Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 114

CA19/14

OPINION OF LORD WOOLMAN

In the cause

WILSON IMPORTS LTD

Pursuer;

against

ADVANCE SPORT SAS

Defender:

Pursuer:  I Clark;  Gilson Gray LLP

Defender:  Frain-Bell;  Gillespie Macandrew LLP

20 August 2015

[1]       Everlast World’s Boxing Headquarters Corporation (“Everlast Corp”) is based in the USA.  It owns the “Everlast” brand of clothing, gym equipment and accessories, which is particularly associated with boxing.  The goods are manufactured by companies in China, Pakistan and Bangladesh. 

[2]       In August 2011, Everlast Corp granted Wilson Imports Limited (“Wilson”) a licence to promote, distribute and sell its products in Europe.  Three months later Wilson entered into a sub-licence with a French company, Advance Sport SAS (“Advance”). 

[3]       The sub-licence was contained in a distribution agreement, whose principal terms were as follows:  

(a)       Wilson granted Advance a non-exclusive sub-licence to distribute Everlast products in France, Monaco and Andorra from 1 January 2012 until 31 December 2014.

(b)       Advance had to purchase all its Everlast products from Wilson.

(c)        Advance had to pay all invoices within 30 days.

(d)       Wilson could terminate the distribution agreement by giving six months’ notice in writing. 

(e)        The distribution agreement could only be varied in writing. 

(f)        Advance agreed to aim for minimum purchase targets of $1 million in 2012, $1.25 million in 2013, and $1.5 million in 2014.  

(g)       Wilson had no liability for consequential losses. 

[4]        With regard to the individual sale transactions, Clause 3.1 provided that:  

“The Distributor shall purchase the Products only from Licensee on Licensee’s standard terms and conditions of sale from time to time. A copy of Licensee’s current standard terms and conditions of sale is set out at Schedule 3 (“Terms and Conditions”). In the event that the terms of the Terms and Conditions conflict with the terms of this Agreement then the terms of this Agreement shall prevail but only to the extent that there is a conflict.” 

No schedule 3 was in fact attached to the distribution agreement.  In its pleadings, Advance confirms that it had never seen such terms.  Mr Clark informed me that clause 3.1 had been inserted by mistake.  Wilson had no standard terms and conditions.  

[5]       After the execution of the distribution agreement, the parties extended the payment period from 30 days to 60 days.  They also included Morocco as part of the sub-licence territory.  Advance argues that there was a third variation.  It contends that the parties agreed that it should be the exclusive distributor in the territories covered by the sub-licence.  It relies on letters to that effect sent by Wilson’s sales director.  Wilson argues that no such variation took place, because the appropriate procedure was not followed. 

[6]       For some time the sub-licence appears to have worked satisfactorily, although below the target levels specified in the distribution agreement.  During the course of 2012 and 2013, Wilson supplied Advance with Everlast goods.  There is a dispute about the precise sums involved.  

[7]       Difficulties arose between the parties.  Advance contended that the goods it received from Wilson were either faulty or late or both.  In consequence it did not pay a significant number of invoices. 

[8]       Wilson argued that a lot of the problems were caused by Advance.  Unlike other customers, Advance chose not to use purchase orders.  That led to a degree of uncertainty about when orders had been finalised.  Further, it changed its mind about orders after they had been placed.  

[9]       In January 2014, Wilson notified Advance that it would terminate the distribution agreement with effect from 16 July 2014.  According to Advance, termination actually occurred on 4 March 2014.

[10]     In the present action for payment Wilson seeks to recover four sums from Advance: (i) $369,796.56 in respect of unpaid invoices;  (ii) $4,452.16 in respect of unpaid interest;  (iii) £470 as compensation for late payment;  and (iv) $40,481.40 in respect of under-payment of various invoices.  

[11]     Advance counterclaims for $4,333,657 as damages for breach of contract.  It maintains a plea of retention in the principal action.  It submits that it is entitled to retain any sums otherwise due to Wilson until the counterclaim is determined.  

The Issues
[12]     The dispute came before me for debate on five questions of law: 

(a)     Was the distribution agreement a contract for the sale of goods?

(b)     Was time of its essence?

(c)     Did Wilson make Advance the exclusive supplier of Everlast products in the sub-licence territories?

(d)     Is Advance entitled to retain the sums it owes to Wilson?

(e)     Are Advance’s pleadings relevant and sufficiently specific?

Wilson seeks decree de plano in the principal action and dismissal of the counterclaim.  Advance invites me to fix a proof before answer.

