Contracting around the Pandemic: How Key Contractual Provisions May Affect Arms-Length Dealing Within the Sports Industry
Photo Source: All-Pro Reels, MetLife Stadium, Flickr (Oct. 18, 2020) (CC BY-SA 2.0).
By: Samuel Son* Posted: 11/05/2020
COVID-19 has had a sweeping economic impact on professional sports in the United States.[1] Due to safety and travel restrictions, sports tourism and attendance to professional sports games have dwindled drastically.[2] Given that ticket sales alone comprise a large percentage of sports league revenues on the order of a few hundred million dollars, the financial effects are likely to be felt for several years.[3] The ultimate challenge, however, is in determining how financial losses will be allocated within the industry due to the myriad effects of the pandemic: will professional athletes or executives take the brunt of the impact or will the loss will be shared evenly?[4]
To answer this question, we must first look to contracts across sports leagues to determine the extent to which contractual provisions govern extraordinary events such as COVID-19.[5] In the midst of the pandemic, contracts have garnered increasing scrutiny within the sports industry.[6] Where athletes, through their players’ unions, have scrambled to ensure their financial interests are unaffected, or at least not prohibitively reduced, teams and league executives who stand to lose money through traditionally reliable revenue streams are deliberating how to recuperate their losses.[7] As the financial woes and uncertainty malinger, contracts will continue to capture the attention of these parties and shape how they negotiate and allocate their respective risks.[8]
Force Majeure Clause
One important contractual provision that has garnered vigorous attention is the force majeure clause.[9] A force majeure clause excuses non-performance of a contractual obligation due to circumstances outside of the breaching party’s control.[10] However, the excusing circumstance must be specified in the force majeure clause.[11] In some jurisdictions such as New York, mere impracticability is inadequate to excuse non-performance.[12] Financial hardship would also fail to excuse performance in such jurisdictions.[13] Lastly, courts construe force majeure clauses narrowly, such that catch-all phrases are interpreted in light of the specific terms that may precede them.[14] For instance, a court considering the phrase excusing performance for “riots, strikes, wars, or all other unforeseen events” would confine the meaning of “unforeseen events” within a similar class to which riots, strikes, and wars—manmade acts—belong.[15] Thus, unforeseen events here would likely fall outside the scope of natural disasters and more within the purview of manmade events.[16] In the context of COVID-19, it would be ideal to specify the excusing event as related to a pandemic or infectious disease, instead of relying on a potentially erroneous or ambiguous term such as “natural disaster.”[17] Where the force majeure is satisfied, the party must also demonstrate that the specified event was outside of its reasonable control and that the party was prevented from fulfilling its obligation.[18]
Impossibility
Where parties have failed to contractually address contingencies such as with a force majeure clause, the breaching party may assert an impossibility defense.[19] Under impossibility, each party must be without fault and an unforeseeable intervening event must have occurred that prevented the breaching party from performing the event at issue.[20] However, as with a force majeure clause, courts construe an impossibility defense narrowly.[21] In one recent case resulting from the COVID-19 pandemic, the Southern District of New York rejected a gym operator’s argument that it should be excused from paying its employees under the impossibility doctrine due to the pandemic and Governor Cuomo’s executive order temporarily closing gyms.[22]
In a second case, the New York Supreme Court considered a caterer’s argument that it should be excused from its rent obligations due to the pandemic and Governor Cuomo’s executive order banning the gathering of large crowds.[23] The court noted a provision within the lease between the caterer and lessor contemplated a scenario where the caterer would be unable to perform due to a governmental order.[24] Thus, because the caterer was attempting to sidestep a lease provision which clearly outlined a contingency in the event of nonperformance by way of a governmental order, the court rejected the caterer’s impossibility defense.[25] The court stressed the importance of preexisting contractual provisions that govern how parties should resolve disputes lest certain roadblocks occur.[26] By highlighting the fact that each party had contemplated that a performance would be prohibited by way of a governmental order, the court stayed true to the common law tradition of deferring to terms that align with the reasonable expectations of parties at the time the contract was effectuated.[27]
