Playing Defense Against A-Rod’s Incomplete Contract

406px-Alex_Rodriguez_Cannons_2.jpgSometimes 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?

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16 Responses

  1. Jeff Lipshaw says:

    Dave, I think you’ve missed at least two possibilities:

    #1: Yankees: “Alex, we want a provision in here about steroid use.”

    Alex: “No.”

    #2: There is a “moral turpitude” or “embarrassing activities” clause but it doesn’t mention steroids, in which case the issue would be interpretation, not extra-contractual defenses.

    On the broader issue of trying to reconstruct “what went wrong? in complex contracts, see this post.

  2. AF says:

    I’m having trouble assuming away the “potential labor law implications,” given that A-Rod’s 2003 steroid test was the result of a negotiated agreement between the union and the owners. Any attempt by the Yankees to penalize A-Rod would be resolved by an arbitrator under the collective bargaining agreement, and would surely be struck down as the 2003 testing agreement provided that players testing positive would not be identified, let alone punished.

    Without a union contract, A-Rod’s 2003 steroid use would have come to light in a different way, with different contractual implications.

  3. dave hoffman says:

    Jeff: You are misreading the story, which states that the Yankees believe that there is no language on point. The moral turpitude clause would (it seems to me) clearly at least be arguably on point (with the interpretation issues you note). Therefore, I assumed, and thought I was clear in assuming, that no such clause existed.

    W/r/t the possibility that the Yankees asked A-Rod for a clause and were turned down, that seems legally the same as possibility #2 that I mentioned.

    Since you mentioned that I missed “at least” two possibilities, perhaps you could lay them out?

  4. dave hoffman says:

    AF: That’s right. It’s just a thought exercise.

  5. Jeff Lipshaw says:

    Dave, I only thought of two as I was sitting there.

    1. All I read was your quote: “no language about steroids in the contract.” That says literally to me there is no language about steroids in the contract. That means we’re dealing in two levels of hearsay about what the contract actually says. The remainder of the sentence says “that would put Rodriguez at risk of losing money.” From that, arguably, we can infer that somebody looked at the whole contract and thinks there’s nothing at all that puts him at risk of losing money, but presently all we know is that there’s nothing about STEROIDS that put him at risk. Pardon my anality. I’ve just been around a long time and don’t take this stuff at face value until I have seen the whole contract.

    2. I’m not sure I understand how #2 fits my alternative. If the Yankees say: “Alex, we want a provision in here that says you warrant you never used steroids.” Alex responds, “no, I refuse to make such a legal warranty, nor will I discuss the issue with you. You will simply have to take your chances on that one.” That’s not a frustration issue – the parties have explicitly bargained the issue out of the legal domain. Nor is there any fraud or misrepresentation. Hence, in this scenario, the Yankees have done as much as they can to create the legal model they want in the contract, realize there’s nothing more they can do, and make a business decision to accept the risk. It is what it is.

    The point of the linked sufficient reason post is that we as lawyers seem to have a hard-wired teleology about contracts, beginning with the rational actor inspired notion that there is some notionally complete contract, revised post Herbert Simon into the view that boundedly rational actors turn complete contracts into incomplete contracts as a result of their inability to see all the possibilities.

    I start with the idea that all contracts are incomplete by their nature as models of complex reality, just as all models are incomplete. Some are more incomplete than others. I thereby arrive at the same fundamental conclusion as you: there is indeed an irreducibility to the exercise. I think I feel less inclined, however, to justify, within the law, why the contract failed to address ALL contingencies, because I start with the assumption that there are only so many it will catch to begin with.

    Or more succinctly: not every failure to cover a contingency is a screw-up.

  6. A.J. Sutter says:

    As usual, I agree with Jeff. I too don’t see frustration in the “Alex says no” scenario. It’s always easy to second-guess a contract that you didn’t negotiate (and sometimes easy to get a queasy stomach reading one that you yourself negotiated in the dimly-remembered past), but in real life negotiation you can’t always get what you want — it’s as simple as that.

    On the available facts, there’s no justification for assuming that the steroids point wasn’t negotiated, so no need to invoke economistic jargon concepts such as in the expression “negotiating on this term would raise the transactional costs of completing the agreement.” In fact, the transactional costs model begs the question of how to quantify the “costs” of having the opposite side think ever after that you are a jerk, even if you do succeed in your negotiation. Relationships and reputation have a way of persisting long beyond negotiating a deal, and the repercussions of pressing your case too obnoxiously in a negotiation can quickly enter the realm of counterfactuals (e.g., deals or concessions that are never offered to you in the future).

