Will COVID-19 be a game changer for sponsorship agreements?

The COVID-19 pandemic has already had a significant impact on sponsorship deals. Many events – including the Tokyo Olympics and Glastonbury Festival – have already been cancelled, and many more are likely to be cancelled, postponed or varied. How does this impact current and future sponsorship agreements?

During the COVID-19 pandemic, event cancellation will, in some cases, be mandated by law; in others, there may be pressure from event organisers, governing bodies, participants or others to cancel, postpone or vary the event. While most sponsorship agreements will specify what should happen if an event is cancelled or postponed, many will not cover the full range of ways in which an event (or series of events) might be cancelled or varied as a result of COVID-19. Prolonged cancellation of all events covered by a sponsorship agreement is unlikely to have been contemplated when entering into it.

What options are there to vary or terminate existing sponsorship agreements, and how should future agreements be drafted in light of the current and any future pandemics? 

Existing agreements

Much has been written about force majeure clauses as a means to tackle contractual issues arising from COVID-19. While they are important provisions, relying on them is rarely straight-forward and there may be specific provisions for cancelled or altered events. Parties should start by reviewing the provisions in the agreement relating to renegotiation/replacement of rights, extensions and refunds before moving on to look at the force majeure, termination, exclusions and limitations of liability, and indemnities and warranties clauses. There might also be specific wording covering partial or non-performance. Agreements should therefore be reviewed as a whole at an early stage to establish each party's rights and obligations. The force majeure clause should apply alongside the more specific clauses to fill in particular types of gaps.

It may be that the parties will also want to consider negotiating a variation to the agreement so as to preserve commercial relations, share risk and obtain certainty. This is particularly the case given that, at the moment, the only certainty is uncertainty: parties may need to build in flexibility where there was previously only rigidity. Variations could include extending the term to cover future/replacement events, varying payment obligations and replacing sponsorship rights. There may be a temptation to agree a simple, informal variation by email but, with fulfilment of sponsorship rights and related provisions (such as early termination, rights of first refusal and exclusive renegotiation windows) being time sensitive and sometimes contingent on other provisions, it would be more certain to enter into formal variations.

In our experience, the starting point will be any express provisions dealing with how replacement or renegotiated rights will be agreed and, failing that, how refunds will work and be valued. There tend to be standard provisions in agreements we see, possibly even ascribing refund values to individual rights. However, these provisions will not always be present and, even if they are, they may not expressly provide for how to deal with comprehensive and prolonged cancellations.  In those circumstances, the starting point would be the force majeure clause. If it applies, performance of the contract might be excused until the obstacle to performance is lifted.

What is force majeure?

Most people assume that force majeure means anything outside the control of a party to a contract. In fact, the term 'force majeure' does not have a specific legal meaning in English law. Rather, it is a general term for a type of clause (and the body of law used to interpret them) which specifies what is to happen if certain events occur which affect performance of the contract. Force majeure clauses can be drafted in a number of different ways and the impact of the clause will depend on the precise wording used. This is why a review of each individual clause is imperative.

Our detailed article sets out answers to a number of questions on force majeure. It also contains a flowchart that will give you a general idea of whether a contracting party is likely to qualify for relief under a force majeure clause in any given circumstance. Here, we look at some of the key issues to take into account as they apply to sponsorship agreements.

Does COVID-19 fall within the definition of a force majeure event?

If the clause only refers to a list of specific types of event (eg fire, flood, war or terrorist attack), then a contracting party will only be able to rely on the clause if the specific event is listed. If the clause is more general (for example, it refers to any event outside a party's reasonable control) then that will make it easier for the party to rely on it. 

Specific wording covering epidemics or diseases should be sufficient to cover COVID-19. Specific wording covering political interference or compliance with law might be sufficient if that is the cause of the obstacle to performance. Those relying on "compliance with law" wording will need to be clear exactly what the law prohibits and allows in the coming months and years. In particular, as the UK has been subject to both government guidance and emergency legislation, it is possible that only legislation which prevents performance would meet such a definition. Likewise, it would have to be unpicked whether it was the law/guidance itself which caused the non-performance or subsequent reactions to, or consequences of, it. 

How has performance been affected?

Most force majeure clauses will provide that performance must have been prevented. This means that the party seeking to rely on the force majeure clause must be able to demonstrate that performance of the contract is – in the words of a leading English case – "legally or physically impossible and not just difficult or less profitable". 

Accordingly, the fact that it is more expensive to perform (eg a rise in underlying costs due to social distancing requirements) or less valuable (eg because fewer people can or do attend) will not normally entitle a party to rely on the force majeure clause. The same is true if it is more inconvenient and/or more difficult to perform. If the difficulty were due to circumstances outside the party's control and was so great that no reasonable person in similar circumstances would be likely to overcome it, then that might be an exception.

