Disruption caused by coronavirus
The breakout of coronavirus has already had a profound impact on the Scottish and UK economy. One of the sectors that has been most affected is the Scottish sports industry: football and rugby matches have been suspended indefinitely, and the EURO 2020 Championships (where some of the games were due to take place at Hampden Stadium, Glasgow) have also been postponed until 2021. In addition, horse-racing, curling and basketball events (amongst others), due to take place in Scotland in the next few months have also been postponed or cancelled.
In light of the pandemic, commercial organisations in the sector are having difficulty fulfilling certain contractual obligations. Tournament organisers risk breaching their broadcasting and sponsorship agreements as a result of postponing fixtures and events; broadcasters are unable to transmit live matches to their paying subscribers and sponsors are not receiving the exposure for their brands that they originally anticipated.
Under Scots law, the default position is that a party has ‘strict liability’ in relation to its performance of contractual obligations. This means that if a party agreed to a certain contractual obligation, it should not be allowed to escape performance of that obligation simply because it becomes more difficult or expensive to perform. However, there are two key exceptions to this principle: the contractual concept of ‘force majeure’ and the common law principle of frustration.
Anatomy of ‘force majeure’ clauses
The majority of commercial contracts governed by Scots law (or any common law jurisdiction) will likely contain a force majeure clause. Such a provision is an exception to the strict liability rule described above, and typically excuses a breach of contract (or failure or delay) by a party in performing a contractual obligation as a result of something outside of its reasonable control (such as an outbreak of war or natural disaster). Under Scots law, parties cannot seek to rely on force majeure where the agreement does not contain a force majeure clause.
The first step for sporting entities considering their rights in light of coronavirus is to check whether the contract in question has a force majeure clause and to review the exact wording of the clause. There is no definition of what constitutes a ‘force majeure event’ under Scots law. As such, the question of whether or not the coronavirus pandemic will be deemed a force majeure event depends on the wording set out in the contract. Force majeure clauses sometimes contain an exhaustive list of events which would be deemed to be force majeure events. In the current crisis, parties may be able to rely on a force majeure clause which expressly cites ‘pandemic’ or ‘epidemic’. Parties may also try to rely on more generic wording such as ‘government intervention’ or similar wording where the nature of the obligation relates to jurisdictions with strict restrictions in place, or ‘acts of God’ – although these should be carefully considered in their individual context.
In relation to clauses where the list is expressed as ‘non-exhaustive’, the party seeking to rely on it may still argue that pandemics such as the coronavirus outbreak are implicitly included, although each case needs to be reviewed on its merits.
Similarly, the party seeking to rely on the clause should check the extent to which the obligation needs to be impacted by the coronavirus pandemic in order for the clause to be exercisable. Where the clause requires that a party is ‘prevented’ from performing an obligation, the courts will often interpret such wording strictly and require that the obligation is made impossible in order for a party to rely on it (rather than merely more costly or more inconvenient to perform). By way of example, a football kit manufacturer may not be able to rely on a force majeure clause under a kit supply agreement simply because shipping to certain parts of the world is logistically more difficult or slower due to coronavirus. Similarly, broadcasters may argue that tournament organisers could organise sporting fixtures behind closed doors rather than cancelling them entirely.
Force majeure applies – now what?
Where force majeure does apply, the relevant clause will typically indicate what should happen to the parties’ respective obligations. The standard position is that the affected party’s obligations are suspended for the duration of the force majeure event, but that the other party (or sometimes either party) has a right to terminate the agreement if the force majeure event continues beyond the expiry of a prescribed fixed period (e.g. 4 weeks). The party seeking to rely on force majeure should be mindful of any right to terminate the agreement by the counterparty and should take this into account before asserting its right to suspend its obligations under the force majeure clause.
The clause usually stipulates that the party relying on it must take reasonable steps to mitigate the effects of the intervening event during such period. For example, a golf tournament organiser may be expected to negotiate with the relevant organising body to reschedule the event and in a way that would not result in a significant loss of viewers. Parties may also be expected to rely on insurance policies, business continuity/contingency plans and other alternatives before being able to use force majeure clauses to avoid having to perform a given obligation.
The clause will usually also provide certain notification and practical requirements, with which the party relying on the force majeure clause must comply. It may also stipulate that the parties are responsible for their own costs arising from a force majeure delay.
The effect of a party terminating an agreement pursuant to its force majeure provisions is entirely dependent on what the agreement says. Typically, the parties will have negotiated provisions so that they will be put back into the position they were in when entering the contract, which is likely to include refunds of sums paid under the agreement where the corresponding goods or services were not provided. In addition, neither party will incur any liability.
Other contractual provisions which may apply
In addition to force majeure, the contract in question may contain a ‘material adverse change’ or ‘material adverse effect’ clause, which may be triggered by the on-going COVID-19 pandemic. In contrast with a force majeure clause, these provisions relate to the state of a contracting party itself or the subject of the contract. By way of example, the title sponsor of a sports league may seek to rely on such a provision in a contract if league fixtures are suspended for a material period of time, given that the value of the sponsorship rights would, in turn, be materially affected. Some longer-term agreements (such as stadium naming rights deals) may have a specific ‘change of law’ clause, giving the parties certain rights in the event of a material change in the law of the relevant jurisdiction.
Again, these provisions need to be reviewed on a case-by-case basis, in respect of the nature of the obligations in question and the exact wording of the relevant provision.
The doctrine of ‘frustration’
Under Scots law, there is also a common law doctrine of ‘frustration’ on which the parties may be able to rely in certain circumstances, in the absence of a force majeure clause in the contract. However, frustration is interpreted very narrowly by the courts: the party’s performance of the contract must be rendered physically or commercially impossible or radically different from the obligations undertaken at the inception of the contract. Evidently, this is a very high bar for a party to establish.
Furthermore, a party’s inability to perform under the agreement must not arise as a result of a breach by it, and the event must also be unforeseen by the parties. Unsurprisingly, the doctrine is rarely relied upon given its narrow interpretation by the courts, but the recent crisis may well see a raft of new cases in this area.
Jurisdictions outside of Scotland
The position summarised in this article applies only to contracts governed by Scots law. The laws in other common law jurisdictions often take a similar approach but vary from territory to territory.
In civil law jurisdictions, force majeure is often governed by statute and the relevant contractual obligations should be reviewed in the context of such legislation.
Check the governing law of your contract – is it a jurisdiction where the concept of force majeure is recognised, e.g. Scots law or the laws of England and Wales?
Review the terms of the force majeure clause - is the pandemic likely to be covered as a force majeure event? If so, what is the threshold for being able to rely on it – impossibility or some lower threshold? The courts will construe this narrowly.
Comply with the notification procedure and any other practical steps required – again the courts will require these to be followed strictly.
Check for any other relevant clauses – for example material adverse effect/change, change of law.
Keep abreast of the situation – keep informed of government announcements and restrictions relating to the outbreak, as these may affect whether or not a party can rely on force majeure.
Check your insurance policy – you may be covered by your insurance, in the event that you can’t rely on force majeure.
Discuss/ renegotiate with the counterparty – they may be open to amending the contract in light of coronavirus, or happy to temporarily waive your non-performance given your previous business relationship.