Reasonable Notice To Terminate And 'Good Faith': High Court Applies Principles To A Supply Contract In Difficulty

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...