Terminating commercial contracts impacted by Covid-19 – new High Court guidance
4th February, 2022
Many commercial contracts contain "force majeure" clauses which provide that, if certain events occur which are outside the parties’ reasonable control, a party who is unable to meet its contractual obligations will be excused from doing.
This is usually for a specified period of time, after which the innocent party will be allowed to terminate the contract if performance has not resumed.
Unsurprisingly there has been a considerable amount written already about the impact of Covid-19 on commercial contracts and the extent to which force majeure provisions can offer affected parties a means of avoiding their contractual obligations. The High Court in the recent case of European Professional Club Rugby v RDA Television LLP has provided some helpful guidance as to how such provisions should be interpreted.
What did the contract say?
The Claimant in this case (“EPCR”) is the governing body and organiser of the two premier club rugby union competitions in Europe. The Defendant (“RDA”) is a media organisation and which licensed the media rights in the competitions from EPCR, covering the four rugby seasons from 2018-19 to 2021-22. RDA in turn entered into agreements with broadcasters in different countries and agreed to pay EPCR a minimum guaranteed sum per season, plus a proportion of revenues.
The contract was to run until the later of (i) 30 June 2022 and (ii) one month after the final match of the competitions in the 2021/22 season. During that period EPCR was required to stage the competitions in a requisite format during the relevant seasons.
The contract also provided that neither party would be liable for any delay or total failure in performing its obligations if and to the extent that delay or failure was caused by a force majeure event affecting its performance of the relevant obligations. The party “not affected by the force majeure event” was entitled to terminate the agreement by giving 14 days’ written notice to the affected party, if performance had been hindered or prevented for more than 60 days.
For the purpose of the contract, a force majeure event was defined as:
“any circumstances beyond the reasonable control of a party affecting the performance by that party of its obligations under this Agreement including inclement weather conditions, serious fire, storm, flood, lightning, earthquake, explosion, acts of a public enemy, terrorism, war, military operations, insurrection, sabotage, civil disorder, epidemic, embargoes and labour disputes of a person other than such party”.
On 11 March 2020 the World Health Organisation declared Covid-19 to be a global pandemic. The parties agreed and the Court held that the onset of the pandemic was a force majeure event as defined in the contract. This was because of the specific inclusion of the word “epidemic” within the contract (which the Court said included a pandemic) and also because the pandemic was, in any event, a circumstance “beyond the reasonable control of a party affecting the performance by that party of its obligations under this Agreement…”.
On 16 March 2020 EPCR announced that the quarter-finals, semi-finals and finals of the competitions were to be postponed. As it turned out, the restrictions imposed as a result of the pandemic prevented the games lawfully taking place before the 2019-2020 season ended on 20 June 2020.
Ultimately, RDA served notice to terminate the agreement in reliance upon the force majeure provisions highlighted above. It said that EPCR had been prevented from, hindered or delayed in performing its fundamental obligations under the contract to stage the competitions and make them available for broadcast, for a period in excess of 60 days. RDA also indicated that, given the potential for claims to arise against it from its sub-licensees, it did not intend to make payment to EPCR in respect of the final invoice in relation to the 2019/20 season.
EPCR said that RDA was wrong and that the purported termination of the agreement was itself unlawful, giving rise to a right for EPCR to terminate the agreement and claim damages for RDA for that wrongful termination. Amongst other things, EPCR argued that RDA had itself been affected by the force majeure event, such that RDA was not entitled to rely upon the provision given the strict wording of the contract. EPCR argued further that RDA had only sought to terminate the contract in an attempt to renegotiate the underlying commercial terms.
What was decided?
The High Court ruled that RDA had been entitled to rely upon the force majeure provisions to terminate the contract. In short, the technical argument put forward by EPCR, which was that RDA could not rely upon the provision because it too had been affected by the same force majeure event, was dismissed by the Court as being “commercially absurd”.
Further, it did not matter whether there was actually a different, underlying, reason behind RDA’s termination of the contract. All that mattered was whether RDA was, on a proper analysis of the contractual provisions, entitled to serve notice to terminate. As such, RDA was entitled to take full advantage of the force majeure provision regardless of the commercial motivations for doing so.
The effect was that, whilst RDA was required to pay an outstanding minimum payment to EPCR which had accrued before the notice of termination took effect, RDA was entitled to an adjustment in respect of the minimum payment it was required to pay for the balance of the 2019/20 season as well as pre-payments it had made to EPCR in relation to the 2020/21 and 2021/22 seasons.
What does this case show?
Whether force majeure applies will depend on the wording of the contract in each case. Whereas some clauses may expressly include the word “pandemic”, less specific language will require some interpretation. As with termination provisions, the scope and applicability of a force majeure clause (and any related provisions) will turn on its specific wording and this should be carefully analysed before seeking to rely on it.
What is clear however is that a party who is entitled to rely upon such a provision will not be prevented from doing so simply because the termination of the agreement is otherwise beneficial to them. Indeed, in this case the Judge noted that “a force majeure provision within a contract is generally inserted to enable parties affected by such an event to avoid contracts that have become financially disadvantageous by reason of such an event”.
If you would like help drafting your force majeure in contracts, contact one of our commercial lawyers, or if you find yourself in a situation where you need advice on a potential force majeure event, whether Covid-19 related or otherwise, our team of commercial dispute lawyers will be delighted to help. Please contact one of our specialists to find out more.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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