5 key English contract law principles that every sports lawyer should know
Published 28 September 2017 By: William Clerk
It is difficult to overstate the importance of the law of contract to sports lawyers. Of course, it is obvious that commercial sports disputes often turn on principles of contract law (see, for example, Force India and Aerolab’s litigation over misuse of aerodynamic design information).1 What is, perhaps, less obvious is that many regulatory or disciplinary sports disputes also turn on contract law – the basis (and therefore limits) of a sports governing body’s power to sanction an athlete is founded on the contractual relationship between the athlete and the governing body. 2
As a result, it is vital that sports lawyers stay abreast of developments in the law of contract. However, it is also difficult for a specialist sports law adviser to do so – given contract law cases come thick and fast, and from a variety of different fields.
This article brings together and summarises what the author considers to be 5 key developments in English contract law from recent cases. At the outset, two points should be noted:
- The cases did not concern sporting disputes directly. However, given the changes they have brought about in English contract law, they are ones which sports lawyers should be aware of.
- This article is confined to the key English contract law cases and does not consider cases from other jurisdictions.
Overview of the cases
Over the last few years the UK Supreme Court (and the Court of Appeal) has provided an embarrassment of riches and has embarked upon reviews and restatements of several core English contract law principles. The five areas of contract law and cases covered are:
- Interpretation of contractual terms - Wood v. Capita Insurance Services Ltd3;
- Implied terms - M&S v. BNP Paribas Securities Services Trust Co4;
- Anti-variation clauses - MWB Business Exchange Centres Ltd v. Rock Advertising Ltd5 / Globe Motors Inc v. TRW Lucas Varity Electric Steering Ltd 6 -
- Penalty clauses - Cavendish Square Holding BV v. Makdessi; ParkingEye Ltd v. Beavis7; and
- Illegality - Patel v. Mirza8.
The cases and concepts will be explained in turn, and examples of their sports law context will be identified at the end of each section.
1. The interpretation of contractual terms
In Wood v. Capita, the Supreme Court restated the law on the interpretation of contractual terms, and addressed the question of whether its earlier decision in Arnold v. Britten9 had changed the law in this key area.
Following Wood v. Capita, the law on the construction (or interpretation) of contractual terms may now be stated as follows:
- A term must be construed giving primacy to the natural and ordinary meaning of the words used (Arnold v. Britten). This is particularly so where a contract has been negotiated and prepared by skilled professional advisers, or is highly sophisticated and complex (Wood v. Capita).
- In construing the term by giving primacy to the natural and ordinary meanings of the words used, the Court must at the same time consider the term in its commercial context i.e. according to the factual matrix (Rainy Sky v. Kookamin Bank10). In this sense, the process of construction is a unitary process (Wood v. Capita).
- Where there are rival constructions of a term, the Court may reach a view as to which construction is more consistent with business common sense. The Court should test rival constructions against one another. In this sense, the process of construction is an iterative process (Wood v. Capita; Re Sigma Finance Corporation11).
- The clearer the natural and ordinary meaning of the words used, the more difficult it will be to justify departing from those words by recourse to commercial common sense and the surrounding circumstances (Arnold v. Britten).
The framework provided by the Supreme Court in Wood v. Capita is comprehensive, and puts an end to arguments relying on the false dichotomy of either (a) a textualist; or (b) a contextualist approach to the construction (interpretation) of contracts. The true position is that the Court must adopt both textualist and contextualist approaches when interpreting a contract: as stated by Lord Hodge (with whom Lords Neuberger, Mance, Clarke and Sumption unanimously agreed) at paragraph 13 of Wood v. Capita:
“Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement.”
The framework also confirms that, over the past few years, the Supreme Court has retreated back from the more flexible, “commercial” (as it is often and ambiguously described) approach to the construction of contractual terms as most famously set out by Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society12. Instead, the Supreme Court has reasserted the importance of the language actually used in the interpretation of contracts.
