Lexblog Article: COVID-19 and the Media, Entertainment & Sport Sector: A Step-by-Step Guide

Examples of the practical impacts COVID-19 is having in the media, entertainment and sport sector supply chain are:

  • Cancellation of live events – countries are implementing different rules concerning public gatherings but the number of sport and communal entertainment events cancelled or postponed due to COVID-19 is on the rise. To date this includes the Tokyo Olympics, Euro 2020, F1 Australian Grand Prix and major football, rugby and basketball leagues. Music events such as Glastonbury Festival, Coachella, South by South West and tours by artists including Justin Bieber and The Rolling Stones have also been affected.
  • Music – in addition to live event disruption, whilst certain streaming services have reported spikes in listeners for artists who have been live-streaming, in some countries music services are not seeing the uptick in streams that might be expected with significant populations at home, and in some countries, including the US, streams have declined noticeably.
  • Film & TV – as many countries implement social distancing rules and close borders, cinemas have shut and production operations to film new content have been suspended. Vital news and current affairs services are also being disrupted and scaled back at national and local levels across many countries.
  • Media rights and programming schedules – broadcasters, who pay billions of pounds to license the rights to live sport and the most binge-worthy shows, will have significant gaps in their programming schedules due to the COVID-19 related cancellations. This will impact viewer numbers and churn the sustainability of subscription prices for some services, advertising revenues, wholesale distribution arrangements for channels and services and – perhaps most significantly – result in some difficult discussions between licensors and licensees.
  • Gambling – as major sporting events are halted by COVID-19, sports betting partners have had to adapt fast and implement business continuity and contingency plans which for some, has included a shift in focus to online casino and poker games, to minimise the financial impact.
  • Out-of-home display advertising – shopping centres across the country are closed and highways unusually quiet as people follow government advice to stay at home, which means that advertisements are not reaching target consumers and many brands are seeking to delay campaigns.

Of course, not all parts of the media, entertainment and sports worlds are feeling the effects of COVID-19 equally. Indeed, some businesses are thriving by filling the void left by the loss of other events and productions, and the fact that almost all out-of-home leisure activities have been put off-limits for many and for some time to come. The esports industry has stepped up by creating an increasing amount of content, including some innovative crossovers with traditional sport, such as the F1 esports event featuring Lewis Hamilton and other F1 drivers. Games companies are seeing significant surges in demand, and have a content creation model which can adapt easily to remote working, so should be able to keep up a strong pipeline of new games.

In this article, however, we want to focus on contractual relationships which are under stress as a result of the COVID-19 pandemic. An important part of the media, entertainment and sport sector is built on a framework of live events with crowds of spectators attending, broadcasters and streaming services acquiring the rights to make events and other content available worldwide and associated deals with advertising, sponsorship and betting partners. A range of contractual arrangements may be affected by event cancellations and other disruptions caused by the COVID-19 pandemic, including ticketing, venues, broadcasting, media rights licensing, advertising, sports betting, production and talent agreements.

Stakeholders across the media, entertainment and sport sector are keen to understand their liabilities under their contracts should COVID-19 cause delay or a failure to perform obligations, and to find solutions.

This note looks at how English contract law on force majeure and frustration applies to the COVID-19 pandemic, and highlights other contractual hints and tips that both suppliers or licensors and customers or licensees should be aware of.

What does a force majeure clause actuallydo?

In this note we repeatedly say that it’s essential to read a force majeure clause carefully to understand when it applies and how it works. These steps are intended help navigate the relevant contractual provisions, however, working out the effect of a force majeure clause is something that can only be assessed by reading the precise drafting of the clause on a case by case basis.

The legal effect of a typical force majeure clause is explored in more detail under Step 6 below. Generally though, a force majeure clause is intended to work like this. Under most contracts both parties will have obligations. Often, these will be performance obligations – to deliver a product or perform a service, for instance. Failure to comply with these obligations will usually result in a breach of the contract. Minor breaches often have only minor consequences, but more serious breaches can lead to liability to pay compensation, give refunds, a right for the other party to terminate and so on. The basic idea behind a force majeure provision is to excuse a party which cannot perform its obligations under a contract from being in breach where it is unable to do so as a result of a force majeure event.

