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2020: The Force Majeure Awakens
- Tuesday, Mar. 10, 2020
The coronavirus disease 2019 (“COVID-19”) has shaken up a host of industries, including sports, which by its very nature requires large gatherings of spectators. In the midst of so much uncertainty, properties, sponsors and event producers are weighing public safety concerns with the integrity of the sport -- and the commercial impact that COVID-19 may cause. As a result, these parties are paying closer attention to an oftentimes forgotten contractual provision, typically tucked away -- if included at all -- near the end of an agreement. We’re referring to none other than the “force majeure” clause.
For starters, what is force majeure?
Force majeure is French for “superior force.” It is not necessarily a right to terminate an agreement, but rather it excuses a party's non-performance due to circumstances beyond its control. Essentially, it is a defense to breach of contract. However, the force majeure defense is construed narrowly: only when the force majeure clause addresses the specific event claimed to have prevented a party’s performance will it be excused (Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900 (1987)) – “mere impracticability of, or unanticipated difficulty in, performance is not sufficient to excuse performance under” such clause. 28 N.Y. Pract., Contract Law § 20:14, citing Phibro Energy, Inc. v. Empresa de Polimeros de Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989)).
There are several elements that may be included in such a clause, starting with what qualifies as a triggering force majeure event (such as an “Act of God,” flood, fire, natural disasters, wars, terrorism, lockouts, and strikes). The force majeure clause may include the time period for which the performance is excused, and a requirement to resume performance once the force majeure event ends. It may state a requirement to take reasonable steps to avoid or minimize the delay of performance, non-performance, and/or damages. In addition, the provision may require that the party enacting the force majeure defense notify the other party that performance will be delayed or impossible. Finally, the clause may include specific remedies when a force majeure event occurs, including one or more of the following: (i) make-goods or substitute benefits, (ii) equitable adjustment or rebate, (iii) extension of the term of the contract, (iv) postponement of the event or services, (v) suspension of performance, or (vi) the right to terminate the agreement and receive a refund for services which have yet to be performed or rights that have yet to be received.
How does the defense of force majeure hold up in court?
Based on the intent of force majeure, New York courts tend to narrowly construe force majeure provisions and find that they “only excuse a party’s nonperformance if the event that caused the party’s nonperformance is specifically identified” in the clause (In re Cablevision Consumer Litig., 864 F.Supp.2d 258, 264 (E.D.N.Y. 2012); see Phibro Energy, Inc., 720 F. Supp. at 318). Courts will look to the following elements to determine where the clause applies:
- Does the event or activity qualify as force majeure under the contract?
- Was the risk of nonperformance foreseeable?
- Can the risk/damages be mitigated?
- And last but not least, is performance truly impossible rather than just impractical or difficult?
In an oft-cited New York case interpreting force majeure clauses, Kel Kim Corporation v. Central Market, Inc., plaintiff Kel Kim, leased a vacant supermarket from the defendants with the understanding that the property would be used as a roller skating rink open to the general public. Under the leasing agreement, it also required that Kel Kim maintain a public liability insurance policy of at least $500,000. When Kel Kim was notified by its insurance provider that its policy would not be renewed after it expired due to the uncertainty about the financial condition of the reinsurer, Kel Kim alerted defendants to this issue and allegedly made every effort to procure the requisite insurance elsewhere but was unsuccessful due to the liability insurance crisis. The day after the insurance expired, defendants sent a notice of default to Kel Kim to cure the insurance requirement within 30 days or vacate the property. As a result, Kel Kim and the individual guarantors brought a declaratory judgment action stating they should be excused for nonperformance -- here, noncompliance with the lease’s insurance provision -- either because performance was impossible or because the inability to procure insurance falls under the lease's force majeure clause.
First, looking at whether Kel Kim’s nonperformance could be excused under the impossibility doctrine, the court stated, “[i]mpossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” The court concluded that Kel Kim’s inability to procure the necessary insurance does not fall under the impossibility doctrine because it was foreseeable and could have been guarded against when the lease was executed.
The court then looked at whether nonperformance could be excused under force majeure. The clause in the lease read as follows:
“If either party to this Lease shall be delayed or prevented from the performance of any obligation through no fault of their own by reason of labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws or regulations, riots, insurrection, war, adverse weather, Acts of God, or other similar causes beyond the control of such party, the performance of such obligation shall be excused for the period of the delay.”
