Jackson Distribution Ltd. v Tum Yeto Inc

In this case the Claimant seeks to recover damages from the Defendant for alleged breach of contract in bringing to an end an agreement pursuant to which it was the sole distributor of the Defendant’s range of “Dekline” products in the UK and the Republic of Ireland.

The main issues are:-

Nicholas Jackson is the Managing Director of the Claimant. He has been in the distribution business of board sports and related fashion brands for about 14 years. He spent his first three years at L’Esprit D’Equipe (a large snowboard distributor in the UK) and became their sales manager. He then set up a company called Jackal Distribution, to distribute and build the brand “Duffs”. Duffs was an American skate shoe and apparel company. He and a partner developed Jackal Distribution into a very successful business increasing sales to almost £3,000.000 by 2004. He sold his interest in that business to his partner and set up the Claimant in 2004.

Todd Swank is the Chief Executive of the Defendant. It is in effect his company. He had been a professional skateboarder. He set up the company about 20 years ago. It operates through various distributors in the USA and over 45 countries around the world.

In September 2004 there was an Action Sports Retailers show in San Diego. Mr Jackson attended. Mr Benzien and Mr Furtado were there on behalf of the Defendant.

The Dekline range had only recently been launched. According to Mr Jackson the skate shoe and clothing market is a very fashion conscious one where brand name is extremely important. It is a very competitive market. He looked at examples of the Dekline range and was impressed with their styling and quality. He had some discussions with Mr Furtado and Mr Benzien about the possibility of him acting as their sales distributor in the UK and Ireland.

Those discussions continued after Mr Jackson’s return to England. He could not start selling until March 2005 because of a non-competition clause in respect of his previous business.

On 10^th March the Claimant sent an email to the Defendant as follows “please could you provide us with confirmation, by email, that you agree Jackson Distribution Limited are your sole distributors for the UK and Ireland for all products under the Dekline brand. Once we have this written agreement, Nick will be able to begin his sales effort in earnest. We shall be able to send you the final official distribution agreement next week for us all to agree on.”

There was then an exchange of emails confirming payment terms as fifty per cent payable on invoice, which would be delivered on shipment and fifty per cent 30 days thereafter, anticipating by that time that delivery would have taken place.

In September 2005 the Claimant forwarded a draft distribution agreement to the Defendant (“the Jackson draft”). That was a document containing eleven clauses, which included: - the Claimant’s and Defendant’s obligations; prices and payment; duration (an initial 6 year period with provision for extension for a further 6 years at the request of the distributor); provisions dealing with trademarks and indemnity of the distributor against claims for any infringement; product liability; provision for how the agreement could be terminated (in effect if any party was in material breach).

On 27^th September Mr Swank confirmed by email that the Claimant had been appointed as “sole distributors of Dekline products in the United Kingdom and Ireland until such times as the Distribution Agreement has been finalised”.

In January 2006 the Claimant chased for a signed copy of the Distribution Agreement. On 7^th March 2006 Mr Swank emailed Mr Jackson in the following terms “I have your agreement here and it’s pretty clean and straight forward. I feel like I should have to ask for more just being the nature of contracts but I don’t really think that is necessary or warranted. We are both working together for success, you are exclusive in region as stated. You will promote and sell. We will provide quality products in a timely manner. We have agreed pricing currently obviously. I just wanted to drop a note before I finalise”.

On 10^th May 2006 Mr Marckx of the Defendant sent a different draft agreement to Mr Jackson by email (“the Tum Yeto draft”). That imposed greater obligations on the Claimant than the Jackson draft. Included was a minimum order schedule. The duration clause (clause 4) was similar to that in the Jackson draft (an initial of period of 6 years with a 3 year extension). The termination clause (clause 7) was the same save that the provisions dealing with what was to happen post termination were differently framed.

On 12^th July 2006 Mr Jackson replied by email as follows “I can get your contract looked at but although there are five or six major changes to make, there are loads of small changes to make which means it would only have to be totally re-written. If you would be happy I would like very much for you to look at the original contract that was 2 or 3 pages long that I sent to you and Todd said looked fine and just add to that any specifics that you want in. I think it would be easier (and cheaper) all round.”

By email of 20^th July 2006 Mr Arin of the Defendant said “My understanding is that there are a number of challenges ahead including finalizing the Jackson/Tumyeto distribution agreement.”

