What happens when parties have their wires crossed about the extent of contractual relations?
Last month, the Court of Appeal gave judgment in a bitter dispute between Hammonds of Knutsford Plc, a drinks wholesaler, and Zymurgorium Limited, a drinks manufacturer, as to whether the wholesaler was the manufacturer’s exclusive wholesaler.
The origin of the dispute lay in a meeting between the parties in November 2015, which according to the wholesaler had resulted in an overarching agreement of exclusivity being granted to the wholesaler so that the wholesaler would be the manufacturer’s exclusive wholesaler.
The relationship between the parties came to an end in 2018 when the manufacturer began directly supplying a major customer, JD Wetherspoons. This led in turn to a claim by the manufacturer for unpaid invoices for supplies made to the wholesaler and a counterclaim by the wholesaler for damages for breach of contract.
However, as no written agreement had been put in place, before the Courts the parties had to rely on purchase orders by way of evidence to show their respective contractual obligations or lack thereof.
High Court and Court of Appeal judgments
The High Court and the Court of Appeal had no difficulty in deciding that it had been agreed between the parties that the wholesaler would supply the manufacturer’s drinks to the wholesaler’s customers. But equally the Courts rejected the wholesaler’s claim that an overarching exclusive agreement had been agreed that the wholesaler would be the manufacturer’s exclusive wholesaler.
Instead, the Courts decided that there were in place five specific supply contracts between the manufacturer and the wholesaler to supply specific customers – one of which was JD Wetherspoons -and each contract had implied terms that the manufacturer would not supply the customer in question except through the wholesaler. As a result, the Courts decided that the manufacturer’s direct supply of JD Wetherspoons was a repudiatory breach of that particular supply contract. Further, they decided that the repudiation of that contract resulted in the renunciation of the other four individual contracts.
It was also decided that damages were owed for breach following the manufacturer’s failure to give reasonable notice of termination.
What does this mean for my unwritten agreements?
The key takeaway from this case for suppliers and distributors (as well as suppliers and wholesalers) is the importance of having an agreement in writing which sets out what is and what is not:
being granted by the supplier by way of rights; and
being accepted by the distributor by way of obligations.
Indeed, this latest judgment from the Court of Appeal parallels the Court of Appeal’s decision just over 20 years ago in the case of Baird Textile v Marks & Spencer.
In Baird Textiles, the claimant had been a supplier of garments to M&S for over 30 years with no formal written agreement ever in place. When M&S terminated the relationship without any warning, Baird claimed that there had been an implied contract requiring M&S to give reasonable notice of termination. The Court of Appeal decided that the claimed obligation on M&S to acquire clothing from Baird was insufficiently certain to amount to either a contractual obligation or a claim based on the concept of estoppel (that is, M&S being stopped from using another supplier).
Taking into account the dismissal of Baird’s appeal as well as the judgment in the current Zymurgorium case, the importance of a contract being in writing is highlighted by the high threshold to be met when implying a contract by conduct. The particular importance in the Zymurgorium case was in being able to establish a common intention between the parties, which is far tougher to achieve when the parties are relying on oral evidence.
In Zymurgorium, the Court of Appeal decided that the November 2015 meeting did not amount to promises that were sufficiently detailed to be enforceable and binding. This emphasises the importance of following up on any conversations surrounding contractual intentions in writing to ensure that all parties are on the same page as to the terms of the agreement, particularly surrounding distributor or wholesaler exclusivity.
How are damages calculated in cases like this?
Whilst the Court of Appeal followed the High Court in rejecting the argument that there had been an exclusive wholesale agreement, it nevertheless decided that five specific supply contracts had been broken. As a result, the manufacturer was liable for damages for breach as it had failed to give reasonable notice in bringing each of the five separate contracts to an end.
However, what is ‘reasonable’ is fact specific to each case and the calculation of damages for this loss is by reference to the loss of profits that would have been earned in the notice period that should have been given.
In this case, the Courts decided that reasonable notice amounted to just three months!
To those involved in longstanding ‘handshake’ supply and distributorship agreements, this latest case should serve as a reminder to consider putting written terms in place. As a matter of law, neither a supply agreement nor a distributorship agreement needs to be in writing in order to be enforceable. But putting pen to paper can provide that extra level of security for both parties and ensure both parties are on the same page about the nature of their relationship.
This applies also to agency agreements where a written agreement may provide certainty beyond that provided by the Commercial Agents Regulations.
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