Legal Column: Contracts Season

By Simon O’Brien | We probably all played musical chairs when we were younger. It was fun then; however, as adults and fans of motorsport (Formula 1 in particular), this time of year often gives the faithful some heartburn over where their favourite drivers might drive. Every year, like clockwork, the pundits begin speculating, the drivers speak of endless possibilities, and the team principals say virtually nothing about the prospect of drivers being fired, hired or retaining positions within teams. Meanwhile, we, the fans, sit outside, watching, waiting and often wondering why it takes so long for drivers and teams to commit to one another for the upcoming season. 

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Sure, sometimes contracting delays are caused by drivers, perhaps waiting to see what happens with engine supply contracts or uncertain whether to leave a factory team for a private one. It’s not surprising, however, that most delays are largely due to business issues: finances and politics.

 Raising money

It’s no secret that running a Formula 1 team is an extremely expensive enterprise. With only a portion of any team’s budget coming from the FIA or the team’s parent company, teams get creative and look for funding wherever they can. Although the most common funding source is team sponsorships, many teams (especially those not named Mercedes, Ferrari, McLaren or Red Bull) often look to pay drivers and their private sponsors to help fill team reserves.

A single look down the starting grid reveals drivers personally sponsored by a variety of big brands, telecom companies, banks, software manufacturers, alcohol companies and even luxury watch manufacturers. Indeed, according to American former Formula 1 driver Scott Speed, “in today’s Formula 1, even the junior development drivers come with substantial sponsorships. With the notable exception of Max Verstappen, my generation was the last to be able to make it to Formula 1 by simply being the fastest guy on the track.”

A single look down the starting grid reveals drivers personally sponsored by a variety of big brands, telecom companies, banks, software manufacturers, alcohol companies and even luxury watch manufacturers.

Simon O'Brien

Although the concept of pay drivers purchasing a race seat is nothing new, a handful of teams recently took pay-driver fundraising to the brink by way of one certain quasi-nationally-funded driver with an affinity for crashing into other cars. Although this particular driver has since been removed from the sport, mid-sized and smaller teams seeking pay drivers to fill seats is just as common as ever. Thankfully, the new class of young pay drivers are proving exceptionally talented for the sport.

 Cutting costs

Equally crucial to a team’s ability to fundraise is the ability to restrict operating costs. For teams with smaller budgets, the idea of producing purpose-built engines is simply impossible. The costs associated with designing and producing a fast, reliable powertrain dwarf the price of purchasing engines from one of the existing engine suppliers; Ferrari, Mercedes, Renault and Honda. Although still an expensive proposition, a team occasionally gets lucky, and a deal is struck whereby engines and technology are supplied at a vastly reduced rate in exchange for an open race seat. For the top teams in Formula 1, the opportunity to place an up-and-coming driver in a lower team’s race car ensures that the driver continues to gain valuable on-track racing experience (a practice Mercedes has employed on more than one occasion with young development drivers such as Pascal Wehrlein and Esteban Ocon.)

 The new class of drivers

Regardless of the reasons by which any particular driver procures a race seat, mid-sized and smaller teams are discovering that this new stock of Formula 1 hopefuls, though far younger, are in many ways more prepared and more consistent than the multitude of politically backed or pay-drivers we’ve seen blow through Formula 1 over the past many decades.

Perhaps never before in the history of Formula 1 has the playing field been so even among the young drivers competing for seats. With few exceptions, the modern Formula 1 racer began driving state-of-the-art equipment even before beginning school, trains like an Olympic athlete, is intelligent, multilingual, and knows how to present himself confidently and knowledgeable to fans and the media.

With technology advancing faster than ever, the modern driver is more likely to begin working in simulators at a younger age, honing his skills through endless hours of relatively inexpensive practice. Learning every turn, apex and breaking point of each Formula 1 circuit before joining a team. In short, to a man (and hopefully soon, to a woman), the modern Formula 1 hopeful will likely be exceptionally fit, talented and prepared at the time of signing.

