Force India Formula One Team Ltd v Etihad Airways PJSC and Aldar Properties PJSC [2009] EWHC 2768 (QB), 4 November 2009
Citation: Journal of Intellectual Property Law & Practice, doi:10.1093/jiplp/jpp234
By delaying too long, Etihad Airways and Aldar Properties had waived their right to terminate a sponsorship agreement with Formula One team Force India, so their purported termination amounted to wrongful repudiation and they were liable in damages.
Legal context
Disputes over sponsorship agreements are comparatively rare, but this case gives some reminders as to what a sponsor should consider both when entering into a sponsorship agreement, and when managing the ongoing relationship with the team being sponsored.
Facts
Etihad Airways, the national airline of Abu Dhabi, and Aldar Properties (together, ‘Etihad') entered into a sponsorship agreement in April 2007 to sponsor a Formula One racing team, Spyker Cars NV (the ‘Team'). The sponsorship agreement contained numerous specific provisions aimed at protecting Etihad's brand. First, the Team undertook not to enter into any sponsorship deemed by Etihad to be in conflict with Etihad's main activities as an airline, so that Etihad would be the only airline to be associated with the Team. Secondly, Etihad had the right to approve the Team's livery. Thirdly, Etihad had the right to decide the name of the Team. Finally, although the Team was permitted to contract with additional sponsors, Etihad had the right to approve these sponsors, and the agreement recognized that ‘gambling and alcohol related sponsor agreements will only be considered favourably if they entail no branding on the Cars or Drivers’.Seemingly as a quid pro quo for Etihad having negotiated a relatively modest sponsorship fee, a rather unusual clause granted the Team the right to source an alternative title sponsor for subsequent seasons. If the Team did so, Etihad had the option, among other things, to terminate the agreement.
In October 2007, Spyker sold the Team to Orange India Holdings Limited, which was owned by a consortium including Vijay Mallya. Mr Mallya's interests include United Breweries Group which, among other things, owns and operates Kingfisher Airlines and produces and sells alcoholic beverages including Kingfisher beer. In order to appeal to the Indian market, and following approval by the World Motor Sport Council, the Team changed its name to ‘Force India’. Etihad made no complaint at the time.
The Team changed the livery of its cars for 2007/2008 winter testing to include the Kingfisher logo. It was disputed whether Etihad had consented. The Team claimed that this was accepted provided that the words ‘Fly Kingfisher’ were not used, whereas Etihad claimed no approval was given.
On 14 January 2008, some 3 months after the acquisition, the Team emailed Etihad proposing to amend the sponsorship fees. Etihad replied on 27 January that it took the email to be notice of the Team's intention to exercise its right to source an alternative sponsor and that Etihad accordingly exercised its right to terminate the agreement.
The Team contended that Etihad's email of 27 January was a wrongful repudiation of the agreement by Etihad and demanded payment of all sums outstanding, plus future losses (including bonus payments relating to world championship points) amounting to at least $15 million.
Etihad counterclaimed that the Team was in breach of the agreement through the promotion of Kingfisher Airlines in its association with Mr Mallya, by using the Kingfisher logo, by changing the Team name and by using new livery. Etihad's email of 27 January, therefore, constituted an acceptance of the antecedent repudiation of the agreement by the Team on 14 January.
Analysis
Sir Charles Gray, sitting as a judge of the High Court, upheld the Team's claims and dismissed Etihad's counterclaim.
He rejected outright the notion that the acquisition of the Team by a consortium including Mr Mallya was made particularly to promote Kingfisher Airlines. He agreed with Mr Mallya's evidence that promotion would be done through sponsorship; indeed, United Breweries Group at that time also sponsored the Toyota team. In any case, any breach there might have been was clearly waived through the conduct of Etihad once it became aware of the identity of the owners of Orange India Holdings Limited.
The limited use of the Kingfisher logo in the new livery, together with the livery itself, was not a material breach by Force India of its obligations under the agreement, not least as ‘the appearance of a car during winter testing is far less important to the sponsors than its appearance during Grand Prix races’.
In any case even if these breaches, together with the change of the Team name, had been material, they were remediable. All the Team needed to do was to remove the Kingfisher logo and amend the livery for the rest of the winter testing and to rename the Team. It was up to Etihad to give notice asking the breaches to be remedied, but no such notice had been given.
In any event, Etihad had waived any breaches through its conduct. From the date the Team was taken over until the date Etihad purported to terminate the agreement, Etihad did not complain about the change of name, the use of the Kingfisher logo or the change of livery. Sir Charles Gray relied upon the decision in Tele2 International Card Company SA v Post Office Limited ([2009] EWCA Civ 9), which summarized The Kanchenjunga ([1990] 1 Lloyd's Rep 391):
The innocent party has to make a decision, because if it does not do so, then the time may come when the law takes the decision out of its hands, either by holding it to have elected not to exercise the right which had become available to it or sometimes by holding it to have elected to exercise it.
Here, he decided that Etihad had delayed too long. Further, in a meeting between the parties in December 2007, well after the Team name had been changed and the new livery unveiled, Etihad had led the Team to believe it was happy with the Team's performance of the agreement. This amounted either to an affirmation of the agreement, or to a waiver of any breaches.
On the facts, Sir Charles Gray found two reasons for such acquiescence: Etihad was in negotiations with Ferrari for alternative sponsorship and was adopting a ‘wait and see’ attitude towards the Team. Further, Etihad needed to placate United Breweries Group as Etihad needed to borrow one of Kingfisher Airlines' aircraft and did not want to ‘rock the boat’ by complaining of breaches of contract by the Team.
On this basis, the Team was entitled to damages for the wrongful termination of the agreement, including a bonus for coming second from last in the constructors' championship in 2008. The Team had gained points in the 2008 and 2009 seasons which, under the agreement, would result in a point bonus. This was all recoverable by way of damages.
There was, however, one small piece of good news for Etihad. The Team had secured alternative sponsorship with Kingfisher Airlines and Whyte & Mackay for the 2008 and 2009 seasons, which mitigated its loss. Because these sponsors are, respectively, an airline and a whisky producer, the Team would not have been able to agree these agreements had the Etihad agreement still been in force and such payments were deducted from Etihad's liability. Rather than the $15 million it claimed, the Team was entitled to damages of around $4 million.
Practical significance
Etihad had succeeded in getting many relevant protections into the drafting of the agreement, both in terms of anti-dilution and competition, and from preventing potentially damaging sponsors from sponsoring the Team. It had the power to approve Team names, livery, and sponsors, and in particular could prevent the Team from obtaining sponsorship from airlines or alcohol producers.
The real lessons to draw from this case, however, are not sponsorship-specific drafting points, but rather general lessons for parties on the operation of a commercial contract, specifically in relation to remedy of, and acquiescence to, breach.
If a party is permitted to remedy its breach before the counterparty can terminate, the innocent party must give notice of the breaches and allow the breaching party the opportunity to remedy the breaches. Even without a specific grace period set out in an agreement, if a breaching party is entitled to remedy any breach then it must be given the opportunity to do so, or any termination based on that breach will be ineffective.
The innocent party must also respond quickly to a perceived breach by a counterparty, even if this is to reserve the party's rights. A ‘wait and see’ approach can quickly get to the point where delay amounts either to waiver of the breach or affirmation of the contract.
Together, these illustrate the vital importance of communication between sponsor and team. A sponsorship arrangement is not a simple payment for services, but an ongoing relationship which requires the commitment and attention of both parties throughout the duration of the relationship.
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