Step 1: Which law applies?

In assessing whether or not a party is entitled to relief from its obligations, it is important to first check both:

    1. the governing law of the applicable contract; and
    2. the laws in the jurisdiction where the obligations are being performed (particularly with regards to any mandatory restrictions in place regarding imports/exports, production and travel bans).

For example, a contract may be governed by English law – meaning the language of the contract will be interpreted under English law principles. However, the obligations under the contract may be performed in another country. For example, Italian law will govern whether production operations in Italy to film content for a new TV series must be postponed or cancelled. This will be relevant to test the impact of the force majeure event (see Steps 4 & 5 below).

Step 2: Is COVID-19 a force majeure event?

Under English law, relief from contractual obligations as a result of a “force majeure” event is only available if expressly provided for in the contract. Unlike civil law jurisdictions, English law has no statutory provisions governing force majeure, nor will force majeure be implied into contracts under English law. (In the absence of a contractual force majeure clause (or other assistance that is provided by the contractual terms), under English law a party will have to seek to rely on other common law doctrines, such as frustration, for relief from breach of contractual obligations (see Step 9 below).)

The language of a force majeure provision will be interpreted in line with existing interpretation principles under English law and there is precedent regarding the meaning of particular phrases. The English Courts will focus closely on the contractual language used such that each case will turn on its own facts and the contractual interpretation of the relevant term.

English law force majeure clauses tend to include either – and often both – of the following types of clause:

  • Types 1 – a clause containing an exhaustive list of circumstances or events that constitute force majeure; or
  • Type 2 – a statement that a force majeure event is any event “beyond the reasonable control of the affected party” – often coupled with a non-exhaustive list of events which shall be considered force majeure.

If the clause follows Type 1 it will be important to check whether it contains specific wording relating to disease, epidemic or pandemic (or similar). However, if pandemic is not expressly listed, other force majeure events that may be applicable to COVID-19 include:

  • “shortage of supplies” – where the downstream impact of the COVID-19 is limited availability of supplies in the market as a whole, not just from a party’s contractual or preferred supplier or licensor;
  • “labour shortages” – where workers are unable to supervise events or other operations because they are off work due to sickness or self-isolation, or their freedom of movement is otherwise restricted; and
  • “act of government” – where an order by a government or a government agency in a country has prevented performance.

If the contract follows Type 2 then on the face of it COVID-19 is an event beyond the affected party’s reasonable control, and whilst it will be helpful if the clause then references pandemics or disease, it is not essential.

In either instance it’s worth bearing in mind the following:

  • Even if COVID-19 is a force majeure event under a contract, it does not automatically follow that performance of all obligations under a contract will be beyond the reasonable control of the affected party, who will probably still need to comply with the remaining steps below in order to claim relief; and
  • It’s important for an affected party to be clear whether it is relying on COVID-19 as the force majeure event, or another event or circumstance that may have arisen as a result of COVID-19 (for example travel restrictions or lack of workforce). This could be important for when notice obligations are triggered (see Step 3 below) and how long the force majeure event is set to continue (COVID-19 may continue for months whereas shortage of supplies may be shorter term).

In any event, it’s important to remember that the effect of English law contracts really does turn on the specific wording of each agreement. There’s no substitute for looking very carefully at the drafting – especially as it’s likely that many disputes will arise out of the disruption caused by COVID-19.

Step 3: Is notification a condition to claiming relief? Should an affected party notify the other party (or parties) to a contract of a force majeure event under a general ‘alert’ or by some other means?

Most force majeure clauses will require that the affected party gives notice that it can’t comply with the contract by reason of force majeure, and this notice will usually need to be given either within a specified period or “as soon as possible”.