Lord Sumption, speaking extra-judicially,13 has provided the following caution:
“It is I think time to reassert the primacy of language in the interpretation of contracts. It is true that language is a flexible instrument. But let us not overstate its flexibility. Language, properly used, should speak for itself and it usually does. The more precise the words used and the more elaborate the drafting, the less likely it is that the surrounding circumstances will add anything useful.”
Key takeaway point
This warning, given hot on the heels of the Supreme Court’s judgment in Wood v. Capita, needs to be heeded by all commercial and sports lawyers. It is vitally important that the words of any contract are clear, and unambiguous. A party may no longer be rescued by recourse to “business common sense”.
Sports law context
Interestingly, in the sports litigation context, recourse to “business common sense” in order to oust the literal meaning of words used in contracts has never found favour with the courts of England and Wales. For example, in Premier Rugby Ltd & Ors v. RFU & Ors14 the Premiership Clubs asked the Commercial Court for a declaration that their players were not bound to be released for an impending international against the All Blacks. The Court was asked to interpret the applicable agreement (being the Long Form Agreement dated 24 July 2001) and, in doing so, counsel for Premier Rugby Ltd urged HHJ Mackie QC, “not to take too literal an approach”15 and to give primacy to business common sense. The judge rejected this approach, and saw no reason to depart from the starting point, that “one expects clauses to mean what they say”16.
2. Implied terms
In M&S v. BNP Paribas the Supreme Court considered another key doctrine of English contract law: the implication of terms into a contract.
As a preliminary point, the Supreme Court confirmed that the twin concepts of (a) interpretation of contracts; and (b) implication of terms into contracts are distinct. They are “different processes governed by different rules” (paragraph 26 per Lord Neuberger). The Court must first interpret the express terms of the contract before then considering whether any terms ought to be implied into the contract. Once more, this reaffirms the importance of the words actually used in the contract itself.
Of wider significance still was the Supreme Court’s review and restatement of the doctrine of the implication of terms. The Supreme Court relegated Lord Hoffmann’s judgment in Attorney General of Belize v. Belize Telecom Ltd17 from what many had regarded as the leading judgment on the implication of terms, to “characteristically inspired discussion rather than authoritative guidance” (paragraph 31 per Lord Neuberger). In doing so, the Supreme Court reverted back to the orthodox statement of the doctrine provided by the Privy Council in BP Refinery (Westernport Pty Ltd v. Shire of Hastings.18
Following M&S v. BNP Paribas, the law on the implication of terms (in fact) into contracts may now be summarised as follows:
- The test for the implication of a term into a contract is (a) objective (b) falls to be considered at the time the contract was made. The Court is concerned with the views of “notional reasonable people in the position of the parties at the time at which they were contracting” (per Lord Neuberger at para 21).
- A term is not to be implied simply because it is fair, or because the parties would have agreed to it if it was put to them. Both of these are necessary requirements, but are not sufficient in and of themselves to justify the implication of a term into a contract.
- A term will only be implied where:
1.3.1. Either (a) it is necessary to give business efficacy to the contract; or (b) it is so obvious that it goes without saying. As to the requirement for necessity, this is a value judgment in each case - a party does not have to show “absolute necessity”; it is enough to show that “without the term, the contract would lack commercial or practical coherence” (per Lord Neuberger, citing Lord Sumption in argument at para 21).
1.3.2. It is capable of clear expression – in this context, anyone relying on an implied term ought to take care (a) to identify precisely what the term contended for is; and (b) to remain scrupulously consistent throughout any correspondence, in order to avoid falling at this hurdle.
1.3.3. It does not contradict an express term of the contract – in practice, many cases on implied terms are defeated by the identification of a contradictory express term.
1.3.4. It is reasonable and equitable (but it is likely to be reasonable and equitable if the above requirements are satisfied).
The test for the implication of terms into contracts is stricter than it had been assumed to be (post Belize v. Belize). As with Wood v. Capita the judgment of the Supreme Court in M&S v. BNP Paribas has moved away from a focus on what was “commercially reasonable” for the parties to have agreed, and back towards what the parties had in fact objectively agreed. In Ali v. Petroleum Company of Trinidad and Tobago,19 Lord Hughes giving the opinion of the majority of the Board of the Privy Council emphasised the importance of this stricter approach:
“the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated…The concept of necessity must not be watered down.”
