Contracts and sponsorship in the sporting industry
Currently sport is one of the biggest money making industries in the world with huge amounts of income being generated by different sports. One of the biggest ways in which income is brought into sports is through sponsorship. This can be sponsorship of different sporting events, different sporting teams and individuals taking part in the sport.
The nature of what is being sponsored may change but one thing that will always remain the same is the fact that a company will be paying large sums of money in order to be associated with an aspect of a certain sport.
The use of a contract in the form of a sponsorship agreement is therefore a key tool by which to generate this income.
The laws of contract will apply regardless of the industry
The fact the sponsorship agreement is associated with the sporting competition is immaterial to the laws of contract. They will apply regardless of the substance of the agreement.
Affirmation of contract in the sporting context
What is meant by affirmation of contract?
Affirmation of contract occurs whereby one of the parties to the contract commits multiple breaches of the contract but the other party does not terminate the contract following the breaches. The party cannot then hang around hoping to maintain their right to terminate the contract indefinitely in the face of breaches by the other party. If they do not terminate they will be seen to have affirmed the contract and will not be able to then exercise their right of termination.
This principle has been held to apply to sponsorship agreements in the sporting context following a recent case involving Formula One.
What happened in this case?
A Formula One team owned by a specific company did not have sponsorship for its car so it entered into an agreement with an airline to enable that airlines logo and brand to be present on the car. A year later the owner of the team sold it to another company who subsequently brought about a change in team name. One of the individuals involved with the new team had an interest in a specific company which operated both a brewery and an airline.
During the next season the new team was to become branded by the rival airline company while the original contract with the first airline remained in place. The original airline looked at other options of sponsoring another team and undertook an assessment of their own teams change in sponsorship.
A year later they terminated the original contract citing breach of contract.
On what grounds did they claim the contract had been breached?
They claimed that the original contract had been breached on the following grounds:
- The use of the new logo at the winter F1 practice sessions
- The change of team name
- The new livery during the F1 winter testing
- The acquisition of the original owner by a company associated with a rival airline
What did the new team owner in this case claim?
The new owner claimed that the sponsor in trying to terminate the contract had in fact committed a wrongful repudiation of the contract as the sponsor had affirmed the contract and lost the right to terminate.
What did the court say in this case?
It was held that the first three alleged breaches constituted a breach which could have been remedied and that the sponsor had not notified the new owner and requested that the breaches be remedied. Accordingly this meant that the sponsor could not terminate the contract as a result of these breaches.
The sponsor’s affirmation of the contract
It was held that the sponsor had affirmed the contract and therefore could not terminate according to the following principles of affirmation:
- A contract gives a party the right to terminate upon the occurrence of specific actions or inactions of the other party (a breach of contract). If these actions occur then the party will be entitled to terminate. However, under the terms of contract law that party must elect as to whether they terminate the contract or not
- The innocent party has to make a decision. If that party does not make a decision then the law will take the decision out of their hands by either finding that the party has elected not to exercise the right to terminate or in some cases holding that they have elected to terminate it
- If the innocent party has knowledge of all the facts and it is clear that by their actions they have elected not to terminate the contract then the court will accordingly hold that they have made that election
- An election can be communicated to the other party by either words of conduct. It must be noted that in cases where it is alleged that a party has elected not to exercise a right of termination upon the happening of defined events it will only be held that the party elected not to exercise the right if it was communicated to the other party in clear and unequivocal terms