Lessons From 2002 For Contract Negotiators and Draftsmen

Profession:Herbert Smith
 
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2002 was a busy year in contract law. Cases like the high profile litigation between the Football League and Carlton and Granada made the headlines and explored fundamental contractual issues such as contract formation, authority, and the requirements for a guarantee.

So what lessons can be learnt from 2002?

1. Heads of terms and offer letters should be reviewed before exchanging contracts, to ensure that all matters dealt with in the heads of terms are addressed in the final form agreement.

  1. Parties intending to assume obligations under a contract, including parents and subsidiaries of contracting parties, must be signatories to the contract.

  2. It is unwise to commit to substantial financial investment or to proceed for any substantial period of time on the basis of a heads of terms.

All three of these lessons can be learnt from Carlton Communications v The Football League [2002] EWHC 1650. This case involved the Football League selling the television rights to matches to OnDigital for approximately £315 million. OnDigital (which was later renamed ITV Digital) was owned by Carlton and Granada (50% each).

OnDigital fell into financial difficulties and the company went into administration in March 2002 leaving outstanding liabilities under the contract of approximately £180 million. Faced with a significant financial loss, the Football League attempted to establish that Carlton and Granada had guaranteed the liabilities of OnDigital and were liable to meet the outstanding payments on the original three-year contract.

In terms of documentation, the initial bid document sent in June 2000 by OnDigital (effectively a heads of terms) in relation to the right to screen Football League matches stated that, "OnDigital and its shareholders will guarantee all funding to the Football League outlined in this document." The bid document was stated to be "subject to contract." Later that month, a short-form binding contract was entered into by OnDigital and the Football

League in which the parties agreed to use their best endeavours to execute a long-form agreement within 60 days and which referred back to the initial bid document but did not refer specifically to any guarantee arrangements. No long-form agreement was ever signed. The parties however proceeded on the terms of the short-form contract until proceedings were commenced in April 2002.

The Court dismissed the Football League's claim that Carlton and Granada had guaranteed the obligations of OnDigital. The Court concluded that there was no such guarantee because:

(a) Neither Carlton nor Granada were a party to, or signatories of, the initial bid document or the short-form agreement. The Football League could not rely on implied or ostensible authority of OnDigital to commit its parents, Carlton and Granada, to a guarantee arrangement. It is a basic principle of company law that a company has its own legal personality distinct from its shareholders and a company is not an agent of its shareholders.

(b) A commitment to a guarantee could not be construed from the short-form contract. The initial bid was subject to contract and contained no offer capable of acceptance. The short-form contract was clearly only a contract between OnDigital and the Football League and did not specifically refer to a guarantee from the parent companies.

(c) Under Section 4 of the Statute of Frauds 1677, a person cannot be made to answer for the debt, default or miscarriage of another person unless the agreement is in writing and signed by the party to be charged therewith or some other person lawfully authorised.

4. Care needs to be taken to ensure that provisions in contracts are sufficiently certain to be enforceable.

In iSOFT Group plc v Misys Holdings Ltd [2002] EWHC 2094, the parties...

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