Material adverse change clause in the spotlight
The FA Premier League v PPLive Sports International (High Court) [2022]
Contracts will sometimes contain a clause which is designed to protect one or maybe both parties from fundamental changes to the subject matter of the contract. This case featured one such contract and highlighted the need to pay close attention to the drafting. The case was also notable for what the judge said about ‘good faith negotiations'.
Facts:
The Premier League, entered into two contracts granting PPL rights to broadcast Premier League football matches within mainland China and Macau for three seasons starting with 2019/20. The first contract, the Live Package Agreement (LPA), related to live and delayed matches. The second contract, the Clips Package Agreement (CPA), related to highlights.
The 2019/20 season was severely disrupted by the Covid-19 pandemic. It was temporarily suspended on 13 March and formally suspended on 3 April. When the competition resumed in June 2020 it was under very different conditions, though the season was completed by the end of July 2020 through the remaining games being played to a compressed timetable.
PPL failed to pay two instalment payments under the contracts. Despite the non-payment, the Premier League continued to provide PPL with the relevant feeds of matches under both contracts for the remainder of the season.
In September 2020 the Premier League served notice terminating both contracts under their terms. It then brought proceedings seeking payment of the two outstanding instalments. It applied for summary judgment on the basis that PPL had no real prospect of successfully defending the claim.
Under clause 12.1(d) of the LPA contract, the Premier League undertook that:
“(d) during the Term the format of the Competition will not undergo any fundamental change which would have a material adverse effect on the exercise of the Rights by the Licensee.”
If there was such a fundamental change, PPL was “entitled to enter into a period of good faith negotiations with the Premier League in order to discuss a possible reduction of the Fees payable” to reflect the effect of that fundamental change on PPL’s exercise of the rights granted under the contract.
The LPA also had a force majeure clause, defined as “any strike, lockout, labour disturbance, government action, riot, armed conflict, Act of God, period of mourning as a result of the death of a reigning monarch, accident or adverse weather conditions…”. Neither party relied on force majeure.
PPL’s primary argument was that clause 12.1(d) had been triggered and that provided it with a defence to the claim.
Decision:
The High Court found in favour of the Premier League.
The judge said there was no doubt that, after the 2019/2020 season resumed, there were significant changes to how the matches that remained to be completed were played: no fans were permitted to attend; the remaining fixtures were condensed into a five week period; a significant number were rescheduled; and kick-off times were modified so that many more matches began late at night (in China/Macau).
The question was whether the changes were properly characterised as a “fundamental change” within the scope (as dictated by the wording) of clause 12.1(d) viewed in the context of the agreement as a whole. It was only if they could be so characterised that the court would have to consider whether those changes had a “material adverse effect on the exercise of the Rights” by PPL. The judge said that, if it was necessary to consider that latter point, it would not be suitable for summary determination so a trial would be needed (although he did say that, in his judgment, PPL would have a realistic prospect of success at trial on the material adverse effect issue).
Performing that exercise, the judge concluded that there was no fundamental change to the “format of the Competition”. Format did not include kick off times, the days matches were played, or whether there were fans present. The expression referred to the structure of the competition between the member clubs.
The judge considered that this result was clear from the words used in the LPA and particularly the ultimate discretion that the Premier League reserved in the contract over scheduling the dates and times of matches.
If there had been a fundamental change to the format of the competition, the judge said (obiter) that he would have rejected the Premier League’s submission that the good faith negotiation requirement in clause 12.1(d) was unenforceable based on Walford v Miles [1992]. As the judge put it, “the concept of good faith in contracts in English law has moved on a great deal” since that case. Accordingly, such a term should not simply be ignored.
The basis upon which the judge drew the distinction was that the Walford case involved an attempt to try to agree a contract (for the sale of a company and property) where one did not at that point exist. This was thought to be different in character from a clause within a subsisting contract. The justification for coming to a different conclusion is seemingly to avoid time consuming and expensive litigation. The court will not compel the parties to reach agreement but may prevent a party from litigating or arbitrating until the period for such negotiations has passed (or a reasonable period if no specific duration is specified).
The LPA made clear that, if it was terminated under its terms, that would not affect any obligation falling due for performance prior to such termination. Accordingly, the instalments had to be paid.
Points to Note:
- As the judge made clear, English contract law does not require, or expect contracts to be renegotiated or rewritten simply because events transpire differently to what was expected.
- The obligation to enter ‘good faith negotiations’ is probably easy to overstate. The obligation to actively attend and participate in settlement negotiations has long been recognised and enforced by the courts. Such provisions should not simply be ignored so a flat refusal to attend discussions is probably unwise. Despite this, a contracting party can rarely, if ever, be compelled to come to a negotiated agreement to vary or waive the terms of the contract, however reasonable or unreasonable that position might be and that remains the position.