From pit lane to payday: Damages in motorsports dispute

The High Court has handed down its judgment in the high-profile dispute between McLaren and racing driver Alex Palou, ruling that Mr Palou's breach of contract led to significant financial losses for McLaren (McLaren Indy LLC and McLaren Racing Ltd v Alpa Racing, Alex Palou & Or [2026] EWHC 110 (Comm)).

The case centred on McLaren's claim for over US$20m following Mr Palou’s early exit from agreements to drive for the McLaren team. While the court had already found the driver and his associated service companies liable for the breach in June 2024, this trial was to determine whether there was a corresponding financial impact and, if so, the level of damages to be ordered.

The judgment provides an insight into how courts decide losses in the high-stakes world of motorsport. Key issues included: the knock-on effects of finding a replacement driver; the financial fallout from renegotiating major sponsorship deals; and the importance of meticulous record keeping.

Background

The claimants, together McLaren, are the entities behind the corresponding IndyCar and Formula One racing teams. Spanish racing driver Mr Alex Palou and his companies were found to have breached contracts to drive for McLaren's IndyCar team for the 2024-2026 seasons, having told McLaren in August 2023 that they did not intend to fulfil their contractual obligations under any of the relevant agreements.

Mr Palou had instead signed a new multi-year contract to continue driving for his previous team, Chip Ganassi Racing, for the 2024, 2025, and 2026 seasons, where he continues to drive today.

As a result, McLaren sought over US$20 million in damages. The defendants argued that McLaren had suffered no loss and had, in fact, benefited financially from the breach following the recruitment of a replacement ‘pay driver’ who was said to bring substantial funding to the team.

Issues for the court

The court had to consider causation, remoteness and quantum in deciding whether and to what extent it should allow the six heads of loss claimed by McLaren, including driver salary costs (relating to the increased salary costs of the team’s remaining driver following Mr Palou’s departure), sponsorship deal revenue losses, loss of performance-based revenue and wasted expenditure.

The court’s decision

Taking each head of loss considered by the court in turn:

1. Driver salary losses: After Mr Palou left, McLaren had to retain Mr O'Ward as their lead driver. McLaren argued that this gave Mr O'Ward a much stronger negotiating position, allowing him to secure a significantly higher salary than would otherwise have been possible. The court agreed that the breach directly caused McLaren to renegotiate Mr O’Ward’s pay sooner and on more expensive terms. It rejected the arguments that these costs were too remote to the breach and that Mr O’Ward’s performance and popularity alone explained the uplift. The court held that increased driver salaries would have been in the reasonable contemplation of the defendants as a result of the breach. The claim succeeded, with an award in the sum of just over US$1.3 million.
    
2. NTT base fee claim: McLaren argued that Mr Palou’s breach forced a renegotiation of its major sponsorship deal with NTT, which had been linked to Mr Palou joining the team. The court accepted that Mr Palou's departure caused the renegotiation, which resulted in reduced fees and rejected the defendants’ submissions on remoteness, noting Mr Palou’s knowledge of the sponsorship negotiations when he signed with McLaren and his role as driver within that. The court also held that McLaren had not failed to mitigate its losses: McLaren had acted reasonably by considering reputational damage and protecting a key commercial relationship by not insisting on strict performance with NTT. The court upheld the claim for the years 2024 to 2026, awarding over US$5.3 million.  The court considered the amount claimed for the 2027 year separately. McLaren had advanced a counterfactual whereby NTT would extend (or another sponsor would take primary sponsorship) for 2027. The court accepted this as logically possible but considered that the amount claimed did not accurately reflect the economic conditions and therefore reduced that element of the claim by half, awarding US$950,000 for that year’s loss.
    
3. Supplier uplift loss: McLaren also claimed a reduction in support payments from its supplier, because it no longer had a full roster of 'A' level drivers. This point was no longer opposed by closing, however, the defendants maintained that they should not be liable for the loss because it flowed from McLaren’s failure to mitigate its loss. The court considered McLaren’s attempts to sign alternative drivers and ultimately rejected the defendants’ arguments, awarding McLaren US$500,000 for this claim.
    
4. Other sponsorship losses: McLaren's claim for loss of profits as a result of loss of sponsorship revenue from other sponsors was partially accepted. The court found the methodology used by McLaren's expert appropriate, except for his reliance on the Palou 2024 Rate Card. (The defendants had not advanced an alternative methodology or calculation). The expert was instructed to recalculate the loss, expected to be between US$2 million to US$2.5 million.
    
5. Loss of performance-based revenue: The court broadly accepted McLaren’s expert assessment (with caution) that Palou’s absence reduced prize money, sponsor performance payments, and affected driver compensation outcomes.  A conservative approach was adopted given uncertainties about immediate championship impact, reducing the amount claimed by half. This part of the claim succeeded in the amount of US$2.05 million.
    
6. F1‑related profits and alternatives: A further claim for lost profits related to Mr Palou's potential F1 role also failed. The court was not convinced that this would have generated significant extra income for McLaren. McLaren's attempt to recover costs such as F1 testing fees was rejected. The court found these costs would not have been recovered even if Mr Palou had fulfilled his contract. The claim for the return of the US$400,000 sign-on bonus also failed, as the court ruled it was a non-refundable payment for Mr Palou signing the agreement in the first place.

In sum, McLaren was awarded in excess of US$10 million in damages, which is likely to increase further once the parties’ experts have recalculated the amount for other sponsorship losses.

Comment

While not all of its claims for loss succeeded, McLaren was awarded significant damages flowing from the defendants' breach of contract. This case is a useful reminder of the complexities of quantifying loss in motorsport, and the sports industry more generally, in light of the inter-dependent network of contracts and sponsorship deals, and highlights several key points for practice:

• Foreseeability of salary costs: The judgment confirmed that having to pay more to retain another key teammate after a star driver/player's departure is a foreseeable and recoverable loss.
   
• Causation of loss of sponsorship: The court accepted that sponsor fee reductions were foreseeably linked to the breach, even without a specific clause tying the deal to Mr Palou. This shows how important it is to build contingency mechanisms into sponsorship contracts to manage the risk of a key driver/player leaving.
   
• Mitigation of loss can include prioritising commercial relationships: The court endorsed McLaren's decision to protect its long-term sponsor relationship rather than strictly to enforce the original contract, confirming that reasonable mitigation can include commercially sensible decisions.
   
• Loss of chance and performance revenues: Claims for performance-linked losses (like prize money) can succeed, but the court will expect to see a robust, evidence-based model in support of such claims.
   
• The importance of evidence: This case underscores how critical contemporaneous documents are. McLaren's claim was strongest where it was supported by clear records. Keeping meticulous notes on roster planning and assumptions underpinning sponsorship deals is vital.
   
• Wasted expenditure claims are difficult to prove: It is difficult to recover upfront costs where the expected profits from the deal are unproven. Claims to recover payments like signing bonuses are unlikely to succeed unless there has been a 'total failure' of what was contracted for.

This article was prepared with the assistance of Katie Shale, trainee in CMS Manchester.

For further information please email the authors or your usual CMS contact.