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Cancellation and Force Majeure Issues in the SARS Era

LESS THAN TWO weeks before the American Association for Cancer Research was scheduled to hold its 2003 annual meeting in Toronto, the Premier of Ontario declared a provincial emergency due to the SARS epidemic. AACR had signed contracts with 21 hotels and the convention center and anticipated 16,000 attendees — nevertheless, on April 2, just three days before the conference was to start, the society made the difficult decision to cancel because of the risk of spreading SARS to its members and ultimately around the world. Many attendees were backing out of the event for fear that they would infect their own patients. Within two weeks, AACR rebooked the meeting for July at the Washington Convention Center in Washington, D.C.

The resulting legal battle between Toronto and the Philadelphia-based AACR has recently been resolved, and there are significant implications for the meeting industry, says John S. Foster, Esq., CHME, attorney and counselor at law, Foster, Jensen & Gulley, LLC, Atlanta. Foster and his partners, with co-counsel in Toronto, handled the case for AACR and its insurance company.

Force Majeure Limitations

Most, but not all, of the hotel contracts had force majeure clauses. (A force majeure provision addresses the conditions under which a party may terminate an agreement without liability in case of major unforeseen events.) The clauses varied in their wording. Some allowed termination without liability based on acts or occurrences that made performance “illegal or impossible.” Some used the term “inadvisable.” And some of the clauses allowed termination only if the convention center became unavailable.

A critical issue is determining if the interval between a potential force majeure occurrence and the meeting justifies termination of a contract. There is no definitive answer. It depends on the proximity of the meeting to the force majeure occurrence, the type and size of the meeting, the type of attendees, and their travel plans. Timing was an issue in AACR's case because its annual meeting was scheduled to start at the beginning of the epidemic when nothing was known about the source of the disease or its cure.

Toronto Demands Payment

However, the hotels and convention center took the position that force majeure did not apply because the emergency was confined to area hospitals, there was no risk to the general public, and business was proceeding as usual. The Toronto Convention and Visitors Association sent AACR a letter stating that if the meeting was not rescheduled in Toronto, the estimated damages to the convention center and the 21 contracted hotels would come to $6.2 million Canadian.

But “AACR couldn't rebook that 2003 meeting in Toronto because a few months was too soon to know how extensive the epidemic would be. They had to make a decision within a short time, so they rebooked to Washington, D.C. Toronto did try to get AACR to rebook for another year, but the association has grown larger every year and its meeting is booked years ahead, so in a few years Toronto will not have enough hotel rooms and convention space to accommodate the group,” explains Foster.

The AACR's position was that its obligation to hold the meeting in Toronto was discharged because of commercial impracticability. (This is the U.S. term for what's called frustration of contract under Canadian law. It means that a party's purpose in entering into the contract is prevented by supervening events.) In other words, the parties could not have foreseen that a deadly, communicable disease with no known cure would occur in Toronto when the convention was booked three years prior. Further, the law does not require the association to perform its obligations under the contract or pay damages if a supervening event, such as the SARS epidemic, would subject its staff and attendees to unreasonable risks.

Insurance Turnaround

AACR had a convention cancellation insurance policy obtained through AON Insurance and underwritten by Travelers Insurance. But Travelers initially denied AACR's request to provide coverage for its lost revenue and to provide a defense for claims brought against the association for breach of contract.

“AACR hired my firm to convince the insurance company that its policy did cover this situation,” says Foster. “The way this type of insurance works is that it covers cancellation of an event for various perils, except those that are listed in the policy as exclusions. We convinced the insurance company that a meeting canceled due to substantial risk to the health of the attendees from pandemic disease, like SARS, was not excluded. The attendees were coming from 28 countries. Cancer hospitals told their doctors not to come to the meeting because they'd have to be in quarantine when they returned.”

Travelers reversed its position after taking a closer look at the situation surrounding the cancellation. AACR had expenses associated with holding the meeting later in Washington, D.C., and the insurance company did pay some of those expenses.

Travelers then hired Foster's firm to defend itself against the claims for cancellation damages from the hotels and the convention center. “We represented the insurance company through AACR,” says Foster. “Travelers paid the fees to defend AACR against the cancellation claims.”

AACR Files Suit

For 18 months, negotiations to settle the dispute were unsuccessful. Then, in June 2004, AACR filed suit in Toronto against 19 hotels and the convention center seeking a declaratory judgment from the Ontario Superior Court that the contracts were discharged due to a frustration of purpose and force majeure (meaning AACR's purpose in entering into the contract was destroyed by a supervening event, the SARS outbreak). Two additional hotels had settled their claims prior to this suit being filed.

In November 2004, the parties (the hotels were all represented by one law firm) came to a settlement resolution through court-ordered mediation, which was handled by a commercial service in Toronto staffed by retired judges. “AACR's CFO went to Canada with the representative from Travelers, and me and my two partners, and we also worked with a Canadian law firm,” says Foster. “Hiring our firm meant AACR did not spend a lot of staff time on this.” The financial terms of the settlement are confidential.

Lessons Learned

  • Redefine force majeure

    “Prior to 9/11 and SARS, most force majeure contracts were based on total impossibility,” Foster says. Now, if the contract is written correctly, there can be partial impossibility, which means that if a party to a contract is partially prevented from performing the agreement because of impossibility or impracticability (incapable of being accomplished by the means available), that party is still required to perform to the extent to which they're capable but is excused from performing the total contract.

  • Use Your Own Contract

    It makes sense for an association to have its own model hotel contract for use with all hotels. “If a hotel resists including a force majeure clause, the meeting planner should consider using another property. Why should the association have to pay its own losses and the hotel's losses?” asks Foster.

    “Epidemics and diseases that could affect travel and the safety of attendees are now foreseeable and should be contemplated in the contract. You waive the right to use it as a defense if you don't mention it in the contract,” adds Foster. “The organization should also have an attorney review the contracts. You can save a lot of time, trouble, and aggravation by having counsel review contracts up front.”

  • Read the fine print in your cancellation insurance policy

    Force majeure clauses in meeting contracts may render hotel and facility contracts null and void, but they neither protect the meeting sponsor from having to pay other expenses nor enable the sponsor to recoup lost revenue. Event cancellation insurance is designed to protect an organization's investment should the meeting have to be canceled due to forces beyond the organization's control. It does not, however, cover all risks. “Meeting sponsors should read the fine print to learn what's covered and what isn't. For example, SARS and other epidemics are now excluded because of claims made by AACR and other organizations,” says Foster. “Meeting planners can negotiate for coverage of additional risks only if the insurance company offers optional coverage. There is no law requiring an insurance company to do so, so epidemics and diseases are now uninsurable risks.”

Unpredictable Climate

The current climate in the meeting and travel industry is unprecedented — with fear of terrorist acts, fear of disease in destination cities, and unpredictable changes in the economy. These factors will always be outside the control of the contracting parties, but they are no longer unforeseeable.

“Parties to a contract must now accept the fact that unless the consequences of such events or occurrences are provided for in the contract, the common law doctrines of impossibility, impracticability, and frustration of purpose will be applied by the courts depending on the facts and the jurisdiction,” Foster says. “If the parties to a contract don't want to risk unintended legal consequences from future events or occurrences outside their control, they should negotiate comprehensive contracts that address the potential events or occurrences and the intended consequences.”

Martha Collins is an Austin, Texas — based freelance writer/editor who covers medical meetings and conventions. She has edited three meeting industry textbooks.

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