Ignore your sponsor at your peril

A recent high profile decision by the England and Wales Court of Appeal has shed light on what amounts to a repudiatory breach of contract and for how long the innocent party can wait before terminating the contract lawfully.

Background to the Case

Formula One racing team owners, Spyker F1 Limited (subsequently re-named Force India Formula One Limited), entered into a main sponsorship agreement in April 2007 with two Abu Dhabi companies, Eithad Airways and Aldar Properties (Etihad) in which both sponsors committed to provide at least  €20 million to the Formula One team over the course of 3 years.

Under the contract Etihad was to be the prominent sponsor of the racing team, it was to be the sole and exclusive airline brand to be associated with the team and it was to have the naming and branding rights together with the endorsement and image rights of the team.

In September 2007 an Indian entrepreneur named Dr Vijay Mallya bought Spyker Limited. Dr Mallya was chairman of a breweries company which encompassed the brands Indian Kingfisher Beer and Kingfisher Airlines. A re-branding exercise of the racing team subsequently took place and the team was re-named Force India and Eithad’s rival airline Kingfisher Airlines was promoted by Force India together with Kingfisher Beer and the team portrayed a strong affiliation with India.

The contract was brought to an end in late 2008 by Eithad, claiming material breaches of the sponsorship agreement by Force India. The Formula One team counter claimed arguing that Eithad had committed a wrongful repudiation of the contract as they had affirmed the contract through its inaction and continued performance of the contract and therefore had abandoned its right to lawfully terminate the contract.

Judgments of the Court

The High Court found in favour of Force India and despite numerous breaches of contract by the Formula One Team, the ‘wait and see’ attitude of Etihad meant that they had affirmed the contract and were not within their rights to terminate. The High Court awarded damages in the sum €5,140,775 to Force India.

On the 6 October last, Etihad appealed successfully on the grounds that Force India had repudiated the contract by committing a series of repeated repudiatory breaches of the contract which were irremediable. The case was sent back to the Queens Bench for assessment of damages against Force India.

The deliberate re-branding and change of name of the racing team without consulting Etihad was considered to be a serious breach of the contract. As per the comments of the Court of Appeal, when considering how Etihad’s rights were effected; ‘the facts stated above show that Force India rode roughshod over all of these rights and protections’.

Further, the Court of Appeal judged that these serious breaches were not capable of being remedied and in fact Force India would not have been willing to do so in any event as their goal was to appeal to the Indian market and wanted Etihad to take a back seat as a sponsor without their approval.

With respect to Force India’s argument that Etihad had affirmed the contract through their ‘wait and see’ approach, the Court of Appeal judged that although delay may always be capable of being compromising, time was not of the essence in this particular case as it was a complex and medium term relationship where it took time for the consequences of the changes to the racing team to become clear and it was legitimate for the innocent party to consider its position before terminating the contract.

Common Law Position in Ireland and the UK

A repudiatory breach of a term is where one party has decided not to perform its obligations under the contract and therefore it is not equitable to expect the other party to continue to carry out its own obligations under the contract.

The common law position in Ireland and the UK is that for a breach of a term of a contract to be repudiatory (therefore allowing the wronged party to lawfully terminate), the breach must be of a serious nature and secondly the breach must be deliberate, i.e. the wrongdoer must have taken a conscious decision to carry out the breach.

Of course contracts may also be lawfully terminated where the term breached is a condition of the contract, i.e. both parties have agreed that the term is a condition of the contract or statute provides that the term is a condition. Contracts may also be terminated where a fundamental breach is committed. This is where the breach is so grave that the injured party is entitled to terminate the contract.

Consequences of this Judgment

This decision (should it be followed by the Irish Courts) will give comfort to sponsors who are involved in complex agreements where the other party appears to be infringing their rights and the sponsor needs time to consider its position and be sure that the infringements are serious and deliberate breaches amounting to repudiatory breaches, therefore allowing them to terminate the contract lawfully.

It means that companies who are being sponsored cannot merely rely on the argument that no action was taken by the sponsor when certain obligations were not fulfilled where time is not of the essence within the contract, i.e. time would be of the essence in the sale and purchase of perishable goods.

It is also clear from the decision that the question of whether affirmation of the contract took place would have to be judged on a case by case basis.

How to avoid litigation

A sponsorship agreement should always contain a clause which attempts to cover this situation as best as possible. Exit mechanisms and clear definitions of each parties obligations should be put in place to avoid costly litigation.

Notice should be given to the other party where one party to the agreement is considering their position within the contract when they feel the other side is not carrying out their obligations. This will quash any argument for affirmation so long as they do not delay for an excessive period.

A cleverly drafted ‘no waiver’ clause, which provides for the situation of affirmation, would also obviously help.

It can be difficult to assess whether a breach is sufficiently serious to enable the contract to be brought to an end lawfully as it may take time to gather all the facts and come to a conclusion. It is even more difficult when the alleged breach has not actually occurred yet and is merely anticipatory. Therefore extreme care should be taken when assessing the situation and advices sought in order to avoid a claim for the wrongful termination of the contract.

This article was written by Patrick Conliffe, solicitor, and edited by Paul Keane.

If you have any queries in relation to the topic of this articles, please contact Paul Keane at pkeane@reddycharlton.ie or at (353) 1 6619 500.

Disclaimer

This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by Reddy Charlton for any action taken in reliance on the information contained herein. Any and all information is subject to change.