High Court rules on the implied duty of good faith and the renewal offer “matching” requirements under a sponsorship agreement to manufacture and sell replica football shirts

In 2011 the claimant, New Balance Athletics, Inc, entered into a sponsorship agreement with the defendant, Liverpool Football Club and Athletic Grounds Ltd, to sponsor the football club and to manufacture and sell the replica shirts of its players. The agreement provided that during the “first dealing period” the parties would negotiate in good faith the renewal of the agreement. If agreement was not reached, Liverpool FC could then enter into negotiations with a third party competitor of New Balance. If an acceptable offer was received from a third party, Liverpool FC had to submit the terms to New Balance, which then had the right to match such offer. New Balance’s rights under the agreement were due to end in 2020.

Nike made an offer to manufacture and sell Liverpool FC’s replica shirts from 2020. New Balance claimed that it had matched that offer, but Liverpool FC said that it had not. In particular, Liverpool FC said that in respect of the distribution term New Balance’s offer to match Nike’s distribution term was not made in good faith. Further, in respect of the marketing term, Liverpool FC said that New Balance had not matched it. New Balance said that it did not have to because the marketing term was not a “material, measurable and matchable” term. However, if it was, New Balance said that it had matched the marketing term.

Good faith was not mentioned in the agreement, but the parties agreed that there was an implied obligation of good faith. New Balance submitted that there could only be a breach of the implied term of good faith if New Balance had not intended to meet, or knew that it could not meet, the distribution obligation. Liverpool FC argued that there could be a breach if New Balance had not reasonably believed that it could perform the terms of its offer. Liverpool FC said that New Balance either knew or did not care that it could not match Nike’s offer or it had no reasonable grounds for such belief.

Mr Justice Teare said that a duty of good faith (or fair dealing) can be breached not only by dishonesty but also by conduct that lacks fidelity to the parties’ bargain. In judging whether a party has not been faithful to the parties’ bargain, it is necessary to consider: (i) the nature of the bargain; (ii) the terms of the contract; and (iii) the context in which the matter arises. Ultimately, the question for the court is whether reasonable and honest people would regard the challenged conduct as commercially unacceptable (Alan Bates v Post Office [2019] EWHC 606 (QB))

Nike’s offer stated, amongst other things, that it would sell the “Licensed Products” in “not less than 6000 stores worldwide”. Liverpool FC said that New Balance had acted in bad faith by making five serious errors with the returns from the regional managers and that any one of those errors would take the number of stores in which replica shirts were sold below 6000.

For example, New Balance’s submission from Japan stated that 250 of the predicted 400 stores sold footwear only. Liverpool FC said that that was a breach of the duty of good faith because, in reality, the Sponsorship Agreement was about selling replica shirts, which accounted for 90% of all sales.

Teare J said that whilst footwear stores were not at the heart of the agreement, the use of such stores to show that New Balance could sell Licensed Product in “not less than 6000 stores” was within the meaning of the agreement and the Nike offer. The licensed products were defined in both the agreement and the Nike offer as including “running shoes”. Teare J said that if Liverpool FC had wished to ensure that the only relevant stores were those that sold replica kit, it should have said so, and it did not. There was therefore no “error”.

Teare J also found no breach of the implied duty of good faith in connection with the other four “errors”. He said that if New Balance had not intended to meet or knew that it could not meet the distribution obligation then it would have been acting dishonestly, which would be in breach of the implied duty of good faith. However, if New Balance honestly believed that it could meet the distribution obligation, but its grounds for so believing had been unreasonable, then that would not be acting in breach of the implied duty of good faith. New Balance’s conduct would be innocent, albeit careless or unwise. Reasonable and honest people would not regard such conduct as lacking fidelity to the parties’ bargain or “commercially unacceptable”, though they would no doubt regard it as imprudent.

Teare J accepted Liverpool FC’s submission that it would be in breach of the implied duty of good faith to be reckless, or not to care, as to whether or not New Balance could meet the distribution obligation, as in that scenario there would be “no belief that New Balance could meet the distribution obligation. Reasonable and honest people would … regard such conduct as commercially unacceptable and not faithful to the parties’ bargain”. However, that was not the case here.

Accordingly, Teare J held that New Balance had matched the distribution obligation.

As for the marketing term, New Balance had offered to market the Licensed Products through initiatives featuring not less than three non-football global superstar athletes and influencers. Its offer did not, however, include the words “of the calibre of Lebron James, Serena Williams, Drake, etc”, as Nike’s offer had.

The issue was whether the omission meant that New Balance had not matched Nike’s offer.

Teare J found that the missing words had been agreed for a purpose, which was to indicate that Nike’s obligation was to use those athletes or influencers who were not only global superstars but were of the calibre of the mentioned names. For that reason New Balance’s offer was less favourable to Liverpool FC.

The other question was whether the calibre of global superstars could be measured. In Teare J’s view, it could. It was not a subjective assessment because a calculation based upon social media exposure was based on appearances, which could be counted. Different people might have different views as to the best way to value such appearances, Teare J said, but it was unrealistic (and contrary to the evidence) to say that their calibre could not be measured.

Overall, therefore, the New Balance offer on marketing was less favourable to Liverpool FC than the Nike offer because Liverpool FC could not require New Balance, on the terms of its offer, to use global superstar athletes “of the calibre of Lebron James, Serena Williams, Drake etc..

Accordingly, Liverpool FC was not obliged to enter into a new agreement with New Balance on the terms of its offer. (New Balance Athletics Inc v The Liverpool Football Club and Athletic Grounds Ltd [2019] EWHC 2837 (Comm) (25 October 2019) — to read the judgment in full, click here).