[13]     Certain matters did not feature in the debate.  First, Wilson argues that by emails dated 16 October and 9 November 2012, the parties reached a settlement agreement that covers the bulk of Advance’s claim.  Second, there is a dispute over whether Wilson can rely on the exclusion clause in the distribution agreement, or whether that provision is invalid under the Unfair Contract Terms Act 1977.  In that connection, there was some discussion about whether the 1977 act did not apply because the distribution agreement was a contract for the international sale of goods.  Third, Advance states that it has paid five of the disputed invoices totalling over $217,000. 

Background
Wilson
[14]     According to Wilson, each transaction began with Advance indicating what goods it wished to purchase.  The parties then discussed the styles, quantities, prices and estimated delivery dates.  Once the details had been agreed, Wilson contacted one of the overseas suppliers.  It produced a series of samples for approval during the course of this “sealing procedure”:  a fit sample, a pre-production and a production sample.  In addition, Wilson operated its own quality control system.  It tested 2.5 per cent of the goods at random by way of an “inline inspection” and a “final inspection”.

[15]     Wilson did not agree any specific delivery dates, because of the possible delays associated with foreign production and shipping.  All orders were therefore made and accepted on the basis of an estimated time of dispatch.  Advance caused problems by (a) failing to provide Wilson with the necessary details by the operative date;  (b) asking for amendments to be made to orders outside the sealing stage;  (c) failing to uplift items from Wilson’s warehouse and (d) failing to give barcode numbers which were necessary to commence bulk production.  

[16]     Wilson offers to prove that it generally did deliver within a reasonable time.  In some instances it paid the additional cost of air freight to bring the goods to Advance.  Few faults were detected.  Advance did not reject the goods that are the subject of the counterclaim. 

Advance
[17]     Advance claims that the problems of quality and delivery time are attributable to Wilson.  Advance submits that the distribution agreement was subject to the Sale of Goods Act 1979.  Accordingly, it contained the implied terms relating to quality or fitness, sale by sample, and delivery within a reasonable time:  respectively sections 14, 15 and 29 (3).  According to Advance, Wilson breached those terms and caused it substantial loss.  Advance also argues that Wilson supplied rival companies.  In so doing it breached Advance’s right to be the exclusive distributor of Everlast goods in the countries covered by the sub-licence,

A.  Was the distribution agreement a contract for the sale of goods?
[18]     The 1979 Act defines a contract for the sale of goods as one

“by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price”:  

s 2 (1).  I conclude without hesitation that the distribution agreement does not meet that definition.  It did not affect a transfer, nor did Wilson agree to a transfer in the future. 

[19]      The distribution agreement was facilitative in nature.  Both parties expected that business would flow from it and each hoped to make a profit.  Crucially, however, it did not impose any binding transfer obligations.  Advance did not have to make any purchases and Wilson was not obliged to make any sales.  The parties agreed that such transfers would take place in the context of the individual transactions.

[20]     In terms of section 1(1), the 1979 Act only applies to contracts for the sale of goods.  Accordingly, the distribution agreement does not contain the statutory implied terms relied on by Advance.  To that extent, the counterclaim is irrelevant.  

[21]     It would be open to Advance to plead that the implied terms were incorporated into the individual sale transactions.  That would involve a substantial rewrite of its pleadings.  It would have to give more detail about the circumstances in which each order was made.  For example, if it claims that the goods were not of a satisfactory quality, it must set out their description, prices, and all the other relevant circumstances in terms of s 14 (2A).  Wilson has already indicated that it seeks details of when, how and by whom each contract was made.  

B.  Was time of the essence?

[22]     Advance makes an argument about time that is not based on the 1979 Act.  It contends that: 

"The date of delivery was of the essence of the contract. The fashion and clothing markets are highly seasonal and time sensitive."

I see no basis for construing the distribution agreement in that way.  It is silent on the question of delivery times.  There is no need to imply such a term to that effect.  It is not necessary for the purposes of business efficacy.  Whether time is of the essence will depend on the circumstances of each order:  Visionhire Ltd v Britel Fund Trustees Ltd 1991 SLT 883, 888 per Lord Hope of Craighead.  

C.  Was Advance an exclusive distributor of Everlast products?
[23]     Advance pleads that “the purpose and effect of the distribution agreement was to allow the defender exclusive rights to the Everlast brand”.  That averment is contradicted by clause 1.1 of the distribution agreement.  It states that Advance accepted appointment as “the non-exclusive Distributor”.

[24]      That is not, however, the end of the matter.  At meetings in Glasgow in March, April and June 2012, Advance informed Wilson that it wished to be the exclusive distributor of Everlast products in the sub-licence territories.  Subsequently Wilson’s sales director sent letters confirming that Advance did have exclusive status.  He “confirmed the Distribution Agreement was exclusive in relation to France” and “that exclusivity was extended to Monaco and Andorra”.  Mr Clark submitted that these letters did not meet the requirements of clause 11.4, which stipulates that any amendment or waiver must be in writing signed by each party.