The requirement to give notice may be drafted as a contractual obligation to serve notice, or as a condition to claiming relief. Look out for words/phrases such as “provided that” or “conditional upon” – these may indicate that if the affected party fails to serve notice within the required time period it will lose its right to claim relief. The affected party must follow the requirements of the notice provision meticulously, including who the notice should be addressed to, how it should be sent and information it needs to contain. Failure to stick to specific requirements to give notice might lead to loss of relief under a force majeure clause, even if the affected party genuinely can’t perform because of force majeure.

An affected party may feel there are benefits, from a relationship perspective, of flagging up the force majeure event and the delay it has caused. It may wish to serve a general alert or early warning notice to its customers or licensees that COVID-19 is causing it delay/disruption and that it is doing whatever it can to mitigate this. Parties affected by COVID-19 sending these notices should be wary that:

  • force majeure clauses often require that a specific notice is issued by an affected party if it wishes to claim relief from breach of contract under a force majeure clause. As ever, the precise requirement under a contract will depend on how it is drafted, but a general ‘alert’ may not satisfy the force majeure notification requirements in the contract; and
  • a general alert may ‘set the clock ticking’, by indicating that the affected party considers the event to be a force majeure event and therefore requiring the affected party to issue formal notice within a specified time period.

Step 4: What does an affected party need to do to show that it can’t perform its obligations?

Once it has been established that COVID-19 – or its consequences – constitute a force majeure event under a particular contract, the party seeking to rely on the force majeure clause will need to show a clear link between the force majeure event and its failure to perform.

Again, there is no standard formulation in English law contracts. Sometimes a clause will only help a party in breach where it is “unable” to perform its obligations. Other more generous clauses will apply to a party in breach not just where it is point-blank “unable” to perform, but where it is “delayed” or “hindered” in performing its obligations. A clause might use any number of different links between cause and effect.

We’ve taken some typical examples to illustrate what an affected party might have to show:

Prevent – This is likely to mean that performance must have become physically or legally impossible, not merely difficult. For example, a music event organiser responsible for an artist’s tour might have to show that the government in the applicable jurisdiction has mandated the postponement or cancellation of its event (through legislation or binding guidance). The affected party will generally also need to show that it was “ready, willing and able” to perform its obligations under the contract and it was the force majeure event which specifically impacted performance.

Delay – Delay has a wider scope and may make it easier for a party to secure the protection of a force majeure clause. Again, for example, a music event organiser responsible for an artist’s tour would need to establish that as a result of the force majeure event, performance of its obligations is taking longer (or finishing later) than planned. The clause may require the delay to be the direct result of the force majeure event and the affected party will still need to comply with the remaining steps below in order to claim relief.

Hinder – Similar to delay, this has a wider scope than simply being unable to or prevented from performing, and may make protection easier to establish. It’s important to bear in mind that hindrance may not be merely financial: English case law makes clear “the fact a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure”[1], unless the contract specifically addresses this. The clause may require the hindrance to be the direct result and the affected party will still need to comply with the remaining steps below in order to claim relief.

Step 5 – Does a party need to take steps to mitigate the impact of the force majeure event?

The affected party must show it has taken “all reasonable steps” to avoid the operation of the force majeure clause or to mitigate its consequences[2]. This is an implied duty which applies, in all apart from exceptional situations, even if the contract contains no express clause requiring the affected party to mitigate the impact of the force majeure event.

Sometimes the consequences of COVID-19 will be clear and nothing can reasonably be done to mitigate its impact. For instance, if a sporting event such as the Euro 2020 is cancelled by the organisers, a supplier who has contracted to provide sports data relating to the Euro 2020 cannot perform its obligation. But that will not always be the case. The question will therefore arise: what is ‘Plan B’ and how far should the business have to go? The fact that Covid-19 is a trigger event is not the end of the contract analysis. The toughest question is what comes next.

