Facts

In October 2014, Brandon AB entered into an agreement with Force India Formula One Team Ltd (Force India), which owned and operated the Force India Formula One Team (the Team), under which Brandon was required to produce the “Team Uniform” and had the exclusive right to manufacture “Products” branded with the “Trade Marks” (all as defined in the Agreement). In August 2017, Brandon transferred its rights and obligations under the Agreement to Stichd Sportmerchandisng BV.

The term of the Agreement was to expire on 31 December 2019. However, during the term, Force India encountered financial difficulties and went into administration. The Joint Administrators (who later became the Joint Liquidators) were appointed on 27 July 2018.

Following a tender process, the business and assets of the Team were purchased by Racing Point UK Ltd on 16 August 2018 for £90 million. No attempt was made by Force India to novate the Agreement to Racing Point.

Stichd contended that the sale to Racing Point breached an implied term of the Agreement, which it argued stated that:

“Force India would continue to operate the Team in respect of which the counterparty (initially Brandon AB and subsequently Stichd) was granted rights under the Agreement and would not transfer the right to operate the Team to any entity other than one within the Force India Group (as defined in the Agreement)”.

The Joint Liquidators denied that any term should be implied into the Agreement, but accepted that certain provisions of the Agreement concerning Stichd’s access to the Team facilities for marketing purposes and at race weekends (as set out in clauses 17 to 20) could not be performed following disposal of the Team. To address this the Joint Liquidators proposed the following implied term: “Clauses 17 to 20 only operate insofar as Force India continues to operate a Formula One team”.

In the alternative, the Joint Liquidators argued that Stichd’s proposed term should be subject to a caveat, so that it read:

“Force India would continue to operate the Team in respect of which the counterparty (initially Brandon AB and subsequently Stichd) was granted rights under the Agreement and would not transfer the right to operate the Team to any entity other than one within the Force India Group (as defined in the Agreement) insofar as Force India is not prevented from operating a Formula One team due to circumstances outside its control”.

The purpose of the trial was to determine whether a term or terms should be implied into the Agreement and, if so, whether there was a breach by Force India.

Decision

Both parties agreed that the leading case on implication of terms is the judgment of Lord Neuberger in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, as set out by Lord Justice Carr in Yoo Design Services Ltd v Iliv Realty Pte Ltd [2021] EWCA Civ 560:

1. a term will not be implied unless, on an objective assessment of the terms of the contract, it is necessary to give business efficacy to the contract and/or on the basis of the obviousness test;
2. the business efficacy and the obviousness tests are alternative tests, but it will be a rare (or unusual) case where one, but not the other, is satisfied;
3. the business efficacy test will only be satisfied if, without the term, the contract would lack commercial or practical coherence;
4. the obviousness test will only be met when the implied term is so obvious that it goes without saying;
5. a term will not be implied if it is inconsistent with an express term of the contract;
6. the implication of a term is not critically dependent on proof of an actual intention of the parties but on consideration of what notional reasonable people in the position of the parties at the time would have agreed;
7. the question is to be assessed at the time the contract was made and not with the benefit of hindsight; and
8. the equity of a suggested implied term is an essential but not sufficient pre-condition for inclusion; a term should not be implied into a detailed commercial contract merely because it appears fair or merely because the court considers the parties would have agreed it if it had been suggested to them; the test is a stringent test of necessity, not reasonableness.

However, in terms of the general principles on implication, there was an issue over the relevance of the “reasonable expectations” of the parties.

Having heard argument, Richard Farnhill, sitting as a Deputy Judge of the Chancery Division, held that the reasonable expectations of the parties were not a separate ground for implication, but one of several routes by which the hurdles of obviousness and necessity could be approached. The assessment involved two steps: (i) an analysis of whether a reasonable expectation arose from the express terms of the contract viewed against its objective setting; and (ii) consideration of whether the protection of that expectation was so obvious as to go without saying or was necessary to give the contract practical or commercial coherence.

In Mr Farnhill’s view, the notional reasonable party, looking at the Agreement and its express terms, would expect that Force India would be required to own the Team throughout the term of the Agreement. Such ownership was sufficiently important that it appeared twice in the Agreement. Further, Force India had granted exclusive rights tied to the existence of the Team and had only limited rights of its own to terminate the Agreement.

In addition, a term protecting that expectation was both necessary and obvious. The disposal of the Team by Force India robbed the Agreement of its entire commercial rationale from Stichd’s perspective. It could no longer profit from the rights it had negotiated, rendering the exclusivity and the five-year term worthless. In the absence of the implied term, the Agreement provided none of the security provided by the express terms. Similarly, had the officious bystander asked the parties, in 2014, if Force India could sell the Team and walk away from its obligations, both parties would have responded that it obviously could not.

Mr Farnhill did not consider that the Joint Liquidators’ proposed caveat limiting the term to be implied to circumstances beyond Force India’s control properly protected Stichd’s reasonable expectations. The implied term was needed to protect the exclusive right granted by Force India to Stichd for a fixed term. It made no difference to Stichd how that right was prejudiced or lost.

The caveat was also unworkable alongside the force majeure clause, which already applied to circumstances beyond the parties’ control that prevented performance. In any case, what had happened to Force India could not properly be classed as events beyond its control. The transfer of the Team to Racing Point was brought about by the administration of Force India. Administration was a defined “Insolvency Event”, giving rise to a right to terminate in favour of Stichd. It was plainly intended by the parties that insolvency was not an event beyond the control of the insolvent party.

Accordingly, Mr Farnhill held that the term to be implied was largely that proposed by Stichd, subject to being limited to the term of the Agreement.

As for clauses 17 to 20, these were also for the benefit of Stichd and plainly contemplated that access would be granted to the facilities of the Team for each year that the Agreement remained in force. Following Force India’s disposal of the Team it was difficult, if not impossible, to see how Force India could comply with those obligations. Further, the clauses were not subsidiary or ancillary to the principal licence right, but free-standing obligations of Force India, which were expressed to subsist not only while Force India owned the Team, as provided in the Joint Liquidator’s caveat.

Clauses 17 to 20 were not grounds to imply a term, however. If the disposal of the Team caused Force India to breach clauses 17 to 20 then Stichd would have a claim for damages.

Mr Farnhill 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 was necessary to give business efficacy to them. Further, Force India had breached that obligation. (Stichd Sportmerchandising BV v Geoffrey Paul Rowley [2022] EWHC 933 (Ch) (14 April 2022) — to read the judgment in full, click here).