[25]     The question of variation in such circumstances depends upon the parties’ intention:  Treitel The Law of Contract 13^th edition, para 5-035.  A stipulation such as that contained in clause 11.4 may not present an absolute bar to oral variation:  Westbrook Resources v Globe Metallurgical [2009] 2 Lloyd’s LR 224 at para 13, per Moore Bick LJ.  It has been suggested that strong evidence would be required:  Spring Finance Ltd v Hs Real Co Ltd [2011] EWHC 57, para 53 per HH Judge Mackie QC.

[26]     I conclude that this question can only properly be determined after proof.  Similarly, I hold that Advance is entitled to lead evidence on its complementary argument that Wilson is personally barred from insisting that there was no waiver or variation. 

D.  Is Advance entitled to retain payment?
[27]      The issue of retention is summarised in Gloag and Henderson The Law of Scotland 13^th edition at para 10.15 as follows:  

“While on the principle of compensation debts which are liquid and payable may be set against each other and extinguished, there is no general rule that a party who is debtor in a liquid debt has any right to refuse or delay payment in respect of any illiquid claim he may have against his creditor.  His obligation is to pay the liquid debt at once;  his only right is to receive payment when his illiquid claim is established.”

[28]      The plea of retention “stands or falls on the issue of mutuality”:  Inveresk v Tullis Russell [2010] UKSC 19, Lord Hope at para 33.  The obligations must therefore be the “counterparts of each other”, although the court should not approach the matter in a technical way:  ibid at paras 34 and 42.  In the same case, Lord Rodger of Earlsferry mentioned the equitable underpinning of the doctrine, but Mr Frain-Bell expressly took his stand on mutuality. 

[29]     What are the counterparts?  Mr Frain-Bell argued that the distribution agreement and the individual contracts were the counterparts of one another.  As such, they were part of the same transaction.  Wilson’s obligation was to supply the products on time and without defects.  Advance’s obligation was to make payment. 

[30]     I hold that the distribution agreement simply gave Advance the right to be a non‑exclusive distributor.  When it was made in November 2011, it provided a framework for Advance to make orders if it so chose.  The first sale contracts were made in 2012.  The ones in dispute date from early 2013.  The counterparts are to be found within the individual sales orders. 

[31]     The general question of retention in the context of liquid and illiquid claims is rendered somewhat academic in the light of my decision in relation to the statutory implied terms.  As I conclude that the central ground of challenge based on the 1979 Act is irrelevant, there is no proper foundation for a plea of retention. 

E.  Are Advance’s pleadings relevant and sufficiently specific?
[32]     I have already held that the counterclaim is largely based upon an irrelevant foundation.  

[33]     Mr Clark challenged the specification of Advance’s averments in relation to causation and loss.  It claims to have suffered the following losses:  $247,137 in respect of stock ordered but not delivered;  $75,434 penalty payments for late delivery to customers;  and $55,702 in respect of unsold stock.  It also claims lost profits of at least $816,897 in 2013 and $2,538,000 in 2014, based upon a profit margin of 57 per cent.

[34]     In this connection Advance founds upon two reports.  One has been prepared by Mr Ken Milliken of KPMG, the other by Jordan Nacmias, a director of Advance who is also a qualified accountant.  I have reservations about the degree of fair notice these reports provide. 

[35]     If the counterclaim proceeds, Advance must provide further specification of its loss as well as the details of individual transactions as referred to in paragraph 20 above.

[36]     There is one final matter.  The defences contain a lengthy extract from the “investor relations” page of French Connection.  It appears to have been simply copied from the internet.  I shall exclude it from probation as being irrelevant.  Wilson should not require to study the business profile of another fashion company.  There is no prejudice to Advance in making this deletion.  It can still lead evidence to prove that the “fashion industry operates on two main seasonal fashion cycles.”

Conclusion
[37]     In the principal action, I propose to sustain Wilson’s fourth plea-in-law and to repel Advance’s second plea-in-law.  Both deal with the right of retention.  I intend to grant decree for payment, however, only for that part of the principal sum that is not contested. I shall not grant decree for those sums which Advance states have already been paid and are set out in Answer 8 of the defences.  

[38]     In the counterclaim, I propose to sustain Wilson’s third plea-in-law and refuse to admit to probation those of Advance’s averments that relate to the 1979 Act and to time being of the essence. 

[39]     I shall fix a by order hearing to discuss further procedure in the light of this opinion.  Meantime I reserve all questions of expenses.