The movie and television industries have been devastated by the COVID-19 virus. Almost all production has been halted, theaters have shuttered and cast and crew have been furloughed or terminated. Delivery of films to networks and streaming outlets have been delayed and, in some instances, productions may never resume. If a producer was in the middle of a shoot when forced to shut down, it may be impossible to restart, because the cast and crew may have conflicting commitments that preclude them from resuming their work at a later time.
Many movie industry contracts contain a Force Majeure clause to deal with situations like the COVID-19 pandemic. This is one of those boilerplate clauses that parties rarely pay much attention to or bother to negotiate. However, the clause is important because it may excuse the performance of one or more parties who cannot fulfill their obligations because of something outside their control, like an earthquake, war or a pandemic. Sometimes these events are referred to as Acts of God. These events may excuse a breach of an agreement by either party because they are deemed unforeseeable. So, for example, if a producer in the midst of production of a television series has to stop production because of a pandemic, the producer may be able to terminate or suspend the performers employed, without any obligation to pay them the balance of their salary for the rest of the season.
Here is a typical force majeure clause found in many artist employment agreements:
FORCE MAJEURE: During the Term, in the event that the development or production of the Series for which Artist is rendering services hereunder are materially hampered, interrupted or interfered with by reason of an event of force majeure or by virtue of any other disruptive event which is beyond Producer's control or a labor dispute, strike or lockout (collectively, "Force Majeure"), Producer shall have the right to suspend this Agreement pursuant to the provisions regarding suspension. Producer may terminate this Agreement at any time upon written notice during the continuation of such event of Force Majeure, and regardless of whether Producer shall have exercised the right of suspension. If this Agreement is terminated pursuant to any of the provisions of this paragraph, Producer shall be released from and relieved of all further obligations and liabilities to Artist, other than Producer's obligation to pay Artist such compensation, if any, as may be due and payable to Artist hereunder at the time of such termination.
Under such a provision, the obligations of the parties to each other can be terminated or suspended. The provision works both ways. It might excuse an actor failing to show up at a location because flights have been cancelled, or it might excuse a producer who suspends or terminates the actor because the shoot had to shut down.
The clause above does not explicitly mention that a disease or a pandemic qualifies as a force majeure and sometimes it may not be clear if a party has been prevented from fulfilling their obligations or just that the event has made it more difficult or expensive to do so. In the case of shooting in Los Angeles, since local authorities have prohibited shooting in the entire County, there is no question that COVID-19 has shut down all productions here.
A producer’s liability from a shutdown might be reimbursable if the producer has a completion bond or business interruption insurance. A completion bond is a type of insurance that guarantees completion of film even if the production goes over budget. Typically, the insurance covers extra costs incurred due to the death, illness, incapacity, default of the producer, director, any principal cast member or other person essential to the production. It also covers the occurrence of an event of force majeure. Before issuing a policy, the completion guarantor will require a realistic budget, with a ten percent contingency amount for unforeseen cost overruns, and an automatic extension of the delivery deadline for up to three months. The insurer will also require that experienced crew be hired. However, not all productions have completion bonds. Many studios self-insure and independent filmmakers with budgets less than one million dollars cannot obtain this kind of insurance.
Business interruption insurance can also cover lost profits and costs that result from disruptions in a company’s supply chain, including failures by suppliers or the inability to sell to customers. However, after the 2002 SARS outbreak, some insurers excluded communicable diseases from their coverage.
Even without insurance or a force majeure clause to rely on in one’s contract, a party could assert the impossibility defense if they fail to live up to their obligations because of unforeseen circumstances. Thus, a producer who misses a delivery deadline could argue that the pandemic made it impossible for him to deliver the production on time, and therefore his failure should be excused. A party relying on the defense of impossibility of performance must establish (1) the unexpected occurrence of an intervening act, (2) that occurrence was of such a character that its non-occurrence was a basic assumption of the agreement of the parties, and (3) that occurrence made performance impracticable[1] Under California law, impossibility of performance will excuse a party's performance under a contract.[2]
The impact of COVID-19 is going to financially hurt many people in the movie industry, including the workers, executives and companies large and small that produce and distribute content. Some companies may not survive. However, the demand for entertainment will surely endure after this crisis is over.
[1] Restatement (Second) of Contracts § 261. In re Janssens, 449 B.R. 42 (Bankr. D. Md. 2010), judgment aff'd on other grounds, 2011 WL 1642575 (D. Md. 2011).
