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Reasonable Notice of Termination and “Good Faith” - Obligations in LongTerm Supply Relationships: The Court maintains a cautious approach

    • Commercial litigation
    • Retail

    10-12-2013

    Hamsard 3147 Ltd & Anr v Boots UK Ltd [2013] EWHC 3251 (Ch)

    The High Court has again considered the application of an implied obligation of good faith, in the context of a decision on the question of what constitutes reasonable notice of termination.

    Facts

    Hamsard 3147 Ltd (“Hamsard”) and Boots UK Ltd (“Boots”) entered into an agreement for the design, manufacture and supply by Hamsard to Boots of a range of children’s clothing.  The agreement between the parties arose out of a complex series of previous trading relationships involving different parties resulting in part from a number of administrations.  The history of the relationship meant that the agreement between the parties was not documented.  The trading relationship between the parties suffered a number of operational difficulties and then deteriorated to the extent that Boots served nine month’s notice of termination upon Hamsard.

    The Court was asked to rule upon what would constitute reasonable notice of termination in the context of an unwritten agreement for an indefinite term.  In particular, the Court was asked to consider whether there was any implied term of good faith within the parties’ agreement. 

    Judgment

    The Court rejected Hamsard’s argument that an obligation of good faith should be implied into the parties’ agreement, on the basis that any such implied term would not be obvious to an objective observer considering the nature of the parties’ relationship. 

    The Court rejected the notion that in commercial contracts there may be a presumed intention of the parties that there is a general obligation of good faith.  Whilst there may be an implied term not to do anything to frustrate the purpose of any agreement, a term cannot be implied to oblige a party to take positive steps to the detriment of its own commercial interests.  Obiter, the Court noted that if in this case any term had been implied, it would only have imposed a duty for the parties to deal with each other on an open and collaborative basis.

    The Court also summarised a number of guiding principles for determining what constitutes reasonable notice.  Much will turn on the particular facts of each case and any general practices of the trade in question but an important consideration is the degree of formality in the relationship – a more relaxed relationship is likely to lead a shorter notice period being implied.

    In this case, the relationship was informal, subject to constant changes and was in essence an interim arrangement with no long term future.  On the basis of this, and other fact specific considerations, the Court found that Boot’s notice period was reasonable.

    Comment

    The case adds to the growing number of recent authorities on the question of an implied obligation of good faith, supporting the general view that English law does not provide for such an obligation, unlike in several civil law jurisdictions. 

    The case also reinforces the importance of ensuring that all terms relating to any agreement, however informal or short-term, are clearly documented, so as to avoid any potential later uncertainty.

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