An Ill-fitting Jigsaw: Frustration in Media Asset Financing Transactions

In media asset financing transactions, it is quite often the case that a jigsaw of interlocking contracts has to be put in place.

Article first appeared in Entertainment Law Review, Issue 7, 2013

Background

In media asset financing transactions, it is quite often the case that a jigsaw of interlocking contracts has to be put in place. Sometimes the pieces of the agreement jig saw don’t necessarily fit and parties to a transaction are left at an impasse because they can neither complete the jigsaw nor terminate the individual arrangements that make up the jigsaw. Does the law provide a solution to this problem? This article aims to explore the legal concept of frustration as a potential mechanism to discharge an agreement in the context of media asset financing.

The scenario

The conundrum can best be illustrated by means of a hypothetical scenario. For example, a producer might enter into an arrangement with a distributor to part finance a film or television programme, in expectation that it would also enter into an agreement with a second distributor of a major territory to finance the remainder of the budget. Indeed, as a way of ensuring that the film or programme will be released to market worldwide, the first distributor might even make it a condition of its money being available that the deal with the second distributor is done. What happens if the agreement with the second distributor cannot be entered into because of the commercial terms of the agreement with the first distributor? For example, if the first distributor is granted worldwide ancillary rights and the second distributor will not conclude a deal without being granted those rights. The producer does not have the resources to finance and make the project itself (a common issue for independent film and television producers) as it needs the value of the deal with the second distributor to cover the budget. As a consequence, the producer is unable to meet certain obligations under its agreement with the first distributor as it cannot complete and deliver the project to it for release in their territory. The performance of the producer’s obligations under the first contract are dependant upon the project being greenlit. However, the project cannot be greenlit without the agreement with the second distributor. This run of events puts the producer in breach of its agreement with the first distributor.

In this instance of circularity and dependency, and other similar scenarios in the world of media asset financing, could the doctrine of frustration be used by a party looking to discharge a contract to which they are a party?

The law

As a general rule, if performance of a contract becomes more onerous or even impossible the party who fails to perform is liable in damages. The doctrine of frustration exists as an exception to this rule and in certain circumstances allows the contract to be automatically discharged when a frustrating event occurs so that the parties are no longer bound to perform their obligations. In English law a frustrating event is an event which:

• Occurs after the contract has been formed;
• Is so fundamental as to be regarded by the law both as striking at the root of the contract and as being entirely beyond what was contemplated by the parties when they entered into the contract;
• Is not due to the fault of either party; and
• Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.

Examples of what have been held to be frustrating events by the courts in the past are fairly limited which may perhaps be indicative of their reluctance to open the floodgates. They include destruction or unavailability of the subject matter of the contract¹ and an individual’s incapacity in a services contract.² Frustration has also been held to occur where there has been a subsequent change in the law or circumstances arise which actually render performance by a party illegal.³ It is easy to see how performance by a party would not be possible by any means in any of these three commonly cited scenarios. But how about where contractual performance imposes a burden on one party which is radically or fundamentally different from that contemplated at the time of contracting, without rendering performance actually impossible? A possibility for succeeding on these grounds has been suggested obiter in cases such as Tsakiroglou & Co Ltd v Noblee Thorl GmbH.⁴ In this shipping case, the sellers agreed to sell Sudanese groundnuts for shipment to the buyers. On the date of shipment the usual and customary route via the Suez Canal was closed. The alternative route round the Cape of Good Hope was more than twice as long and so freightage round this route was more expensive. As a result, the sellers failed to ship the goods as promised. One of the reasons the House of Lords rejected an argument on the grounds of frustration by the sellers was on the basis that the only real difference between the two alternatives for performance was the cost of shipping and therefore the seller’s resulting profit. Had the route via the Cape of Good Hope been more hazardous or affected the condition of the goods, these factors together may have built an argument that performance by other means would have been so radically different as to frustrate the contract, but expense alone was not sufficient. More recent cases have also suggested that all extenuating factors will be taken into consideration by the courts when making an assessment. In Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage and Towage) Ltd, The Sea Angel,⁵ Rix L.J. said:

“Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”

Unsurprisingly, there exists a massive amount of case law citing examples of situations whereby the frustration argument failed. Most relevant for this discussion, are where:

• an alternative method of performance was possible⁶;
• the contract was merely more expensive to perform⁷;
• there were changes in economic conditions alone which were unexpected but not entirely unforeseen, and where the contract includes mechanisms that would have allowed the contract to operate even in a more difficult economic climate⁸;
• the contract was more difficult to perform or onerous⁹;
• ordinary risks of business, such as rises or falls in prices, depreciations of currency or unexpected obstacles¹⁰; and
• a party’s insolvency or inability to get finance.¹¹

The mantra of these cases is that frustration should not be due to the fault, act or election of the partyseeking to rely upon it.¹² More bluntly you can’t get out of a contract you don’t fancy being party to anymore by arguing frustration.

The consequences

When a frustrating event occurs the contract is automatically discharged and the parties are excused from their future obligations. Because no one party is at fault, neither party may claim damages for the other’s non-performance. The rule is that the “loss lies where it falls” so no claim can be made for the value of a partially completed contract.¹³ If a party incurred obligations before the frustration event, it remains bound to perform them. Where the change of circumstances is insufficiently serious to frustrate a contract, the party unsuccessfully claiming frustration remains liable to perform his promises.¹⁴

Application

The key to establishing frustration is to identify what the parties’ contractual obligations were at the date of the contract, and then to assess how the event in question alters them. In our hypothetical scenario, at the date of contract the producer was under an obligation to deliver the materials necessary for the distributor to be able to exploit the distribution rights in its territory. The “event” that followed was the producer’s inability to sell the rights for a major territory to the second distributor and thereby cover the rest of the budget. To what extent is our event so fundamental as to be regarded by the law as striking at the root of the contract? Arguably, it is fundamental because without the agreement with the second distributor the producer cannot draw down on further funds to greenlight the project and as such cannot satisfy the main condition under the first agreement. As to the question of foreseeability, clearly a straight forward case of frustration is one where the event interfering with performance is totally unexpected and could not have been contemplated by the parties. However, case law suggests that the doctrine is slightly wider in scope than this and could apply to situations where the parties foresaw or ought to have foreseen the frustrating event.¹⁵ An exception to this, of course, is where one party foresees the possibility of the event and hides this from the other. The question to ask is to what extent was this “event” seen by one or both parties? Clearly market risks always exist and people can pull out of deals they have been discussing before formal contracts are entered into. In our scenario, it is unlikely that the producer would have committed to the first agreement unless, in his view, the agreement with the second distributor was likely to be achievable. As part of this analysis the agreement itself should be reviewed. To the extent there is an express provision for consequences of a given event within the contract this will govern their position rather than frustration. Indeed a good commercial lawyer would have addressed any foreseeable risk by including in the agreement a “what if” provision along the lines “if another distribution agreement is not entered into within 3 months of the effective date, this agreement shall terminate”. Absence of wording along these lines in the first distribution agreement or wording which does not envisage the extent of the circumstances which interfered with performance could be used as evidence to suggest that neither side anticipated the problem and therefore could bolster the argument that frustration should govern their position.

Moving onto the notion of “impossibility” in our scenario, without the second sale which was intended to finance a large proportion of the budget, the producer would have to find investment from another source which may indeed be commercially impossible in the current market conditions depending on the amount needed to finance. The larger the gap the more successful the producer might be at arguing impossibility. But what about where, as suggested obiter in Tsakiroglou, the contractual performance imposes a burden on one party which is radically different from that contemplated at the time of contracting but it does not render performance actually impossible? The producer clearly did not anticipate entering production without the funds generated by the agreement with the second distributor and the finance plan could demonstrate this. Whilst other means of satisfying obligations under the agreement with the first distributor do exist, the alternatives can be said to be radically different to that contemplated at the time of contracting. The producer would need to change the entire finance plan, production schedule and even key talent in order to be able to accommodate the new financing arrangements which could ultimately impact on the resulting product. Arguably this is more than merely more expensive or onerous but changes the project in its entirety. It is on these grounds that the producer may be able to argue frustration. Given that case law has not recently tested this particular slant and the absence of any cases from the media industry generally, the reception by the courts to an argument on these grounds cannot be predicted.

