Clause 1.1 “Northamber will become the 100% exclusive source for all Genee World products in the UK effective July 1st with no sales by Genee to any reseller or other party in the UK. All enquiries generated or received by Genee will be passed to and transacted via Northamber.”
[Exclusivity agreement made between Northamber PLC and Genee World Limited]
Exclusive distributorship and exclusive supply agreements are entered into by suppliers and distributors across may different sectors. But what is the distributor to do if it finds that its supplier is breaking the exclusivity and believes that this is as a result of third party inducement? And what are the penalties that await the supplier and inducer?
These were the issues at the heart of a recent Court of Appeal judgment.
Background
Northamber PLC, a distributor of IT equipment (including AV displays), entered into a Resellers Agreement with Genee World Ltd, an importer of AV displays, in 2016. This was followed by an Exclusivity Agreement in 2017, which made Northamber the exclusive distributor of Genee’s products in the UK with the exception of Excluded Accounts.
Genee breached the agreement with Northamber by selling directly to various resellers, including IES, a company supplying IT equipment to educational establishments. Mr. Ranjit Singh, the sole director of Genee from November 2015 to November 2018, had significant involvement in the breach.
Legal Proceedings
In late 2017 / early 2018 Northamber became aware of Genee selling directly to resellers. Northamber started court proceedings in August 2018, alleging breach of the Exclusivity Agreement by Genee. It also claimed that Mr. Singh and IES had induced this breach.
Northamber obtained an injunction restraining Genee from supplying goods within the UK to anyone other than Northamber (except for the Excluded Accounts) in September 2018. The court granting the injunction as it decided that Genee had breached the exclusivity agreement between July 2017 and November 2018 and that this included selling directly to IES from March 2018 onwards.
The court also decided that Mr. Singh, in procuring the breach of the agreement by Genee after the injunction had been granted (by supplying to other resellers), had not acted bona fide. Instead he had acted in a way which was inconsistent with his duties as a director as a matter of company law – specifically the duty of a director to act in the best interests of their company.
The claim against IES for inducement was dismissed, as it was ruled that Northamber had already breached the ESA in selling to others and that IES merely gave Genee the opportunity to breach the ESA.
Damages of over £1.6m were ordered in favour of Northamber and Mr. Singh was found in contempt of court, fined £25,000, and ordered to pay 75% of Northamber’s costs!
Appeals and Grounds
Although it had been granted an injunction, awarded damages, and received a costs order in its favour, Northamber appealed to the Court of Appeal.
Northamber’s appeal was in respect of:
- the dismissal of Northamber’s claims against IES for inducing breach of contract.
- The dismissal of its claims against Mr. Singh and IES for unlawful means conspiracy.
- The judge’s interpretation of Mr. Singh’s actions as bona fide within his authority for the period prior to 11 September 2018.
- Misinterpretation of clause 1.1 of the Exclusivity Agreement regarding sales to Capital.
- The costs orders issued.
IES also filed a respondent’s notice, presenting four grounds to uphold the original judge’s decision (and an application to adduce further evidence, which was not pursued at the hearing.) Mr. Singh also appealed. His appeal included four grounds, primarily addressing procedural irregularities and his bona fide actions within his authority as Genee’s director.
Key Findings
- Breach and Inducement: The Court of Appeal confirmed Genee’s substantial breach of the Exclusivity Agreement.
By placing orders with Genee, IES induced Genee’s breach, and in doing so fulfilled all elements of the non-contractual wrong of inducing breach of contract. The Court of Appeal decided that IES had an active role in these breaches which established IES’s liability.
- Director’s Duties: The Court of Appeal ruled that Mr. Singh’s actions up to 10 September 2018 were within his bona fide authority. However, his actions after the injunction was granted were deemed in contempt of court. They showcased a disregard for legal duties and exposure to personal liability for inducing Genee’s breaches.
- Unlawful Means Conspiracy: Northamber’s claims for unlawful means conspiracy was effectively addressed by the finding that Genee, Mr Singh, and IES had conspired to breach the exclusivity agreement.
Conclusion
The Court of Appeal’s judgment reinforces crucial legal principles surrounding the enforceability of exclusive distributorship and supply agreements, the scope of directors’ duties, and liability for inducing breaches of contract. The judgment underscores the importance of adherence to contractual obligations and the severe consequences of non-compliance.
Of note is the fact that the Court of Appeal decided that Mr. Singh had acted bona fide in promoting the success of Genee in the period up to 10 September 2018, despite breaching the Exclusivity Agreement, as this was arguably in Genee’s interest since it resulted in sales and revenue generation! But once the injunction had been granted Mr. Singh continued to breach the Exclusivity Agreement which was a contempt of court.
It was decided by the Court of Appeal that this was not in good faith as it exposed Genee to legal penalties, fines, potential asset sequestration, and significant reputational damage. Therefore, these actions did not align with promoting Genee’s success under company law.
The judgment also resulted in important findings on third party inducement, as the Court of Appeal decided that IES was aware of the Exclusivity Agreement and that IES’s actions in placing orders with Genee demonstrated its intention to obtain products from Genee despite knowing that this would be a breach. The Court of Appeal therefore relied on the principle that placing orders would constitute inducement if active encouragement were to be involved or crucially if the purchaser was aware that fulfilling the order would necessitate a breach.
In doing so the Court of Appeal gave reference to a 1949 judgment where it had been decided that knowingly facilitating a breach could count as inducement. The Court of Appeal decided that in placing substantial orders and paying for Genee’s products whilst knowing of the exclusivity terms was active encouragement of Genee to breach its obligations with Northamber.
Finally, it was decided by the Court of Appeal that IES’s role in the series of direct transactions meant it was an accessory to Genee’s breaches and since IES had the requisite knowledge and acted intentionally, the legal requirements for the non-contractual wrong of inducement were present.
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