Was the termination right? Unveiling the contractual intent hidden in the ambiguous construction of force majeure clause!

When COVID-19 was declared a global pandemic in March of 2020, a rugby organization - European Professional Club Rugby (EPCR) was compelled to suspend its rugby matches.  The suspension led a sports media broadcaster -- RDA Television LLP (RDA) to terminate a media rights agreement (MRA) that it had signed with EPCR.  Under the MRA, RDA had procured the rights to broadcast the live rugby matches.¹ Termination of the MRA led to a dispute between the parties involving the following main claims and counterclaims:

1. EPCR claimed that:

• RDA did not have the right to terminate the MRA on grounds of force majeure, RDA too being a party affected by force majeure;
• RDA had committed a repudiatory beach by purporting to terminate the MRA; and
• as a result of the wrongful repudiation, it (EPCR) had suffered damages.

2. RDA counterclaimed for the…

• return of certain prepayments made for the upcoming seasons; and
• adjustment of the rights fees paid for the current season which was suspended.

EPCR had relied on the wordings of the force majeure clause, and challenged RDA’s right of termination, which in part states – “… the party not affected by the Force Majeure Event may terminate this Agreement…”. 

EPCR’s argument was that RDA too was affected by the pandemic; and moreover, since it did not notify RDA that it had suspended the rugby matches on grounds of force majeure, RDA did not have the right to terminate the agreement under force majeure provisions.

But the court held that:

• RDA was not prevented from relying on the clause simply because it, too, had been affected in a general sense by the same force majeure event;
• RDA’s right to terminate on grounds of force majeure was unrestricted; and
• serving a notice of force majeure by EPCR was not a precondition to invoke RDA’s right to terminate the MRA; and had it been so, a party placed in breach by reason of force majeure could always prevent its counterparty from exercising its rights simply by not serving a force majeure notice -- which is commercially absurd.

BACKGROUND FACTS

In 2018, EPCR licensed its media rights in the competitions for the 2018-19, 2019-20, 2020-21 and 2021-22 seasons to RDA, under the MRA that contained a force majeure clause (clause 26 of Schedule 6) that defined what constituted “Force Majeure Event” in Schedule7, 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 labor disputes of a person other than such party”.

Clause 26 (of schedule 6) on force majeure stated

26.1. If either party is affected by a Force Majeure Event which prevents that party from performing its obligations under this Agreement, the affected party shall promptly notify the other of the nature and extent of the circumstances in question.

26.2. Subject only to clauses 1.7 of Schedule 2 and 26.3 of this Schedule 6, neither party will be liable neither for any delay in performing its obligations nor for failure to perform its obligations under this Agreement if and to the extent that the delay or failure is caused by a Force Majeure Event affecting its performance of the relevant obligations.

26.3. If either party is affected by a Force Majeure Event, it shall use all reasonable endeavors to mitigate and/or eliminate the consequences of such Force Majeure Event and inform the other party of the steps which it is taking and proposes to take to do so.

26.4. If the Force Majeure Event prevents, hinders, or delays a party's performance of its obligations for a continuous period of more than 60 days, the party not affected by the Force Majeure Event may terminate this Agreement by giving 14 days' written notice to the affected party.

On 20 March 2020, after the World Health Organization declared COVID-19 as a pandemic, EPCR wrote to RDA stating that the board of EPCR had decided that the quarterfinals, semi-finals, and finals of the competitions would be postponed to protect all payers, fans, and stakeholders from pandemic exposure. But notably, the letter did not reference clause 26!

On 13 May 2020, EPCR wrote to RDA stating that the remaining matches would not take place before the season ended, and as per the revised plan the quarter-final, semi-final, and final matches were rescheduled at the beginning of the following season in September-October. In fact, none of the postponed matches were re-scheduled within the 2019-2020 season which ended on 20 June 2020; the matches were eventually played in September-October 2020 after the start of the 2020-2021 season.

On 5 June 2020, RDA served its notice of termination of the MRA under clause 26.4, on the grounds that EPCR had been prevented, hindered, or delayed for a continuous period of over 60 days to perform its obligations because of a Force Majeure Event (the Covid-19 epidemic) as EPCR had failed to make the matches (quarterfinals, semi-finals and final) available for live transmission for a continuous period of over 60 days.

However, per EPCR’s argument, RDA was not entitled to serve notice of termination because it (i.e., RDA) too was a party affected by a Force Majeure Event within the meaning of clause 26.3 as RDA had admitted in its own mail of 30 April by stating that some of its own partners and sub-licensees were refusing to pay their invoices because of the postponement of matches caused by the pandemic. So, as contended by EPCR, RDA was rather obliged to use all reasonable endeavors to mitigate and/or eliminate the consequences of such Force Majeure Event. EPCR alleged that RDA had wrongfully repudiated the MRA by purporting to terminate it. EPCR served its own notice of termination based on that alleged repudiation.

Later, as a part of RDA’s witness statement, RDA conceded that Covid-19 pandemic had a significant detrimental effect on the sports media rights industry which depends on live sporting events taking place, and although their business was not directly affected by Covid-19 they were affected via their clients.

EPCR further argued that

• RDA’s actual motivation behind termination was to renegotiate the underlying commercial terms; and
• the effect of the MRA when read as a whole was that EPCR was permitted to perform by completing the matches in any following season and, therefore, the 60-day period referred to in clause 26.4 never started and certainly did not start on 5 June when RDA served its notice under clause 26.4.

EPCR claimed damages it said it had suffered because of RDA’s wrongful repudiation. RDA counterclaimed for the return of certain prepayments and an adjustment of the sum paid for the 2019-20 season under clause 1.7 of Schedule 2.

