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England and Wales High Court (Patents Court) Decisions

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Cite as: [2013] EWHC 3251 (Pat)

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Neutral Citation Number: [2013] EWHC 3251 (Pat)
Case No: HC12C00079


Royal Courts of Justice
The Rolls Building
Fetter Lane

B e f o r e :


(1) Hamsard 3147 Limited
Trading as "Mini Mode Childrenswear"
(2) J S Childrenswear Limited
(in liquidation)
- and -

Boots UK Ltd


Ian Mill QC & Joanna Pollard (instructed by Fladgate LLP) for the Claimant
Terry Bergin (instructed by Browne Jacobson LLP) for the Defendant
Hearing dates: 3, 10, 11, 12, 24 June, 1 July



Crown Copyright ©

    Mr Justice Norris :

  1. This case was originally to a significant degree a "passing off" claim relating to the use by Boots UK Ltd ("Boots") of its "mini club" childrenswear brand. But that claim was abandoned two months before trial. The remaining claim that has gone to trial concerns the termination in November 2009 of an agreement between Boots and its former childrenswear supplier, Hamsard 3147 Ltd ("Hamsard").
  2. Hamsard seeks four heads of relief from Boots. First, it seeks damages for wrongful termination of the supply contract. Here the key issues are:-
  3. a) Given that both parties accept that under the supply contract a reasonable period of notice to terminate should be given, was the 9 months' notice actually given too short? If so, what would have been a reasonable notice period?
    b) If the notice period actually given was too short, what profit would Hamsard have earned during the extended notice period which ought to have been given?
  4. Second, if Hamsard is entitled to any damages in respect of any period after September 2010 (when the actual notice expired) how should the following questions of principle be answered:-
  5. a) Should one assume sales growth in the product supplied by Hamsard from and after September 2010 for the balance of any longer notice period? Or should one assume sales to be constant year-on-year?
    b) Should one reduce the expenditure (to be offset against any sales for the purposes of calculating profits) to reflect savings that would have been made by Hamsard if a longer notice period had been given, so that the profits in the notional extended period would have been greater?
    c) What stock would have been left at the end of that longer trading period, and how would it have been dealt with?
    d) In assessing the share of the profit to which Hamsard would have been entitled in respect of sales made in the notional extended period, should one follow the "profit staircase" which applied prior to September 2010? Or should one apply a "blended rate" (representing an average over time) rather than an incrementally stepped profit share?
  6. Thirdly, was it an implied term of the contract between Hamsard and Boots that the parties should at all times act in good faith towards one another in relation to the operation of the contract, and approach one another on an open and collaborative basis, so as to ensure that they maximised the net profits generated under the agreement? If so, did Boots act in breach of that term:-
  7. a) In cancelling what has been called "the transitional Autumn/Winter 2010 range" of childrenswear ("AW10")? If so, what profits would have been earned and what is Hamsard's share?
    b) In giving away or destroying the residue of the stock that had not been sold by the time the contract terminated at the end of August 2010? If so, what profit would have been made from such sale? What is Hamsard's share of that profit? And how does this impact upon any "stock loss" claim?
  8. Fourth, when a (final) profit reconciliation is taken as at 31 August 2010
  9. a) Is Boots owed £215,942.00 (as it counterclaims)? or
    b) Does that claim wrongly treat certain Advantage Card costs as a deduction against Hamsard's entitlement to profit (because it ignores an agreed cap of 1.3% of sales)?
    c) Does that claim ignore an amount due from Boots in respect of fixtures and fittings?
    d) Does that claim wrongly treat Hamsard as entitled only to a 20% profit share for July and August 2010? Or should Hamsard receive a "blended rate" for those two months?
    e) Does that claim wrongly treat stock losses?
  10. The agreement that was terminated by the notice given by Boots to Hamsard in November 2009 is one that was not recorded in writing and had come into existence only in February 2009. But it arose out of an earlier trading relationship between different parties: and it is that early relationship which provides the context within which the February 2009 agreement must be ascertained. So I must start with the early history.
  11. In 2001 Boots Company Plc ("Boots1") decided to sell a range of "own brand" childrenswear in its stores. But it did not wish to produce that range "in house". Nor did it wish to expend management time and effort in identifying designers, manufacturers, suppliers and distributors to get such stock into its stores. Boots1 decided to out-source the entire operation to a specialist company that would itself undertake (or procure that others would undertake) the design, manufacture, supply or importation and distribution to Boots stores of children's clothing, footwear, hats, gloves and scarves for the 0-4 year age range ("the products"). Boots1 selected Adams Childrenswear Limited ("Adams") for this purpose. Adams already had its own established retail operation with its own brands.
