Law ness and breaking contracts F
rom time to time during the life of a company, things will go wrong. The timing of those events will not always be in the control of the entrepreneur, and occasionally they will occur around the time that the company is pursuing a major event – an acquisition, an investment or a major commercial agreement. When this happens, it can be tempting to sweep these events under the rug and hope that the counterparty to the major event simply won’t notice until after the ink is dry on the contract.
Unfortunately, that is often a route that would leave the company and even the entrepreneur himself open to legal action – losing the contract, and even paying damages to the counterparty. It is broadly understood in business that actively lying to a counterparty is likely to create legal issues; what is perhaps not so widely understood is that failing to bring a counterparty’s attention to something, if that thing is significant in context, can be just as risky.
On 4 March 1998, SGL (a company founded and owned by five entrepreneurs) signed a heads of terms with AWS. The terms were for a major commercial agreement – SGL was already a successful business, but the AWS agreement was significant to the business. Moving from signed heads of terms to a full agreement took a couple of months so, as is often the case, both SGL and AWS behaved in the intervening time as though the contract was already in force. AWS paid SGL the first two instalments of SGL’s fee under the agreement, and SGL and its founders duly performed their obligations under the as-yet unwritten agreement. The agreement was eventually signed on 6 May 1998.
On 27 May, Geri Halliwell left the Spice Girls – and resigned as a director of SGL. As became apparent when she published her autobiography, “If Only”, Geri had actually informed the other four founders that she intended to leave the band as early as March – in fact she had mentioned an intention to leave even prior to SGL entering into the heads of terms, although it had not been taken seriously. Certainly it was clear to all concerned on 25 April, when Geri called a meeting with the entire band and their manager and reiterated her plan to leave.
AWS was an Italian scooter manufacturer, which had signed up SGL to promote a new line of “Sonic Spice” air-cooled scooters on the Spice World tour. From signature of the heads of terms through to 27 May, the Spice Girls had taken part in various promotional activities at AWS’s request. When news of Geri’s departure broke, AWS informed SGL that it would not be paying any further fees.
Breach of a Contract Term
The first argument that AWS made was that Geri leaving the band was an outright breach of the contract by SGL. AWS’s view was that they had signed up to sponsor a tour given by the Spice Girls, and that meant the band of all five singers as it was generally known. Without Geri, the tour that took place was not a Spice Girls tour - and accordingly SGL was in breach of the agreement. This argument was rejected by the court, because where the contract referred to the Spice Girls, that term was defined as meaning “the group of individuals performing under the professional name “Spice Girls” (currently comprising...[band members’ names])” – accordingly it was not a breach of the contract for one of the members to leave. On the wording of the contract, AWS had agreed to sponsor a tour by a band called the Spice Girls – with no term of the agreement dealing with who would be comprised in that band, or making it clear that AWS was making the contract only on the basis that the tour would go ahead with the then-current lineup.
Similar types of argument could be constructed in respect of many material facts that have been withheld from counterparty. Where, for example, a software application’s beta test results have revealed major issues (beyond the normal run of what might be expected from a beta) a
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