Participation Sports Events: COVID-19 CANCELLATIONS – Frustration & Force Majeure

Many mass participation sports events have been cancelled as a result of Coronavirus/Covid-19, not least because of the restrictions imposed by law (see, for example The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 – in particular Regulation 7 which limits gatherings to no more than 2 people save for specific exceptions).

The cancellation of events has given rise to questions about what should happen next: many participants asking whether they are entitled to a refund whilst event organisers have had to wrestle with the problem of having invested considerable sums of money into organising an event that cannot now take place.

Before considering what should happen after cancellation of an event, it is worth setting out in summary the typical life-cycle of an event:

• When a participant (a consumer) enters a sports event they will inevitably do so by entering into a contract with the event organiser (a business).
• The event organiser will begin arranging an event and will offer places in the event to prospective participants.
• At a very early stage, the event organiser will be contracting with suppliers of goods and services (businesses), e.g. medics & event safety contractors, venues, finisher medals & T-Shirt suppliers etc.
• Prospective participants will be invited to accept the organiser’s offer of entry into the event.
• Entry into the event will be subject to the participant accepting the organiser’s terms and conditions of entry (the contract). These will inevitably be the organiser’s standard terms and conditions (in other words, the terms of the contract will not be individually negotiated with each participant).
• There will then be an exchange of consideration, usually in the form of the participant paying the entry fee and the organiser providing entry into the race.
• Ordinarily, the event will take place, the participant will take part and the contract is discharged through performance.
• Occasionally things might go wrong and this is when it is necessary to turn to the terms and conditions.

Cancellation of the event will – on the face of it – mean that the contract cannot the discharged by way of performance.

A contract that cannot be performed is ‘frustrated’.

The courts have defined a frustrated contract in this way:

[F]rustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.

Davis Contractors Ltd v Fareham Urban DC [1956] AC696 at p.729 per Lord Radcliffe

It is important to emphasise the word ‘incapable’. An occurrence that simply hinders performance (makes it more difficult or more expensive, for example) will not be a frustrating event – the occurrence must make performance impossible. It is also important to emphasise that the occurrence of the ‘frustrating event’ must have been unforeseeable at the time when the contract was made.

There would seem to be little doubt that the Covid-19 restrictions imposed by law would satisfy the requirements for frustration – it is likely that the planning for sporting events and entry into these events took place long before anyone was able to anticipate the occurrence of Covid-19 and the restrictions that have been put in place.

Where a contract is frustrated it is automatically terminated and both parties are thereafter discharged from performing their obligations. In the case of a sporting event, the event organiser would not need to put the event on and the participant would not be required to pay the entry fee.

The problem with most large sporting events is that participants will probably have already paid the entry fee well in advance and event organisers are likely to have already paid significant sums of money to suppliers of goods and services.

Where money has already been paid pursuant to a frustrated contract, the default position is set out in statute – the Law Reform (Frustrated Contracts) Act 1943 (‘the 1943 Act’).

The 1943 Act provides that:

• Any money paid by a party to the contract before the frustrating event should be refunded and any money that was due before the contract was automatically terminated will not need to be paid (see: Section 1(2) of the 1943 Act)

• However, if a party has incurred expenses then that party can retain (or require to be paid from sums due to be paid) an amount up to the value of the expenses incurred but only if the court thinks that it is fair and just to do so (see: section 1(2) of the 1943 Act)

• Where a party has received a benefit under the contract prior to it becoming frustrated the court may order that the party receiving the benefit pays a fair price for that benefit received. The court can make that order irrespective of whether or not anything was paid or had become payable before the contract had become frustrated (see: Section 1(3) of the 1943 Act).

Having explained the effect of a frustrated contract it is important to emphasise that a contract will only be frustrated if it cannot be performed. This is a crucial consideration.

It was stated above that where an event is cancelled it would seem on the face of it that the contract cannot be discharged by performance: but is that actually the case? This is an important preliminary question.

If the contractual terms anticipate the event in issue (e.g. in these current times the Coronavirus pandemic) – if the terms and conditions deal with what should happen in that specific situation – then the contract is not frustrated.

Where the contract is not frustrated then the contract will be performed consistent with the terms of the contract. So if the contract says that one party or the other will have to suffer the loss of cancellation then that will be determinative (assuming that the contractual term is incorporated and enforceable – and more on this later).

SCENARIO.

Having outlined some of the law, let us consider the following scenario.

