January 14, 2019

The Retail Agreement

In June 2017, as part of an agreement to settle various disputes and litigation, the claimant, SDI Retail Services Ltd (an indirect subsidiary of Sports Direct International Plc) entered into a Retail Agreement with the defendant, The Rangers Football Club Ltd, which granted SDI Retail certain non-exclusive rights to manufacture, sell and distribute Rangers branded football kits and other merchandise (the Offered Rights).

Paragraph 5 of Schedule 3 of the Retail Agreement gave Rangers the ability to negotiate with third parties and enter into a further non-exclusive agreement with that third party in relation to the Offered Rights.  If Rangers received an offer from such a third party, Rangers had to provide SDI Retail with written notice of the terms of the third party offer.  SDI Retail then had ten days to provide written notice to Rangers as to whether it wanted to match the third party offer and enter into a further agreement with Rangers.

Paragraph 5.8 provided that if SDI Retail exercised its matching right, Rangers had to cease engaging, and not enter into any agreement, with “that third party or any other third party in respect of the Third Party Offer and/or … any of the Offered Rights …  in respect of which the matching right is exercised”, other than in relation to any of the Offered Rights over which SDI Retail had not exercised its matching right.

It was also agreed, in Paragraph 5.9, which was subject to Paragraph 5.8, that any new or amended offer or indication of interest from a third party in respect of any of the Offered Rights would be a separate third party offer “and the terms of this paragraph 5 shall apply”.

Events

In June 2018, Rangers informed SDI Retail that it had received an offer from the Elite Group and offered SDI Retail the opportunity to match that right, which SDI Retail subsequently did.

SDI Retail and Rangers then sought to reach an agreement in respect of the matched offer, but without success.

In September 2018, Rangers entered into a new agreement with Elite without notifying SDI Retail in accordance with the matching right provisions.  SDI Retail only learned of the Elite Agreement after having seen a statement on Rangers’ website describing Elite as “our new non-exclusive partners” and providing a link to buy the new Rangers kit from a website run by Elite.

SDI Retail issued proceedings against Rangers for breach of contract, seeking final injunctive relief restraining Rangers from future breaches and mandatory injunctions requiring it to undo its existing breach (i.e. to ‘undo’ its agreement with Elite).

Decision

Breach of contract

The main question was whether, under the Retail Agreement, SDI Retail had a recurring right to match any third party offer made to Rangers once SDI Retail had already matched an offer and the third party had then gone back to Rangers with a further, different offer.  If the answer was “yes”, then Rangers was in breach of contract by failing to give SDI Retail the opportunity to match Elite’s second offer.

Mr Justice Teare noted that the meaning of a contract was that which the words used by the parties would convey to a reasonable person with the background knowledge that was reasonably available to the parties at the time they had entered into the contract.  Neither party relied upon any particular background knowledge. Therefore, Teare J had to construe the words used by the parties having regard to the contract as a whole, the context in which the agreement was made and its commercial purpose.

Teare J noted that the prohibition in Paragraph 5.8 was on dealing not only with the third party who had made the matched offer, but also on dealing with “any other third party”.  Further, the prohibition was in respect of not only the third party offer in question, but also in respect of “any of the Offered Rights … in respect of which the matching right is exercised”.  This indicated that the prohibition was of wide, not narrow compass.

Given that SDI Retail had a non-exclusive licence, the Retail Agreement clearly contemplated that others might also be given a non-exclusive licence to the same effect.  However, Teare J said, the matching rights in Paragraph 5 clearly restricted Rangers’ ability to grant such a right.

As for whether the matching right could be exercised on a repeated basis, Teare J said there was nothing in the Retail Agreement excluding Rangers’ duty to notify SDI Retail of a third party’s offer where SDI Retail had already matched an earlier offer.

Rangers submitted that to require matching on a repeated basis was uncommercial because it effectively enabled SDI Retail to block the grant of non-exclusive rights to third parties and thereby exercise exclusivity over the rights granted.

In response, SDI Retail submitted that if it had only one matching right, its competitive position would be seriously undermined by Rangers’ ability to grant further rights to a third party on more favourable terms than those granted to SDI Retail, immediately after SDI Retail had used up its one opportunity to match.

In Teare J’s view, SDI Retail was correct.  By matching an offer, SDI Retail was agreeing to trade on the same terms as a potential competitor.  If that potential competitor then offered to trade on more favourable terms, it was not uncommercial to allow SDI Retail also to trade on those same terms if it so wished.  In other words, if the third party could change its mind as to the terms offered, it was not uncommercial to allow SDI Retail to match the changed bid.

Teare J also held that Paragraph 5.9 specifically contemplated that Rangers might receive a new or amended offer from a third party.  Making it subject to Paragraph 5.8, and stating that “the terms of this paragraph 5 shall apply”, was an express recognition that there could be multiple matching rights.

Teare J said that SDI Retail had clearly obtained a very beneficial right to match offers by third parties, which right was agreed to last for two years from the expiry of the initial term (Paragraph 5.14).  Teare J recognised that Rangers might prefer not to be as limited in its ability to deal with third parties as it was by Paragraph 5, but that did not mean that the commercial consequences were so extreme that the words did not have the meaning ascribed to them by SDI Retail.  Accordingly, Rangers was in breach of contract by not giving SDI Retail a further opportunity to match Elite’s new offer.

Injunctive relief

Here, Teare J said that if the court was considering final injunctions, that meant it had already determined the dispute in the claimant’s favour.  Therefore, an injunction, whether mandatory or prohibitory, would usually be granted, but might be refused where it would be unjust or unconscionable.

Teare J held that it was appropriate to grant the injunctive relief sought by SDI Retail.  One of the injunctions required Rangers to take positive steps in respect of the Elite Agreement (referred to as the “undoing” injunction).  Teare J found that, given the circumstances in which Rangers had entered into the agreement with Elite, i.e. without giving SDI Retail notice and with their “eyes open”, there was a cogent case for such a mandatory “undoing” injunction.

Teare J also said that there was a risk that damages might not be an adequate remedy given the cap on damages and the exclusion of consequential losses in the Retail Agreement.  More significantly, he said, the grant would not be out of all proportion to the requirements of the case, nor would it cause extreme (or any) harshness to Rangers.  Rangers might be exposed to a claim by Elite, Teare J said, but the indemnity provisions of the Elite Agreement made it clear that Rangers was aware of the risk.

Accordingly, as well as granting prohibitory injunctions on Rangers restraining it from future breaches, Teare J also granted a mandatory “undoing” injunction that Rangers would: (i) not perform the Elite Agreement; (ii) not assist Elite to perform the Elite Agreement; and (iii) inform Elite that it would not perform the Elite Agreement.  (SDI Retail Services Ltd v The Rangers Football Club Ltd [2018] EWHC 2772 (Comm) (24 October 2018) — to read the judgment in full, click here).