Force Majeure and Impossibility Defenses in Professional Sports
In sports leagues, contracts have been increasingly important in mitigating the ongoing risks associated with COVID-19.[28] However, as the financial consequences of the pandemic are likely to unfurl indefinitely, sports leagues and players will have to scrutinize their contractual provisions with renewed vigor.[29] When it comes to potential breaches of contracts, sports leagues need to ensure, at minimum, that their provisions have legal weight.[30] Namely, do their force majeure clauses specifically outline a pandemic, or do they have a broad, catchall provision?[31] If the latter, courts are hesitant to recognize the force majeure clause insofar as the catchall provision fails to be similar to the event in question.[32] Even if a pandemic is listed as an event excusing non-performance, parties need to show that they have taken reasonable actions to fulfill their respective obligations.[33] As it relates to an impossibility defense, courts will look closely at preexisting contractual arrangements and seek to determine whether parties have contemplated the event in question.[34]
Though professional leagues must also consider their reputation when dealing with other parties at arm’s length, they should ensure that their contracts are adequately drafted so as to consider their bottom-line and avoid costly litigation in the future.[35] In effect, the more precisely parties can draft contracts that specifically contemplate the occurrence of certain frustrating events, the more each party will be able to apprise the risk and negotiate more effectively.[36]
*Staff Writer, Jeffrey S. Moorad Sports Law Journal, J.D. Candidate, May 2022, Villanova University Charles Widger School of L
[1] See Chris Bengel, Sports Leagues Will Lose at Least $12B in Revenue Due to Stoppages Cause by COVID-19 Pandemic: Report, CBS Sports (May 1, 2020), https://www.cbssports.com/general/news/sports-leagues-will-lose-at-least-12b-in-revenue-due-to-stoppages-cause-by-covid-19-pandemic-report/ (projecting twelve-billion dollar loss for professional sports leagues in United States in 2020 due to pandemic).
[2] See Sports ETA Report Looks at Economic Impact of U.S. Sports Travel Post-COVID 19 Impact, SportsEvents Mag. (Sept. 4, 2020), https://sportseventsmagazine.com/2020/09/04/sports-eta-report-looks-at-economic-impact-of-u-s-sports-travel-post-covid-19-impact/ (reporting two-and-half-billion dollar loss in direct spending on travel or watching sports events in March 2020 due to pandemic).
[3] See Evan Dammarell, The Coronavirus Pandemic Could Cost NBA Nearly $690 Million in Ticket Revenue, Forbes (Mar. 19, 2020), https://www.forbes.com/sites/evandammarell/2020/03/19/the-coronavirus-pandemic-could-cost-nba-nearly-690-million-in-ticket-revenue/#2afc31992b6e (estimating NBA’s ticket revenue loss at $690 million as of March 2020). The updated estimated loss of ticket revenue in the NBA from TicketIQ as of August 2020 is substantially higher at $1.69 billion. See Live Events and Coronavirus: Cancellations, Ticket Refunds and Industry Impact, TicketIQ Blog (Aug. 11, 2020), https://blog.ticketiq.com/blog/live-events-and-coronavirus-protection-and-ticket-refunds (scroll down to charts) (depicting estimated losses in ticket revenue for various sports leagues including NBA, NFL, and MLB). Note that these figures assume 100% capacity. See id. (estimating ticket sale losses by multiplying average secondary market prices by total number of seats and games). It is important to note, however, that the NFL has recently allowed for limited seating capacity at the stadiums, though many teams, such as the New York Jets and the New England Patriots, are still not allowing any fans in their stadium. See, e.g., Where Each of the 32 NFL Teams Stands on Allowing Fans into Stadiums, ESPN (Oct. 30, 2020), https://www.espn.com/nfl/story/_/id/29910246/where-32-nfl-teams-stands-allowing-fans-stadiums (describing all thirty-two teams’ policies on allowing fans in respective stadiums).
[4] See Chris Cwik, Bills Players May Not Get Paid if Titans Forfeit in Week 5 Due to NFL's Coronavirus Rules, Yahoo Sports (Oct. 8, 2020), https://sports.yahoo.com/bills-players-may-not-get-paid-if-titans-forfeit-in-week-5-due-to-nf-ls-coronavirus-rules-152712850.html (describing potential loss in player salary if games are cancelled during 2020 NFL season).
[5] For further discussion of how the pandemic will shape the drafting of key contractual provisions, which will in turn broadly shape how parties manage risks and negotiate with each other in light of such risks, see infra notes 29-36 and accompanying text.
