Certainty is in short supply for many businesses at present, but especially for those in the hospitality sector. Although restrictions related to COVID-19 are being relaxed, there is uncertainty for the hospitality sector as to when and how it will be able to re-open, and when customers will be happy to return. We have looked below at a hypothetical example and identified some of the legal issues that arise and how they apply.
Let’s take the hypothetical example of a customer which in August 2019 booked its major annual event to take place at a London conference centre in early September 2020. There are caterers, speakers who have been booked as well as numerous delegates, who have paid to attend the event.
We shall assume that neither the customer nor the venue has business interruption insurance cover for COVID-19, although that will always be worth checking. Reputationally, the customer has decided it will have to give all delegates a full refund of the event booking fees if it does not proceed, irrespective of customer’s booking terms for delegates, which say that the booking is non-refundable and also irrespective of any legal arguments about the legal concept of frustration (see below). The customer is still weighing up whether to give refunds to delegates who simply prefer not to attend if the conference proceeds.
Decision time is fast approaching as the customer and delegates want certainty. The venue wants the event to go ahead if possible and points to its booking terms which state that it is too late for the customer to cancel without incurring 70% of the total amount of the originally agreed venue charges. The customer would rather cancel or postpone the event now, but doesn’t want to pay the full amount of the substantial cancellation charge to the venue, especially as there is concern that the venue might not be able to proceed, either at all, or as originally contemplated in September 2020.
One of the legal issues which falls to be considered in the scenario outlined above is that of force majeure. Force majeure clauses are contractual clauses which set out parties' obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents contract obligations from being fulfilled. Depending on their drafting, such clauses may have a variety of consequences, including excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance; entitling that party to suspend performance, or claim an extension of time for performance; or giving either party a right to terminate. Force majeure will only apply if it is explicitly provided for in the contract.
If there is no “force majeure” clause, the parties may turn to the law of frustration. It is normally very difficult to show that a contract has been frustrated. Frustration requires that an unforeseen subsequent event, outside the control of the parties, has made the contract impossible to perform, or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations. In general terms, a contract may be frustrated if:
- the frustrating event occurred after the contract had been formed;
- the frustrating event was not the fault of either party to the contract;
- the frustrating event was beyond the contemplation of the parties at the time the contract was entered into; and
- the frustrating event made the performance of future obligations under the contract impossible, illegal or radically different.
Whether a contract will be frustrated by a supervening event occurring, such as the occurrence and spread of coronavirus in the UK, will very much depend on the individual facts of each case and the bar for establishing frustration is high. As with the test for "prevention" of performance under force majeure clauses, the fact that performance has been made more difficult or costly is not enough.
In the scenario set out above, August 2019, when the customer booked the venue, is substantially before COVID-19 seems to have appeared, even in China, so the scenario seems to satisfy the requirements of the first three bullet points.
On the fourth bullet point, it is hoped that by September 2020 it will not actually be illegal for the venue to host the conference, but if the activities booked and envisaged by both the customer and the venue were central to the event and can’t be done even with whatever social distancing precautions are still likely to be required in September, the contract may still be frustrated.
If a contract is frustrated, it is automatically discharged at the time of frustration. This means that the parties to the contract do not need to perform any future contractual obligations. In addition, parties to the contract cannot claim compensation for non-performance of these future obligations.
Under the Law Reform (Frustrated Contracts) Act 1943, any money paid pursuant to the contract before the frustrating event occurred is repayable and the parties are released from future performance obligations.
If a party has incurred expenses before the frustrating event occurred, they can seek to retain or recover these expenses from any money paid or payable at the time of frustration. However, a party will not be able to retain or recover a sum greater than the amount of money paid or payable at the time of the frustrating event. This means that if no money was paid or payable before the frustrating event then expenses will not be recoverable.
What is the best strategy? The obvious commercial instinct is to “postpone” the event so that the customer and delegates have certainty for now, sums already paid are not a “write off” and the venue has something to hang on to in terms of a hoped for future date for the event. However, what does “postpone” mean in legal terms? In many cases a contract between parties will be for a specific event on a specific date. One party telling the other that the contract will not proceed on that date is in reality often a termination of the contract. Whether that termination is lawful will depend on the circumstances and whether it is legally justified. Both the customer and the venue may be at risk of being in repudiatory breach and open to claims in damages if they wrongfully terminate the contract.
Furthermore, a second wave of COVID-19 or even a different epidemic, or pandemic, resulting in similar lockdown may be considered to be foreseeable, and frustration may not at this stage apply to a “postponed” event, making it quite difficult, but not impossible, to draft an agreement for the postponed event which has enough certainty to be meaningful.
We have not touched on many other potential issues which can arise in the scenario we have outlined, such as whether heavy cancellation fees amount to an unenforceable penalty, or the enforceability of limitation or exclusion of liability clauses. The reality is that the customer and the venue both have things to gain and lose and the best way for them to achieve certainty and the best outcome is likely to be through co-operation. By discussing their commercial objective early with their own lawyers they can decide whether it is better to seek to rely on any applicable force majeure contract clause, or rely on the principles of contract frustration, or reach a “full and final settlement” which draws a line under the agreement for the September 2020 event, or to try to reach agreement for a postponed event with the relative uncertainty that still carries.
Our experience at Clarion
We have recently been advising a number of clients in the hospitality sector on a wide range of issues in relation to the impact of the UK Government restrictions related to COVID-19 on event bookings and their cancellation and postponement, ranging from small one off events to large scale festivals, as well as related issues with suppliers and customers.
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