The recent High Court decision in Stichd v Force India Formula One Team provides an instructive, and comparatively rare example, of a party successfully bringing a claim for breach of contract in reliance on an implied term. The decision includes a useful analysis of how the reasonable expectation of the contract parties fits into the classic test for the implication of implied terms.
- Under the contract Force India granted a trade mark licence to Stichd for the exclusive right to manufacture products branded with the Force India F1 team trade marks for just over five years
- In July 2018, Force India encountered financial difficulties and entered into administration. To save Force India as a going concern, the administrators sold its business and assets to Racing Point UK.
- When the sale was completed, the Agreement was not novated to Racing Point. As a result, Racing Point did not step into Force India’s role as the licensor under the Agreement.
- There was no express term of the Agreement that prohibited Force India from selling its business to a third party. Consequently, Stichd brought a claim for damages against Force India for breach of the following implied term:
“Force India would continue to operate the Team in respect of which the counter-party (initially Brandon AB and subsequently BSM [now 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).”
Test for implied term and the parties’ “reasonable expectations”
Farnhill J set out in detail the now well-established test for the implication of implied terms. The essence of this test being that a term will not be implied unless, on an objective assessment, it is either:
- necessary to give business efficacy to the contract (only satisfied if the contract would lack commercial or practical coherence without the implied term); and/or
- the term is so obvious that it goes without saying (also known as the officious bystander test).
The judgment is noteworthy for its consideration and application of the reasonable expectation of the parties and how this concept relates to the test for the implication of terms summarised above. Farnhill J stated that “the reasonable expectations of the parties do not form a separate ground for implication; they are one of a number of routes by which the hurdles of obviousness and necessity can be approached”. Farnhill J then explained that the proper approach derived from the authorities involves two steps:
“First, I analyse whether a reasonable expectation arises from the express terms of the contract viewed against its objective setting. Second, I must then consider if the protection of that expectation was so obvious as to go without saying or was necessary to give the contract practical or commercial coherence.”
Farnhill J concluded that the implied term proposed should be read into the contract by reference to the two-stage reasonable expectations tests. His primary conclusions being:
- that a notional reasonable party looking at the Agreement would expect Force India to be required to own the team throughout the term of the Agreement on the basis that Force India’s ownership had been referred to twice in the Agreement and that it had granted exclusive rights tied to the existence of the Team with limited rights of its own to terminate the Agreement; and
- a term protecting that expectation was both necessary and obvious (thereby satisfying the standard implied term test). The disposal of the F1 team having robbed the contract of its entire commercial rationale from Stichd’s perspective and rendered the exclusivity and five-year term worthless.
The decision represents a classic application of the test for implied terms, albeit via the “route” of determining the reasonable expectation of the parties.
It is worth noting that the court gave particular weight to the fact that this was an exclusive and time-limited licence so that the sale of the licensor’s business rendered the licensed rights worthless. In this regard, the decision follows an earlier Court of Appeal decision where an almost identical term was implied into an exclusive distribution agreement following the sale of the licensor’s business. There appears to be a heightened risk that the courts will imply a term protecting the value of licensed rights where the licence has been granted on an exclusive and time-limited basis. Licensors would be well advised to pay particular attention to ensuring that the possibility of a sale of their business during the term of the licence is expressly addressed in the contract or otherwise take steps to ensure that a licensee retains its ability to commercialise licensed rights post-sale or merger.
For a more detailed analysis of this decision please see the Entertainment Law Review case comment available here.