Fri, 24 Feb 2023
The Court of Appeal has handed down Judgment in this case concerning implied terms in unwritten agreements between a gin company and their wholesaler. Lois Norris, led by Steven Reed, successfully dismissed the Defendant’s appeal.
The Facts
Zymurgorium Ltd (‘ZL’) were a manufacturer of drinks, predominantly gins and gin liqueurs. In November 2015 ZL met a wholesaler, Hammonds of Knutsford (‘HoK’) and began selling their products through them.
When the parties first met, ZL was a small, family run business. However, by 2018 the company had grown exponentially, in part due to a series of viral articles on the websites Ladbible and Unilad about their ‘Sweet Violet’ gin liqueur. To put it into perspective, when the parties met ZL were not even VAT registered but by 2018 they were grossing over £1 million per month.
In late 2018 HoK discovered that ZL were suppling a major customer - JD Wetherspoon (‘JD’) - directly, without going through them as wholesaler. HoK terminated the business relationship and ZL claimed for unpaid invoices. HoK issued a counterclaim for breach of contract, arguing that there had been an unwritten overarching agreement between the parties which required ZL to supply products exclusively through HoK, and in supplying JD directly ZL had acted in repudiatory breach of the agreement.
At first instance, HHJ Pearce rejected HoK’s argument that there was an overarching agreement between the parties. The Judge instead found there were individual contracts in relation to 5 customers, including JD, and that by supplying JD directly ZL acted in repudiatory breach of that contract and renounced the others. The Judge found a reasonable period of notice was 3 months and ZL were liable in damages for each of the 5 contracts for that timeframe.
The grounds of appeal
HoK appealed on the following grounds:
- there was an overarching agreement between the parties;
- it was a term of any overarching agreement that the relationship was to be ‘exclusive’;
- any agreement was or became ‘relational’;
- a reasonable notice period was more than 3 months.
ZL cross-appealed:
- the agreement with one of the 5 customers, ‘Bargain Booze’, was not an individual agreement;
- the breach of the JD contract did not renounce the other 4 agreements.
The decision
The Court of Appeal upheld the first instance decision and dismissed both the appeal and cross-appeal.
It was held that the Judge had not erred in concluding there was no overarching agreement between the parties. The initial meeting between the parties in 2015 did not lead to such a contract; the content of any agreement was simply insufficient. All that could be potentially inferred was an obligation by ZL to try to meet whatever order HoK made.
The enforceable obligation would have been no more than HoK agreeing to pay for whatever of ZL’s products they purchased. That was not enough to make a contract between the parties.
In response to the second ground of appeal the court noted that HoK sought to put the argument in two ways – 1) that the overarching agreement had been initially exclusive, or 2) an agreement became exclusive, or an exclusive agreement was subsequently implied. The first point had to fail as the court held there was no overarching agreement in the first place.
As to the second point, the court held this had not formed HoK’s case at first instance. HoK were seeking to rely upon a new argument on appeal in submitting that it could be implied to be contractual and exclusive at a later point. Whether a contract had been in place in November 2015 was a question of fact, which the Judge had rejected. It was therefore not open to HoK to argue this point on appeal.
HoK accepted if they lost on grounds 1 and 2 then ground 3 – the relational contract – fell away. This point therefore became irrelevant.
The court dealt with the remaining grounds together. Beginning with ground 1 of the cross-appeal, while the Judge’s reasoning could have been set out more fully, he was nonetheless entitled to reach the conclusion he did. He also dismissed ground 2 of the cross-appeal; ZL accepted they had some contractual obligation to HoK, it was simply that they disputed the content of such an obligation. ZL were quite clearly acting as though they were free to supply to direct to customers without even notifying HoK. There was nothing distinct about JD in that regard to separate them from the other agreements.
As to the final issue – length of notice – the court held it was highly fact dependent. In this case, HoK were able to develop an alternative product within 3 months. HoK would also be required to promote ZL’s products during the notice period, which also pointed towards a shorter timeframe.
Conclusion:
This case highlights the risks when parties fail to distil in writing their respective obligations. While there are appropriate circumstances where contractual terms will be implied, the court will not simply ‘fill in the gaps’ where the agreement lacks any real substance. Equally, it forms an important reminder that an appeal court will not consider points not canvassed at first instance.
One does wonder whether the parties would have committed their relationship to writing had they known just how successful ZL would become. This litigation represents a cautionary tale to any small businesses who contract informally: it is better to be safe, than sorry.
