COVID-19: Expectation feeds Frustration
Those in the sport industry will have noted with concern the increasing number of sporting events being cancelled across the globe as a result of the spread of COVID-19. In turn, rights holders and event organisers will have reached for the filing cabinet and dusted off their terms and conditions to see if their policies cover them for losses caused by contagious diseases. Many in horse racing will have inadvertently been covered against this latest variant of coronavirus as a result of insurance they took following the devastating impact that foot and mouth had on the industry at the beginning of this millennia. However, for both the insured and uninsured, the next step is to check the contracts that they have with sponsors and suppliers to see whether such a scenario has been anticipated.
The expectation is that any good commercial contract will contain a force majeure clause but, whether or not it does, they should also consider the doctrine of Frustration.
The literal translation of “force majeure” is “superior force” and in practice it means the happening of events outside the control of the contractual parties (for example, natural disasters, epidemics or the outbreak of hostilities). It is usual for parties to provide in a contract that such events will not make the defaulting party liable if they prevent it from performing its obligations. The concept is derived from civil law and is not fully recognised under common law, therefore in a contract it should always be properly defined. Nonetheless, it would be difficult to envisage a situation in a commercial business-to-business contract where an epidemic such as COVID-19 would not be considered to be a force majeure event.
Thus, where a contract contains a force majeure provision (or a similar section dealing with what happens in the event of cancellation or a failure to deliver rights, for example), what to do in the event of force majeure will be spelled out in black and white. Take, for example, an event organiser who sells sponsorship packages to their event; a force majeure clause might state that the owner will not be liable to repay the sponsor the annual sponsorship fee if it is forced to cancel the event due to government advice.
However, the absence or imprecision of a force majeure clause need not spell disaster for a rights holder; the common law principle of frustration may apply.
As a general rule, if performance of a contract becomes more difficult or even impossible, the party who fails to perform is liable in damages (AKA the doctrine of absolute contracts). The doctrine of frustration is an exception to this. It allows the contract to be automatically discharged when a frustrating event occurs so that the parties are no longer bound to perform their respective obligations. The doctrine of frustration is generally thought to provide a better solution (than that provided by the doctrine of absolute contracts) to the problems of loss allocation which arise when performance is prevented by supervening events for which neither party to the contract is responsible.
Generally speaking a frustrating event is an event which:
- occurs after the contract has been formed;
- is so fundamental as to be regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract;
- is not due to the fault of either party; and
- renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.
For an event owner forced to cancel the event due to COVID-19, it is clear that all four of the criteria detailed above will have been met.
So, if the doctrine of frustration applies, how much money will our event owner have to repay to a sponsor? This is detailed in the Law Reform (Frustrated Contracts) Act 1943 (LRA). The LRA applies to most commercial frustrated contracts governed by English law, with the exception of contracts which have excluded its effect, certain shipping contracts, insurance contracts and contracts for specific goods which have perished. The LRA provides that:
- money paid before the frustrating event can be recovered and that money due before the frustrating event, but not in fact paid, ceases to be payable;
- a party who has incurred expenses is permitted, if the court thinks fit, to retain an amount up to the value of the expenses out of any money they have been paid by the other party before frustration; or where money was due and payable at the time of frustration, recover a sum not exceeding that amount for expenses; and
- the court may require a party who has gained a valuable benefit under the contract before the frustrating event occurred, to pay a “just” sum for it. This is so whether or not anything was paid or payable before the frustrating event.
Thus, this can be hugely beneficial to event organisers because it has the effect of reducing the sums repayable to sponsors or payable to suppliers. If, for example, the sponsor has paid for a year round sponsorship package, the event organiser has expended time and money on delivering some of the year-round rights (for example, digital or experiential rights) and the event is cancelled, the event organiser can claim to subtract the value of the rights that have been delivered and the costs of delivering them from the amount to be refunded. This can amount to a considerable reduction and, when many events are seasonal and cannot be rescheduled, the doctrine of frustration can be the difference in going bust or survival.
It is however for the court to decide if the deduction of costs would be just in all of the circumstances. For instance, if a concert cancelled it would be difficult in our view to withhold refunds from ticket holders on the basis of expenses incurred. The likelihood is that a court would not feel that just.
One sign of this is that the Competition and Markets Authority has said that a clause in a contract which prevents a ticket holder being entitled to a refund in the event of cancellation would likely to be unreasonable and void under the Consumer Rights Act.
The operation of the LRA is not just a theoretical option; In the wake of the Ryder Cup cancellation/postponement due to 9/11, this firm advised the Ryder Cup on its contractual arrangements and the doctrine of frustration was at the forefront of the commercial solution and resulted in businesses that had booked hospitality packages not getting full refunds because of the operation of the LRA.