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This note is based on government guidance as at midday on 16 March 2020.

Due to unforeseen circumstances, our event has been cancelled...

The email that has been filling our inboxes for the past week, with the promise of more to come. The coronavirus is clearly having a substantial impact on all aspects of everyone’s life; and, in the commercial sphere, whilst established supply chains are inevitably affected – although they appear at this stage to be pretty resolute about finding a way through - it seems it is the events industry that has borne a significant impact at this early stage of the crisis and it is surely inevitable that it will become more impactful with the government likely soon to set limits on event size. More and more businesses and organisations are now inevitably looking closely at their contracts to see how they can manage the impact the crisis will have, what mitigations there are and, ultimately what possible remedies might be available. Can we cancel the event? What do we do if the other party cancels? What if the delegates can’t get here? What about all the money we’ve already spent? Do we have insurance to cover us? What happens if we run out of toilet roll!? This article hopes to provide you with the necessary tools to assess and review the terms of your event contracts (but can also be applied to other contracts equally affected too), but it does come with a health warning - each contract will have to be reviewed separately because, truth be told, it all depends…

What clause should I look for?

A force majeure [1] clause is often buried away at the back of contracts, with both parties sincerely hoping that they will never have to look at it in the cold light of day. That said, when things go wrong, the clause suddenly becomes extremely important. And, as if we ever needed it, it is an event quite like this that really makes one realise just how important the so-called “boilerplate” clauses are, and that time spent reviewing these at the outset and making them fit for purpose is time incredibly well spent.

The force majeure clause is designed to protect the parties when something happens that is outside their control and results in a party (the “affected party”) being unable to perform its obligations under the contract, as originally envisaged at the time they entered into the contract. This “something” is known as a “force majeure event”. The clause will typically suspend performance of the affected party’s obligations whilst the event of force majeure is ongoing such that, hopefully, the contract can be “resurrected” when the event is over. The clause can also provide a process to be followed when a force majeure event occurs and may address how the consequential impacts are going to be handled, including how costs incurred or payments already made are to be dealt with. But, as they generally have a suspending effect on the performance of obligations, it is one thing to think about these clauses in the context of ongoing relationships, such as supply chains, which show some signs of being able to withstand the pressures the coronavirus pandemic over the longer-term; but, it is the immediacy of the one-off, imminent requirements – the event at the end of March; the conference next April; the concert this summer; the exhibition due to open next week – when the force majeure clause and its application can take on a whole new perspective. And it is this that has been the source of so many queries we have received since the pandemic spread to Europe.

In the UK, there is no statutory or common law definition of force majeure or force majeure event. This gives contracting parties the total freedom to dictate what they want to happen in these situations, but also means each contract must be carefully interpreted to assess whether an event or set of circumstances amounts to a force majeure event as defined in that specific contract, and so a generic position cannot be determined.

If the force majeure definition or clause provides a list of examples, care should be taken to check whether the interpretation is exhaustive and limited to that list or whether the list is non-exhaustive (ie does it have wording along the lines of “including but not limited to” or “etc” when citing example events). Usually, but not always, a force majeure event is defined in the general sense along the lines of “circumstances outside of the control of the parties” with examples then given of what is considered outside of the parties’ control such as fire, flood, terrorist act, act of war, act of government, etc.

So, is the coronavirus outbreak a force majeure event?

 

The big question. And, unfortunately, the answer is: “it depends”. It depends on the definition of “force majeure” in the relevant contract; it depends on the drafting of the force majeure clause; and it depends on the specific circumstances which the clause is being applied to. It will also quite heavily depend on the UK government’s stance on coronavirus and any relevant policies, guidance or directions it may make at any given time as the crisis develops.

