Lock it in Eddie: Avoiding uncertainty and confusion when doing deals in sport

Freehills' litigator, Max Duthie, considers Eddie Jordan's disastrous pursuit of Vodafone's sponsorship dollars in the English High Court, and wonders if lessons can be learned from this and other cases about the way to do business in sport these days, and in particular about the need for clarity in contractual negotiations.

On 4 August 2003, His Honour Justice Langley delivered his judgment in the case of Jordan Grand Prix Limited v Vodafone Group plc¹ - it was not pleasant reading for Mr Jordan or for the company that runs his Formula One motor racing team. Jordan Grand Prix Limited had sued Vodafone for, among other things, breach of a $230 million sponsorship contract purportedly entered into during a ten-minute mobile phone call in March 2001. Apart from losing the case, and with it the prospect of millions of dollars in damages, Mr Jordan also had to endure the Judge's hostile comments on his credibility. Justice Langley found parts of Mr Jordan's evidence to have been 'crass' and described him as a 'wholly unsatisfactory witness … [occasionally] reduced to embarrassed silence by the exposure of blatant inaccuracies in what he was saying'.

Leaving aside the Judge's views on Mr Jordan's testimony, the decision is a wake-up call (one of a few in recent years) for sports organisations who might traditionally have been happy to make vague commercial arrangements on little more than a nod or a handshake. As is the case in other industries, if commercial agreements in the sports world are to be legally enforceable, they need to meet established criteria, including the need for certainty and completeness. At each stage in the negotiation of such agreements, the parties must ask themselves whether that round of discussions has resulted in a binding agreement. If at any stage this is not clear to a party, that party should take steps to have the matter clarified, either through direct communication with the other party or, if necessary, by seeking legal advice. Otherwise, it might find itself locked into a binding contract when it thought otherwise (or vice versa).

The Jordan case

The facts of the Jordan case are fascinating. For some time in 2000 and early 2001, Vodafone had been considering a sponsorship deal in Formula One. Vodafone's global brand director, David Haines, was weighing up the relative benefits of sponsoring one of the so-called 'front row' teams such as Ferrari or McLaren, as against a deal with a lower profile team such as Benetton or Jordan, who might be cheaper and offer greater exposure on the car.

By 22 March 2001, Mr Haines had received sponsorship proposals from all four of the above teams, and was at various stages of negotiations with each of them. At the same time, Mr Haines was considering the recommendation that he was to make to Vodafone's 'Brand Council' and various other committees within the Vodafone organisation, before a final decision on sponsorship would be made the following month. One of the teams was to be chosen and, in Mr Haines' view, 'Jordan probably had their nose ahead' at this stage; in other words, on 22 March 2001, Jordan was the team that Vodafone was most likely to go on to sponsor.

Just after 7 pm that evening, as Mr Haines sat in the back seat of a crowded car being driven through the rain on a dark and busy road near Dusseldorf, he made the now-famous call to Eddie Jordan. Mr Jordan took the call on a speakerphone so that his director of business affairs, Ian Phillips, could also participate. At the trial, there were conflicting accounts of what was said during the call, and the Judge raised serious doubts about the value of a purportedly contemporaneous note of the conversation made by Mr Phillips. At the forefront of the case was a comment allegedly made by Mr Haines when interrupting Mr Jordan's enthusiastic sales pitch: 'Eddie, stop, stop, you've got the deal.'

But Jordan never did get the deal and two months later Vodafone signed a multi-million dollar sponsorship agreement with Ferrari for three seasons.

So, did he or didn't he say it? Mr Phillips thought he did, and that it 'left no room for misunderstanding that the sponsorship contract had been awarded to Jordan'. Mr Jordan thought he did too. On the other hand, Mr Haines did not think he said it, and nor did the two other men in the car with him at the time. Critically, the judge preferred Mr Haines' evidence, and found that he had not used those words.

The need for certainty and completeness

So much for the question of the words used in the conversation. More interesting perhaps is the legal effect of the conversation if Mr Haines had used the words, 'you've got the deal'. Would this have meant a binding contract had been entered into there and then? Aside from the issue of Mr Haines' authority (to enter into contracts on Vodafone's behalf), the answer to this question depends on whether the arrangements at the time of the phone call were sufficiently certain and complete for the court to recognise them as forming the terms of a binding contract. The Judge found that there was no—or an insufficiently certain—agreement on some issues that were fundamental to the negotiations, such as the car's livery, performance bonuses and Vodafone's option to renew. The Judge considered this to be fatal to any claim that a binding contract had been entered into, whether or not Mr Haines had in fact used the phrase 'you've got the deal'.

