Reasonable expectations

Stichd v Force India Liquidators (High Court) [2022]

There is a well-known rule of English property law which embodies a general legal principle called ‘non-derogation from grant’, namely that, if the grantor agrees to confer a benefit on another, then the grantor should not do anything that substantially deprives the beneficiary of the enjoyment of that benefit. The judgment in the Force India case appears to be analogous with that principle.

Facts:

Force India, the former Formula 1 motor racing team, entered into an Agreement in 2014 under which a company called Brandon was contracted to produce the team’s uniform and had the exclusive right to manufacture products (team uniform and licensed team merchandise / leisurewear) branded with Force India trade marks for a period of five years. Brandon’s rights and obligations under the Agreement had been transferred to Stichd. Force India subsequently became insolvent and the liquidators sold the team's assets to Racing Point (effectively meaning that Force India ceased to exist). No attempt was made by Force India to novate the Agreement it had with Stichd to Racing Point.

In the absence of an express provision dealing with the point, Stichd argued that a term should be implied into the Agreement that Force India was required to own the team throughout the Agreement’s five-year term and that by transferring the assets of the team to Racing Point, the liquidators had breached that implied term.

Decision:

The judge ran through the legal basis under English law for implying terms, namely:-

  • 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 obviousness;
  • The business efficacy test will only be satisfied if, without the implied term, the contract would lack commercial or practical coherence;
  • The obviousness test will only be met when the implied term is so obvious that it goes without saying. It needs to be obvious precisely what that implied term should be and it must be capable of clear expression. The greater the options for the way any implied term could be drafted, the less likely the term will be regarded as necessary or obvious;
  • A term will not be implied if it is inconsistent with an express term of the contract
  • The question is to be assessed at the time the contract was made, not with the benefit of hindsight;
  • 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 one of necessity, not reasonableness.
  • The burden is on the party who is seeking the implied term. The default position is that if an agreement fails to address a particular point, that is assumed to have been intentional and the inference is that the loss lies where it falls. If the parties had intended something different, the instrument would have said so.

    • The judge discussed the implication of a term based on the ‘reasonable expectations’ of the parties. It was made clear that this is not a separate basis for the implication of a term but another way in which the necessity or obviousness tests can be approached. This led the judge to consider the ‘prevention principle’ under which a term might be implied requiring a contracting party in some way to actively facilitate or at least not actively prevent the performance of the other party. After discussing a number of past cases, the judge said “there is a basis for implication if the express obligations assumed by the parties under the Agreement would give rise to an expectation in the mind of the reasonable reader of the Agreement and the protection of that expectation satisfies the tests of obviousness or necessity”.

    The judge quoted a 2004 case of CEL v Nedlloyd. In that case, an exclusive logistics agreement with limited termination rights would have provided reasonable parties with an expectation that the customer would not be able to bypass those exclusivity rights by its own deliberate actions of merging the business with another. A clause protecting [those expectations] was said to be both obvious and plainly necessary to protect the practical and commercial coherence of the contract

    The court concluded that an implied term was obvious from the Agreement's other terms and was necessary to give business efficacy to them. The notional reasonable party, looking at the Agreement, would expect that the company would be required to own the team throughout the Agreement's term.

    Force India had granted exclusive rights tied to the existence of the team and had only limited rights to terminate the Agreement.

    This was an arm's length transaction between commercial parties, from which Stichd intended to make a profit. Force India's disposal of the team’s assets robbed the Agreement of its entire commercial rationale from Stichd's perspective. Whilst the licence created pursuant to the Agreement could survive the sale of the assets, in the absence of the team there was no way for Stichd to profit from the manufacture and sale of team merchandise.

    Points to Note:

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