  12. The fundamental structure of the agreement reached in March 2002 was that Adams should supply Boots1 with the products, Adams agreeing that it would place all orders for manufacture and shipping of the products in its own name and subject to the terms and conditions that would normally apply. Adams was to pay all invoices raised by the suppliers: but as soon as the supplier requested payment from Adams then Adams was entitled to issue an invoice to Boots1 (which had to be paid within an agreed timescale). In that way Adams' working capital requirements were kept to an absolute minimum. In commercial terms Adams therefore had a guaranteed order book from Boots1 and an assurance that its manufacturing costs (plus all import duties and levies and all delivery costs to Adams' distribution warehouse) would be covered. As to the other operating costs of Adams (for example, staff and management costs of sales staff employed by Adams in the sales areas in Boots' stores and the incremental costs of the buying, merchandising, finance, HR and IT teams within Adams part of whose time would be spent on operating the agreement, and the local distribution costs), Boots1 agreed to pay these as well within 30 days of being invoiced. So all of Adams' costs were covered. Adams was then entitled to a specified share of the profit that was made from the sale of the products.
  13. In November 2003 that original agreement was the subject of a novation by Adams to Mini Mode Childrenswear Limited ("Mini Mode 1"), an associated company of Adams. Following the novation Boots1 and Mini Mode 1 agreed that Mini Mode 1 would be the sole and exclusive supplier of childrenswear and babywear to Boots1. This relationship was embodied in a fresh trading agreement made in February 2006.
  14. Shortly thereafter the Adams group of companies (including Mini Mode 1) entered administration. The business and assets of Mini Mode 1 were acquired from the administrators by a new company also called Mini Mode Childrenswear Limited ("Mini Mode 2") which was backed by an entrepreneur called Mr John Shannon ("Mr Shannon") and managed by Mr David Empson ("Mr Empson"). This led to a new agreement between Mini Mode 2 and Boots1 which took effect on the 1 July 2007 ("the 2007 Agreement").
  15. The 2007 Agreement provided for Mini Mode 2 to continue to supply Boots1 with the products, but on the terms and the conditions set out in the 2007 Agreement. The detailed terms were as follows:-
  16. a) By clause 2.3 Mini Mode 2 agreed that it would place all orders for products in its own name and subject to the terms and conditions that would normally govern the relationship which it had with its suppliers.
    b) Mini Mode 2 agreed that it would pay all valid invoices raised by a supplier in respect of the cost price of the product.
    c) By clause 2.5 Boots1 agreed that Mini Mode 2 would be entitled to issue an invoice to Boots1 in respect of that cost price immediately upon Mini Mode 2 being able to provide Boots1 with evidence that the supplier had requested payment from Mini Mode 2.
    d) By clause 2.6 Boots1 agreed to pay those invoices in full in cleared funds (less a discount of 2.5%) within 10 days of the receipt of the Mini Mode 2 invoice.
    e) By clause 12.5 Mini Mode 2 could invoice Boots1 for the operating costs incurred by it on a monthly basis, and Boots1 had to remit payment for that amount by a bank transfer within 30 days of the date of the invoice.
    f) By clause 2.7 the distribution costs incurred by Mini Mode in relation to the delivery of products to the stores of Boots1 were to be met as an operating cost.
    g) By clause 13 Mini Mode 2 was entitled to a 20% share of the net profits resulting from the operation of the agreement (with Boots1 being entitled to 80%).
    h) Clause 13.2 provided for a "profit staircase" so that if in any 12 month period the net profits exceeded £4,000,000 then Mini Mode 2 was entitled to a profit share of 30% on all net profits in excess of £4,000,000: and if the net profit for that 12 month period exceeded £8,000,000 then it was in addition entitled to a 40% share of all net profits in excess of £8,000,000.
    i) By clause 12 the net profits were to be calculated by Boots1 by reference to the operating costs claimed by Mini Mode 2 and by Boots1, those operating costs having been the subject of a budget agreed in writing for each 12 month period (which budget could not be altered without the consent of both parties recorded in writing).
    j) By clause 12.4 Mini Mode 2 was entitled to invoice Boots1 for a sum equal to 5% of the sale price of all sales in that month (which Boots1 had to pay within 30 days) on account of the share of the profit to which Mini Mode 2 was prospectively entitled once the quarterly calculation of the net profit was undertaken.
    k) By clause 17 the 2007 Agreement was to continue in force until terminated either by notice (under clause 17) or because of the commission of a material breach of the agreement which the party in breach had failed to remedy (under the machinery contained in clause 19 of the Agreement).
    l) Clause 17.2 provided that either party was entitled to terminate the 2007 Agreement by giving 12 months' notice in writing.
    m) Clause 4.1 provided that Boots1 would have the exclusive right to sell the products.
    n) Clause 4.3 contained an agreement (i) that Mini Mode 2 would be the sole and exclusive supplier of the products to Boots1 stores and (ii) that Boots1 would not sell any products other than those supplied by Mini Mode 2 (with specified exceptions).
