At the end of 2023, judgment was given in respect of the termination of an agency agreement between Aston Martin MENA (“AMMENA”) and the UK car manufacturer Aston Martin Lagonda (“Aston Martin”).
Aston Martin had appointed AMMENA as its exclusive distributor of Aston Martin cars in the Middle East, North Africa, and Turkey under the terms of a distribution agreement which was intended to run from 2018 until 2059. Simultaneously the parties entered into an agency agreement. Under the terms of the agency agreement AMMENA appointed Aston Martin as AMMENA’s agent in respect of AMMENA’s operations as distributer under the distribution agreement.
When Aston Martin failed to make payment of contractually guaranteed minimum payments in 2019 and 2020 amounting to approximately £5.7 m, AMMENA gave notice of termination of the agency agreement with immediate effect. This was followed by a voluntarily agreed “Transition Period” until AMMENA resumed its obligations as distributor in October 2021.
In response to AMMENA’s claim for failure to pay contractually guaranteed minimum payments, Aston Martin claimed that it was entitled to set off such payments against expenses it had incurred in relation to a dispute with the Aston Martin dealer in Saudi Arabia.
Claims and counterclaims
AMMENA claimed that it was entitled under the agency agreement to be paid the Manager Committed Minimum Profit (as defined in the agency agreement) (“MCMP”) for the period 1 January to 30 September 2021. AMMENA also claimed that during the Transition Period Aston Martin had acted in breach of an express duty of good faith contained in the agency agreement or an implied duty of good faith (or both).
In response, Aston Martin counterclaimed under an indemnity in the agency agreement for the costs which it had incurred in respect of a settlement of a termination dispute between AMMENA and a Saudi car distributor.
Finally, the question had to be considered by the court as to whether AMMENA had validly terminated the agency agreement on 19 April 2021.
Interpreting what an agreement means
In determining whether AMMENA was entitled under the agency agreement to be paid the MCMP for the period of 1 January to 30 September 2021, the judge looked not simply at the words used in the relevant clause of the agency agreement but also the context in which those words were used.
AMMENA had relied on a clause which provided:
“The [MCMP] (as stated in the Business Plan), making proper allowance for sums paid under clause 4.3.”
The definition of MCMP referred to the net profit shown for the year in question in the Business Plan agreed from time to time by the parties. As such, AMMENA’s argument that reliance should be had to the figure in a previous Business Plan if no Business Plan had been agreed for a subsequent period, was rejected by the judge. Instead the judge decided that in the absence of an agreed Business Plan for any year, Aston Martin was not obliged to pay the MCMP to AMMENA.
AMMENA tried to argue in the alternative that if there was no express right to the MCMP because of the lack of a Business Plan, then a term was to be implied into the agency agreement given:
“the mandatory nature of the obligation on Aston Martin to pay the MCMP.”
It was submitted that in this respect the MCMP should be the same as the final year of the Initial Period (as defined in the agency agreement). This was because, claimed AMMENA, it was necessary for the “business efficacy of the agency agreement as a whole”.
However, this argument was dismissed by the judge as it is a well established legal principle that a term can only be implied if, without the term, the contact would lack commercial or practical coherence.
Indeed the judge stated that the implied term proposed by AMMENA would contradict the language of the agency agreement!
But what of a duty to indemnify?
As a matter of general agency law a principal has an obligation to indemnify its agent for loss suffered by the agent in the proper exercise of the agent’s authority, that is in acting for the benefit of and as directed by the principal.
However, in this case, AMMENA had given an extensive indemnity to Aston Martin. The indemnity covered damages, costs, and losses in connection with the assignment or termination of the existing dealership arrangement with the Saudi dealer.
But what the indemnity did not do was to extend to the costs incurred by Aston Martin in respect to the settlement of a dispute between AMMENA and the Saudi dealer. In reaching this decision the judge again considered the language of the indemnity in the text of the agency agreement and the context in which the words where used.
