What sports lawyers need to consider when terminating an athletes contract following a repudiatory breachStuart Benzie
As the Luiz Suarez “biting incident” at the FIFA World Cup1 and, more recently, the punching incident with Ben Flower at the Super League Grand Final2 demonstrate, there are times when sponsors will need to quickly consider whether they are able to sever links with a sportsman. While the these examples are extreme, it is important for sponsors and sportsmen to be able to terminate contracts and to know what the outcome will be following termination in terms of potential liability or entitlement to compensation.
Knowing whether, and in what circumstances, the common law rights to terminate and claim for damages following repudiatory breach may be excluded is crucial for litigators and those who are involved in drafting and negotiating contracts: if the common law right can be excluded, parties will have to rely solely on the terms of their contract, which may provide for a far less advantageous remedy if the terms of the contract limit, or exclude entirely, the amount of damages that can be claimed upon termination.
For example, is not clear that Luiz Suarez’s action caused any loss to his sponsors: however, the Lance Armstrong situation demonstrates circumstances where a sponsor may suffer losses and where it is crucial that there is clarity as to what losses can and cannot be recovered from the athlete.3
This article contains an up-to-date review of the essential authorities and examines how this area of law may develop in the future.
Defining Repudiatory Breach
A repudiatory breach of contract is “an actual breach of contract by conduct (or sometimes by omission) which is grave enough that it goes to the root of the contract.”4
The legal test for repudiation has been expressed in numerous ways. However, it is “commonly expressed in terms of whether the breach goes to the root of the contract or whether a party evinces an intention no longer to be bound by the terms of the contract.”5
The Effect of a Repudiatory Breach
A repudiatory breach does not automatically bring the contract to an end. The innocent party can elect either to affirm the contract, in which case the contract continues; or to accept the repudiation, in which case the contract is brought to an end immediately upon acceptance. This right to accept repudiation and terminate the contract is a right at common law.6
In its recent judgment in Force India Formula One Team Ltd v Aerolab SRL the Court of Appeal highlighted the following principles7:
- ‘Where a party has repudiated a contract the aggrieved party has an election to accept the repudiation or to affirm the contract.
- An act of acceptance of a repudiation requires no particular form… It is sufficient that the communication or conduct clearly and unequivocally conveys to the repudiating party that that aggrieved party is treating the contract as at an end.
- The aggrieved party need not personally, or by an agent, notify the repudiating party of his election to treat the contract as at an end. It is sufficient that the fact of the election comes to the repudiating party's attention...’ 8
Though the right to terminate following repudiatory breach is a common law right, the contract may provide guidance on whether or not a breach is repudiatory in nature9.
Defining a “Material Breach”
Many contracts allow termination on the happening of a “material breach” and that term may be defined to a greater or lesser extent. The extent to which the parties define any particular term as “material” (or in some similar way) will not of itself determine whether a breach of that term is repudiatory at common law. However, when the court construes an agreement to decide if a particular term is fundamental, the fact the parties have chosen to allow termination for certain terms and not others, will clearly influence the outcome.
Restriction on the Right to Terminate – Remedial Periods
Perhaps the best example of a term that may restrict the right to terminate, in the context of sporting contracts, comes in the form of terms setting out a remedial period for a particular breach.
Per Ramsey J in BskyB, “the fact that for a particular breach the contract provided that there should be a period of notice to remedy the breach would indicate that the breach without the notice would not, in itself, amount to a repudiatory breach.”10 Ramsay J held in that case that there was “no question of a repudiatory breach”11 until the three months specified remedial period had elapsed.
Therefore, if a party tries to accept a purportedly repudiatory breach before the remedial period has elapsed, the court will hold that it was not possible for a repudiatory breach to have occurred before the end of that remedial period and the ‘innocent party’ will be deemed to have had no right to terminate.
Sports law practitioners should be particularly alert to this danger as remedial periods are common in contracts used in a variety of sports. Where an athlete commits some particularly serious breach it may be detrimental to a sponsor to be seen to delay taking steps to sever links with that athlete. As such it is important that a contractual right to terminate in such situation exists, or at the very least, the contract does not prevent the exercise of the common law right to terminate.
The Level Damages Available
Recent case law has considered the important question of whether, and if so under what circumstances, terms of a contract can affect the level of damages available to an innocent party in respect of a termination following repudiatory breach. Practitioners will be familiar with terms inserted in sports contracts that purport to limit, or in some cases exclude, damages. It is important to determine whether or not such terms can extend to damages for repudiatory breaches because if they do, an innocent party may stand to obtain a significantly less advantageous remedy.
