COVID-19: frustrating a sporting nation

Posted in Dispute resolution, litigation and investigations Football Rugby

Sport around the world has become collateral damage of another world health crisis. In Australia, as an exponential number of people are forced into self-isolation by the emerging and potentially deadly coronavirus (COVID-19), the enjoyment they experience from sport is compromised at a time when many normally would seek refuge in watching their favourite team.

Long before the recent two person gathering rules made the postponement, suspension or cancellation of seasons and events unavoidable, every sporting administrator was reviewing their business continuity plans (or kicking themselves for not having one) to determine whether they had to throw in the towel and what this may mean for their contractual obligations.

Our recommendations:

1.      Contract managers and in-house counsel should review contracts to consider whether you or your counterparty's rights may be affected.

2.      If force majeure clauses have been included, you should consider whether they could be triggered by or against you and seek advice. If  they have not been triggered, consider whether the contract may be otherwise frustrated or you have any other rights.

3.      Engage with your contractual counterparty regarding the effect of the outbreak to prepare and mitigate potential disruptions.

4.      If you are entering into new contracts or varying existing ones, seek advice on whether inserting force majeure provisions (or some other  measure) is appropriate.

How sport has been impacted

All sports have been affected by COVID-19 and the impact has been felt from grass-roots to professional levels. The first high profile casualty in Australia was the Formula One World Championship’s opening race in Melbourne after McLaren withdrew when a team member tested positive for COVID-19. Then, the Australian men’s cricket team played New Zealand in front of a closed venue before the series was cancelled altogether in the interests of player and public safety. Even the most-determined administrators in the National Rugby League and Australian Football League only delayed the inevitable as the evolving medical advice made play impossible.

The postponements, suspensions and cancellations have had a ripple effect across the sports industry and other sectors which are adjacent to and reliant on these events for significant revenue streams. Some examples include:

  • Broadcasters being unable to exploit their commercial rights and realise the increased advertising income associated with televising live sport.
  • Companies and brands which sponsor teams and advertise at venues that have had to forego the goodwill and anticipated revenue associated with the exposure of their products to fans and the public at large.
  • Venues which rely on hire fees, catering and membership fees as their main sources of income that are not receiving any revenue while gathering bans remain in place.
  • Administrators that are having to reschedule sporting matches, as well as stand down players and staff while missing out on ticketing, sponsorship, membership and other revenue streams.

These circumstances raise the broad question of what this pandemic means for contracts of those who broadcast, facilitate, host, sponsor and support the participating teams and players.

Force majeure

The indirect financial pressures from COVID-19 may cause parties to rely on force majeure clauses for relief from the performance of certain obligations including payment of sponsorship money, provision of a suitable venue and disbursement of player salaries.

Some of these contracts may define a ‘force majeure event’ (FM Event) as:

An event or a circumstance beyond the reasonable control of a party which occurs without the fault or negligence of the party and may include…...

Many of the agreements governing the various competitions and events of this year’s sporting calendar will probably not refer to a coronavirus outbreak expressly.

The steps for a party to rely on an FM Event are usually outlined in the clause itself. Generally, if a FM Event occurs, the performance of certain obligations will be suspended for a specified period of time (e.g. until COVID-19 is contained or its consequences on the contract parties are mitigated).  For some sporting events, a suspension of obligations may not be viable and one party may seek to terminate the agreement entirely if this is permitted by the terms of the agreement.

Legal advice should be sought before invoking this mechanism to avoid breaching the contract through repudiation or other conduct.

Frustration

Whether force majeure is available depends on the terms of a contract and these clauses are interpreted in accordance with the usual principles of contractual interpretation. This means that where there is no clause or the scope is too narrow, a contracting party may have to look at other rights, including whether the doctrine of frustration has been triggered.

The doctrine of frustration can apply where a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.[1]  While it is easy to imagine certain scenarios that would meet this requirement, it is a high threshold and unlikely to apply where performance is merely delayed. 

For example, a playing contract may be frustrated if an athlete was subject to a period of compulsory isolation and as a result was not able to provide their services at a certain time or place as contracted. However, it is unlikely to apply where the provision of those services are merely delayed by the compulsory isolation and the terms of the contract contemplate performance over a period of time (e.g. the 2020 calendar year). 

Where frustration does apply, the contract is terminated by operation of law at the time the frustrating event occurred. The common law provides that losses lie where they fall and no party can claim damages for non-performance because neither party is at fault. This applies in some Australian jurisdictions but New South Wales, South Australia and Victoria have legislation which alters the allocation of losses.[2]

The doctrine of frustration should not be relied on without the advice of legal counsel. If a party incorrectly invokes the doctrine – and the court later disagrees – the mistaken party may have repudiated an otherwise effective contract and become liable for damages.

Commercial outcomes

Given the current uncertainty, businesses and sports administrators are forecasting months and, possibly, a whole season that may be disrupted. However, parties to contracts that are affected by COVID-19 may consider their relationship remains valuable in the long term, and therefore a commercial response may be more appropriate than relying on legal rights.

The parties may choose to negotiate a variation of their contract to accommodate changes to rights and obligations that are impacted by COVID-19. This may include putting in place temporary measures which are to apply during the pandemic and terms governing the transition to normal arrangements once it passes. Alternatively, the parties may agree to terminate by mutual consent with the view of re-negotiating once the crisis has passed.

Please contact Matthew Fonti, Peter Mulligan or Jeremy Moller if you would like to discuss any of the above in greater detail.

 

[1] See, e.g., Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3 and Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143, 161

[2] Frustrated Contracts Act 1978 (NSW), Frustrated Contracts Act 1988 (SA) and Australian Consumer Law and Fair Trading Act 2012 (Vic)

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