    o) Clause 4.2 provided that in the event of notice being given under clause 17.2 of the 2007 Agreement then Mini Mode 2 would be entitled to explore opportunities and to make plans to sell its products to other retailers (but could not make any actual sales until a date falling 6 months after the date of the notice of termination): so that the exclusive right for Boots1 to sell the Mini Mode products would terminate at that point.
    p) Clause 10.2 provided:-
    "Notwithstanding any other provision of this agreement... the parties agree and acknowledge that Boots shall be entitled to determine, in its absolute discretion, the Sale Prices".
    q) Clause 13.4 provided:-
    "Both parties agree at all times to act in good faith towards one another in relation to the operation of the Agreement to approach their dealings with one another on an open and collaborative basis so as to ensure that they maximise the Net Profit generated under the Agreement".
    r) Clause 30.2 of the 2007 Agreement provided:-
    "Each of the parties are independent contractors contracting on their own behalf and nothing contained in this Agreement shall be construed as creating a partnership or agency relationship between the parties…"
    s) Clause 28 provided that the 2007 Agreement represented the entire Agreement between the parties, and that any amendments or variation should only be effective if and to the extent they were recorded in writing and signed by authorised persons.
  17. On 1 April 2008 the benefit of the 2007 Agreement was assigned by Boots1 to Boots.
  18. Later in 2008 there were some amendments to those terms. For internal administrative reasons (designed to improve its cashflow) Boots wished to extend the time within which it had to pay invoices issued by Mini Mode 2 in relation to sums due to its suppliers. So whereas the 2007 Agreement provided for payment of Mini Mode 2's invoices within 10 days, by the amendment this was extended (from August 2008) to 15 days: and then from 1 November 2008 to 25 days and from 1 April 2009 to 50 days. In return for having to accept extended payment terms Mini Mode 2 procured an amendment to the termination provisions of the agreement so that clause 17.2 was amended to require 18 months' notice in writing to be given.
  19. That provides sufficient of the early history and I can (after commenting on the evidence) turn to the immediate context of the present dispute and set out my findings of fact.
  20. I have placed the greatest reliance on the contemporaneous documents, which provide a fair record of events and afford a reliable insight into the thinking behind the actions of the parties.
  21. As to the written and oral evidence of fact:-
  22. a) I find myself unable to treat the evidence of Mr Shannon as reliable (though I should make absolutely clear that I do not consider that he set out consciously to mislead me). He plainly felt bitter at losing significant sums of money in the collapse of Mini Mode 2 and believed that Boots ought to have borne a greater share of the pain. His recollection was coloured by a determination that in some general way "Boots should pay" and was shaped by the requirements of the analysis undertaken by his expert witness. This led him to put his name to complaints that simply had to be abandoned, and to advance a shifting case such that Leading Counsel was unable until part way through the trial to tell me what exactly it was that Mr Shannon was claiming.
    b) Rachel Polson of Boots was a slightly nervous witness who clearly needed time to gather her thoughts but then gave considered and reliable answers.
    c) Mr Wallace and Mr Barker were clear and impressive witnesses, willing to give answers that were not in the direct interest of Boots. They, together with Alison Hands, Kay Croot, Bev England, and Andrew Blundell gave evidence the essential truth of which I accept.
    d) I also accept the evidence of Colin Stuart of Boots. He was unable to answer certain questions put to him about negotiations with Mothercare (who eventually took over from Hamsard as Boots' brand developer and supplier). But this was not because of a desire to be evasive or to conceal some dark secret which (if disclosed) would show that Boots had decided to behave badly towards Hamsard. He had simply not appreciated (for it was not foreshadowed in the pleaded case) that he would be asked about documents and dates relating to these events and had therefore come unprepared. His evidence was reliable.
  23. I can turn to my findings relevant to the issues I have to decide. Before taking up the narrative I should set out the business cycle (or "critical path") from design to sale of childrenswear. I will describe it as it was projected to be in 2009 (relating to the Spring/Summer 2010 ("SS10") and Autumn/Winter 2010 ("AW10") ranges), because that is necessary to understand the significance of events in the narrative. But it is important to record that it did not have to be that way. If Boots had chosen different launch dates for its ranges or if Hamsard had sought to source its products in Sri Lanka or Turkey or Portugal (rather than China) the cycle would have been different.
  24. An overview for SS10 would be
  25. a) From mid-March to early June 2009 the design and selection process would be undertaken;
    b) From early June to early July 2009 prices for the manufacture of the designs would be negotiated with suppliers and individual supply contracts signed;
    c) From early July to the end of August 2009 the fabric would be manufactured;
    d) From the beginning of September to mid-October 2009 the garments would be manufactured;
    e) In mid-October 2009 the goods would be shipped from Hong Kong;
    f) In mid-November 2009 they would arrive in the UK and be taken to Hamsard's warehouse facilities where the stock would be built up ready for distribution to individual stores;