It will be a question of fact as to whether an affected party has taken steps to mitigate the impact, but relevant factors could be:

  • Assuming an event cancellation has not been mandated by law in the applicable jurisdiction, what could the affected party have done to prevent cancellation during COVID-19 (e.g. protective measures)?
  • If a business continuity/ disaster recovery plan is in place, an affected party might be expected to implement it before it can invoke force majeure.

The fact that taking mitigating steps may be more expensive than performing the original contract usually does not matter. “A mere difficulty or additional expense is not a sufficient ground” for the force majeure provisions to be invoked[3], and the English courts are particularly alive to attempts to use force majeure provisions to avoid performance for economic reasons. Therefore, just because a contract has become more expensive as a result of COVID-19, or even uneconomic, to perform, that will not always constitute a force majeure event.

Step 6 – If a party is entitled to force majeure ‘relief’, what does this actually mean under the contract?

An entitlement to force majeure relief generally means (1) that the affected party is excused from contractual liability, including damages, in relation to its non-performance (or delay); and (2) either party may terminate the contract where the force majeure event continues for a defined period (often 3 months plus). Relief could include:

    1. relief from liability for liquidated damages with an extension of time to delivery dates;
    2. relief from breach of contract claims for non-performance; and
    3. relief from termination for default.

As always, everything will depend on the drafting of the contract in question.

It’s particularly important to look out for language such as the following:

  • Some force majeure clauses will simply say that a party is relieved of its obligations “if” or “where” it is unable to perform because of a force majeure event. However, others will say that this relief is only available “to the extent” that failure to perform results from the force majeure event. To put it another way: if the affected party is not affected from performing some of its obligations as a result of force majeure, it must continue to perform those obligations. (This sort of language can also have other effects, which are beyond the scope of this note.)
  • Some clauses will only allow relief “for so long as” or “during” a force majeure event. For a party with performance obligations these types of provision can be particularly dangerous, as they suggest that performance has to resume, and be on time, as soon as the force majeure event is over.

Step 7 – Does the non-affected party have to do anything to help the affected party, and might they have to keep paying?

This will depend on the contract. The non-affected party may have a contractual obligation to help the affected party to mitigate the impact of the force majeure event. In most media and sport agreements such an obligation would be rare, however.

Another question which often arises where a licensor or supplier is prevented from performing its obligations by reason of force majeure is whether the other party – usually the customer or licensee – has to keep paying for something (for example, a service) they are not receiving.

This is an enormously important, question, and one that is likely to underpin many significant negotiations and disputes that will flow from the COVID-19 crisis. However, the starting point is, as usual, to look at the terms of the relevant contract. It is not unusual for a contract to require a customer or licensee to continue to pay a supplier or licensor even if it is affected by a force majeure event. A contract might alternatively provide that the sums payable by a customer or licensee are reduced while performance is affected. For the present, the important point to bear in mind is that if the provisions of an English law contract are clear, and especially where the contract has been negotiated by sophisticated parties with advice from lawyers, the courts will be very reluctant to step in.

Step 8 – What other provisions of the contract might be relevant?

It’s important never to look at a force majeure clause in isolation. Take a holistic view of the entire contract. Other clauses that may be relevant include:

