McLaren v Palou — 5 legal lessons for drafting & managing sports contracts

The High Court’s recent decision to award McLaren over $12m in its contractual dispute with IndyCar driver Alex Palou offers a clear illustration of the commercial risks that arise when agreements with high‑profile talent break down.

With many contractual and participation relationships in sport being subject to the jurisdiction of confidential sports arbitration forums, the judgment provides valuable insight into how courts assess contractual promises, quantify loss and treat allegations of misrepresentation in elite sport.

Here, Emily Rickard from our employment team examines the consequences of Palou’s defection, the court’s approach to the issues in dispute and the wider lessons for businesses negotiating contracts with athletes or other high‑value individuals. 

The background of McLaren & Palou

McLaren sued IndyCar champion Alex Palou for breach of contract after he reneged on a deal to drive for McLaren’s IndyCar team from 2024 to 2026. In 2023, Palou confirmed that, despite his agreement with McLaren, he’d signed an extended contract with his existing team — Chip Ganassi Racing (CGR) — covering the same period.

The 2025 F1 championship winning team claimed damages exceeding $20m, citing:

• Lost sponsorship revenue.
• Lost testing programmes.
• Nearly $400,000 in signing bonuses.
• Costs associated with restructuring their driver lineup. 

The contract at the centre of the dispute extended beyond Palou’s driving obligations. It included a promotions agreement allowing McLaren to use his name, image and likeness for sponsorship and commercial activity, reflecting his value not just as a driver, but as a significant commercial asset to McLaren’s wider brand and commercial partner relationships.

Palou admitted breaching the contract but argued that he was misled by McLaren CEO Zak Brown and his alleged promises of an F1 seat — something that McLaren strongly denied. Crucially, the contract didn’t guarantee him a race seat — it carefully framed the opportunity as an “option” that McLaren could exercise. That wording gave McLaren flexibility over driver selection while protecting itself from being contractually bound to deliver career advancement in a notoriously competitive and uncertain environment.

McLaren’s claim was substantial and Palou’s team challenged the amount on three key grounds:

1. McLaren should offset any financial gains arising from the breach to avoid double recovery, such as the $1.25m paid by a replacement driver to continue racing for McLaren’s IndyCar team.
2. McLaren should’ve taken reasonable steps to reduce its losses by renegotiating sponsorship deals and pursuing drivers who could’ve maintained the sponsorship value tied to driver quality.
3. McLaren’s damages mustn’t be too remote and should’ve been reasonably foreseeable when the contract was signed.

The judgment

The case was heard in the UK High Court (Commercial Court) in London with the judgment handed down on 23 January 2026 by Judge Simon Picken. McLaren was awarded over $12m in compensation. The court recognised the significant commercial disruption caused by Palou’s breach, including the impact on sponsorship deals, team performance and driver retention. 

Some of McLaren’s claims against Palou were rejected, particularly the smaller sums relating to F1 sponsorship impacts, the costs of F1 testing programmes and the sign-on bonus that McLaren had advanced to Palou. While the court dismissed the F1-related elements — nearly $15m of the original claim — it largely sided with McLaren on the IndyCar-specific losses.

Palou’s argument that he’d been induced into the contract by assurances of an F1 seat was weakened by the express wording of the agreement. The court ultimately focused on the contractual language as written rather than on alleged expectations or informal representations, reinforcing the principle that sophisticated commercial parties are held to the terms that they sign. 

Overall, the verdict represents a partial win for McLaren and is likely to reshape how teams and athletes approach contract negotiations — especially regarding promises of career advancement and the handling of sponsorship arrangements. 

Legal & commercial lessons

The McLaren v Palou case highlights several key issues businesses and athletes face when negotiating sporting contracts:

1. Awareness of breach of contract

Breaches can be minor (e.g. missing a non-critical event) or material (e.g. failing to perform key duties). The latter often leads to significant damages or contract termination.

The ‘innocent’ party is typically entitled to damages designed to put them in the position they’d have been in had the contract been properly fulfilled.

Many sports disputes involve third parties — for example, another team or agent — who must be careful of their conduct. Unlawful interference with a contractual relationship can often lead to an induced breach of contract for which that third party may be liable.

2. Exit clauses & termination provisions

Contracts should clearly define exit clauses, including notice periods, compensation obligations and dispute resolution mechanisms. As in the McLaren-Palou case, linked agreements such as driving and promotions contracts may trigger cross-liability if one is breached.

