When the Los Angeles Clippers sold for $2 billion, owners of sports franchises had good reason to rethink the value of their teams. In particular, Charles Wang, owner of the New York Islanders, had cause to regret his not yet consummated sale to Andrew Barroway for only $420 million. He reneged on his commitment and apparently found another buyer for $548 million and Barroway sued.  I say “apparently” since the Complaint only says that Wang demanded the new price; it did not say that he had an offer at that price. Their agreement was memorialized in a 70-page document but it had not yet been signed. That raised two different sets of issues. First, notwithstanding the lack of a signature, did they have an enforceable agreement? Second, if not, did Wang have any obligation to Barroway?

The American rule had been that until the contract had been entered into, there was no obligation. That rule has been supplanted in most jurisdictions. Many have adopted the taxonomy proposed by Judge Pierre Leval in TIAA-CREF v. Tribune.[1] If all major terms were set and the signing was a mere formality it would be treated as a contract; he called this a Type I agreement. In a Type II agreement some terms were left open, but the parties were obliged to negotiate in good faith. If, however, too many terms were left open, the agreement would be unenforceable.

Although Barroway did not invoke the Leval classification in his Complaint, it is at least plausible that a court would find this a Type I agreement. An email from the sellers said “we are signed off,” suggesting that there had been agreement. Assuming that there was an enforceable contract, what then? The contract had a $10 million breakup fee. If the seller were to enter into an agreement (or even a term sheet) with another buyer, then Wang could walk away for $10 million. In fact, the breakup fee was symmetrical. Either party could terminate for $10 million. That suggests that the parties intended that if market conditions changed dramatically the price would have to be renegotiated.

That seems simple enough, but the agreement also included an exclusivity clause and a specific performance clause. The buyer’s argument for specific performance was unpersuasive. It was entitled to specific performance, it argued, because the seller “violated the most basic term of the [agreement]—sale of the Islanders at the agreed-upon price.” But that is precisely what the breakup fee allows it to do. The buyer also argued that the seller had breached the exclusivity clause and the remedy for that should be specific performance. (The contract asserted that breach of that clause could cause irreparable harm.) Whether it had breached the clause would be a fact question. Courts are reluctant to award specific performance, so even if Wang had breached the exclusivity clause, a court might restrict the buyer to a damage remedy. If the court were to hold that the breakup fee (liquidated damages) did not shield the seller, then liability could be substantial. The damages could be the difference between the contract price and the sale price—over $100 million.

There is a further complication. The deal required approval of the NHL. Since the owners benefit if a franchise sells at a high price, they might choose to reject the agreement on the ground that the sale price was too low. That should not excuse the breach of the exclusivity clause, but it could put a damper on the damage claim.

The matter of the league’s approval comes up again if the court were to find that this was only a Type II agreement. Even if the court were to find that Wang breached his good faith duty to negotiate the deal to completion, the league has no such good faith duty. If the court were to find that the league would reject a contract that was now under market, then negotiations, whether good faith or not, would not have resulted in a sale at, or near, the terms of Barroway’s contract. If this was only a Type II agreement, then the breakup fee should not come into play, so the court could not fall back on the $10 million remedy. Most courts have concluded that for Type II agreements, the remedy should be expenditures made in reliance. That might entail the costs of transactional lawyers and, perhaps, compensation for the time of executives. In its Complaint, the buyer claimed that reliance damages totaled “more than $2 million,” substantially less than the breakup fee.

The third possibility, of course, is that the court could simply hold the agreement unenforceable. I think that unlikely but the possibility does exert some downward pressure on the settlement value. The buyer attempted to cover this base by invoking promissory estoppel. Its proposed remedy was the reliance losses plus costs including reasonable attorney fees, again an amount that would be well under the breakup fee.

So, when one works through all the possibilities, Mr. Wang should expect a considerable payoff to his decision not to complete the deal. The breakup fee gave him that option. Had the agreement included language that made clear that neither party had any obligation until the agreement had been signed, the option price would have fallen from $10 million to $0.

[1] 670 F. Supp. 491 (S.D.N.Y.1987). The New York Court of Appeals has been skeptical of the Leval classification. IDT Corp. v. Tyco Group, 918 N.E.2d 913, 915 n.2 (N.Y. Ct. App. 2009).

Victor P. Goldberg is Jerome L. Greene Professor of Transactional Law at Columbia Law School.