Skip to content

Jumpers for Goalposts

Good faith, the beautiful game and the ISDA Master Agreement

Image courtesy of Liverpool Echo


The winners of last season’s Champion’s League Trophy. The reigning World Club champions. The runaway leaders of this season’s Premier League. Who would have thought that the struggle to be the shirt sponsor of Liverpool Football Club would have relevance to the world of OTC derivatives?

The Facts

The Claimant, New Balance, is the shirt sponsor of Liverpool Football Club. New Balance’s sponsorship contract ends in 2020 and it was keen to renew. The contract required the parties to negotiate any renewal in “good faith”. If agreement could not be reached, Liverpool was entitled to enter into negotiations with a third party competitor of New Balance.If it obtained an acceptable offer, it was then required to submit the specific terms of that offer to New Balance. New Balance would then have 30 days to notify Liverpool that it would enter into an agreement “no less favourable” to Liverpool than the “material, measureable and matchable terms” offered by the third party competitor. If New Balance did this, Liverpool would be obliged to enter into a new agreement with New Balance.

Liverpool obtained a competitive offer from Nike which, broadly, stated that Nike would:

  1. Produce and sell products for Liverpool “in a manner consistent with Nike’s other top tier UK football clubs”.
  2. Produce products under at least 2 global Nike-controlled brands.
  3. Produce products in collaboration with a major US sports team.
  4. Market products with no less than three “non-football global superstar athletes and influencers of the calibre of Lebron James, Serena Williams, Drake, etc”.
  5. Sell product in not less than 6000 stores, 500 of which were Nike owned or controlled and in not less than 51 countries online through

New Balance matched Nike’s offer. Its ‘matched terms’ notification was almost word-for-word identical to that of Nike, except that no reference was made to Lebron James, Serena Williams or Drake. However, Liverpool did not consider New Balance’s offer to be “genuine” because of the “contrived and unconsidered replication of the warranties and terms of the Nike offer” and because it considered that New Balance could not actually deliver on the offer it had made. Put simply, Liverpool believed that New Balance’s offer had not been made in good faith. “See you in court” said New Balance, seeking an order that its contract with Liverpool be enforced.

Fidelity and football shirts

Although it was accepted that Nike had a larger distribution network than New Balance, New Balance had concluded that it could match the distribution terms of the Nike offer on the basis of an internal audit of its global distribution network. Liverpool argued that the audit process had not been carried out in good faith. Specific allegations of bad faith included that:

  1. Some of the outlets in Japan and China which had been included in the overall figures for the matched deal only sold footwear and ‘lifestyle products’ respectively, and not clothing.
  2. New Balance had assumed sales growth in Brazil which was 10 times the historical average.
  3. New Balance had overestimated the number of outlets through which sales could be made in North America.
  4. The number of distribution outlets in India and South Africa had both been over-stated.
  5. In Ecuador, 6 distribution outlets were included in the final figures for the ‘matched bid’ but it was estimated that no Liverpool-branded items would actually be stocked in those outlets.

Bad faith and boot deals?

New Balance ultimately lost this case. It could not match Nike’s offer to co-opt “global superstars” like Lebron James, Serena Williams and Drake into its promotional activities. As such, the court found that New Balance’s offer was “less favourable” to Liverpool.

However, of more interest was the court’s analysis of ‘good faith versus bad faith’ – where New Balance was held to have prevailed on all counts. Specifically, the court found no evidence of bad faith on the part of New Balance in either Japan or China because the sponsorship contract made specific reference to footwear, and not just replica football strips. Furthermore, it found the aggressive sales growth assumptions in Brazil justified on the grounds that Liverpool had 3 Brazilian players on its books. Overestimation of outlets in North America was not found to have been in bad faith, and the inaccuracies in India and South Africa were found to be a combination of keying errors and arithmetical errors. Even the ‘mythical’ store figures in Ecuador were not considered to be an example of bad faith. Whilst it was “imprudent” not to study the ratio between the number of distribution outlets and the number of units actually being sold, the court recognised that the audit exercise was inevitably rushed (New Balance only had 30 days to match Nike’s offer). As such, this did not amount to a breach of the implied duty of good faith.

The test of bad faith

It is clear from the judgment of Teare J that dishonesty will constitute bad faith. If New Balance did not in fact intend to meet (or knew that it could not meet) the distribution obligation then it would be acting dishonestly.

In addition, the court held that a duty of good faith can also be breached by conduct which “lacks fidelity to the parties’ bargain”. In essence, this is a question (to be answered by the court) as to whether reasonable and honest people would regard the conduct alleged to constitute bad faith as being “commercially unacceptable”. In determining the answer to this question it is necessary to consider the nature of the bargain, the terms of the contract and the general context. An honest (even if unreasonably held) belief – in this case that New Balance could meet the distribution obligation – would NOT constitute a breach in this regard.

Good faith and the ISDA Master Agreement

The ISDA Master Agreement requires counterparties to OTC derivatives to act in good faith in a number of circumstances, including:

  1. When converting amounts denominated in one currency into the currency in which payment is due (for the purposes of determining whether sufficient sums have been received).
  2. In determining the ‘fair market value’ of deliveries that have not been made (for the purposes of determining the default interest to be paid on those defaulted deliveries).
  3. In determining rates of interest to apply to failed payments.
  4. In determining loss suffered or the cost of obtaining replacement transactions.
  5. In exercising rights of set-off.

In the various iterations of the CSA there is also a general obligation on the parties to perform their obligations in good faith and a commercially reasonable manner.

Staying onside

In practice, the requirement to use good faith in the ISDA Master Agreement applies mainly to the actions of a party within a close-out. The ISDA Master Agreement describes a broad methodology to be followed in these circumstances, but subjectivity remains. Different approaches are legitimate and even the same process can produce different results. Time is of the essence.

Results are uncertain and imperfect. They may not always stand up to subsequent close scrutiny undertaken at leisure. The process is time-bound. In principle, the close-out process is very similar to the situation in which New Balance found itself when conducting its internal audit process to determine whether it could match the terms of the Nike offer.

What then can we take away from New Balance’s home loss at the hands of Liverpool?

The New Balance case provides a welcome dose of common sense and reassurance. It tells us that close-out is nothing to fear. Act honestly and the court tells us that we’ll be fine. Errors are by no means fatal – perfection is not required or expected. 20:20 hindsight may exist but is largely irrelevant. Is the result somewhere on the spectrum of what could be considered “commercially acceptable” in the circumstances? If so, you’ll be OK.

Press enter or esc to cancel