Exclusive negotiation periods: comments from ASIC v Mitchell

By Martin Ross and Mark Lebbon

The allegations made by the Australian Securities and Investments Commission in the Federal Court case, ASIC  v Mitchell (No 2)^[1] centred on alleged breaches of director duties by two former Tennis Australia (TA) directors during negotiations for the sale of domestic broadcast rights for the Australian Open.

While the case primarily related to alleged breaches of the Corporations Act 2001 (Cth), the judgment of Justice Jonathon Beach also commented on contractual clauses which provide for an exclusive negotiation period (ENP).

What is an ENP clause?

An ENP clause is a contractual provision whereby the parties agree that they will negotiate exclusively with each other – and not with any third parties – for a defined period about a certain subject matter. Often the subject of the ENP is a potential renewal of the relevant agreement.

In ASIC v Mitchell, TA and Seven Network (Operations) Ltd (Seven) were parties to a broadcast rights agreement that ended in July 2014 (Seven Agreement). The Seven Agreement provided for an ENP. The ENP began on 1 April 2013 and ended on 30 September 2013.^[2] Seven did not have a last right of refusal in respect of any grant of future broadcast rights.

Comments in ASIC v Mitchell

In ASIC v Mitchell, Justice Beach commented generally about what the ENP clause in the Seven Agreement required of the parties. While the specific terms of the ENP clause will ultimately determine how it applies, the comments of Justice Beach provide a useful framework when considering the purpose and application of other ENP clauses.

Justice Beach observed that where an ENP applies parties cannot simply go through the motions in seeking to comply with the terms of the ENP and that an implied contractual obligation or duty would, at least in respect of the Seven Agreement, require TA at a minimum to make a bona fide effort to negotiate with Seven during the ENP and do all such things reasonably necessary to enable Seven to have the benefit of the ENP.^[3]

Justice Beach commented not only on what the ENP required during the ENP itself, but also prior to the ENP commencing. His Honour stated that the effect of the ENP was that even before the ENP began TA:^[4]

could not deal with or entice suitors in a way which would deprive Seven of the benefit of the ENP such as accepting an offer or substantially progressing negotiations on the understanding that a contract would be entered into with the suitor at the expiry of the ENP.

This meant that TA was prevented from actively enticing or negotiating with potential licensees prior to the commencement of the ENP and could not engage in any conduct that would prevent Seven from being given a genuine opportunity to arrive at a deal.^[5]

This raises a question as to the extent to which a rights holder can have discussions with other potential licensees prior to the start of an ENP? The answer to this question will turn on the specific terms of the relevant ENP clause.

In ASIC v Mitchell, Justice Beach did not have to determine whether TA had breached the ENP clause in the Seven Agreement, however His Honour observed that an ENP clause may not prevent a rights holder from seeking out interest from other parties before the ENP commences, but a party who is subject to an ENP would have to be careful to ensure that any discussions did not either turn into negotiations or otherwise deprive the incumbent licensee of the benefit of the ENP clause.

Before holding discussions with other potential licensees prior to an ENP commencing, rights holders should seek legal advice to determine the extent to which such discussions can take places.

Conclusion: implications of ASIC v Mitchell

While the parties’ respective obligations under an ENP clause will depend on the specific drafting of the clause, the judgment in ASIC v Mitchell provides some useful guidance in respect of how ENP clauses may be interpreted. In summary:

• in seeking to comply with the terms of an ENP parties cannot simply ‘go through the motions’ in seeking to comply with the terms of an ENP. A party who is bound by an ENP should make a bona fide effort to negotiate with the other party to the ENP (often the incumbent licensee) in order to give that party the benefit of the ENP; and
• if a rights holder wishes to engage in any form of discussions with other potential licensees prior to the start of an ENP, they must be careful to ensure that such discussions do not deprive the other party to the ENP of the benefit of the ENP (such as accepting an offer or signalling that an offer will be accepted or substantially progressing negotiations with other potential licensees).

Legal advice should always be sought before holding discussions with third parties prior to the commencement of an ENP. Hall & Wilcox has extensive experience advising parties on all aspects of commercial rights negotiations, including the interpretation and enforcement of ENP clauses in the context of media rights and sponsorship agreements.

[1] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 (ASIC v Mitchell).
[2] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, 3.
[3] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, 693.
[4] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, 694.
[5] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, 695.