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Published March 1, 2012
Introduction
An interesting sport case has been playing itself out in the Supreme Court of Canada. The case highlights the importance of seemingly innocuous contract clauses which, in this case, can leave several parties vulnerable to a number of lawsuits. But the astute use of the same clauses saved another party from the same fate.
In many contracts, 'innocuous' clauses (also known as as "boilerplate clauses"[1] ) address how disputes will be resolved, and under what law the contracts will be interpreted. These clauses are commonly thrown into contracts with little attention given to their meaning or effect.
Another important aspect of this Supreme Court case speaks to how multiple contracts inter-relate and how an organization's bylaws can become an important part of a contract. For example, in promoting an event, an organization may enter into a leasing agreement, multiple sponsorship agreements and a management agreement, among others. All of these agreements must work together, overlapping where necessary in a seamless way, without conflicts or duplication. This takes careful attention to detail.
If you don't want to follow the details of the Ottawa Rapidz case, just jump to the section "Lessons to be Learned".
Contractual Trail of the Case
The Ottawa0 Rapidz were a baseball team created to bring baseball back to Ottawa after the loss of the Ottawa Lynx triple "A" baseball team in 2007. The team was owned by Momentous.ca - a company created specifically for this purpose. The team entered the Can-Am League for the 2008 season, and to do this, Momentous.ca had to enter into two agreements with the Can-Am League: first, an agreement to demonstrate that they had a facility lease and thus a place to play, and second, a league affiliation agreement.
To execute the first agreement with the League, to show that they had secured a facility, Momentous.ca had to enter into an agreement with the City of Ottawa, which actually owned the baseball stadium where the games would be played. Then they entered into the agreement with the League committing confirming a the 2-year lease on the City-owned stadium, a $200,000 letter of credit (which is essentially a guarantee to pay up to $200,000 to the League for any default by Momentous.ca), and an agreement to go to arbitration in the event of any dispute arising between the parties (that is, Momentous.ca agreed not to go to court in the event of a dispute with the League, but rather to go to private arbitration). This last, seemingly small detail is very important to this case.
The second agreement with the League, the affiliation agreement, specified that upon any "unsanctioned withdrawal" of the team from the League, Momentous.ca would forfeit the $200,000 guaranteed by the letter of credit in the first agreement (this is how the contracts inter-related) and also contained a mandatory arbitration clause with a waiver of legal action outside of the League's bylaws.
The bylaws of the Can-Am League (with which Momentous.ca agreed to comply when it affiliated with the League) contained two clauses: one stating that disputes would be heard in the jurisdiction of the state of South Carolina and a second stating that they would be heard by arbitration in accordance with the League's bylaws.
Finally, the $200,000 line of credit of Momentous.ca was guaranteed by Miles Wolff, Commissioner of the Cam-Am League. In other words, Wolff would be on the hook if Momentous.ca could not honour its line of credit.
A Litany of Lawsuits
The Ottawa Rapidz failed as a business venture. Team management applied for a voluntary withdrawal from the League for financial reasons, which the League's bylaws allowed. The League, however, refused to allow such a voluntary withdrawal and, in refusing, triggered the clause requiring Momentous.ca to forfeit the $200,000 because its withdrawal from the League was now an unsanctioned withdrawal.
A messy situation ensued - the very thing all parties had wanted to avoid by the terms of their various contracts. But the drafting of the contracts is exactly what brought the parties to litigation. A number of claims were filed with the Ottawa courts:
The Legal Outcome
Faced with the Momentous.ca lawsuit, the Can-Am League was able to rely upon the two contracts it had signed with Momentous.ca, and its bylaws, to have the case dismissed. The League had carefully drafted its contracts from a risk management perspective and had ensured that the contracts and its own bylaws were consistent and worked in concert for the benefit of the League.
The Trial Court (Ontario Superior Court) dismissed all of Momentous.ca's claims. It dismissed Momentous.ca's claim against the League based primarily on the two 'innocuous' clauses discussed previously: the choice of legal jurisdiction clause and the arbitration clause.
Momentous.ca appealed the decision. The Court of Appeal agreed with the Trial Judge in dismissing the claim against the League.
The Appeal judge also addressed Momentous.ca’s claims against Wolff and the City of Ottawa. This is where things got even messier. The Appeal judge said that theoretically, because Wolff had sued Rapidz in Ontario in order to get back the money from the line of credit, Momentous.ca would be able to maintain its lawsuit against him in Ontario. And, theoretically, because the City of Ottawa allegedly reneged on its long term lease agreement with Momentous.ca, Momentous.ca would be able to maintain its lawsuit against the City in Ontario. However ... because Momentous.ca did not raise these jurisdictional issues in its filing of documents for the appeal, the Court dismissed its actions against both Wolff and the City of Ottawa.
Momentous.ca has appealed to the Supreme Court of Canada and we are awaiting that decision.
Lessons to be Learned
Regardless of the outcome of the Supreme Court, there are some lessons to be learned here. First, contracts, and particularly situations involving multiple parties and multiple contracts, need to be crafted very carefully. The Can-Am League protected itself very well by carefully including choice of law and arbitration clauses in its contracts and making sure that they were consistent with its bylaws, and those bylaws had been drafted quite carefully to support exactly this sort of contract construction.
It is important to think ahead as to how and where potential disputes will be handled and ensure an integrated mechanism is established. This means making sure various policies and contracts all work together: for example, the athletes' agreement, selection policies, discipline policies and appeal policies must all be consistent as to how disputes will be handled.
The second lesson here relates to the position in which the City of Ottawa and Miles Wolff found themselves. By remaining outside the lease and league affiliation agreements, both parties left themselves vulnerable to legal claims. It is important for parties to look to the whole scheme of a deal and not necessarily to be a “lone dove” (or "lone wolf"!). At the same time, of course, organizations need to be sensitive to the contractual risk management measures they undertake, whether alone or as part of a group.
Remember that the Sport Law & Strategy Group is well positioned to review your contracts or help you manage your contractual relations, to avoid messes like the one described here.
[1] Boilerplate clauses do not relate directly to the particular subject matter of a contract but still set out certain rights of the parties. They are standard clauses drafted using commonly used and understood language.
