When you act in good faith, will you ever walk alone?
In its recent decision of New Balance Athletics, Inc v Liverpool Football Club and Athletic Grounds Ltd  EWHC 2837, the English High Court shed light on the meaning of what constitutes good faith. This is a reminder to all parties on the importance of the implied duty of good faith in negotiations and making of tenders.
The dispute related to the current Champions League and FIFA World Club winners, Liverpool Football Club (Liverpool), and its sportswear manufacturer, New Balance Athletics, Inc (New Balance).
The parties signed a sponsorship agreement (Agreement) in 2011, whose terms gave New Balance matching rights to the terms offered by any third party, allowing it to continue its association with Liverpool .
An offer from Nike included, amongst other terms, for Nike to pay Liverpool £30 million per season, 20% of the net sales of licenced products and 5% of net sales of footwear, in exchange for exclusive merchandise rights.
Nike was required to sell and distribute products in at least 6,000 stores worldwide and to market products through initiatives featuring "non-football global superstar athletes and influencers of the calibre of LeBron James, Serena Williams, Drake etc…".
New Balance offered to match Nike's offer but it was rejected by Liverpool. Liverpool had concerns as to whether New Balance was able to match Nike's ability to distribute and attract such calibre of celebrities.
The English High Court Case
New Balance brought a claim in the English High Court to enforce its matching rights in the Agreement. During proceedings, Liverpool questioned whether the sponsor's offer to match Nike's offer was made in good faith.
While both parties accepted the common ground that there was an implied obligation of good faith, the scope of what constituted good faith was open for determination by the Court.
New Balance had argued that it had observed its duty of good faith and that it would only have breached the duty of good faith if it did not intend to meet, or knew that it could not meet, the terms of its offer.
Liverpool's argument was that the duty of good faith was breached if the sponsor either knew or did not care that it could not match the competitor's offer, or it had no reasonable grounds for such a belief.
Decision of the English High Court
Teare J held that the 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 determining whether a party has not been faithful to the parties' bargain it is necessary to consider the:
- Nature of the bargain
- Terms of the contract
- Context in which the matter arises.
Ultimately, in determining whether a party showed good faith, "the question for the court is whether reasonable and honest people would regard the challenged conduct as commercially unacceptable." (see Fraser J in Alan Bates v Post Office1)
In outlining the scope of what constituted the obligation of good faith, Teare J found that New Balance had acted in good faith in matching Nike's offer of distributing in 6,000 stores.
Although New Balance was successful in its good faith argument, it ultimately failed due to its inability to contractually match Nike's ability to link Liverpool with global superstars and influencers.
This case is particularly noteworthy because of the parties' acceptance of the implied duty of good faith and for the guidance provided by Teare J on the scope of such a duty. It is also important to note that the due diligence exercise undertaken by New Balance before matching Nike's offer was crucial evidence that it had conducted itself in fulfilment of the implied obligation of good faith.
Another key point to bear in mind is that, when assessing if a party has been faithful (or not) to the bargain, it is necessary to consider, amongst other things, the terms of the contract.
As such, when agreeing good faith obligations in any contract, parties ought to properly contain the obligations within a clear and definable scope. This will provide certainty for all.
For more information on this or related issues, please get in touch with the author of this briefing or your usual HFW contact.
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Research conducted by Russell Quek, Trainee Solicitor.
- Alan Bates and others v Post Office  EWHC 606 (QB) at paragraph 706-711.