An Analysis of COVID-19’s Effect on Force Majeure Clauses
COVID-19 has resulted in almost complete suspension of footballing activity globally, drastically impacting club revenue, rendering them unable to fulfil existing contracting obligations.
In the latest article for The Legal Pitch, 3rd year LLB Law with Chinese Law student, Muqaddas Hussain considers the extent to which a global pandemic qualifies for ‘force majeure’, and whether this justifies excusing a club’s non-payment of contractually agreed salaries, with reference to FIFA’s recent decision in Nikolay Bodurov vs Esteghlal. Future trainee solicitor of Latham and Watkins, Fadzai Ramwi, provides an additional legal opinion regarding the case outcome.
To begin, force majeure clauses are defined as contractual provisions that excuse one or both parties’ performance of their obligations when an extraordinary event or circumstance, beyond their control, arises. Force majeure clauses are usually listed as ‘any case beyond the parties’ control’ and thus, businesses may extend legal terms in contracts to allow for events that may hinder or prevent full performance of said contractual obligation. Without such a clause, parties may be liable for breach, or the contract to be terminated/frustrated.
The case in question concerns Bulgarian ‘Player,’ Nikolay Bodurov and the Iranian ‘Club,’ Esteghlal. We will refer to said phrases (‘The Player’ and ‘The Club’) as the legal terminology throughout.
Budurov is a Bulgarian football player, who opened his career at childhood club Pirin Blagoevgrad in 2004. The 5’11 centre-half made a total of 428 league appearances, with his most notable stint being two years at Fulham FC in the Championship from 2014-16. Despite being relatively unknown in the British footballing sphere, Budurov had a solid playing career, and endured a lengthy spell in the Bulgarian national team, appearing 50 times for his country. This case considers Budurov’s contract with his latest club, Esteghlal.
Back in January 2020, The Player entered into a short-term employment contract with the Iranian Club, lasting until 31 May 2020. This included, in accordance to Clause IV.1(a) of the contract between Budurov and Esteghlal, the Players’ “right to be paid for the activity performed,’’ that is defined as playing during the season. The Player was set to be paid €25,000 per month, with an additional €10,000 to be paid to his agent, Latchezar Tanev.
Iran entered national ‘lockdown’ on 27 February 2020, as a result of the COVID-19 pandemic. Subsequently, on 14 March the Club announced training was suspended until further notice. The same day, Nikolay demanded his 2 months outstanding salaries in line with Article 14bis of the FIFA Regulations on the Status and Transfer of Players (RSTP). The parties had agreed to be ‘governed by FIFA Regulations and subsidiary by Swiss Law,’ under Article 7 of their contract.
Article 14bis considers ‘terminating a contract with just cause for outstanding salaries’ and states a player must give the debtor club, in this case Esteghlal, 15 days to fully comply with its financial obligations before they can terminate a contract with just cause on the basis of two outstanding monthly salaries. The Player indicated that he gave a final deadline of 29th March 2020 in reply on the same day, and reminded the Club that failure to comply would lead him to terminate the contract under the provisions of FIFA RSTP. The club requested an extension for the payment to be made, but did not specify its request, so the Player merely ignored this.
Additionally, the agent’s fees were still owed at this point, under Article 3.6 of the contract.
No payments were made, nor was there any evidence of processing payments. Thus, the Player unilaterally terminated his contract on 30th March 2020, on the basis of outstanding remuneration. There was a series of correspondence between the parties on the same day. The Player received an email from the Club explaining they had commenced disciplinary action against him for leaving Iran on the 6th March without their permission. Responding, the Player informed the Club that they could not open disciplinary proceedings after his termination of the contract.
The ‘Player’s’ arguments
The player lodged a claim before the FIFA Dispute Resolution Chamber, (henceforth DRC) for both outstanding remuneration and compensation for the breached contract, amounting to €135,000 in May.
He submitted that since two months salaries were overdue, as well as the agents fee, he was entitled to make his demand for payment within 15 days under Article 14bis RSTP. He pointed out that the Club’s request for an extended payment deadline on 27 March 2020 was not specific enough, entitling him to ignore it.
Since the Club failed to pay, he concluded he terminated his contract with just cause because of outstanding salary payments. This is essentially a contractual clause allowing termination of contract without notice.
The ‘Club’s’ response
The Club made 3 key arguments.
1. When the Player left Iran on 6th March 2020 only one-month salary and the agents fee was overdue.
2. The Player allegedly terminated the contract during a situation of force majeure, in a period in which the contract was suspended. Thus, the Players termination of the contract was without just cause.
3. While not denying that they owed the Player outstanding salaries, they claimed it was his responsibility to understand the difficulties of Iran’s banking system. Subject to international sanctions, the Player should have understood the impossibility for the Club to make timely payments.
Dispute Resolution Chamber’s Decision
The DRC referred to the COVID-19 Guidelines issued by FIFA in response to the pandemic. These aimed to mitigate the disruptive consequences of COVID-19, and ensure responses focused on the common interest. The FIFA COVID-19 FAQ, provided further clarification on common regulatory matters.
The issues surrounding force majeure arise as the Club contested the Player’s termination of the contract on 30th March 2020, took place during a force majeure event as the pandemic caused this period of unforeseen contractual suspension. Analysing this argument, the DRC made reference to the FIFA issued COVID-19 Guidelines and FIFA COVID-19 FAQs in direct response to the uncertainty around the pandemic. They found that on the basis of these documents, FIFA did not state that the COVID-19 outbreak was a force majeure situation in any specific country or territory, or that any specific employment or transfer agreement was impacted by the concept of force majeure.
