A Detailed Analysis through the Lens of Force Majeure and the Doctrine of Frustration and the Rise of Potential Contractual Disputes
*Written by Raj Shah
Apart from the extremely alarming health-related implications, Covid-19 or the Coronavirus has largely impacted several industries, trade, commerce, and other sectors of society. The sports industry was among the most impacted industries to have faced the brunt of the pandemic, primarily because of the huge pumping of money and investment by stakeholders and the unprecedented cancellation, or postponement of major domestic and international leagues around the world. Over the last two years, several contractual disputes related to endorsement, player contracts, separate clauses, force majeure and other issues have been addressed before various Courts.
This article tries to analyze the potential defences that stakeholders might happen to take in order to defeat the long and tedious process of Litigation. The author tries to address the Force majeure clause enlisted under Section 32 of the Indian Contract Act, 1872, the common law doctrine of frustration with respect to sporting leagues and contractual obligations and how the understanding of the same under Section 56 of the Indian Contracts Act, 1872 is slightly different. Further, the author also delves into how the different understanding of the Force Majeure clause in Sporting contracts could positively impact the legal framework in the future. It also looks at the Pre and Post Covid financial standing based on the decisions taken by various leagues.
Many economists, having shared their opinion on the Covid-19 pandemic predicted a detrimental impact on and a multi-million-dollar loss to the worldwide economy which could lead to a Great Recession too. Most countries and States adopted strict protocol measures like Lockdowns and curfews in order to curb the transmission of the novel virus.
Apart from the health-related trauma, the implications of Covid-19 may be seen in Trade, commerce and business as well. Most sporting leagues, the Olympics, and other National and International sporting competitions have either been put on hold, cancelled, postponed or are still left to be deliberated upon. The stakes are extremely high in such sporting leagues, and it is no surprise that the stakeholders would lose a significant amount of money in such unprecedented times. As a result, the stakeholders in such unforeseen circumstances are hoping to minimize their losses, which increases the burden on the Judiciary.
IMPACT OF COVID-19 ON SPORTS LEAGUES
The sporting industry felt the brunt of this pandemic essentially because there is regular pumping of money, and the stakes are extremely high. Sporting leagues like the NBA, EPL, the IPL, and La Liga were either temporarily suspended, cancelled or postponed till further notice. Seeing the situation, not many had hopes of finishing the remaining leagues within the stipulated year-end period. The situation at hand was so unpredictable that the Tokyo Olympics, initially proposed for 2020 were held in 2021. The NBA 19-20 season was amongst the first to be suspended but was also among the first few to bounce back. Clubs and Franchises had to deal with strict protocols like bio-bubbles, 18-day quarantine, daily check-ups and Covid tests in order to ensure the smooth functioning of various leagues. Many prominent and major leagues around the world like the Indian Premier League governed by the BCCI, the English Premier League and other football leagues like La-Liga and Bundesliga bounced back and completed their respective seasons after great deliberation and efforts from top-level officials in accordance with the protocols. The IPL that was initially supposed to begin in March was postponed to April 15 with the hope of being able to get rid of the pandemic by then. However, India imposed a 21-day full lockdown which made the suspension of the IPL inevitable. However, the IPL was played from September 2020 onwards. As per reports, a total wipeout of IPL would cause India a loss of 4000 Crore and a drop in the value of IPL was estimated at 1 billion. Not only would this affect the stakeholders, but also players, club/franchise owners, coaching staff, ground staff, broadcasting rights owners, and other State revenue. It had been suggested that organizers of the English Premier League could have been liable to pay Sky Sports a whopping $3.5 billion (£3 billion) fine if they failed to finish the 2019-20 season by the end of July, in light of the broadcasting agreement between the two parties. This shows the grave impact Covid-19 had or would’ve potentially had on the Sporting industry paving the way for several Litigious battles and Contractual disputes. Many parties relied on the defences available under Contracts law to get away with their contractual obligations which will be discussed further by the author in this article.
THE TWO DEFENCES IN UNAVOIDABLE CIRCUMSTANCES
Cases related to breach of contractual obligation were bound to rise considering the unprecedented restrictions on mobility due to the lockdown rendering the performance of such contracts practically impossible. Circumstances which would otherwise be deemed as a breach of contract may be rendered as unavoidable circumstances. In this regard, there are two defences that parties rely upon. The First is the well-recognised concept of Force Majeure according to which a party may not be held liable for non-performance of their contractual obligations amidst events that are unforeseeable like an act of God, or any event which makes performance inadvisable or impossible. The Second is the Common law Doctrine of Frustration or Impracticability as understood under Section 56 of the Indian Contracts Act, 1882.
FORCE MAJEURE CLAUSE IN SPORTS
“A ‘force majeure" clause (French for "superior force’) is a contract provision that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.” The aftermath of several disasters – earthquakes, hurricanes, wars, terrorist attacks, strikes and other unpredictable events on contractual obligations have forced parties to rely on Force Majeure clauses. In contrast to the Doctrine of frustration or Impracticability, the terms of Force Majeure are slightly open-ended and are subject to the parties' discretion in terms of which events may constitute Force Majeure and which may not. Although, while this may seem like an advantage, it might not be as advantageous. There has been a lot of controversy around the fact that Pandemics may/may not be protected under the Force Majeure clause, more so when the events mentioned in a particular contract include a rather exhaustive list. In such cases, Courts take a narrow interpretation. For instance, Terrorism or War cannot be equated to a threat of terrorism or war. However, when contracts include wordings like ‘unforeseen circumstances’ or ‘any other event, the terms are interpreted by the Court Ejusdem Generis to include man-made and naturally occurring circumstances. Although, the coronavirus outbreak presents a somewhat unique situation in that it includes both a naturally occurring component (the virus itself) and a government action component (including the quarantines and other measures put in place in response to the outbreak).
