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DECEMBER 4, 2002

Arrows - where do we go from here?

The announcement that Arrows is going to appeal its exclusion from the FIA Formula 1 World Championship was no surprise but the question that now needs to be answered is how that appeal will happen.

The team is in a very delicate situation as at the start of next week there begins a trial which will establish whether or not the team (and Tom Walkinshaw personally) owe tens of millions of dollars to the investment bank Morgan Grenfell Private Equity. It is possible that Arrows might win that case which will reduce the team's debt load by around $80m. If the guarantees which the bank claims are upheld there is unlikely to be any course of action left but to put the team into liquidation.

If Morgan Grenfell loses Arrows will still have debts of around $85m - but $50m of that figure is owed to Walkinshaw's TWR and Broadstone companies. Something like $35m will be needed to settle the debts with other creditors but that might be possible with a big new investment in the team. At the moment the investors are waiting to see if Arrows gets an entry before paying up. The investors themselves have gone very quiet after a burst of publicity in Germany a few weeks ago. They may also be questioning elements of the deal as they were under the clear impression from somewhere that the granting of the entry was just a formality.

The trial over the guarantees begins next Tuesday under the weathered eye of Justice Sir Gavin Lightman. He is the same judge who issued a damning 17-page judgement against Arrows in July which said that the Arrows management "can only be described as underhand and improper, indeed downright dishonest". He went on to say that "the only inference I can draw from this state of affairs is that AGPI is prepared to say or do anything which it thinks best suits its interests".

The judge, an insolvency expert, concluded that that Arrows "is and has long been insolvent" and said that he was "concerned for all the creditors of Arrows. The management of Arrows however are responsible for the prolonged insolvent trading and if Arrows goes into liquidation, administration or receivership (as appears practically inevitable) creditors may have to seek relief against the directors in proceedings for wrongful and fraudulent trading".

Walkinshaw later responded saying that the judge was wrong in his assessment and did not have access to all the necessary information.

"The company's never been insolvent," he said. "There has never been any fraudulent trading or any irregularities that I'm aware of."

Lightman will now listen to all the evidence and will then decide how to rule in the case.

In the circumstances appeals against the FIA refusal to accept Arrows's entry for 2003 pale into insignificance although Arrows may want to move quickly to keep the new investors interested.

But the options for a protest are limited.

The rules of participation in Formula 1 are very clear. Clause 10.3 of the Concorde Agreement is an undertaking by a team to participate in each event. Clause 10.2 is an undertaking to be bound by and to respect the terms of the Concorde Agreement. There are further undertakings in Clause 5 in which teams accept that they must fulfil certain criteria, one of which requires the team to have participated in each event in the previous year unless prevented by force majeure. Arrows clearly did not do this although it has argued that it was restrained from doing so by force majeure. The legal definition of force majeure is accepted to be unforseeable circumstances which prevent someone from fulfilling a contract. This includes fires, floods, earthquakes, wars but does not include financial difficulties.

The Concorde Agreement also covers disputes which signatory teams agree will be "finally settled" under the rules of conciliation and arbitration of the International Chamber of Commerce in Lausanne. This will take at least six months and will cost more than $1m.

There are also a number of provisions in the Sporting Regulations which cover legal actions. Article 3 of the F1 sporting regulations states that all competitors undertake to observe the provisions of the FIA International Sporting Code, the F1 technical and sporting regulations and the Concorde Agreement.

Article 58 of the International Sporting Code also states that competitors "shall undertake to submit themselves without reserve to the decisions of the sporting authority and to consequences resulting therefrom. In case of non-compliance with these provisions, any person or group which organises a competition or takes part therein, will have the licence which has been issued to them withdrawn, and any manufacturer shall be excluded from the FIA Championships on a temporary or permanent basis."

Legal action outside the provisions laid down by the FIA is unlikely to be successful. The FIA's record in court is solid and the Appeal Court in Paris ruled in April 1988 that the federation is "the only organiser of international events". At the time the FIA President Jean-Marie Balestre said that the decision "establishes that the federation has an independence which allows it to make decisions with total autonomy".

This principal was upheld during the recent European Commission investigation into the rules and regulations of the FIA.

Trying to take legal action against the FIA can also spark further trouble as there are various rules designed to provide penalties for those who attack the FIA. Article 151c of the International Sporting Code states that "any act prejudicial to the interests of any competition or to the interests of motor sport generally" can be penalised by the FIA. Article 25e of the FIA Statutes empowers the World Council to apply penalties to any licence-holder who has contravened the statutes and regulations; pursued an objective contrary or opposed to those of the FIA and who has refused to abide by decisions of the FIA.

And the F1 Sporting Regulations also allow for the Formula 1 Commission to act. Article 48 of the regulations states that "if in the opinion of the Formula 1 Commission a competitor fails to operate his team in a manner compatible with the standards of the championship or in any way brings the championship into disrepute, the FIA may exclude such competitor from the championship forthwith."

All in all any challenge against the FIA will be a daunting task.

But Tom Walkinshaw is no stranger to such challenges and, it should be remembered, in 1984 took a case against the Royal Automobile Club (Britain's national sporting authority) all the way to a Tribunal of Enquiry, presided over by former attorney-general Lord Shawcross. Shawcross ruled that the RAC was right in its rulings and was highly critical that the case had been taken as far as it had.