 

For UK based events, as things stand at the moment, coronavirus is currently unlikely to amount to a force majeure event as the government has not yet restricted event size or the movement of people on a large scale. However, if such measures are put in place - and there is a growing sense of inevitability that they will be - this may then meet the required threshold and trigger application of the force majeure clause. Why is this? Well, the simple fact that the impact of coronavirus makes it harder to put the event on; or will result in fewer attendees; or will make the event less financially feasible is unlikely in itself to be sufficient to constitute a force majeure event because the event can still theoretically be held - the virus is not affecting a party’s strict obligations under the contract: the venue can still make the space available and staff the event; and the hirer can still use the space and host the event. It may not be until a Government direction is made not to hold the event that you can truly say that a party’s obligations are impossible to perform: the venue, in particular, cannot then perform the single most important obligation it has under the contract which is to make the space available for the event and that would genuinely represent an event beyond the party’s reasonable control.

 

If the event is not based in the UK or if attendees, speakers or materials are coming from outside the UK, the impact of coronavirus on the performance of the contract will depend on the specific country in question, its current risk status and control measures and/or related risks according to government guidance. The travel advice relevant to, and applied between, the countries concerned will also be a factor: the ban on UK-US flights being an obvious example.

 

How do we interpret a force majeure clause?

 

Again, it depends (get used to that answer, if you can…). The clause should set out what effect the force majeure event must have on the affected party, in order to set the process for what happens next in motion. For example (in order of decreasing impact), whether the contract states that the clause will only be triggered when the force majeure event:

  • prevents the affected party from performing its duties” - that party must be physically or legally unable to fulfil its obligations. In other words, performance of the contract must become impossible. As intimated above, it is not enough to show that it has simply increased the level of difficulty for a party to perform its obligations, nor can the affected party claim that it has made it too expensive or economically unviable or reputationally damaging;

  • hinders the affected party from performing its duties” - performance of the contract must place the affected party in such a precarious position that it would cause them to endanger their business as a whole and place them in a position where they would not able to perform their contracts with other parties. Again, a mere increase in cost remains insufficient to trigger the clause and this, it appears, remains quite a high bar [2] ; or

  • delays the affected party from performing its duties” - the affected party has some time-limited “wriggle room” where it has been delayed (for example, adverse weather conditions leading to shipment delays).

If a party wants or needs to rely on the force majeure clause, it must be able to show that all of the requirements under the clause have been met. That is:

1. there has been a force majeure event;
 
2. due to that force majeure event, the affected party has been prevented, hindered or delayed (or as otherwise determined by the contract) in performing its obligations under that contract; and

3. the affected party has complied with any procedural requirements set out in the clause (eg given adequate notice to the other party, taken steps to mitigate the impact, etc).

It is important to note that, in order to take the benefit of the force majeure clause, the affected party that seeks to rely on the force majeure clause must ensure that any procedural requirements attached to it, such as giving prompt notice of the event and its anticipated impact, are satisfied. If they are not, then the ability to rely on the clause ebbs away, and may in fact mean that the party seeking to rely on the clause is itself in breach of contract by not doing those things. It is also generally seen as important that steps have been taken to minimise/mitigate the impact of the force majeure event and demonstrate this to the other party. It is often wise, therefore, to maintain an open line of communication between the parties and keep each other up to date with any progress updates, or further changes in circumstances.

A couple of relevant observations in light of this:

  • For event organisers, a force majeure clause based around delay which does not include strict time limits may not be adequate to protect the parties, as any delay in the party’s ability to perform the services in sufficient time prior to the event will inevitably have a knock-on effect for other elements of the event, not least the date upon which it is scheduled to happen, which may not be moveable.

  • For a party whose only contractual duty is to make payment under the contract (eg hiring spaces or employing catering or security services, etc), the threshold under point (2) above is unlikely to be met as the force majeure event is unlikely to have caused an inability for that party to make the payment. In these circumstances, the paying party would instead have to rely on the other party initiating the force majeure clause. But even in that case, if the force majeure clause only relieves the affected party, then the unaffected party (in this example the paying party) still has to perform its side of the contract, so still needs to ensure payment is made, otherwise it will face being in breach of contract itself. That feels, in some instances, pretty unjust: but it comes back to the fact that the force majeure clause is, essentially, just a means of allocating risk – and some of that risk will fall on the unaffected party.

What happens when a force majeure clause is triggered?