  • Payment – as above, check whether there are any rights for the customer or licensee to withhold payments if obligations are not performed (even if due to force majeure)?
  • Suspension/hardship – are there any rights for the affected party to suspend its performance (for example, due to economic change or under an express ‘hardship’ clause)?
  • Termination – can either party (including the party affected by force majeure) terminate, and will any compensation be payable for termination for force majeure?
  • Change in law – many countries are introducing new laws to deal with COVID-19 which could make performance of obligations more expensive. Consider how this is dealt with under the relevant contract. Change in law may be a force majeure event itself, but a contract may also have a separate provision which specifies what the consequences of a change of law will be. Check how any references to “applicable law” are defined (if at all), and consider whether it includes guidance, court or regulatory orders as well as primary legislation. For example, if a major music festival is to be held in the US and local law impacts on the costs of performance, does this still trigger a change in law price adjustment if the contract is governed by English law?)
  • Availability/take or pay service credits – do service credits still apply even if the reason the supplier or licensor has not supplied is force majeure?
  • Material adverse change (MAC clauses) – are there any clauses entitling a party to terminate the contract where a material adverse change or event means that the contract would be loss making (for example)?
  • Health & safety – can the supplier or licensor still comply with health and safety regulations and guidance that it may be contractually bound to comply with?
  • Key personnel – are specified people who are no longer available earmarked for particular obligations?
  • Notice clause – ensure any notices that have to be given are valid and keep an eye out for the effects of any provisions deeming when a notice is served – these are common in English law contracts and can change the dates on which notices are legally effective from the dates on which they are actually given or received.
  • Variations – bear in mind that any contractual amendments agreed due to COVID-19 will need to be made in accordance with any variations clause. Contracts often specify that any changes must be in writing to be effective. The UK Supreme Court has made it clear that the terms of a contract specifying how any amendments should be made must be complied with in order for variations to be effective, sometimes with results that can be surprising and unexpected from a commercial perspective.
  • No waiver – a no waiver clause does not necessarily protect a party from post-breach inaction. A non-breaching party should still reserve its rights and remedies and notify the party in breach by formal contractual notice.
  • Dispute resolution – a dispute resolution clause may include an escalation process which requires parties to resolve any dispute by following certain steps or using a particular process. These clauses can be very prescriptive and should be followed carefully.

Step 9 – Could any other implied English law be relevant? Frustration?

English law recognises the common law doctrine of frustration. However, if a contract includes a force majeure clause, the common law rules on frustration are ordinarily displaced in relation to that same event[4] so that frustration cannot be relied on as an alternative.

This means that if a party has a legitimate claim for force majeure, but fails to invoke a contractual procedure under the relevant clause, it is unlikely that it could argue that a contract has been “frustrated” in relation to the same event.

If there is no force majeure clause, frustration may enable a party to avoid its contractual duties. However it will need to show:

    1. the event was unexpected and beyond the control of the parties; and
    2. the event renders it physically or legally impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken when the contracted was agreed.

Step 10 – Anything else to think about?

  • Follow the contractual process for notification meticulously.
  • Take a holistic view of the contract analysis – consider what clauses may help/hinder and don’t forget to look at the boilerplate.
  • Retain documented evidence of steps you are taking, the reasons surrounding those steps and steps taken to mitigate (and also steps counterparties may be taking if they are the ones invoking force majeure). This could include credible records – including trustworthy public domain information where available – which set out the factual context for the decision in question. It is important to document the alternative options available at the time of performance (or lack of them!).
  • Consider whether you wish to adopt a collaborative/non-adversarial approach to resolve the issue. Early engagement with contract counterparties and a collaborative resolution of issues may be preferable to an adversarial approach.
  • Re-source supply wholly or partially – risks can be reduced or removed if you have a viable alternative which can be implemented quickly. Consideration should be given to the lead times for re-supply and how these fit with existing inventory. Be careful as re-sourcing may be in breach of existing supply contracts.
  • Recover assets – certain assets may be used under licence. Equally, there may be other materials on site which belong to you. The terms of any applicable contract will strongly influence your ability to recover these items.
  • Ensure you make all required third party notifications in timely fashion (including insurance, industry regulators, etc.).

[1] Thames Valley v Total Gas, [2005] EWHC 2208 (Comm)

[2] Channel Island Ferries v Sealink [1988] 1 Lloyds Rep 323.

[3] B&S Contracts v Victor Green [1984] ICR 419, (427(D)).

[4] Jackson v United Maritime Insurance [1874] LR10 CP 125

The post COVID-19 and the Media, Entertainment & Sport Sector: A Step-by-Step Guide appeared first on mediawrites.law.

Source:  https://www.lexblog.com/2020/04/08/covid-19-and-the-media-entertainment-sport-sector-a-step-by-step-guide/