In February, we published an article on a Court of Appeal judgment on a case where parties had not entered into a written contract. At the heart of the dispute was whether a drinks wholesaler had been granted exclusivity to sell a manufacturer’s drinks.
The issue of exclusivity, and indeed whether an agent or distributor has been appointed on an exclusive or some other basis, has the potential to create conflict where the parties have failed to enter into a written agreement.
Putting pen to paper is a great start, but the terms of the agreement must be clearly drafted in order to reflect the true intentions of the parties and, in particular, the extent of the exclusivity. This is as true for agents and distributors as it is for franchisees.
This was demonstrated in the recent High Court judgment in the case of London Business House Limited, Faisal Rehman v Pitman Training Limited, Pitman Training Group Limited.
The franchise agreement
Pitman Training Limited (“Pitman”) provided career focussed training courses for individuals looking to develop their professional skills. London Business House Limited (“LBH”) was attracted by the opportunity to sell Pitman courses under Pitman’s franchise model. Following discussions, LBH entered into a written franchise agreement with Pitman in March 2015 in respect of the Nottingham area.
The business was unsuccessful and the relationship came to an end in 2017. LBH blamed such failings on Pitman’s supply of course materials to another course provider, Derby, which had been selling the materials within the Nottingham area. In doing so, LBH claimed that Pitman had:
- breached the terms of the franchise agreement and, in particular, Pitman’s entitlement to enjoy exclusivity to “trade the Pitman brand” within the Nottingham area; and
- misrepresented to LBH in pre-contractual negotiations that LBH would enjoy an exclusive territory from which to trade the Pitman brand.
What did the franchise agreement say?
The franchise agreement did not explicitly reference LBH being entitled to the exclusive right to trade the Pitman brand throughout the Nottingham area. However, the court was persuaded by the argument put forward by LBH that the concept of exclusivity lies at the heart of a franchise agreement. It was also accepted that there were a handful of clauses within the agreement, which, upon the true construction of the agreement as a whole, suggested that LBH would receive some form of exclusivity to trade the Pitman brand.
However, in the absence of clear terms regarding the scope of the exclusivity granted to LBH, the extent of LBH’s right to exclusivity was unclear. However, Pitman’s sale of “white labelled” course materials, which did not carry the Pitman brand, to Derby did not constitute a breach of LBH’s limited right to exclusivity under the franchise agreement.
On the issue of misrepresentation, the court was not satisfied that there was sufficient evidence to prove that Pitman had fraudulently misrepresented Pitman’s position with regard to exclusivity. This was not least because the franchise agreement contained “standard” entire agreement and non-reliance clauses which, together, operated so as to prevent LBC from relying upon pre-contractual statements made by either party which may have induced them to enter into the franchise agreement. In other words, the court was only prepared to look to the terms of the agreement regarding exclusivity to determine the proper scope of LBH’s right, rather than any pre-contractual statements which may or may not have been made by Pitman.
As with any breach of contract case, it was incumbent upon LBH to prove that:
- it had suffered loss as a consequence of Pitman’s breach of the exclusivity granted to LBH; and
- that such loss was caused by Pitman.
LBH failed upon both grounds.
In respect of the issue of causation, it was not possible for LBH to establish that LBH’s business had been diverted to Derby. In fact, the types of Pitman courses being provided by LBH and Derby were fundamentally different – Derby had provided government funded courses which could only be sold following receipt of government funding. Whilst LBH was permitted to apply for such funding under the terms of the franchise agreement, it did not do so. The court was not therefore persuaded that any business was actually diverted from LBH to Derby and that LBH suffered loss as a consequence.
What does this mean for my agreements?
Although this case concerned the relationship of a franchisor and its franchisee, the key takeaway points from this case are just as important for agents and distributors.
The first is that the parties to an agreement must be clear that the scope of the appointment of the agent, distributor, or franchisee is properly articulated and accurately reflects the intentions of the parties.
The second is that exclusive, sole, or non-exclusive not only mean different things but the extent of the appointment can be reduced or widened by the language of the agreement entered into by the agent, distributor, or franchisee.
The third is that properly drafted boilerplate clauses, are important. Such clauses, which are often contained at the very end of agreements, are frequently overlooked, but can be instrumental to the interpretation, validity, and enforcement of an agreement.
The court’s role will always be to determine the proper construction of a contract as a whole and, where an agreement does not contain an entire agreement or a non-reliance clause, the parties are effectively inviting the court to look to pre-contractual statements and negotiations.
Equally, the parties will never be entitled to rely upon a lack of such clauses to their advantage where fraudulent pre-contractual statements have been made in order to induce another party to enter into a contract. This conduct falls foul of the law of misrepresentation and liability for such actions cannot be excluded as a matter of English law.