• Let us then assume then that a mass participation sporting event has had to be cancelled because of Covid-19 restrictions.
• Assume that the planning and the preparation for the event began long before the threat of Covid-19 was anticipated.
• Assume that participants had entered and paid their entry fees many months prior to Covid-19 being an issue.
• Assume that the event organiser had also already entered into contracts with suppliers of goods and services.

Two questions fall for consideration:

1. Does the organiser have to refund the participants?
2. Does the organiser have to pay the suppliers of the goods and services?

In answering those two questions, it is crucial to first ask as a preliminary question:

• Is the contract truly frustrated?

To answer that preliminary question will require scrutiny of the contractual terms.

It might well be the case that the contract has anticipated the frustrating event.

It is extremely common for contracts to contain ‘Force Majeure’ clauses. These clauses essentially deal with situations where the contract subject matter of the contract cannot be performed and this clause will set out what should happen in that situation.

If the contract terms deal with the specific occurrence giving rise to the cancellation (or amendment or postponement of performance) and if that term apportions risk and liability then the contract is probably not frustrated at all!

It is not frustrated because, although the occurrence might qualify as a frustrating event, the contract deals with it. The contract explains what should happen in those circumstances and therefore the contract can still be performed consistent with those terms.

It is necessary at this stage, however, to make a distinction between the ‘parties’ involved in the two questions set out above.

• In question one we have a business (the event organiser) contracting with a consumer (the participant).
• In question two we have a business (the event organiser) contracting with other businesses (venues, suppliers and service providers).

It is important to have regard to this distinction because consumers are generally treated very differently to businesses.

This distinction between ‘business to business‘ contracts and ‘business to consumer‘ contracts is crucial.

The law recognises that businesses are able to apportion risk between themselves; they are expected to look after their own interests and if necessary insure against risks – often referred to as the ‘freedom of contract‘.

Over recent years ‘the freedom of contract’ principle has been eroded and subject to statutory intervention in respect of businesses dealing with consumers.

The law generally recognises that consumers are in a weaker position and that there is usually a significant imbalance in the bargaining power between businesses and consumers.

Consumers don’t generally have the opportunity to negotiate the terms of the contract and will usually have to accept standard terms.

There is obviously a danger that a business will draft their standard terms in a manner favourable to the business and to the disadvantage of a consumer creating a significant imbalance in the rights of the parties to the contract.

The most important piece of legislation governing the relationship between businesses and consumers in recent times is the Consumer Rights Act 2015. In many respects this is an Act that consolidates existing law but it also expands upon consumer rights.

Amongst many of the protections provided for in the Consumer Rights Act 2015 are that contractual terms:

• must be easy to understand;
• must be brought clearly to the attention of the consumer, and;
• must not create a significant imbalance against the rights of the consumer and in favour of the rights of the business.

Having regard to the fact that an event organiser will have invested considerable sums of money and time into organising the event long before it is due to take place, then it is perhaps understandable that they will want to avoid giving refunds to participants in the event of cancellation. To avoid that eventuality many event organisers will include a ‘force majeure’ clause expressly stating that there will be ‘no refunds’ if the event has to be cancelled.

What the event organiser will be doing with a ‘no refund’ policy is place all of the risk onto the participant – the consumer.¹

The event organiser does not want to be left out of pocket but the effect of a ‘no refund’ policy will be to leave the other contracting party – the consumer – out of pocket.

This would appear to amount to a significant imbalance in the apportionment of burden or risk between the parties to the contract: the organiser bearing none of the risk or burden resulting from the cancellation and the consumer bearing it all.

Whilst a suitably drafted one-sided force majeure clause – apportioning all of the risk on one party – is likely to be binding in a business to business contract that is unlikely to be the case in a business to consumer contract and that is because such a contractual term is likely to be regarded as unfair (see: footnote 1 – Director General of Fair Trading v First National Bank plc [2001] UKHL 52 at para [17]) .

Chitty on Contract at [15-168] states:

… even if a force majeure clause were drafted in plain and intelligible writing, it may be found to be unfair, for example, where it requires the consumer to accept a suspension of performance or delayed or substitute performance without giving him the opportunity to cancel the contract, or which denies him a full refund in the event of cancellation of the contract by the seller or supplier upon the occurrence an supervening event specified.

Chitty on Contract, 33rd Ed., at [15-168]

Where a contract term is found to be unfair it will not be enforceable against the consumer. That means that the respective term will be regarded as null and void – struck out as though it never existed.