However, if the force majeure clause covers the situation where performance is 'hindered' or 'delayed', there might be more scope to rely on the clause, even if performance is simply more onerous. This distinction will be key in sponsorship agreements going forwards. For example, if an event is cancelled even though the organisers are legally entitled to go ahead (eg because the organisers think cancellation would be the right thing to do or because participants or customers are deemed unlikely to attend), their performance has not been 'prevented'. However, it might have been 'hindered' depending on the circumstances.

Is there causation? 

The force majeure event must be the cause of the non-performance (or 'delayed' or 'hindered' performance if covered). It would not therefore be possible to argue that performance of obligations that arose before COVID-19 is excused. Again, this will be a key issue in future when events are legally entitled to proceed but there might be other reasons why the organisers or others cancel.

Has the affected party mitigated the effects of the force majeure events? 

Force majeure relief will not be available if the consequences of the force majeure events could have been avoided or mitigated. This means that, before a party can rely on the force majeure clause, it must first consider whether there is anything it can reasonably do to mitigate the relevant problem and, if there is, do it.

What is the effect of a force majeure clause and how is it triggered?

Usually, the contract will provide that the affected party's obligations are suspended for the duration of the force majeure event. In some instances, force majeure provisions may also provide that the parties may seek to terminate the contract if it becomes unfeasible to resume the contract once the force majeure event has ceased or if the event lasts for beyond a stated period of time. Any formalities specified in the contract such as giving written notice to the other party, must be complied with.

What if force majeure cannot be relied upon?

A contracting party may be able to rely on other legal concepts to excuse non-performance:

• Frustration: This doctrine might allow a contract to be discharged when an unforeseeable event occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different one from that originally contemplated. However, the threshold is high and it only applies where there is no express provision (such as a force majeure clause) covering the event. Our detailed article sets out a number of the key issues to consider on frustration.
• Restitution: The law of restitution might also apply where there has been a total failure of consideration (eg where no sponsorship rights are delivered but payment has been made). 

Future agreements – top tips

There are a number of ways in which an event might be affected by COVID-19, including cancellation, postponement and variation. Some or all events covered by an agreement might be affected. In most cases, relying on a standard force majeure or termination clause will not be sufficient and specific drafting will be needed to cover each applicable scenario. 

Here are our top tips for drafting sponsorship agreements in future.

Don't rely on standard force majeure clauses

Now that COVID-19 is at the forefront of everyone's minds, it is certainly not unforeseeable. While there is no definitive case law that an event must be unforeseeable for a party to be able to rely on a force majeure clause, it is possible that courts will imply such a requirement into future agreements. 

You may, however, be unable to rely on a force majeure clause where you knew an event was likely to arise unless you have specifically covered that event. While it may not be true of future pandemics, it would be hard to argue that the parties to sponsorship agreements covering this or even next year, would not have considered an event likely to be cancelled as a result of COVID-19.

It is also possible that courts will expect a party to have done more to mitigate the effects of the pandemic on their contract before allowing them to rely on a force majeure clause. 

Accordingly, parties should expressly address COVID-19. This can be by way of an amendment to a standard force majeure clause and, preferably, specific drafting outside the clause. If amending a standard force majeure clause, make sure that it expressly covers any epidemic or pandemic including COVID-19 and any subsequent pandemics that may follow this particular strain of the virus in a second wave. 

If the clause is to take effect where performance is made more difficult or expensive (as opposed to impossible or unreasonable), then it should expressly say so. In some situations, it will be prudent to specify what sort of mitigation each party is expected to undertake.

Lastly, careful thought should be given to the effect of the clause and any issues around replacement rights, payments and refunds.

Consider non or part delivery of sponsorship rights

COVID-19 poses a real risk of some or all sponsorship rights not being delivered. A good example is the proposal to play some football matches 'behind closed doors' (ie without a live audience in the stadium but potentially broadcasting to viewers at home) or at neutral venues.

This will clearly affect some sponsorship rights such as match-day tickets, match-day hospitality, stadium store merchandise revenue, and stadium advertising (with fewer or no spectators in the stadium). For example, the contract should set out whether a match at a neutral venue would count as a home match for the purposes of in-stadium advertising and ticket allocation, given it is possible that a neutral venue wouldn't be delivered on a clean venue basis to allow the home team its usual advertising space or ticketing rights.  

It is therefore essential to include provisions in the agreement for the sponsor to be compensated financially and/or by way of replacement for the rights not delivered. These options are often set out in a 'waterfall' of provisions.

