International Tax Panorama

Background

On 24th March 2020, the first delay in the 124 history of the modern Games took place when the Tokyo Olympics were postponed, due to ongoing coronavirus pandemic. It is historical in the sense that the modern Olympics have been canceled only three times, all during wartime.

Calculating the stakeholder’ costs

Postponing a significant event like the Olympics has massive implications for multiple stakeholders, especially in terms of financial loss.

Back in December, the Tokyo Organising Committee had announced that costs had reached approximately €11.5 billion ($12.4 billion). As per the reports, domestic sponsors have committed more than €2.75 billion towards the Olympic Games, with big companies such as Bridgestone, Toyota, Panasonic and Samsung also have separate, exclusive contracts with the IOC. However, the biggest player in this scenario is the TV rights holder NBC Universal in the US, whose parent company Comcast paid €4 billion for the four Summer/Winter Olympics held between 2014 and 2020. NBC Sports has also announced an Olympic record sale of more than US$1.25 billion of national advertising space for Tokyo 2020. In this context, it is essential to look into the contractual obligations surrounding this major event. 

Contractual issues under the Host City Contract:

The first contract that must be looked into is the 81-page “Host City Contract”. It was signed in 2013 by the IOC, the city of Tokyo, and the Japanese Olympic Committee. Under the contract, the ultimate decision making power to cancel or postpone the Olympics rests on the IOC. 

Under section 66 titled “Termination,” the IOC has sole discretion to terminate the contract for several reasons. It could be a civil disorder, state of war, boycott, and others. It also says the IOC can terminate if it has “reasonable grounds to believe, in its sole discretion, that the safety of participants in the games would be seriously threatened or jeopardized for any reason whatsoever.”

It is pertinent to mention that natural disasters led to the cancellation of the games in the past. For instance, the 1908 Olympics, originally to be held in Rome, had to be moved to London when the Mount Vesuvius erupted. Also the Italian government had to divert money to projects such as the rebuilding of Naples and not the construction of Olympic venues.

In the very same section, the IOC can terminate if “the games are not celebrated during the year 2020.” It means that the IOC has the right to cancel the games only if they are not held during 2020. This can be interpreted that the games can be postponed only as long as they are held during the calendar year. However, in the present case, the games have been postponed for the next calendar year, which is outside the purview of the contract. Therefore there are higher chances of renegotiation for a new host city contract.

The contract says the IOC has to give local organizers, the city, and the national Olympic committee 60 days’ notice to terminate. The section also says the city, local organizers. and the national Olympic committee “waive any claim and right to any form of indemnity, damages or other compensation.” Thus, not only the IOC has the sole contractual right to cancel the Games on safety grounds, but it is also protected from any claims for damages by the host city in such an event.

Further, the section mentions that the organizers also agree to “indemnify and hold harmless” the IOC from any third party claims in respect of the IOC’s withdrawal from the games, such as those from broadcasters. This means that the ultimate cost might be borne by the local taxpayers of Japan if the organizers agree to indemnify. 

In such a situation, legal cases and insurance claims are inevitable as it has wide-ranging effects on the different contracts signed between the IOC, sponsors, the Organising Committee, TV rights holders and the insurance companies. The IOC and local organizers could take the defense that it is no longer possible to proceed with the current schedule, and also provide some protection in the face of any legal cases and insurance claims from multiple contractual claims tied to the event, from broadcasters to sponsors.

Taking defence under “Force Majeure clause” 

It is very much likely that renegotiation of the host contract might fail, leaving with the only option towards either litigation, arbitration or mediation, as per the contractual terms. If the sponsors and the TV broadcasters do not get what they have paid for — the pressure on the IOC to compensate them will be significant.

In that situation, the IOC and the local organizers can take the defense of “force majeure” clause, or ‘Act of God’. 

According to Black’s Law Dictionary a force majeure clause “is meant to protect the parties in the event that a contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.”

To put it simply, a force majeure clause is a provision under the contract that relieves a party’s performance of its contractual obligations when certain circumstances arise beyond their control, making performance inadvisable, commercially impracticable, impossible, or illegal. These clauses are quite standard in contracts, yet in times like pandemic, it could help in navigating performances when there are issues affecting performance that are outside the parties’ control. At the same time, it affords parties an opportunity to draw a roadmap of the implications to the opposing parties if the otherwise remote or unplanned catastrophe occurs. That roadmap may allow for decision making in times of uncertainty, informed underwriting as well as proactive crisis planning.

Here, the defense can be taken that the IOC hasn’t entirely canceled but has only postponed the Olympics. These proclamations suggest that the 2020 Olympics and Paralympics are no longer possible, which ultimately makes the fulfillment of any kind of contract impracticable or impossible.

Effectiveness of Insurance claims 

Postponement of a major event like the Olympics will lead many organizations like the IOC, sponsors, local organizers, travel providers, and hospitality to recoup some money from insurers for the delay.

It is pertinent to look into the postponement insurance that could cover money already spent and additional costs incurred to rearrange the event.

However, it is being predicted that the pay-outs might be smaller as companies would still be able to make money out of the Olympics when it finally happens. Few sponsors like Comcast Corp have stated that they have insurance if the Olympics gets postponed.

Thus, it can be said that there is some reprieve for the insurers in this situation as postponement will cost the insurers much less than canceling the Tokyo Games altogether, due to the chance that some of those involved may not have policies specifically covering a postponement.

Conclusion

A major event like the Olympics is nothing without its athletes. However, a major decision in terms of cancellation of postponement is primarily made on the pedestal of billions invested in the project. This revolves around the money, the sponsors, and the billions invested in the project. However, if the IOC shrugs off its responsibility to pay to its stakeholders (Sponsors, TV rights holder etc.) the ultimate burden might fall on the organizers. In the midst of all the chaos, it cannot be denied that the ultimate responsibility might fall on the local taxpayers, in the garb of organizers, to stage the Games.