Playing Defense Against A-Rod’s Incomplete Contract
posted by Dave Hoffman
Sometimes it’s tough to find a legal angle on the latest micro-scandal. Not so with the revelations that the hated Yankee slugger Alex Rodriguez tested positive for steroids in 2003. Check out the original S.I. article that broke the story. Here’s the key bit (for me):
Anticipating that the 33-year-old Rodriguez, who has 553 career home runs, could become the game’s alltime home run king, the Yankees signed him in November 2007 to a 10-year, incentive-laden deal that could be worth as much as $305 million. Rodriguez is reportedly guaranteed $275 million and could receive a $6 million bonus each time he ties one of the four players at the top of the list: Willie Mays (660), Babe Ruth (714), Hank Aaron (755) and Barry Bonds (762), and an additional $6 million for passing Bonds. In order to receive the incentive money, the contract reportedly requires Rodriguez to make extra promotional appearances and sign memorabilia for the Yankees as part of a marketing plan surrounding his pursuit of Bonds’s record. Two sources familiar with Rodriguez’s contract told SI that there is no language about steroids in the contract that would put Rodriguez at risk of losing money.
How could the Yankees possibly have failed to have allocate the risks of this contingency? It strikes me that this is a nice example of the irreducible incompleteness of even heavily negotiated contracts. The Yankees either (i) didn’t think about it; or (ii) did think about it, but realized that negotiating on this term would raise the transactional costs of completing the agreement.
Now, assume away reputational effects & potential labor law implications. Assume also the allegations are true: A-Rod juiced. Finally, assume that we’re in condition (i): the Yankees didn’t know about the steroid use. A-Rod knew about the use and may have known about the positive test and thus the possibility of disclosure. Given the missing term, what should a Court do if the Yankees were to breach their duty to pay A-Rod and argue that his steroid use vitiates the contract? Like Larry’s excellent post about divorce and fraud, I’ll go through the usual suspects.
1. Nondisclosure = Misrepresentation? Assume, as seems likely, that the Yankees didn’t ask A-Rod about his steroid use. Does his statement to a third party (Katie Couric) create a fraud defense for the Yankees? No, since the statement post-dated the signing of the contract. How about nondisclosure? As Richard Craswell’s excellent article on nondisclosure makes clear, the law in this area is a little complicated.
Nondisclosure can be misrepresentation when the fact undisclosed would have corrected a basic assumption on which the contract was made. (RST 161) Was A-Rod’s non-steroidal status just such a basic assumption? Seems unlikely: (1) was this really so unforeseeable, given that over 5% of players tested positive in 2003? (2) reading between the lines, the contract appears to say something about steroid use, just not something that puts him at risk of losing money for past misconduct. This suggests in turn that the Yankees’ claim to be “blindsided” by the news needs to be taken with a large grain of salt.
2. Frustration? Restatement 265 states:
“Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.”
Basically the same problem: was A-Rod’s cleanliness a basic assumption that motivated the contract? The Yankees may say that they made the deal only because they believed he would be able to break records and draw crowds, which will be less likely now. But it’s clearly true that the purpose of the contract was to employ him as a slugger, who (as a bonus) had a clean image, not a clean player who happened to hit. That all said, frustration is a better fit than mutual or unilateral mistake, in my view, since the problem that destroys contractual value here is the revelation of the drug use, which happened after formation. If the Yankees learned that A-Rod used drugs today, but that fact were not made public, they’d have no claim at all for rescission. This, incidentally, fits well with my casual economic analysis of steroids in sports, which holds that “almost all of steroids’ social ills seem to be caused by monitoring.”
What do you think?