Bristows’ SnippITs: It can be expensive to drive a different car (McLaren v Alpa Racing)

This post is the latest in Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond. 

The recent High Court decision in McLaren Indy LLC & McLaren Racing Ltd v Alpa Racing USA LLC & Others serves as a reminder of the evidential challenges of claiming losses based on complex and unpredictable counterfactuals. 

Key takeaways

Drafting “deemed direct losses”: Although McLaren succeeded in some of its claims, others were slashed considerably. McLaren also had the challenge of showing each of its losses were in the reasonable contemplation of the parties at the contracting stage. To avoid this evidential hurdle, parties should consider drafting into their contracts a non-exhaustive list of heads of loss which, if suffered, are expressly recoverable (often known as “deemed direct losses”). This can prove a useful reference tool regarding what the parties did in fact contemplate. Alternatively, parties can indemnify against specific losses (which obviates the need to prove foreseeability).

Labelling of contract payments: Suppliers should consider how payments are described under their agreements to ensure this reflects the commercial reality. If payments are conditional upon certain events, make sure this is clear (e.g. by linking payments to specific milestones/deliverables). In this case, McLaren’s labelling of an initial payment as a “signing bonus” meant that the payment was not recoverable as a loss once Palou had signed the contract (thereby fulfilling the condition of payment).

Preservation of evidence (including instant messaging): Instant messages such as WhatsApp are continuing to be used by commercial parties in favour of more formal emails. Other recent cases have shown the risks that can arise by conducting business in this way (which we have previously explored here).Once litigation is anticipated, the duty to preserve evidence applies just as strictly to WhatsApp communications and parties should ensure that the disappearing messages function on WhatsApp is turned off to avoid the destruction of relevant materials. McLaren’s failure to do this called the reliability of some of its evidence into question.

Background

The claim centred on a contract between McLaren, owner of the eponymous IndyCar and Formula One racing teams, and Alex Palou, a Spanish racing driver. Under the contract, Palou had agreed to move from his existing team to drive for McLaren for the 2024 to 2026 seasons. The contract also allowed McLaren to use Palou’s name, image and likeness for sponsorship and promotion. In breach of his contract with McLaren, Palou signed a new multi-year deal to stay with his existing team. 

Palou admitted liability for breach but claimed that McLaren had suffered no loss and had actually financially benefitted from the breach by the recruitment of a replacement ‘pay driver’.

Issues considered by the court

McLaren sought more than $20 million in damages under six heads of loss, including:

1. $1.3m in lost profits for additional costs incurred as a result of the higher salaries McLaren had to pay to other drivers following Palou’s breach (the driver salary loss claim).
2. $5.4m in losses from negotiating a sponsorship deal with NTT (an IT and business services company) on less favourable terms following Palou’s breach. McLaren had entered into the sponsorship agreement with NTT premised on Palou driving a McLaren car which NTT agreed to sponsor. NTT was “following the driver”, having previously sponsored Palou at his previous team (the NTT sponsorship claim).
3. $4.1m for performance-based losses, being the difference between the performance-based revenues that McLaren obtained in the actual (breach) scenario compared with what McLaren argued would have been the position in the counterfactual scenario with Palou’s “generational talent” driving for McLaren. This claim included prize money, sponsorship revenue and driver compensation (the performance revenue claim).

In the alternative to its loss of profits claim, McLaren claimed its wasted expenditure. This included $400k for the recovery of Palou’s contractual “signing bonus”. McLaren argued that this payment was a “deposit” and an “advance” on Palou’s salary that should be recovered as wasted expenditure (the contract payment claim).

Court’s decision

Overall, the Commercial Court awarded McLaren around $12m in damages (approximately 60% of its original claim). In relation to losses mentioned above:

The driver salary loss claim: The court accepted that, having lost Palou, McLaren felt compelled to urgently do everything it could to retain one of their existing drivers, Mr O’Ward. In negotiations between McLaren and O’Ward, Palou’s decision not to join McLaren was “obviously…the elephant in the room” regardless of whether O’Ward actually used that leverage. It followed that Palou’s breach was an effective cause of the loss. The court also considered it was obvious that the losses arising from the salary negotiations were not too remote given that this must have been in Palou’s reasonable contemplation at the time of entering his contract. The court awarded damages in full ($1.3m) .

NTT sponsorship claim: The court found it was “abundantly clear” that Palou’s move to McLaren was at least a factor for NTT’s decision to enter an agreement with McLaren and ultimately concluded that Palou’s breach was an effective cause of the NTT renegotiation. The court rejected Palou’s submissions that the losses were too remote. Given his industry experience, Palou was taken as knowing the importance of drivers to sponsorship agreements. Palou also had actual or imputed knowledge that NTT was negotiating a move to McLaren to follow Palou and that McLaren might lose sponsorship revenue in the event Palou was not at McLaren. The court awarded $6.3m, which represented almost 90% of the claim.

Performance based revenue claim: The court found that if Palou had driven for McLaren in the counterfactual then there “must be a real or substantial chance that he would have finished as champion” and so there was lost performance-based revenue. However, it adopted a “cautious approach” accepting that Palou may have needed half a season to find his feet. The court therefore awarded McLaren $2.05m (reducing the claim by 50%) .

Contract payment claim: The court held that it did not need to determine the wasted expenditure claim but nonetheless found that it would have failed in its entirety as McLaren had made a bad bargain and would not have fully recouped its expenditure in the counterfactual. In relation to the “signing bonus” specifically, the court agreed with Palou that the bonus was payable upon signing the agreement and was not conditional upon any future performance. McLaren’s characterisation of the payment was not consistent with the way it had been described in the contract. The court concluded that “McLaren intended Mr Palou’s signing-on bonus to be consideration for his signature and that, therefore, McLaren took the risk that he may breach the agreement.” This was the case even though the clause in which the signing bonus sat described all the payments listed as compensation for Palou’s “performance of all of its obligations under this Agreement”.

Note on McLaren’s Document Policy:

McLaren’s document retention policies were criticised by the court, particularly an internal policy document which included advice such as: “Clear out files and electronic communication channels often. Get into the habit of doing this regularly… Always use the disappearing messages functionality within WhatsApp… Consider what is being written and if you would be happy for the individual or an Employment Tribunal to see it. If not, delete it”. The court described the position in relation to disappearing WhatsApp messages in particular (a practice which continued to be used even after McLaren’s lawyers had instructed custodians to preserve all relevant documents) to be “in short, unsatisfactory”. The court kept this in mind when considering the reliability of McLaren’s evidence.