Pandemic: Force Majeure Contracts and Insurance in the Music Business

After the cancellation of SXSW, we need to think about those “force majeure” clauses that everyone skips over in contractual boilerplate.  “Force majeure” or the less secular “Act of God” clause is a species of the “impossibility of performance” defense to a breach of contract claim that excuses the liability of a nonperforming party.  Earthquakes, floods, severe weather or other natural disasters are what the parties are typically thinking with force majeure, some act that is beyond their control.

These clauses sometimes are risk shifting, meaning that party A and party B may agree that one of them will bear the economic damages of the disaster, or permit rescheduling or other delay until the force majeure event has passed in a reasonable period of time.  Force majeure clauses typically break between suspending performance for a period of time and allowing the parties to terminate the contract, with little or no penalty.  It’s well to think of force majeure as a species of the impossibility defense to a breach of contract that has been available in the law since 1863.  A successful impossibility defense may be thought of as an exoneration of the breach, so excuses nonperformance before the breach actually arises.

This post is much longer than we usually ask you to read, but I think it’s a very important topic and I hope you find it useful.

Examples of Force Majeure Clauses

Distribution Agreement

Contract 1

Force Majeure. If because of: act of God, inevitable accident, fire, lockout, strike or other labor dispute, riot or civil commotion, act of public enemy, enactment, rule, order or act of any government or governmental instrumentality (whether federal, state, local or foreign), failure of technical facilities, failure or delay of transportation facilities, shortage of raw materials, or other cause of a similar or different nature not reasonably within Distributor’s or Company’s control, as applicable (a “Force Majeure Event”), either party hereto is materially hampered in the performance of its obligations under this agreement or its normal business operations are delayed or become impossible or commercially impracticable; then, without limiting such party’s rights, the party affected by such Force Majeure Event shall have the option, by giving the other party notice, to suspend its obligations hereunder for the duration of any such contingency (other than the obligation to account or pay hereunder or permit audits hereunder, except to the extent either party’s ability to do so is impaired by virtue of such Force Majeure Event). Any such suspension shall be limited to a period of the duration of such Force Majeure Event, but in no event longer than six (6) months, after which, unless such suspension shall be lifted, the party not suspending its obligations hereunder may, during the pendency of such suspension, terminate this agreement by notice in writing to the other party. Should Distributor suspend the manufacture or distribution of Products pursuant to this Paragraph, Company shall have the right to manufacture and/or distribute (as applicable) Products itself or through third parties during the pendency of such suspension.

Contract 2

Neither party shall be deemed in default of this Agreement if either party’s obligations are delayed or become impossible or impractical by reason of an act of God, war, fire, earthquake, strike, sickness, accident, civil commotion, epidemic, act of government or governmental instrumentality, failure of technical facilities, failure or delay of transportation facilities, shortage of raw materials, or any other cause of a similar or different nature beyond Distributor’s or Owner’s control (“Force Majeure Event”). Upon the happening of any Force Majeure Event, Distributor may suspend the Term for the duration of the Force Majeure Event by written notice to Owner. Owner shall have the right to terminate this Agreement upon sixty (60) days written notice to Distributor if the Force Majeure Event affecting Distributor is not prevalent throughout the recording industry in the United States and continues for one hundred and eighty (180) days. Distributor shall have the right to terminate this Agreement upon sixty (60) days notice to Owner if the Force Majeure Event affecting Owner is not prevalent throughout the recording industry in the United States and continues for one hundred and eighty (180) days.

Digital Distribution

Contract 1

For the purposes of this Agreement, “Force Majeure” shall mean any event which a Party hereto could not reasonably prevent or predict, such as fire, flood, acts of God or public enemy or terrorist, Internet failures or “hacking”, earthquakes, governmental or court order, national emergency, strikes or labor disputes, the effect of which it could not reasonably prevent or predict and which renders impossible or impractical the performance of contractual obligations either totally or in part.  The Party invoking a Force Majeure shall inform the other Party (either by notice, email, or telephonically) within five (5) business days of its occurrence by accurately describing all the circumstances of the situation involved and its effect upon the performance of its contractual obligations.  The taking place of a Force Majeure shall have the effect of suspending the obligations of the Party which has invoked the provisions of this Section to the extent such obligations are affected by the Force Majeure.  Contractual dates shall be extended for a period equal to the duration of a Force Majeure.  The cessation of a Force Majeure (in the judgment of the Party that invoked it) shall be communicated by the Party that invoked it to the other Party (either by notice, email, or telephonically) within five (5) business days of such cessation.

