsors claiming force majeure or frustration. We take a look into these legal concepts and give a user friendly guide to when they might apply and their consequences.
Mills and Magic Airways
Mills receives a letter from one of his sponsors, a high-end package holiday company, Magic Airways, stating that due to the on-going travel restrictions, and social distancing measures, his various international appearances to promote the company have been impossible to source and organise. The sponsorship deal included an obligation on Mills to feature in a promotional video, which shows Mills flying with the Magic Airways to various holiday destinations, showcasing a five star luxurious experience. Given the restrictions on travel, social distancing and public health measures, such as the requirement to wear masks and quarantine in certain destinations, the sponsor claims that the promotional video and travel cannot take place. As such, Magic Airways are not able to pay the sponsorship due under the contract. The letter goes onto say that Magic Airways think it is unfeasible for it to perform its side of the agreement going forward with all these restrictions in place and events being cancelled. They claim that the concept of the endorsement deal in the new reality we are all facing is clearly not the deal Mills and Magic Airways entered into at the start of the football season.
Mills is worried that his main source of off field income is at risk. Despite trying his best to promote Magic Airways on his social media, the on-going travel restrictions as a result of the pandemic means that his international promotional video and appearances are not going ahead, so he has very little to tweet about!
The Chief Executive of Paddington United is also worried about receiving a similar letter from the Club’s local sponsor, Pie n’ Stuff, wanting to terminate their sponsorship. As part of its deal, Pie n’ Stuff have significant signage inside the stadium, and are exclusive caterers to the match day crowds. With the pandemic leading to matches taking place behind closed doors, the sponsor has lost significant impact of its deal. This was not the deal that was envisaged when the parties signed the contract. Now all that can be seen on televised matches are the pitch side hoardings, which Pie n’ Stuff do not have, as their signage is inside the stadium.
Frustration
The doctrine of frustration will have effect where an event arises, which goes beyond what was contemplated by the parties when they entered into the contract, which makes performance of the contract impossible and which does not arise as a result of breach by one of the parties.
Mills’ sponsorship agreement with Magic Airways may well have been frustrated on the basis that it is impossible for Magic Airways to organise international appearances and to film Mills flying all over the world, because of Covid-19 travel restrictions and social distancing guidelines. Magic Airways are also not making a return on the contract because Mills is not able to promote the brand as he normally would without such restrictions in place. If a contract has been frustrated, it automatically ends, and the parties are, generally speaking, excused from all their future obligations, from that point onwards. However, exceptions can apply, and the parties need to carefully consider whether the Law Reform (Frustrated Contracts) Act applies, as this legislation applies to most commercial contracts. This legislation may require one of the parties to compensate the other as a result of the contract having been frustrated. In this example, Mills may be able to recover compensation from Magic Airways for promotional work that he carried out prior to the pandemic, but for which he was not paid before the contract became frustrated. This would be on the basis that under section 1(3) of the legislation the Court may require a party, such as Magic Airways in this case, who has gained a valuable benefit under the contract before the frustrating event occurred, to pay a "just" sum for it (as determined by the Court).
Not every event of a pandemic necessarily leads to a cause of frustration 1. However, that is not to say that an epidemic or pandemic, or events associated with it, cannot amount to frustration. No doubt they can, so long as they render performance impossible or illegal or “radically different”. Given the dramatic impact of the Covid-19 pandemic, there would appear to be scope for Magic Airways to claim that frustration applies. Clubs, Players and Sponsors should reach out and be pro-active about seeking to agree a commercial resolution. For example, if Mills’ endorsement deal with Magic Airways is in place for the next 3 years, there will be scope to potentially carry out the contract in the future, rather than seek to terminate based on frustration.
Force Majeure
Force majeure clauses allow parties to avoid liability if the reason they cannot perform the contract is due to circumstances not within a party's reasonable control as defined by the ‘force majeure’ clause.
As the pandemic is on-going, in preparation for tough times ahead, Paddington United start reviewing their sponsorship agreements, one of which is the Club’s local sponsor. Within the contract, there is a force majeure clause:
“If a party is prevented, hindered or delayed in or from performing any of its obligations under this agreement by a Force Majeure Event (Affected Party), the Affected Party shall not be in breach of this agreement or otherwise liable for any such failure or delay in the performance of such obligations. The time for performance of such obligations shall be extended accordingly”.
