We are pleased to bring to you our next Guest Post by Ms. Savni D. Endlaw, Associate Partner and Ms. Sneha Jain, Partner at Saikrishna & Associates.
Savni and Sneha are a part of Saikrishna’s litigation and dispute resolution team. They represent some of the top tech companies (social media, e-commerce, aggregators etc.), OTT service providers, broadcasters, authors, and publishers with focussed advise on technology laws, media and entertainment laws, cross-border IP issues, sports law, intermediary liability, privacy laws, and defamation laws.
With the Star Wars Day around the corner, one would usually expect lots of Star Wars related events and exhibitions lined up. However, the Coronavirus (COVID-19) has played a dampener. Though fans will not be deterred as a virtual Star Wars Convention has been organised for May the 4th. News reports also indicate that the digital release of Star Wars: The Rise of the Skywalker on Disney Plus has been advanced two months early to be on May the 4th.
While the usual industry-practise (till now) was to release films in a staggered manner – first in theatres, then on television and finally on the Internet, the COVID-19 pandemic is already giving rise to a new normal. Earlier, producers would provide an exclusivity window to each mode of exploitation. However, now first releases on Internet or television are becoming common. Rights owners have already started adopting this model. See here and here.
This leads to the question – can a theatre owner claim breach by a producer for first releasing the film on television / the Internet or would a producer be able to claim discharge due to impossibility in light of shutting down of theatres due to COVID-19?
While there is a whole body of case law on the general law of frustration, despite best efforts, no case in the context of frustration of an IP license could be found.
This article attempts to identify the relevant tests for claim of frustration of an IP contract from the existing non-IP cases.
The general categorisation of an event / occurrence, like the mass lockdown due to COVID-19, as a ‘force majeure’ event per se is meaningless, unless (i) the event actually impacts the obligations under a contract, and / or (ii) the event falls within the definition of ‘force majeure’, if provided in the contract.
For example, in an author’s contract to timely deliver a manuscript for timely print and online publication by a publisher, the author’s obligation to timely deliver the script in unlikely to be impacted by COVID-19 as the internet is still functional to deliver the script by email. For the same reason, the publisher’s obligation to timely publish online may not be impacted. However, the publisher’s obligation to timely publish in print may arguably be impacted as COVID-19 has led to shutting down of printing presses. Further, the exclusive window of release between print and online (if any) may arguably also be impacted.
Thus, as a first step, a party should assess all the obligations to be performed under the contract and delineate those impacted due to COVID-19. Obligations that remain unaffected cannot be avoided citing COVID-19.
However, if any contractual obligations are impacted, the next step is to assess whether the contract itself anticipates the consequences of the force majeure event, either expressly or impliedly. Indian laws treat a contract as sacrosanct and the intention of the parties is always given precedence. Thus, if parties have defined ‘force majeure’ in their contracts broadly enough to cover COVID-19, courts will give precedence to such intention and treat the contracts as contingent contracts under Section 32.
However, absence of a force majeure clause in contracts does not imply that parties have no option to seek discharge due to impossibility. Section 56 of the Contract Act provides that a contract to do an act becomes void when that act becomes impossible to perform. As a result, even in the absence of a specific force majeure clause covering COVID-19, such a discharge may be envisaged under Section 56.
Interestingly, on 19th February 2020, the Procurement Division, Dept. of Expenditure, Ministry of Finance issued an Office Memoranda clarifying that breach in the supply chains due to COVID-19 will fall within the Force Majeure Clause of the government procurement contracts. Notably, the definition of ‘force majeure’ in the Procurement Manual did not include a ‘pandemic’; yet, the Government chose to expand this definition by categorizing COVID-19 as a ‘natural calamity’ for the purposes of this clause. However, not all contracting parties may be so expansive. Hence, if the contractual definition does not cover COVID-19, parties may still seek recourse to Section 56. In such cases, relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement (Satyabrata Ghose v Mugneeram Bangur & Co. and Anr., 1954 SCR 310)
This leads the assessment to its third step, i.e. parties should identify whether the impacted obligations form the core / crux of the contract. Parties will be able to claim discharge due to impossibility if an unforeseen supervening event renders the performance of an act impracticable and useless vis-à-vis the object and purpose of the contract, such that it totally upsets the very foundation upon which the parties rested their bargain (Satyabrata Ghose v Mugneeram Bangur & Co. and Anr., 1954 SCR 310).