The law on certainty and completeness is relatively straightforward (although applying it to the facts of any case is more difficult). First, certainty. If it is not possible to identify the scope of the rights and obligations agreed by the parties to a 'contract', then it will be void. But the courts try, where possible, to uphold agreements, and so where there is more than one possible meaning to the words used in a contract, the courts will interpret the meaning from those words (but where no meaning at all can be found, then the contract will be void). The terms need not give rise to certainty at the time of making the contract, so long as they will do so eventually at the time for performance. For example, sponsorship or broadcast contracts might provide for rights fee increases based on factors unknown at the time of execution, such as future team performance or rates of inflation. While such provisions are in one sense 'uncertain', if they provide a method of calculating the rights fee with certainty at the time when payment is due, then even though the rights fee cannot be calculated at the time of the contract being entered into, the contract will still be valid.

The need for completeness is slightly different from the need for certainty. If an essential or important part of a transaction is yet to be agreed, the agreement is not finished and is therefore not binding. But which parts of a transaction are essential or sufficiently important for the absence of agreement to invalidate the contract? This will depend on the parties' respective intentions, or rather (as the test is objective) how a reasonable person would have interpreted those intentions. So, if the parties' intention (judged objectively) was that they would not be bound unless and until agreement is reached on a certain issue (however small), then indeed they will not be bound unless and until agreement is reached on that issue.² Conversely, if the parties' objectively-judged intention was that the agreement would be binding notwithstanding some issue or issues (perhaps even seemingly major issues) remaining unresolved, the agreement will still be binding.³

In Jordan, the unresolved issues included the colour of the racing car, the performance bonuses to be paid to the team and Vodafone's rights to renew. The Judge's view was that, without agreement on these issues, there could be no binding agreement between Jordan and Vodafone. Again ignoring the issue of Mr Haines' authority, if the parties had reached agreement on some or all of those matters prior to or on 22 March, then a binding contract might have been entered into on the phone that day. The lesson from this is clear: if a party is keen to conclude a contract at a given point in time (perhaps because of looming deadlines, or the need to decide quickly between competing offers), it should determine which elements of the deal are essential, and confirm that clear agreement has been reached on those issues and that therefore a binding contract has been made.

At the risk of stating the obvious, it will always be wise to record the deal in writing. This not only avoids subsequent disputes over the specific terms agreed orally, but may also affect the court's assessment of whether a binding contract was entered into at all.⁴ In Jordan, the Judge had to consider whether a three-year $230 million sponsorship deal had been entered into on the phone and concluded that there was 'an inherent improbability of an agreement of such a nature for payments of such a size being made in such a manner'.

A sporting tradition?

Is it really that remarkable that a multi-million dollar sponsorship deal should be done on the phone, or scribbled on the back of a ciggy-packet? The answer should be yes, but in sport it is possibly no. While the vast majority of significant commercial arrangements in sport are these days contained in sophisticated contracts that have been negotiated and drafted by experienced legal advisers, there are still a number of exceptions. Generally speaking, this is not the case in other industries, so why is sport different in this way? Why are sports deals prone to be less well-documented than deals in other spheres? There are at least two reasons.

The first is the inflexibility of the sporting calendar. For instance, the Australian Open Tennis Championships will begin on 19 January 2004, come what may. If contractual negotiations on, say, the tournament sponsorship or the official ball supply are delayed, it is almost inconceivable that the start of the tournament would be postponed to allow for continued talks and drafting.⁵ In that respect, negotiating commercial agreements in sport is quite unlike negotiating in other spheres; the same time pressure will not necessarily apply when, say, negotiating the sale of a restaurant business, the purchase of a parcel of land, or the provision of financial services. This peculiarity might result in sports contracts often being finalised late at night on the eve of an event, perhaps partly in writing, partly orally, with some issues remaining unresolved and others covered by ambiguous language. The parties cross their fingers and (unfortunately) the lawyers lick their lips.

The second reason is a cultural one, based on a dreamy Corinthian view (now rare but not completely gone) that commercial agreements in sport can be successfully made between gentlemen over a brandy in a smoke-filled room, with nothing so gauche as a written contract. For example, Manchester United's Roy Keane, one of the world's best and highest paid soccer players, reportedly has no written agreement with the agent and solicitor that advises him on his multi-million pound playing and commercial arrangements.

But these peculiarities will not lead the courts to treat sporting contracts differently, and when problems arise, the basic principles of contractual analysis and construction will always be applied by the courts to determine whether a contract exists (and if so, to interpret its terms). Certainty and completeness have already been considered above. Other basic principles crucial to the formation of a contract are considered below.

