A recent article in the New York Times describes a legendary contract enacted in 1976 between two owners of a struggling American Basketball Association (ABA) team and the National Basketball Association (NBA). Ozzie and Daniel Silna were the owners of the Spirits of St. Louis, a team that was going to be left out in the cold and excluded from the new NBA. As compensation, the Silnas and their attorney negotiated a deal that was, at the time, viewed as somewhat of a bargain: just $2.2 million (the other excluded team's ownership got over $3 million), plus 1/7 of all NBA TV revenue until the end of time (i.e. this contract had no term in place). As explained by the Times:
The Silnas’ deal resonates, at least in part, because it appears that they snookered the league, or, more accurately, the Nets, the Pacers, the Nuggets and the Spurs, who dealt directly with the brothers.
The Silnas' gamble paid off handsomely: an estimated $300 million to date, an impending $500 million settlement payment, plus an eventual (undisclosed) buyout payment that has now been negotiated. This is obviously an uncommonly great deal, but the takeaways for parties in everyday transactions should not be overlooked.
First, never sign a contract that you have not read, and do not fully understand. As the Times implies, the ABA/NBA side was in a hurry to get a deal done, and were willing to agree to a term they likely did not fully comprehend. Your contract should almost always include a set term, plus a clear description of how and when the agreement may be terminated early or renewed. Also, just because a contract is well-drafted, does not mean those terms are in your favor.
Second, consult your crystal ball. The parties involved in the Silnas' deal do not appear to have appreciated the value of what they were dealing with. That the NBA would become an international sensation - with superstars like Jordan, Kobe, Lebron, etc. - probably seemed like a pipe dream in 1976. Your own business might seem like a longshot when you're working out of your garage or basement. But countless American success stories have humble beginnings. So consider the future before entering into long-term deals, or selling ownership interests, in your own business.
FARTHING & STEWART LLP
Brian S. Stewart