“any circumstance not within a party's reasonable control including, without limitation, acts of God, epidemic or pandemic, acts of war or terrorism, shortage of supply, breakdowns or malfunctions, interruptions or malfunction of computer facilities, or loss of data due to power failures or mechanical difficulties with information storage or retrieval systems, labour difficulties or civil unrest”.
The event of Covid-19 will fall within the definition of force majeure in the Club’s contract with its sponsors as it references ‘epidemic or pandemic’. However, the parties should consider the exact wording to check if the clause is triggered, and if so, what the consequences are 2Fortunately, for Paddington United the force majeure clause simply extends the time for performance of the contract until the force majeure event has passed, which in this case is arguably when matches can resume with fans in attendance (at which time the sponsors will begin to receive again the publicity they contracted for). Until then, the sponsor’s obligations to supply the catering services and to pay for sponsorship will be suspended, as will the Club’s obligation to promote the brand within the stadium.
Considerations for Clubs, Players and Sponsors in Force Majeure cases:
Parties should assess whether the Covid-19 pandemic falls with the scope of the clause. If the clause specifically refers to epidemics or pandemics, then it likely will. However, if it doesn’t, then it may depend whether there is any catch all wording in the clause that is broad enough to cover what has happened.
Clubs, players and sponsors need to consider what the clause says about the connection between the force majeure event, and the reason why a party isn’t able to perform the contract. Some clauses might require that the force majeure event has prevented the party from performing, others might allow for lower standards, like hindered or delayed. This could be important because there may be a dispute about whether it is the pandemic that is the reason the party can’t perform, or whether it is down to some other cause, like the party’s poor financial position before the pandemic started, for example.
Each side needs to consider whether the effect of the clause is to suspend the parties’ obligations for the period that the force majeure event is active, or whether it’s to terminate the contract completely going forwards. If it’s a suspension clause, then the party will need to carry on performing after the effects of the pandemic subside. If it’s a termination type clause, the party who wants to rely on the clause may need to serve a notice under the clause, and a time limit might apply to that .
Key takeaways for all parties to consider when facing contractual problems because of Covid-19
If you find you are getting into a potential dispute, these are the practical things you should be considering doing:
Always review the termination provisions in the first instance, along with the options available under force majeure and frustration
Get legal advice before attempting to terminate a contract, if you terminate unlawfully, the risk can be detrimental and very costly.
Write to the other side to preserve and protect your position. Consider whether any contractual notices need to be served and if any time limits apply.
The parties should carefully consider the list of force majeure events when drafting/signing contracts.
Insurance against some force majeure events may be available and the parties should consider this before making any hasty decisions. Consider whether any notifications to your insurers may be prudent.
Where merchandise has been produced or is already in the market, each side should consider negotiating business continuity provisions, if appropriate.
Covid-19 is unlikely to give rise to a frustrating event for contracts being made now, as a pandemic is already in existence at time of contracting; the effects of it are much more likely to be within the contemplation of the parties.
Get advice about how best to maximise claims to legal professional privilege over any sensitive communications or documents.
Do not assume you can ignore a contract merely because it contains a force majeure or a frustration clause.
Reach out to counterparties and be pro-active about seeking to agree commercial resolutions. Consider doing so on a “without prejudice” basis, if there is a risk of a dispute.
We hope this article highlights some of the legal and commercial consequences of the pandemic within the sports industry. If you are dealing with any of the issues discussed, please do get in touch to see how we can help.
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See for example Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754, where a Hong Kong court rejected a tenant’s claim that a tenancy agreement was frustrated because the premises were affected by an isolation order by the Department of Health due to the outbreak of SARS, which meant that it could not be inhabited for 10 days. The court held that a 10 day period was insignificant in view of the two-year duration of the lease, and that whilst SARS was arguably an unforeseeable event, it did not “significantly change the nature of the outstanding contractual rights or obligations” of the parties in the case. ↩
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See for example CAS 2015/A/392[4], where the Court of Arbitration for Sport found that the Royal Moroccan Federation of Football was not entitled to postpone the African Cup of Nations tournament in 2015 due to concerns about the Ebola virus. The CAS found that Ebola was not a force majeure event because it did not make the organising of the tournament impossible. ↩