Renewal Clauses

In this post, I will be discussing Renewal clauses that involve the right of first refusal. Right of first refusal is a common clause in endorsement contracts between athletes and sponsors.  They allow the sponsor to match a third parties offer to keep the athlete on it's marketing team.  Right of first refusal can be a powerful tool for sponsors if it is drafted correctly.

Sports teams implement renewal clauses so that they can protect their star athletes.  However, it doesn't guarentee that they can retain the athletes services.  For example, in 2006, the Minnesota Vikings offered to make Seattle Seahawks free agent offensive lineman Steve Hutchinson the highest paid offensive lineman on their team after the first year of his contract.  The Seahawks already had a highly paid offensive lineman so they couldn't match the Vikings offer.  This tactic is allowed and it was a smart move by the Vikings identifying that the Seahawks wouldn't be able to match the offer.

In a renewal clause, sponsors need to define what elements need to be matched. An athlete might want the exact offer matched in the contract.  There are many objects that can be offered including base compensation, incentives/bonuses, royalties for products, or other non cash items such as a car or house.

Another concern with the right of first refusal is how to enforce it as a sponsoring organization.  A sponsor may seek an injunction requiring the athlete to fulfill the sponsorship.  The organization is allowed to do so because the right of first refusal is stated in the contract.  However, the athlete may not want to be a part of the original organization and it could risk other future sponsorships with athletes.  The athlete may not want to be a part of that organization and make it known publicly which would hurt the brand.

Right if first refusal clauses are considered the most restrictive to the sports propety/sponsor because it allows the athlete to test the open market which forces the property to make the decision to match the offer and ultimately pay more.

Renewal Clauses that aren't specific can lead to future problems when the contract expires.  For example, in 2007 Mastercard sued FIFA after FIFA reached a deal with Visa to sponsor the next two world cups.  Mastercard had been the payment card sponsor with FIFA for 16 years prior to the Visa deal.  FIFA believed they were free to find a new sponsorship deal because one couldn't be made with Mastercard.  However, the previous contract between Mastercard and FIFA had a right of first refusal which is why Mastercard sued.  FIFA lost $90 million because of the dispute and this shows the importance of making the terms of renewal clauses clear to both parties.



Another example of enforcing rights of first refusal was the Oakley v. Rory McIlroy and Nike case involving an endorsement agreement.  The right of first refusal granted Oakley the right to match any terms offered to McIlroy by a third party "regarding the endorsement of products the same as or similar in his agreement with Oakley (Eyewear, apparel, and accessories).  Obviously, Nike offers a similar product endorsement so what does this mean?


The remedy for a breach of personal services agreement is usually monetary damages unless services are unique.  However, courts would never enforce an individual to continue performing services.  Courts could enforce an injunction or non-compete but thats only if it doesn't impose undue hardship on the individual.  The deal of $200-$250 million was seen as unaffordable to Oakley and there was speculation that they waived the right of first refusal.  But what if Oakley didn't waive the right and tried to seek damages?


It would be difficult to measure damages and put monetary vale on McIlroy's brand image being associated with Oakley.  To remedy thos problem in the future, brands should consider including liquidated damage provisions in endorsement agreements in the event of a breach.  Right of first refusals can be a powerful tool if they are drafted correctly.

Hope you enjoyed my thoughts!

-Mark

Sources:

http://www.forbes.com/sites/oliverherzfeld/2013/03/19/oakley-v-rory-mcilroy-and-nike-enforcing-rights-of-first-refusal-in-endorsement-agreements/

http://www.acc.com/legalresources/publications/topten/sla.cfm

http://www.sportsbusinessdaily.com/Journal/Issues/2009/04/20090427/From-The-Field-Of/Properly-Drafted-Right-Of-First-Refusal-Helps-Sponsors-Keep-Stars.aspx

Privity of Contract

Hi Everyone,

Privity involves being privy to or a party to a contract.  Only parties involved in the contract are allowed to claim benefits or incur liability.  However, some contracts grant benefits to third parties, or third parties may want to be substituted into the contract.  In these two instances, third parties may try to enforce the contract.  The general rule is that a party not involved in the contract cannot claim benefits or incur liability because they are not privy to the contract.

For example, lets look at a case that involves privity of contract.  In Yashin v. NHL, Yashin refused to play for the Ottawa Senators in his last season of his 5 year deal of his contract.  Yashin wanted to dispute his Standard Player’s Contract with the NHL.  The Standard Player’s Contract is between the NHLPA representing all the players and the NHL representing teams through the Collective Bargaining Agreement.  In Article 17.5 of the CBA, it states that grievances can only be initiated by the NHLPA and NHL only.  Yashin didn’t have the support of the NHLPA because it wouldn’t benefit all players.  Yashin couldn’t benefit from the contract because he was not privy to it. 

Another interesting case involving privity of contract once again involves Yashin.  The case Potechin v. Yashin has a season ticket holder for the Ottawa Senators suing Yashin (the Senators star player) for refusing to play.  The contract to be a season ticket holder was between Potechkin and the Ottawa Senators.  Yashin was not privy to the contract and could not be found liable.

These examples involve a third party not privy to the contract and therefore are not bound.  However, there are a number of other ways that third parties can assert right under a contract.  The ways include novation, vicarious performance, exemption clauses, trusts, and assignments.  These exceptions where third parties can play a role are discussed below:

Novation: The creation of a new contract to substitute in a new party in the existing contract.  Once the new contract is formed, the existing one is terminated.  For example, a company signs a contract to provide plumbing services to the Thompsons.  The business owner of the company decides to retire and recommends another company to replace them.  The new company signs the same contract that was previously held and is thus substituted in, relieving the other company of it’s obligations and giving the owner a happy retirement.

