Beware inadvertent waiver of right to first refusal

By Jan-Hendrik Gous on 17 June 2020
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A right of first refusal is a contractual right to conclude an agreement with another person before anyone else can. The holder of the right is generally entitled to match any bona fide third party offer within a specified period of time. 

In the recent English case of New Balance Athletics, Inc v Liverpool Football Club [2019], the judgement of the High Court in London emphasised the care that should be taken when exercising a right of first refusal. The court adopted a very strict interpretation of the terms of a third-party offer that is required to be matched.

Facts of the case

In terms of a sponsorship agreement concluded between the parties, New Balance held the right to sponsor Liverpool FC and to manufacture and sell the club's replica football shirts.  The agreement was to terminate on 31 May 2020, subject to a right in favour of New Balance to match any third-party offer for sponsorship thereafter.  The agreement determined that in the event of Liverpool FC receiving a third-party offer, the specific terms of such offer had to be submitted to New Balance.  New Balance thereafter had a right to within 30 business days notify Liverpool FC in writing whether or not it will enter into a new agreement with the club "on terms no less favourable to the Club than… the material, measurable and matchable terms of such third-party offer".

Liverpool FC subsequently received an offer from Nike.  The offer inter alia contained a provision that Nike will "market LFC… through marketing initiatives featuring not less than three (3) non-football global superstar athletes and influencers of the calibre of LeBron James, Serena Williams, Drake, etc…".

New Balance subsequently notified Liverpool FC that they were prepared to conclude a new agreement on terms no less favourable to the club than the "material, measurable and matchable terms" of the Nike offer.  New Balance furthermore attached to their notification a signed offer which contained a clause matching the wording of the marketing and distribution clause contained in Nike's offer.  Importantly though, New Balance's offer did not refer to LeBron James, Serena Williams or Drake.  The offer merely provided that New Balance will "market LFC… through marketing initiatives featuring not less than three (3) non-football global superstar athletes and influencers…".

Liverpool FC rejected New Balance's offer, arguing amongst other things that New Balance had not matched Nike's marketing term.  New Balance argued that it did not have to match such term, given that the term was too vague and therefore not "material, measurable and matchable".  In the alternative, New Balance argued that it did in fact match the marketing term.

Court's finding

The court dismissed New Balance's argument that the marketing term was too vague and that the valuation of marketing initiatives using sport stars or celebrities was wholly subjective.  The court found that the calibre of the athletes and influencers provided for in Nike's offer can be measured in a variety of ways.  A calculation can for example be done based on social media exposure, in terms of which specific appearances of the named persons can be counted.

Given that Nike's offer was otherwise matched in full, the court speculated as to the reasons for New Balance omitting the names of specific athletes and influencers in its offer.  The court mentioned the possibility that New Balance did not have contracts with athletes or influencers comparable to the persons listed in Nike's offer.  The court held that there must have been a specific purpose for including the names of the specific athletes or influencers in Nike's offer.  That purpose must have been to indicate that Nike's obligation was to use those athletes or influencers who were not only global superstars but were of the calibre of the mentioned global superstars.

The court concluded that "the New Balance offer on marketing was less favourable to Liverpool FC than the Nike offer because Liverpool FC cannot require New Balance, on the terms of its offer, to use global superstar athletes "of the calibre of Lebron James, Serena Williams, Drake etc."".

Analysis of judgement

It is clear from the judgement that parties should take care when agreeing on the specific wording of a right of first refusal.  The parties should be clear as to the specific terms of a third-party offer which are in fact required to be matched.  In this case, New Balance was undone by the extensive reach of the phrase "material, measurable and matchable terms".  The court found that New Balance did in fact match Nike's offer in terms of the proposed distribution of Liverpool FC products.  New Balance however fell short in terms of the marketing obligation.  New Balance would have been better suited to have been more specific in the contract regarding the marketing obligations that they were required to match.

The judgement also underlines the fact that when exercising a right of first refusal, a party should ensure that it is in fact matching the terms of the third-party offer.  In this case New Balance submitted a counter offer in the belief that they were matching Nike's offer.  The court held that this was not the case.  By omitting provisions that were contained in Nike's offer, an unnecessary risk was taken that the offer would not comply with the requirements of the right of first refusal.    

Lastly, regard should be had to the required formalities in exercising a right of first refusal.  On this occasion, the contract merely required notice from New Balance to Liverpool FC that it intended to match the third-party offer.  Instead, New Balance submitted a counter offer without being obliged to do so.  Had New Balance merely agreed to match Nike's offer, the parties could thereafter have entered into negotiations as to the specifics of the renewal.

In conclusion 

A right of first refusal can be a powerful tool for a party to ensure the continuation of its relationship with a valuable commercial partner.  Special care should however be taken when agreeing on the specific wording of the right, and ensuring that the right is exercised in a valid and acceptable manner. 

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