Terminating a contract – when to hold ’em and when to fold ’em
It was reported on 11 January 2020 that the Professional Golf Association (PGA) of America has terminated its contract with a Trump Organisation relating to the hosting of the 2022 PGA Championships at a golf course owned by a Trump Organisation.
The PGA President has indicated that the PGA of America board voted to ‘exercise its right’ to terminate the event agreement with Trump National, as they feel that conducting the PGA Championship at a golf course owned by the Trump Organisation would be detrimental to the PGA of America brand.
The Trump Organisation responded that PGA of America has no such right, with a Trump Organisation statement saying, ‘this is a breach of a binding contract and they have no right to terminate the agreement’.
Risk, reputation and repudiation
The PGA of America’s decision to terminate the event agreement with Trump National is of course in response to the public backlash arising from the storming of the United States Capitol by supporters of Donald Trump 5 days prior.
Do the actions of Donald Trump supporters, or even the actions of Donald Trump himself, give the PGA of America a right to terminate a contract with separate legal entity, even if that entity is controlled by or associated with Donald Trump? Like the answer to many legal questions, ‘it depends’.
Most contracts have a range of provisions which apportion risk between the contracting entities. These are often in the forms of warranties, indemnities, liability caps, clarifications on exclusions of different types of loss, and obligations relating to insurance. Where a right of association arises, such as in a sponsorship agreement or event agreement (as would be the case between the PGA of America and Trump National), there are often provisions relating to ‘reputation’ issues.
A typical simple ‘reputation’ or ‘disrepute’ clause in an event or sponsorship agreement may read something like this: ‘each party will refrain from doing anything that may bring the name, brand or reputation of the other party into disrepute’. An agreement will generally go one step further in clarifying that a breach of the reputation provisions amounts to a material breach, giving the innocent party a right to terminate the agreement.
Of course, we do not know what the event or sponsorship agreement(s) between the PGA of America and the Trump Organisation states in relation to reputational issues, and whether a breach of any of these obligations provides a right to terminate the agreement(s).
One thing we do know, however, is that terminating any agreement at any time requires very careful consideration (and appropriate legal advice) for one simple reason: risk of repudiation.
What is repudiation?
Every failure to comply with contract obligations is a breach of contract. Minor breaches of contract merely entitle the other party to damages. Certain more serious types of breach of contract are of such significance that they entitle the other party to terminate the contract. This is where it gets interesting in the case at hand, if PGA of America purports to terminate an agreement in circumstances where no such right to terminate exists, then PGA of America will have repudiated the relevant agreement, which in turn would give the Trump Organisation a right to accept the repudiation, terminate the agreement, and sue the PGA of America for damages.
Repudiation is a complex area of law, and in short, an unwillingness or an inability to perform the contract. Wrongful termination of a contract will ordinarily be held as a repudiation of the contract. In addition to express termination clauses in a contract, in Australia, there are generally 4 types of repudiatory breach of contract that may justify termination at common law:
- Breach of a condition which amounts to a repudiatory breach (Type 1).
- A sufficiently serious breach of an intermediate term (an intermediate term falling somewhere between a warranty and a condition) (Type 2).
- Renunciation (refusal to perform or an unwillingness or an inability to render substantial performance of the contract) (Type 3).
- Anticipatory breach (a renunciation at a time when main obligations are not yet in force) (Type 4).
Type 1 is a typical form of repudiatory breach. Here, if a party to a contract breaches a term that constitutes a condition, i.e. a vital term, this will amount to a repudiatory breach, giving the innocent party a right to accept the repudiation and elect to terminate the contract. Note, the innocent party is not required to accept the repudiation and terminate the contract. Rather, they may elect to affirm the contract and enforce the performance of the contract by the other party (and can still claim damages for the breach). Complexity can arise in repudiation cases because not every breach of contract amounts to a repudiatory breach. A contract may also exclude common law rights to terminate. Accordingly, great care must be taken by parties purporting to terminate a contract due to a repudiatory breach to ensure they indeed have a right to terminate.
If, for example, the PGA of America gave Trump National a notice to terminate the relevant agreement(s) on general ‘reputational damage’ grounds, the scope of the reputational damage clauses in the relevant agreements would need to be carefully considered. To be effective, they would presumably need to extend to reputational damage caused to PGA or their events by Donald Trump personally, in addition to anything done or not done by the relevant Trump Organisation, and ideally be expressed as being a condition of the contract or a matter which, if breached, is sufficiently serious to give rise to termination.
Of course, termination of an agreement in the sporting world for reputational reasons is nothing new. Not surprisingly, Nike and a range of other sponsors terminated their sponsorship agreement with Lance Armstrong when it was proven that Armstrong had participated in doping. More recently, Cricket Australia, Steve Smith, and David Warner all reportedly had various sponsorship agreements terminated due to reputational damage caused by the ball tampering scandal known as ‘sandpaper gate’.
Could there be a catch with a laches?
Terminating an agreement for reputational issues or disrepute sounds simple enough, however, it certainly remains open to interpretation. Trump lawyers have shown themselves to be prepared to bring inventive arguments before a Court. In the case at hand, it is not impossible to consider the Trump Organisation lawyers arguing along the lines of:
- Any right to terminate the event agreement pursuant to a disrepute type clause is limited to anything done by the relevant Trump Organisation, and not anything done by Donald Trump personally.
- Even if the disrepute type clause extended to Donald Trump’s personal actions, then a laches defence applies, because this conduct of Donald Trump is no worse than a range of previous conduct since the contract began. If the PGA of America failed to terminate the contract previously for repeated comparable conduct, the Trump Organisation may argue (using a laches defence) that having ‘slept on their rights’, the PGA is now prevented from enforcing those rights.
Most court cases on repudiation in Australia relate to whether a party was ready and willing to perform the specified terms of the contract or whether the breach was sufficiently serious. Wrongful termination of a contract will generally be deemed repudiation.
This is no ‘gimme’
It will be interesting to follow this case to see if Trump National takes legal action to challenge the termination of the event agreement by the PGA of America. If Donald Trump’s history of litigation is anything to go by, the PGA of America should get ready to play a few balls out of the rough. To borrow a term from golfing parlance, this is unlikely to be a ‘gimme’.
This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.
© Moulis Legal 2021