Replacement of sponsorship rights

The first stage will likely be for the provision of alternative rights of equivalent value. These may include use of archive footage, e-sports and bespoke 'stay at home' shows. Consider whether: 

• replacement must be by agreement between the parties or is at the discretion of the organiser
• the sponsor has a right to be consulted and agree what is an "equivalent right" – agreements should provide for the matter to be determined by an independent expert if there is no agreement and if one party doesn't have ultimate control of what happens
• the sponsor should be given a number of options and entitled to choose its preference, and
• replacement rights can be provided for up front. 

Roll-over of sponsorship rights 

Consider roll-over of sponsorship rights not provided in any year as a result of cancellation/suspension to the subsequent year. For example, the term could extend for as long as the interruption continues, perhaps subject to a long-stop date. Where a season is curtailed and matches are lost, sponsorship rights in relation to those lost matches could be rolled over into the subsequent year. However, to avoid a situation where an agreement ends mid-season (which is impractical for both parties) the agreement should provide for an extension to the end of the relevant season with a pro-rata additional fee for doing so. 

Refund of sponsorship fee

If rescheduling becomes impossible or equivalent rights cannot be agreed, the contract should provide for a fee reduction or refund. Specific values could be attributed to individual rights to establish the refund (eg values per venue or per event). 

Address the different ways an event might not take place

In a live performance context, what if an artist does not want to appear due to COVID-19? What if a venue does not want to host the event due to COVID-19? What if attendance/ticket sales fall below a certain level and the event is pulled? Will they result in breach? You need to expressly provide for these situations. 

Take care over the grant of sponsorship rights clause

Look out for whether any sponsorship rights are granted by the sponsored party "subject to" any decisions of governing or governmental bodies. This is a red flag for the sponsor because it could mean that, in an instance such as COVID-19 where many sponsored events are cancelled on the instructions of government or governing bodies, the sponsored party would be under no obligation to even deliver the sponsorship rights, whereas the sponsor may still be obligated to pay the sponsorship fees. 

In the same vein, take care over the drafting of the "Applicable Laws" clause in case rights are granted subject to being able to deliver the rights in accordance with Applicable Laws.

In such a case, the sponsor may have recourse in contract law by claiming a total failure of consideration (by paying the sponsorship fee and getting no sponsorship rights) – see above.

Draft payment clauses carefully

Consider when payment should be due and what triggers the payment obligation – eg is payment on a specific date required in advance of the event, or should it be tied to delivery of the rights?

If an agreement covers more than one sponsored event, it would be sensible to agree and ascribe monetary values to each of the events for application by the parties should any event be cancelled and the 'waterfall' mechanism need to be deployed. This will save a commercial headache and long negotiation later down the line when the sponsor comes to rely on those provisions on cancellation. If monetary values cannot be ascribed then provision could be made for an independent expert to determine the issue. 

Consider implications for other agreements that make up part of the wider deal

Sponsorships often form one piece of a wider value proposition that might include services or other elements. Often, the sponsor will be an exclusive or preferred provider to the sponsored party in its product or service sector.

Where value is derived from both sponsorship rights and other elements that may be recorded in separate agreements (for example, a sponsorship agreement that may sit alongside a separate services agreement entered into at the same time) ensure that provisions dealing with disruptions arising out of COVID-19 track through all related agreements to determine how any value to be delivered under those separate agreements would be impacted when the events don't take place. 

Consider reputational issues

What are the reputational implications for your business? The consequences of a decision to proceed, postpone, or cancel an event due to COVID-19 are not purely financial. The possible negative effects on the reputation of your business of any decision need to be factored in, prepared for and managed.

On 7 May 2020, the UK government issued recommendations on responsible contractual behaviour where impacted by the COVID-19 emergency. This is only guidance and so doesn't override the rights of parties under contract or common law. However, the scope of areas in relation to which "responsible and fair behaviour in the national interest" by parties in performing and enforcing their contracts is expected, covers issues such as claiming breach of contract and commencing proceedings, and is a relevant consideration to bear in mind alongside the possible applicability of force majeure and our top tips for drafting sponsorship agreements in future. 

How has the game changed?

The German Bundesliga was the first major football league to get back under way during the coronavirus pandemic on 16 May 2020. Every team has been in quarantine, and players will regularly be tested for coronavirus. While matches will be played behind closed doors, one team, Borussia Mönchengladbach, is planning to have cardboard cut-outs of fans in the stands! 

Will the English Premier League and other major sporting events be following in the Bundesliga's footsteps and gearing up for a summer of sport unlike any other?