Affirmation of contract: it’s make your mind up time

01 January 2010

Max Duthie

This article was first published in in the January 2010 edition of the World Sports Law Report.

In light of the recent decision by the High Court on affirmation of contract and loss of chance in a sports sponsorship agreement[1], Patrick Rennie of Bird & Bird LLP looks more closely at the reasons behind the decision and the lessons it holds for contracting parties.

In November 2009, the High Court ruled on a sponsorship contract dispute between Formula 1 team, Force India Formula One Team Limited (“Force India”), and sponsors Etihad Airways P.J.S.C. and Aldar Properties P.J.S.C (“Etihad”).  The court decided that inaction and continued performance on the part of Etihad, despite multiple breaches of contract by Force India, amounted to affirmation by Etihad so that it was deemed to have abandoned its right to terminate the contract.  The decision was consistent with recent authorities on affirmation, but serves as a timely reminder that sports sponsors, just like other contacting parties, cannot hang around and hope to preserve their contractual right to terminate indefinitely in the face of breaches by their counterparts.  The court also decided that when looking at damages in relation to loss of chance, the events that have actually occurred between the breach and the trial can be taken into account.

Background

In early 2007 Force India, which was at this time owned and operated by a different company, Spyker, lacked a title sponsor for the upcoming Formula 1 season.  It entered into negotiations with Etihad and signed a heads of agreement shortly before the first race of the season, the Australian Grand Prix. 

In late August 2007, Spyker sold Force India to Orange India Holdings SARL (“Orange”) and the team changed its name from Spyker to Force India.  One of the ultimate owners of Orange had an interest in the Kingfisher brand, which included Kingfisher Airlines as well as the famous Kingfisher brewery.  Etihad witnesses said they did not feel “in the loop” regarding the change of ownership and that they were concerned that Kingfisher Airlines was a competitor and that the team was now associated with alcohol. 

During the winter practice sessions of 2007 Force India added new livery and the Kingfisher logo to its cars.  Around the same period Etihad was looking into the possibility of becoming the sponsor of another Formula 1 team and had begun a legal assessment of Force India’s change in ownership to “understand their potential leverage”.  But it was not until late January 2008 that Etihad wrote to Force India informing the team that it was terminating the agreement due to a material breach by the team.  Force India countered by claiming that Etihad had committed a wrongful repudiation (because it had affirmed the contract and lost the right to terminate) and that Etihad owed the team substantial sums in outstanding sponsorship fees and damages for future loss.

Affirmation of contract

Force India relied on the decision in Tele2[2] in which the principles of affirmation by election were summarised as follows:


  1. If a contract gives a party a right to terminate upon the occurrence of defined actions or inactions of the other party and those actions or inactions occur, the innocent party is entitled to exercise that termination right.  The innocent party has to decide whether or not to do so.  Its decision is, in law, an election.

  2. It is a prerequisite to the exercise of the election that the party concerned is aware of the facts giving rise to its right and the right itself.

  3. The innocent party has to make a decision, because if it does not do so then ‘the time may come when the law takes the decision out of [its] hands, either by holding [it] to have elected not to exercise the right which has become available to [it] or sometimes by holding [it] to have elected to exercise it’.

  4. Where, with knowledge of the relevant facts, the party that has the right to terminate the contract acts in a manner that is consistent only with it having chosen one or other of two alternative and inconsistent courses of action open to it (i.e. to terminate or affirm the contract), then it would be held to have made its election accordingly.

  5. An election can be communicated to the other party by words or conduct.  However, in cases where it is alleged that a party has elected not to exercise a right, such as the right to terminate a contract on the happening of defined events, it will only be held to have elected not to exercise that right if the party ‘has so communicated [its] election to the other party in clear and unequivocal terms’.

Etihad had sought to terminate the agreement on the basis that it had been breached by Force India and that the breaches were material.  The purported breaches were:

  • The use of the Kingfisher logo at the winter practice sessions.

  • The change of name from Spyker to Force India.

  • The new livery during the winter testing.

  • The acquisition of Spyker by a company associated with Kingfisher Airlines, a rival to Etihad.

The court said that the first three alleged breaches had been capable of remedy and that Etihad had not notified Force India and requested that such breach be remedied (as the agreement required).  This simple omission meant that Etihad could not terminate as a result of these purported breaches.

Importantly the court also ruled that in relation to three of the supposed breaches (including the association with a rival airline), Etihad’s knowledge of the breaches and resulting inaction meant that it had affirmed the contract and waived its right to terminate.  Etihad’s reasons for its inaction (including aviation politics) were essentially irrelevant.  The court said that Etihad had been engaged in a policy of “watch and wait and see” in order to understand what advantage they might be able to extract from the situation”.  It did not act, and in doing so affirmed the agreement.

Loss of a chance

The court then considered Force India’s claim that because of Etihad’s wrongful repudiation, Force India had lost the chance of being paid a contractual bonus in the second and third years of the agreement (which would have been payable based on the number of World Championship points gained in those years).  Etihad argued that an assessment of the points that would have been gained by Force India in the 2008 and 2009 seasons was speculative because Formula 1 is wholly unpredictable and that the claim had to fail.

Force India argued that the court was free to take account of the facts that had actually taken place between the termination of the agreement and the trial, which would entirely eliminate the need for speculation.  Force India had in fact gained 13 World Championship points in the 2008 and 2009 seasons, which would have earned them an additional $1.3m under the agreement.  The court followed the House of Lords’ decision in Golden Strait[3] (which said that it was open for a defendant to reduce his liability by reference to events that occurred between the breach and the trial) and applied it by analogy to the assessment of a loss of chance, awarding Force India $1.3m under that head of its claim.

Comment

This decision confirms the law on affirmation and is a reminder to all that when the party with which you have a contract breaches that contract (in such a way that gives rise to a right to terminate), the law requires you to make a decision: terminate or not.  This might not always be easy in a sponsorship context – particularly if the relationship is a long one and there is a history of goodwill that you don’t want to disturb.  But if you don’t make a decision, the courts will infer one.  And, what is more, if a subsequent wrongful repudiation leads to a loss of chance, it is now clear that post-termination events will be considered.  All the more reason to make sure that if you are going to terminate, you still have the right to do so. 

 






[1] Force India Formula One Team Ltd v Etihad Airways PJSC, Aldar Properties PJSC [2009] EWHC 2768 (QB)



[2] Tele2 International Card Company SA v Post Office Limited [2009] EWCA Civ 9



[3] Golden Strait v Nippon Yusen [2007] 2 AC 353

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