    g) The SS10 range would be launched at the beginning of January 2010;
    h) After launch there would be a sales period until the arrival of the next season's stock.
  26. Each seasonal range would tend to have two or three "phases", each "phase" following about 6 weeks after the preceding phase. For the second and third "phases" the critical path was slightly longer because of the impact of holidays. The launch date for Phase 3 of the SS10 range was targeted to be the latter part of May 2010.
  27. This case concerns the cancellation of the AW10 range. The "critical path" for AW10 Phase 1 was projected to be that the design and selection process would start in mid-September 2009 and conclude by mid-January 2010, contracts with suppliers would be placed in the second half of January 2010, manufacture of fabrics and garments would run to the end of May 2010, shipping from Hong Kong would take place at the end of May arriving in the UK at the end of June 2010, stock building would take place during July and early August 2010, and the range would be launched in the second half of August 2010. Phase 2 would start in mid-November 2009, with key supply contracts being placed in the second half of March 2010 to enable a launch in the second half of October 2010.
  28. I can now take up the narrative. On 31 December 2008 Mini Mode 2's parent company (then called "Adams Childrenswear Limited") went into administration (again), to be followed in January 2009 by Mini Mode 2 itself. The administrators were Pricewaterhouse Coopers LLP. The turn-around director who oversaw the realisation of the assets was Mr Wiggins. At 19:20 on the 16 January 2009 Boots learned that the business of Mini Mode 2 was for sale with a deadline for the submission of indicative offers of noon on the 16 January 2009. So the deadline had already passed when Boots first learnt of it. Mr Shannon was, as he had been in the previous administration, once again a potential bidder.
  29. The administration of Mini Mode 2 was disrupting the supply of childrenswear to Boots: and some of the suppliers were (as one of them put it) "very uncomfortable with the situation with Adams going forward under the leadership of Mr Shannon and Mr Empson". So Boots formulated a strategy, part of which they communicated to Mr Shannon in these terms:-
  30. "As we explained, we are seeking continuity of supply and a stable partner in the short and long term, and we have concerns as to whether your proposal would give us this. Our concerns are around the level of support that you would enjoy from the supplier base and around the degree to which the Minimode business is dependant upon Adams and its as yet unproven recovery plan. In the light of this we have decided to bid for the brand ourselves, and will be in contact with the administrator in the next day or so to confirm our interest and make a firm proposal. However, we did also agree to set out the terms under which we could co-operate, and have set out the main points below. Were we to work together we would require
  31. From this it is clear that Boots was not prepared to let the old arrangements simply continue: the "joint venture" that had been governed by the 2007 Trading Agreement had to be transformed.
  32. At the same time Boots had communicated to the administrators of Adams Childrenswear Limited their concern over continuity of supply: but all the administrators would confirm was that "the parties with which [they were] in discussion regarding the sale of Adams [had] all stated that they intended to continue the relationship with Boots" their view being "predicated on the basis that the contractual, commercial and operational arrangements [would] continue in their current form". The fact that Boots might not be content with this was ignored.
  33. By 6 February 2009 it was clear that the administrators were not going to accept a proposal from Boots for the acquisition of the assets and business of Adams Childrenswear Limited and Mini Mode 2. Instead, on the 14 February 2009 both were sold to JS Childrenswear Limited (a company backed by Mr Shannon and others) ("JSC"). JSC took over all aspects of running the Adams and Minimode businesses with immediate effect. Faced with this, Boots was not content to let the old arrangements be simply transferred to JSC (as if the administration had not happened). It wanted the Minimode business to be conducted by a totally separate company with its own bank account and directors. Mr Shannon responded: and within days the Mini Mode 2 business was vested in Hamsard. The remainder of the Adams' business was left in JSC. Both Hamsard and JSC became subsidiaries of a holding company.
  34. But neither was Boots content to let the old arrangements simply be transferred to Hamsard either. It still pursued structural change. Boots wanted a place on the board and access to management accounts. It wanted a 50% share in the benefit of any sale of the Minimode business in the future. Mr Shannon's original written evidence was that Mr Filby of Boots said that if they did not get it then he would serve 18 month's notice on Hamsard, though Mr Shannon withdrew this evidence in the witness box. But Boots was prepared to vary the then current operational arrangements (which had in any event been due for amendment had Mini Mode 2 remained Boots' trading partner by extending the payment periods) so that Hamsard's invoices would be paid within 25 days; and it was willing to underwrite or guarantee all future orders. In the meanwhile:
  35. "An interim agreement will be agreed by simple exchange of emails to cover the period before any formal agreement is signed".

