AML: HMRC flexes enforcement muscle to the tune of £7.8 million
Kevin Magnussen, the extremely talented Formula 1 driver, left court last week having lost a claim brought by his former manager in relation to payment of commission until 2021, despite them parting company at the end of 2014. He also failed in a claim against his lawyers for failing to protect his interests because it was time barred.
In about 2008, Magnussen (a minor at the time) signed a management contract with Dorte Riis Madsen, which was reviewed in 2011 when he became an adult and was to run for a further 10 years entitling Madsen to 20% of his income. The contract was governed by Danish Law.
Between 2008 and 2013, Magnussen competed in junior motorsports series (including Formula Ford, Formula Renault 2.0; Eurocup Formula Renault, Formula 3 (German, Euro and British Series) and Formula Renault 3.5, finally securing a coveted Formula 1 drive in 2014 for McLaren Mercedes. Junior racing series require funding and in 2010, Magnussen secured financial support from Danish billionaire Anders Holch Povisen; and together they formed Racingselskabet; owned as to 51% by Povisen and 49% by Magnussen. Through that structure; Magnussen received a salary and Povisen required his investment to be repaid. Madsen also apparently received a salary from Racingselskabet.
Despite a good showing in 2014, Magnussen did not secure a Formula 1 drive for 2015, losing out to two-time world champion Fernando Alonso. It is reported he felt frustrated that Madsen had not formulated a “Plan B” so he would not be on the grid. Magnussen was retained as a reserve driver for McLaren Honda, and did sub for Alonso for one race in Australia, following a pre-season accident. Magnussen claimed to have negotiated his own driving deal at Renault Sport F1 for 2016; and latterly a multi-year deal with Haas F1 Team from 2017 with the assistance of Povisen. Despite the fallout, the manager continued to receive her salary from Racingselskabet until the summer of 2016; but when that stopped. Madsen took legal action to claim the full 20% she considered was due under the original contract.
The court in Copenhagen ruled against Magnusson finding that Madsen was entitled to 20% of his income between September 2015 and July 2021; and certain interests in Racingselskabet which receives the income from Formula 1 related activities. Magnussen also sued his lawyers, on the basis that they failed to protect his interests rather than those of Madsen. The intention was presumably that if Madsen succeeded in her claim, he could claim an indemnity or contribution from his lawyers. Whilst the Judge found that his lawyers did need to take some responsibility, as the contract was drafted in 2010 and finalised in 2011, too long had passed and his claim was time barred. The result being that not only must Magnussen pay the damages awarded, but he must also pick up the other parties’ legal bills as well as his own.
Depending upon the precise role Madsen undertook, Magnussen may have been able to walk away from obligations before he was 18, as the only contracts for ‘necessaries’ are binding on a minor. The archaic term ‘necessaries’ is essentially contracts for the minor’s benefit, for example, contracts of apprenticeship or education. In Proform Sports Management Ltd v Proactive Sports Management Ltd and Stretford, a dispute concerning Wayne Rooney’s agent; the court held that acting as a player’s agent and carrying out the functions of personal representation was not analogous to a contract for necessaries. The agent did not undertake matters essential to a player’s training or livelihood and accordingly the contract was voidable. The financial obligations under a motorsport management agreement are often guaranteed by a parent or guardian for this reason. A contract can be affirmed by conduct (continuing without objection) or expressly (as here where Magnussen’s entered into a new contract). Thus, it is important to act swiftly if this is likely to be an option.
It is in any event possible that such a long and restrictive contract would not be enforceable as a restraint of trade. Each case is fact specific, and the court would analyse whether the restrictions were reasonable having regard to the services provided. In junior motorsport, a manager invests time in an early career which may be unremunerated at that stage and potentially their own money; and so a longer term contract may be more acceptable. The court will be assisted by expert evidence to the industry ‘norm’. A flat rate of 20% commission for 10 years whether or not a service was provided is potentially subject to challenge. However, where the driver had received legal advice, the court may consider this simply to be a bad commercial bargain (but hence potential culpability of the lawyers).
In Denmark, the standard limitation period is 3 years from the breach of contract or when the damage occurred; and it appears for this reason Magnussen’s claim failed as there were no features which extended this provision. In England & Wales, the equivalent limitation period is 6 years; which may well have saved Magnussen’s claim against his lawyers.
In order to reduce the likelihood of dispute; the management agreement should be negotiated in a fair fashion, setting out the respective duties and obligations of the parties and importantly what happens should a relationship go wrong. For sports contracts, it is essential that the adviser has sport specific experience to ensure this happens (particularly for junior motorsport contracts where external investment is usual). Manager, investor and athlete should receive independent advice. This does not need to be costly, but acting prudently at the outset could save money down the road. When a relationship goes sour, advice should be taken again at that stage, to ensure all rights are protected and any time limits for action identified. There are a number of ways to achieve protection with or without co-operation of the parties.
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