Stumped! Breach of Endorsement Agreements
By Seshank Shekar
Personal brand endorsement agreements are an inherent part of the entertainment and sports industries. Brands spend millions in order to align themselves with a successful and attractive personality in the hope that such association will register a connection with potential customers. Most of these endorsement agreements for “personal services” secure a famous celebrity’s presence at the brand’s promotional events, commercials and other materials which help to retain the celebrity’s image within the brand. Unfortunately, the practise of such celebrities refusing to satisfy the terms of their endorsement agreements, especially in instances wherein their market value has risen exponentially, has increased over the last few years. In these situations, the brands are often affected adversely as the loss of the personality’s services could cause substantial harm to the brand, whether monetary or otherwise. The recent episode between Mahendra Singh Dhoni, and Karnataka Soaps and Detergents Ltd (KSDL), a state run manufacturer of soaps and toiletries, perfectly illustrates this scenario.
According to reports, the dispute, which was heard by an Arbitral Tribunal, was based on an endorsement agreement signed in early 2006, wherein Dhoni agreed to become KSDL’s brand ambassador for the purpose of promoting their products for a period of two years. The endorsement agreement between Dhoni and KSDL was worth an estimated INR 80 lakh, in consideration of which Dhoni agreed to appear in shoots, commercials or other promotions for 5 days each year. Dhoni was allegedly available for 3 days in the first year and thereafter did not make himself available during the remainder of the contract period. While KSDL made a claim of INR 6.5 crore against Dhoni citing loss of profits, Dhoni responded with a counter claim of INR 13.5 crore for “loss of earnings” as he was barred from endorsing any other toiletry brand on account of the agreement. The Arbitral Tribunal, while dismissing the claims of both parties, found that no actual damage was caused to KSDL to substantiate their claim of compensation from Dhoni. Additionally, the Arbitral Tribunal also held that KSDL failed to utilise Dhoni effectively as per the terms of the agreement. Dhoni’s claim against KSDL was also dismissed.
In light of the dispute between Dhoni and KSDL, it is worth visiting the rights and remedies available to a brand under the current Indian legal scenario in cases where a celebrity fails to fulfil all of his/ her services under an endorsement agreement. Reference must be made to the Indian Contract Act,1872 (ICA) and the Specific Relief Act, 1963 (SRA), which govern contractual relationships in India and provide for three principle remedies in case of breach of contract in the form of: a) Damages b) Specific Performance and c) Injunctions.
Damages mean compensation for the loss suffered by an injured party to a contract. The ICA provides that a party who is injured by a breach of contract may bring an action for damages. However, courts have generally been reluctant to award damages for lost profits in the area of endorsement agreements. Although the breach (as well as the proximate/foreseeable injury to the brand) may be undisputed, the difficulty lies in the ability to prove the amount of damages with reasonable accuracy. While determining the extent of compensation, the court has to take into consideration not only the measure of damage to the party, but also factor in the remoteness of such damages.
In the case of endorsement agreements, the consequences of a breach by the celebrity could hurt the brand in a number of ways. If the celebrity fails to appear as scheduled, the brand may suffer financially for expenses such as booking the venue or studio, etc., as well as loss in future profits. The traditional view is that damages in relation to lost profits are speculative and non-recoverable because it is impossible to predict with certainty the success of a commercial, advertisement or marketing campaign. Theoretically, the consequences of a breach of an endorsement may be endless. However, there must be a limit to the liability that can be attached to a celebrity in case of breach of contract. Damages which are completely unrelated to the breach would be considered too remote and therefore irrecoverable.
Section 73 of the ICA incorporates this principle by stating that the party who suffers breach is only entitled to compensation for damage which occurred naturally in the usual course of things or such damage which the parties knew would likely result in the case of a breach. The provision also proved that there can be no compensation granted for any remote or indirect loss or damage.
Keeping the above principles in mind, it is evident that brands can probably claim compensation for only money spent already in terms of fees or promotion in pursuance of the said agreement and not for loss in estimated proceeds such as “future profits” as they are not accurately ascertainable.
