Article / 12 Feb 2020

The implied duty of good faith

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Gateley Legal

The recent High Court decision in New Balance Athletics, Inc (“NB") v Liverpool Football Club and Athletic Grounds Ltd (“LFC”) [2019] EWHC 2837 (Comm) examines the extent of a duty of good faith.

In this case, the High Court heard an application from NB to enforce its matching rights contained in a sponsorship agreement with LFC (“the Agreement”).

The terms of the Agreement required the parties to negotiate renewal of the Agreement in good faith (although this was an implied, not an express, term). If the parties could not reach an agreement, LFC could enter into negotiations with a third party and NB had the right to match the third party's offer. 

LFC questioned whether the NB’s matching offer was made in good faith.

The claim

The Agreement granted NB an option to match third party offers relating to the provision of LFC licenced products, provided it did so on terms no less favourable to LFC than the terms of the Agreement and the ‘material, measurable and matchable’ terms of the third party’s offer. 

If the terms satisfied these requirements, then LFC would be obliged to enter into a new agreement with NB on the same terms. If the terms did not, within the specified timeframe, then LFC would be free to contract with a third party.

The Agreement would expire in May 2020 and therefore LFC entered into negotiations with NB to agree a new deal. However, no agreement was reached by the end of 2018 and therefore LFC entered into negotiations with Nike.

On 1 June 2019 the mighty reds won their sixth European title and, shortly after, agreed a deal with Nike which included an annual payment of £30 million and 20% royalty on net sales of all LFC products.

LFC notified NB about the Nike deal and NB subsequently confirmed it was willing to enter into a new agreement on terms no less favourable than the material, measurable and matchable terms of the Nike offer.  LFC considered this offer to be disingenuous. 

NB applied to the High Court to enforce its matching rights. The parties agreed that many of the terms of the Nike offer were ‘material, measurable and matchable’ and were in fact matched by NB and they also agreed that the Agreement created an implied duty of good faith.

LFC believed NB’s matching offer was hollow and therefore not valid by reason of NB’s alleged breach of good faith. 

NB believed some of Nike’s marketing obligations, for example, marketing featuring global superstars of the calibre of Lebron James and Serena Williams were not ‘measurable and matchable’, even if they were ‘material’. Even if the obligations were considered ‘measurable and matchable’, NB still claimed it had agreed to match the terms although NB did not explicitly mention names of any global superstars.

The court found the calibre of athletes such as Serena Williams and LeBron James could be measured and by omitting the words ‘of the calibre of Lebron James, Serena Williams’  from its terms, NB’s terms were less favourable to LFC than the Nike offer. NB failed to fulfil the conditions of the matching rights clause and LFC was free to contract with Nike.

Outcome

In addition to being a reminder of the significance of making clear offers, and understanding the meaning of contractual clauses, the court's interpretation of the scope of the duty of implied good faith was a key point. 

NB submitted it would only breach the implied duty of good faith if it knew that it could not match or did not intend to match the terms of Nike’s offer. LFC argued the implied duty was breached if NB knew it could not or did not care whether it could match Nike's offer, or it had no reasonable grounds to believe it could match the offer.

A duty of good faith will obviously be breached by dishonesty, but the court held it would also be breached by conduct that does not stay true to the parties' bargain. 

What can we learn from this case?

From the case, it is clear that the court will consider the nature of the bargain, the terms of the contract and the context in which the matter arises when deciding whether a party has not been faithful to the parties' bargain.

The crux of the court’s interpretation will be whether the conduct in question would be viewed as commercially unacceptable by a reasonable and honest person.

The court held that the scope of an implied duty of good faith will take into account the express terms of the agreement. If a party holds an honest belief but its grounds for so doing are not reasonable, that would not breach the implied duty of good faith. Its conduct would be innocent, albeit careless. The court did not consider reasonable and honest people would regard such conduct as lacking fidelity to the parties' bargain or being ‘commercially unacceptable’, though they may regard it as foolish or irresponsible.