Pepsi has successfully sued for termination of its sponsorship
and supply contract for the Montréal Forum, a sports and
entertainment landmark, because the developer did not fulfill its
promise to transform the site into a "first-class
entertainment facility." The decision in Forum Entertainment Centre Company v. Pepsi Bottling
Group (Canada) Co., 2008 QCCS 4672 (CanLII) is very
significant for the interpretation of commercial contracts,
particularly in the context of real estate development. The case
provides a cautionary tale to promoters and developers as to
undertakings related to the nature and destination of their
Pepsi entered into a 15-year agreement with FEC under which
Pepsi became the exclusive named sponsor and soft-drinks supplier
for the Forum in return for a significant sponsorship fee and a
commission on the sale of Pepsi products. In addition to ensuring
the exclusivity of Pepsi as sponsor and supplier, the FEC was
obliged to "operate and maintain" the Forum as a
"first-class entertainment facility."
FEC sued Pepsi for substantial amounts in unpaid sponsorship
fees and sales commissions. Pepsi successfully countersued for
termination of the contract and a substantial reduction in the
sponsorship fees for preceding years on the basis that the
developers had not fulfilled their obligations as to the
destination of the Forum.
The Québec Superior Court considered the statements of
the developers in pre-contractual promotional materials, press
releases, press conferences and negotiations with Pepsi, as well as
expert testimony and marketing surveys, to determine that an
entertainment facility required a certain standard of lessees and
certain types of commercial and recreational activities, rather
than merely the commercial outlets found in shopping centres. The
court found that FEC's obligation to "operate" a
first-class entertainment facility related to the lessees and
nature of their businesses, in addition to the physical condition
of the proposed project.
More importantly, the court characterized the obligation to
operate a first-class entertainment facility as an "obligation
of result" under which FEC could avoid liability for
non-performance only by establishing an external cause such as
force majeure or the fault of Pepsi. The fact that FEC's
conduct was not faulty was not a defence.
The existence of an "entire agreement" clause in the
contract did not preclude recourse to external evidence to
interpret the agreement. Rather, the clause only prevented the use
of evidence intended to expand the rights and obligations of the
parties beyond those expressly stipulated or implied in the
Since the obligation to operate a first-class entertainment
facility was the essence of the sponsorship and supply agreement,
the court granted Pepsi's request for termination and reduction
in its sponsorship fees for the years preceding termination.
McCarthy Tétrault Notes:
The Pepsi decision indicates that promises related to
the nature and destination of a real estate project may impose
onerous obligations on a developer, depending on the ultimate
interpretation of the contract. Pepsi won its case because FEC did
not perform its obligation of result to create a first-class
entertainment facility, rather than on the basis of poor economic
performance. In addition to describing the substance of contractual
obligations in sufficient detail, it may be important for the
parties to consider the nature of the obligations as obligations of
result or the less onerous "obligation of means" in order
to allocate clearly the risks of non-performance. The decision
underscores the limits on the effectiveness of most "entire
agreement" clauses. It also reminds us to consider carefully
the potential impact of pre-contractual statements on the
interpretation of an agreement and to avoid unwanted
interpretations by clear contractual provisions. These observations
are subject to the outcome of an appeal initiated by FEC.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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