A compensation claim in terms of a termination clause
In a judgment delivered by the Court of Appeal (Inferior Jurisdiction), presided by the Honourable Judge Lawrence Mintoff, on 3 February 2021, the Court inter alia upheld that in the context of termination before the agreed termination date which is not attributable to a fault of the nonterminating party, compensation can only be awarded to the nonterminating party in accordance with the mechanism provided in the termination procedure.
Arbitral proceedings were instituted by the appellant company Peak Media Limited (C 53617) (the ‘ appellant company’) on the basis of a White Label Agreement (the ‘ Agreement’) for the provision of services to Betsson Services Limited (C 44114) (‘ Betsson’), including the marketing and promotion of Casino White Label in the British market. Clause 8.2.5 of this Agreement provided a specific termination procedure in case of the imposition or modification of requisites by governmental agencies. In turn, such requisites would have impacted either the commercial interests of the terminating party (e.g. the need to obtain a licence) or which would have substantially prevented such party from the performance of its obligations.
Betsson terminated the Agreement on 30 June 2014 on account of the entry into force of the Gambling (Licensing and Advertising) Act in the United Kingdom which would have required the appellant company to obtain a licence in order to provide remote gaming services in that jurisdiction. However, since the law did not come into force until 1 November 2014, the appellant company requested that the Agreement not be terminated prematurely. The appellant company claimed that it suffered significant damages in terms of loss of profit and reputational damage as a result of the termination and that termination under Clause 8.2.5 of the Agreement was tantamount to a contractual breach because the legislation in question was not yet in force. Thus, the appellant company proceeded to institute arbitral proceedings seeking inter alia an award for the liquidation and payment of damages by Betsson.
Betsson counterargued that in any case, any damages due to the appellant company were limited by Clause 8.6 of the Agreement which stated that:
In the event that Betsson terminates the agreement before the agreed termination date, and Partner is not in material breach or default, then Betsson agrees to pay the Partner a revenue share on the Players on the same terms as the then current Revenue Share in place between the parties. Betsson shall then pay such revenue share for a period of twelve months following the termination.
Furthermore, the appellant company argued that damages should also be awarded on the basis of the unlawful infringement of a trademark or other unfair competition in terms of an alleged breach of Article 32 and Article 32A of the Commercial Code. The Arbitral Tribunal disagreed on the basis that the appellant company’s claim for damages was specifically dependent on a finding that the termination was tantamount to a contractual breach. In addition, the consequences of early termination by Betsson had been unequivocally agreed upon in Clause 8.6 of the Agreement. Thus the Arbitral Tribunal found that the claim in respect of an alleged breach of Article 32 and Article 32A of the Commercial Code did not fall within the remit of the proceedings and could not be upheld.
Reference was made by the appellant company to its own valuation and that of its operation. However, the Arbitral Tribunal rejected this attempt to determine the company’s value and subsequently claim damages on that amount. Clause 8.6 of the Agreement clearly stated that any damages awarded had to be calculated according to the ‘ revenue share on the players […] for a period of twelve months following the termination’. That being said, the appellant company had to be compensated if the termination was not consequential of its own contractual breach.
In view of the above, the Arbitral Tribunal concluded inter alia that:
Betsson had not failed to perform its obligations under the Agreement and therefore no damages were to be awarded on the basis of a contractual breach;
Clause 8.6 of the Agreement was applicable to the proceedings and therefore compensation was due by Betsson to the appellant company in the amount of EUR 197,000; and
Arbitration costs were to be borne as to eighty percent (80%) by the appellant company and twenty percent (20%) by Betsson.
The appellant company appealed against the arbitration award and requested the Court of Appeal (Inferior Jurisdiction) (the ‘ Court’) inter alia to:
Vary the arbitral award by finding Betsson liable to compensate the appellant company in an amount which exceeds EUR 197,000;
Reverse and annul the arbitral award (i) insofar as it found Betsson not liable to pay damages in terms of contractual breaches and (ii) with regard to the apportionment of costs.
The first ground of appeal above was based on an allegedly erroneous interpretation of Clause 8.6 of the Agreement and the arbitrator’s failure to verify the mathematical formula used (if any) in the calculation of compensation to be awarded. The Court noted that the appellant company argued that the compensation it was due to receive in terms of Clause 8.6 of the Agreement was equal to the actual revenue generated by players in the year 2013. The Court held that this approach ran contrary to the arbitral proceedings during which it was determined that the compensation to be paid was based on sixty percent of the actual revenue generated.
The appellant company also argued that a ‘without prejudice’ offer was tendered by Betsson in an attempt to settle the dispute amicably, and that the seemingly low amount of this offer confirmed the failure to implement mathematical formulae properly in the computation of such compensation. The Court did not agree with the appellant company in this respect and observed that the latter had already been reprimanded by the Arbitral Tribunal for submitting evidence of a ‘without prejudice’ offer in proceedings. Furthermore, the Court stated that in accordance with Clause 8.6 of the Agreement, the compensation to be awarded could only be calculated upon the lapse of twelve months from the termination of the same Agreement. Nor could the computation be based on projections or estimated figures as provided by the appellant company. In view of the foregoing, the Court rejected and dismissed the first ground of appeal.
The appellant company also appealed against the arbitral award on the ground that following the determination that compensation was due in terms of Clause 8.6 of the Agreement, the Arbitral Tribunal failed to liquidate the damages due in terms of its remaining claims namely, Betsson’s failure to honour its contractual obligations. In particular, the appellant company argued that the conduct of its counterparty prevented it from the execution of its marketing campaign with the consequential loss of its pool of players and reputational damage. This ground of appeal was based on Article 1125 of the Civil Code which stipulates that a person shall be liable in damages for the failure to perform a contracted obligation.
The Court however noted that no evidence was submitted by the appellant company in substantiation of these alleged damages or the quantification of the same. Apart from the dearth of evidence in this respect, the Court observed that the appellant company made no reference whatsoever to extra-contractual damages, the Civil Code or the Commercial Code in its original statement of claim to the Arbitral Tribunal. In view of the foregoing, the Court rejected and dismissed the second ground of appeal.
The Court then moved to address the ground of appeal on the proper apportionment of arbitration costs. The appellant company lamented that in spite of being the successful party, the Arbitral Tribunal ordered it to bear eighty percent of the arbitration costs. As a general rule, it is the party cast which must bear the entirety of the arbitration costs. The Court agreed that this was the general rule subject to the discretion of the Arbitral Tribunal to apportion costs in a reasonable manner. However, owing to the considerable costs incurred in the arbitral proceedings, the Court noted that most of the compensation due to the appellant company in terms of the arbitral award in its favour would have to be suffered by the same company in terms of arbitration costs. In view of the foregoing, the Court ordered that in line with the principle of equity, costs should be split equally between the parties.
On the basis of the above, the Court decided to:
reject and dismiss the first two grounds of appeal of the appellant company;
uphold the third ground of appeal and order that the costs of the arbitration proceedings be split equally between the parties, with the costs of this appeal to be borne as to two-thirds by the appellant company, and one-third by Betsson.