Reasonable notice to terminate and 'good faith': High Court applies principles to a supply contract in difficulty

03 January 2014

Andrew White, Esther Johnson

This recent dispute arose after one of the parties went into administration, causing the existing 'formal' contractual arrangements to fall away. It examines how parties should calculate a 'reasonable' notice period for termination and also highlights the on going debate amongst the judiciary on the issue of good faith and its significance under English business-to-business contracting.

Facts: Hamsard, a supplier of children's wear to Boots, went into administration in February 2009. Boots subsequently sought to terminate the relationship. Prior to the administration, the supply arrangements had been governed by an agreement entered into in 2007. Following the 2009 administration, Boots moved to a 'transitional arrangement' which might or might not develop into a more fixed, long term arrangement. Under the 2007 Agreement the notice period for termination was 18 months, but Boots took the view that under the transitional arrangement, it needed to simply give Hamsard a 'reasonable' period of notice.

Taking account of the time needed to bring to market the two final collections, in November 2009 Boots gave nine months' notice of termination of the supply arrangements. Subsequently, Hamsard argued that this was an unreasonably short period, pointing to the 18 month period of notice specified in the 2007 Agreement. It also argued that Boots had breached an implied duty of 'good faith' (which was set out expressly in the 2007 Agreement) by cancelling the Autumn/Winter 2010 range and giving away unsold stock to charity once the agreement had terminated.

Reasonable notice to terminate: In the High Court, Mr Justice Norris confirmed that the precise duration of a 'reasonable' period of notice of termination of a contract depends on the particular facts involved (Decro Wall Manufacturing). Also, what is reasonable in any particular circumstance is to be judged 'at the time when the notice is given'. The relevant facts in this case were:

  • that the arrangements between Boots and Hamsard were by necessity 'informal, short-term and subject to constant temporary adjustment' due to the suppliers worsening financial position and in the circumstances, the notice period was related to what was required for the parties to wind down their existing contract;
  • there was no practice or custom of the trade which suggested what a reasonable period of notice would be (despite the supplier calling an expert witness to argue for this);
  • the nine month period was actually longer than the period that Hamsard had itself proposed. By the time that notice was given, the relationship between the parties had broken down and would continue to be difficult during the notice period; and
  • both parties knew that the Spring/Summer 2010 collection would be the final one supplied by Hamsard and the notice period was of an appropriate duration to cover this.

Duty of 'good faith': Having held that the notice period was reasonable, the judge then considered if there was an implied duty of good faith under the transitional arrangements. There was an express duty in the 2007 Agreement which obliged the parties to '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 (Clause 13.4).' The questions were whether it was 'obviously intended' that this provision should apply to the transitional arrangement and if so, what the scope of the duty involved. For instance, Hamsard argued that as a matter of 'good faith' Boots should maximise the return on unsold stock.

On the facts, the Court did not accept that a duty of 'good faith' should be implied into the transitional arrangement. The 2007 Agreement had been entered into as a long-term arrangement. However, the transitional arrangement was very different – it was interim and  short-term and it was not obvious that the parties would have intended this type of duty to apply.    

However, the judge went further, stating that there was no implied duty even if the arrangements were to be regarded as 'some sort of nascent joint venture.' There was no positive obligation on a contracting party to 'subordinate its own commercial interests to those of the other contracting party', which is what Hamsard were, in effect, asking Boots to do.  The High Court decision of Yam Seng v ITC earlier in 2013 imposed an implied duty of honesty on the parties, but that was simply irrelevant to the issues in this case.

Further, if a term akin to 'good faith' was implied into the contract on the same terms as Clause 13.4, the impact would be limited. It would only impose a duty on the parties to deal with each other 'on an open and collaborative basis.' There would be no obligation on either party to maximise the 'Net Profits' enjoyed by the other. Thus, Boots had an almost unfettered right to terminate the agreement upon reasonable notice – without being obliged to consider the impact of this on Hamsard's 'Net Profits'.

Conclusions: This case provides guidance on two important issues – what factors are relevant when calculating a reasonable notice period and also the circumstances in which the law infers 'good faith' within a contractual relationship. The former of these two issues is now relatively settled law and the challenge is how to apply the principles to varied situations. The 'good faith' issue still requires further clarification. Future disputes will no doubt continue to put pressure on the courts for more definitive guidance on the impact of 'good faith' in B2B contracting.

Source: Hamsard 3147 Ltd and others v Boots UK Ltd [2013] EWHC 3251 (Pat), Mr Justice Norris, 31 October 2013

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Andrew White
Esther Johnson