Unlike a commercial agency agreement, where the minimum periods of notice necessary to end the agency agreement are laid down in the Commercial Agents Regulations, there is no statutory fixed period of notice to terminate a supply or distributorship agreement.
In an ideal world, the parties would agree in writing the period of notice to terminate such an agreement. In the real world, however, it is often the case that either there is no written agreement at all, or, if there is, that it does not provide for a fixed period of notice of termination.
English law provides that in these circumstances, the period of notice necessary is “reasonable notice”. What is “reasonable notice” has been the subject of a number of cases, including the recent case of Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) v Boots UK Ltd.
Facts of the case
Hamsard and Boots entered into an unwritten supply agreement in February 2009 as a result of a complicated earlier trading relationship between Adams Childrenswear group companies and Boots.
A few years before contracting with Hamsard, Boots had entered into a written supply agreement with a company called Mini Mode Childrenswear (the “2007 Agreement”). The 2007 Agreement provided for the parties to give 18 months’ notice of termination of the agreement.
Following the administration of Mini Mode Childrenswear, its business and assets vested in Hamsard, which began supplying Boots in February 2009 on the basis of an unwritten agreement.
In November 2009, Boots gave Hamsard 9 months’ notice of termination of the unwritten agreement between the parties.
Hamsard sued Boots for damages, claiming that 9 months’ notice was too short, and that the correct period of notice was 18 months, on the basis that this was the period of notice set out in the 2007 Agreement.
The parties agreed that a “reasonable” period of notice had to be given to terminate the agreement between them. It was therefore up to the judge to determine what was reasonable.
The judge decided that 9 months’ notice was reasonable. He found that what was reasonable had to be judged at the time when the notice was given, taking into account the practices and customs of the trade in which the parties operated. What was reasonable will also depend on the degree of formality of the commercial relationship – the more relaxed a commercial relationship is, the less likely is it that the court will imply a lengthy notice period.
The judge decided that 9 months’ notice was reasonable in this case because the agreement was informal and intended by the parties to be a short-term, interim arrangement. Further, the agreement had to be constantly adjusted to take account of Hamsard’s deteriorating financial position. Even though a written agreement providing for 18 months’ notice had been entered into in 2007, that agreement was between Boots and the previous supplier. Boots had been thrown into the new agreement with Hamsard because Hamsard had taken over from Boots’ previous supplier following the previous supplier’s administration.
In addition the judge considered that it was relevant that at the time that the notice of termination was given, Hamsard had no money, the communication between the parties had broken down, and there were problems in the supply chain due to Hamsard’s failure to pay manufacturers.
The judge also rejected Hamsard’s argument that Boots had to exercise its right to terminate the agreement in good faith.
The Hamsard decision can be compared with that a few years ago in Jackson Distribution Limited v Tum Yeto Inc. This case concerned the termination of an unwritten distributorship agreement between a skate brand and its distributor. Curiously, the court in this case also found that 9 months’ notice was a reasonable notice period for terminating the agreement.
However, it should not be taken from this that if you need to terminate an unwritten distributorship or supply agreement, the period of notice required will always be 9 months. In the Tum Yeto case, the skate brand (which had terminated the agreement) argued that 4 to 6 months’ notice was reasonable, whereas the distributor claimed that the correct notice period should have been 2 years. The judge applied some of the factors which were applied in the Hamsard case, but also found other factors were important. These included the fact that the distributor was not selling competing products, and the considerable investment made by the distributor in the early years of the agreement.
As such, each case will depend on its own facts. In different circumstances, a shorter notice period may be held to be reasonable, or a longer notice period may be required. This makes it very difficult to draw anything other than broad principles from these two cases.
In order to avoid the uncertainty and the risk of getting it wrong and ending up in court, parties who are entering into a distributorship or supply agreement should make sure they enter into a written agreement which deals with the period of notice required to terminate the agreement.
Those who do not do so run the risk of ending up in uncertain territory, and uncertain territory is the ideal breeding ground for expensive litigation!