The court found that the inability to maintain the requisite insurance did not fall under the triggering events listed in the lease’s force majeure clause, nor did fall under the catchall “or other similar causes beyond the control of such party,” as general words are not to be given expansive meaning. Further, the court stated that the events listed in the force majeure provision pertain to a party’s ability to conduct daily operations, and not to insurance which was part of the bargained-for protection of the landlord's unrelated economic interests of Kel Kim continuing to operate a public roller skating rink on the property. As such, Kel Kim’s declaratory judgment action was rejected.
In a case more relevant to event/experiential marketing, Team Marketing USA Corp. v. Power Pact, LLC, 839 N.Y.S.2d 242 (2007), the parties entered into an agreement in March 2005 in which plaintiff agreed to staff approximately twenty of Toyota’s promotional marketing events. After the first event, defendant relayed to plaintiff that Toyota had changed the proposed schedule of events and the future of the entire program was in question. Defendant alleged plaintiff agreed to work on an “event-by-event” basis going forward; however, plaintiff asserted defendant cancelled the contract altogether and plaintiff separately agreed to staff events which were not part of the original schedule. By June 2005, plaintiff had informed defendant that as a result of defendant's “inefficient practices,” plaintiff had “decided not to staff the Toyota program going forward,” and sent defendant an invoice for $7,826.55, representing a cancellation fee pursuant to the original contract for the nearly twenty events. Defendant claimed plaintiff had cancelled the original agreement, and thus was not obligated to pay the cancellation charge.
To counter plaintiff’s claims, defendant argued force majeure, as the agreement contained the following clause:
“Notwithstanding anything to the contrary contained herein, [defendant] shall not be liable to [plaintiff] if Promotion is not able to take place or [plaintiff] is rendered unable to timely perform any of its obligations hereunder for any reason, including, without limitation, strikes, boycotts, war, Acts of God, labor troubles, riots and restraints of public authority.”
Citing to Kel Kim, the court held that the event that prevented performance here was not stated in the clause as one of the triggering events. In addition, when looking at the catchall phrase, “the precept of ejusdem generis as a construction guide is appropriate,” meaning: the general language of excuse is not to be given the most expansive meaning possible, but instead, are only to apply to the “same general kind or class as those specifically mentioned.” Since none of the triggering events in the clause were similar to the defendant’s actions of rescheduling or cancelling the promotion schedule and the “reasonable expectations of the parties were not frustrated due to unforeseeable circumstances beyond their control and of the type enumerated in the contract, defendant cannot rely on the force majeure clause.” As a result, the court held that plaintiff sufficiently pleaded cause of action for breach of contract and force majeure clause did not apply to preclude plaintiff from recovering under the contract.
To hold the event or not to hold the event, that is the question.
Back to present day, in which many properties, sponsors, and event producers are grappling with the COVID-19’s impact on events. We have already seen a flurry of events being cancelled or performed with no attendees due to the virus: the Italian government initially required that all sporting events set between March 4 and April 4, 2020 be staged behind closed doors (including one of the biggest games of the Italian football season: Juventus v. Inter Milan) but has now halted all sporting events completely through April 3; the NCAA is looking into alternatives for its cash cow event, the men’s and women’s “March Madness” basketball championships, ranging from no fans in the areas to cancelling the big dance altogether (for which the NCAA says it has insurance for such a major loss); and just this past weekend, the organizers of the BNP Paribas tennis tournament in Indian Wells, CA, which is considered the “fifth Grand Slam” due to all of the top players participating, cancelled the tournament -- the first major US sporting event to do so. In addition the NHL is not allowing its employees to make work-related trips outside of North America and the NBA is looking into hosting basketball games with no fans. In Tokyo, Japan, thirteen days before the Tokyo marathon on March 1, 2020, it was announced that the race, which was expected to have 38,000 participants, would be limited to the elite field of 176 athletes and 30 wheelchair athletes. Organizers said all registered runners could defer entry until next year; however, they are required to pay again and they are not receiving a refund for this year’s race. It’s worth noting this the race doubles up as an Olympic trial for Japanese marathon runners.
Of course, there’s the elephant in the room: the 2020 Summer Olympics in Tokyo. The International Olympic Committee (“IOC”) has repeatedly said that the Olympics will open as planned despite the COVID 19. Of note, Japan Olympic Minister Seiko Hashimoto stated “the IOC has the right to cancel the games only if they are not held during 2020.” Per the host city contract , the IOC must give the Tokyo organizing committee 60 days’ notice to terminate – so we will know if drastic action will be taken by the end of May. And if cancellation only applies if the Games are not held in 2020, then we may see a postponement to later in 2020, which would still comply with the contract. (Another drastic alternative -- hosting the Games without spectators -- that would certainly not satisfy those who plan to attend, but the Games could still be broadcast.)