A hunch supported by this year’s great midfield battles waged between some of the youngest drivers on the grid. Many of these young drivers have shown that they are competitive under extreme conditions on multiple occasions during the current season. Examples include Carlos Sainz in Toro Rosso, finishing fourth in Singapore; Sergio Perez in Force India, finishing fourth in Spain; and 18-year-old Lance Stroll wrestling his Williams to a podium finish in Azerbaijan. Such similarly impressive race results from different drivers in different equipment provide teams with a unique opportunity to focus less on finding the “right” driver and more on the best sponsorship and/or political opportunities a driver can bring to the team.

 The excluded bunch

The options and opportunities are virtually limitless for the rare few, e.g. Lewis Hamilton, Sebastian Vettel, Fernando Alonso and likely Max Verstappen in the near future. Whether you love or hate them, most fans and team principals would likely agree that these drivers make up the top tier of driving talent in open-wheel racing.

Upon the impending termination or expiration of their contractual obligations, each of the top Formula 1 team will undoubtedly arrange secret meetings with the driver. Top teams from other racing series will reach out to the driver’s management group to gauge the driver’s interest in leaving Formula 1, as the world of racing fans holds its collective breath to see where the driver will land. I would refer you to the roller coaster ride that was Fernando Alonso’s 2018 negotiations.

 Commencing negotiations

Until this point, the majority of this column has been a commentary on the increasing quality, consistency, and maturity of the new, young driver. A blessing for all teams not involved in the fierce battle at the sharp end of the constructor’s championship. Regardless of team or driver, though, the interest of the two in working together signals the beginning of legal battles and contract negotiations.

The options and opportunities are virtually limitless for the rare few, e.g. Lewis Hamilton, Sebastian Vettel, Fernando Alonso and likely Max Verstappen in the near future.

Simon O'Brien

In every driver contract, there is a multitude of parties which must be consulted in the negotiation process. They include but are in no way limited to, the following: the driver; the driver’s management team; the driver’s development program; the driver’s individual sponsors; the race team; the race team sponsors; the engine supplier (if applicable); and often times the race team’s parent company or owner. What’s worse? Each party arrives at the negotiating table with its own legal team to ensure the protection of its financial interests.

 The key issues

Business decisions have likely already been established at this point in the process. The driver’s management team and the race team will have agreed upon the term of the agreement, the driver’s salary, bonus structure, who keeps any trophies the driver wins, the fringe benefits, et al. Where the lawyers get involved, despite crossing the T’s and dotting the I’s, is in negotiating the priority of sponsorship and licensing rights and defining the rights, duties, and obligations which make up the ground rules that each party will be required to abide by, and in the event of a catastrophe, the terms for terminating the driver agreement.

In any given driver contract, it would not be uncommon for the driver to have particular agreements with personal sponsors or investment groups. These agreements often make demands on the driver’s time, perhaps conflicting with races or with a team or team-sponsored corporate events. Frequently personal sponsorship agreements will provide licenses permitting the sponsor’s use of the driver’s likeness, image, voice, and more. Likely competing with the team or team sponsors use of such licenses. Even more detrimental to the negotiating process is if a driver has a personal sponsor that is a direct competitor with a team sponsor. When these conflicts occur, with the exception of the top-tier drivers, the usual hierarchy is that of 1. Team and team sponsor, and 2. Driver and driver sponsor. Depending on the circumstances and amount of financial commitments from the team sponsor, the driver may be required to amend or terminate long-standing personal sponsorship agreements, breaking relationships and costing the driver money.

Filling a race seat is costly and time-intensive, but if done correctly, it can propel a flailing team high into the points or perhaps even onto a podium. But following the selection of the desired driver and the corresponding driver’s sponsorships and financial or political benefits to the team, each of the parties will begin conducting the multiparty negotiation outlining the future relationship between the driver, the team and all associated parties. When the dust settles, the seat will have been filled if the negotiations have been successful. If not, the team will have to start the process again.