Key takeaway point
It follows that legal advisers must take more care than ever to draft contracts that not only (a) admit of no ambiguity in the express terms used; but (b) are complete and comprehensive – nothing, however obvious, should be left unsaid.
Sports law context
This strict approach was recently considered in a sporting context in Marussia Communications Ireland Ltd v. Manor Grand Prix Racing Ltd20 where a Chancery Division judge (Males J) considered this new test in the context of a claim for trade mark infringement brought by Marussia. Manor defended by, amongst other things, asserting that there was an agreement between the parties into which a term was to be implied – that Marussia consented to Manor’s use of its trade mark.
Whilst this would not have been determinative of the dispute, the Court applied M&S v. BNP Paribas and held that there was in any event no basis for implying the term contended for into the agreement between the parties. In fact, such a defence had no real prospect of success.
3. Anti-variation clauses
Strictly speaking, Case 3 is not one case at all – but two. However, given (a) both cases were handed down by the Court of Appeal within months of each other in 2016; (b) they concern exactly the same question; and (c) MWB refers to and adopts much of the legal analysis on the relevant point in Globe Motors, they must be considered at the same time.
One of the most common boilerplate clauses in commercial contracts is an “anti-variation” clause, which typically follows hot on the heels of (or immediately preceeds) an ““” clause. The purpose of an anti-variation clause is, of course, to ensure that parties are held strictly to the terms of the contract that they signed, and that they may not avail themselves of the argument that in fact a slightly different agreement was entered into and/or that the terms of the agreement were changed subsequent to it being signed. The anti-variation clause has traditionally been an important weapon available to the parties in any claim for breach of contract; however, two recent decisions of the Court of Appeal have suggested that the clause may not provide as much (or indeed any) protection as previously thought.
In Globe Motors, the Court of Appeal considered an anti-variation clause and held (albeit obiter) that, in principle, a contract containing a clause that any variation was to be by agreement in writing could in fact be varied by an oral agreement or an agreement by conduct. In MWB, the Court of Appeal adopted the reasoning from Globe Motors – and held that an anti-variation clause did not preclude a variation being made.
In both cases, the Court of Appeal cited the principle of party autonomy – that is, that parties are free to make or unmake contracts at will, and are free to waive compliance with any terms of a contract as they see fit. It followed from this that the parties were as free to vary the terms of the anti-variation clause as they were to vary any other clause. Thus, a two-stage process of variation was in play:
- Stage one – the anti-variation clause was itself varied to allow for variation of the remaining contract terms. However, the strict legal analysis of this stage is unclear:
1.1.1. In MWB at para 89 Arden LJ considered that that the agreement to vary the anti-variation clause was itself a “collateral unilateral contract”; in Globe Motors at para 107 Beatson LJ set out how the parties’ words or conduct, “may give rise to a separate and independent contract which, in substance, has the effect of varying the written contract”.
1.1.2. Alternatively, the parties may have waived compliance with the anti-variation clause (see the discussion of waiver per Beatson LJ in Globe Motors at para 101).
2. Stage two – the relevant remaining contract term was in fact varied.
Key takeaway point
In summary, and despite the uncertainty as to the strict legal analysis, there are now strong appellate authorities that anti-variation clauses will not preclude a party from relying on a contractual variation (provided the variation is supported by consideration). Taken at their highest, the effect of anti-variation clauses is simply to require more cogent evidence from a party seeking to rely on a variation who must show that the variation was in fact made despite the anti-variation clause being in place.
Permission has been granted to appeal MWB to the Supreme Court, and it is hoped that the Court will provide increased clarity on the legal analysis at play behind the decision. In the meantime, in the wake of Globe Motors and MWB, advisers should be astute not to place too much reliance on anti-variation clauses, and instead should look to alternative means to provide contractual certainty.