Contract 2

Force Majeure Event:  any act or event, whether foreseen or unforeseen, that meets all three of the following tests:  (i) the act or event prevents or delays a Party (the “Nonperforming Party”), in whole or in part, from (A) performing its obligations under this Agreement; or (B) satisfying any conditions to the other party’s (“Performing Party”) obligations under this Agreement; (ii) the act or event is beyond the reasonable control of and not the fault of the Nonperforming Party, and (iii) the act could not have been prevented by reasonable precautions and cannot reasonably be circumvented by the Nonperforming Party through the use of alternate sources, work‑around plans or other means.   Without limiting the generality of the foregoing, each of the following acts and events is deemed to meet the requirements of clauses (i) through (iii) and to be a Force Majeure Event: war, flood, lightning, drought, earthquake, fire, volcanic eruption, landslide, hurricane, cyclone, typhoon, tornado, explosion, civil disturbance, act of God or the public enemy, terrorist act, military action, epidemic, famine or plague, shipwreck, or strike, work-to-rule action, go-slow or similar labor difficulty or other similar or dissimilar causes.

Recording Agreement

If because of:  act of God; inevitable accident [an old common-law version of an unavoidable accident, like an accident caused by a deer jumping in front of a car]; fire; lockout, strike or other labor dispute; riot or civil commotion; act of public enemy; enactment, rule, order or act of any government or governmental instrumentality (whether federal, state, local or foreign); failure of technical facilities; failure or delay of transportation facilities; illness or incapacity of any performer or producer; or other cause of a similar or different nature not within Company’s control; Company is materially hampered in the recording, manufacture, distribution or sale of Records, then, without limiting Company’s rights, Company shall have the option by giving you notice to suspend Company’s obligations under this agreement for the duration of any such contingency.  If any suspension imposed under this paragraph by reason of an event affecting no Record manufacturer or distributor except Company continues for more than six (6) months, you may request Company, by notice, to terminate the suspension by notice to you within thirty (30) days after Company’s receipt of your notice.  If Company does not do so, this agreement shall terminate at the end of that thirty‑day (30) period (or at such earlier time which Company may designate by notice to you), and you shall be deemed to have fulfilled all of your obligations under this agreement except those obligations which survive the termination of this agreement (such as warranties, re‑recording restrictions and obligation to pay royalties.

Show Agreements

Contract 1

Each party’s obligations to perform hereunder will be excused in the case of a Force Majeure Event.  A “Force Majeure Event” is defined as acts, omissions, accidents and events which are beyond the reasonable control of the party claiming Force Majeure and which prohibit that party’s performance of its obligations under this Agreement including, without limitation, (i) acts of God, (ii) strikes or labor disruptions in the metropolitan area where the Event is scheduled to be held, (iii) civil riots or disturbances in the metropolitan area where the Event is scheduled to be held, (iv) weather events in the metropolitan area where the Event is scheduled to be held, (v) acts of terrorism in the metropolitan area where the Event is scheduled to be held, (vi) medical conditions, which result in quarantine or similar limitations or restrictions on travel or congregation in the metropolitan area where the Event is scheduled to be held, (vii) damage to the venue where the Event is scheduled to be held rendering it unsafe or unsuitable for giving of live entertainment performances.   In the case of Artist, a Force Majeure Event includes, without limitation, death, serious illness or incapacity of Artist which renders it impossible or not reasonably practical for Artist to attend the performance.  If the Event is cancelled due to a Force Majeure Event, the parties will use commercially reasonable efforts to schedule the Event on an alternate date.  

 Contract 2

In the event Show cannot reasonably be put on because of unpredictable occurrences such as an act of nature, government, or illness/disability of Band, the 50% deposit of Fee is non-refundable, but no other portion of Fee is due, and the parties may negotiate a substitute Show on the same terms as this Agreement save for the time of Show, with no further deposit of Fee due, in which case a new Agreement reflecting this will be signed by the parties. No further damages may be sought for failure to perform because of force majeure.

