Good faith principal taken into Fergie Time over United Fragrances

The recent case of Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) provides an interesting insight into the principle of good faith in English Law. The matter involved the distribution of products under licence from Manchester United Football Club for sale around Asia.

Background – The principle of good faith

Whilst under English law there is no general duty to perform contracts in good faith, the dictum of Lord Bingham in the case of Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 at 439 is often quoted when describing the English approach to good faith.

“In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as ‘playing fair’.

 “Misrepresentation”

For a claim under the Misrepresentation Act 1967, a claimant must prove that the representation was made, that it was false and that he entered into the contract by relying on that representation. The burden of proof will then be on the defendant to prove a reasonable belief in the truth of the representation. Where a defendant cannot prove a reasonable belief, a claimant will be able to recover losses subject to the rules of causation and remoteness. Generally, a claim made under the Misrepresentation Act 1967 is easier to prove than one in contract.

In Yam Seng the action involved two companies but the business relationship was between the individual owners of the Companies, namely Mr Presswell of ITC (the Defendant) and Mr Tuli of Yam Seng (the Claimant).

On 12 May 2009, the parties entered into a Distribution Agreement drafted between themselves without legal expertise whereby the Defendant granted the Claimant exclusive rights to distribute Manchester United branded fragrances and toiletries in selected duty free outlets as well as in Hong Kong, Macau and parts of mainland China. Whilst the Agreement was extended to run until December 2011, the relationship ended acrimoniously in July 2010, due to a number of disputes, namely:-

1. Failure to Supply – The Defendant had indicated that the range would be available for purchase during the course of 2009. This was then revised just prior to Christmas in 2009 before an announcement in February 2010 that toiletries would not be produced, despite the Defendant knowing that the Claimant had already been marketing the full range of products to his customers.

2. Late Deliveries: Various delivery dates were given for the second shipment, which had been initially ordered on 6 August 2009 and eventually shipped over 3 months later causing the Claimant to arrange and then cancel the Dubai duty free launch for 4 separate dates.

3. Failure to register products for sale in China: A cosmetic product must be registered with the Chinese authorities prior to it being imported into China. The Defendant had informed the Claimant that the registration process for the fragrance was being conducted and that it would be completed by the end of April 2010. However, no application had actually been filed.

Singapore Prices: Whilst the Claimant had the right to supply products to Singaporean Duty Free, a third party distributor had been granted the right to sell in Singapore itself. The parties had discussed the issue of pricing for the domestic retail price in Singapore and it was common ground that the domestic retail price would be higher than that of the duty free price of US$44. The Defendant said he had informed his domestic distributor that the price should not be below US$46.40. In fact, the Defendant sent the request 3 days later and the response from the distributor had been that the product was already on sale at the lower retail price of S$59 and could not be changed so soon after the launch. In June 2010 the Claimant again requested confirmation from the Defendant of the domestic retail prices. The Defendant said he had instructed his domestic distributor to increase its prices but had failed to relay the distributor’s response that it would take up to 2 months for the price change to take effect. A representative then informed the Claimant that the product was for sale in a department store at an even lower price of S$53.10 in accordance with its “instructed pricing strategy” of S$59.

The parties met in Hong Kong in early July 2010 when the Defendant requested the Claimant hand back the rights to distribute toiletries in Hong Kong and Macau as he wanted to use a single distributor for toiletries throughout the whole of China. At this point the Claimant reminded the Defendant of the efforts he had gone to in marketing the toiletries to then be told that they would not be produced, despite having entered into an agreement for these territories with a third party. As a result of correspondence that followed, the Claimant gave notice terminating the Agreement for breach on 29 July 2010.

ITC’s rights in the products

The Defendant had expressed to the Claimant in his first communications that his company had “recently signed” a licence agreement to manufacture and sell Manchester United fragrances. The Defendant continued to represent, either expressly or impliedly, that the company had the legal right to manufacture and sell such products. The company did not actually acquire any rights until 5 May 2009 and even at the point the Agreement with the Claimant was signed, the company still did not have the rights in relation to the toiletries only having acquired a non-exclusive licence on 21 August 2009.

Claims

The Claimant alleged that the Defendant had committed the following repudiatory breaches of the Agreement:

• A failure to act in accordance with an implied obligation of good faith –

 o specifically by prejudicing the company’s sales by offering the same products for domestic sale in the territories at a lower price than the Claimant was permitted to offer for duty free sales; and

o instructing or encouraging the Claimant to incur marketing expenses for products which the Defendant was unable or unwilling to supply and offering false information which the Claimant then relied on.

• A failure to ensure orders were shipped “promptly”, as required by the Agreement; and

• Failing to make products available when promised, or at all, in respect of the toiletries.

The Claimant also alleged that the Defendant had misrepresented the true extent of the licences to manufacture and sell Manchester United fragrance and toiletries and, as a result, was entitled to damages under section 2(1) of the Misrepresentation Act 1967.

Decision

Decided in favour of the Claimant, the High Court held:-

• The Defendant was under an implied duty not to approve a domestic retail price for a product which undercut the duty free retail price, though it was found that the duty free price in the Agreement and the price the Defendant had sold the products to the distributor for were in fact the same and therefore no undercutting or breach had occurred;

• The Defendant was under an implied duty not to knowingly give false information. The assurances given by it as to the production of toiletry products, which never were, was not a breach of this obligation as they had intended to produce the products when the assurances were given. However, the implied duty was breached when the Defendant led the Claimant to believe that the Singaporean domestic retail price for the product had been increased when it knew this to be untrue. As a matter of commercial importance for the Claimant’s dealings with its customers, on discovery of the Defendant’s dishonesty, the Claimant could not reasonably be expected to continue its business relationship with the Defendant which justified termination of the Agreement.

In terms of the Defendant wanting to use another distributor for the toiletry products in Hong Kong and Macau, the Judge found that this was a breach of the exclusivity granted to the Claimant and having previously refused to supply toiletry products also breached its contractual obligation to the Claimant.

The Defendant was also held to be in breach of its obligation to ship products promptly and whilst this did not merit termination, the breach had been accepted.

With regards to the Defendant’s failure to supply products; the parties had agreed a phased release of the products and the letters setting out the release dates formed collateral warranties as to when each product would be available. Although these warranties had been breached, the breaches were not repudiatory and had been accepted.

The Judge also found that the Defendant had misrepresented its position from the outset by claiming that licences had already been obtained from Manchester United when, at the date of the discussions with the Claimant, it had not. It was therefore held that the Agreement between the parties would not have been entered into had the representations not been made and as a result the Claimant was entitled to damages under section 2(1) of the Misrepresentation Act 1967.

The Claimant was therefore entitled to recover for all losses caused by the transaction induced by the misrepresentation, including consequential losses whether foreseeable or not, which included costs incurred in marketing and distributing the products less the income received from the sales of those products.