In Internet Broadcasting Corporation v MAR LLC (Marhedge) (“NetTV”), Gabriel Moss QC held that there was a “strong”, though rebuttable “presumption… against the exemption clause being construed so as to cover deliberate, repudiatory breach” and that, “[t]he words needed to cover a deliberate, repudiatory breach need to be very ‘clear’ in the sense of using ‘strong’ language such as ‘under no circumstances...’”12
Conversely, Flaux J, commneted obiter dicta (in passing) in AstraZeneca UK Limited v Albemarle International Corporation and Albemarle Corporation, argued that there is no such presumption and that the NetTV judgment is “heterodox and regressive and does not properly represent the current state of English law”.13 Flaux J did, however, confirm that the court would require very clear wording to construe an exclusion clause as excluding the right to damages upon termination following a repudiatory breach. As such, on Flaux J’s approach, the court will still consider commercial sense and the intentions of the parties as part and parcel of the question of construction.
It should be noted that Astrazeneca and NetTV are both High Court judgments and that Flaux J’s comments were obiter dicta. The Court of Appeal has granted permission to appeal in Shared Network Services Limited v Nextiraone UK Limited14, a case that requires this issue to be addressed and which is expected to resolve this conflict of authority.
In any event, it appears that very clear, if not unequivocal, wording would be needed in order to exclude a party’s common law right to damages following a repudiatory breach. The courts will take into account the fact that commercial contracting parties are aware of the value of the right to recover damages for a repudiatory breach.15
The Future of the Law on Repudiatory Breach
The author takes the view that the Court of Appeal is likely to prefer Flaux J’s approach:
- As noted by Flaux J, Gabriel Moss QC relied upon Lord Upjohn’s “strong, though rebuttable presumption” formula in Suisse Atlantique Societe d'Armament SA v NV Rotterdamsche Kolen Centrale.16 This was a case on the doctrine of fundamental breach, which is no longer good law, and Lord Upjohn was in the minority. Therefore, Gabriel Moss QC’s approach is not based on good law and, in his discussion of “deliberate repudiatory breach”, he comes dangerously close to reviving the doctrine of fundamental breach.
- Flaux J provides a more comprehensive, and accurate, analysis of the authorities: in particular, he notes that Lords Wilberforce and Diplock rejected the notion of a presumption and held in Photo Production Ltd v Securicor Transport Ltd (“Photo Production”) that “whilst exemption clauses are construed strictly, it is always a question of construction of the clause whether it covers a particular breach.”17
- The courts have shown an inclination in recent years, in line with the approach of the American courts to contractual freedom to allow parties to contract freely on such terms as they see fit and only intervene where absolutely necessary. The concept of a strong presumption is at odds with this approach.
- The modern approach to limitation or exclusion clauses is predicated on Photo Production and it is difficult to see how the approach in NetTV can be reconciled with an approach that is founded on the construction of individual agreements.
The question of whether or not contractual terms can limit or exclude the common law right to damages for repudiatory breach is one of considerable importance for sports law practitioners: the outcome determines whether a Claimant will be able to claim for the full losses caused by a repudiatory breach or instead be restricted to a much smaller figure, or even prevented from claiming at all. It may in certain circumstances prevent a sponsor from taking swift action to end its relationship with an athlete, or severely limit any right to compensation.
It is highly likely that the Court of Appeal will decide that there is no presumption as suggested by NetTV but that the question is one of construction, requiring very clear wording in contractual terms in order to limit or exclude damages for termination following a repudiatory breach.
In general terms the following issues should always be considered when negotiating or drafting sports agreements:
- Always ensure that contractual termination clauses are expressly without prejudice to the parties rights and remedies at common law;
- When drafting termination events: ensure that you don’t exclude termination for events that you may want to regard as repudiatory breaches. This is particularly important in sponsorship contracts. If the sponsor has a particular sensitivity about the sportsman or woman using a rival’s products, expressing political opinions or leading a lifestyle which is inconsistent with the sponsor’s image, these factors should be explicitly identified as triggering the right to terminate;
- If possible lawyers should avoid remedial periods for breaches of contracts: they are likely to prevent your client from terminating until the end of the remedial period. Again in the context of a sponsorship contract, the greater the period of time which a sponsor has to wait before terminating, the greater the adverse publicity from a negative association. The desire to quickly end an association with an athlete was demonstrated following the Luis Suarez biting incident during the recent World Cup in Brazil. Although this is an extreme example, where other sponsors are terminating agreements, the inability to terminate an agreement swiftly may result in increased levels of negative publicity.
- If a contract provides for a specific remedy in relation any particular breach: make it clear that the existence of that remedy is not intended to exclude common law right to terminate or the common law right to damages for loss of bargain in the event of a repudiatory breach. For example, if a contract provides for a deduction in payments made to an athlete where an athlete is suspended from competition: ensure that a right to terminate is reserved. In many cases of routine infractions of the rules of a sport, a sponsor may not wish to terminate the agreement; however, where the suspension results from serious or repeated acts of misconduct (Suarez) it is important that termination remains an option.
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- Tags: 2014 FIFA World Cup Brazil | Commercial Law | Contract Law | Cycling | England | Football | Litigation | Rugby | Sponsorship | Super League | Wales
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About the Author
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.