Hosting Agreement

Except as otherwise provided, if performance hereunder (other than payment) is interfered with by any condition beyond a party’s reasonable control, the affected party, upon giving prompt notice to the other party, shall be excused from such performance to the extent of such condition.  However, if a force majeure detrimentally affects a party’s performance of a material covenant hereunder for fourteen (14) days or more, the other party can terminate this Agreement.  Each party acknowledges that website operations may be affected by numerous factors outside of a party’s control.

Termination for Impossibility Force Majeure

As you can see from the examples given, contracts vary widely on what constitutes a force majeure event outside of a few core events.  They also vary on what action the parties are to take, tending toward short term suspensions with a right of termination.  Only two examples I could find actually mention “epidemic” while another refers to “quarantine” but it is fairly common to refer to what are essentially government orders which may include “state of emergency” type declarations such as that by the City of Austin that essentially caused the cancellation of SXSW.

Almost all refer to the contract law doctrine of “impossibility.”  What is that?  For example, A and B may contract for A to promote concerts at B’s venue on a “four wall” basis, but before the concerts can be performed, B’s venue burns to the ground.  Even if the contract between A and B is silent on force majeure, or refers obliquely to “acts of God,”  the continued existence of the venue is an implied term of the agreement.  In our example, as long as neither A nor B is an arsonist, a court might well find that both are released from their obligations under the agreement because performance is now literally impossible.  B may also be excused from paying A’s losses for promoting the event, or guarantees to performing artists.  The same could be true of heirs not being liable for a personal obligation to perform by a party who dies before the date that performance is due.

Less final intervening events may give rise to a suspension of performance for a period of time with performance subsequently rescheduled.  If the intervening event continues past a certain time period that would be long enough to make the performance stale or undesirable, then some force majeure clauses allow for termination.  It’s common to see this period be designated as six months in the entertainment industries which is usually designed to address labor strikes for companies that are signatories to collective bargaining agreements.

It is important to note that the clean hands–so to speak–of both parties is significant in these cases.  That determination may be proved to a court or jury in evidence by the party not affected by the force majeure event, or made by local police or other governmental authorities investigating the force majeure event.  Delays may result during the pendency of the investigation.

A force majeure event is generally thought to be an intervening event of a great magnitude outside the control of the parties.  The event may make performance impossible, as in the case of the venue that burns, or so difficult it will be deemed to be impossible if the parties bargained for that relief, such as if the venue were flooded due to a hurricane or condemned  due to an earthquake.

A fire that destroys a venue seems like the simple case compared to the coronavirus.  What about an epidemic?  How do you know that there is an “epidemic” in the first place?  One way might be to refer to a declaration of a government body, such as the World Health Organization.  That’s not always helpful.  For example, WHO declared on January 31, 2020 that the coronavirus constitutes a “public health emergency of international concern.”  Is that the same as an “epidemic”?

As we saw with the cancellation of SXSW, economic harm can occur even If there are no cases of coronavirus in your city, state or region, so is what WHO says even relevant in the force majeure analysis for you?  When the Mayor of Austin announced a “local state of disaster” and cancelled the event as a matter of social isolation, it was not because of something that had happened at that time, but rather because of something that might happen and a potential contagion which was anticipated to have dire consequences.  Including political consequences which should not be overlooked.

At the same time as the Mayor cancelled SXSW, the head of the Austin Health Authority acknowledged there was no clear scientific consensus on the effectiveness of cancelling mass gatherings.  While the Mayor’s action clearly affected interstate (and international) commerce and the lack of scientific consensus may seem arbitrary, no Constitutional challenges have yet been mounted (such as the Commerce Clause as well as substantive and procedural due process challenges to geographical quarantines, travel restrictions or “voluntary” social isolation).

In the case of Austin in particular, the city has long branded itself as the “Live Music Capitol of the World”.  The harm of the City’s decision to shut down SXSW could be extensive and long lasting and may result in a political reordering of the city if social isolation becomes the rule.

The question then becomes what is the force majeure event that produces the economic harm?  Is it the presence of the virus somewhere in the world?  The country?  The state?  The county?  The city?  The venue?  Or is the event actually the action of a government authority that may turn out to be an overreaction?  This may be important for analyzing the force majeure clause in a contract, and ultimately for interpreting an insurance policy.