There was further discussion at the Action Sports Retailer Show in San Diego in September 2006. According to Mr Jackson in his discussions with Mr Arin, Mr Marckx and Mr Furtado there, they accepted his agreement but might propose some minor modifications to it. Mr Marckx had emailed on 14^th September “we will follow up from our side on the contract as things start to die down after ASR.”

In the event there appeared to be no discussions and no written agreement was signed.

Mr Jackson said that he took Mr Swank’s email of 7^th March 2006 to represent an acceptance of the draft agreement that he had provided. However he also agreed as an experienced businessman he was aware that there is no agreement of terms of a written contract until people sign it. He said in relation to the Tum Yeto draft he was happy with most of it but was not happy with a number of things including the minimum order schedule. He agreed that in his response he did not say that there was already in existence a contract.

He pointed out that they did not with their 45 international distributors have written agreements. He was somewhat surprised to be asked for a written one in this instance. He accepted that the Claimant had been appointed sole distributor for the UK and the Republic of Ireland in March 2005. He accepted that in September 2005 he was agreeing that the Claimant was to be the sole distributor until a formal written distribution agreement was finalised. However he pointed out that as far as he was concerned there was no written agreement then and if one was not signed there would be no written agreement, and either party could bring the agreement to an end. He did not consider that he was in March 2006 agreeing the terms of the Jackson draft. He was not a lawyer and he would need to refer the details of a contract to the lawyers.

When it was suggested to him that the parties had at least agreed that the initial period of the sole distributorship was 6 years (clause 4) and that it could only be terminated for material breach (clause 7), he said “we never agreed an agreement in that way because we never agreed the whole thing. You can’t just take pieces of it.”

He said they did not usually have written agreements with distributors. The Jackson draft was referred to the Defendant’s lawyers and that led to the Tum Yeto draft being sent. Mr Jackson raised with him at the Barcelona Trade Fair in June 2006 that the Tum Yeto draft was too favourable to Tum Yeto for example containing a minimum order schedule. It was suggested to Mr Jackson that he should have his lawyers look at the Tum Yeto draft and come back with comments.

Mr Furtado did not agree that in September 2006 in discussions with Mr Jackson he, Mr Marckx and Mr Arin accepted the Jackson draft but indicated that minor modifications might be proposed to it. In any event no written agreement was concluded and business continued on the basis agreed in March 2005.

Clause 4.1 of the Jackson draft provides “this agreement shall come into effect on the date of the signing of this agreement and, subject to clause 7.1 shall continue in force for an initial period of 6 years.” It is common ground that the agreement was never signed. The Claimant contends the conduct of the parties shows that they were acting on its terms alternatively that Mr Swank’s email of 7^th March 2006 was an agreement of those terms.

Brogden v the Metropolitan Railway Company [1877] 2 A.C 666 is authority for the proposition that terms of an agreement can be accepted by conduct. The burden of showing that parties acted on the terms of a written agreement which has not been executed lies on the party so contending. I do not consider that that burden has been discharged in this case. I reach that conclusion for these reasons:-

I have come to the clear conclusion the stage was never reached when the Defendant and the Claimant agreed that the Jackson draft should govern their contractual relationship.

Mr Brocklebank made alternative contentions. In the first place he contended that even if the Jackson draft was not found to govern the contractual relationship, clauses 4 and 7 thereof which were in similar terms to clauses 4 and 7 in the Tum Yeto draft should govern the position. The difficulty with that contention is that there were other terms in the Jackson draft which were favourable to the Claimant. There were other terms in the Tum Yeto draft which were favourable to the Defendant. In the circumstances of this case I do not accept that the parties agreed that those terms for duration and termination should apply divorced from the other terms of the agreement.

Mr Brocklebank next submitted that the agreement was to subsist until such time as a written agreement was finalised.

While it is clear that the parties hoped to conclude a written agreement there was always the possibility that no such written agreement would be concluded. I do not accept that it was the parties intention that the agreement would in those circumstances last in perpetuity.

In Martin-Baker Limited v Canadian Flight and Murison [1955] 2 QB 556 at 577 McNair J. said (in the context of a distribution agreement) :-

“accordingly, it appears to me that I have to approach the determination of this question not with any presumption in favour of permanence; and indeed if there is any presumption at all, it would seem to be a presumption the other way. It is to be borne in mind that this agreement is one in a commercial or mercantile field. No case was cited to me where it has been held that this doctrine of irrevocability applies to a contract in the commercial or mercantile field and I do not feel that the law merchant would normally look at such an agreement as this as being agreement intended to constitute permanent relationships.”