Pertinently, the mere physical or literal impossibility of performance does not discharge a party from a contractual obligation, even if such impossibility is due to an unforeseen supervening event. As a fourth step, parties must assess whether impacted obligations have been rendered completely impossible or have merely become onerous. If the supervening event has led to a fundamentally different situation that was not agreed or contemplated between the parties, the contract or contractual obligation arguably ceases to bind the parties and becomes void. However, if the event has merely made the performance of the obligation more onerous and where performance is otherwise possible, the parties are not discharged from their obligations (Alopi Parshad & Sons Ltd. v. UOI, (1960) 2 SCR 793 approved in Energy Watchdog v CERC & Ors., (2017) 14 SCC 80).
This assessment of the third and fourth step is at the centre of any adjudication on discharge due to impossibility and is highly fact specific. The Supreme Court quotes the celebrated English Sea Angel case with approval in the Energy Watchdog case holding that the application of the doctrine of frustration involves a multi-factorial approach – analysing (a) the terms of the contract itself, (b) its matrix or context, (c) the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, so far as these can be ascribed mutually and objectively, (d) the nature of the supervening event, and (e) the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. The judgment quotes further that the (a) doctrine of frustration is not to be lightly invoked, (b) mere incidences of expense or of delay or onerousness is not sufficient, (c) the test of ‘radically different’ assumes importance, and (d) there has to be a break in identify between the contract as contemplated and its performance in the new circumstances.
In this background, the clause permitting severability of contractual obligations assumes importance. If the obligations that have been rendered impossible are severable from the other obligations in the contract, it shall survive to the extent of such other obligations. This survival of the contract is subject to proof that the scope and intention of the agreement is not entirely altered due to the severance, and the crux of the contract remains intact. In other words, for severance of the impossible obligations, the contract, shorn of the offending part, must retain the characteristics of a valid contract (Shin Satellite Public Co. Ltd. v. M/s Jain Studios Ltd., JT 2006 (2) SC 89). Hence, testing the severability of obligations under the contract would be the fifth step / consideration for assessing whether to seek discharge or continuation of a contract.
To summarise, in order to assess whether discharge of an IP licensing agreement can be sought, the following steps / tests ought to be considered:
- Assess the obligations under a contract and delineate those obligations that are impacted.
- Assess whether the contract contains a ‘force majeure’ clause and if yes, whether the event leading to impossibility is covered within its scope.
- Assess whether the impacted obligations form the object and purpose of the contract i.e. the fundamental core of the contract.
- Assess whether the impacted obligations have been rendered impossible or are merely rendered onerous.
- Assess whether the impacted obligations are severable from the other obligations in the contract.
Applying these steps / tests to the earlier example of the author-publisher contract, arguably, the print publication is merely delayed and not rendered impossible for all times to come. This publisher may be unable to avoid the print obligation completely on grounds of COVID-19. At the most, the publisher may avoid an allegation of breach for delayed performance, but such a delay will not render the contract itself void or empower the publisher to avoid the print obligation altogether. However, at the same time, if the print publication is time-sensitive (if it must coincide with another event such as ‘Diwali’ or the release of Star Wars: The Rise of the Skywalker), the publisher may then argue impossibility and frustration.
Similarly, a theatre owner may argue that COVID-19 has only led to a delay in the theatrical release making the compliance of the first window of release and exclusivity obligation more onerous but does not render it impossible. A producer who has violated this obligation and permitted first release on television / the Internet may arguably be unable to avoid allegations of breach and may be liable for damages. On the other hand, such a producer may also argue that (a) there is a clear break in identity between the contract as entered in normal circumstances and its performance in the current pandemic where people are in lockdown having access only to television and Internet as sources of entertainment, and (b) in any event, the film can still be released theatrically whenever the lockdown is lifted. If at all there is any exposure, only the earnings would be impacted.
Be that as it may, since, a contract forms the basis of the issue of impossibility of performance and since, contractual adjudications are an assessment of risk-allocation, it would be interesting to see where courts allot the risk of supervening events leading to impossibility in IP disputes sought to avoided due to COVID-19.
Note: Views are personal and not of the employer.