Warner Brothers International Television Distribution v. Golden Channels & Co.
Filed April 15, 2008
Cite as 05-55374

Decision on Breach of Contract Reversed

Warner Brothers (Warner) gave license on television programming to Golden Channels (Golden), a cable television company in Israel. Golden was connected with two other cable television companies, and the three together, as Israel Cable Programming Ltd., coordinated their operations.

Due to change in Israeli television market, Warner and Golden accordingly changed their arrangement. Instead of yearly agreements, they made a contract for 30 months.

The parties entered into a new agreement, as follows:

• Golden had less power to pick and choose programs


• Golden had to buy at least the minimum amounts specified in the contract of various types of programs, both new and popular shows, and old reruns


• Golden was obligated to spend $5 million the first year, $5.5 million the second year, and $3 million the last six months when the contract commenced in 1999


• Golden was obligated to provide “an irrevocable unconditional draw down letter of credit,” for at least $5 million


• Warner could “at its sole discretion” extend the term for a second 30-month period. If extended, Golden was obligated to pay Warner a $500,000 extension option fee and “minimum spend” amounts of $3 million for the first 6 months, then $7 million and $7.5 million respectively for the subsequent two years


• Warner and Golden expressly did not agree to maintain the letter of credit in place during the extension. Instead, they agreed that the $5 million letter of credit would be in place during the initial term “only.”

When Warner exercised its option to extend the term of the license agreement, Golden told Warner it could not pay the quarterly licensing fee and asked to renegotiate the agreement, principally to lower licensing fees.

While the parties negotiated, Warner agreed to continue to supply programming for a lower fee. It reserved its right to demand the full amounts required under the contract if negotiations were not successful.

Negotiations continued even though no written agreement had been made regarding appropriate security. On its part, Golden allowed the bank to renew the letter of credit.

Warner was adamant that the $5 million letter of credit would have to remain in place during any new deal. Golden told Warner that it would maintain the letter of credit through the extension term only after the completion of a merger with two other cable television companies. Also, if only for a reduced amount based upon what would be a reduced price.

When the negotiations remained unsuccessful, Warner issued a notice of default pursuant to the terms of the contract or else be subject to suspension of delivery of programs or termination of the contract, or both.

Eventually, Warner terminated the contract. It drew down the entire $5,000,000 on the letter of credit and sued Golden to collect money claimed on top of the $5,000,000.

A case for breach of contract was file. The court made the following conclusions:

• Golden was estopped from denying that it had agreed to extend letter of credit’s term. Golden’s renewal of the letter of credit had misled Warner into continuing negotiations.


• The parties created an implied contract to extend term. Their agreement required that modifications be in writing and course of negotiations did not permit an implication that Golden agreed to extend term.

On Appeal, the Ninth U.S. Circuit Court of Appeals reversed the decision and remanded the case for further proceedings based on the following grounds:

• Golden did not breach contract where it tendered payment of $5 million to Warner and demanded return of $5 million letter of credit securing debt after renewal negotiations failed


• district court erred in holding that licensee was estopped from denying it had agreed to extend letter of credit’s term because there was no reasonable reliance on the unmade promise to extend the letter of credit


• Despite Warner exercised its option to extend contract, both parties continued performance was impliedly conditioned on presence of "appropriate security," amount and form. The parties agreed to “discuss” said conditions. Hence, no breach if no agreement on appropriate security for extension term was reached until the contract ended.