Vicarious Performance: Where one party is substituted to perform the task but the original party remains responsible for liability and performance.  For example, Davidson Homes signs a contract to fix a house that needs stairs repaired.  Davidson Homes subcontracts the job to StairMasters, a company that specializes in building stairs.  StairMasters are responsible for building the stairs but if the stairs aren’t up to performance standards then the liability is on Davidson Homes.

Exemption Clauses: Are put into a contract used to protect parties from liability.  Sports teams use exemption clauses to keep athletes from suing.

Trusts: A legal entity created by a grantor for a beneficiary whereby the property is transferred for their benefit.  For example, John Smith names his son Michael as a trustee in his will in case he dies.  John Smith passes away and all of his estate transfers to his son Michael.

Assignments: A transfer of rights from one party to a third party.  For example, you rent a house and are under contract with Mr. and Mrs. Johnstone.  Mr. and Mrs. Johnstone assign the contract to their son Josh.  You are now required to pay rent to Josh instead of the parents.  It differs from novation because no new contract is formed and your consent is no

Hope you enjoyed learning about privity of contract.

-Mark

Minors and Contracts

Hi Everyone,

The characteristics of a valid contract include capacity, legality, and privity of contract.  In this instance, we will be focusing on capacity specifically relating to minors signing contracts.  Being a minor refers to being under the age of majority in a particular jurisdiction.  For example the age of majority is 18 years of age in Ontario but varies in other provinces including British Columbia where age of majority is 19 years of age and Nova Scotia where it is also 19 years of age.  The general rule is that a contract is not enforceable against a minor but can be enforceable by the minor.  The exception is that the contract with the minor is for necessaries of life or beneficial contracts of service.  If it is not a necessity of life such as housing, food, or clothes, then the minor can repudiate it at any time.  In addition, if the contract with the minor is not beneficial, it can be repudiated.

For example in Nash v. Inman (1908), a tailor supplied clothing to a minor who refused to pay.  The tailor sued claiming that the clothes were necessaries and therefore the minor should be required to pay a reasonable price.  The court ruled in favour of the minor because the tailored clothes were not considered necessaries since he already had adequate clothing.  This case can be found here: Nash v. Inman.

Another example is in Toronto Marlboro Junior “A” Hockey Club v. Tonelli.  Tonelli was an exceptional player and signed a player contract at 17 with the Toronto Marlboros for three years.  Upon turning 18 years of age, which is the age of majority in Ontario, Tonelli repudiated the contract and decided to sign a professional contract with a team in the WHA.  The Toronto Marlboros sued Tonelli for breach of contract.  It was dismissed because the contract didn’t benefit Tonelli.  A contract is only enforceable against a minor if it benefits the minor and the onus is on the party (Toronto Marlboros) to establish the benefit.  The WHA is professional hockey league and Tonelli would be paid compared to junior. Upon reaching the age of majority, Tonelli has the right to repudiate the contract.  The contract becomes invalid if it is not ratified after turning the age of majority. Therefore the contract between the Toronto Marlboros and Tonelli was not beneficial to the minor.  This case can be found here: Toronto Marlboro Junior "A" Hockey Club v. Tonelli.

Hope you enjoyed my discussion on minors and contracts.

-Mark

The Basics and Formation of a Contract

Hi Everyone,

Before we analysis a contract, it is important to understand the basics and formation of a contract.  The essential elements of a contract are the intention to create a legal relationship, offer and acceptance, consideration, and legality.  A valid contract does not come into existence until one party, the offeror (or) has made an offer to the other party, the offeree(ee) who accepts it. 

For a contract to be created and become binding an offer must be made.  An offer is a promise to do something or give something of value.  Once the offer is made, there must be a form of acceptance.  For example, a man offers $15,000 for his car, and the other person accepts it.  The only person that can accept the offer is the person that the offer is made to.  An offer can lapse meaning the offer is terminated.  For example, the party could die prior to acceptance, fail to accept the offer in the time period specified or no time period is specified but doesn’t accept in reasonable time.  Another option is that the offeree rejects the offer and makes a counteroffer.  A counter offer does not accept the terms of the contract but proposes to add or modify them. 

There is no format that an offer must be made as long as it is understood to be an offer.  The offer must be communicated by the offeror for the offeree to be able to accept it.  Offers can be made verbally, in writing, or through a gesture such as raising your hand in a silent auction.  The general rule for acceptance on the other hand is that it occurs at the time of receipt but there are exceptions for mail and electronic.

Consideration involves the exchange of something.  A contract is void for lack of consideration because there must be an exchange that involves both sides. 

In addition to offer and acceptance, there must be an intention to create a legal relationship relying on presumption law.  The parties to a contract must have intended from the beginning of negotiations that legal obligations would result from the agreement.  The promisor will be bound to the promise that they make.

This is just the basics of the formation of contracts and I will go into more detail when I discuss particular cases.

-Mark

Introduction

Hello Everyone,

The purpose of this blog is to discuss the basics of contracts and their place in sports.  Contracts are a part of daily life but I will be focusing on topics related to the sports industry.

A variety of topics will be discussed particularily ones that I am passionate about including professional and amateur sports.  I hope that you will learn from my analysis of contracts in sports and join me for my exciting adventure!

-Mark