Background
Zymurgorium Ltd (Zymurgorium) is a craft drinks manufacturer and Hammonds of Knutsford PLC (Hammonds) a drinks wholesaler.
In November 2015, their respective managing directors met. Hammonds was keen on Zymurgorium’s range of products, mainly gins and gin liquors, and agreed to become Zymurgorium’s wholesaler. There was no definite commitment by Hammonds to place orders of any particular amount or even a promise to do so at all, nor a definite commitment by Zymurgorium to accept and fulfil orders. Most importantly, there was no written contract agreed at that meeting or afterwards.
Nevertheless, Hammonds did become a wholesaler of Zymurgorium products, and the relationship continued until Hammonds discovered that Zymurgorium had begun to supply one of its customers, JD Wetherspoon (JDW), through Matthew Clark Bibendum, thereby cutting out Hammonds. That caused Hammonds to refuse to pay invoices and terminate the contracts.
The case
Acting through their solicitor, Andrew Holden of Napthens LLP, Zymurgorium claimed for unpaid invoices and Hammonds counter claimed for damages for breach of contract. Hammonds claimed that there was an overarching master agreement which meant Zymurgorium could not supply its product except through Hammonds. Hammonds argued that Zymurgorium had committed a repudiatory breach of contract, meaning the breach was so serious it struck the core of the agreement and gave Hammonds the option to terminate the contract.
The claim and counterclaim were heard by His Honour Justice Pearce (the judge) in the High Court. For the counterclaim, the judge held that there was no overarching master agreement relating to all of Hammonds’ customers but found there were individual contracts relating to five customers, including JDW. The judge also found that by suppling JDW directly, Zymurgorium had acted in repudiatory breach of that contract and given up the other contracts. The judge held that a reasonable notice period for the contracts was three months and Zymurgorium were liable for damages for breach of the five contracts for that period.
The appeal
Following the judge’s conclusions, Hammonds appealed the decision on the following grounds:
- the conversation between managing directors at the meeting in November 2015 evidenced an intention to create legal relations and so was sufficient to create a distribution agreement; and
- the judge should have found there was a variation to the agreement creating obligations of exclusivity, or he should have found an implied contract for exclusivity came into existence through the conduct of the parties.
Zymurgorium cross-appealed the decision that by supplying JDW directly they had given up the other four contracts – which they had always supplied through Hammonds and intended to continue to supply through Hammonds.
The appeal and cross-appeal were heard in the Court of Appeal in London on 7 and 8 December 2022.
The judgement was handed down remotely on 30 January 2023. The Court of Appeal dismissed both appeals.
Hammonds’ appeal was dismissed by the Court of Appeal because it found what was agreed at that initial November 2015 meeting was “little more than an agreement by the parties to take matters forward” and so did not amount to a contract and as there was no contract there could not be variation to it.
Conclusion
The Court of Appeal’s decision to dismiss the appeals offers a reminder to businesses of the potential consequences of oral contracts and contracts implied through conduct. Where terms are not set out in writing there is the risk that there will not be sufficient substance and any informal oral agreement or handshake may not result in legally enforceable obligations.
Informality in the relationship limited the scope of Hammonds case, but also caused Zymurgorium to believe that its only contractual arrangements with Hammonds arose on the acceptance of orders placed for its products and therefore allowing it to accept orders directly from customers.
That ambiguity has so far led to a High Court trial and an appeal. The time and cost expense could have been avoided if the terms of the relationship had been recorded in writing.
The case also highlights the risk of terminating commercial relationships. Zymurgorium wished to supply JDW directly as there were two wholesale businesses involved in the journey of the product from the manufacturer to the seller.
A manufacturer terminating such a relationship may reasonably believe that any claim made against them out of termination would relate to that relationship only, but the Court of Appeal was prepared to uphold a decision that the termination of the contract with JDW also amounted to a termination of the arrangements in place with four of Hammonds’ other customers.