Offer and acceptance

As any law student will tell you, a binding contract needs (a) an agreement, (b) consideration (the quid pro quo), and (c) the intention of the parties to create legal relations. The 'agreement' has traditionally been analysed in terms of an 'offer' and an 'acceptance', although in more recent years judges and commentators have suggested that this requires an artificial view of how some contracts are made.⁶ Where one party does make an 'offer', it has an important legal effect—without any more action from that party, the offer can be accepted by the other party and a contract will be formed. The point is a simple one—if you don't want to find yourself entering into a contract before you are ready, make sure that what you say during negotiations is not an offer (ie, make sure that what you say would not appear to a reasonable person to demonstrate a willingness to be bound without further negotiation). If you are on the receiving end of what looks like an offer, get confirmation of its status.

In Jordan, it was argued that a comment made by Mr Haines to Mr Jordan and others during an evening at Silverstone race track constituted an offer by Vodafone. Mr Haines was said to have issued a 'challenge' to the Jordan team—that if they would accept a price of $230 million and a particular livery for the car, then 'the deal was theirs'. The language used was certainly like that of an offer, but the surrounding circumstances were all-important. Justice Langley agreed with Mr Haines that it had not been an offer: 'no one could sensibly have believed in the context of a first exploratory meeting of this kind that such a challenge could be seen as a contractual offer'.

Intention to create legal relations

Jordan is not the first sports organisation to have had a difference of opinion with another party over the enforceability of an 'agreement'. In 1996, the Rugby Football Union (England's rugby union governing body) sold the broadcasting rights to England's home matches in the then Five Nations Championship to Rupert Murdoch's pay-television platform, BSkyB. In doing so, it abandoned the traditional collective selling of broadcasting rights to all of the five countries' matches. As a result the RFU (and the England rugby team) was effectively expelled from the Championship. A settlement deal was done (contained in a document called the Five Nations Accord), allowing the RFU back into the Championship on certain conditions, but the RFU subsequently refused to acknowledge that the Accord was legally binding. Three years later, in a fairly ignominious public climb-down, and only when the RFU had been expelled for a second time, did it confirm that the Accord was binding.

Often parties negotiating without lawyers will reach a verbal 'in principle' agreement with a commitment to negotiate a written contract, drafted by lawyers, at a later date. Ask those parties whether at that time an enforceable agreement has been entered into and the responses may not always be the same. Even where a 'heads of agreement' has been signed with an intention to execute a long-form agreement at a later time, it is not always clear whether the parties are bound by the heads unless and until a long-form is signed.

The most critical question to ask when looking at these issues is what were the parties' respective intentions. As mentioned above, one of the requirements of a contract is that the parties intended to be legally bound (rather than not bound at all, or bound only in a moral sense). But how do you know the other party's intention? Well, as with an 'offer' and with the issue of completeness, the courts assess this objectively. This means that the courts do not ask simply whether a particular party intended to create legal relations (which would be difficult to prove); rather they ask whether a reasonable person in the shoes of the other party would have thought the first party intended to create legal relations. The result of this might be that a party that secretly lacks any intention to enter into an enforceable contract will still find itself bound if its conduct in the eyes of the reasonable person suggests otherwise. Because of the objectivity of the test, and because there is effectively a rebuttable presumption that the parties to a commercial agreement had the requisite intention, it ought to be rare that the question arises. But it still does. One of the ways in which the confusion might be avoided is for parties to use clear labels that describe the nature of their intentions at any given time. One such label is 'subject to contract'.

Subject to contract

These words create a presumption about the parties' intentions: that any statement made or agreement reached is not to be binding unless and until a formal contract is executed by the parties. The words ought to be enough to make the position clear.⁷

The question arose in August 2002 in the English Football League case.⁸ In early 2000, the Football League invited tenders for the broadcast rights to three seasons of second-tier English soccer, and in June of that year the relatively newly-formed digital broadcaster, ITV Digital plc, submitted a 'subject to contract' bid stating that 'its shareholders [would] guarantee all funding' to the Football League. When the Football League and ITV Digital entered into a written contract later that month, under which ITV Digital agreed to pay a whopping $760 million over three years, there was no reference to the parent guarantee, and ITV Digital's ultimate shareholders (the media giants, Carlton Communications plc and Granada Media plc) were not parties. Inevitably, ITV Digital went into administration with nearly $435 million of the licence fee owing. Would Carlton and Granada agree to cover the outstanding payments? No. They were not parties to the contract, the contract itself contained no guarantee, and the bid document lacked the elements essential for a guarantee under the Statute of Frauds (a signed and written record of the guarantee).

But the Football League argued that Carlton and Granada were liable because the reference to a guarantee in the 'subject to contract' bid document was effectively an offer by Carlton and Granada that if the Football League did the deal with ITV Digital, then they (the parents) would guarantee payment of the rights fee. So, the argument went, the Football League accepted the offer simply by doing the deal with ITV Digital and at that point entered into a separate deal with the parents (acceptance of the offer was the very performance of the bargain itself: a unilateral contract).