To coin a phrase – it depends. The clause will hopefully set out a process to be followed and this process is likely to be impacted by the “effect” the force majeure event must have (ie prevent, hinder or delay).

The clause may pause or suspend a party’s duty to perform its obligations for a specified time frame (eg “for 30 days from the date of notification of the force majeure event”). In effect, this puts the contract on “pause” until the force majeure clause (and its impact) ends. For event contracts, this may prove unhelpful depending on the proximity to the date of the event. But that said, there may be other, more strict time constraints put in place that are intended to try and ensure sufficient time for the other party to make alternative arrangements if necessary (eg “for 30 days from the date of notification of the force majeure event, and in any event, no less than 20 days from the date of the Exhibition”).

If the time extension is not enough to enable the affected party to fulfil its duties, the other party may also be given the right under the clause to source the services or goods from elsewhere. The clause may also grant the other party a right to terminate if the affected party remains unable to fulfil its obligations for a period of time.

What about costs?

You guessed it: it depends. The flexibility around force majeure clauses means that some will be drafted to provide for costs and recovery of them (or not), but others, probably most, will remain silent. If the clause does address costs, then the parties should follow the process that is set out and care should be taken to ensure that all necessary procedural requirements have been fulfilled in order for the provisions relating to the allocation of the costs exposure to then be upheld.

If the force majeure clause remains silent, the general position under common law is that “costs fall where they lie”, ie tough luck. Any costs incurred or payments made will not be recoverable and each party must accept their fate (hence why insurance is often taken out to try and back this off although, as we are seeing, even if the cause is notifiable disease, like COVID-19 now is, it may still be excluded from cover and insurance policies should be carefully checked). However, all hope may not be lost, as the statutory framework around the law of frustration may apply - which tries to guard against so-called “unjust enrichment” where the loss falls unreasonably too much on one party by comparison to the other.

What is frustration and how can it help?

 

The Law Reform (Frustrated Contracts) Act 1943 (Act) applies where:

1. a contract is governed by English law;

2. the contract becomes impossible for the affected party to perform or is otherwise “frustrated”; and

3. due to this frustrating event, the parties are discharged from their duties under the contract and the contract is “frustrated”. 

The test under the Act is high, as performance must either be impossible, or the frustrating event has made the performance of the contract result in something that is so radically different from what was originally envisaged that the original obligations are, in effect, incapable of being performed. However, where the contract relates to a specific event and date, it might be possible to meet this threshold.

Does frustration help with costs?

It depends (sorry) on the extent to which the force majeure clause addresses costs. The below analysis should also be reviewed in light of any relevant payment terms in the contract.

  • Money already paid or due to be paid: Under section 1(2) of the Act, if money was paid prior to the frustration of the contract, that sum may (essentially) be recovered by the paying party. If money was due to be paid at the time of the frustration, that sum is no longer payable.

  • Expenses incurred: Conversely (also provided under 1(2) of the Act), parties may be able to recover money already spent towards performance of the contract. If the party receiving payment under the contract has, prior to the frustration, incurred expenses for the purpose of their performance of the contract, they may be able to retain or recover the whole or any part of the sums paid or due to be paid in order to cover the cost of those expenses (limited to the amounts actually incurred).
  • Other benefits: Section 1(3) of the Act states that where, prior to the frustration, one party has obtained a valuable benefit from the other party’s actions in or for the purpose of their performance of the contract (other than expenses or payments as applied above), the value of that benefit may be recovered from the benefiting party.

It should be noted that these provisions do not provide express rights for parties to recover or retain sums, and the wording of the Act simply provides the courts with some flexibility in assessing the circumstances in the case. The purpose of the Act is to prevent unjust enrichment of one party over the over, rather than to apportion loss (although this is subject to academic debate). The affected party must also be able to show that it took all reasonable steps to mitigate the impact of the frustrating event on its performance.

Can force majeure and frustration work together?

The inter-connection between these two concepts is complex, and a carefully drafted force majeure clause can either provide protection from, or expand the rules under, the law of frustration. If a force majeure clause covers all of the elements (notably all costs), the Act will be displaced and will not apply. However, if the force majeure clause is incomplete (notably by not covering cost allocations), then the law of frustration and the provisions of the Act can be applied in addition to the contract. If there is no force majeure clause in the contract then, provided the circumstances permit, the law of frustration and the Act will determine the position on recoverability.

