Impact of Covid-19 on Sponsorships in Sport: Spain
The global sports sector has already experienced severe economic consequences as a result of the Covid-19 pandemic. Since the World Health Organisation declared the pandemic on 11 March, sports events across Spain have been suspended with no fixed timeline as to when they will resume.
As a consequence of the suspensions, sports clubs have missed out on associated revenues, including from broadcasting rights and advertising. Domestic clubs are also mindful that their current economic situation could worsen if sports federations decide to terminate seasons early, as has been the case with football in France, the Netherlands and Belgium. These revenues are critical for many of the clubs. To make up some of the difference, clubs are trying to maximise other sources of income, such as sponsorship contracts.
Renegotiation in good faith: sharing the burden
Agreements governed by Spanish law typically do not provide for a concept of hardship that enables parties to renegotiate or avoid performance of a contract which has become commercially onerous to perform. However, in practice, due mainly to the close relationships clubs and sponsors have in the sports sector, many parties are renegotiating the terms of sponsorship agreements in order to share the economic burden of suspensions. Given current circumstances, it might be advisable for both sponsors and clubs to try to renegotiate agreements in good faith in order to diminish the losses they are suffering. Even if they do not reach an agreement, if there is a breach of contract and one party files a claim for damages, it could use such negotiations as an action carried out in good faith under its duty to mitigate damages.
Difficulties to fulfil existing commitments
If competitions are not resumed, sports clubs may be unable to fulfil their duties under sponsorship agreements (e.g. use of the sponsor’s logo in a particular competition).
Additionally, depending on the long-term impact of Covid-19 on the economy, sponsors may face severe liquidity problems, making it very difficult or impossible for them to fulfil commitments. In this scenario, the relevant sponsor may be forced to terminate its sponsorship contract. For example, it has been reported that Adidas and Emirates, the two main sponsors of the Real Madrid football team, have faced critical financial difficulties. As a result, their respective national governments have provided them with financial support to enable them to continue running their businesses as usual. Not everyone will be so fortunate; there will be lots of companies with financial problems which may not be eligible to obtain such aid from their governments, and which will struggle to fulfil the commitments of their sponsorship contracts.
Potential exemption from liability of sports clubs: force majeure
Under Spanish law, where clubs cannot fulfil their commitments because of the Covid-19 pandemic, there is scope for them to be exempted from liability for non-performance or released from meeting their main contractual obligations. Depending on the content of the agreement and the specific circumstances of the case, the performance of a club’s obligations could also be suspended if the effect is merely temporary.
If the agreement contains a force majeure clause which enables the club to terminate the agreement explicitly by virtue of the pandemic, or to release its obligations without assuming any liability, the parties will be bound by such contractual obligation.
If the agreement contains a force majeure clause which triggers termination or release of obligations but does not explicitly include pandemics as a force majeure event, Spanish courts could still consider the current scenario as a force majeure cause and exempt sports clubs from liability even if they do not comply with their obligations. Spanish courts will analyse whether the force majeure clause will be triggered on a case-by-case basis, i.e. in light of the terms of the agreement and the specific circumstances of the case. The Regional Court of Madrid previously considered a situation caused by the H1N1 virus to be force majeure. The court found that the cause was unpredictable and unavoidable, and therefore could be considered as force majeure, exempting the defendants from liability.
Potential exemption from liability of sponsors: rebus sic stantibus
Sponsors may assess the possibility of invoking the rebus sic stantibus doctrine if they cannot fulfil their financial commitments due to Covid-19. This doctrine enables contracts to be adapted or terminated when, following supervening events, the obligation, as contemplated between the parties at the date of the execution of the contract, no longer makes sense. If this doctrine is applied by a court, the sponsor may not be obliged to make all relevant payments if, for example, the season is suspended before its completion.
However, the rebus sic stantibus doctrine has to date only been applied by the Spanish courts on an exceptional basis and in a very restrictive manner. The Spanish Supreme Court set out the requirements for the application of the rebus sic stantibus doctrine: it is necessary that (i) there is an extraordinary change in circumstances after the conclusion of the agreement; (ii) this change in circumstances defeated the basis of that agreement by “annihilating” the balance of the parties’ rights and obligations under it; (iii) this was unforeseeable; and (iv) that it produced an excessive disproportion between the parties’ obligations. It is arguable that the Covid-19 pandemic and the ensuing economic crisis may be considered as an extraordinary and unforeseeable change which produces an imbalance and an excessive disproportion between the obligations of the parties.
In summary, contract parties should analyse any possible or foreseen disruption in the performance of each parties’ obligations on a case-by-case basis. In doing so, both sponsors and sports clubs should be mindful that the possibility to invoke the force majeure defence or the rebus sic standibus doctrine may exempt the non-performing party from liability and/or release it from the performance of its obligations. In any case, claimants should always seek to minimise the damages the non-performing party could suffer and act in accordance with good faith principles.
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