The war in Ukraine is having a devastating impact on millions of lives, and the sports business community is, generally, taking a strong stance.

Since February a string of clubs, federations and teams have withdrawn from contracts with Russian sponsors in solidarity with the global international condemnation of Russia following its invasion of Ukraine.

To name but a few collapsed sponsorship deals:

• UEFA “ended” its deal with Russian state energy company Gazprom;
• Manchester United “withdrew” from its deal with Russian state airline Aeroflot;
• US Formula 1 team Haas “terminated” its deal with Russian chemical company Uralkali (who has since threatened to sue Haas for damages); and
• Everton “suspended” its sponsorship deals with Russian companies USM, Megafon and Yota.

These developments beg the questions – on what legal basis have sports rights holders been able to terminate or suspend these contracts? Or, if the contracts haven’t been formally terminated or suspended, how is a party legally able to “withdraw” from or “end” the contract in the way described?

Perhaps most importantly, what lessons can rights holders learn from these recent events?

You would be right in thinking that these issues are reminiscent of the considerations around terminating sponsorship agreements during the height of the Covid-19 pandemic (see our contractual impact assessment flowchart accessible here). However, Covid-19 presented the problem of sponsors looking to exit agreements in the main part due to tightened purse strings and the fact that rights holders were practically unable to deliver rights under their agreements. Here, it is (generally speaking) the rights holders who are looking to exit agreements with sponsors which have ties to Russia. The rights holders being mostly concerned about the reputational damage of their association with these businesses, and the impact of sanctions.

How might a rights holder contractually terminate an agreement with a Russian sponsor?

Damage to reputation

– it is common for sponsorship agreements to contain a clause that allows a party to terminate if the sponsor brings the name or brand of the rights holder into disrepute or adversely affects its reputation.

• Whether or not the right applies in this context will depend on the way any such clause is drafted. The most important consideration is likely whether the clause relies on active conduct of the sponsor i.e. whether the right is triggered if “the conduct of the [sponsor] brings the [rights holder] into disrepute”. If so, a Russian sponsor with no influence or direct connection with key decision makers in Russia may argue that the clause doesn’t apply given that they have not actively engaged in conduct with respect to the war in Ukraine. Instead, they are being affected by the actions of entities over whom they have no control.
  
  
• The termination right is much more likely to apply if the clause doesn’t rely on conduct, for example if it is triggered simply when “the [sponsor] has a negative effect on the reputation of the [rights holder].” Here, an important consideration will be whether the assessment is made objectively or whether it is made “in the sole discretion” of the rights holder. The former will require the rights holder to present some evidence of reputational damage, but the discretion afforded by the latter is a legal “slam dunk” for a rights holder.
  
  
• Material breach – sponsorship agreements will also enable a rights holder to terminate for material breach by the sponsor.
  
  
• It’s difficult to see what type of clause might be breached in these circumstances given that the conflict will be unrelated to any contractual action or inaction by a sponsor. That being said, any obligation on a sponsor to “exercise its rights under the agreement in a manner consistent with the good name and reputation of the rights holder” or to “co-operate with and comply with all reasonable requests of the rights holder” could theoretically be breached by a sponsor who, by way of example, publicly expresses its support for the conflict despite being requested not to do so by the rights holder, or who uses the rights holder’s trade mark in association with any press release or communication relating to the conflict without consent.
  
  Ultimately, it will be a question of fact as to whether any particular sponsor breaches its contractual obligations in responding to, or commenting on, the conflict. It’s a separate question whether or not any such breach constitutes a “material” breach of the agreement, which is generally considered to be a breach that has a “serious effect on the benefit which the [rights holder] would otherwise derive”.
  
  It’s worth mentioning that certain contractual rights to terminate for material breach rely on the breach being irremediable. Whether or not the breach is irremediable will depend on the facts, and the extent of the brand damage caused by the breach.
  
  

Force majeure

– force majeure clauses can be drafted in a number of different ways and the impact of the clause will depend on the precise wording used, but usually a party can rely on a force majeure clause to suspend, and in certain cases terminate, contracts when they are prevented from performing under the contract as a consequence of a defined “Force Majeure Event”.

A successful claim under a force majeure clause relies on two things:

• a Force Majeure Event having occurred. Notably, war and sanctions are frequently called out in commercial contracts as events that fall into the definition of Force Majeure Event; and
  
  
• a party being prevented from performing under the contract as a result of the Force Majeure Event. This is slightly trickier. Taking war and sanctions in turn:
  
  
  • It’s hard to see how the war would practically impact the performance of a sponsorship agreement between, for example, a sports team based in the UK and a Russian company. The exchange of fees for association and promotional rights is unlikely to be impeded by physical fighting in Ukraine.
    
