Contractual remedies for damage to reputation in sport sponsorship

Published 22 November 2013 | Authored by: Stuart Benzie, Timothy Killen

It takes many good deeds to build a good reputation, and only one bad one to lose it.

Benjamin Franklin

The problem of Damage to Reputation in Sponsorship Contracts

There have been many parodies of easily recognisable product endorsements by now-disgraced sports personalities published on the Internet, the images of Lance Armstrong and Tiger Woods on Twitter with the Nike swoosh and the caption – “Nike – Don’t Do it” is a memorable example. While many appreciate the humour of these, they highlight the risk of damage to the reputation of well-established brands caused by the alleged or actual misconduct of sponsoring athletes.

It is no secret that companies pay vast amounts of money to secure endorsements, so that they may profit from their association with the success, vitality and talent of the individual. When an athlete does something to negatively affect their personal reputation, and thereby tarnishes the positive attributes which the endorsed products sought to embody or reflect, the sponsoring company will often suffer loss – either because the endorsement is not as profitable as it would have been had the athlete retained their good reputation or, worse, because the product's close association with the athlete may stigmatise the product altogether.

One recent example of a reputation irreversibly tarnished is that of the cyclist Lance Armstrong, who admitted to the use of performance enhancing drugs throughout his career. Following these admissions, Armstrong's well-known and long-established associations with both Nike and Trek were terminated, no doubt because his endorsement was no longer considered to be the profitable arrangement the brands had desired. It is unknown whether any damages were pursued by Armstrong's former endorsers, but had they decided to attempt a recovery, the route to such damages may not have been immediately apparent.

The protection of damage to reputation is normally considered to be the role of defamation but, as Armstrong said nothing which directly defamed or tarnished the reputation of his sponsors, such an action would be unsustainable. Nevertheless, the brands' association with a declared 'cheat' clearly lowered their desirability to the consuming public and it is self-evident that a loss was nevertheless sustained.

What is proposed in this article is that an application of normal contractual principles may afford a sponsor a route to recovery of losses sustained in circumstances where an athlete's actions affect the marketability of an endorsed product.

 

Defamation or Breach of Contract?

While defamation may be the established remedy for damage to reputation, authorities in contractual cases show that, in certain circumstances, the courts have been willing to compensate claimants where their reputation has been damaged as a consequence of the actions of a contractual counterparty.

In Wilson v. United Counties Bank1 a bankrupt customer brought a successful action for breach of contract against a bank and the House of Lords unanimously upheld recovery of damages for consequential loss of personal reputation, Viscount Finlay stating at p.120, that:

"It is difficult to see on what principle such damages might not be given if there has been an actual bankruptcy as the result of breach of contract on the part of the defendant to take steps to prevent it. If the imputation of bankruptcy would give right to such damages in an action for libel, why should not the fact of the bankruptcy owing to the defendant's breach of duty confer a similar right upon the plaintiff [in an action for breach of contract]."

This is an early case, however, the comparison of the right to damages in defamation and contract is illuminating. It appears that where damage to reputation, of a sort that would give a right to recovery in defamation has been caused by a breach of contract, rather than a defamatory statement, such damages are recoverable.

In Kpohraror v. Woolwich Building Society2 the plaintiff successfully brought an action for, inter alia, damages for loss of business reputation resulting from a cheque being wrongly dishonoured by his bank. Evans LJ, giving the leading judgment of the Court of Appeal, upheld the Master's finding below that such loss was recoverable, citing Wilson as authoritative on the matter. Moreover, the Court of Appeal made it clear that the class of persons entitled to recover such losses was not restricted to traders (at 124D)3.

Perhaps the leading case in this area, however, is the House of Lords decision in Malik v. BCCI4. The Bank, BCCI, was found to have been involved with a large-scale fraud and other criminal acts, as a result of which the claimants, both employees of the bank, lost their jobs. The employees brought successful actions against the bank for breach of their employment contracts. In the course of judgment, the House of Lords unanimously upheld the pleaded head of loss for "stigma damages", under which the claimants claimed that their future employability had been handicapped by reason of the stigma attaching to the bank's activities and their innocent association with them.

Mr Malik, the lead claimant, recovered damages because of a breach of the implied, mutual duty of trust and confidence. However, put another way, it could be said that the damage was caused by Mr Malik's association with what Lord Nicholls described as, a "dishonest and corrupt business".

Although the duty of trust and confidence does not exist in sports sponsorship agreements, it may be argued that an action by a contracting athlete which brings their reputation into disrepute may, in circumstances where that action can be brought within the ambit of an express or implied term, be a repudiatory breach of the sponsorship contract, entitling the brand to terminate.

In defence of the claim in Malik, counsel for BCCI submitted that injury to reputation is protected by the law of defamation, the boundaries of which could not be side-stepped by allowing a claim in contract, where such a claim would not succeed in defamation (relying on Lonrho plc v Fayed (No.5)5, per Dillon LJ). Crucially, for present purposes, Lord Nicholls described this submission as misconceived.

Lord Nicholls observed that, with certain exceptions, defamation provides a remedy whether or not the injury to a person's reputation causes financial loss. However, Lord Nicholls went on to note that if, as a result of the injury to his reputation a claimant does in fact suffer financial loss, this may also be recoverable in a defamation action as 'special damage'. It was this element of 'special damage' that Lord Nicholls considered may also be recoverable for breach of contract.

There was no good reason, in his Lordship's opinion, why, provided damage to reputation could be brought within the ambit of the breach of an express or an implied term of a contract, and that that breach could be proved to have caused financial loss, such loss would not be recoverable simply because the subject matter of such a breach (being harm to reputation) would more ordinarily be dealt with by the tort of defamation.