[2] In re Toyota Motor Corp., 790 F. Supp. 2d 1152, 85 Fed. R. Evid. Serv. 451 (C.D. Cal. 2011) (applying California law).
Many movie industry contracts contain a Force Majeure clause to deal with situations like the COVID-19 pandemic. This is one of those boilerplate clauses that parties rarely pay much attention to or bother to negotiate. However, the clause is important because it may excuse the performance of one or more parties who cannot fulfill their obligations because of something outside their control, like an earthquake, war or a pandemic. Sometimes these events are referred to as Acts of God. These events may excuse a breach of an agreement by either party because they are deemed unforeseeable. So, for example, if a producer in the midst of production of a television series has to stop production because of a pandemic, the producer may be able to terminate or suspend the performers employed, without any obligation to pay them the balance of their salary for the rest of the season.
Here is a typical force majeure clause found in many artist employment agreements:
FORCE MAJEURE: During the Term, in the event that the development or production of the Series for which Artist is rendering services hereunder are materially hampered, interrupted or interfered with by reason of an event of force majeure or by virtue of any other disruptive event which is beyond Producer's control or a labor dispute, strike or lockout (collectively, "Force Majeure"), Producer shall have the right to suspend this Agreement pursuant to the provisions regarding suspension. Producer may terminate this Agreement at any time upon written notice during the continuation of such event of Force Majeure, and regardless of whether Producer shall have exercised the right of suspension. If this Agreement is terminated pursuant to any of the provisions of this paragraph, Producer shall be released from and relieved of all further obligations and liabilities to Artist, other than Producer's obligation to pay Artist such compensation, if any, as may be due and payable to Artist hereunder at the time of such termination.
Under such a provision, the obligations of the parties to each other can be terminated or suspended. The provision works both ways. It might excuse an actor failing to show up at a location because flights have been cancelled, or it might excuse a producer who suspends or terminates the actor because the shoot had to shut down.
The clause above does not explicitly mention that a disease or a pandemic qualifies as a force majeure and sometimes it may not be clear if a party has been prevented from fulfilling their obligations or just that the event has made it more difficult or expensive to do so. In the case of shooting in Los Angeles, since local authorities have prohibited shooting in the entire County, there is no question that COVID-19 has shut down all productions here.
A producer’s liability from a shutdown might be reimbursable if the producer has a completion bond or business interruption insurance. A completion bond is a type of insurance that guarantees completion of film even if the production goes over budget. Typically, the insurance covers extra costs incurred due to the death, illness, incapacity, default of the producer, director, any principal cast member or other person essential to the production. It also covers the occurrence of an event of force majeure. Before issuing a policy, the completion guarantor will require a realistic budget, with a ten percent contingency amount for unforeseen cost overruns, and an automatic extension of the delivery deadline for up to three months. The insurer will also require that experienced crew be hired. However, not all productions have completion bonds. Many studios self-insure and independent filmmakers with budgets less than one million dollars cannot obtain this kind of insurance.
Business interruption insurance can also cover lost profits and costs that result from disruptions in a company’s supply chain, including failures by suppliers or the inability to sell to customers. However, after the 2002 SARS outbreak, some insurers excluded communicable diseases from their coverage.
Even without insurance or a force majeure clause to rely on in one’s contract, a party could assert the impossibility defense if they fail to live up to their obligations because of unforeseen circumstances. Thus, a producer who misses a delivery deadline could argue that the pandemic made it impossible for him to deliver the production on time, and therefore his failure should be excused. A party relying on the defense of impossibility of performance must establish (1) the unexpected occurrence of an intervening act, (2) that occurrence was of such a character that its non-occurrence was a basic assumption of the agreement of the parties, and (3) that occurrence made performance impracticable[1] Under California law, impossibility of performance will excuse a party's performance under a contract.[2]
The impact of COVID-19 is going to financially hurt many people in the movie industry, including the workers, executives and companies large and small that produce and distribute content. Some companies may not survive. However, the demand for entertainment will surely endure after this crisis is over.
[1] Restatement (Second) of Contracts § 261. In re Janssens, 449 B.R. 42 (Bankr. D. Md. 2010), judgment aff'd on other grounds, 2011 WL 1642575 (D. Md. 2011).
[2] In re Toyota Motor Corp., 790 F. Supp. 2d 1152, 85 Fed. R. Evid. Serv. 451 (C.D. Cal. 2011) (applying California law).
