High Court Considers What is Reasonable Notice Where Contract is Silent on Termination Rights

Ideally, all contracts should include details of the length of the contract and each party’s respective termination rights; but what happens where no such provision is included?

Where a contract is silent as to its term and how it may be terminated one or both parties can give ‘reasonable notice’ to the other.

What is reasonable notice? What is ‘reasonable’ will depend on the individual circumstances of a case and the facts pertaining at the time notice was given (not when the contract was entered into).

There are several factors that a court may consider when assessing what notice period are reasonable, including:

  • Length of the contract term and type of contract;
  • Degree of financial dependence of the terminated party on the contract;
  • The common intention of the parties at the time of entering into the contract;
  • The commitments of the parties which exist at the date of notice to terminate; and
  • The time that would be required by the terminated party to replace the lost business represented by the contract.

A case last year involving Hamsard and Boots has shown how the law is presently being applied in these matters :

Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) v Boots UK Ltd [2013]

The Claimant, Hamsard, designed, manufactured and supplied a range of children’s clothing to the high street brand Boots, to sell in its high street stores. The agreement had arisen from earlier trading relationships with several different parties from March 2002 through to November 2009 (when Boots gave Hamsard 9 months’ notice of termination) but nothing was ever documented in writing.

Hamsard claimed damages for wrongful termination alleging that 9 months’ notice was insufficient, as an Agreement entered into by Mini Mode2 in 2007 governed its relationship with Boots and this stated that the notice period was 18 months.

Boots argued that no detailed terms had been agreed with Hamsard because it had been thrown into a relationship with them in 2009 as a matter of necessity, as Hamsard had taken over performance of Mini Mode 2’s obligations under the terms of the aforementioned 2007 Agreement. Boots also stated that the notice period under the 2007 Agreement was irrelevant as it was not what the parties regarded as “reasonable” for this type of relationship.

Decision

The Judge agreed with Boots that 9 months’ notice of termination was reasonable.

The Judge set out five principles which should be taken into account when deciding what period of notice is reasonable to terminate a contract:-

  • Each decision turns on its facts – what length of notice is reasonable must always depend on the particular facts of the case;
  • 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 in which the parties are involved because this background could help an objective observer to assess what the parties may have agreed as to be  “reasonable notice”;
  • What is “reasonable notice” is to be judged as at the time when the notice is given – the Judge quoted the decision in Paper Light Ltd v Swinton Group Ltd [1998] CLC 1667 which stated that whether a term is implied has to be judged at the time a contract is entered into, however, once decided that reasonable notice should be implied, the question as to the length of the notice should be judged at the time the notice is given.
  • The circumstances pertaining at the time of the contract are still relevant – implying that the reason for which notice is required is a matter to be determined as at the date of the contract;
  • 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.

Applying these principles to the facts of this case the Judge held that:

  • The contract was informal, short term and subject to constant temporary adjustment;
  • It was obvious there was no long term future to the arrangements;
  • There was no relevant custom or trade practice;
  • The notice period previously agreed was irrelevant;
  • The notice period of 9 months exceeded one previously suggested by Hamsard;
  • The contract between Hamsard and Boots was an interim one;
  • When notice was given Hamsard had no money, communication was poor and suppliers were unhappy; and
  • Notice did not come out of the blue.

Why is this case important?

Whilst this case does not create any new law, the clear set of principles that the judge formulated may be applied to determine what notice of termination is deemed reasonable where a contract is silent on the issue of term and termination.   Commercial practitioners, in particular, will find the first principle useful to see how the law has been applied to specific situations both in this case and those it cites. In particular, the uncertain state of Hamsard’s finances was a factor in favour of a shorter notice period.

For those operating under commercial contracts, or considering entering into new contracts, it is a reminder of the importance of ensuring you have legally enforceable notice provisions in place to give common understanding and certainty between the parties. Although the law makes provision, as in the above case, for circumstances where a contract is silent as to notice, it is not a good alternative to reaching a sensible, mutual commercial decision at the time that contracts are drawn up.