Finally, it should be considered whether any of the examples of events in case law where frustration failed are analogous with the scenario at hand and could therefore be used as a defence by the first distributor. There are a number that could apply here. For example, it could be argued that the effect of being unable to sell an additional territory simply makes the contract more expensive or onerous to perform. Although the doctrine of frustration is concerned with events that occur after the contract has been entered into which make the performance of the contract more onerous, impossible or illegal to perform, quite clearly the courts have found that the fact performance may be more expensive than anticipated is not sufficient. Or as Lord Radcliffe said quite simply, “It is not hardship or inconvenience or material loss itself which calls the principle of frustration into play”.¹⁶ The distributor could also run the defence that inability to get finance cannot amount to frustration. An argument could even be made by the distributor on the grounds of ordinary risks of business or unexpected obstacles being insufficient to discharge the contract. Whilst financial issues are usually the reason why a party wishes to end a contract, case law dictates quite clearly that this in itself does not amount to frustration. If it did, the courts would no doubt be inundated with cases on these grounds. The producer would have to demonstrate a combination of factors led to frustration of the contract and not simply those rooted in lack of profitability.

Conclusion

Given the courts’ previous reluctance to let parties use frustration as a means of discharging a contract, it would be difficult to argue frustration as a means of discharging a contract in the context of an ill-fitting media asset financing jigsaw. Aside from the narrow possibility of an argument that the event meant performance was radically different from originally contemplated but not impossible, the producer may have difficulty establishing a frustrating ‘event’ has occurred. In our hypothetical scenario, the first distributor has a plethora of ways to argue that the inability of the producer to find a second distributor to deal on certain terms was not one that could frustrate the contract but one that simply makes it commercially less attractive. In essence the law will not enable a party to get out of a bad bargain and the occurrence of unanticipated events will not generally allow a party to avoid its contractual obligations. However, all will depend on the terms of the contract and the nature of the obligation undertaken. In exceptional circumstances the doctrine of frustration may apply.

Melissa Fish is an associate in the Media team of Fieldfisher's Commercial IP group.

1 Taylor v Caldwell 122 E.R. 309; (1863) 3 B. & S. 826 ; Shipton, Re [1915] 3 K.B. 676; Bank Line Ltd v Arthur Capel & Co [1919] A.C. 435.

2 Condor v The Barron Knights [1966] 1 W.L.R. 87 and Hare v Murphy Bros [1974] 3 All E.R. 940; [1974] I.C.R. 603.

3 Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] A.C. 265; Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] A.C. 32.

4 Tsakiroglou & Co Ltd v Noblee and Thorl GmbH [1962] A.C. 93 at 103.

5 Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [[2007] EWCA Civ 547; [2007] 2 All E.R. (Comm) 634at 111

6 Seabridge Shipping Ltd v Antco Shipping Co (The Furness Bridge) [1977] 2 Lloyd’s Rep. 367.

7 Tsakiroglou & Co Ltd v Noblee and Thorl GmbH [1962] A.C. 93.

8 Gold Group Properties Ltd v BDW Trading Ltd (formerly Barratt Homes Ltd) [2010] EWHC 323 (TCC).

9 Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd [1977] 1 W.L.R. 164; [1976] 3 All E.R. 509 CA.

10 British Movietonews Ltd v London and District Cinemas Ltd [1952] A.C. 166; [1951] 2 All E.R. 617 HL

11 Cf. Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm); [2010] 2 Lloyd’s Rep. 668; Francis v Cowlcliffe Ltd (1977) 33 P. & C.R. 368 DC.

12 J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1 at 8 CA.

13 Appleby v Myers (1865–66) L.R. 1 C.P. 615.

14 Bremer Handelsgesellschaft mbH v Westzucker GmbH (No.3) [1989] 1 Lloyd’s Rep. 582 CA.