When you think you’re exclusive but you’re not: Court of Appeal examines exclusivity in the Retail & Consumer industry

In this article, we examine the practical outcomes from the judgment for those entering into similar arrangements.

The background and the disagreement

The dispute concerns the breakdown of a commercial relationship between a drinks manufacturer (of primarily gin and gin liqueurs), Zymurgorium Limited (the “Manufacturer”), and a drinks wholesaler, Hammonds of Knutsford plc (the “Wholesaler”).

In 2018, the Wholesaler discovered that the Manufacturer was supplying one of its major customers, J D Wetherspoon (“JDW”), without going through the Wholesaler. This led to a breakdown in the relationship between the parties. The Manufacturer subsequently brought a claim against the Wholesaler for unpaid invoices and the Wholesaler counterclaimed against the Manufacturer for damages for breach of contract.

In bringing its counterclaim against the Manufacturer, the Wholesaler argued that the parties had entered into an overarching agreement during a meeting in November 2015 which, although not put in writing, required the Manufacturer to exclusively supply its products through the Wholesaler (the Master Wholesale Agreement (“MWA”)). The Wholesaler’s alternative position was that five Specific Supply Agreements (“SSAs”) were in addition orally agreed, relating to the exclusive supply through the Wholesaler by the Manufacturer of its products to five specific customers of the Wholesaler (one of which was JDW). In supplying JDW directly, the Manufacturer had (a) acted in repudiatory breach of the JDW SSA which the Wholesaler accepted and (b) renounced the other four SSAs.

The High Court’s decision

By the time the claim came to trial, the issue of the unpaid invoices was no longer in dispute and so this only left the question of the Wholesaler’s counterclaim for breach of contract to be heard.

In relation to the question of whether there was an express agreement as to exclusivity under the MWA, the Judge found, on evidence, that exclusivity had not been agreed between the parties under the MWA. Indeed, the Judge went as far as to say that there had been no contract (i.e. no MWA) entered into between the parties. In reaching this decision, the Judge warned against the automatic imposition of a contract arising in casual commercial arrangements: “The court must be careful to guard against a casual finding of a contract coming into existence or indeed being varied simply because the parties’ relationship has developed, lest an undesirable element of uncertainty be introduced into the law of contract” (at [158]).

However, the Judge did find that the alleged oral SSAs - including the JDW SSA - did exist and included implied terms that the Manufacturer would only supply goods to the SSA customers through the Wholesaler. The Judge found that by supplying JDW directly, the Manufacturer had “undoubtedly” acted in repudiatory breach of the JDW SSA and renounced the other four SSAs in doing so, thereby owing the Wholesaler damages for breach of contract.

In terms of level of damages, the Judge assessed that there should be a reasonable notice period of termination implied under those SSAs which was commensurate with the nature of the arrangement between the parties. Whilst the Wholesaler tried to maintain a notice period of twelve months, the Court settled for a three month notice period. In this regard, the Judge commented that: “any notice period in excess of three months would have imposed unreasonable obligations from the point of view of both parties” (at [165]). The Manufacturer was therefore liable for damages for repudiatory breach of the specific SSA with JDW and renunciation of the other four SSAs for the period of three months.

The Court of Appeal’s decision

Both parties sought to appeal the decision of the High Court. The Wholesaler appealed the conclusion that there was no MWA and the Judge’s determination of a reasonable notice period of termination being only three months. The Manufacturer accepted the Judge’s assessment of three months’ worth of damages for breach of the JDW SSA, however cross-appealed against the findings that by supplying JDW the remaining four SSAs were renounced.

Both the appeal and cross-appeal were dismissed.

On the issue of whether the meeting in November 2015 amounted to the agreement of the MWA, the court found that even though the parties intended there to be a commercial relationship with legally enforceable obligations on each side, this was only contained within the Purchase Orders rather than an MWA agreement made during the November 2015 meeting.

The Wholesaler’s second ground of appeal related to the length of notice of termination for the SSAs – the Wholesaler wanting to claim for a longer period of notice than the three months awarded by the High Court and therefore, further damages. The Wholesaler argued that: (a) it had invested significant management time in developing commercial relationships with its customers; and (b) the drinks market was cyclical and so a longer period of notice should apply (and damages should be awarded) following the repudiatory breach in December as it would take longer for a wholesaler to clear their stock following the Christmas period.  However, the Court of Appeal upheld the implied three months’ notice of termination.

In respect of the Manufacturer’s cross-appeal that it had not renounced the other four SSAs in breaching the JDW SSA, the Court of Appeal rejected the cross-appeal and said that when the Manufacturer supplied JDW directly – in breach of the exclusivity agreement found in the JDW SSA – “the Judge was entitled to regard that as conduct which would lead a reasonable person in the position of [the Wholesaler] to conclude, correctly, that [the Manufacturer] did not recognise any obligation of exclusivity, or indeed any contractual obligation to [the Wholesaler] at all over and above the obligation to fulfil the orders it accepted” (at [84]).

Lessons to be learnt – especially for those in the Retail & Consumer industry

Oral Contracts

There may be a number of reasons why formal written agreements are not put in place – for example in the earlier stages of a business relationship or, conversely , where there is a robust lengthy relationship that is based on trust. However, this case demonstrates the practical benefits of setting out what has been agreed between the parties, whether this be in a formal written contract, or even in contemporaneous correspondence. Those entering into supply agreements should clearly set out the obligations of both parties to ensure certainty in the performance of the contract and to protect themselves should the business relationship deteriorate.

Implied Terms

Businesses in the Retail & Consumer sector should specifically determine issues such as exclusivity and notice period for breach and commit these to writing at the time the contract is agreed between the parties. They should avoid leaving such vital terms for the Court to determine and imply. For example, in this case the Court held that a three month notice of termination was sufficient – whereas the Wholesaler argued that the length of notice should be dependent on when in the year the breach occurred, given the cyclical nature of the drinks market. This argument was not properly made during the High Court proceedings and so was not properly considered in the Court of Appeal, but one can see how a Court would struggle to apply – and imply – such complicated permutations of length of notice of termination into a commercial contract in the event it is not reduced in writing between the parties. If this was something that would have been important to the Wholesaler, it was vital that it was specifically added into a formal written agreement.

‘Framework’ v Individual Agreements (and Implied Terms again!)

Parties should also take care to outline the way in which framework agreements operate, as well as the interrelation with individual agreements. In this case, the Court found that there was no framework agreement (i.e. the MWA) but there were individual agreements (i.e. the SSAs) which the Wholesaler could rely on.

Interestingly in this case, the Court found interrelationship between the five SSAs, in that by breaching the JDW SSA, the Manufacturer was held to have disregarded “any contractual obligation” in all the SSAs. Again, because of a lack of a written agreement, the Court determined the interrelationship of the SSAs in this way. Ideally for the Manufacturer, written SSAs would have been in place which outlined that the breach of one SSA does not necessarily mean a breach of the remainder.

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Contributors: Victoria Hobbs (Partner) and Prashant Kukadia (Associate) of Bird & Bird LLP