They added, in any dispute it is for the party relying on the legal principle of force majeure to necessarily prove the existence of the event in their case, in accordance with the legal requirements. Hence, whether or not a situation qualifying for force majeure is proven, is a question of law and fact, to be considered on a case-by-case basis. Here, the Club failed to provide substantial evidence to justify the existence of a force majeure scenario.
An interesting finding the panel made was that parties can only invoke COVID-19 specific Guidelines and FAQs when and if they had attempted to vary contract clauses in response to the situation caused by pandemic directly. Since the Club did not vary the contract in light of the situation arising due to the pandemic, they could not rely on these documents.
(Image courtesy of City People Magazine), FIFA DRC
The DRC rejected all of ‘The Club’s’ arguments. Their claim of Iran’s banking system being a hindrance to timely payment, was deemed inadequate to justify their failure to carry out their contractual obligations to the Player. In fact, they claimed that the payments should have been made to the Player before the football season was suspended due to the pandemic. They emphasised that complications arising from COVID-19 do not excuse past failures to fulfil contractual obligations, as was the case here since the outstanding payments were from the period before suspension. As such, the Club was not found to have offered a valid explanation for their non-payment.
‘The Player’s’ arguments were partially accepted, except in relation to agent fees. Specifically, Budurov was found to have satisfied the requirements of Article 14bis, requiring the Player to put the debtor club in default in writing and grant them at least 15 days to fully comply with their financial obligation(s). This was the case, consequently granting the Player a just cause to terminate his contract as the Club unlawfully failed to make at least two months salaries. While the club attempted to rebut this, the DRC found by the time football was formally suspended, two months salaries were already overdue, nor did the Club raise issues with the Player leaving Iran prior to his contractual termination.
Where the Club submitted that termination of the contract was not allowed because of the alleged force majeure situation caused by COVID-19, the DRC stated their failure to submit any evidence or allegations that they faced a force majeure situation beforehand nullified this claim. Further, while the Club made some reference to continuing the football season after 24th June 2020, but failed to make explicit reference to how this would affect the Player’s contract, was also negated. It was thus concluded that force majeure could not be satisfied.
Assessing the outcome
The FIFA Guidelines were expected to bring a measure of safety by protecting the interests of both Players and Clubs, securing contractual stability between both parties during the pandemic. While FIFA announced that COVID-19 is a force majeure event for football generally, they refused to determine whether it represents a force majeure circumstance in any specific country or territory. The requirement for a case-by-case assessment for such circumstances allows for the parties’ original intentions to be more closely maintained. A blanket approach, whereby COVID-19 qualifies for force majeure in all circumstances would be far too generous in allowing parties to overcome their contractual responsibilities by having easy claim of this provision. It would give unfair advantage to debtor clubs, who due want legal recourse to avoid previously agreed payments of salaries. As such, the DRC’s decision in relation to Bodurov and Esteghlal seems reasonable in that it wishes to limit the use of force majeure clauses, as to respect the original contractual agreement and protect both parties to some extent. Indeed, the protection of the Player’s financial interests in this case, only outweighs the Club’s interest in relation to claiming force majeure, due to a failure to observe the correct steps to come under the protection of the Guidelines.
Yet, it is worth noting that while this allows for the proper interpretation of force majeure provisions, as these clauses are legally required to be considered on their precise terms and context, it means this case has limited potential for guiding future cases contesting the existence of force majeure. Nor does it set any specific precedent, besides outlining that a case-by-case approach is to be taken. This is understandable however, given the required flexibility as a result of the COVID-19 related disruptions in sports.
Additional Legal Opinion, Fadzai Ramwi
In my opinion, there are two important findings by the Panel that clubs can consider in the course of any future action they take. First, the finding that clubs can only rely on the Guidelines and FAQs if the employment contract has been varied in advance of the contracts termination by any player. As ‘the Club’ in this case had not varied the contract prior to the Player’s termination of the contract, they could not invoke the force majeure clause. Therefore, it is a lesson for clubs to ensure that if they wish to rely on this clause, they must vary player contracts ex ante any contractual termination by any player. Second, the Panel found that the party relying on the force majeure clause had to provide some evidence to prove that the situation they were in “…was to be considered a situation of force majeure.” (Paragraph 27) Again, the Club in this case failed to give evidence proving this. Therefore, if future clubs are seeking to rely on the force majeure clause, they must also be able to provide evidence of their financial situation impacting their ability to fulfil contractual obligations.
Whilst these two points seem relatively clear, there is an element of uncertainty, particularly with the second point about parties having to provide evidence of the situation they were in which warranted a force majeure. This is because the Panel did not clarify the kind of situation that clubs need to be in, in order to be able to rely on the Guidelines and FAQs. Further, the Panel did not shed light on the kind of evidence that would substantiate proof of a force majeure. In my opinion, these gaps in the law could cause a lack of certainty for any clubs that find themselves in similar situations in the future. However, it is important to note that as we face unprecedented times due to COVID-19 and there ceases to be updated case law regarding force majeure clauses, it is inevitable for some uncertainties to arise.
Additionally, as each case will be reviewed on a case-by-case analysis to ensure that the parties’ original intentions are maintained, perhaps it would not be useful to have such a rigid framework. Perhaps it is the case that the gaps leave space for flexibility which enables each case to be judged on its own merits. Therefore, it is arguable that the case strikes the correct balance between flexibility and certainty. The certainty is derived from the Panel outlining two conditions that have to be satisfied (the variation of the contract pre-termination by any player and evidence of the club’s situation which resulted in a force majeure) whilst the flexibility is derived from the areas that have not been clarified. In light of this, it is difficult to accurately predict how a similar case would play out, as it would depend on the party’s individual experience.