Alex Palou, the IndyCar champion, has learned an expensive lesson about contractual commitment. After a week-long trial, the Commercial Court ordered him to pay McLaren more than US$12 million in damages for walking away from a signed deal to race for the team. 

For commercial and contentious lawyers, the judgment makes for a fascinating, if rather long read. The case assesses claims for loss of profits, wasted expenditure and unjust enrichment in the context of:

• lost sponsorship fees;
• increased payments to alternative drivers;
• signing-on fees; and
• performance bonuses. 

In doing so it explores causation, remoteness, mitigation and loss of chance. A 'back to basics' reminder for us all!

For motorsport enthusiasts the case also reveals insight into the commercial operations of teams, covering issues ranging from "pay drivers" (who pay the team for the opportunity to race), the likelihood of a young driver racing for a team sponsored by a vaping company, the value (or lack thereof) of certain sponsorship rights, and the purpose and benefits of driver testing programmes. 

If you can't face reading all 124 pages of the judgment, here's our overview and key takeaways: 

From done deal to no deal

In 2022, Palou signed up to race for Arrow McLaren (McLaren's IndyCar team) until the end of 2026, with an option for 2027. He'd also serve as an F1 test and reserve driver.

Then came summer 2024. Palou changed his mind. He re-signed with Chip Ganassi Racing (CGR), one of McLaren's fiercest rivals.

McLaren called this "a clear breach" and sued. Palou conceded he'd breached the contract. The only question before the court was therefore how much he'd pay for doing so.

The legal arguments

Palou mounted four main defences:

• Induced by F1 promises: He claimed the team had promised him a future Formula 1 race seat. McLaren denied this. The contract only included an "option" for McLaren to have Palou drive in F1, deliberately framed to preserve the team's flexibility in a notoriously unpredictable sport.
• No real loss suffered: Palou argued McLaren might actually have profited from his departure. His replacement, Nolan Siegel, brought $1.25 million in "pay driver" funding. Palou argued that should offset McLaren's claimed losses.
• Lack of causation and losses too remote: It was claimed that several heads of damages were caused by factors other than Palou's breach, and that the losses were too remote.
• Insufficient mitigation: Palou's team contended that McLaren should have better mitigated its losses, and/or that the renegotiation of sponsorships (which was necessary in the team's view to preserve relationships and reputation) was not appropriate

The court disagreed with the majority of Palou's arguments: it focused on the contract's express terms, not alleged informal assurances. Sophisticated commercial parties, it held, are bound by the bargains they sign. So, any verbal 'promise' of an F1 drive was irrelevant.

On the Siegel point, Palou couldn't prove McLaren wouldn't have signed the young American anyway, even if Palou had stayed. So that claim failed too.

While there were other potential causes of some losses claimed, the court concluded that Palou's breach was an effective cause, restating the principle that even if the breach of contract is not the sole cause, or even the dominant cause, losses can be recoverable. Remoteness arguments were also rejected. The losses were in the contemplation of the parties at the time they did the deal. 

What McLaren won

The court split the award into several components:

• Driver retention costs: McLaren said they needed to retain at least one top-tier driver after Palou's departure, so it renegotiated an extension to Pato O'Ward's contract, at a significant increase.  The court agreed that this expense, and payments to other drivers were reasonable, recoverable costs resulting from Palou not joining the team.
• Lost sponsorship revenue (NTT Data): The tech sponsor, NTT Data, had signed on expecting Palou to race for McLaren. When he didn't, McLaren proactively renegotiated terms. The court accepted McLaren had acted reasonably in doing so. It agreed with evidence of former Williams F1 team principal Claire Williams that "if you aren't treating your sponsors in the way that they feel they should be, that gets out and it can be damaging to your reputation." This 'intervening act' from McLaren was therefore reasonable and didn't break the chain of causation. Offering a reduction in fees and 'make-good' rights was reasonable mitigation.
• Early termination losses: NTT later exercised an option to walk away from the sponsorship a year early. The evidence was that, on the open market, McLaren would now achieve a smaller fee for the applicable rights. McLaren claimed the shortfall and were awarded approximately 50% to take account of uncertainties.
• Lost GM bonus: McLaren would have received a substantial bonus from engine supplier, General Motors, for running an "A-level driver" of Palou's status. No other drivers of this standard could be secured, so this lost bonus sum was awarded as a loss flowing directly from the breach.
• Lost performance income and other sponsorship losses: The court accepted Palou is "an exceptional talent" who would have won races, and even championships, for Arrow McLaren, thereby awarding damages for loss of sponsor bonus payments and prize money. It also awarded other lost sponsorship income which Palou's presence in the team would have helped generate.

