How careful attention to warranties can avoid transfer nightmares

Newcastle United Football Club said they did not rule out legal action against AC Milan following last summer’s transfer of midfielder, Sandro Tonali, who was banned from competitive football for ten months shortly after signing. The case has brought into focus the standard provisions within transfer agreements and, specifically, warranties. In this Q&A, we consider how drafting of warranties and other provisions in transfer agreements can manage risks. Frequently, transfer agreements are negotiated and concluded under huge time pressure, hence why there is a tendency for clubs to rely heavily on standard provisions. However, blanket use of a standard agreement without tailoring it to the relevant circumstances can result in a failure to adequately address and provide for risk. In order to address risk, transfer agreements will typically include warranties given by the transferring club regarding the player in question. These warranties are open for negotiation and can be drafted in different ways to protect clubs’ interests, depending on whether they are buying or selling a player.

What are warranties?

Warranties are contractual statements or assurances on matters relating to the asset being sold – in this scenario, a player. Just like any asset purchase, the principle of caveat emptor (buyer beware) applies and in that context, warranties serve two main purposes:

1. To provide the buying club with a remedy if the statements later prove to be incorrect; and
2. To flush out any potential problems surrounding the player at an early stage.

Whilst they are no substitute for thorough due diligence, it is in the interests of a club acquiring a player to draft comprehensive warranties to mitigate potential risks as far as possible. A buying club would primarily seek warranty protection from the selling club. However, it is usual for the player to also provide similar warranties within the playing contract.

What sort of warranties are typically provided?

Some of the typical warranties that a selling club will be asked to provide include confirmation that:

• the selling club holds the player’s registration absolutely and is the sole owner of the player’s sporting, federative and economic rights;
• the player does not have any criminal convictions or is subject to any criminal investigations or proceedings;
• the player is not subject to any regulatory investigations which could lead to the player being suspended from playing football or subject to any current playing suspension; and
• it has made a full and honest disclosure to the buying club of the player’s past and current medical history that could in any way affect his health, fitness and/or ability to play professional football.

How do representations and undertakings differ from warranties?

It is common for the buying club to also require the selling club to provide representations and undertakings. Whilst representations and undertakings are usually grouped together with the warranties within the same clause in the transfer agreement, under English law, there are important differences between each of them which clubs should bear in mind.

Representations

Representations are statements which induce a party to enter into a contract and a buying club may seek to draft a transfer agreement on the basis that the warranties are also representations. This is because it will give the buying club the option of pursuing a tortious claim for misrepresentation (provided this is not excluded by the terms of the agreement) as well as a contractual claim for breach of warranty in the event a warranty is untrue.

The usual remedy for a contractual claim for breach of warranty is damages aimed to compensate the buyer for its loss of bargain i.e. to place it in the position it would have been in had the warranty been true. Quantifying a buying club’s loss following a breach of warranty will be fact specific, depend on several factors and is likely to be a complex exercise requiring specialist expert evidence. However, generally speaking, damages for a breach of warranty are likely to be based on the difference between the actual market value of the player and the player’s market value had the warranty been true. By contrast, the remedy for misrepresentation is damages calculated in accordance with the tortious measure which aims to restore the buyer to the position it would have been in had the breach not occurred. Therefore, the measure of tortious damages would likely be the difference between the actual market value of the player and the transfer fee paid.

Understanding when it is best to choose the contractual or tortious measure of damages is a separate topic outside the scope of this article, but generally speaking it is best to choose the tortious measure of damages when the innocent party would have made a bad bargain even if the warranty was true. For example, if a buying club has paid £100 million for a player when the actual market value based on the warranty being true was £60 million, then the tortious measure of damages is likely to be the best option as the buying club can still recover the transfer fee.

A contractual claim for breach of warranty will also not generally entitle the innocent party to rescind or terminate the agreement whilst another potential remedy for misrepresentation is rescission of the contract i.e., undoing the contract and restoring the parties to their original positions which may be an attractive option for a buying club depending on the circumstances.

In practice, a selling club is likely to resist any provision that the warranties are also representations and will instead seek to incorporate a provision within the entire agreement clause confirming that the buying club has not relied on any representations as well as a provision excluding liability for misrepresentation.

