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Allens Arthur Robinson

Focus: Sports Media – September 2002

ITV Digital shareholders not liable to the English Football League

In brief: On 1 August this year, the High Court of Justice in England handed down its decision in Carlton Communications plc and Granada Media plc v The Football League1. The proceedings were keenly followed in international sporting circles, as partner Richard Alcock and lawyer Janey Draper explain.

The Carlton and Granada case arose out of the financial difficulties faced by ITV Digital plc (formally known as ONdigital plc), a provider of digital terrestrial subscription television. In June 2000, ONdigital entered into a contract with the English Football League that granted ONdigital rights to broadcast all Football League matches during 2001/2, 2002/3 and 2003/4. ONdigital had agreed to pay £136.5 million for the rights, with £12 million due on signing, £35.5 million within 60 days of signing and £89.25 million due on each of 1 August 2001, 2002 and 2003. On 27 March this year, ONdigital was placed into administration and on 13 May, the League terminated the licence because of ONdigital's impecunious position. On 5 July, the League contracted with British Sky Broadcasting for the remaining rights for a significantly lesser amount.

Carlton and Granada were 50% shareholders in ITV Digital Holdings, the parent company of ONdigital. On 12 April this year, Carlton and Granada sought a declaration that they were not liable for any payments due under the June 2000 contract. The League counterclaimed, seeking a declaration that Carlton and Granada were liable to pay damages in the order of £131 million (being the difference between what was paid by British Sky Broadcasting and what was owed under the June contract).

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The parties' arguments

The June contract itself did not contain a guarantee and Carlton and Granada were not parties to it. The June contract foreshadowed a long form agreement to be signed within 60 days, to be negotiated with reference to: the pre-tender document dated 27 March 2000; the initial bid dated 7 June 2000; pre-existing arrangements the League had for its portal; and side letters from ITV dated 6 and 15 June 2000 and from ONdigital dated 13 and 15 June 2000. No long form agreement was concluded, and matters proceeded along the terms of the June contract.

The League based its claim on a statement contained in an initial bid document that 'ONdigital and its shareholders will guarantee all funding to the FL outlined in this document'. The League argued that the statement in the initial bid was a unilateral offer by Carlton and Granada to guarantee ONdigital's obligations in the event that a contract was concluded. The League maintained that it accepted the offer by entering the June contract.

Carlton and Granada argued that:

  • the initial bid was not a unilateral offer to guarantee capable of acceptance by conduct;
  • ONdigital did not have authority to make a guarantee on their behalf;
  • such a guarantee would be prohibited by the Statute of Frauds; and
  • even if there was such a guarantee, it would not allow the Football League to recover damages for anticipatory repudiatory breach of contract by ONdigital.

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The construction issue

Justice Langley was sceptical about the ability of a company which, with the benefit of professional advice of experienced management and lawyers, negotiated an agreement in a major commercial context but sought to rely on a large third-party guarantee referred to in a short sentence in a 'subject to contract' document.

He held that the initial bid could not be construed as part unilateral offer by Carlton and Granada and part subject to contract proposal by ONdigital. Subject to contract proposals were, as he saw it, the antithesis of (or at least incompatible with) a unilateral offer. The fact that the relevant document was 'subject to contract' precluded it from being accepted to create a binding obligation - subject to contract proposals remain in negotiation until a formal contract is executed.

As the whole of the initial bid was subject to contract, the extent of the obligations concluded could be found only in the June contract, which contained no such guarantee.

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The authority issue

The League argued that ONdigital had either implied actual authority or ostensible authority to offer the guarantee on Carlton and Granada's behalf by virtue of the control and approval process exercised by Carlton and Granada over the bid amount, and by virtue of being shareholders of ITV Network.

Justice Langley held that approval of an offer to be made by another company is substantially different from authorising that company to contract on your behalf. Focusing on the concept of a company's separate legal entity distinct from its shareholders, Justice Langley concluded that there was also nothing to justify a conclusion of express or implied agency.

As a new venture, ONdigital was dependent on funding from Carlton and Granada, except to the extent it generated funds from its own business. However, while Carlton and Granada were regularly consulted on the size of ONdigital's bid, evidence was given that at no time was there an authorisation to offer or include a corporate guarantee. Neither verbally nor by contract had ONdigital, Carlton or Granada consented to such authority or made an implied representation that such authority existed.

While Carlton and Granada were not parties to the June contract, ITV Network became a party on 11 August 2000 as recipient of a sub-licence of the free-to-air television rights. Carlton and Granada were substantial shareholders in ITV Network, but they were not the only shareholders. ITV Network had its own management and became involved through a sub-licence, not a joint bid. Therefore, ITV Network's involvement did not give the necessary authority to bind Carlton or Granada in a guarantee.

Thus, there was no express, actual, ostensible or implied authority on which ONdigital could rely.

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The Statute of Frauds issue

Carlton and Granada argued that the alleged guarantee fell foul of the Statute of Frauds because the requisite contract (that is, the June contract):

  • did not record or note the agreement of the guarantee;
  • did not refer to the full funding amount (while the initial bid referred to a payment of £240 million, an amount of £315 million was paid under the June contract); and
  • because none of the documents the League relied on were signed by a person authorised by Carlton and Granada.

Justice Langley said that he was bound by authority set down in Tiverton v Wearwell [1975] CH 146 that a 'subject to contract' document does not satisfy Statute of Fraud requirements. That case also held that the requisite document must contain a statement of the material terms of the contract, which the initial bid did not. In holding that the initial bid and June contract did not contain such a statement, Justice Langley noted the significant difference between a guarantee of £240 million and one of £315 million. There were also no documents signed by Carlton or Granada, or by a person authorised to sign on their behalf.

Accordingly, the League's claim also failed by virtue of the Statute of Frauds.

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The scope of guarantee issue

Justice Langley referred to the dichotomy, distinguished by Lord Reid in Moschi v LEP Air Services Ltd [1973] AC 331, of guarantees which oblige the guarantor to meet instalment payments if the principal fails to pay, and guarantees that the principal will carry out the contract. In the latter type of guarantee, failure by the debtor to carry out the contract puts both the debtor and the guarantor in immediate breach. In the former, the guarantor's obligation arises only if the debtor fails to pay.

Justice Langley held that if there was an effective guarantee in this case, it would have been of the second type, and applicable to the League's claim as it was based on ONdigital's repudiation of obligations under the June contract.

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Conclusion

Justice Langley found in favour of Carlton and Granada, declaring them not liable to the League for any sums due under or damages payable for breach of the June contract because:

  • the initial bid could not be construed as an offer capable of acceptance by conduct as it was subject to contract;
  • ONdigital had no actual, ostensible or implied authority to bind Carlton or Granada; and
  • any such guarantee would have been void for not meeting the requirements of a written agreement under the Statute of Frauds.

However, if a guarantee did exist, it was of the type where both the debtor and the guarantor would be in breach of the contract based on ONdigital's behaviour.

References
  1. Carlton Communications plc and Granada Media plc v The Football League [2002] EWHC 1650

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