It is accepted on behalf of both parties that the agreement could not simply be terminated without any notice (in the absence of breach). That is wholly understandable in the circumstances which existed. I accordingly reach the clear conclusion that in this case there was an implied term that the sole distribution agreement should be terminable on reasonable notice.

In consequence I am satisfied that there was an agreement in March 2005 whereby:-

There was debate about what terms of payment were incorporated within the agreement and the Defendant at one stage intimated an intention to amend the pleadings to pursue an alleged breach of such terms. After reflection no such application was made.

It is alleged that the Claimant failed properly failed to promote and sell Dekline. That is further particularised in paragraph 12 of the Defence although not all allegations are pursued. When Mr Craig in his final submissions was asked to point to the evidence he relied on in support of the alleged breach he had to concede it was embarrassingly thin.

Mr Jackson sets out in paragraph 21 to 23 of his witness statement the substantial marketing steps taken and investment made in the promotion of Dekline. It is unnecessary to set it out in detail but I accept that evidence. I turn to deal relatively briefly with the particular allegations.

The Defendant also relies on the decline in orders between Spring/Summer 2006 and Spring/Summer 2007.

There is no doubt that sales increased up to Spring/Summer 2006 and the Defendant was very pleased with the Claimant’s performance. Mr Jackson emphasised that this fashion led business, aimed at young people needed continuous update of the design of the product. The Defendant did not address that for five seasons. Furthermore there were substantial problems with the quality of the product. He sets out the position in detail in paragraph 23 of his witness statement.

For the Autumn/Winter 2007 deliveries the Defendant had, according to Mr Jackson, started to address a number of these issues. The quality and design was very much better. In consequence for the Autumn/Winter 2007 the pre-orders were much higher. The graph NJ2 annexed to Mr Jackson’s statement demonstrates the position.

Mr Furtado did not accept that the reduction in sales was attributable to the lack of new designs and poor quality of shoe production.

Mr Jackson impressed me with his experience and expertise in this field. I am satisfied that he was very good at his job. I prefer his evidence on this point to that of Mr Furtado. In any event I do not accept that any decline in sales was attributable to any failure properly to promote Dekline.

For the above reasons I conclude that there were no repudiatory breaches of contract on the part of the Claimant entitling the Defendant to terminate the agreement.

The Claimant contends that 2 years notice would have been reasonable notice. The Defendant contends that 4 to 6 months would have sufficed.

In Alpha Lettings Limited and Neptune Research and Development Inc. [2003] EWCA Civ. 704 Longmore L.J said at paragraph 30

“There is little authoritative guidance on the appropriate notice for termination of exclusive agencies or (as lawyers sometimes prefer to call them distributorships.One possible view is that the reasonable notice period should equate to the time needed to find an alternative supplier and get a new product approved. Another view is that it need only reflect the time required for an orderly winding down of the distributorship. The only common ground between the parties was that, in the absence of any express term, the question, of what notice of termination is to be taken as reasonable, must be determined as at the time of termination.”

He went onto set out some of the factors to be taken into account.

31 “One very important consideration will be the degree of formality in the relationship. A completely formal agreement would probably have its own provisions for termination so no problem about assessing a reasonable period for termination will arise. But the more relaxed the relationship, the less likely it will be that the law would imply a lengthy notice period. There was evidence in the present case that at an early stage in the relationship. Alpha had wanted a more formal relationship than then existed and had proposed, among other things, a contractual period of notice of 12 months. Mr Sule did not, however, want any formal relationship and nothing came of the discussions. One result of not having any formal written contract was that Alpha were entirely free to sell products of other suppliers to their customers even if those suppliers were competitors of Neptune. No doubt not all products so supplied could be described as competitive products but the fact is that Neptune's business only accounted for 20% of Alpha's overall turnover. This is an indication that a lengthy notice of period should not be implied.
32. Mr Jones sought to emphasise the length of time which the parties' relationship had lasted (15 years from 1983 – 1998) as a factor in favour of a lengthy notice period. He likened the position to that of a valued and long-serving employee who would be entitled to a longer period of notice than an employee who had served a lesser period of time. I do not consider that a contract of employment is sufficiently analogous to an exclusive agency or a distributorship contract to be helpful. In the first place a distributor may have to spend or invest considerable capital at an early stage of the relationship to build up the business which may thereafter run with moderate annual expenditure. This would militate in favour of a lengthier notice period in the earlier years of the relationship and perhaps a lesser period once the business is up and running. No doubt it is right to lay some stress on the length of the relationship but I would not myself regard that as, in any way, critical, since businessmen expect to run risks in the ordinary course of business while employees have a legitimate (and often contractual) expectation that their services, rendered for the benefit of their employers, will be properly and adequately recognised. As McNair J said in Martin-Baker Ltd v Canadian Flight and Murison [1955] 2QB 556, 580-1, one of the few English cases to touch on the issue of reasonable notice for the purposes of a distributorship agreement:-

