In a recent decision, the English High Court has, unusually, agreed with a licensee that it was entitled to an implied contractual term. Here, the court held that Force India Formula One Team Limited had an implied obligation to retain ownership of its racing team for the entire five-year duration of a trade mark and merchandising agreement. The recent trend of decisions has made it hard to argue for implied terms as the party claiming such a term needs to show that it is necessary to make the relevant contract work in practice and the courts have repeatedly confirmed that it is not sufficient that an implied term is reasonable or would even have been agreed had the issue been raised.
Why was this case different?
It is important to note that the court did not invent a new test or depart from the recent decisions in this area and so emphasised a number of points, the most important being that:
- the implied term must be necessary to give business efficacy to a contract, on an objective assessment of the express terms;
- “business efficacy” means that the contract lacks commercial coherence without the term;
- an implied term cannot be inconsistent with any express term;
- whilst an implied term needs to be reasonable, that is not sufficient in itself – there must always be a basis of necessity rather than mere reasonableness.
The court considered the alleged implied term against the background of three express rights in favour of the licensee (Stichd Sport Merchandising BV) and decided that two of these rights did not require an implied term: first, the obligation on Stichd to manufacture uniforms under the agreement had ceased to exist on the sale of the racing team by Force India to a third party as “Team” had to be “owned and managed by Force India” so this specific obligation fell away as soon as the team was sold; secondly, there was no basis for implying a term allowing continued access to the Force India team’s facilities as there was already a clear express obligation on Force India to do so and so no room to imply an additional term as well.
However, the Court felt that the implied term was necessary in order to protect Stichd’s express right to earn revenues through the sale of licensed team merchandise during the term. The key factors influencing the court were:
- continued ownership of the team by Force India was clearly of importance to the parties as it was mentioned more than once in the contract;
- as a commercial contract, the intention for Stichd to make a profit could be assumed;
- there was a lengthy duration for the contract (five years) and the ability to make profits was protected by territorial exclusivity and very limited termination rights;
- termination for insolvency was only a right for the non-defaulting party so could not be relied upon by Force India;
- Stichd was required to undertake initial work and to make upfront investments which it could not recoup in the event of the team being sold by Force India.
Conclusion and notes
In reaching a decision to imply the requested term into the agreement, it is interesting that the court concluded that the express terms gave rise to a “reasonable expectation” that Stichd’s rights would be protected by such a term and that, without it, the lengthy term and exclusivity protections in its favour would have been completely undermined – to the court’s mind, this would make the agreement commercially incoherent. In line with recent caselaw, the court focused its reasoning and analysis on the express terms of the licence agreement.
It should be noted that arguments in favour of an implied term will be helped to the extent that the express terms in the agreement accurately reflect the intention of the parties and, in this particular case, the careful definition of “Team” by reference to it being owned and managed by Force India helped Stichd’s arguments for an implied term. For licensors, care should be taken to ensure that sufficient termination rights or the ability to transfer ownership of an asset are spelt out as restrictions may be implied by the courts later on.
How Moore Barlow can help
To protect your business, you will need to ensure that you have appropriate commercial contracts in place with suppliers, buyers, sellers and any other organisation that you have a financial relationship with. That’s where Moore Barlow’s commercial and technology team can help.
