Sports Sponsorship Contracts amidst Covid-19 : What lies ahead?

Dhanishta Mittal and Mustafa Rajkotwala

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INTRODUCTION

The Coronavirus pandemic has brought the sports industry to standstill, with major sporting events across the globe  either being cancelled or rescheduled to future dates

The International Olympic Committee (IOC) has declared a postponement of the much awaited 2020 Tokyo Olympics, scheduling it to 2021. The 133rd edition of the Wimbledon Championships has been cancelled, while the 2020 ATP and WTA tours have been suspended indefinitely, the Union of European Football Associations (UEFA) has postponed its Euro 2020 to the forthcoming calendar year, all Union Cycliste Internationale (UCI) and Formula 1 events have been cancelled. Cracks have already started to show in the industry with the football club MSK Zilina and USA Rugby (USA’s national rugby governing body) filing for bankruptcy.

In light of such a crisis, we aim to analyse the various repercussions the industry might face both in the near future and in the long run in the context of sponsorship deals. The article presents probable recourses to assuage the losses that would take place in such a predicament by relying on force majeure precedents from Courts, deriving authority from various common law jurisdictions around the globe.


HOW DETRIMENTAL IS THE PANDEMIC TO SPORT SPONSORSHIPS?

Organizations such as the IOC have declared deferring the games until the next year in hope that the pandemic would be finished by then. However, this is not an option for Sponsors engaged in annual contracts. The IOC’s decision to postpone the 2020 Tokyo Olympics to 2021 while keeping the brand name as ‘Tokyo 2020’ is a welcome decision since the sponsors who had already bid for the media rights, broadcasting rights, on-site contracts et al have been protected from untimely termination of their contract on account of non-performance amidst the pandemic. Such an action is a remedy for sponsors from the painstaking process of a re-auction, particularly as rival companies would compete with greater prices at stake in the future seasons of the event.  Termination of existing sponsorship contracts could act as a potential hazard for existing sponsors in terms of competition from rivals in the forthcoming calendar years. There is also uncertainty over whether the previously acceptable format of branding and advertisements would continue to be acceptable in the market, which further puts undue hardship on the sponsors to be adaptive of the dynamic changes, post the pandemic. Even as global governments attempt to restore normalcy,  bans on mass gatherings to avoid resurgence of the disease in their respective countries, continues to linger, as noted with the Bundesliga matches taking place without live audience.

However, not all sponsors might be in a position to push existing contract still the next year, particularly those in dire financial straits. Such sponsors might be compelled to terminate their contract and seek ‘compensation’ or ‘refund’ of upfront money on grounds of inability of organizers to perform their contract.

Prominent organizations like FIFA have already created emergency funds for clubs, national federations and governmental bodies to sustain the football industry primarily because of the stakes involved in such events. Players across sports are taking salary cuts and sponsors have stated their disinterest in payments for those events/matches which are cancelled. Additionally, broadcasters, particularly in the United Kingdom have allowed audiences to stall payments for hefty subscriptions until live sports return to normalcy. With the possibility of many events get re-adjusted with truncated tournaments later in the year, this compression will lead to reduced time, reduced money and diverted audience. The women’s sporting fraternity is also set to take an even bigger hit in generating sponsorship deals and event organizations. The female sporting business has always been  less established than men’s events of the same category.


IS FORCE MAJEURE THE ONLY HOPE FOR REVIVAL?

Under general sponsorship contracts, sponsors may be remunerated for their business losses during this pandemic, on grounds of force majeure. However, many contracts could not have predicted possibility of such an impediment. Multiple insurance companies have also made declarations on COVID-19 not per se being covered as a relief mechanism for indemnification in case of non-compliance of the contractual terms.

Delving deeper into the scope of force majeure (as defined in Section 56 of the Indian Contract Act), the Indian courts have accorded a wide ambit to the provision to protect the interestsof a party that is unable to perform its contractual duties on account of unforeseeable events. Additionally, it has been clarified that even though the performance of the activity might not become entirely impossible, if its conduct becomes impracticable, it would nonetheless be considered under this clause. This black swan event leaves event organizers in an imbroglio. Organizing a mass event has become impracticable especially in light of governmental lockdowns being issued in major countries leading to absence of any live audience. Furthermore, it is impractical to organize such an event due to the potential hazards to public health and safety if large audiences gather in consolidated spaces.

