In December 2022, the Victorian Court of Appeal dismissed an appeal brought by Smash against Euromark (a UK retailer of Smash drink bottles and other consumer products commonly sold throughout Australia by Coles, Woolworths, Officeworks and Big W) against a decision of Lyons J in the Supreme Court of Victoria (Euromark & Limited v Smash Enterprise Pty Ltd & Ors [2021] VSC 97). In the original decision, Lyons J had held Smash Enterprises Pty Ltd engaged in sharp practice as well as acting dishonestly and in bad faith when it went behind an exclusive distribution agreement to directly solicit sales from retailers themselves. (see Smash Enterprises Pty Ltd v Euromark Limited [2022] VSCA 267)
Background
Euromark Limited is a UK based distributor and wholesaler of home-wears and 'back-to-school' products, supplying large retailers such as Tesco, ASDA and Sainbury's shops.
In July 2011, Euromark entered into a three-year exclusive distribution agreement with Smash for the UK. However, from October 2012, Euromark allege that - despite the exclusive agreement - Smash directly solicited Euromark's customers and as a result of this conduct, Euromark terminated the distribution agreement in December 2012.
Evidence
Dr Oren Bigos KC acted for Euromark and on appeal submitted that Smash's conduct not only constituted a breach of the distribution agreement, but also that its directors' "Solicitation Conduct" (Mr Harbison and Mr Malone) constituted breaches of the section 21 of the Australian Consumer Law.
After experiencing difficulties in the relationship between Euromark, in October 2012 Smash started contacting UK retailers directly and arranging meetings to discuss direct supply.
In the original decision of Lyons J in, he had held in March 2022 that Smash was liable in breach of contract to Euromark for its lost profits and also that Harbison and Malone of Smash were liable for £640,000 in losses as a result of their unconscionable conduct in seeking to circumvent the distribution agreement by dealing directly with Euromark's UK retailers.
Appeal
On appeal, Smash, Harbinger and Malone all contended that their conduct did not amount to unconscionable conduct because it was not significant enough to meet the high threshold of being 'offensive to good conscience."
Upholding the original decision of Lyons J, the Court of Appeal unanimously held that the conduct of Harbinger and Malone had indeed been unconscionable because at the very same time that Euromark was bound by the distribution contract, Smash and its directors were contacting and negotiating the direct supply of its products to retailers.
In particular, the bench held the following factors to be significant:
Smash engaged in solicitation conduct despite teh exclusive sales agreement;
on 3 December 2012, the same day Malone professed to Euromark that Smash would continue to observe the terms of the distribution agreement, he emailed Tesco to arrange direct supply to the retailer;
After confirming it would abide by the distribution agreement, Smash continued to correspond with Tesco and Sainsbury's about priceing and took steps to set up a supply facility in the UK; and
Smash failed to supply products to Euromark.
Taking into account the actions noted above, the bench concluded Malone's letter of 3 December 2012 to Euromark had been a sham because Smash had no intention of continuing to comply with its supply agreement, or that it would honour the exclusive distributor relationship, despite representing that it would and being fully cognisant that the distribution agreement remained on foot.
The Court of Appeal concluded:
In all these circumstances, I have formed the view that Smash engaged in unconscionable conduct within s 21 of the ACL. In short, I consider the conduct of Smash was against conscience: it was ‘far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience’.
This is because both the purported termination and the plan for direct contact by means of the Solicitation Conduct was undertaken intentionally and without regard to Euromark’s rights. This conduct was undertaken with the intended consequence that the customers Smash had contacted directly would not return to Euromark. It was deliberately not disclosed by Smash to Euromark at the time.
By Rob Norton and Louise Gehrig
Unconscionable conduct is behaviour so harsh and unjust that it is deemed to fall so far outside the norms of society that it is offensive to good conscience. In the face of such conduct, courts have both an equitable and statutory jurisdiction to sanction that unconscionable behaviour.