Sick Days: the impact of a global pandemic on sports related contracts

Posted in Bankruptcy, financial restructuring and insolvency Dispute resolution, litigation and investigations

The past few weeks have seen the widespread cancellation of sporting events around the world due to the COVID-19 pandemic. The NBA, NHL, MLS, and MLB seasons have been postponed, NCAA’s March Madness tournament has been cancelled, soccer across Europe has been suspended, and the USA PGA Championship and the Masters will be postponed

The widespread cancellation of sporting events creates the potential for a large number of contractual issues to arise. For example, fans who bought tickets to these events may seek refunds; athletes, teams staff, and arena employees may face uncertainty regarding what compensation, if any, they will receive, or are entitled to receive, during the period of suspension; and on a larger scale, contracts between the leagues and other organizations, such as broadcasters and sponsors, may be affected.

In short, the contractual ramifications of the COVID-19 pandemic, though still uncertain, may be significant. While the outcome of such contractual issues cannot be predicted with certainty, the common law doctrine of frustration and contractual force majeure clauses will be of relevance to all parties.

The Common Law Doctrine of Frustration

Traditionally, the fact of a contract being impossible to perform on account of some intervening event was no excuse for failure to perform. However, this strict approach was gradually relaxed with the development of the doctrine of frustration. The doctrine’s application is contextual, but generally frustration occurs when, following the execution of a contract, some intervening event occurs which makes performance of the contract “radically different from that which was undertaken by the contract”.

A pre-condition to the operation of the doctrine is that the contract makes no provision for the intervening event which has arisen. Thus, in the context of the COVID-19 pandemic, the doctrine may be inapplicable to a contract which addresses how an event like the pandemic would affect the parties’ obligations under that contract. It is also important to consider whether there is any implied allocation of risk in the contract, its background, or context.

As highlighted above, this threshold for “frustration” is hard to meet. However, if this doctrine applies, a court may fully excuse both parties from their obligations. In Canada, the effect of the doctrine may also be governed by provincial legislation in all provinces and territories except Nova Scotia. For example, the Ontario Frustrated Contracts Act provides that sums paid are recoverable, and sums payable cease to be payable.

Force Majeure Clauses

Unlike the doctrine of frustration, which applies only to contracts that are silent with respect to an intervening event, force majeure clauses are contractual provisions which explicitly allocate the risks associated with specified intervening events that are outside the control of the contracting parties. Special considerations should be given for contracts in Quebec, where in the absence of the clause, the general civil law concept of superior force may apply by default.

The applicability of any force majeure clause will depend on the terms of the provision, but typically follows a three part assessment.

First, an assessment must be made as to whether the COVID-19 outbreak falls squarely within one of the clause’s outlined triggering event. This determination is made based on the specific wording of the clause at issue. Common triggering events under force majeure clauses include natural disasters, wars, civil unrest, and various government actions, but some force majeure clauses also identify epidemics, pandemics, and quarantines as triggering events, or have broader clauses such as “acts of God” or “events beyond the reasonable control of parties”.

Second, where the triggering event under a given force majeure clause is applicable, it is then necessary to assess the impact and causation of the event on the performance of the contract. For example, some contracts may permit invocation of a force majeure clause in the event that performance is rendered commercially impracticable, while other contracts may state that the clause applies only in the event that performance becomes impossible.

Lastly, in the event that a force majeure clause is triggered and properly invoked, the outcomes will need to be assessed, and are typically not limited to discharge of the contract (unlike in the doctrine of frustration). For example, some clauses may discharge the parties to the contract from their obligations thereunder, while other clauses may require the parties to use “commercially reasonable”[1] efforts to mitigate the impact of the triggering event. In the latter case, parties may need to remain prepared for the possibility that sporting events resume in the near future, and that they will be required fulfill their contractual obligations.

As outlined above, COVID-19 has impacted most aspects of the sporting world, and individuals and companies in the industry may be facing immense difficulties to perform their obligations. However, the considerations outlined above require significant legal analysis, and parties that have had their contracts affected by COVID-19 are strongly encouraged to seek legal counsel to assist them in navigating the various legal and factual considerations. Please do not hesitate to reach out to Norton Rose Fulbright’s global teams if your business has been affected.

The authors would like to thank Alexandra David and Brandon Schupp, Articling Students, for their assistance in preparing this legal update.

 

[1] Atcor Ltd v Continental Energy Marketing Ltd (1996), 178 AR 372.

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