The High Court considers the correct approach to assessing what is “reasonable notice” to terminate where the contract is silent
29 / 11 / 2013
The High Court has found that nine months was the correct notice period to terminate a supply contract where the agreement was silent on the point. The decision does not create any new law, but it does provide useful guidance on the application of the law to particular situations, as the judge laid down five principles for assessing what constitutes “reasonable notice” in such circumstances.
Where a contract has no fixed term and there are no termination rights, it can be terminated by reasonable notice by one or both of the parties. What constitutes “reasonable notice” will be determined in accordance with the ordinary principles applicable to implying terms into contracts, and the sufficient period will be largely dependent on the individual circumstances of each case.
The claimant in the case before the High Court was Hamsard 3174 Ltd (“Hamsard“). Hamsard designed, manufactured and supplied children’s clothing to the defendant, Boots UK Ltd (“Boots“). The unwritten agreement between the parties had arisen out of various earlier trading relationships. In summary:
(i) In July 2007, an agreement between Mini Mode Childrenswear (“Mini Mode“) and Boots Company Plc provided for termination at will by either party on 12 months’ notice.
(ii) In April 2008, Boots Company Plc assigned the agreement with Mini Mode to Boots and later that year the notice period for termination at will of the agreement was extended to 18 months in return for Mini Mode accepting longer payment terms.
(iii) Mini Mode then went into administration and the business was hived off into the claimant, Hamsard. Hamsard began supplying Boots in February 2009. The parties subsequently considered entering into a joint venture by no agreement was reached and, in November of the same year, Boots gave Hamsard nine months’ notice of termination.
Was nine months “reasonable notice”?
Hamsard claimed that nine months’ notice was unreasonable in the circumstances and sued Boots for wrongful termination of the agreement. It argued that the correct notice period was 18 months on the basis that the agreement entered into in July 2007 governed the relationship between the parties, and that 18 months reflected the maximum life of a design and production cycle and was therefore an appropriate period in the circumstances.
In its defence, Boots argued that its relationship with Hamsard was born purely out of necessity. Hamsard had taken over the performance of Mini Mode’s obligations and Boots needed to ensure the continuing supply of the current and next season’s stock and no detailed terms between Hamsard and Boots had been agreed.
The High Court’s decision and the five principles
The Court agreed with Boots and held that nine months’ notice of termination was reasonable. In reaching the decision the judge, Norris J, identified five principles which should be taken into account when deciding what period of notice is reasonable to terminate a contract:
(i) Each decision turns on its facts.
(ii) The general circumstances and practices of the trade may be relevant to the facts of the case as such background could help an objective observer to assess what the parties may have agreed as to “reasonable notice”.
(iii) What is “reasonable notice” is to be judged at the time when the notice is given.
(iv) The circumstances pertaining at the time of the formation of the contract are still relevant as implying a requirement to give reasonable notice of termination is intended to serve the common purpose of the parties and such common purpose for which the notice is required is a matter to be determined at the date of the contract.
(v) The degree of formality in the relationship is a very important consideration. The more relaxed the relationship, the less likely it is that the law will imply a lengthy notice period.
The judge applied the above principles to the facts of the case. He placed particular emphasis on the fact that the contract was interim, informal, short-term and born out necessity. An objective observer would expect the notice period to be related to when those immediate needs had been addressed and nine months was sufficiently long to leave the parties knowing their position for the current and next seasons. The relationship was not intended to be long-term and therefore the parties’ long-term business needs were irrelevant to the notice period. It would be clear to an objective observer that there was no long-term future to the arrangement, particularly because the parties had previously tried, but failed, to agree to a joint venture.
Interestingly, the judge also gave weight to the fact that, when notice was given, Hamsard had no money, communication between the parties was poor and there was discontent in the supply chain. The manner in which the contract was being performed at the time of the purported termination (and foreseeably would be performed during the notice period) were, the judge held, legitimate factors to be considered in assessing what was “reasonable notice” in the circumstances and in this case they were factors in favour of a shorter notice period. It was also clear to the judge from the facts that Hamsard must have anticipated the notice to terminate, again a factor supporting a shorter notice period.
For all of these reasons, the judge found that nine months was the correct period in the circumstances, and accordingly Boot’s termination of the agreement was valid.