Thus, it would appear that there is authority for the proposition that "stigma damage" is a head of loss recoverable for breach of contract where there has been:

• A breach of some term of the contract between the claimant and the defendant;
• Actual pecuniary loss suffered by the claimant;
• That the loss was caused by the breach; and
• That the loss claimed is not too remote.

It is plain to see how this approach applies to sponsorship agreements. The underlying premise of such an agreement is that the sponsor benefits from the association of its brand with an athlete. When an athlete acts in a way that damages the image it is seeking to enhance, it would seem that damages are in principle recoverable.

 

Breach of a Term

The question in each case must be; is the behaviour of the athlete a breach of a term of the sponsorship agreement. Many agreements contain express clauses, usually referred to as a 'morals clause', which require athletes to comply with the rules of their sport, or more generally not to act in any way which may be detrimental to the image of the sponsor. Much has been written about the use of morals clauses in relation to Armstrong and others, however, most breaches of morals clauses result not in damages for pecuniary loss, but the termination or suspension of the agreement and/or the repayment of the amount of the sponsorship.

There is no reason, however, why a well-drafted morals clause may not in itself include the right to recovery in the event of breach. One straightforward approach may be to permit recovery of an amount of agreed liquidated damages (provided this does not offend the rules on penalty). Alternatively, a clause could simply provide for the recovery of "consequential loss caused" by breach.

As many sports lawyers know, it is often the reality of the situation that the nature and content of such a clause will be determined by the relative bargaining power of the parties. Whilst the sponsor will want the morals clause to be widely drafted with the remedies for breach as generous as possible, the sportsperson will want the conduct which offends the clause to be as narrow as possible, and the remedies to be limited.

Although the inclusion of a morals clause or other like provision is now commonplace in sponsorship agreements, such a clause may not appear in every contract. The question then becomes: can a term be implied requiring the athlete to comply with the rules of the sport and/or not to act in a way which is detrimental to the image of the brand?

Turning again to simple propositions of contract; the leading authority on implied terms is the Privy Council case of AG of Belize v Belize Telecom6. Lord Hoffman's starting point in his leading judgment was that if a provision is not included in a contract then the presumption must be that the parties did not intend to include it. Where an event occurs which is not addressed by the contract, Lord Hoffman concludes that the loss lies where it falls. However, his Lordship continued:

"In some cases...the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means."

In the context of an agreement which has the purpose of enhancing the reputation of a brand, whilst clearly fact-specific, there is a good argument that the true meaning of such an agreement would include a term that the athlete would not act in way that was likely to cause damage to that reputation.

As a result, it would be easy to conclude that the finding of misconduct against Armstrong in the USADA report would be in breach of an express or implied term of the type discussed above. It may be less straightforward, however, when an athlete's conduct is unconnected with his sport (as, for example, with the revelations which emerged in 2010 of Tiger Woods' various extra-marital affairs). In such circumstances, the question will be answered by the scope of the term which it is said has been breached.

 

Establishing Loss

The other major task is establishing pecuniary loss: as a starting point, the claimant could produce its accounts to demonstrate a drop in sales following discovery of the athlete's misconduct. However, to establish that the loss was caused by the athlete's behaviour may be a more difficult task. An analysis as to whether other factors have influenced the financial data may also be necessary and it is likely that it would need to be established by expert evidence.

 

Remoteness

It was said in the case of Cointax v. Myham & Son7, referred to in Malik v BCCI, that:

"To sum up the whole matter, it appears to me that the sound view to take is this: The loss to a man's business may not be, and perhaps is not, usually in contemplation between the parties as the consequence of a breach of contract, but where the party guilty of the breach of contract or warranty knows that the other party is relying on his fulfilment of the contract and knows the possible and probable consequences of such reliance, the damages caused to the other party by the consequent breach of his contract are recoverable by him."

Accordingly, although also subject to the precise facts of each action, remoteness is unlikely to be a major obstacle in sports cases. The parties to a sponsorship agreement understand that in most cases where a corporate entity sponsors a professional athlete, the purpose of such sponsorship is to enhance the brand by that association. As such, where an athlete acts in a way that damages the brand, the pecuniary loss caused by the breach will very likely be held by a court to be within the probable and anticipated consequences of such reliance.

 

Conclusion

Consequently, and contrary to common perception, it seems that English law does in fact recognise a head of damage which can be described as "stigma loss", and that this is a type of loss which is likely to be suffered in situations where sponsored athletes are found to have cheated or acted in a way which might otherwise damage the sponsor's brand image.

The two main hurdles for a sponsor to succeed in such a claim are: (1) establishing the existence and scope of a term which prohibits the athlete's behaviour; and (2) proving the existence of loss which was caused by the breach of the term.

The quotation from Benjamin Franklin at the start of this article is as true in relation to modern corporate marketing as it was in the 18th century. Modern companies invest considerably in developing trusted brands, and it takes relatively little to damage or in some cases destroy that brand. If that damage is caused by a sponsored athlete's breach of contract, it is suggested, in principle, that English law should, and does, provide a remedy for such losses.

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About the Author

Stuart Benzie

Stuart Benzie

Stuart is an experienced Commercial Lawyer and Advocate, who was called to the Bar in 2002, having qualified as a Solicitor with Clifford Chance in 1999. Stuart has advised a number of Premiership football clubs and an Italian Serie A club in relation to funding (and refinancing) structures for stadia.

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Timothy Killen

Timothy Killen

Tim was called to the Bar in 2010 and is developing a successful commercial practice focusing on the regulatory and contractual aspects of sports litigation. Before coming to the Bar, Tim taught law, first at the University of Birmingham and later at Birkbeck College, University of London at which time he was also a visiting lecturer at the University of Onsnabrück in Germany.

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