    Another way in which it can be misleading to judge the “completeness” of contracts from reading the text alone (and, a fortiori, from reading hearsay about the text) is that a decontextualized reading often ignores factors that may influence a party not to enforce the contract, even when it’s entitled to. Sometimes these factors are already evident during the negotiation phase. E.g., as we used to remind ourselves at one of my former companies, “it’s not nice to sue your customer.” When there isn’t even bargaining power, you put some provisions in only because you hope that the other side will comply with them, not because you think you’ll have any leverage if there’s a breach. That may not be apposite in the A-Rod case, I admit.

  7. AF says:

    It’s a thought exercise that assumes away the central fact.

    Through his union, A-Rod has already negotiated an explicit and specific agreement as to the effect of failing the 2003 steroid test.

    This is not a case of an incomplete contract. The consequences of this exact contingency have already been resolved in a separate agreement.

  8. Jeff Lipshaw says:

    For the record, I think it’s a good thought exercise! Just assume no union contract. I’ve been thinking about using it in a class as another example of the practical limits of contract in the complex business context.

  9. Gabe Feldman says:

    Two additional points, both of which I realize fundamentally change the thought exercise, but address your initial question regarding the failure of the Yankees to allocate the risk of a postitive steroid test. First, the collective bargaining agreement contains a standard player contract. With limited exception, the terms of that contract (other than salary, length of contract, etc.) cannot be modified by the player or the team. Second, the standard player contract does contain a morals clause. A team may terminate a player contract if the player “shall at any time…fail, refuse or neglect to conform his personal conduct to the standards of good citizenship and good sportsmanship or to keep himself in first-class physical condition or to obey the Club’s training rules.”

    So, the risks of the contingency were allocated through the (heavily negotiated) collective bargaining agreement and standard player contract.

  10. Jeff Lipshaw says:

    Hi Gabe! You are as always too modest in not indicating that you are the Director of the Sports Law Program at Tulane.

    I read that as saying there would be legal risk to A-Rod if the Yankees really seriously wanted to lose his services, which I doubt.

  11. Gabe Feldman says:

    Greetings, Jeff. You have always been my best PR person (though my mother will likely pass you as soon as she learns how to blog). I did not intend to suggest a conclusion either way about the ability of the Yankees to terminate A-Rod’s contract. I was only pointing out that the Yankees were not in a position to allocate the risk of a positive steroid test (or the discovery of a past positive test) in their contract with A-Rod. That said, for a variety of reasons I don’t have time to list, I think it would be very difficult for the Yankees to argue that anything A-Rod did during the term of his contract (even lying to Katie Couric!) constituted a failure to “conform his personal conduct to the standards of good citizenship.”

  12. dave hoffman says:

    Gabe, thanks for highlighting the morals clause. The problem with the caluse, from the team’s perspective, is presumably that it isn’t a warranty against past bad conduct. So, assume that A-Rod did something that ordinarily would trigger the morals out – for instance, gambling? – wouldn’t the timing be crucial? Pre-formation misconduct can’t be punished under the clause. Assuming that’s true, I’m a little confused as to how the morals clause does, in fact, allocate the risk of past steroids use? A-Rod didn’t control the release of this information, and, in fact, had a contractual interest in it not being released. (One that he might, in some implausible counterfactual scenario, have a right to sue the leaker on).

  13. Gabe Feldman says:

    Dave—

    You’re exactly right—the morals clause seems to permit a team to terminate a player only for misconduct committed during the term of the contract. Assuming that’s true, hasn’t the risk of undisclosed past steroid use (or any past, undisclosed misconduct that might rise to the level of termination if committed during the term of the contract) been allocated to the team? And, as AF notes, isn’t that conclusion particularly strong here, where the league agreed that the positive steroid test in question would not be disclosed and would not result in any disciplinary action? The team, of course, is free to investigate any possible pre-contract misconduct and act accordingly (ie, not sign the player).

  14. Is it possible that the Yankees accepted the risk because they really wanted A-Rod to break the record and knew that it would probably take steroid use to break the record? They were willing to accept the risk of “revelation of steroid use” and didn’t really want to discourage steroid use? Is that too cynical?

  15. Ed Unneland says:

    I guess we’re a long way away from when Walter Alston had, what, thirty straight one-year handshake oral agreements to manage the Dodgers; both when they were at home in Brooklyn, and during their, ahem, temporary sojourn someplace west of the Rockies where there is no there there. (Just kidding about L.A.; consider it on the same level of jocularity as a Norwegian politician promising to get Jaemtland back from the terrible Swedes.)

  16. Jeff Lipshaw says:

    Christine, I would have thought that was too cynical, but then again I would have never believed in this day and age somebody would spend $1,000,000 decorating an office. Could John Thain spell “K-O-Z-L-O-W-S-K-I”?

    My sense is that nobody running baseball wants steroids, largely because there is no team sport in which individual records mean so much. 61. 714. 104. 56.