It is well to consider the larger impact on the wider music business if venues start getting shut down, tours cancelled and festivals sidelined.  Record deals are made in anticipation of artists promoting their records, publishing deals may be contingent on record deals being in place, sponsorships may require live appearances at events and so on.  If the touring business is essentially shut down, the ripple effect could be substantial.  Social media alone will not replace touring.

It also must be said that Big Tech has tried for years to get us to believe that digital piracy actually helps artists and songwriters because it drives fans to shows.  Digital music services would have us believe that the artist data they can generate helps with routing tours and that benefit makes up for low royalties.  However stinky that assertion is, if there’s no touring or touring is severely cut back, then piracy and streaming income becomes even more important.

We will review various typical categories of insurance policies and then consider a few actions government could take to offset decisions to foreclose opportunities to work by local musicians and also to essentially shut down local venues.  Since insurance is likely to be unavailing, we will emphasize the importance of working with local musicians and venues to preserve the creative class in cities like Austin.  Because the City of Austin took the action to cancel SXSW, this role falls on government agencies devoted to the commercial music business, such as the Austin Music Office, but also other boards and commissions such as the Austin Music Commission.

I understand that the Mayor believed himself to be acting prudently in cancelling SXSW, and I neither commend nor criticize his decision.  Yet there are consequences from his decision that he has set in motion, and the Mayor needs to deal with those consequences, too.

Insurance

A typical way to address impossibility or force majeure is through insurance of various types.  Unfortunately, in the overwhelming majority of cases, diseases (and therefore epidemics) are excluded unless you have taken specific steps to include an endorsement for that purpose—assuming an endorsement is even available or available at a realistic price.  According to press reports, even SXSW did not have epidemic insurance endorsements to their wide ranging risk coverage.

Let’s consider different types of common insurance policies, but let’s also remember the cynic’s guiding principle of insurance—insurance companies exist to charge you a premium so they can deny coverage.  Almost every case will require policy interpretation and probably litigation.  My bet is there’s going to be lots and lots of litigation due to insurance claims being denied regarding the coronavirus.

Homeowners and Umbrella Personal Liability Coverage:  In a standard “HO3” homeowners policy, transmission of a communicable disease causing bodily injury or property damages is probably excluded (check the “Liability Coverages” paragraph).  Umbrella policies may cover communicable disease other than STDs, so it’s worth checking that coverage.  Travel insurance may cover cancellation due to emergency medical treatment for the traveler but you need to read that policy closely because coverage will turn on definitions as epidemics are probably excluded.

Cancellation Or Non-Appearance Coverage:  Traditional event cancellation or non-appearance insurance is offered by companies like Beazley or K&K/Aon and covers expenses and/or profits from a wide variety of events and perils.  (AEG famously insured its costs for Michael Jackson’s non appearance at 50 shows for the O2 Arena in London.)  These are often big-ticket policies which typically cover power failure, damage to leased or rented venues,  lack of access to the venue, failure of public transport facilities or denial of access (such as a terrorist attack or explosion), earthquakes, labor strikes, inability to erect facilities or staging at the venue, failure of broadcasts, and other previously unforeseen cause that is not the subject of an exclusion.   The policy also can cover both cancellation and non-appearance of key personnel for reasons of death or illness, as well as disease outbreak if not excluded, or just nonappearance. Larger policies are usually written through Lloyds of London or use Lloyds as a “reinsurance” guarantor.  It is almost certain that coronavirus will be excluded for policies written after January 2020, and of course these policies will have force majeure clauses.  Because these insurance contracts are essentially bespoke risk coverage for particular events, they will usually be very clear about what the carrier does and doesn’t cover.

Civil Authority Coverage:  If a shutdown of operations occurs due to a government order, civil authority coverage may be extended to include a disease outbreak.  This coverage was sold during the 2014 Ebola outbreak to cover losses from a government ordered shutdown of your business, a supply chain disruption, or a government ordered shutdown of common carriers such as airlines, ferries, trains and the like.  Those Ebola-related coverages were typically sold as an endorsement to a commercial property program.  If the harm can be shown to be the result of government action, it’s possible that civil authority coverage may offer some relief.

