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Company Commercial Notepad - February 2012

 

3. Commercial: Unenforceable Restraints of Trade - Proactive Sports Management Ltd v Rooney & Others

Background

In Proactive Sports Management Ltd v Rooney & Others [2011] EWCA Civ 1444, 1 December 2011. the Court of Appeal considered whether the agreement between Wayne Rooney and his former management company, Proactive Sports Management Limited, was an unenforceable restraint of trade.

The doctrine of restraint of trade provides that individuals and organisations should be free to carry on their trade or business as they see fit. A contractual provision which restricts trade must be reasonable, in relation to the interests of the parties concerned and the interest of the public, in order for it to be enforceable, otherwise, the risk is that the entire contract may be unenforceable.

Facts

In January 2003, the footballer Wayne Rooney entered into an image-rights representation agreement ("the Agreement") with Proactive Sports Management Limited ("Proactive"), a sports agency. The Agreement provided that Proactive was appointed by Stoneygate 48 Limited ("Stoneygate"), the company in which Mr Rooney had vested his image rights, as Stoneygate's sole and exclusive representative in relation to the exploitation of Mr Rooney's image rights for a term of eight years. It entitled Proactive to a 20% commission on all relevant contracts and arrangements negotiated by Proactive. The Agreement stated that even after the Agreement was terminated, this commission was to continued to be paid on any agreements arranged by Proactive before termination. At the time the Agreement was entered into, Mr Rooney was 17 years old and did not have independent legal advice.

Proactive had also acted on behalf of Mrs Coleen Rooney and her image-rights company, without any written agreement, and had been paid a commission of 20% in a similar arrangement as Stoneygate.

In October 2008, the relationship between the parties broke down. In December 2009, Stoneygate and Mr Rooney purported to terminate the Agreement and Stoneygate did not make further commission payments to Proactive. Proactive sued Mr Rooney for £4.25 million claiming unpaid commission and for breach of contract. Mr Rooney's defence was that Proactive was not entitled to post-termination commission and that the Agreement was unenforceable because it was an unreasonable restraint of trade.

Decision

The original High Court hearing held that the doctrine of restraint of trade applied to the Agreement: it imposed substantial restraints on Mr Rooney's freedom to exploit his earning ability over a long period of time on terms which were not commonplace in the market and which were not based on commercial negotiations between parties with equal bargaining power. The High Court took into account Mr Rooney's age when he entered the Agreement and the absence of independent legal advice. The High Court also held that Proactive was not entitled to commission on sums which had not been paid by the time the Agreement was purported to be terminated.

Proactive challenged this before the Court of Appeal on three main grounds: (1) the restriction related to commercialising image rights, which is an ancillary activity to Mr Rooney's main occupation as a footballer (and it was not therefore a restraint of his ‘trade''); (2) the Agreement did not restrict Mr Rooney's earning potential but instead facilitated it; and (3) the Agreement could not be considered as unfair and oppressive. Proactive also submitted that where it had procured a contract and had fulfilled its obligations, it was entitled to receive a commission even if payment was received after termination of the Agreement.

The Court of Appeal held that:

  1. The exploitation of image rights, or other activities which may be argued to be ancillary to a person's main occupation, is capable of protection under the doctrine of restraint of trade. The fact that the activity is ancillary might make the restriction on trading insubstantial and thus justifiable but this is not a reason for eschewing the doctrine altogether. There is public interest in ensuring that people can reach their full potential, and when this takes the form of endorsement of goods, this has a positive effect on consumption levels, which is generally beneficial to the wider economy.
  2. With regard to the issue of restricting or facilitating the ability to earn, an agreement such as the one in question can achieve both at the same time: its purpose may be to exploit image rights and generate wealth, but in doing so it limits the subject's ability to exploit those rights to their fullest potential and can ultimately have a "sterilising" effect.
  3. The inequality of bargaining power, as demonstrated by Mr Rooney's failure to obtain independent legal advice, meant that, on the facts, this Agreement could be considered unfair and oppressive.

Conclusion

The decision is significant as the Court of Appeal confirmed that a contract for the exploitation of image rights, or other ancillary activities to a person's main occupation, may constitute a restraint of trade.

If the restraint of trade cannot be shown to protect a legitimate business interest and is found to be unreasonable, having regard to the interests of the individual parties concerned and the public as a whole, it will be unenforceable. Further, if the agreement is drafted in such a way that the offending restraint of trade cannot be ‘severed' from the rest of the contract, the entire contract may be unenforceable.

In Rooney, the Court of Appeal found that the entire contract did constitute a restraint of trade and that the offending clauses could not be severed. Importantly, the Court of Appeal emphasised that it is a well-established principle that once a party withdraws from such a contract, the contract is unenforceable. Therefore, once Rooney refused to abide by the Agreement, Proactive could not enforce its contractual right to 20% commission - even if the Agreement stipulated that such payments were to continue after termination of the Agreement.

Where businesses seek to contractually restrain the trade of others they should ensure that such clauses only protect legitimate business interests and that they are no wider than what the courts consider reasonable.

 

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