In the case of Hamsard 3147 Limited (trading as "Mini Mode Childrenswear") v JS Childrenswear Limited (in Liquidation) and Boots UK Limited (2013)the Court laid down the principles to consider when determining what is reasonable notice when a contract is silent on term and termination rights.

Background

In March 2002, Boots Company Plc ("Boots 1") entered into a number of agreements with successive companies for the supply of baby clothes which culminated in a fresh long term "joint venture" agreement in July 2007 (the "2007 Agreement").  The 2007 Agreement was subsequently assigned by Boots 1 to Boots UK Limited ("Boots").  The supplier of baby clothes, Adams Childrenswear Limited (the then parent company of Mini Mode Childrenswear Limited), ran into financial difficulties in early February 2009 and Mini Mode Childrenswear Limited entered into administration soon thereafter.  The relationship with Boots was taken over by JS Childrenswear Limited who acquired the business and assets of Mini Mode Childrenswear Limited from the administrator. The business was subsequently vested in Hamsard 3147 Limited ("Hamsard").  The 2007 Agreement was not accepted by Boots as being suitable for this new arrangement and the parties tried to reach an alternative agreement whilst continuing to do business based on short term arrangements which were entered into on an almost weekly basis. Hamsard later ran into financial difficulties which ultimately led to Boots looking for a new baby clothing provider.  This was confirmed by Boots in correspondence on 27 November 2009.  Boots sought to give notice to terminate the contract between Boots and Hamsard, to take effect from 31 August 2010 (nine months later, and not the 18 months that had been stipulated under the 2007 Agreement).  Boots also decided that any remaining stock left unsold as at 31 August 2010 would be either destroyed or given to charity and refused to order goods it did not need from Hamsard now that it had found an alternative supplier.

Hamsard claimed damages for wrongful termination of its supply contract with Boots, alleging that nine months' notice was insufficient. Hamsard's argument was that their relationship was governed by the 2007 Agreement and, under this agreement, the notice period should have been 18 months.  Hamsard also argued that a term obliging the parties to act in good faith should be implied into the contract, as per the decision in Yam Seng [2013] where the High Court implied certain obligations into a distribution agreement and characterised these obligations as aspects of a duty to perform in good faith.  Implying such a term into the contract would have lengthened the notice period and would have required Boots to maximise profit in the joint venture, i.e. to order the unwanted stock and to sell rather than give away all surplus stock.

Boots disagreed and argued that both parties were 'fire fighting' as a result of the administration of Mini Mode Childrenswear and that the notice provisions should not come from the 2007 Agreement but from the new arrangement that came into existence between Hamsard and Boots in early 2009.

Decision

Norris J held that, on the basis of the evidence before him, nine months was an appropriate notice period.  He identified a number of principles which should be taken into account when deciding what period of notice is reasonable:

  • Each decision will turn upon its own facts.  The decision of what length of notice is reasonable must always depend on the particular facts of the particular case.
  • What is "reasonable notice" is to be judged as at the time when the notice is given. In this case Norris J stated that the existence of an 18 month notice period in the 2007 Agreement was of no relevance to what in November 2009 was a "reasonable" period of notice.  He stated that the 2007 Agreement, which was negotiated between commercial parties, was not some sort of pre-estimate of what would be reasonable.
  • The degree of formality in the relationship is an important consideration.  The less formal the relationship, the less likely it is that the court will imply a lengthy notice period. Norris J stated that the notice period cannot be divorced from the realities of operating the contract.  The manner in which the contract was being performed at the time notice was given, and foreseeably how it would be performed during the notice period, are legitimate factors to take into account in assessing what was "reasonable" in all the circumstances.
  • The circumstances pertaining at the time are still relevant. These circumstances could be used to shed light on the common purpose of the parties.  In this case, Norris J stated that the object the parties had in view by agreeing upon reasonable notice (their 'common purpose') was that they should have a period to adjust themselves to the fact that their current interim operational arrangement (brought about by necessity) had no long term future and would have to be brought to a close and that a 9 month period was ample time to do that.
  • General circumstances and practices of the trade may be relevant.  The facts of a particular case may include the general circumstances and practices of the trade which could help an objective observer to assess what the parties may have agreed as to "reasonable notice".  However, Norris J thought that there was no evidence in relation to this implied contract to assist him in determining what is reasonable notice.

The Court also rejected the suggestion that a term obliging the parties to act in good faith should be implied into the agreement.  The proposition of Yam Seng was that the term of good faith would be more likely to be implied in "relational" contracts involving a long term relationship.  In this instance, the adoption of the relationship by Boots in February 2009 was brought about by force and circumstance.  Norris J made clear that it was plain to him that this was an interim arrangement which was intended to operate until the parties had an opportunity to negotiate a new joint venture. 

Comment

The creation of a set of clear principles setting out how to determine what notice period is reasonable, where a contract is silent on the issue of term and termination, has added some much-needed clarity and guidance to this area of the law.  However, it is clear that this is no substitute for having a clear and well-drafted notice clause within a contract.

As for the implied good faith obligation, this judgment indicates a slight change of position when compared to the judgment of Leggatt J in Yam Seng.  Whilst much of Norris J's judgment was consistent with Yam Seng, he did indicate that Yam Seng should not be regarded as authority for the proposition that in commercial contracts, "it may be taken to be the presumed intention of the parties that there is an obligation of good faith".