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Are IceArizona and the Arizona Coyotes in breach of contract with the City of Glendale?

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Let's take a look at the legal implications of last Friday's Coyotes bombshell.

Matt Kartozian-USA TODAY Sports

It's the NHL offseason, so like clockwork, the Arizona Coyotes are now in jeopardy again.

A new article published by TSN up in Canada outlines how some members of the Glendale City Council - particularly Ian Hugh - believe IceArizona is in breach of contract with the City over the management of Gila River Arena. Nullifying the agreement, as Councilmember Hugh seems to desire, would almost certainly result in relocation of the Arizona Coyotes.

But Hugh's rationale - and the idea that the lease agreement would be declared invalid by a court - is on extremely shaky legal ground even before the first lawsuit gets filed. Here's why.

What it Means to Breach a Contract

A "breach of contract" in very simple terms, is the failure of one party to fulfill their obligations as outlined in a contract - the arena management agreement in this instance - to another party. What are the obligations IceArizona has to the City of Glendale?

According to the actual Gila River Arena Lease Agreement , IceArizona has four primary responsibilities under the arena management contract. You can find them all in the Statement of Intent in Section 1.1, but the major four are:

  1. The Arizona Coyotes must play all home games at the arena.
  2. IceArizona must provide the City of Glendale with additional revenue streams (outlined in detail here).
  3. IceArizona must secure non-hockey related events to the arena, either through their own efforts or through the hiring of an arena manager (in this case, Global Spectrum).
  4. IceArizona must maintain Gila River Arena and ensure it remains in compliance with municipal, state, and federal laws dictating safety, cleanliness, and accessibility.
Thus far, IceArizona seems to be fulfilling all of its obligations here. If that's the case, then there would not be a breach of contract, at least as far as the primary obligations of the contract are concerned.

A Question of Accounting

Councilmember Hugh's point of contention is that IceArizona is inaccurately reporting its actual losses to the City of Glendale, and that the ownership group is using the money provided by Glendale to service the debt it ensued when it purchased the team, not on managing the arena. These two facets in conjunction would lead to a breach of contract, Hugh concludes.

There are, however, several problems with Hugh's argument. The first issue is that proving that IceArizona is using the $15 million it receives from the City of Glendale for debt service - as opposed to the tens of millions of dollars the group receives in revenue from ticket sales, television contracts, sponsorships, etc - is almost impossible. Unless there's a verifiable path to track the money specifically coming from Glendale to the Fortress Investment Group, then saying one dollar is different from another is a pipe dream at best.

IceArizona's Financial Flexibility

The second issue is that even if there was a way to determine where the dollars are going, there is nothing in the language of the Arena Management Contract that specifically precludes IceArizona from using the money it receives from the City of Glendale for whatever purpose it deems suitable.

Let's illustrate the above point with an analogy. If you pay a contractor to renovate your kitchen, the fee the contractor charges you is not specifically for the costs associated with renovating your kitchen. You pay the contractor to perform a service, and what the contractor does with that money is immaterial as long as the terms of the deal are fulfilled. If the contractor wants to blow all of the money you gave her on gambling in Las Vegas, power to her. As long as your counters get resurfaced and your cabinets replaced, you cannot sue her for breach of contract.

What's the Harm?

Lastly, let's say that there is some provision that can be interpreted to say that IceArizona is not fulfilling some of their obligations. The City of Glendale must then prove a demonstrable harm associated with such an infraction.

Why is that? Well, there's no real violation of the law in a civil dispute between two private parties. So what courts do is attempt to balance the interests of the two parties with the severity of the alleged violation. In some cases, the violation is so egregious that termination of the contract and payment of punitive or compensatory damages is the only way to remedy the harm.

But what exactly is the harm to Glendale associated with IceArizona under-reporting their losses? There is none. The City pays $15 million a year to IceArizona whether or not IceArizona loses $3 million, $30 million, or $300 million. IceArizona could claim they made $150 billion dollars last year and Glendale would still be legally obligated to pay $15 million next year.

If there is anybody that is harmed by under-reporting loss figures, it's actually IceArizona. That's because it makes it more difficult - at least relatively speaking - for them to reach the $50 million threshold necessary to utilize the out-clause contained in Section 3.3. In fact, the basis for Glendale to even be able to audit IceArizona's finances is contained in that section, which is also important.

Intent Matters Too

Courts also typically look at intent when judging what the language of a statute or contract means. Obviously, they could ask the authors of the agreement what the intent of a particular clause was, but this doesn't usually happen. Instead, courts utilize context clues to ascertain what a given part of the law means.

In this instance, the fact that the Auditing Clause is contained in Section 3.3 and it includes language specific to the procedures necessary for the execution of the out-clause could lead a judge to reasonably infer that the reason an audit takes place is to determine whether or not IceArizona has met the requirements necessary to execute the out-clause.

The reason that matters is if IceArizona does not meet that threshold by the end of Year 5 under their own under-reported figures, or that the group doesn't exercise the out-clause at all, then the contents of the Audit are completely irrelevant to IceArizona's ability to meet its contractual obligations. Therefore, IceArizona would not be in breach of contract.

Political Considerations

The decision to go to court is a relatively simple one. All it would take for the City of Glendale to sue IceArizona for breach of contract is a majority vote of the City Council. Councilmember Hugh may get his way, especially with Glendale's finances front and center as election season rolls around.

But election season could work against the lawsuit effort too. Arizona's Public Records Laws are strongly worded in favor of access to information, which means that the audits of IceArizona's finances - both by the ownership group and by the City - could very easily become public knowledge if a news organization or private entity was willing to do the legal legwork to get them.

If it turns out that Glendale is dramatically overstating IceArizona's loss reports, or that there is a reasonable explanation for IceArizona's accounting methods, then Glendale simultaneously damages their case in court while giving taxpayers reason to wonder why the City is spending more of their money on costly litigation.

Final Thoughts

It's not out of the realm of possibility that Glendale does decide to sue IceArizona. More than one City Council member has expressed displeasure with Coyotes Chairman Andrew Barroway. It's clear that the relationship between Glendale and the Coyotes is sour.

But once a breach of contract suit arrives in Maricopa County Superior Court, the City will likely face an uphill battle to prove their case. Nullifying an agreement worth hundreds of millions of dollars over a single clause that does not affect IceArizona's ability to perform their primary obligations is a lot for a court to swallow.