The High Court has ruled that a term should be implied into a merchandising licensing agreement for Force India Formula One Team, that Force India was required to own the team throughout the agreement's five-year term, and that it had breached that obligation.
The dispute related to a manufacturing agreement from 2014 which was originally between Brandon AB and Force India Formula One Team Limited. In 2017 the rights and obligations under the agreement were transferred to Stichd.
Under the agreement Brandon, and subsequently Stichd, had to produce the team uniform and had the exclusive right to manufacture branded product. The implied term dispute arose because Force India became insolvent during the term, and joint liquidators sold the team's assets to Racing Point. No novation attempts were made and Stichd contended that the sale to Racing Point breached an implied term of the agreement that Force India had to remain owners.
The court reviewed the case law on implied terms in detail, as well as the express terms of the agreement. It said that the following issues were relevant:
It was obviously important to the parties that Force India owned the team. It was recorded in the recitals to the agreement and specified in the definition of team.
It was an arm's length transaction between commercial parties, such that it can be assumed that Stichd intended to make a profit from it. The arrangement had been profitable before the sale. The only way that Stichd could make profits under the agreement was through the sale of licensed team merchandise and leisurewear.
The contemplated term, during which Stichd could make those profits, was just over five years. Both parties had a right unilaterally to terminate the Agreement on 31 December 2017 by giving written notice on or before 31 March 2017. Neither party did so. Otherwise, the termination rights were limited and were never exercised.
Stichd's ability to make profits was further protected by an exclusivity right within the territory.
The level of profit was neither excessive nor unusually high and so was not a high risk – high reward arrangement.
Stichd was required to undertake work in return for the licence of rights. Stichd was also required to operate the E-shop, which would have involved some upfront investment.
The court rejected the argument that any implied term should be limited to circumstances beyond Force India’s control, because the implied term was necessary to protect the Stichd’s exclusive right, it made no difference to Stichd how that right had been lost; such a limitation would have been unworkable alongside the force majeure clause. The transfer to Racing Point would not have been or have resulted from an event beyond Force India's control.
In summary, the court concluded that Force India was required by the Agreement to own the team throughout the term, both because that was obvious from the agreement's other terms and because it is necessary to give business efficacy to them. Therefore, Force India had breached that obligation.
Can you imply a term that a team must compete?
The facts that gave rise to this result are, to some degree, more prevalent in F1.
Takeovers in other sports will aim to retain a team’s heritage which is heavily drawn from the branding and, by association, merchandising. See football where colours and crests hold mythical statuses with rebranding loathed – take the ill feted colour change of 2012’s Cardiff City. New owners can’t get around exclusive licences by swapping Arsenal’s cannon for a crocodile, they’ll have to work with what they inherit.
Whereas F1 teams come and go, even when not prompted by financial trouble. As teams change, so do the brands, so does the merchandising. Racing Point has already been superseded by Aston Martin. Owners will want to plaster their new trademarks across every available surface, its par for the course. There is, therefore, little imperative to continue or novate historic exclusive merchandising arrangements.
But whilst other sports might not be so susceptible to changes of control, or at least changes that result in new branding, the value in supplying or sponsoring a team might be closely tied to the league or competition that team competes in. And yet express obligations obliging the team to compete in that league or competition, are not present in every sponsorship agreement.
In football the consequences of promotions or relegations will usually be accounted for in sponsorship agreements but attempted breakaways, such as the European Super League (ESL), can be unanticipated. Indeed, many sponsors were unhappy at the idea of their brands being diverted away from the Premier League, which left those who didn’t have clauses specifying that clubs had to compete in the league in a tricky position.
Could sponsors lean on this case to argue the existence of an implied term that a club will compete in a specific league? Perhaps. But persuading a court that continuing to sponsor a breakaway club would become “inefficacious, futile and absurd” will potentially be an uphill battle– especially as a key motive of any breakaway will, ultimately, be to increase a club’s profile.
This precedent might present more opportunity in Esports, where teams have active divisions competing in different competitions. If a team withdrew a division from a key competition, such as League of Legends, or significantly scaled back its presence across multiple divisions then, in the absence of an agreed term, sponsors could look to argue that there was an implied term the team would maintain its presence and the reduction of activities amounts to a breach. The success of that argument would be heavily dependent on, amongst other things, whether such reduction robbed the sponsorship of its commercial rationale, which would turn on establishing just how much prestigious profile had been lost.
It is worth giving thought as well to situations where a team’s failure to compete arises in connection with external events, such as the Russian invasion of Ukraine. Even if a sponsorship contract doesn’t contain specific wording saying that the team must compete in the applicable competition it will usually have a force majeure clause that will dictate the implications of an unforeseeable event preventing parties from performing their duties. Alternatively the contract may be deemed frustrated. However, if the team chooses not to compete, for example for political reasons, force majeure or frustration would not apply. So in this scenario, where there is no express obligation to compete and the team chooses not to take part in a competition, could a sponsor rely on this Force India case to argue that a clause obliging the team to compete should be implied?
“I consider that Force India was required by the Agreement to own the Team throughout the Term, both because that was obvious from the Agreement's other terms and because it is necessary to give business efficacy to them”