'Good Faith' under English law: Manchester United-branded products dispute breaks new ground

18 February 2013

Andrew White

Manchester United is a global brand which is very strong in Asia and the Middle East. In 2009 Singapore-based company Yam Seng entered into an exclusive distribution deal with International Trade Corporation (ITC) to market Man United-branded deodorants and toiletries to duty-free outlets across those regions. Yam Seng's Managing Director titled the presentations which he delivered to future customers 'Welcome to The Theatre of Dreams'. Unfortunately, the deal which he struck with UK-based ITC was to become the stuff of nightmares.

Yam Seng v International Trade Corporation is a new High Court decision which narrates what happened, in forensic detail. In his judgment of 1 February 2013, Mr Justice Leggatt holds ITC liable for various breaches of contract. While ITC held certain rights to market Manchester United merchandise, and permit others to do so, the judge clinically dissects how ITC's boss misled Yam Seng about the legal, commercial and logistical position, and repeatedly missed deadlines for supplying products to Yam Seng. He made promises which he knew to be unachievable or which were based on half-accurate information at best. At one point he even threatened to appoint another distributor to replace Yam Seng - a move which the judge held to be completely unjustified on ITC's part, and which went "to the root" of the contract.

The overall result was that ITC exposed Yam Seng to financial loss and business embarrassment as Yam Seng's MD tried to market the branded products to customers (like Dubai Duty Free) in the face of ITC's unreliable business behaviour. The legal jargon comes thick and fast - repudiatory breach and actionable misrepresentation by ITC, some contract affirmation by Yam Seng, and lost profit and wasted expenditure claims - all in the midst of an absorbing story of a collapsing relationship.

The judgment is not only vital reading for lawyers, but also for anyone involved at a senior level with product marketing. (By the way, there is nothing in the judgment to suggest that Manchester United were aware of the evident business shortcomings of ITC).

But the judgment does not end there. What happens next is eye-opening. Mr Justice Leggatt goes on to argue with great erudition that the English law-governed distribution agreement contained an enforceable, implied obligation on the parties to act in "good faith". He concludes that ITC breached that obligation by knowingly concealing from Yam Seng the true situation concerning ITC's pricing arrangements with a crucial distribution channel in Singapore. That breach was held to be "repudiatory". It justified Yam Seng's premature termination of the distributorship, and its subsequent damages claim against ITC (which totalled S$339,000).

There have been quite a few "good faith" commercial cases in recent years. But for lawyers, it's the way the judge constructs the argument here which breaks new ground.  Till now, the law has been quite piecemeal. In Yam Seng, Mr Justice Leggatt draws together the pre-existing, disparate strands. He explains the importance of implied good faith in long-term agreements requiring extensive cooperation, singling out joint ventures, franchise agreements and long-term distribution agreements. He  outlines evolving attitudes to binding good faith in other common law countries, and seeks to dispel the traditional hostility to a binding good faith principle among many members of the UK legal fraternity. Of course major questions remain open. What agreements should the principle apply to? What should it involve in practice? But overall the judge has produced perhaps the most comprehensive judgment to date on the topic.

This landmark ruling is part of a steady, 'below-the-radar' narrowing of the gap between some key principles of English common law and of European civil laws. If the judge's reasoning filters through the English courts it will speed up that convergence, considerably. And it will give contracting parties across many industry sectors an additional legal platform both for cooperation and for dispute management with their contracting counterparts.

The line of branded consumer products which Yam Seng agreed to promote did not end up winning over consumers in the target markets. And in fact, the line was discontinued. It's ironic that it's the legal decision which the deal with ITC generated which is likely to makes waves, and for a long time to come.

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Andrew White

With thanks to associate Amy Hunter for her background assistance.