"It is the common experience that people, who are prepared to put up capital for the development of new business, do run risks."

It follows from this that while initial capital investment and business expenses out of the ordinary run of things may well be relevant to the amount of notice, ordinary and recurring expenditure is unlikely to have much relevance.

33.

It must not be forgotten that every distributorship is a bilateral contract. There was some debate before us as to the appropriate implied obligation of a supplier in the position of Neptune in the present case but, in the end, both parties were prepared to agree that it was necessary to imply a term that Neptune would accept and fulfil orders placed by Alpha in respect of both standard and special valves if such valves were in Neptune's current range and were ordered in reasonable quantities. The existence of this implied term is, of course, of great importance when it comes to assessing any damages for breach of contract on the part of Neptune for giving an unreasonably short period of notice, once such breach is proved. But there will have been a correlative obligation on Alpha, the extent of which was not debated before us, but is most likely to have been that Alpha were under an implied obligation to use their best reasonable endeavours to promote the sale of Neptune's valves in the United Kingdom. The concept of a party to a contract being obliged to use his best endeavours to promote the products of the other party after notice of termination has been given (by whomsoever it may be given and in whatever circumstances) is a difficult one and must also militate in favour of a shorter rather than a longer period of notice.”

And later at paragraph 36

“36.

We were not referred to any English authority apart from Martin-Baker Ltd v Canadian Flight and Murison [1955] 2QB 556 and Decro-Wall v Practitioners in Marketing Ltd [1971] 1 WLR 361. The first case concerned the distributorship in Canada of ejector seats from aircraft which had been manufactured and patented by Mr Martin Baker. The main issue was whether the agreement, which was in writing and provided that the distributor could not sell products of other suppliers which might compete with those of the supplier, was terminable by any notice at all or was intended to be permanent. It is not surprising to modern eyes that McNair J decided that it was terminable on reasonable notice; he held that such reasonable notice was a period of 12 months. Decro-Wall was much relied on by the judge in the present case and was a case of a distributorship of French tiles in which the Court of Appeal held that a twelve month notice was appropriate. But there are three major distinctions between that case and the present. First, as in Martin-Baker, there was an express provision that the distributor was not to sell any goods competing with those of the supplier; secondly, the French tile business constituted 83% of the distributor's turnover, unlike the 20% of turnover in the present case; thirdly, although (as in the present case) there was substantial initial investment ("expensive spadework") in launching and promoting a new product in the United Kingdom, the agreement was terminated only three years after it began before any real reward for the initial expenditure could be reaped. In this case, there had been ample opportunity for the reward of initial investment to be earned. One way of regarding cases such as Decro-Wall might be to treat them as belonging to a category of case in which there is an implication that the agreement must exist for a reasonable time before any notice can be given. That would, however, not be open to us in this case.”

The Judge at first instance had found that a reasonable period of notice was 12 months. The Court of Appeal determined that that was too long and a 4 month period was appropriate. On the different facts in the Decro-Wall case a 12 month period was held to be appropriate. Salmon L.J. emphasised the significance of early investment at page 370

“Mr Ross Munro has argued that the Judge was wrong in holding that reasonable notice is a 12 months notice. He says it cannot be more than 3 months notice. I am afraid that I cannot agree. I think that on the facts the Judge was fully entitled to reach the conclusion at which he arrived. After all, the Defendants had put in a lot of expensive spadework to which I have already referred. When a new product is being launched, no one can expect the real benefit of his efforts to accrue in the first year or two. These come later. In these circumstances I do not think that the Judge can be faulted in holding that 12 months notice is reasonable.”