Contracts Season

March 26th, 2018

We 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 favorite drivers might end up driving. 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 on the outside, watching, waiting, and oftentimes wondering why it takes so long for drivers and teams to commit to one another for the upcoming season.

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 is not surprisingly however, that most delays are due in large part to typical 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 find it. Although the most common source of funding is through 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 veritable buffet 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 F1 by simply being the fastest guy on the track.”

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, the practice of mid-sized and smaller teams seeking pay-drivers to fill seats is just as common as ever. Thankfully for the sport, the new class of young pay-drivers are proving to be exceptionally talented.

CUTTING COSTS

Equally important 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 the design and production of a fast, reliable powertrain dwarfs the price of simply purchasing engines from one of the already existing engine suppliers; Ferrari, Mercedes, Renault and Honda. Although still an expensive proposition, occasionally a team 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 racecar 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 F1 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 knowledgably to both fans and the media.

With technology advancing faster than ever before, 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 even joining a team. In short, to a man (and hopefully soon, to a woman), the modern Formula 1 hopeful is likely to be exceptionally fit, talented, and prepared at the time of signing.

A hunch supported by this year’s fantastic midfield battles waged between some of the youngest drivers on the grid. On multiple occasions during the current season, many of these young drivers have shown that they are competitive under extreme conditions. Examples include Carlos Sainz in his Toro Rosso finishing fourth in Singapore, Sergio Perez in his 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 provides teams with a unique opportunity to focus less on finding the ‘right’ driver, and more on the best sponsorship and/or political opportunities that a driver can bring to the team.

THE EXCLUDED BUNCH

For the rare few, e.g. Lewis Hamilton, Sebastian Vettel, Fernando Alonso, and likely Max Verstappen in the near future, the options and opportunities are virtually limitless. Whether you love them 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 teams will undoubtedly arrange secret meetings with the driver, and 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, all 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 thought, the interest of the two in working together signals the beginning of the legal battles and contract negotiations. In every driver contract there are a multitude of parties which must be consulted in the negotiation process. They include, but are in no way limited to, the following: 1.) the driver; 2.) the driver’s management team; 3.) the driver’s development program; 4.) the driver’s individual sponsors; 5.) the race team; 6.) the race team sponsors; 7.) the engine supplier (if applicable); and often times 8.) the race team’s parent company or owner. What’s worse? Each party arrives at the negotiating table with their own legal team to ensure the protection of their financial interests.

THE KEY ISSUES

At this point in the process, the business decisions have likely already been established. 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 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 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 even terminate long standing personal sponsorship agreements, breaking relationships and costing the driver money.

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

Originally published at: Paddock Magazine on October 9, 2017.