Justice Langley (the same Judge that later heard the Jordan case) ruled that Carlton and Granada had no obligations to pay the Football League and that the league's unilateral contract argument was 'inventive but misconceived'. For one thing, the 'subject to contract' notation on the bid document meant that it was not an offer—it was not open to acceptance (the presence of those words was in the judge's view 'the antithesis of or at least incompatible with a unilateral offer').

Contracts by conduct

What happens when negotiating parties never get round to finalising an agreement, but go ahead and perform some of the relevant obligations anyway? Say a sports event organiser is in detailed negotiations with a broadcaster, but by the time the event takes place, some issues in the negotiations remain unresolved, and no contracts have been signed. What if the event goes ahead and is televised by the broadcaster anyway (this is by no means unheard of)? What is the legal relationship between the broadcaster and the event organiser and what terms govern that relationship?

This is undoubtedly a difficult situation for the courts to unravel. It is probable that a contract will be deemed to govern the relationship, and without a clear acceptance of any offered terms, it may be that the parties will be considered to have accepted the terms of an agreement by their conduct. As for which terms were accepted, this will depend on the circumstances of the negotiation, and on what a reasonable person would have considered were the parties' respective intentions at the time. In other words, again, this is based on an objective test.

When Frank Bruno fought Mike Tyson for the undisputed world heavyweight title in Las Vegas in 1989, the UK's ITV broadcast network thought it had the broadcast rights. More specifically, the network believed that the fight was covered by a contract for the rights to four Mike Tyson fights that it had negotiated with Don King over drinks at Le Refifi restaurant in London 18 months earlier. The network relied on (a) the terms of the contract as set out in an unsigned draft agreement, which had been circulated after the evening at Le Refifi, and (b) the fact that in respect of the first three fights (against Larry Holmes, Tony Tubbs and Michael Spinks), the rights had been delivered and the fees paid. They argued before the High Court in England⁹ that, despite no contracts being signed, the acceptance of the rights fee and the delivery of the rights meant that the contract had been entered into by conduct, and the terms of the contract were those that were contained in the circulated draft (they were principally the same terms that had been scribbled on paper napkins at Le Refifi, but ITV had earlier abandoned their argument that a binding deal had been entered into at that time). On the facts of the case, and in particular because of the absence of an unequivocal offer in the circulated draft, the Judge did not find that a contract had been entered into by conduct, preferring to conclude that the three earlier fights had been covered by ad hoc acceptances of offers made by ITV on a fight-by-fight basis. But this was a close call and it was certainly arguable that a contract by conduct had been made.

To avoid such difficulties, and the inherent uncertainty in this type of situation, negotiating parties should where possible anticipate approaching deadlines and if necessary agree on an interim contract, that will at least give certainty while negotiations can continue.

Conclusions

The days of recording sports commercial contracts in spidery biro on the back of strip club napkins have seemingly gone. Perhaps no more will the parties to such deals blithely comply with their respective obligations without questioning the legal status of the agreement. But there are still occasions where the peculiarities of the industry, the unique nature of an event, or the idiosyncrasies of the parties might result in confusion as to whether or not a binding contract exists, and if so what its terms are. Litigation is a costly and destructive way to resolve such confusion—better to avoid it by negotiating at all times with clarity, and with an eye on the clock. And by considering (and if necessary taking advice on) the legal effect of each step that is taken. That way, you and everyone else will know when you've got the deal.

1 [2003] EWHC 1956 (Comm).
2 If the parties agree to negotiate that issue at a later date, this on its own will not be enough to save the contract as it is an agreement to agree, and therefore unenforceable.
3 See the judgment of Lord Justice Lloyd of the English Court of Appeal in Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601.
4 Additionally, in certain circumstances the law requires an agreement to be in writing.
5 Although in fact this has happened in European soccer leagues in recent years, as the start of the season has been delayed while negotiations of broadcasting contracts continue. But this is extremely rare.
6 See, for example, the comments of Lord Denning MR in Port Sudan Cotton Co. v Chettiar [1977] 2 Lloyd's Rep 5, and Carter and Harland, Contract Law in Australia, 4th ed, Butterworths, 2002, para 203.
7 Although it might be that the specific facts of a case suggest an alternative position, eg. that the parties to a 'subject to contract' arrangement each intended to be bound immediately by the terms of the arrangement, but at the same time intended that those terms be restated more completely or more precisely in a written document, see Masters v Cameron (1954) 91 CLR 353.
8 Carlton Communications plc and Granada Media plc v The Football League [2002] EWHC 1650 (Comm).
9 Anglia Television Ltd and Others v BBC and Others, The Independent, 17 February 1989.

Max Duthie is a litigator at Freehills, Melbourne, and is a member of the firm's sports industry group. Max previously worked for many years in the UK's leading sports law practice, advising among others sponsors, clubs and event organisers on commercial and other disputes. This article was first published in the World Sports Law Report.