Sports law context
In player/athlete contracts, one way of providing such certainty would be expressly to restrict the class of persons (in the contract itself) who are stated to have authority to vary the terms of the contract on behalf of the club – perhaps even to a single agent acting on behalf of the club. If this restriction is made known to the player/athlete in the contract, it will be very difficult to argue that any variation made by agreement other than with the relevant, identified agent is valid and binding; there will have been no ostensible or implied authority capable of binding the club.
4. Penalty Clauses
Case 4 (Makdessi) is again, strictly, two cases – though they were heard at the same time by the Supreme Court in conjoined appeals and must, therefore, being considered together.
Makdessi concerned the law in relation to penalty clauses within contracts. At the outset (para 3) of the judgment of the majority (given by Lords Neuberger and Sumption), the Supreme Court noted that, “[t]he penalty rule in England is an ancient, haphazardly constructed edifice which has not weathered well” and later (at para 31), that “the law in relation to penalties has become a prisoner of artificial categorisation”. The remainder of the judgment constitutes a comprehensive review and restatement of the law in relation to penalty clauses within contracts.
As with all the cases in this article, the facts of Makdessi are not directly relevant. What is relevant is the following summary of the Supreme Court’s restatement on the law in relation to penalty clauses:
- The penalty rule regulates the remedies available for breach of a party’s primary obligations21, and not the primary obligations themselves (para 13). A conditional primary obligation cannot be a penalty (it does not impose an obligation to perform an act and a consequence for not doing so) (para 14). Put another way, the rule against penalties applies only in the context of a breach of contract (para 239).
- The question of whether a clause is a penalty clause is a matter of construction, and falls to be considered at the time the contract was agreed (paras 9 and 243). Classification of a term as a penalty clause or otherwise depends on the substance of the term and not its form (para 15).
Penalty clauses are not confined to stipulations for the payment of money (para 16). They may extend to obligations to transfer assets, clauses relating to the retention of deposits, or other sums (paras 16 and 228).
- The rule against penalty clauses is substantive and not procedural (para 34). However, where there is an equality of bargaining positions, there is a strong initial presumption that the clause is legitimate i.e. that it is not a penalty (para 35).
- If a clause is a penalty clause, it is unenforceable. However, the innocent party will still be left with his remedy in damages under the general law (para 9).
- A clause will be a penalty clause where:
1.5.1. It does not serve to protect any legitimate business interest of the innocent party (para 152); or
1.5.2. It imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation it is triggered by (para 32). It will be out of all proportion to the legitimate interest where it is extravagant, exorbitant or unconscionable (paras 152, 244 and 255).
- Monetary compensation is not the only legitimate interest that the innocent party may have in the performance of the primary obligation (paras 28 and 32). The dichotomy between (a) compensatory vs. (b) deterrent clauses is a false dichotomy (para 131).
- The four indicative tests formulated by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd22 are not strictures or a quasi-statutory code to be applied mechanistically; rather, they are considerations to be taken into account in deciding whether a clause is a penalty or not (paras 21 and 22).
Key takeaway point
Advisers need to be aware that the familiar test (which had been applied for over a century) for identifying a penalty clause – whether a clause is a bona fide liquidated damages clause on the one hand (enforceable) or a penalty clause on the other hand (unenforceable) – is no longer good law. Instead, the Supreme Court has set out a new test, which Lord Hodge pithily summarised as follows:
“the correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract.” (para 255)
Sports law context
In 2008, having been constructively dismissed by Newcastle United, Kevin Keegan begun arbitration proceedings – and the case provides an illustration of the penalty doctrine being applied in sports litigation. Whilst Kevin Keegan was successful, he tried to argue that the liquidated damages clause did not apply (which limited his damages to £2m) because, amongst other things, it was unenforceable as a penalty clause.
The arbitral tribunal made clear in its award (Keegan v. Newcastle United FC Ltd23) that the liquidated damages clause was not punitive in nature – given “the near impossibility of estimating precisely what his loss would be, we consider [the clause] to be reasonable and to represent a genuine pre-estimate of his loss”24.