NBC has already sold 90% of its advertising inventory, for over $125 billion. Comcast Chair and CEO Brian Roberts said that Comcast and NBCUniversal are covered in the event of an Olympics cancellation. “We have insurance for any of the expenses we make. So there should be no losses should there not be an Olympics.” …Of course, that likely means no profits either.
Coronavirus, there’s insurance for that (right?).
Insurance coverage will be determined by the specific policy and the exclusions incorporated therein. While some organizations may have insurance which will allow for recovery under their polices, this is likely not the case for all parties, as diseases like COVID-19 may have been carved out from coverage as a result of the severe acute respiratory syndrome (“SARS”) scare from a few years ago. Even if event producers were able to secure all-encompassing coverage prior to the COVID-19 outbreak, these policies are quite costly and the coverage may not cover 100% of losses. As for trying to obtain insurance since the outbreak that would be broad enough to cover COVID-19, it is very unlikely that reasonably priced insurance could be found.
Reading the fine print.
For properties, sponsors, and event producers, the likelihood that your event may be cancelled due to COVID-19 is a growing possibility at this point in time. As such, it is important to understand whether the applicable contract addresses force majeure or contractual “impossibility” and, more importantly, exactly what and how much your insurance covers. While reviewing and drafting agreements, one should keep in mind the narrow reading that New York courts apply to force majeure provisions and remember that each case is very fact specific. Therefore, for example, it should not be assumed that COVID-19 will be classified as an “Act of God.” If the government institutes as shutdown and/or travel ban, this may trigger force majeure if this is outlined under the clause in an agreement, as opposed to heightened precaution which may cause a participant not to travel/participate in an event. In addition, depending on when the contract was drafted, the possibility of an event getting cancelled due to COVID-19 may have been foreseeable at the time, and thus, the court may view this as a risk which was taken into effect at the time of entering into the agreement.
As we all try to make sense of how to best proceed during these times, it is important to realize that the force majeure clause may not excuse all parties from performing under their contracts. Excusing performance will depend on the governing law of the contract (as different jurisdictions interpret force majeure differently), the specific facts of the situation, and, of course, the specific contractual language. Going forward, when drafting the force majeure or related clauses, within contracts it may be worthwhile for the parties to incorporate specific remedies and prepare for alternative ways to fulfil the services or provide rights and benefits under the agreements, such as postponement of an event or the provision of a make-good, rather than just using force majeure to excuse performance.
Mma H. Afoaku is an associate in the Advertising, Marketing & Public Relations group at Frankfurt Kurnit. Ms. Afoaku advises clients on transactional and counseling matters across a variety of industries, including sports, automotive, beauty, e-commerce, interactive entertainment, food and beverage, social media, and telecommunications. She negotiates and drafts talent agreements, sponsorship and event promotion agreements, music license agreements, branded entertainment agreements, license agreements, agency and management agreements, and releases. She also advises clients on advertising copy and content review, social media guidelines, intellectual property, and right of publicity clearance. To contact Mma H. Afoaka, ESQ click here.
Christopher R. Chase is a partner at Frankfurt Kurnit where he practices intellectual property, advertising, sports, and entertainment law. Super Lawyers magazine named him a 2019 Super Lawyer in media and advertising. He counsels entities and individuals in the advertising and entertainment industries on all aspects of their businesses, including rights clearance (such as copyright, trademark, and rights of publicity), regulatory matters, and risk assessment. He structures and negotiates creative services agreements, commercial production agreements, brand and celebrity licensing agreements, sponsorship and event promotion agreements, celebrity talent and on-camera agreements, content distribution agreements, media agreements, and content releases and licenses. He also counsels clients regarding potential and actual litigations arising out of commercials, print advertisements, sweepstakes, contests, and other promotions, magazines, films, television productions, and websites. Further, he has vast experience addressing music issues, including structuring and negotiating master use and sync licenses for commercials, video games, television productions, and films, music distribution agreements, artist/band services, appearance, and promotion agreements, and concert sponsorships. To contact Christopher R. Chase, ESQ click here.
This column presents a general discussion of legal issues, but is not legal advice and may not be applicable in all situations. Consult your attorney.