What makes a contract bad? Is it one that’s poorly written, with spelling mistakes and contract ambiguity? Or one that accurately records the details and expectations of what turns out to be a terrible idea?
While the first option can definitely be bad, the examples here generally fall into the second category.
When researching for this article I’ve also often found that one party in a “terrible” contract will actually consider it to be fantastic, while on the other side sits a party with nothing but regret.
In other cases, both parties in a contract will end up suffering as a result of being locked into it.
Here, I’ve picked five different types and sizes of agreement from recent history, which all demonstrate the consequences of a poorly conceived or executed contract.
1. Merger agreement - AOL and Time Warner
This deal in 2001 is commonly viewed as being one of the worst in recent memory, perhaps in history. In looking to combine the best of traditional and new media, the merged entity fell victim to terrible planning and catastrophic timing.
At the time, there seemed to be some logic to the tie-up - Time Warner would gain instant access to the digital ecosystem that AOL had created, having previously lagged in online development, while AOL would benefit from access to Time Warner’s cable infrastructure and media catalogue.
However, there were three key issues that would result in, firstly, a $99 billion dollar write-down a year later and, ultimately, a separation of the two companies eight years hence.
The first problem was the dotcom crash that coincided with this deal going through. The stockmarket plummeted and advertising revenues dried up meaning that AOL’s revenue projections were vastly over-inflated.
This could possibly have been overcome without the second problem, which was the emergence of high-speed broadband at a time when AOL was the dominant player in subscription dial-up internet access. Suddenly, people no longer wanted to use their core service and subscription numbers started to fall rapidly.
While these first two problems could be classed as “foreseeable but external” the third problem was most definitely internal. The two sets of employees were thrown together with high expectations of being able to generate efficiencies.
However, these never came to pass. The Time Warner side of the business is generally characterised as being stubborn and resistant to change, as well as working in long-standing silos. The AOL side have been reported as being brash and arrogant, believing that they represented the future of the business.
Whatever the nuanced truth, it’s fair to say they didn’t get on and didn’t commit wholeheartedly to making the deal work.
Estimates vary, but the net result is somewhere in the region of $200bn in shareholder value being lost.
2. Ronald Wayne and Apple
Ronald Wayne was the third co-founder of Apple Computers in 1976, along with Steve Jobs and Steve Wozniak. Older than the other two, he was the “grey hair” that the company required in its early days to counterbalance the exuberance of the Steves.
His reward for co-founding was a 10% stake of the business. He held this stake for just two weeks before relinquishing it. His fear at the time was that his various assets could potentially be seized if the business were to fail.
In return for his stake he received $800. A year later he received a further $1,500 for agreeing to forfeit the right to any future claims against Apple, which had restructured to be a corporation.
Based on the information available at the time, you can empathise with his decision. He was understandably risk-averse and couldn’t have foreseen that Apple would go on to become the most valuable corporation in the world.
His 10% stake would today be worth in the region of $80bn.
To add further insult, in the 1990s he chose to sell his original copy of the contract he signed with Apple for $500 to a memorabilia dealer. That same contract was sold at auction in 2011 for $1.6m.
3. Winston Bogarde and Chelsea Football Club
When it comes to modern sport contracts, the quantities of money are huge and generally each year will set new benchmarks. From £200m football transfers to $230m basketball deals.
However, one deal from the early years of the Premier League in England still stands out. In pure monetary terms it’s been dwarfed by many contracts since, but for me this was one of the first high profile examples of a player simply putting money far above anything else.
The player in question is Winston Bogarde and the contract is the one he signed with Chelsea Football Club in 2000. Having previously played with Ajax, AC Milan and Barcelona, he came with a strong reputation and one that fully warranted the £40,000 per week, four year deal that was agreed.
A week after he signed, the manager who had pushed for his purchase, Gianluca Vialli, was sacked from the club. He was replaced by Claudio Ranieri, who didn’t particularly see Bogarde in the same light and didn’t intend to play him in the first team.
In these circumstances, the way things generally go is that the club and the player, and the player’s agent will seek to arrange a transfer to another club and both parties can move on.
However, with no alternative clubs looking to match Bogarde’s wages and his own drive to play first team football clearly not as strong as it might have been earlier in his career, he instead opted to simply see out his contract with minimal effort.
In the four years he stayed at Chelsea, he made only 12 appearances, and none in the final two years.
A rough estimate places his wages-per-game at around £700,000.
4. Viager agreement between Andre-Francois Raffray and Jeanne Calment
A viager agreement is a method of buying property whereby one party agrees to buy the other’s house for a reduced fee, but can only take possession when the other party dies. On top of any initial lump-sum, they also agree to pay a monthly fee up until the point when the other party dies.
Only a small proportion of property deals are done this way in France but there are specialist property companies set up to deal with them.
Effectively the purchasing party is taking a bet on how long the counterparty is going to live (and hoping that it’s not too long).
Jeanne was already 90 when Andre-Francois agreed to buy her apartment in Marseilles in 1965. His monthly payment was to be in the region of $500, which left him plenty of headroom against the value of the property.
Unfortunately for Andre-Francois, Jeanne went on to become the world’s oldest living person, eventually dying 32 years later at the age of 122.
Not only that, but she also outlived Andre-Francois, who sadly died in 1995 and so was never able to live in the apartment. To add further insult, the terms of the agreement also meant that his wife was obliged to keep paying the monthly fee even after his death.
Estimates suggest that the payments made to Jeanne for her apartment totalled more than double its value.
5. 20th Century Fox sign over the licensing and merchandising rights for Star Wars to George Lucas
Again, it’s a contract that for one side (Lucas) proved to be incredibly lucrative, whilst the other side (Fox), must be kicking themselves to this day.
Again however, you can understand Fox’s decision-making at the time, given the previous lack of success for science fiction films. They were looking to minimise any potential losses.
We also shouldn’t shed too many tears for the poor studio, as they still reaped their share of the revenue from the ticket sales. Star Wars would go on to hold the title of the highest grossing film of all time before being overtaken by E.T. during the 1980s.
As for the deal itself, in exchange for a reduction in the director’s fee, Fox handed Lucas the rights to all revenues from Star Wars merchandise and licensing.
In the very first year after release, sales from replica toys were worth more than $100m. And that was just the start.
The money would keep rolling in, spiking around the release of sequels but always significant. Indeed, in 2011 revenues from merchandise was recorded at $3bn. And that was a year without a film release.
In 2012 Lucas sold Lucasfilm to Disney for a reported $4.05 billion. Estimates vary for how much Fox saved from his fee originally - $20,000-$50,000 - but either way it was a pretty costly decision.
I came across numerous further examples when researching this article of other contracts and deals that make you wish for a time-machine.
Huge parts of America were sold off for relative pittances, businesses assumed transformational technologies like the telephone wouldn't catch on and numerous companies were caught out by dotcom fever in the early 2000s.
At the centre of all of these arrangements were legally-binding contracts reflecting the wishes and aspirations of the signing parties. I bet some of them wish they'd kept their pens in their pockets.
If you’re after more information on effective contract management, then you can read about it in our related blog article.
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