FASHION LAW


Supplier v distributor: who has an obligation to act in good faith?


W


hen a supplier and distributor enter into a distributorship agreement, they do so expecting they will both benefit. For otherwise, why enter into the distributorship agreement in the first place?


A statement of the blindingly obvious? Well, yes and no. Yes, insofar as agreements are a part of everyday business life and a


contracting party expects that by carrying on business, it will benefit. No, insofar as English law allows parties to freely negotiate and perform


contracts in order to pursue their own goals provided that they do not commit a breach of the contract. In addition, it has been an underlying principle of English law that a general duty to perform a contract in good faith is too uncertain and therefore does not exist.


However, a recent High Court judgment has undermined this principle. The case concerned a Singaporean distributor of Manchester United


branded fragrances and toiletries and a UK supplier. The supplier had entered into licence agreements with Manchester United Merchandising Limited which enabled it to supply the products in question.


The distributor entered into the distributorship agreement with the supplier for these products for certain territories in the Middle East, Asia, Africa and Australasia. It did so on the back of various representations by the supplier. It performed the distributorship agreement on the back of other representations made by the supplier. In both instances, some of the representations were untrue.


But after:


• the withdrawal by the supplier of some products after the distributor had started to market them;


• significant delays in the supplier’s supply of the products;


• an attempt by the supplier to renege on certain rights granted to the distributor;


• failure by the supplier to respond as it should have to enquiries made by the distributor;


• provision by the supplier of false information to the distributor as to the price at which the products were being marketed in Singapore, the distributor had had enough.


The distributor claimed that the supplier had committed a serious


(repudiatory) breach of the distributorship agreement. The distributor accepted that the supplier’s actions brought the agreement to an end and claimed damages.


The distributorship agreement had been prepared by the supplier and the


distributor. It was a short document. It consisted of just 8 clauses. It was effectively “term-lite” - if not on the back of a fag packet, then certainly on the back of a large envelope.


The Court decided that whilst the supplier was in breach of a number of


express terms of the distributorship agreement, the breaches were not serious. Further, the distributor had been aware of the breaches and yet had continued to perform the distributorship agreement. As such, the distributor could not rely on them.


20 • FOOTWEAR TODAY • SEPTEMBER 2013


By Stephen Sidkin


There was, however, a further breach which was serious. In respect of this


breach the Court considered that a duty of good faith and fair dealing was to be taken as implied with the distributorship agreement - being a duty which required the supplier and the distributor to communicate effectively and co-operate with each other in performing the agreement. By entering into the distributorship agreement in the first place, the parties had committed themselves to co-operate with each other for their mutual benefit.


According to the Court, what is to constitute good faith and fair dealing is determined:


(i) by the relational nature of the agreement; and


(ii) by the standards of conduct to which, on an objective basis, the supplier and the distributor must have been expected to comply without their being stated.


Overall, the Court’s judgement helped the distributor succeed in its claim


against the supplier for breach of an implied duty of good faith in the provision of information and was able to claim damages for wasted expenditure and for misrepresentation.


Looked at objectively, the distributor succeeded because the supplier’s


failures to communicate and be honest about its own contractual and production positions were so significant. The fact that the distributorship agreement was silent as to these issues was overcome.


Does this mean that in the future distributorship and their relational


agreements will include express declarations that the supplier and distributor will deal with each other in good faith? Possibly.


Can distributors be expected to rely on this recent decision when seeking


to tackle alleged failures by their suppliers in situations where the distributorship agreements in question are lax as to the express obligations of suppliers? Probably.


Should supplier and distributor look to state expressly in their


distributorship agreement the issues which are important to them so as to reduce uncertainty and the likelihood of future litigation? The answer is blindingly obvious unless either has a burning desire to waste management time and incur legal fees.


Stephen Sidkin is a partner in Fox Williams LLP (www.agentlaw.co.uk; www.fashionlaw.co.uk) © F


ox Williams LLP 2013


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