Among other questions, the crucial one before the court was whether (or not) RDA was entitled to terminate the MRA under clause 26.

DECISION

The Court observed that RDA’s true motive for terminating the MRA was irrelevant, as long as, on a true construction of clause 26, RDA was entitled to serve a notice terminating the MRA, considering that no assertion was made that the force majeure clause was subject to any implied terms that restricted the ability of either party to take advantage of the force majeure machinery. The court noted that EPCR did not assert that RDA was under an implied duty (”Braganza duty”)² to act in good faith while terminating the MRA. So, even if the true reason for serving the notice was to renegotiate the licensee fee, as alleged by EPCR – it would make no difference in court’s decision.

The Court also found that EPCR, based on the terms of the MRA, was required to stage each of the scheduled matches and make those available for live transmission during each season, which for 2019-20 ended on 20 June 2020. By the time RDA gave notice of termination, the outstanding matches had been postponed for well over 60 days.

The Court further clarified that phrase “… the party not affected by the Force Majeure Event …” must be construed in the context of clause 26 when read as a whole and in the context of the definition of Force Majeure Event.

Clause 26 distinguishes between a party whose performance is affected by a Force Majeure Event and the party who would be entitled to treat the non or delayed performance as a breach of the MRA.

• The opening words of clause 26.1 “….affected by a Force Majeure Event which prevents that party from performing its obligations under this Agreement…” identifies the party whose performance is affected.
• Clause 26.2 provides the party (whose performance is affected) with qualified protection from liability for what would otherwise be a breach of contract caused by a Force Majeure Event.
• Clause 26.3 obliged the party affected by Force Majeure Event to use all reasonable endeavors to mitigate and/or eliminate the consequences of Force Majeure Event as a condition to avail the protection otherwise afforded by clause 26.2.
• Clause 26.4 is to be read in the context of clauses 26.1 to 26.3, and subject to the definition of Force Majeure Event “any circumstances beyond the reasonable control of a party affecting the performance by that party of its obligations under this Agreement …”.  The phrase “….the party not affected by the Force Majeure Event …” in clause 26.4 is referring simply to the party to whom is owed the performance that has been prevented, hindered, or delayed.

In the present case it is RDA to whom the performance was owed and EPCR is the party whose performance had been prevented, hindered, or delayed by the Force Majeure Event. The phrase did not deprive a party in the position of RDA of the benefit of clause 26.4 simply because it had been affected in a general sense by the same Force Majeure Event that had prevented hindered or delayed the performance by the other party (in this case EPCR) of its obligations under the MRA. The outcome would be absurd if RDA was not entitled to terminate the MRA per EPCR’s assertion.

The court found EPCR’s other argument -- that because it did not serve a notice expressly referring to clause 26.1 -- RDA was precluded from taking advantage of clause 26.4, as “absurd” in construing clause 26.1, because, if right, it would mean that the party placed in breach by reason of the Force Majeure Event could preclude its counter party from serving notice under clause 26.4 simply by not serving a clause 26.1 notice. The obligation to give notice under clause 26.1 is not a condition precedent to the applicability of the remaining parts of the clause. Even if it were, EPCR’s letter of 20 March 2020 could well be considered as being such a notice.

SIGNIFICANCE OF THE DECISION

In this case, the parties could rely on the force majeure provision since the COVID-19 pandemic amounted to an "epidemic" as defined in the force majeure clause which was drafted non-exhaustively.

It is clear from the decision that where necessary, a court will consider wordings in the context of other relevant provisions in the contract and apply commercial common sense to arrive at a true meaning and effect of a contract. The natural meaning of clause 26.4, when read in isolation, was producing an absurd result inconsistent with commercial common sense.

Often a force majeure event will, by its very nature, affect both or multiple parties to a contract, particularly if it has a macroeconomic or widespread effect.³ In such circumstances, two parties to a contract can be affected differently.  For example, performance of the core contractual obligation of one party can be hindered (as was the case of EPCR who failed to provide live matches) and the other party’s business can just be generally affected (as was the case of RDA whose payments by the sub-licensees were delayed). The courts are likely to take a commercially prudent approach to determine the rights of the parties, in such scenarios, by unveiling the true intent of the contractual bargain -- if the intent seems commercially irrational when read as written.

The decision is a reminder to the contracting parties that -- although termination right under commercial contracts, most of the time, may be unfettered (without any constraints or restrictions), and although the courts are generally reluctant to impose duties of good faith to such rights, but then, if the freedom to exercise such rights becomes debatable and comes under a court’s scrutiny -- a party may have to demonstrate that it has indeed acted rationally and in good faith while exercising its discretion to terminate a contract.

ABOUT THE AUTHOR

Pallab Mukherjee, a Chartered Engineer with a master’s degree in Construction law & Arbitration, is a commercial management expert having more than 30 years of diverse experience across Middle East and India in various industry sectors including Oil & Gas and Petrochemicals; had played pivotal roles in commercial management transformation projects. He actively promotes the profession of contract management and authors essays on contract law. He is a public speaker, mentor, and coach.

END NOTES

1. Reference article: Kicked into touch: How Covid-19 ended a rugby broadcasting contract   (Fieldfisher, 15 February 2022)

2. The Braganza duty is named after the case Braganza v BP Shipping Ltd. [2015] UKSC 17 in which it was stated that, when exercising a contractual discretion, a person must not act irrationally, arbitrarily, capriciously, perversely or for an improper purpose. This is often described as a duty to exercise a contractual discretion “in good faith”. See also - Corporate Law Update (Macferlanes, 23 July 2021)

3. Reference article: Court interprets force majeure clause in the context of Covid-19 (Macferlanes, 11 February 2022)