More than ever, we’re seeing sports personalities wanting to negotiate commercial rights agreements separate to their sporting contracts, often managing these arrangements through a dedicated image rights company. Consequently, it’s imperative to ensure that the various contractual relationships and relevant parties — including any third-party image rights company — are fully aware of their crossing rights and obligations.

3. Limitation of liability clauses

In commercial contracts — especially in high-risk industries like motorsport — it’s common to include clauses that cap liability to a fixed amount, exclude liability for indirect, consequential or reputational loss and limit liability to direct damages only. 

Commercial contracts should always include a clear limitation of liability clause, especially in contracts involved high-value sponsorships, personal guarantees and strategic reputational risks.

4. Sponsorship effects 

Sponsorship deals often hinge on the presence of specific athletes. Palou’s withdrawal led McLaren to renegotiate its deal with NTT, resulting in increased costs and lost revenue. 

Sponsorship agreements should include clear performance obligations and remedies for breach, as well as provisions for renegotiation if key talent departs.

5. Misrepresentation & negotiating tactics 

High-performance individuals — whether F1 drivers or CEOs — often demand career-progression options written into their contracts. These clauses must be framed to withstand strategic pivots and market turbulence.

McLaren v Palou highlights the risk of relying on verbal promises or implied career progression. Only written, explicit guarantees are likely to be enforceable. 

An entire agreement clause prevents parties from relying on pre-contractual statements or informal promises. This means that any verbal or informal assurances made during negotiations won’t be legally binding and. 

Both parties should ensure transparency in negotiations and avoid ambiguous language that could lead to future disputes. A well-drafted entire agreement clause has the power to limit liability and narrow the scope of litigation. 

Practical advice for businesses

1. Draft with precision — ensure that all terms, especially regarding career progression, exit clauses and sponsorship obligations, are clearly defined and documented.
2. Seek specialist advice — engage sports law experts to review contracts and advise on industry-specific risks.
3. Plan for dispute resolution — include arbitration or mediation clauses to resolve disputes efficiently and maintain business relationships.
4. Monitor regulatory changes — stay updated on evolving legal standards and precedents in sports contract law.
5. Protect reputation — consider the reputational impact of contract disputes and plan communications accordingly. Even if a party is committed to openly breaching a contract, it may still be sensible to engage in carefully framed and managed without-prejudice discussions beforehand. If the parties can amicably reach a commercial resolution, they can avoid unnecessary time, cost and (often more importantly) reputational damage.

Wider implications of McLaren v Palou

The McLaren v Palou dispute serves as a stark reminder for both businesses and athletes that elite sports operate as much in the realm of commercial certainty as it does competitive ambition. While athletes are increasingly treated as global brands and strategic assets, this case makes clear that contractual commitments remain binding and unilateral defection can carry significant financial consequences.

For sports teams and commercial partners, the judgment reinforces the importance of precision in drafting, discipline in negotiation and strategic thinking prior to any unilateral action. Aspirational discussions about career progression - particularly in environments as competitive and fluid as motorsport - must be carefully managed and reduced to clear contractual language if they’re intended to be relied upon. Courts will enforce the agreement as written, not the expectations one party later claims to have formed.

For athletes, the judgment serves as a caution about the risks of strategic manoeuvring when multiple contracts intersect and relying on verbal representations when navigating overlapping contracts and long‑term career decisions. Reliance on informal assurances or implied guarantees, particularly where an entire agreement clause is in place, is unlikely to provide a defence to breach. Legal advice at the negotiation stage is essential to avoid exposure to substantial damages.

Ultimately, the outcome of the case demonstrates that as athlete contracts become increasingly complex and commercially significant, clarity, foresight and legal rigour remain the most effective tools for managing risk and preserving professional relationships.

Talk to us

Our commercial, employment, regulatory, litigation and sports law teams work together to help clients to navigate the contractual and sector‑specific issues highlighted by cases like this. From drafting and reviewing commercial agreements to advising on obligations and providing specialist support in the sports industry, we help organisations and talent to manage risk, protect their commercial interests and resolve disputes effectively.

Talk to us by emailing hello@brabners.com, calling us on 0333 004 4488 or filling in our contact form below.

Disclaimer

Please note that this commentary is based on publicly available information and legal analysis. We haven’t had sight of the actual contract(s) between McLaren and Alex Palou and therefore can’t confirm the precise wording or structure of any contractual provisions. 

Furthermore, our interpretation is made from the perspective of English law which may differ materially from the governing law of the contract. As such, any conclusions drawn should be treated as indicative rather than definitive and subject to the nuances of the applicable jurisdiction.