A duty of good faith
A significant part of the judge’s consideration of the dispute between AMMENA and Aston Martin related to the claims made by AMMENA that it was owed an express or an implied (or both) duty of good faith by Aston Martin during the Transition Period. AMMENA further claimed that the duty of good faith had been breached by Aston Martin in various ways including by Aston Martin taking nine specific actions.
In considering the issues the judge looked at specific clauses of the agency agreement as follows:
“2.2 This Agreement shall come into force on the Commencement Date and (subject to the provisions for earlier termination in clause 6 below) shall last for an initial period of three years (the “Initial Period”) and shall continue in force thereafter for additional periods of three years each (“Additional Period(s)”) unless and until either party gives to the other not less than twelve months’ prior written notice of termination such notice to expire at the end of Initial Period or one of the Additional Periods.”
“6.1 Without affecting any other right or any available to it, either party may terminate this Agreement with immediate effect by notice to the tother if:
- Subject to clause 6.2 below, the other party commits a material breach of any of its obligations under this Agreement which is incapable of remedy; or
- Subject to clause 6.2 below, the other party fails to remedy (where it is capable of remedy) any breach of any of its obligations under this Agreement after being required in writing to remedy or desist from such breach within a period of sixty days;”
“2.3 Once either party gives notice of termination, the parties will meet and confer to work out an orderly transition plan so that AMMENA can assume its duties under the AMMENA Distribution Agreement and to minimise insofar as practicable any losses incurred by the [Manager] in the course of, or as a result of, or in connection with termination of the agency. AMMENA and [Aston Martin] will (acting reasonable and in good faith) agree minimum sales targets for volume and mix for the two years immediately following termination of this Agreement”
The judge considered the clauses and was of the view that the provisions concerning a transition plan applied to a notice of termination having been given under clause 2.2 and not to a notice of termination having immediate effect under clause 6. Indeed, the judge drew attention to the context in which the clauses appeared, and further to the provisions in the agreement which were to apply when the agreement was terminated, by notice with immediate effect – in short, this provision did not address a transition period. As the judge pointed out, whilst the parties had clearly considered what should happened when the agreement was terminated immediately, the fact that they had not provided for a transition period meant that it was intended by them that the transition period – and the need for good faith – should apply only when twelve months’ prior written notice of termination was given.
The judge then turned to clause 3.2 of the agreement which required Aston Martin in good faith to take all reasonable steps to pass on to AMMENA the benefit of the experience and structures developed by Aston Martin in undertaking the agency agreement. With reference to this, the judge again drew attention to the need for the words used to be looked at in the context of the agreement as a whole.
As a result, the judge decided that whilst there was an express duty of good faith, this duty did not extend to the actions alleged to have been taken by Aston Martin to “undermine the potential profitability of the business under the Distribution Agreement” or to the “pricing structure” under the agency agreement.
Implied terms
As part of its case AMMENA had made nine specific allegations of breach of the duty of good faith. As such the judge went on to consider each of these nine claims in case the judge had been wrong about the duty of good faith as set out above. But again, this was of no assistance to AMMENA as it was the view of the judge that in respect of each of the nine claims, Aston Martin had acted in good faith at all times and had fully discharged its obligations.
So had AMMENA validly terminated the agency agreement on 19 April 2021?
It was the view of the judge that the MCMP for 2019 had not been extinguished and that the monies remained owing to AMMENA as of 25 January 2021. Given that AMMENA had called on Aston Martin to make payment within a period of sixty days and Aston Martin had failed to do so, the notice of termination for failure to remedy a breach was valid.
Take home points
- It is important for businesses and their lawyers to consider what might happen when the agreement to be entered into by the businesses comes to an end.
- If certain obligations are important to one party to the agreement, it is far better that they are expressly stated in the agreement than to be in a position where a claim has to be made that such obligations are to be implied.
This can be critical when an agreement ends and there is a post-termination “Transition Period”.
