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Not a level playing field: Post-Covid, each ‘force majeure’ and ‘material adverse change’ turns on its own terms

Each force majeure turns on its own terms hero image showing an empty football stadium Print publication

21/02/2022

Why are the European Professional Club Rugby v RDA Television and Football Association Premier League v PPLive Sports International cases of interest?

One recent case relates to rugby, the other relates to football.  Both cases concern the contractual consequences flowing from the suspension of games due to the Covid-19 pandemic.  Both European Professional Club Rugby v RDA Television and Football Association Premier League v PPLive Sports International [1] arise out of broadly similar facts, but each involves a different strategic approach and results in a different outcome.  Together, therefore, these cases highlight important lessons for all businesses concerned with Covid-related and also general contractual breach and potential termination.

In particular, the cases demonstrate that there is no level playing field when it comes to contractual protections.  When it comes to ascertaining liability and/or the ability to terminate following breach of a commercial contract, everything comes down to how well the game was played during contractual negotiations.

What happened in the particular cases?

In European Professional Club Rugby v RDA Television, the court held that, there was no doubt that the pandemic qualified as a ‘force majeure event’ because the contract referred specifically to epidemics.  In addition, on the proper construction of the contract, the specific relevant terms of the force majeure clause were triggered, despite the parties having differing views as to the meaning of the overall clause and the notice requirements.  On the facts and according to the specific terms, therefore, the contract could be terminated by force majeure.

In Football Association Premier League v PPLive Sports International the force majeure clause was drafted quite restrictively.  It exhaustively listed examples of force majeure events (of which epidemic/pandemic was not one) and did not have any fall-back, ‘catch all’ provision [2]. As such, neither party relied on force majeure, and the case was brought on the alternate basis that the pandemic triggered the contract’s material adverse change (or MAC) provisions. On the facts and according to the specific terms, the parties’ liabilities under the contract could not be altered or terminated as a result of the pandemic.

What legal advice arises?

Covid has had, and is continuing to have, a significant impact on many businesses.  Whether Covid-related consequences might enable parties to minimise or avoid contractual liability is therefore likely to be a key consideration for many businesses for some time to come.  So, what do businesses need to know?

Force majeure
  • A force majeure clause may excuse one or more parties from performance of a contract following the occurrence of certain events which are outside a party’s control.
  • A force majeure provision cannot be implied – an express clause will be required.
  • A force majeure clause may have a variety of consequences: it may enable the parties to terminate the contract altogether; it may allow the contract or liability under it to be suspended while the force majeure event continues; it may provide for the adjustment of certain terms as a result of changing economic or market conditions; and/or it may allow for the extension of contractual deadlines.
  • The term ‘force majeure’ has no recognised meaning in English law and should therefore be expressly defined in the contract.  Commercial contracts typically define exceptional events such as ‘acts of God’, natural disasters, terrorism, strikes, government acts, building collapse, fire, and the like as force majeure events. The International Chamber of Commerce includes epidemics within its sample exhaustive force majeure clause– a fact which may be of evidential value in cases where there is a dispute about whether Covid is caught.
  • Depending on the wording of the clause, a party seeking to rely on a force majeure clause may need to prove that it has taken all possible or reasonable steps to prevent or mitigate the effect of the force majeure event.
  • Force majeure provisions also often include specific notification requirements and/or timescales which, if not strictly complied with, may prevent an affected party relying on the clause altogether.
  • Finally, following a recent Court of Appeal case [3], to successfully rely on a force majeure clause a party must be able to prove not only that the event in question caused the contractual breach/non-performance, but also that it was the only cause.  A party cannot invoke force majeure if it would not otherwise have been ready, willing and able to perform its contractual duties if the exceptional event had not occurred.
Frustration
  • Where there is no force majeure clause to rely on, an alternative route to contractual termination might lie in the English common law doctrine of frustration. The doctrine provides that, on the occurrence of a ‘frustrating event’, parties are no longer bound to perform their obligations and a contract is therefore effectively terminated.
  • A frustrating event is one which: occurs after the contract has been formed; is so fundamental as to go to the root of the contract; is neither party’s fault; and renders further performance impossible, illegal or makes it radically different from that which was contemplated by the parties at the time the contract was made.
  • Importantly, however, the doctrine operates within very narrow confines and the courts will not lightly relieve parties of their contractual obligations.
  • In particular, frustration is not available where a contract has otherwise made express provision for the consequences of the occurrence of the event in question; where an alternative means of performing the contract is possible; or if the contract merely becomes more expensive or less commercially viable to perform. The bar for a successful frustration claim is high.
  • In addition, because no one party is at fault in an incidence of frustration, neither party may claim damages, and if a party incurred obligations before the time of frustration, it remains bound to perform them [4].
Material adverse change
  • Another alternative, as the FAPL v PPLive case demonstrates, is to check whether the contract contains any material adverse change provisions, which, if they apply in the factual circumstances, may allow a party to re-negotiate, reduce or avoid certain contractual liabilities

What practical advice arises?