Commercial General Liability:  CGL policies may include “disease” in the definition of “bodily injury.”  Unless otherwise excluded, a venue with CGL might be covered if it did not take adequate precautions that helped spread the coronavirus.  Exclusions could be direct exclusion of communicable diseases, excluding pollution, or other exclusions.

Commercial Property Coverage:  Probably not covered unless a specific endorsement.

Business Interruption Coverage:  If your business closes because your employees are ill due to a disease outbreak, economic losses are probably not covered.  But—if the presence of disease on your business property constitutes “pollution”, you may have coverage for physical property damage due to the disease.

Contingent Business Interruption Coverage:  Usually coverage for you if your customer or vendor fails, but again if that loss is due to a disease outbreak, you are probably not covered absent a specific endorsement.

Environmental Insurance:  These policies may cover losses for bodily injury, clean up and property damage caused by “pollution” which may include viruses and bacteria.  However, it’s common to specify particular bacteria such as Legionella bacteria.

Supply Chain Insurance:  We are beginning to understand the strategic impact of locating so many elements of the U.S. supply chain in China.  Supply chain risk coverage typically would not require losses to physical property, just economic loss due to a supplier’s shut down or other disconnect.

Sovereign Disaster Risk:  Just for reference, the World Bank issues a parametric catastrophe bond that covers pandemic risks as part of its Pandemic Emergency Financing Facility.  The World Bank also sells pandemic risk swaps.  The International Bank for Reconstruction and Development also issues “capital at risk notes” designed to transfer the pandemic risks of low income countries to the global capital markets.  If this has a “Big Short” feel to it, let’s hope not.

Economic Development Action

It is unlikely that insurance is going to help solve the economic loss from cancellation of major tours, concerts and festivals.  Therefore when a government takes action that creates a sudden economic contraction, government should also be prepared to take ameliorative action that helps support local businesses.  In the case of SXSW, there are many downtown businesses that make their year during SXSW, or a good portion of their annual revenues.

If those businesses, especially venues, cannot make payroll or rent, they will close.  As we saw from the Austin Music Census, landlords already are trying to raise rents beyond what venues can reasonably pay, so we have to assume that they will be more than happy to let venues out of their leases—never to return.  If enough venues close—already an endangered species in Austin—then there will be less and less reason to brand Austin as the “Live Music Capitol of the World” and the entire character of the city may change.

Economic Stimulus:  “Affected Venues” and “Affected Musicians” should be criteria based categories of individuals who would be eligible for relief.  State and local governments have some economic levers available to them such as utilities and tax relief.  The Mayor of Austin and mayors of other affected cities should take steps to obtain any federal disaster relief funding available for Affected Venues and Affected Musicians relating to coronavirus (perhaps as part of the federal coronavirus funding).

Tax Relief:  Restaurants large and small, hotels, and others in the hospitality industry as well as supermarkets have no doubt stored large stockpiles of perishable foods in anticipation of SXSW visitors.  There are a lot of hungry people in Central Texas–just ask the Central Texas Food Bank.  Austin has more nonprofits per person than any other city in the country.  These restaurants know where to take their unused food, but give them extraordinary and immediate tax reduction for giving away this food.

Revision of Quarantine Laws:  If decisions are taken by state and local authorities to exercise state police powers to give effect to quarantines or quarantine zones, it is likely that their will be a wave of new legislation to target those powers as most existing quarantine laws have been on the books over 50 years due to the decline in infectious disease.  (A review of quarantine authority was listed as a priority for state governments in the President’s 2002 National Strategy for Homeland Security, but it’s doubtful much was done.)

I will return to this topic in coming weeks and months, but I think a few conclusions are obvious:  First, there may well be a cascading effect of a wide variety of entities reviewing and potentially exercising any force majeure rights they have in existing agreements.  Force majeure clauses will be closely scrutinized in future agreements.  Like force majeure rights in contracts, insurance policies will be closely scrutinized and coverage will likely be litigated.

But the most obvious conclusion is that state and local governments wishing to preserve the cultural and economic base of their cities and regions once this contagion passes must be proactive with alternatives if they are going to order an entire industry to shut down.

 

 

 

2 thoughts on “Pandemic: Force Majeure Contracts and Insurance in the Music Business

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