In the talent and endorsements space, RoFR clauses play the role of allowing a relationship to be renewed beyond the original period, at the option of one of the parties (usually the manager or sponsor), on commercial terms that are set by free market competition.

RoFR plays an important role, especially in relationships governing the development and support of budding talent. It enables managers and sponsors who participate in talent development — be it of the sporting, acting, artistic or other sort — to receive a form of “call option” to participate in the financial success that results once the talent is embodied in performances.

To provide a simple analogy, it enables the person who has planted, watered and fertilised a fruit tree to be given the first chance to buy and enjoy the fruits it bears at rates that would otherwise be paid for them in the open market.

Over time, the right of first refusal has developed into a valuable tool to entice sponsors and others to invest early-stage capital, time and energy in talent, much as a venture capitalist would in a start-up company.

This type of clause has also played a “pressure-valve” role that provides aspiring talent the opportunity to access the open market valuations as opposed to remaining stuck in long term and arbitrarily-valued contracts with managers and sponsors.

What was the Yuvraj case about? And what was the decision?

The case involved Percept’s attempt to enforce the “right of first refusal” clause in its management and marketing contract with cricketer Yuvraj Singh, who was reportedly being courted by a rival sports marketing company as the contract was nearing expiration. The 2003 contract gave Percept the exclusive rights to manage and market Yuvraj during the four-year contract period, which apparently had an expiration date of December 11, 2007.

The “right of first refusal” clause in question gave Percept the right, during the contract period as well as for a certain number of days thereafter to match any third party offer received by Yuvraj Singh and to continue the relationship on those commercial terms for the period beyond the original service period.

Taking into consideration the Supreme Court of India precedent in Percept D’Mark vs Zaheer Khan and Another (in which Percept had proceeded against another Test cricketer), the High Court held the clause to be a “post-termination negative covenant in a personal services contract” and, therefore, void and unenforceable.

How do the courts reason in cases like these?

Based on the Supreme Court case law, the Mumbai High Court stated that the clause Percept was attempting to enforce was a post-termination negative covenant. As such, it was unenforceable under the Indian Contract Act, being a contract in restraint of trade.

The basis of the court’s ruling is that in contracts for personal services, parties may choose to fetter themselves in certain ways during the period during which there is mutual contractual give-and-take of services and consideration.

However, once the period of mutuality is over, one party cannot negatively constrain or restrict the other party’s right to deal with others. This is similar to the judicial treatment received by post-employment non-compete clauses.

It is important to note that the court held this category of post-termination clauses invalid in personal services contracts only and did not comment on their validity in other categories or types of contracts.

However, what shouldn’t go unnoticed is that personal services contracts include all celebrity endorsement and sports sponsorship contracts, a category of deals that has relied heavily on such clauses in the past.

What, according to you, are the policy implications of the verdict, for the sports management industry?

As an operational matter, the proposition that post-termination negative covenants are per se unenforceable in personal services contracts will have its supporters — after all, why force a party to receive a highly relationship-based service such as career management if it doesn’t want to?

On the other hand, why not, if it was one element of the “original” deal bargain documented in an arms’ length contract? The blanket illegality of such clauses might not be the most apt in the sports services industry.

International legal developments suggest that unless a contractual restraint has no redeeming characteristics and is per se illegal (as in the case of oligopolistic price fixing), a judgment on whether a restraint is an unreasonable restraint of trade must consider the relative balance of its pro-competitive justifications and anti-competitive effects within the context of the specific industry.

D. MURALI

INDRA NATH

http://InterviewsInsights.blogspot.com

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