Matching clauses have attracted a lot of press coverage lately, with Rangers Football Club and Sports Direct in 2018 and more recently with Liverpool Football Club and, its current kit manufacturer, New Balance. So, what are matching clauses and what happened in the Liverpool case?
Matching clauses usually mean that before you can agree a contract with a new company (Company 2), you have to first offer the same terms to the current company you are working with (Company 1). If Company 1 matches those terms, you have to contract on those terms with Company 1 rather than Company 2.
The matching clause in the Liverpool case
New Balance (originally through New Balance’s related company, Warrior Sports) replaced Adidas as Liverpool’s kit manufacturer in 2012 and wanted to renew its contract with the current European Champions. However, Liverpool wanted Nike to be its kit manufacturer from the start of the 2020/21 football season (see here), when its contract with New Balance was due to end.
Liverpool and New Balance’s agreement provided that towards the end of the term of the agreement they had to negotiate in good faith to try to renew the agreement. During this negotiation window, New Balance agreed that Liverpool could look for offers from third parties. As a result, Liverpool received an offer from Nike which consisted of two main provisions, namely that Nike would pay Liverpool (i) £30 million per season in return for the right to be the exclusive kit supplier and (ii) 20% of the net sales value of licensed products (excluding footwear), and 5% of the net sales value of licensed footwear.
The matching clause came into play due to Nike making an offer that was acceptable to Liverpool. Liverpool sent the terms of Nike’s offer to New Balance following which:
- New Balance had 30 business days to inform Liverpool if it would renew on terms that were not “less favourable”. New Balance notified Liverpool accordingly;
- If New Balance offered no “less favourable” terms then Liverpool would have to renew their kit manufacturing agreement with New Balance rather than Nike.
But after New Balance had notified Liverpool, the club responded that Nike’s offer had not been matched by New Balance. As such the focus turned to the distribution and marketing offers.
Liverpool argued that New Balance’s:
- distribution offer was not made in good faith (for example, Liverpool doubted New Balance could distribute the products in 500 New Balance operated stores and 6000 or so stores in total). Liverpool considered that it was implied into the agreement that it would be bad faith if New Balance had no reasonable grounds for believing it could match the 6000 figure or if it could be said that New Balance did not know or care if it could match the figure. However, New Balance considered that what was implied into the agreement was instead that it would be bad faith if New Balance did not actually intend to (or knew it could not) meet its distribution offer; and
- marketing offer was different (for example, unlike Nike’s offer it did not reference high profile individuals such as Lebron James, Serena Williams and Drake).
With no resolution in sight, the decision was referred to VAR – the High Court in this case.
High Court decision
Regarding the distribution terms, the judge summarised good faith as requiring the Court to decide “whether reasonable and honest people would regard the challenged conduct as commercially unacceptable”. The judge decided that New Balance’s distribution terms had been offered in good faith as New Balance had undertaken due diligence before making the offer. Further that the five alleged errors to which Liverpool had pointed would not be regarded as commercially unacceptable (bad faith) or as evidence that New Balance did not care about the estimates or was reckless. For example:
- the fact that many of the New Balance stores in Japan and China were footwear and lifestyle stores only (as opposed to clothing stores) was not a breach of the agreement which Liverpool had with New Balance;
- New Balance’s estimate for Brazil was “aggressive” but Liverpool’s recent successes included three Brazilian players (Alisson, Firmino and Fabinho). Equally, New Balance’s confidence about overcoming a manufacturing issue was a view that could have been honestly held so the relevant numbers did not have to be removed from the Brazilian estimate;
- New Balance could have reviewed the unit/door ratios to spot anomalies (for example, on average Argentina had 12 units of stock in 83 stores, Chile had 23 units of stock in 43 stores and Ecuador had no units of stock in 6 stores). But whilst this would have been a good idea, not doing so was not bad faith.
However, the judge decided that the marketing terms were not matched as Nike’s offer included marketing initiatives “featuring not less than three (3) non-football global superstar athletes and influencers of the calibre of Lebron James, Serena Williams or Drake, etc”. In contrast New Balance’s offer omitted the involvement of individuals “of the calibre of Lebron James, Serena Williams or Drake, etc”. By Nike making this commitment, Nike promised to use individuals of that calibre and, conversely, New Balance did not make such a promise.
Take home points
The importance of the wording of matching clauses can be crucial in deciding who succeeds. Particular care should be taken when such clauses are included in agreements. It is very important to carefully define what does and does not constitute a match for the purposes of these clauses. For example, is it simply a matching of a price? If it is by reference to ‘distribution’ and/or ‘marketing’, what do these terms mean?
At the present time, the extent to which there is a general requirement in English law that parties to a contract act in good faith is uncertain. It is possible for an implied duty of good faith to exist in relational contracts. But it is also possible, as in this case, for the parties to add wording in a contract that they will act in good faith. However, deciding whether reasonable and honest people would regard certain conduct as commercially unacceptable can be difficult and lead to uncertainty (as mentioned in this case, the assessment includes considering the nature of the bargain, the contract terms, and the context). Therefore, it is important to set out in the contract what such good faith obligations entail and not be in the New Balance and Liverpool situation where the parties disagreed as to how wide good faith could be .