Whilst this decision was arrived at applying the old test for penalty clauses, it serves to illustrate that where it is impossible to precisely estimate loss flowing from a breach of contract (as will often be the case in sports contracts) it will be very difficult indeed to argue that a clause is penalty clause. The new test, requiring the clause to be exorbitant or unconscionable, will be even harder to satisfy in these circumstances.
In Patel v. Mirza the Supreme Court grappled with the “notoriously knotty” problem (as Sir Robin Jacob called it25) of the effect of the illegality doctrine on the law of contract, and embarked on a root and branch review and restatement of the law in this area. The judgment is compulsory reading for any sports law practitioner involved in commercial litigation.
Patel v. Mirza concerned a claim in restitution; it was defended on the ground of illegality. Given the facts of the claim, the strict ratio of the case is confined to rescission: money transferred pursuant to an illegal transaction is recoverable via rescission, and such a claim will not generally be defeated by a defence of illegality.
What is of more relevance to sports lawyers, however, is the broader restatement of illegality doctrine and its effect on the law of contract given by the Supreme Court, and in particular in the lead judgment of Lord Toulson.
Prior to Patel v. Mirza, the illegality defence had been viewed through the prism of the lead House of Lords case Tinsley v. Milligan26 from which the traditional “reliance” test was drawn: a claim would be barred from succeeding if it needed to rely on the claimant’s illegal acts to succeed. This reliance test, though deceptively easy to enunciate, was notoriously difficult to apply in practice. In Patel v. Mirza the majority of the Supreme Court held that the reliance test from Tinsley is no longer good law. Instead, a new test focused on public policy was put forward by Lord Toulson (with whom four other members agreed) at para 120:
“The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system…in assessing whether the public interest would be harmed…it is necessary (a) to consider the underlying purpose of the prohibition…(b) to consider any other relevant public policy on which the denial of the claim would have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.”
This test did not receive unanimous approval by the Supreme Court in Patel v. Mirza. Lord Sumption described the move away from the reliance test towards a public policy test as a substitution of “a new mess for the old one” (at para 265). Furthermore, at least one first instance court has held that the ratio of the case is confined to rescission, and that courts are not bound to apply Lord Toulson’s new policy based test to cases outside this narrow category where there is previous binding higher authority.27 Therefore, it remains to be seen whether (outside the context of rescission) and how the courts will apply the new test.
Nevertheless, it is clear that the scope of illegality defences has been reduced by Patel v. Mirza. It is worth remembering that illegality defences are not confined to extreme cases:
- Illegality defences are not in-frequently raised in commercial disputes (although they are seldom pursued to trial). For example, in a claim brought by an individual concerning sums due under an agency agreement where invoices were raised by the agent’s limited company and not by the agent as an individual, the (potentially) illegal treatment of income derived from the commercial agency agreement (i.e. as income of the agent’s limited company not as income of the individual agent) formed the basis of an illegality defence.
- In a sports context, consider the interesting (and perhaps not wholly far-fetched) example of a contract between an athlete or a team and a doctor pursuant to which the doctor would provide performance enhancing drugs in return for payment. If the athlete or team failed to pay the doctor in breach of this contract, would the illegal purpose of the contract preclude the doctor from recovering sums due to him under the contract? Whatever the answer, this example must now be addressed by reference to Lord Toulson’s policy-based test in Patel v. Mirza and not the reliance test from Tinsley.
Key takeaway point
Practitioners should be alive to this change in the law, and astute to the new landscape: the illegality defence may no longer be as powerful as it once was when deployed in in contractual disputes.
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William is a barrister specialising in civil and commercial law at 2 Temple Gardens (see https://www.2tg.co.uk/barristers/profile/william-clerk). He is rapidly developing a busy sports practice with a strong focus on the commercial, disciplinary, and regulatory aspects of sports disputes across all major sports. He is frequently instructed to advise on the interpretation and application of sports bodies’ regulations.