Don't Make Promises You Can't Keep: Pepsi Successfully Terminates Its Exclusive Sponsorship Agreement For The Montréal Forum

Author:Ms Geneviève Bergeron, Chantel C. Tremblay, Martin Boodman and André J. Payeur
Profession:McCarthy Tétrault LLP

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 in Forum 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...

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