FI team Force India and Abu Dhabi-based airline Etihad recently went to war over the latter’s termination of their sponsorship agreement. The case was heard in the UK High Court and Nick Johnson reports on the key points coming out of the judgment recently pronounced.
Topic: Sponsorship
Who: Force India Formula One Team Limited, Etihad Airways P.J.S.C., Aldar Properties P.J.S.C.
Where: High Court, London
When: 4 November 2009
Law stated as at: 2 December 2009
What happened:
Abu Dhabi-based airline Etihad and property company Aldar were held not to have been entitled to terminate their sponsorship agreement with the claimant, Formula One team Force India.
In a High Court judgment handed down on 4 November 2009 (http://www.bailii.org/ew/cases/EWHC/QB/2009/2768.html), the defendants were held to have waived and/or acquiesced in breaches through their conduct and words. They were accordingly not entitled to rely on those breaches as grounds for termination and were themselves liable to Force India for damages for breach.
The defendants had alleged Force India was in breach because the team, formerly known as Spyker F1, had changed its name and livery without the defendants' prior approval, as required under the Agreement. The team had also acquired a new investor, who owned the Kingfisher brand. The Kingfisher logo had been displayed on the team's cars during winter testing, which the defendants argued breached both their category exclusivity and provisions protecting them against association with alcohol brands. (The key business activities under the Kingfisher brand are Kingfisher Airlines and Kingfisher beer.)
However, the defendants waited around three months to bring their breach allegations and their communications and conduct in the meantime amounted, said the judge, to a waiver of the breaches and/or acquiescence in them.
Why this matters:
The judgment makes for an interesting narrative, with some good detail as to how the deal came together in the first place, the various changes and differing commercial agendas that led to it falling apart and some of the reasons why Etihad and Aldar may have chosen to adopt a "wait and see" approach in the face of apparent contractual breaches by Force India.
There are some interesting points to draw from it:
- "Remediable" breaches: Paragraph 63 in the judgment is a good reminder of how the UK courts will interpret "remediable" or "capable of remedy" in the context of a contractual breach. Effectively (in line with Schuler v Wickman Tools [1974] and Expert Clothing Service v Hillgate House Limited [1986]), this means that the consequences of that breach are capable of being put right or retrieved "for the future". Just because certain past damage cannot be put right does not mean the breach is necessarily irremediable.
- "No waiver" clauses: The sponsorship agreement contained a typical boilerplate clause stating "No parties will be affected by any delay or failure in exercising or any partial exercising of its rights under this Agreement unless he has signed an express written waiver or release." The effect of this provision does not seem to be addressed directly in the judgment, but evidently it did not act so as to preserve the defendants' rights.
- Quantum of loss in sponsorship agreements: In calculating Force India's loss, the judge was prepared, as you might expect, to give credit for replacement sponsorship revenues post-termination to the extent these related to categories restricted under Etihad/Aldar's sponsorship agreement. These were revenues that would not have been available if the defendants had not terminated. But he gave no credit at all for additional sponsorship revenues gained in other sponsorship categories, taking the view that "a point is never reached when a team ceases to need or search for sponsorship". Was he right to take this approach? It may well be that, in the context of this case, the team would have generated these additional sponsorship revenues in any event, whether or not the defendants terminated. However, rights owners will typically limit the overall number of sponsors that they contract with: this usually helps maximise revenue, limit brand clutter and keep sponsor relationships manageable. In any event there is typically a limited amount of inventory that a rights owner can trade with sponsors. So the idea of a limitless capacity for sponsorship seems unrealistic in practice, and in other circumstances perhaps the courts should give an element of credit where the removal of one sponsor makes a property less cluttered and more attractive for others (even if in different categories).
- "Loss of a chance" damages: The normal contractual rule for damages is that they are assessed as at the date of breach. Under the Etihad/Aldar sponsorship agreement, certain elements of Force India's remuneration were contingent. In particular, the defendants could be required to pay a bonus whose amount would vary depending on the position reached by the team in the Constructor's Championship and on the number of points scored by the team. Those elements were uncertain as at the date of breach, but by the time of judgment had become certain. Taking his lead from Golden Strait v Nippon Yusen [2007], where the defendant was allowed to rely on events between the date of breach and date of trial so as to reduce his liability, the judge took the view that he should be entitled to disregard the normal "date of breach" rule and instead use the benefit of hindsight in assessing what bonuses would actually have been payable. (It will be interesting to see how this approach impacts on litigation strategy in future similar cases. Will claimants look to try and accelerate or delay proceedings depending on their performances on the field of play?)
