The Court of Appeal has recently ruled on how to turn a casual (contractual) relationship into an exclusive one. In Zymurgorium Ltd v Hammonds of Knutsford plc, the Court of Appeal concluded that if manufacturers want their wholesaler to be ‘the one’, they will need to show a written, contractual intention to that effect. 

Facts 

Zymurgorium are makers of craft gin in the Manchester area, and Hammonds of Knutsford are local wholesalers. The two parties came to an informal, oral arrangement at a meeting in 2015 that Hammonds would sell and market Zymurgorium’s gins. At the time, Zymurgorium was a very small business: the director was making gin in his shed, and the business was not even large enough to be VAT registered. By 2018, the gin business had grown significantly and Zymurgorium were making millions.

During 2018, Hammonds made several bespoke, individually negotiated arrangements with particular customers (including Greene King and Wetherspoons).

Unfortunately for Hammonds, Zymurgorium were playing the field, supplying customers directly without going through Hammonds. Hammonds terminated the relationship and Zymurgorium claimed for unpaid invoices. Hammonds counter-claimed for damages for breach of contract.

The basis of this claim was that, although not in writing, there was an overarching master wholesale agreement between the parties which contained good faith obligations and it could be terminated by reasonable notice, which arose either at the time it was entered into in 2015, or on subsequent variation.

Hammonds also argued that there was an existence of oral individual contracts in respect of five specific customers and that these were subject to the duty of good faith and termination by reasonable notice. Zymurgorim denied the existence of both the overarching agreement and the individual contracts.

First instance decision

At first instance, the judge concluded there was no overarching contract but found that there were individuals’ contracts in relation to the five customers. By supplying a customer directly, Zymurorium had acted in repudiatory breach of that contract and renounced the others. The judge found that a reasonable notice period for termination of the contract was three months, and Zymurgorium was liable in damages for each of the five contracts in that timeframe.

Court of Appeal decision

The Court of Appeal held that the meeting in 2015 did not amount to promises that were sufficiently developed to be enforceable as binding contractual obligations. They were just an agreement to take matters forward and something more is needed to amount to a legally enforceable obligation. There was neither an overarching contract, nor an express agreement as to exclusivity, because it wasn’t mentioned in any written correspondence. Terms can be implied by conduct, but that bar is very high, and it was not reached here.

The Court of Appeal also concluded that there was no subsequent variation which resulted in exclusivity. Hammonds were trying to rely on this new argument on appeal, but this case was never pleaded fully in the opening or closing submissions, so Hammonds could not rely on this point.

In addition, the Court of Appeal said that the individual contracts made in 2018 could give rise to an obligation of exclusivity between the two parties. The relevant factors were:

• When each of these were being agreed, there was a shared assumption of exclusivity in their relationship (oral evidence showed that from 2017, the parties had a shared belief that Hammonds was the exclusive distributor. The individual agreements post-dated this belief);
• there was evidence of extensive discussion between Hammonds by the respective customers, and without the exclusivity obligation, they would have been wasting their time, as Zymurgorium could deal directly with the customer;
• Zymurgorium was kept informed about pricing arrangements, there was a commitment to not change the price arbitrarily; and
• Hammonds was purchasing large quantities of goods, so was committing to large scale funding and development of the products.

The Court of Appeal also considered notice periods for termination and said that three months was reasonable if there is an obligation on one party to promote goods, as that favours a shorter notice period. It rejected all grounds of appeal.

Key takeaways

• Agreements to take matters forward between wholesalers and manufacturers will not produce legally binding obligations unless they are sufficiently detailed.
• Where there is a continued obligation of one party to promote the goods of another, a reasonable period of notice for the termination of the contract is three months.
• And finally, if you want a relationship to be exclusive, you should get that in writing.