Interestingly, the court rejected Palou's "sulking driver" argument that, if required to race for McLaren, his heart wouldn't have been in it, affecting his performance. Palou argued the performance income would therefore never have been received, so shouldn't be awarded. The court dismissed this as unrealistic. A "competitive-minded and highly successful driver in his prime" would not have sat and sulked, but "would have done what he has apparently always done, which is to try to win every race in which he takes part."

Claims that were not awarded

McLaren were not awarded several smaller sums they sought to claim. These included costs tied to F1 sponsorship, wasted expenditure relating to Palou's testing programme costs, and, of most interest, a $400,000 signing-on bonus which was paid to Palou. McLaren argued this bonus was an advance on salary, forfeited when Palou breached. The court held that, as drafted, the bonus was consideration for Palou's signature rather than a recoverable advance payment. This illustrates the importance of clear drafting when structuring upfront payments. 

Who bears the cost?

While principally liable to McLaren, Palou may not ultimately pay the damages himself.

When he agreed to break the McLaren deal and stay with CGR, the American team promised to indemnify him for any losses arising from the dispute. So CGR will likely pay McLaren on Palou's behalf.

Practical lessons

For in-house lawyers negotiating commercial deals with athletes and other talent, this case offers several practical considerations:

• Verbal promises and expectations. Verbal assurances or implied promises about an athlete's career are dangerous. If you're acting for the talent, ensure material promises appear in the final contract. If you're acting for the team, deploy a robust entire agreement clause.
• Consider caps and exclusions of liability carefully. The damages award suggests Palou's contract may not have included typical exclusions for loss of profits and lost contracts. Alternatively, there may have been unlimited liability for 'wilful default' or similar, which meant such exclusions/caps could not be relied upon in this scenario. This is a reminder that standard exclusions and caps linked to fees paid to the athlete are not always appropriate where losses flowing from a breach could be significant. Preserving unlimited liability for wilful default may also be prudent.
• Draft signing bonuses with clarity. The $400,000 upfront payment was not recoverable because the contract treated it simply as consideration for signature. If you want clawback rights, should the talent walk away, state this explicitly in the contract.
• Limits on obligations to mitigate. It's sometimes unclear how far an innocent party must go, but as this judgment shows, they are not obliged to insist on strict contractual performance where doing so would damage commercial relationships. Courts can be sympathetic and recognise the commercial realities in which parties operate – notably the duty to mitigate did not mean McLaren had to take steps detrimental to its brand integrity and sponsor relations.
• Dispute resolution provisions. Arbitration and/or mediation provisions can allow swifter resolution of disputes while preserving commercial relationships. Arbitration is particularly valuable where confidentiality is a priority. That said, had this case not gone to court, McLaren wouldn't have had the chance to set the record straight.

The commercial reality

At this level of sport, top drivers are more than athletes. They are global brands and strategic assets whose value lies not only in competitive performance but also in their ability to activate sponsors and generate commercial revenue.

The substantial damages award in this case underscores the real contractual risks associated with talent arrangements in professional sport but is also translatable to engaging talent and celebrities in a range of contexts.

If you'd like to discuss how to protect your business when hiring talent, please contact your usual Lewis Silkin contact or one of the authors.