Don’t make promises you can’t keep: Pepsi successfully terminates its exclusive sponsorship agreement for the Montréal Forum
November 13, 2009
André J. Payeur
Chantal C. Tremblay
Pepsi has successfully sued for termination of its sponsorship and supply contract for the Montréal Forum, a sports and entertainment landmark, because the developer did not fulfill its promise to transform the site into a "first-class entertainment facility." The decision inForum Entertainment Centre Company v. Pepsi Bottling Group (Canada) Co., 2008 QCCS 4672 (CanLII) is very significant for the interpretation of commercial contracts, particularly in the context of real estate development. The case provides a cautionary tale to promoters and developers as to undertakings related to the nature and destination of their projects.
Pepsi entered into a 15-year agreement with FEC under which Pepsi became the exclusive named sponsor and soft-drinks supplier for the Forum in return for a significant sponsorship fee and a commission on the sale of Pepsi products. In addition to ensuring the exclusivity of Pepsi as sponsor and supplier, the FEC was obliged to "operate and maintain" the Forum as a "first-class entertainment facility."
FEC sued Pepsi for substantial amounts in unpaid sponsorship fees and sales commissions. Pepsi successfully countersued for termination of the contract and a substantial reduction in the sponsorship fees for preceding years on the basis that the developers had not fulfilled their obligations as to the destination of the Forum.
The Québec Superior Court considered the statements of the developers in pre-contractual promotional materials, press releases, press conferences and negotiations with Pepsi, as well as expert testimony and marketing surveys, to determine that an entertainment facility required a certain standard of lessees and certain types of commercial and recreational activities, rather than merely the commercial outlets found in shopping centres. The court found that FEC’s obligation to "operate" a first-class entertainment facility related to the lessees and nature of their businesses, in addition to the physical condition of the proposed project.
More importantly, the court characterized the obligation to operate a first-class entertainment facility as an "obligation of result" under which FEC could avoid liability for non-performance only by establishing an external cause such as force majeure or the fault of Pepsi. The fact that FEC’s conduct was not faulty was not a defence.
The existence of an "entire agreement" clause in the contract did not preclude recourse to external evidence to interpret the agreement. Rather, the clause only prevented the use of evidence intended to expand the rights and obligations of the parties beyond those expressly stipulated or implied in the agreement.
Since the obligation to operate a first-class entertainment facility was the essence of the sponsorship and supply agreement, the court granted Pepsi’s request for termination and reduction in its sponsorship fees for the years preceding termination.
McCarthy Tétrault Notes:
The Pepsi decision indicates that promises related to the nature and destination of a real estate project may impose onerous obligations on a developer, depending on the ultimate interpretation of the contract. Pepsi won its case because FEC did not perform its obligation of result to create a first-class entertainment facility, rather than on the basis of poor economic performance. In addition to describing the substance of contractual obligations in sufficient detail, it may be important for the parties to consider the nature of the obligations as obligations of result or the less onerous "obligation of means" in order to allocate clearly the risks of non-performance. The decision underscores the limits on the effectiveness of most "entire agreement" clauses. It also reminds us to consider carefully the potential impact of pre-contractual statements on the interpretation of an agreement and to avoid unwanted interpretations by clear contractual provisions. These observations are subject to the outcome of an appeal initiated by FEC.
Corporate Commercial Litigation