    
  • It is more likely for sanctions to impact the performance of a sponsorship agreement. For example, if a Russian affiliated sponsor becomes subject to sanctions and as a result the receipt of sponsorship payments under the contract by the rights holder from the sanctioned entity becomes illegal, the force majeure clause may apply. However, it’s worth noting that this scenario affects the sponsor’s performance of its obligations under the agreement (i.e. the obligation to pay sponsorship fees) rather than the rights holders’ obligations under the agreement, which primarily consist of obligations related to branding and marketing and which would still be able to be performed in these circumstances. So, the sponsor is the party affected by the force majeure event, rather than the rights holder, and therefore whether or not the rights holder can terminate in these circumstances will depend on the express drafting of the force majeure clause, in particular whether or not it enables just the affected party (or also the counterparty) to terminate in these circumstances. Of course, the scope of the specific sanctions rules that apply and any exceptions to them will be relevant considerations too.

Usually, force majeure clauses will provide that the affected party’s obligations are suspended for the duration of the force majeure event, and, if the party is unable to resume performance within a prescribed period of time, the contract becomes terminable. So, this clause may be useful for a rights holder looking to swiftly suspend its contract as a response to the invasion of Ukraine, but it will take much longer for a rights holder to be able to terminate on these grounds. 

It’s also worth noting that force majeure relief may not be available if the consequence of the force majeure event could have been avoided or mitigated. It is unlikely that there is anything a rights holder can reasonably do to mitigate against the impact of sanctions, but this is worth being aware of this requirement in any case. 

If a rights holder does not have a contractual right to terminate, how else might they be able to “withdraw” or “end” an agreement with a Russian sponsor?

• Walk away – a rights holder could unilaterally tear up a sponsorship agreement by refusing to co-operate with and completely disassociating their brand from a Russian-affiliated sponsor (for example, by removing the sponsor’s trade mark from their club kit) despite having no contractual basis for doing so. It is equally possible that the rights holders’ desire to terminate the contract is shared with the sponsor, allowing the parties to bilaterally negotiate out of the agreement.
  
  The main risk associated with the rights holder walking away without the consent of the sponsor is that such an action would likely render the rights holder in repudiatory breach of contract. As a consequence of this, the sponsor could terminate the contract and seek damages for losses suffered by it as a result of the breach. Of course, the extent it would be able to claim for the losses would of course depend on the caps and exclusions of liability as set out in the sponsorship agreement. This risk is largely dependent on the attitude of the sponsor and its appetite (and if sanctioned, its ability based on the nature and extent of the relevant sanctions) to commence legal proceedings.
  
  
• Frustration – in the absence of a useful force majeure clause, a rights holder may be able to rely on the common law doctrine of frustration. This is interpreted very narrowly by the courts as the party’s performance of the contract must be rendered physically, legally or commercially impossible or radically different from the obligations undertaken at the inception of the contract. In line with our commentary relating to force majeure, it would be difficult for a rights holder to rely on frustration unless the sponsor became the subject of sanctions and as a result it became legally impossible for the contract to be fulfilled.
  
  
• Illegality – a rights holder may be able to rely on the common law doctrine of illegality which provides that a contract can be discharged where it has become illegal as a matter of law for that contract to be performed. This doctrine may be engaged where the sponsor becomes the subject of sanctions, although as noted with respect to force majeure, the extent to which a rights holder will be able to rely on it will depend on the specific sanctions in place and the extent to which they actually prevent performance of the contract.

Lessons learnt

In short, it may be less than straightforward for a rights holder to terminate an agreement with a Russian affiliated sponsor in response to the war in Ukraine given that none of the ‘obvious’ termination rights appear to be engaged in these circumstances. The ideal clause for a rights holder to find in its contract would be a straightforward right for it to terminate in circumstances where “the [sponsor] has a negative effect on the reputation of the [rights holder]”, although in our experience this would be a lucky find - as you might imagine, sponsors resist agreeing to this on the basis it affords a wide discretion to the rights holder. Going forwards, rights holders might want to push for clauses such as this more strongly than they otherwise would and make it explicit in the contract that any breach by the sponsor gives them a right to terminate.

More generally, if COVID-19 taught rights holders one thing, it’s not to underestimate the importance of clear termination and force majeure clauses in sponsorship agreements (and commercial agreements more generally). No one expected that these learnings would be put to the test so soon, but the flurry of collapsed sponsorship deals with Russian affiliated sponsors serve as a useful reminder of the importance of clarity in drafting termination provisions. Each party should be clear on their termination rights so that they can make considered decisions in circumstances that may be have been completely unforeseeable at the time the contract was entered into.