Some terms in a consumer contract will always be unfair and some terms might be unfair in certain circumstances – and many businesses will be aware that the term is unfair or likely to be unfair – but that will not stop or prevent a business from putting an unfair term or terms into the contract.

Some consumers might be aware of their statutory rights, some may take legal advice and then become aware, but many – perhaps the majority – will just accept what is written in the contract and assume that it is a case of ‘caveat emptor‘ (the latin phrase meaning ‘let the buyer beware’) and so be it.

Whilst we can all reach educated conclusions on whether or not a term is ‘unfair’, it is important to recognise that this will ultimately be a question for a Court if the parties cannot reach a settlement. In reaching our educated conclusions we can be aided by previous cases and guidance issued by statutory bodies.

Because consumers require protection there are a number of government organisations that look after consumer interests. The Office of Fair Trading (OFT) was one such body now replaced by the Competition & Markets Authority (CMA). The CMA have issued guidance on unfair consumer contract terms:

– CLICK HERE TO OPEN THE CMA GUIDANCE IN NEW TAB.

Will a force majeure clause which states that a consumer will not be entitled to a refund be regarded as unfair?

At p.A48 of ‘Historic Annex A to unfair contract terms guidance‘ (CLICK HERE TO OPEN ANNEX A IN NEW TAB) there is an example of a ‘no refund’ clause which specifically makes reference to an epidemic:

In the above situation the original term was clearly expressed and in plain English: the effect of the original clause was that all monies paid in advance would be forfeited and retained by the business if it was forced to close due to an epidemic – there would be no refunds.

After the clause was challenged by the OFT it was amended such that there would be a full refund less an amount equivalent to the benefit that had already been conferred on the consumer.

It would be difficult to argue that there is anything unfair about the new term – the consumer is required to pay for the benefits received but will be getting a refund for the benefits that they have paid for but cannot receive in the future due to the closure.

Whilst this is only guidance and whilst this is only an example and moreover it is based on an interpretation by the OFT and not the CMA, using this as an example, it is therefore likely that any clause that permitted an event organiser to cancel an event and retain pre-payments would be considered unfair. This is all the more so when an event is cancelled and the consumer has received no benefit at all.

Returning now to the question of whether an event organiser who cancels an event due to Covid-19 will need to give a participant a refund:

• let us assume that the participant contract contains a force majeure clause;
• let us assume that the clause anticipates in a suitable manner the Covid-19 situation;
• and let us assume that the clause states that there will be no refunds.

In this situation (a business to consumer contract) it is not simply a question of basic contract law principles. The contract term in question will need to be assessed for fairness. Knowing what we know about the way that the OFT has interpreted ‘no refund’ clauses where closure/cancellation is caused by an epidemic then it is likely that a court would also find the contract term to be unfair.

If the court agreed that the clause was unfair it would be regarded as unenforceable against the consumer – that it is it would be effectively ‘struck out’ and deemed null and void.

In the absence of a term dealing with the event that caused cancellation:

• The contract will be frustrated.

• The contract would be automatically terminated.

• The Law Reform (Frustrated Contracts) Act 1943 would apply.

• The participant would be entitled to a full refund.

• The event organiser could seek to retain a portion of the money to cover expenses that have been incurred.

• The event organiser would only be entitled to retain an amount up to the expenses incurred and would therefore need to provide compelling evidence of the expenses incurred.

• The event organiser is not guaranteed to be able to retain any of the consumer’s money: the court will only make that order if it considers it fair and just to do so.

It follows from this that there is then the question as to whether a court would allow an event organiser to retain any of the consumer’s money?

This is of course a question for the court and one that a judge would decide after hearing respective argument and would turn on individual facts.

My personal opinion is that a court would be reluctant to permit an event organiser to retain any of the money in most cancelled event situations for the following (amongst other) reasons:

• The court will probably be conscious of and give significant weight to what, if any, benefit the participant has received prior to the frustrating event. In most cases the participant will have received absolutely no benefit at all under the contract until the day of the event.
• The court will probably also be conscious of the fact that the loss is ‘a business risk’.
• The court will undoubtedly be invited to consider which contracting party is best placed to insure against the risk.
• A business is better placed to negotiate contracts of insurance with extended cover for specified events.
• Consumers generally do not have the ability to seek out bespoke insurance cover – they are generally only able to obtain ‘off the shelf’ policies.

