Co-authored by Kate Almond.
The recent High Court decision1 regarding the dispute between New Balance and Liverpool FC (LFC) has attracted global press attention and brought into sharp focus the ever increasing value of kitwear sponsorship deals for clubs. However, the High Court judgment also offers valuable insight into the interpretation of matching clauses in sponsorship agreements as well as providing an update on the interpretation of “good faith”.
Facts: The matching clause
The dispute centres on a matching rights clause in the sponsorship agreement between New Balance and LFC (the Agreement) that stipulates:
- LFC and New Balance would negotiate in good faith in relation to renewing the Agreement;
- If LFC and New Balance could not reach an agreement on renewal of the Agreement, LFC could discuss a potential replacement sponsorship deal with other sportswear providers; and
- If another sportswear provider made a suitable offer, LFC would be under an obligation to inform New Balance, triggering New Balance’s right to inform LFC of their intention to enter into an agreement with LFC “on terms no less favourable to the club than (i) the terms of this Agreement and/or (ii) the material, measurable and matchable terms of such third-party offer”.
In July 2019, LFC informed New Balance of an acceptable offer they had received from another sportswear provider (the Rival Offer), and accordingly invited New Balance to inform them if they wished to match the Rival Offer. New Balance proceeded to submit their counter-offer (the New Balance Offer), which it considered to be on no less favourable terms than the Rival Offer. Although the wording of the distribution and marketing clause in the New Balance Offer was broadly similar to that of the Rival Offer, it did not include any reference to named athletes or influencers who would be used in LFC-related sponsorship campaigns. LFC therefore reached the conclusion that the New Balance Offer did not match the Rival Offer. This led New Balance to initiate proceedings against the club, seeking specific performance of the Agreement.
The key issue for the court to rule on was whether the New Balance Offer matched “the material, measurable and matchable terms of a third-party offer”. The court held that LFC was not obliged to renew the Agreement with New Balance on the basis that the New Balance Offer was on less favourable terms than the Rival Offer.
In reaching this decision, the key point highlighted by the court was the omission of any specific named athletes or influencers of the same status as those included in the Rival Offer. Contrary to New Balance’s submissions, the court concluded that “the calibre of the named athletes or influencers can be measured”2 objectively by considering factors such as social media exposure. By failing to include specific individuals in the New Balance Offer, it was the court’s view that New Balance had failed to match the Rival Offer and had therefore made an offer on less favourable terms than the Rival Offer. New Balance’s claim was dismissed and LFC are free to enter into an agreement on the terms of the Rival Offer.
Comment: The duty of good faith
In reaching its verdict, the court considered the duty of good faith which, although not expressly included in the Agreement, was deemed to be an implied duty on the basis of the nature of the Agreement as a “relational” contract. New Balance’s submissions relied on the fact that the duty of good faith could only be breached if New Balance could not or knew that it could not meet the distribution obligation. LFC’s position was that New Balance would be in breach of the implied duty of good faith if they did not reasonably believe it could perform the terms of the New Balance Offer. Before reaching its decision, the court clarified that the question “is whether reasonable and honest people would regard the challenged conduct as commercially unacceptable”.3 To understand the court’s position on the duty of good faith, it is helpful to consider a particular distribution issue in Japan that was a point of dispute. In its submissions, LFC argued that of the 400 distribution points in Japan proposed in the New Balance Offer, 250 of those sold footwear only. According to LFC, it therefore followed that New Balance had breached the duty of good faith as the primary purpose of the Agreement was to sell replica shirts, not footwear. However, “running shoes” were in fact included in the definition of “Licensed Product” in the Agreement, and the court therefore held that New Balance was not in breach of the implied duty of good faith in relation to distribution in Japan.
In reaching this conclusion, the court made it clear that if LFC wished to ensure that footwear-only distribution points would be excluded from the Agreement, this should have been made expressly clear in the Agreement. This serves as a helpful reminder to clubs negotiating sponsorship agreements that the court will generally not carve out a specific item, even where that particular item (e.g. replica shirts) represents the vast majority of sales, unless the definition of “Licensed Products” expressly excludes it. Any argument relating to the implied importance of a specific item over other products in sportswear sponsorship agreements will not be received well by the court. If LFC considered replica shirts to be a different type of product to branded footwear, this distinction should have been made expressly clear in the Agreement.
As the value of sponsorship and sportswear agreements continues to multiply, this decision serves as a helpful reminder to all parties of the importance of the drafting of a matching rights clause. If New Balance had been clearer at the negotiation stage about the specific terms that would need to be matched by any third party, it is unlikely that this dispute would have arisen. Although the New Balance Offer matched the vast majority of the terms of the Rival Offer, their failure to provide specific names of athletes and influencers of a certain level contributed to their claim failing.
 New Balance Athletics, Inc v The Liverpool Football Club and Athletic Grounds Limited  EWHC 2837 (Comm)
 New Balance Athletics, Inc v The Liverpool Football Club and Athletic Grounds Limited  EWHC 2837 (Comm), para. 80.
 New Balance Athletics, Inc v The Liverpool Football Club and Athletic Grounds Limited  EWHC 2837 (Comm), para. 44. Refers to Alan Bates and others v Post Office  EWHC 606 (QB), paras 706-711.