[6] See Sue Reisinger, In the Trenches of Sports Law, It's All About the Pandemic, Law360 (Oct. 9, 2020), https://www.law360.com/articles/1318450/in-the-trenches-of-sports-law-it-s-all-about-the-pandemic (emphasizing how one team lawyer spends several hours each day consulting clients on force majeure provision).
[7] See Andrew Beaton, NFL, Players Reach Deal to Ease Coronavirus Financial Crisis, Wall St. J. (July 24, 2020), https://www.wsj.com/articles/nfl-players-reach-deal-to-ease-coronavirus-financial-crisis-11595633015 (describing pact between NFL Players Association and NFL in spreading financial loss over several years and ensuring players’ financial well-being).
[8] For further discussion of the ways in which contractual provisions may have a protracted effect on how players and sports leagues negotiate with each other and shape other behavior, see infra notes 28-36 and accompanying text.
[9] See Reisinger, supra note 6 (highlighting sports lawyer’s extensive consultation regarding force majeure clauses in light of pandemic).
[10] See Steven M. Herman, COVID-19 Update: Thoughts on Force Majeure and Impossibility of Performance, Nat’l L. Rev. (Mar. 26, 2020), https://www.natlawreview.com/article/covid-19-update-thoughts-force-majeure-and-impossibility-performance (defining force majeure clause).
[11] See Glen Banks, Force Majeure—Scope of a Force Majeure Clause, 28A N.Y. Prac., Contract Law § 20:14 (2020) (citing Phibro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, 720 F. Supp. 312, 318 (S.D. N.Y. 1989)) (“Ordinarily, the clause must contemplate the specific event that is claimed to have prevented performance.”).
[12] See id. (citing Philbro Energy, Inc., 720 F. Supp. at 318) (“Mere impracticability of, or unanticipated difficulty in, performance is not sufficient to excuse performance under a force majeure clause.”).
[13] See id. (citing Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 931 N.Y.S.2d 436 (N.Y. App. Div. 2011).
[14] See id. (citing Team Marketing USA Corp. v. Power Pact, LLC, 839 N.Y.S.2d 242 (N.Y. App. Div. 2007)) (describing process by which courts narrowly construe force majeure clauses).
[15] Id. (citing Kel Kim Corp. v. Central Markets, Inc., 519 N.E.2d 295, 296-97 (N.Y. 1987)) (“General words are not to be given an expansive meaning but should be confined to things of the same kind and nature as the particular matters mentioned.”).
[16] See Jennifer Roach & Matthew Ridings, Force Majeure & Commercial Contracts, Bloomberg L. (March 2020) (citing Standard Ice Co. v. Lynchburg Diamond Ice Factory, 106 S.E. 390, 393 (Va. 1921)), https://www.thompsonhine.com/uploads/1137/doc/ForceMajeureCommercialContracts.pdf (circumscribing “breakdown, fire, high water, washout, or from any other cause whatsoever beyond its control” to physical disability of factory in question).
[17] Cf. Kate Brown, The Pandemic is Not a Natural Disaster, New Yorker (Apr. 13, 2020), https://www.newyorker.com/culture/annals-of-inquiry/the-pandemic-is-not-a-natural-disaster (describing impact of crowded communities in contributing to and spreading infectious diseases).
[18] See Herman, supra note 10 (listing additional requisite elements for force majeure clauses to be enforceable).
[19] Force Majeure and the Doctrine of Impossibility, Law.com (Apr. 2, 2020), https://plus.lexis.com/search?pdsearchterms=LNSDUID-ALM-AMLAWR-20200402FORCEMAJEUREANDTHEDOCTRINEOFIMPOSSIBILITY&pdbypasscitatordocs=False&pdisurlapi
=true&pdmfid=1530671&crid=02e34a44-61da-4375-a819-153bfc764d9c (noting possibility of raising impossibility defense where agreements lack force majeure clause).
[20] See Herman, supra note 10 (specifying elements of impossibility defense).
[21] See Muhammad Faridi & Timothy Smith, 2 NY Contract Cases Highlight Limits of Impossibility Defense, Law360 (Sept. 24, 2020), https://www.law360.com/articles/1312617/2-ny-contract-cases-highlight-limits-of-impossibility-defense (discussing two recent New York cases that narrowly interpreted impossibility defense).