Specific Performance is an equitable relief given by a court in case of breach of contract which compels the defendant to actually perform the contract according to its terms and conditions. Specific performance rests on the principle that if the person on whom an obligation rests, fails to discharge such an obligation, the aggrieved party will have a right to insist on the actual performance of the agreement to obtain satisfaction. However, this is subject to a few exceptions to section 14(1) of the SRA, inter alia, that contracts which run into such minute or numerous details or which are so dependent on the personal qualifications or volition of the parties and contracts the performance of which involves the performance of a continuous duty, cannot be specifically enforced or performed.
Accordingly, courts have interpreted Section 14(1) to denote that contracts involving performance of artistic skill and personal service, like contracts to sing, act, etc. are those requiring personal skill and therefore cannot be specifically enforced by the court. Endorsement agreements, by their very nature, are contracts for personal service as they involve and depend on the personal qualifications and skill of the celebrity.
The Supreme Court of India, in Percept D Mark v. Zaheer Khan (AIR 2006 SC 3426) and the Delhi High Court in Infinity Optimal Solutions Pvt ltd v. Vijender Singh (CS(OS) 1807/ 2009) observed that contracts for personal, confidential and fiduciary services are dependent on mutual trust, faith and confidence and specific enforcement of such contracts were held to be barred under Section 14(1) of the Specific Relief Act.
While these two cases dealt exclusively with talent management contracts, the principles applied would be similar for endorsement agreements as they are contracts for personal service as well. Therefore, a brand would be precluded from compelling the sports person to fulfil the affirmative terms and conditions of the contract – such as the requirement of personal appearances or shooting of commercials – by the remedy of specific performance.
Negative injunctions are the most commonly used remedy in the enforcement of personal service contracts. Negative injunctions are orders by courts to prevent a celebrity from committing a breach thereof. In certain limited circumstances, they can be as effective as a mandatory injunction.
Under Section 41(e) of the SRA, an injunction cannot be granted so as to prevent the breach of a contract, the performance of which cannot be specifically enforced. In effect, injunctions cannot be granted with respect to contracts such as those provided under Section 14(1) of the SRA as they cannot be specifically enforced.
However, Section 42 of the SRA provides that notwithstanding the provisions of Section 41(e) if the contract comprises a negative covenant, the Court is not precluded from granting an injunction to perform the negative covenant only because it is unable to compel specific performance of the affirmative parts of the agreement.
In general, negative covenants in a contract, such as those preventing a celebrity from endorsing a rival brand or product or product category cannot be enforced if they apply after or beyond the term of the contract. Such agreements are considered to be in “restraint of trade” and are governed by Section 27 of the ICA which renders void ‘every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind’.
However, the courts have consistently held that negative covenants in personal service contracts, as long as they only apply during the term of the Contract, do not attract Section 27 of the ICA and hence can be enforced, unless the contract is unconscionable, excessively harsh, unreasonable or one-sided.
Thus, it is conceivable that a company could obtain an injunction to restrict a celebrity from signing an endorsement agreement with a rival brand for the duration of the agreement in order to prevent a breach of the agreement. Unfortunately, such injunctions for enforcing negative covenants are often of no practical or economic value to the brand as there are two primary situations which restrict their usefulness. First, courts highly scrutinize requests for negative injunctions because of their likelihood to contravene Section 27 of the ICA. Second, the brand’s primary concern is an economic and public relations return on the personal service contract, which could be adversely impacted through the negative publicity that could surround any attempt to obtain and enforce an injunction against a celebrity.
Historically, endorsement agreements tend to heavily favour the celebrity over the brand, whether the management of such brand is a multi-national conglomerate or an independent owner. However, celebrities in this day and age command more power and control than their predecessors which results in them dictating terms to even the most powerful companies in the world. Therefore, the old rules of protecting celebrity endorsees should be made less stringent so as to expand available remedies against such celebrities who breach endorsement agreements, thereby ensuring an equality of power between the brand owners and the celebrities.
© The Sports Law & Policy Centre