What is a "reasonable" notice period when the contract is silent?
This was the question that came before Mr Justice Norris towards the end of 2013 in the case of Hamsard 3147 Limited trading as "Mini Mode Childrenswear", JS Childrenswear Limited (in liquidation)) v. Boots UK Limited.
This case arose following the insolvency of the supplier of the "Mini Mode" clothing brand to Boots stores throughout the United Kingdom. However, the principles laid down are of universal application to a question that arises on many occasions – what is a "reasonable" notice period if the contract is silent on this point? The reasons for this silence can range from the parties failing to address the issue up front to, as was the case here, circumstances having intervened between the parties leading to a renegotiation of the original agreement leaving the notice period position somewhat unclear.
In his judgment, Norris J set out the following principles to be applied when deciding whether a notice period given is "reasonable":
- what length of notice is reasonable must always depend on the particular facts of the particular case – other cases on this issue are therefore of limited assistance;
- the particular facts might well involve consideration of the general circumstances and practices of the trade in which the claimant and the defendant are involved, since that relevant background might assist the objective observer to understand what the parties may reasonably be understood to have agreed as to being "reasonable notice";
- what is "reasonable notice" is to be judged at the time when the notice is given – indeed as Norris J said, quoting Clarke J in Paper Light Limited v. Swinton Group Limited (1998), "…it would be unsatisfactory and make no commercial or other sense to hold that the reasonable period of notice should be determined long before the notice was to be given.";
- the principle that the length of notice to be given is to be assessed in light of the circumstances obtaining when the notice is given does not mean that the circumstances at the time of the contract are irrelevant; and
- the degree of formality in the relationship will determine what notice period is reasonable – the more relaxed the relationship the less likely it is that the law will imply a lengthy notice period.
Applying these principles to the case before him, Norris J decided that a nine-month period of notice given by Boots to Hamsard was indeed reasonable.
Does affirmation of a contract by one party where there has been a repudiatory breach by the other party constitute a waiver of those breaches for the purposes of deciding what notice period is "reasonable"?
Counsel for Hamsard claimed that, whilst his client was in repudiatory breach of the contract, once Boots decided to affirm the contract and terminate it by notice Hamsard's repudiatory breaches were irrelevant and could not be taken into account in deciding what period of notice was reasonable. This argument was rejected by Norris J, who stated that affirmation of the contract is not the same as waiver of the breaches.
Was it relevant in deciding what period of notice was "reasonable" that the current arrangements would inevitably be terminated as they were only ever intended to be interim in nature?
Norris J stated that the "notice period cannot be divorced from the realities of operating the contract". Accordingly the fact that the termination of the interim arrangements had been discussed between the parties and that they were preparing for such an event lends itself to a shorter period of notice as being "reasonable".
Should a term of "good faith" be implied into the contact when deciding whether a notice period is "reasonable"?
The original 2007 Agreement between Boots and its supplier contained a provision that the parties would "… at all times act in good faith towards one another in relation to the operation of the Agreement to approach their dealings with one another on an open and collaborative basis so as to ensure that they maximise the Net Profit generated under the Agreement …". While acknowledging that the revised commercial arrangements between the parties placed the continued existence of the good faith provision in doubt, counsel for Hamsard argued that the modern approach of the courts was to consider whether the provision which it is sought to imply into the contract (namely a provision of good faith dealings between the parties) would spell out in words what the contract, read against the relevant background, would reasonably be understood to mean. To support his argument counsel for Hamsard quoted the decision of Leggatt J in Yam Seng Pte Ltd v. International Trade Corporation (2013), in which Leggatt J held that while English law did not recognise a requirement of good faith as a duty implied by law into all commercial contracts "…there seems to me to be no difficulty … in implying such a duty into any ordinary commercial contract based on the presumed intention of the parties". Further, counsel for Hamsard sought to classify the commercial arrangement between Hamsard and Boots as a long term "relational contract", which had existed since 2002 and which, in the words of Leggatt J, "…may require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract…".
While accepting the decision of Leggat J, Norris J said that the current arrangements were distinguishable on their facts. While the 2007 Agreement was "a true joint venture which was contemplated to last for a considerable period and it made appropriate express provision… about the approach each party should adopt to the relationship … [the] implicit contract entered into in February 2009 was brought about by force of circumstance and is plainly an interim arrangement affording the different parties an opportunity to negotiate a new joint venture". Indeed, as Norris J said: "It is not obvious that [the parties] would have intended a clause about "good faith" directed to the conduct of a long term joint venture to form part of their interim bargain."
Lessons to be learned
What lessons can be learned from this decision?
Finally, it is clear from the comments of Norris J on the "good faith" argument that, while he did not rule out its application in future cases, the implication of a term of "good faith" in a commercial contract cannot be used to detract a party from exercising its contractual rights. As Norris J stated, "… I do not accept that there is to be routinely implied some positive obligation upon a contracting party to subordinate its own commercial interests to those of the other contracting party… Boots had a contractual right to terminate the relationship on reasonable notice. It was free to exercise that right according to its terms…"Even if a "good faith" term is either expressly recorded in an agreement or implied by the courts, this term does not necessarily take precedence over or detract from other commercial terms of the contract".