Most teams will have sponsors on whom they rely for funding during the season but those same sponsors are concerned about paying out sums in sponsorship for races which might never take place. This article looks at whether a sponsor has any right to withhold all or part of a sponsorship payment due to races not cancelled or postponed during the Coronavirus crisis?
The starting point, as with any contractual issue, is what does the contract say? Most motorsport sponsorship agreements will be set out in writing and will often contain extensive terms dealing with the parties’ relationship in some detail. Whilst I doubt any party would have anticipated that a significant part of the season would be cancelled or postponed due to a global pandemic, the sponsorship agreement might have, for example, a payment term which requires the sponsor to make a payment on or after the happening of certain events, such as after a certain amount of races have taken place, and it would be difficult for the sponsor to avoid making that payment if a contractual obligation to pay has arisen. If the sponsorship agreement itself is silent as whether the sponsor can withhold payment or if the terms of the contract don’t apply to the current situation, then we must consider whether the coronavirus crisis is a force majeure event or whether the parties can consider their obligations at an end due to frustration of the contract?
For a party to rely on force majeure, then there firstly needs to be a force majeure clause in the contract. It is not possible to imply a force majeure clause into a contract and there is no common law right to postpone performance of an obligation under a contract due to the occurrence of a force majeure event. If the contract contains a force majeure clause then the clause needs to set out the events which will be considered an event of force majeure. A lawyer drafting a sponsorship contract is unlikely to have been sufficiently prescient of the current situation to include a specific mention to coronavirus or Covid-19 in the contract (as it is a novel disease) but he or she might have included a reference to an epidemic or a global pandemic. If the force majeure clause doesn’t refer to a pandemic or epidemic, then it might refer to an “Act of God” or an “event outside of the parties’ control”. Whilst it is likely that the Courts may at some point have to rule on whether the coronavirus pandemic is or is not an Act of God, it seems likely that the Covid-19 outbreak would be considered an event outside of the parties’ control (but the Court will probably have the last word on that too).
If the coronavirus pandemic is an event covered by the force majeure clause, then the parties again need to turn to the clause to look at whether it states that reliance on the clause can only take place when performance is ‘hindered’ or ‘prevented’ (the most commonly used terms in a force majeure clause) by the force majeure event. Then whether something is ‘hindered’ or ‘prevented’ is going to be fact dependent, but it is likely that the government restrictions are going to prevent or hinder parties from performing many of their obligation.
Typically, a force majeure clause will only suspend performance of the obligations under the contract with the intention that the contract can restored when the time comes that both parties can fulfil its obligations. However, some contracts do allow a party to terminate a contract if the other party hasn’t been able to fulfil its obligations due to a force majeure event for a set period of time.
However, perhaps the important point to take is that an obligation to make a payment is unlikely to be rendered impossible or even merely hindered by a force majeure event. It is unlikely that a sponsor would be able to rely on a force majeure clause to avoid making a payment due to a team under a sponsorship agreement and the sponsor would need to consider recovering any payment made to a team under an insurance policy.
If there is no force majeure clause in the sponsorship agreement, then a party might try to rely on the doctrine of frustration. The doctrine of frustration allows a party to consider a contract to be at an end when it becomes impossible to perform. The effect of frustration is that both parties are released from their contractual obligations, although a party might still have to make payment for the benefit of any services it received whilst the contract was extant. But because both parties are released from their contractual obligations, the bar is set very high by the Courts for deciding when a frustrating event is deemed to have occurred. A frustrating event must be outside of the parties’ control, unforeseeable and must render performance of the contract impossible. The examples normally given of when frustration can be relied upon are acts of war or event venues burning down immediately prior to the event making performance impossible.
Whilst coronavirus is likely to be considered to be a frustrating event by the Courts at some point in the future (litigation surrounding non-performance of contractual obligations due to Covid-19 seems regrettably inevitable), it is unlikely to be a panacea to parties under a sponsorship agreement. Our view is that one off sponsorship agreements for single events which will no longer take place due to the coronavirus are likely to be frustrated (and subject to any force majeure clause in the contract), for example if a party has entered into a contract for specific sponsorship opportunities with a team at the 2020 Monaco Grand Prix only (to the exclusion of any other race on the F1 calendar) which is no longer possible due to the complete cancellation of this year’s race. But it is unlikely to apply to season long sponsorship agreements or agreements in respect of races which have only been postponed, not cancelled.
To conclude, whilst we have referred in this article to the possible legal consequences of the coronavirus outbreak to sponsorship agreements, it should of course be remembered that teams and sponsors are often in long term commercial relationships and whilst a sponsor might have a contractual obligation to still make payment, the sponsor may well be suffering from its own economic difficulties dependent on the industry it is in. By far the best thing for teams and sponsors to do in the current climate is to communicate with each other and try to come to arrangement around sponsorship payments with both parties can live with in the short run, as hopefully the motorsport seasons will be up and running again soon and we will see racing in 2020.
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*The information provided in this article is designed to provide useful information on the subject, not to provide specific legal advice.