In all of those circumstances, where a consumer has paid money to enter an event and it has been cancelled before the consumer has received any benefit at all then it would seem unjust – in my personal opinion – to apportion any of the loss (which is a business risk) on the consumer.

Does that mean that, as a participant, you should claim a full refund?

Well, the answer to that rather depends on your circumstances and your perception of what is fair…

None of this is the fault of the event organiser, nor is it the fault of the competitor. Neither party is at fault and all parties are affected by the cancellation and the overarching circumstances caused by the pandemic. It is true that every individual will be affected in their own individual way and each individual will have a different outlook. It is also true that:

• Some organisers have handled the Coronavirus difficulties better than others.
• Some event organisers have engaged with and communicated with their customers better than others.
• Some organisers have given participants full refunds and some have point blank refused to do so.
• Some have offered free transfers to events later in the year (in the hope that the restrictions may be lifted in the future and events can go ahead), and,
• Some have deferred entries into the same event for the following year.

It is inevitable that the actions of and attitudes of event organisers might influence how their customers react. Some of the actions of event organisers have led to polarised opinion – some disgruntled participants have argued that organisers have ‘no right’ (morally or legally) to refuse refunds and others have said ‘read the terms and conditions – you agreed to no refunds’.

What I would say is this: and it applies to both participants and to event organisers (and indeed suppliers of goods and services to the event organisers) :-

• Just because you can do something (whether by contract or by statutory right or even common law) it doesn’t necessarily mean that you should do it.

You don’t need to assert your rights and (in some circumstances but not all) you can even expressly waive your rights if you consider that it is the right thing to do.

• If an event organiser is offering a free deferral to the event next year and you are likely to enter anyway – you can accept that option. This awful situation is not your fault but it is not the fault of the event organiser either. Allowing the event organiser to retain the money in exchange for entry next year assists them with cash-flow, helps them meet their obligations and gives them time to plan for ways to make-up any shortfall the following year.

• If you – as a participant – are finding yourself in a difficult financial situation and the refund is going to help you and your family then by all means press for the full refund: your situation is more important than that of a corporate entity. Yes, the corporate entity has staff to pay and support but that should not come before you and your family’s interests.

• If you – as a supplier of goods or services to an event organiser – can afford to absorb a contractual entitlement to payment, then again, you can do so. Recognising that you are both in a difficult situation and anticipating that you might want to consider doing business with each other in the future, some forbearance is perhaps the best way forwards.

Dispute prevention is always a better alternative to dispute resolution.

Whilst the CMA has recently indicated that it is investigating ‘no refund’ clauses (CLICK HERE), initially in three specific industries/areas, it is unlikely that this will assist anybody in the immediate term. What it does achieve is to send a signal out to all businesses – not just in those three areas – that they should carefully consider whether their terms and conditions are fair.

The CMA can in due course seek an injunction against a business with unfair contract terms in consumer contracts. This would require the business to change their contractual terms. This, of course, will take time.

That means that, in the short-term, if a participant wants to challenge a ‘no refund’ clause they will need to go it alone.

• In the first instance that should be by way of informal negotiation with the event organiser.
• If that does not result in a satisfactory outcome then legal action could be pursued, beginning with a letter before action and ultimately a claim in the County Court on the small claims track (based on the value of the claim).

Another alternative is to seek a ‘chargeback’ if the payment was made by debit card or credit card. Alternatively, if the purchase was on a credit card, a claim to the credit card company under s.75 of the Consumer Credit Act 1974 could be pursued.

Going forward, one way to avoid all of this would be for event organisers to ensure that the consumer contract terms are ‘fair’ and balanced. For example, a term that was expressed in a manner consistent with the court’s discretion (in s.1(2) of the Law Reform (Frustrated Contracts) Act 1943) to allow some of an advance payment to be retained up to the value of the expenses incurred (and no more than that amount) has more of a chance of being regarded as ‘fair’ and is also less likely to offend customers!

As stated earlier: dispute prevention is better than dispute resolution and in these difficult times understanding and forbearance on both sides is appropriate. This is not the fault of either party and everybody is going to suffer one way or another!

1. The leading case on unfair terms in consumer contracts is Director General of Fair Trading v First National Bank plc [2001] UKHL 52. At para [17] the late Lord Bingham said: A term falling within the scope of the regulations is unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer in a manner or to an extent which is contrary to the requirement of good faith. The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty. [↩]