In terms of existing arrangements:
  • When reviewing existing contracts, parties should note that what appears, on the face of it, to be a force majeure clause, may in fact be an exception or exclusion clause; or it may be a clause which covers contractual frustration. Each of these types of provision has different legal and practical implications, and specialist advice will be needed.
  • Where supply chain or other contractual issues do arise, parties should consider commercial and reputational risks, alongside legal issues. For example, in such exceptional circumstances, parties may wish to consider being flexible about restructuring deals or debts so as to preserve relationships, even where there is no legal right or obligation to do so.
  • Any business wishing to invoke force majeure (or to ascertain the validity of any force majeure claim made against it) should ensure compliance with any specific notification or other contractual requirements and time-scales.
  • It will be prudent for any party wishing to rely on or to rebut a force majeure claim to keep clear records of all relevant factual and economic evidence as the effects of the virus unfold.
  • Parties should also consider the potential for alternative ways of performing affected contractual obligations and/or for mitigating any loss or damage.
  • As well as primary contractual arrangements, parties should check their various insurance contracts. In some cases, invoking or receiving a force majeure or a frustration claim can impact insurance policies. In particular, parties should ascertain any notification requirements.
In terms of new arrangements:
  • Parties should seek to specify the kind of events that they consider to be within the scope of force majeure. They should be defined precisely and, where relevant, should capture industry-specific, as well as more general, risks. Parties should also consider, with their specialist advisers, whether they want any force majeure provisions to be restrictive/exhaustive (which can provide certainty), or to be widely drafted and potentially to incorporate a ‘catch-all’ provision (which can provide flexibility).
  • The English courts do not look favourably on reliance on force majeure clauses to escape contractual obligations that have simply become more expensive or difficult to perform. Parties can, however, negotiate and expressly provide for a clause of this kind.
  • To offer flexibility, parties should consider including within the contract a specified time period after which the contract terminates automatically; or providing for one or more of the parties to have an option to terminate; or both.
  • Parties should consider providing for the terminating party to have some form of redress, for example if goods or services have already been paid for at the time of the force majeure event.
  • Customers should consider seeking provisions which give them priority in the event that a force majeure event impacts on the supplier’s ability to supply – so that the customer is first in the queue for scarce resources in a time of force majeure, and is first to have supply recommenced following the end of the force majeure event.
  • Where parties are part of a supply chain, complexities can arise where each contract in the chain has different terms and/or is subject to different governing laws. When negotiating new deals, parties should aim for consistency and suitability across the chain, wherever that is possible and bargaining position allows.
  • An appropriate ADR (alternative dispute resolution) clause should be considered so as to come into play in the event of dispute over force majeure or similar clauses and frustration arguments.

How we can help

Relying on a purported force majeure or similar clause, or attempting a frustration claim, is not an easy, nor by any means a guaranteed, ‘get out’ for contracting parties when times get tough.  By far the better advice is to try to anticipate, at the point of drafting, the types of circumstances in which the parties may require flexibility to renegotiate key terms; may wish to extricate themselves entirely from the arrangements; and/or may wish to avoid or limit liability for any breach or non-performance, and then to cater for those eventualities in the contract.

Walker Morris’ Commercial Dispute Resolution experts have a wealth of experience in advising clients on complex issues of contractual interpretation, including on the operation of force majeure and material adverse change clauses and the doctrine of frustration in the context of the Covid-19 pandemic.  We are able to support businesses with negotiations for new commercial/ supply chain arrangements and loan documents, and we are able to provide strategic risk management and/or dispute resolution advice if/when any party is seeking to minimise or avoid contractual liabilities.

For further information or advice in relation to your own business and circumstances, please do not hesitate to contact Gwendoline, Nick or Nick.

 

[1] [2022]EWHC 50 (Comm), [[2022] EWHC 38 (Comm)

[2] such as, for example, “…any circumstances beyond the reasonable control of a party affecting performance by that party of its obligations”, or the like

[3] Classic Maritime Inc v Limbungan Makmur [2019] EWCA Civ 1102

[4] the Law Reform (Frustrated Contracts) Act 1943 does, however, provide some limited scope for parties to recover monies paid under the contract prior to the frustration

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