Undertakings

A warranty is a promise that a present fact or circumstance is true whilst an undertaking is a promise that one party will do something in the future. Therefore, unlike a breach of a warranty claim where the only available remedy for the innocent party is a claim for damages, a breach of an undertaking may also give rise to a claim for specific performance and injunctive relief. For example, if the selling club agrees to transfer the player’s registration to the buying club but, without justification, fails to do so, the buying club may be able to seek an order compelling the selling club to do so.

Typical undertakings include that the selling club will:

• continue to retain the player’s registration from the date of the transfer agreement until the player is registered with the buying club and that during such period it will not solicit or accept any other offers for the transfer of the player;
• do all things necessary to transfer the player’s registration to the buying club as soon as practically possible, including terminating the player’s contract, cancelling its registration of the player and completing any regulatory forms; and
• pay all applicable taxes due on any amounts received in connection with the transfer and not commit any act which might constitute an offence of tax evasion.

What about indemnities?

It is also standard for a buying club to require the selling club to indemnify it in the event of any breach of the warranties, representations and undertakings. This indemnity is usually very widely drafted to capture all liabilities, costs, expenses, damages and losses which are suffered and incurred by the buying club as a result of the breach.

The key advantage of such an indemnity is that in the event of any breach, the buying club can recover all the loss and costs it suffers on a pound for pound basis and avoid the potential hurdles with recovering damages such as the obligation to mitigate loss.

A selling club will resist giving any such indemnity wherever possible arguing that the buyer club should instead prove its loss in the normal manner or, alternatively, attempt to limit the scope of the indemnity in some way.

How can a selling club seek to limit its potential liability?

Carefully Consider Each Warranty

It should go without saying but before agreeing to provide any warranty, selling clubs must consider carefully the wording of each warranty requested by the buying club and to the extent that any of the requested warranties are troublesome or not accurate, seek to delete or amend the warranty accordingly. For example, if the buying club has sought a warranty confirming that the player is not subject to any regulatory investigations and the selling club is aware of an ongoing investigation, this should be disclosed to the buying club and referred to within the wording of the warranty in order to avoid the possibility of a subsequent claim.

Awareness

One of the main ways in which a selling club can seek to limit its exposure is to qualify warranties and any representations based on its awareness by, for example, using the commonly used phrase "so far as the seller is aware". By doing so, the selling club is seeking to ensure that it is not liable for any issues that it does not or could not know about.

If the buying club is prepared to accept a knowledge qualifier, it is sensible to stipulate what amounts to knowledge or awareness in order to prevent uncertainty and avoid the risk of what an arbitral tribunal may imply.

From the selling club’s perspective, it is best to ensure that awareness only relates to actual knowledge (without having made any enquiry), whilst a buying club is likely to insist that the selling club must have made full enquiry into the subject matter of the warranty or representation. If the selling club must accept a duty to enquire, it will usually seek to confine this to an obligation to make reasonable enquiries of certain specified individuals only.[3]

For added protection, a selling club may seek to go further and provide that the buying club is barred from making a breach of warranty claim in respect of any fact, matter or circumstance which was known to it at the time the transfer agreement was concluded. For example, if it was in the public domain that a player was subject to an investigation for a criminal offence, then such a provision may be sufficient to ensure that the selling club avoids any liability even if this was not expressly disclosed to the buying club and referred to within the wording of the warranty.

Time Limits

The normal time limit for bringing a breach of warranty claim is 6 years however, whilst this is not a common provision within transfer agreements, it is open to the parties to negotiate a shorter limitation period in order to prevent a selling club from remaining exposed to the potential risk of a claim.

The parties can also agree gateway provisions which require the buying club to provide notice of claims (often requiring some detail of the claim and an indication of its value), within a particular time period, and by a particular method. Failure to comply with these provisions can shut out an otherwise valid claim.

Financial Limits

Financial limits are rarely seen within transfer agreements but are widely used within sale and purchase agreements in other sectors. If a selling club is in a particularly strong negotiating position, then it could seek to include limitations on the value of the claims that can be made. These limitations can take different forms:

• “de minimis” limits can operate to exclude low value claims by providing a minimum limit for individual claims; and
• overall caps can provide a maximum cap on the liability of the selling club for warranty claims.

Our expertise

Our Sports Business Group is one of the UK’s leading sports practices, ranked highly in Legal 500 and Chambers & Partners, and our specialist team members are experts in the drafting and negotiation of transfer documentation and related disputes. For an initial discussion, please contact John Shea.