Implied duty of good faith clarified (High Court)
New Balance Athletics, Inc v Liverpool Football Club and Athletic Grounds Ltd  EWHC 2837 (Comm)The question
What is the scope of implied good faith?
The key takeaway
Acting in a dishonest way would be a breach of a duty to act in good faith. However, there is no breach if a party had an honest belief, even if the basis for such a belief was unreasonable.
In 2011, Liverpool Football Club (Liverpool) agreed a sponsorship deal with New Balance Athletics, Inc (New Balance). The contract included a “matching right”:
- that the parties must negotiate the renewal of the agreement with good faith during the “first dealing period”;
- if no agreement was reached, then the club could negotiate with a third party; and
- New Balance would have the ability to match the third party’s offer.
In considering whether New Balance had acted in good faith, Mr Justice Teare looked at (1) the nature of the bargain, (2) the terms of the contract and (3) the context in which the matter arose. He ruled that ultimately, the question for the Court to consider was whether “reasonable and honest people would regard the challenged conduct as commercially unacceptable”. (Alan Bates v Post Office  EWHC 606).
Liverpool argued that New Balance were not able to provide distribution in 6,000 stores, relying on five particular errors which would make the number of available stores lower. One of the errors concerned the stores in Japan; Liverpool noted that 250 of the 400 stores that New Balance claimed could sell merchandise only sold footwear. To this, Teare J stated that, as the Licensed Products in the Nike agreement were defined as including running shoes, there was no error and they had not acted in bad faith by including those stores.
As for the other errors, Teare J stated that if New Balance had honestly thought that they could match Nike’s distribution offering (even if they had believed this unreasonably) then they would not have breached the implied duty of good faith as reasonable and honest people would not regard such conduct as commercially unacceptable.
However, as New Balance had not matched Nike’s marketing services, particularly providing the non-football global stars of the calibre noted by Nike, the Court held that Liverpool was not required to continue with New Balance.
Why is this important?
The case provides useful guidance on the scope of the duty of good faith. Whilst Liverpool may have believed that New Balance match Nike’s distribution services, as long as New Balance could show that they honestly believed that they could, then they would not be in breach of the implied duty.
Any practical tips
Always make sure that you honestly believe the negotiating positions being advanced! Bear in mind that commercially unacceptable behaviour may breach obligations of good faith.