In a well-documented High Court case, McLaren has been awarded millions of dollars in damages after driver Alex Palou reneged on an agreement to drive for the Arrow McLaren IndyCar Team, and to provide reserve and test driving services to the McLaren Formula 1 team.
This case provides interesting lessons for teams, athletes, agents and brands relating to agreements between teams and their elite athletes, and commercial agreements with brands and suppliers.
In particular, this case shines a light on the following issues.
Agreements with athletes
SIGNING ON FEES
Any element of an athlete’s fee that is payable in consideration of their signature is likely to be unrecoverable by their team, as was the case in McLaren v Palou, in which the Court ruled that the signing on fee was a literal reward for Palou’s agreement to sign the contract. From the team’s perspective, it would typically be considered reasonable to ensure all fees are expressed as subject to performance by the athlete, payable in instalments, and refundable if the Driver defaults.
TERMINATION RIGHTS
If an athlete is entering into a contract in order to achieve a specific outcome, whether that be securing a Formula 1 seat or a regular starting position in a football’s team’s lineup, they should be advised not to rely on promises and non-contractual representations, but instead to consider ways to hold the team accountable contractually. For example, termination rights linked to the team’s failure to support an aspiring Formula 1 driver in his journey by offering him a certain number of rookie test sessions, or including a footballer in a certain number of starting lineups during each season, can help the athlete to exit a relationship that is not working, and avoid protracted, expensive legal proceedings such as McLaren v Palou. That being said, this case has demonstrated that contracts can, and regularly are, broken in sport. If a relationship is not founded on mutual trust, making the wrong long-term commitments can be career defining.
LIABILITY AND INDEMNIFICATION
In McLaren v Palou, McLaren claimed it had suffered substantial losses relating to its Formula 1 and IndyCar teams and their commercial agreements with third parties. These alleged damages far surpassed the fees payable to Palou under the driver agreement. Careful drafting can help athletes to avoid liability for losses that do not directly result from the athlete’s breach. As a minimum, if the team’s bargaining power is such that the athlete is on the hook for losses associated with the team’s agreements with third parties, the athlete should resist providing indemnities in this regard and should require the team to agree to an express obligation to take steps to mitigate its losses. In circumstances where an athlete is being courted by another team, the athlete should take a leaf out of Palou’s book, requesting an indemnity to shield the athlete from incurring these sorts of losses.
Commercial agreements with brands or key suppliers
KEY INDIVIDUALS
In cases where major commercial agreements are contingent upon the presence of key individuals in the team, suppliers, brands and teams should weigh up the benefits of making this contractual. From the supplier or brand’s perspective, this would provide them with clear recourse – and ideally the ability to exit – should the key individual leave the team.
From the team’s perspective, in the event of the athlete’s breach of contract leading to the sponsor or supplier terminating the agreement, the team will have a more straightforward claim against the athlete given the causal relationship between athlete’s breach and team’s loss. Better still, if the team is concerned about the athlete honouring the contract, an indemnity could be sought to cover anticipated losses. That being said, the benefits of naming key individuals in commercial agreements should be assessed on a case-by-case basis taking specialist legal advice, particularly as the risk of losing the athlete in a non-breach scenario could leave the team exposed.
PERFORMANCE BONUSES
A brand will often try to include a performance-related element in sponsorship deals. This might be tied to the fee or a break clause where a certain level of performance is not achieved. While the team may be confident of achieving the performance milestones, circumstances outside of the team’s control such as a key team member’s departure (or failure to join the team as expected) could compromise the team, leading to lower than expected revenues or the departure of key partners. In McLaren v Palou, the Court determined that McLaren could not recover all of its losses linked to failure to achieve performance bonus milestones, citing the inherent uncertainty in projecting performance outcomes notwithstanding the Driver’s talent. That said, it may be preferable for a team to agree to a lower overall guaranteed fee, over a higher fee that encompasses performance-related elements.
Our sports team has extensive experience advising teams, athletes, agents and brands on agreements with elite athletes, as well as commercial deals with brands and suppliers. For more information, please get in touch.