[22] See id. (citing Lantino v. Clay LLC, No. 1:18-cv-12247, 2020 WL 2239957 (S.D.N.Y. May 8, 2020)) (stating how financial hardship standing alone is inadequate for impossibility defense); see also James Gormley, Governor’s Executive Order Closes Bars, Restaurants, Gyms and Theaters Until Further Notice, Legis. Gazette (Mar. 16, 2020), https://legislativegazette.com/governors-executive-order-closes-bars-restaurants-gyms-and-theaters-until-further-notice/ (reporting temporary closing of gyms, bars, restaurants, movie theaters, and casinos until further notice as of March 2020).
[23] See Faridi & Smith, supra note 21 (citing Backal Hospitality Group LLC v. 627 West 42nd Retail LLC, No. 154141/2020, 2020 WL 4464323 (N.Y. Sup. Ct. Aug. 03, 2020))
[24] See id. (citing Backal Hospitality Group LLC, 2020 WL 4464323, at *13 ) (detailing court’s scrutiny of lease).
[25] See id. (citing Backal Hospitality Group LLC, WL 4464323, at *13 ) (“Although the parties attempted in vain to negotiate a lease modification, plaintiffs nevertheless attempted to unilaterally terminate the lease in a manner violative of the terms thereof.”).
[26] See id. (citing Kel Kim Corp. v. Cent. Markets Inc., 519 N.E.2d 295, 295 (N.Y. 1987)) (noting unavailability of impossibility defense where parties can foresee and contract around event).
[27] See id. (describing court’s attention to parties’ contemplation of governmental order through provision, which stipulated to subsequent negotiation regarding rent); see also Jay M. Feinman, Good Faith and Reasonable Expectations, 67 Ark. L. Rev. 525, 537 (2014), https://law.uark.edu/alr/PDFs/67-3/ALR-67-3-525-570Feinman.pdf (“Reasonable expectations permeate contract law.”).
[28] See Beaton, supra note 7 (describing how NFL and players restructured salary caps in light of COVID-19); see also Scott Davis, The NBA is Withholding $30 Million in Player Salaries, but Top Players like Lebron James and Stephen Curry Avoided Reductions for Now, Insider (May 15, 2020), https://www.insider.com/nba-salaries-reduced-lebron-james-steph-curry-2020-5 (describing agreed-to player pay reduction between NBA and players’ union in light of pandemic).
[29] See Understanding the Impact of COVID-19 on Telecommunications, Media, and Entertainment Organizations, Deloitte (Apr. 12, 2020), https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/COVID-19/COVID-19-Understand-sector-impact-sports.pdf (listing various potential ongoing effects of pandemic on professional sports ecosystem, such as on fan relationships and venue strategies).
[30] For further discussion of how parties should draft their contractual provisions and meet key requirements such that the provisions are carried out by courts, see infra notes 31-36 and accompanying text..
[31] For further discussion of how courts narrowly construe catch-all provisions, see supra notes 14-16 and accompanying text.
[32] See Force Majeure Clauses: A 4-Step Checklist & Flowchart, Gibson Dunn (Mar. 24, 2020) (citing Kel Kim Corp. v. Cent. Markets Inc., 70 N.Y.2d 900, 902-03 (1987)), https://www.gibsondunn.com/wp-content/uploads/2020/03/force-majeure-clauses-a-4-step-checklist-and-flowchart.pdf (“[C]ourts generally interpret force majeure clauses narrowly and typically do not interpret a general catch-all provision to cover externalities unlike those specifically enumerated in the balance of the clause.”).
[33] See Herman, supra note 18 (noting how party must show that event was outside of party’s reasonable control).
[34] For further discussion of how courts look to preexisting contractual provisions that prescribe how parties should remedy nonperformance, see supra notes 24-26 and accompanying text.
[35] See Basil M. Loeb, Deterring Player Holdouts: Who Should Do it, How to Do it, and Why it Has to be Done, 11 Marq. Sports L. Rev. 275, 275-78 (2001), https://core.ac.uk/download/pdf/148695273.pdf (describing how player holdouts can damage sports league’s reputation).
[36] See Chris Jones, The Importance of Attention to Risk Allocation Provisions in Contracts, Nat’l L. Rev. (Dec. 15, 2017), https://www.natlawreview.com/article/importance-attention-to-risk-allocation-provisions-contracts (describing how contracts that express key clauses can avoid costly litigation).