The Delhi High Court in a recent judgment pronounced that force majeure cannot act as a panacea for all delayed contracts. It’s operation will be circumstantial and analysed on a case-by-case basis. If the situation necessitated completion of contractual obligations before the pandemic, then the application of force majeure will fail and that is likely to hold true for all industries. This clause is generally inserted in contracts to protect the parties from non-compliance of their obligation on account of an ‘Act of God’ which is unforeseeable, making the performance of the contractual duties impossible if not impracticable. In principle, three cumulative requirements are necessary for the application of force majeure: (i) performance under the contract must be rendered impossible; (ii) the event giving rise to the impossibility of performance must be unforeseeable; and (iii) the situation must not be attributable to the party seeking to invoke the principle. The mere fact that meeting the obligations has become more difficult, financially or otherwise does not suffice as valid grounds – however, may be sufficient if it is determined that the factual circumstances caused by the ‘flu pandemic’ are beyond the reasonable control of the parties.


ALTERNATIVES FOR SPONSORS 

All associated stakeholders – whether organizers, sponsors, players, staff members bear substantial pecuniary losses in the event of a cancellation. For example, as the Indian Premier League 2020 (IPL) stands indefinitely suspended, it can be concluded that the BCCI would face major financial repercussions, because it stands to lose money from on-site sponsors and commission on sale of ‘IPL 2020’ merchandise. Sponsors like PayTm, Star India and Vivo are also at a great risk of losing their money because of the long term (5-year) contracts signed by them for the IPL tournament, bagging broadcasting media and title sponsorship rights respectively, for the entire duration beforehand.

Furthermore, many sponsors use these tournaments as a platform to launch new products in the market. It seems in the interest of both the parties that either they re-negotiate with the organizing committee for compensation of their losses, or write-off these additional, pre-dated expenses if their contracts fail to attract force majeure or impossibility of performance of contracts. In order to continue the existing long-term contractual obligations, a pro-rata reduction formula could be mutually agreed upon, by the ‘parties’ with respect to the fees to be paid under the contractual terms. This negotiation would allow for continuation of the amicable relationship between the organizing committee and the sponsor since both are to benefit from such an understanding, especially when the same sponsor is to continue for the next IPL season as well.

Accordingly, even for annual contractual sponsors, there ought to be discussions such that one party is not bearing an undue loss in the given situation. The sponsor and the organization can amicably determine the nature of ‘compensation’ for the potential losses to be sustained by the sponsor in case of cancellation or deferment of the event. The already loss-bearing organizations could be compelled to pay the sponsor for their inability to fulfil their contractual obligations.  Alternatively, there could be no-audience games like those suggested by the USA before declaration of shutdowns. However, this solution is detrimental, especially to the interests of on-site sponsors whose business is heavily dependent on presence of humongous audience, as well as the players who are motivated to perform for their audiences.  No-audience games however, can both boost as well as downplay media and broadcasting rights prices especially when live audience which otherwise would have attended the event, would watch the match online anyway. However, the cheering and presence of audience which adds acelebratory element to the games will undermine the visual and audio appeal to the experience of a ‘live’ game.

Lastly, the e-Sport market, especially the video gaming industry, is booming over the past decade and now, virtual leagues su can act as a substitute during the time of cancellation of games. Nonetheless, the actual performances of the players in the games are a major determinant for the selection of players in the virtual sporting world too. Even for fantasy league platforms, the teams are formed in tandem with the scheduling of the actual game, thereby resulting in dearth of pecuniary businesses on this platform as well. A lucrative alternative towards compensation for losses sustained during this season would be to switch over to the digital media.  Primarily, because most of the sponsorship deals are a long-term commitment to the tournament and jeopardizing their interests due to an unforeseen catastrophe would stand as not a viable decision for most of the companies. Australian sponsors have started initiating conversations and creating interactive content such as trivia, quizzes, user generated data to keep the audience engaged. As has been found through surveys, the appeal to e-Sports is majorly in the younger demography, thereby failing to generate a market focused on the aristocrats who otherwise invest heavily in sports. It is found that majority of the viewers of live sports are people above the age of 40s who are relatively ‘settled’ and possess the potential to invest in the market attracting brands and sponsors, are relatively less interested in video games. Thus, the contribution from the e-Sport market targeting the younger generation is not as lucrative a market as the live sporting industry. While the scope for e-Sports is extensive, the probability of it substituting the actual sporting business is limited.


CONCLUSION

As force majeure shall act as primary recourse for sponsorship contracts globally, its application stands unpredictable due to various jurisdictions addressing this issue based on their domestic laws and the particular contractual arrangements. However, prima facie the severity of this pandemic fulfils the requisites of an event that makes it impossible and impracticable for the parties involved to perform their obligations, which could invoke ‘Act of God’ as a defence. Nonetheless, given that the sports industry has been affected substantially due to this virus outbreak, a change in the approach towards sponsorship contracts is inevitable in terms of its reaction from the customers and various stakeholders involved. Although this pandemic will be a setback in terms of substantial financial losses to the industry, the post-pandemic scenario in terms of engagement and technological advancements has much potential in store for the industry


The authors are BA.LLB students at NALSAR Hyderabad.

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