More often than not, Sports contracts have Force Majeure as a clause, however, pandemics or epidemics do not form part of it essentially because they are not explicitly mentioned. For instance in CAS 2015/A/3920, the Royal Moroccan Federation of Football (FRMF) was unable to postpone the 2015 African Cup of Nations tournament on grounds of Ebola. The CAS opined that Ebola would not constitute a Force Majeure event as the Ebola virus only made the organising difficult and not impossible. In contrast, a notable example would be the CBA between the NBA and the NBPA which included the term epidemic in its contract. Considering the fact that Covid-19 was declared a pandemic, the NBA could have invoked the Force Majeure Clause.
The primary issue is the lack of certainty and the high tolerance of subjectivity in drafting such clauses. Recently an order clarifying the issue at hand was released on 19th February 2020 “whether the disruption of the supply chains due to the spread of coronavirus in China or any other country will be covered in the Force Majeure Clause? In this regard, it is clarified that it should be considered as a case of natural calamity and Force Majeure Clause may be invoked, wherever considered appropriate, following the due procedure as above.” Any contract having similar wordings may be able to use this clarification to furnish proof. However, contracts not having similar wordings, especially sporting contracts might have to be dealt with on an individual factual basis.
Other concerns with respect to invoking Force majeure are lack of good faith and fair dealing. Many have argued for the disallowance of terminating a player’s contract 2-3 months before his renewal or release on account of Force Majeure clauses. Many speak for the implied concept of good faith and fair dealing in sports where teams must not terminate contracts of players in order to sign other players on grounds of unprecedented events like Covid-19.
DOCTRINE OF FRUSTRATION AND IMPLIED TERM
Section 56 of the Indian Contracts Act, 1872 explains the Doctrine of Frustration as a situation where “A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful would be considered void.” After the execution of the contract, if unavoidable circumstances arise which are beyond the control of the parties, the entire contract may be rendered void.
Over time, the Doctrine of Frustration has been implemented slightly differently by the Indian Courts as against the English Courts.
The English Court, in the case of Taylor vs Caldwell introduced the theory of ‘implied term’. In this case, Plaintiff’s music hall was rented by Defendant for 4 concerts. Before the due date, the hall burned down. The Contract did not have any provision concerning such contingencies. However, Justice Blackburn observed that in every contract, there is an ‘implied term’ which makes it imperative for the specific thing to exist in order to complete the contract which in this case is the Music Hall. The burning of the hall (specific thing) made it impossible to perform the contractual terms and thus was a reason enough to frustrate the contract.
In contrast, the Indian Courts have rejected the application of the ‘implied term’ theory. The Apex court in the case of Satyabrata Ghosh vs Mugneeram Bangur observed that the aforesaid theory would fall within the purview of Section 32 as part of contingent contracts as against Section 56. While the Supreme Court might have set this precedent initially, another bench of the Apex Court in the case of Union of India vs C. Damani and Co and the Madras High Court in the case of Bansilal Fomra vs Thadava Cooperative Agricultural and Industrial Society Ltd recognised the theory of implied term in contracts and as a reason for the frustration of contracts when the obligation becomes impossible to perform. The jurisprudence in this regard is evolving as observed in the Sushila Devi case where the Court realised that the application of the implied term in Section 56 was not only restricted to events which were humanly impossible to perform but regard must also be given to the practicability and possibility of performing the said contract.
Corresponding these observations to sports and its stakeholders, for instance, had the EPL, IPL, and La Liga been cancelled, organizers who contingent on the fact that players would be available to play started preparing for the aforementioned leagues could’ve relied upon the theory of implied term as the travel ban and imposition of lockdown by India, England, Spain and other countries would render the travelling of players as impossible. On another note, the organizers, broadcast owners, and all stakeholders who got into league-related contracts could also rely on the fact that the foundation or basis of the contract was defeated by the imposition of the lockdown as it would be impracticable and impossible to perform them. This would attract the theory of disappearance implied in Section 56.
Many IPL, EPL, and La-Liga owners and Franchises/Clubs' own players and coaching staff are being paid millions and crores of rupees. For instance, Harry Kane, Cristiano Ronaldo, Rishabh Pant, Virat Kohli, LeBron James, and Rohit Sharma are among the few highest-earning players in their respective leagues. In light of the pandemic and the imposition of lockdown, Club owners could try and reduce their financial burden and losses by invoking the same Theory of disappearance in order to rescind or terminate contracts which are rendered impossible to perform.
While the contemporary era thrills us with several unanswered and deliberative questions on Sports governance and Contractual agreements, the author is quite certain of the fact that the post-Covid-19 era is going to witness a dynamic change in terms of how contracts are drafted. Unlike other industries and businesses, unfortunately, the sports industry cannot function on a Work from home culture. The defences relied upon by clubs and franchises (Force Majeure and Doctrine of Frustration) and losses incurred by every stakeholder, player, broadcaster, playing, non-playing staff and others have been unparalleled. The primary reason for this is the regular cancellation, postponement or suspension of leagues opening the gateways of potential litigation disputes essentially because every issue is to be decided on a case-to-case basis.
As per the author, future sports-related contracts are expected to be more detailed and broadly drafted in order to ensure that the benefits of the defences may be taken in a smoother fashion. The purpose is to automatically recognise and include Pandemics and Epidemics as part of a Force Majeure event thereby resolving the legal issues currently influencing the Sporting industry and setting a new trend for sports governance.
*The author is a law scholar at Jindal Global Law School, Sonipat, India.
(The image used here is for representational purposes only)
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