That being said, it serves to be reminded that there is a very high (and quite strictly applied) threshold in order to make out a “frustrating event”: the contract must become impossible to perform. For event contracts, the silver-lining is that this may be easier to show than for general, ongoing supply chain agreements. By their very nature, events will be tied to specific dates, times and locations. If, for example, artwork is due to be shipped from a country for an exhibition in the UK, but that country is currently in lockdown and not allowing flights to the UK, then it becomes impossible for the artwork supplier to provide the artwork to the UK. Or, if a Government directs that events attended by more than 500 people must not go ahead, then a concert, exhibition or other event exceeding this threshold could be said, as a result of the direction, to now be impossible to perform.

What about ticket sales and cancellations?

Once again, it depends (last time, we promise) on the contract and any express rights to cancel which, in addition to the analysis set out above if the cancellation rights are triggered by an event of force majeure, must be read in light of balancing the rights and obligations of both the organiser/promoter and the ticket-holder (especially if they are a consumer). If the cancellation clause only gives the event organiser the right to cancel, but no right (or very limited rights) to the ticket-holder (where they are a consumer), then the clause may be found unfair and the organiser may not be able to rely on it. There may be greater tolerance where the ticket-holder is not a consumer (in the legal sense, ie they are acting in the course of their profession or trade), but UCTA can still have bearing on the reasonableness of the terms and, as a result, their enforceability.

What now?

For those involved in events, it is crucial that you review the terms of your contracts, with particular focus on the force majeure, cancellation and termination clauses, so that you can either determine your best course of action or simply scenario-plan. Each contract will be different (even if they relate to the same event) and the rights of each party may vary vastly, depending on the contract and specific circumstances of the case. Most industries have already seen a surge in cancellations (by event organisers and by attendees) but it is worth considering the commercial and reputational impact of these cancellations.

Parties should consider the relationship potentially at stake: is this a one-off event, or is it a recurring event supported by the parties? For one-off events, the parties may choose to take a more rigid line to protect their interests: charge full fees for cancellations and/or strictly apply the relevant cost-allocation position. Where there is a long-standing relationship (eg an annual awards ceremony or graduation always hosted at the same venue), then a more commercial, pragmatic approach may be preferred, and the parties may be able to agree a course of action outside of the contract to try and share the exposure more fairly. For organisations established as charities, restrictions can apply when looking to make payments not required by any contractual obligation, and charities should proceed cautiously in this area. Remember though that if the parties do choose to vary the contract to deal with the impact of the prevailing circumstances, they should make sure that any variations are properly documented in accordance with any requirements set out in the contract (typically, for example, in writing and signed by an authorised representative of each party).

There is also a risk to reputation. Cancelling events without refunding ticket holders may have a negative impact on your brand, even when cancelling under compassionate circumstances. Refunds and alternative dates may soften the impact of the cancellation but can obviously lead to incurring substantial costs if insurance is unavailable. 

On an on-going basis, parties can use risk assessments to inform their decisions in relation to their events, and these should be reviewed following any updated Government guidance. A change in policy from the Government may bring the application of the force majeure clauses into play and so any contracts (and policies) should be kept under review.

It is clear from the above that the impact of coronavirus is inherently fact specific and contract specific. If you are in any doubt, your legal advisors should be able to help guide you through possible courses of action. And not that this is necessarily the priority just at the moment, but if you are reviewing contract terms for future events (whether your own or someone else’s), it will no doubt pay to reflect upon current experiences and assess the important clauses (cancellation, termination and force majeure) accordingly.

[1] Force majeure - meaning "superior force"; also casus fortuitus (Latin) "chance occurrence, unavoidable accident"

[2] Tennants (Lancashire) Ltd v C.S. Wilson &Co Ltd [1917] AC 495

If you require further information about anything covered in this briefing, please contact Paul Jones, Hannah Laird or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2020

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