    It was thus apparent, even at that early stage, that a distinction was being drawn between "current operational arrangements" arising out of the necessities of the moment (which could be covered by an exchange of e-mails) and the creation of a new structure to govern any longer term collaboration in the changed circumstances arising out of yet another insolvency (and consequent supplier disquiet).

  36. There was, however, no such exchange of emails. Mr Shannon did not accept Boots' proposals, and negotiations simply continued. As they continued Boots wrote, on 19 March 2009, to emphasise "the clear risks that [the recent administration of the Adams Childrenswear Group] caused for continuity of product supply and the fact that [Boots] manifestly had insufficient control over an important brand for [its] business". It therefore made fresh proposals as to the joint ownership and/or control of the Minimode brand. As part of its proposals it suggested:-
  37. "The current trading arrangement relating to Minimode and other brands… would continue broadly on the terms of the relevant agreements in place between Boots and the pre-administration Adams Childrenswear Group. For example, we do not propose any change to the current financial arrangements or the profit split. However, we would wish to ensure that:-

    At its conclusion the e-mail emphasised:-

    "Nothing in this e-mail… is intended to be binding on either of us. Certainly, nothing in this e-mail imposes on either of us any obligation to enter into substantive discussions or constitutes an agreement to enter into any legally binding obligations…".
  38. Mr Shannon was, however, unhappy with the current state of his relationship with Boots. He wrote:-
  39. "I am concerned that in good faith I have continued to purchase stock, employ the team and place further orders for you with no contract in place. [Mr Filby] was keen to document by a simple exchange of emails that whilst we discuss the new arrangements we should confirm that the existing contract continues with payment terms at 25 days. Can I ask you to confirm by return email to me that my understanding is correct".
  40. There was no email in those terms because Boots did not want "the existing contract" to continue with Hamsard. Instead, on 3 April 2009 Boots sent a draft letter (which it invited Mr Shannon to sign on behalf of Hamsard) recording an agreement in these terms:-
  41. "We confirm that we will place orders for stock with you and provided you invoice us, pay for that stock. In addition, we confirm that the financial and operational arrangements in place between Boots and Minimode Childrenswear Limited will continue in place until further notice provided that Boots has exclusive rights to sell Minimode… products in the United Kingdom and the Republic of Ireland".

    Hamsard in its turn did not accept that arrangement.

  42. There are probably two reasons for that. First, it appears that Hamsard was looking to parties other than Boots to inject £5m-£10 million into Hamsard's business. That is because Hamsard was on any normal commercial basis grossly under capitalised and entirely dependant (a) on the credit afforded by its suppliers (which, as a new business emerging from administration, was far tighter that the credit extended to Mini Mode 2): and (b) the willingness of Boots to pay stock invoices within the credit period afforded by suppliers (and faster than would have been the case if the amended 2007 Agreement had been in force between the parties). Second, that very shortage of capital meant that the former basis on which Boots had conducted its business with Mini Mode 2 would no longer suffice, and Hamsard needed some alteration in the arrangements (in particular a reversal of the extended payment periods provided for under the 2008 amendments). Thus, by mid April 2009 Hamsard was so short of cash that Mr Empson of Hamsard was requesting that some of the Operating Cost invoices should also be paid early because there was a serious problem with the business, and Mr Shannon was making clear that by the end of the month there would not be enough funding in the business to support both the Adams and the Mini Mode businesses (i.e. JSC and Hamsard) and that he intended to focus effort on Adams.
  43. The practical consequence for Boots was that stock which was needed to replenish its stores could not be delivered unless Boots was willing (in addition to paying the Operating Cost invoices early) to shorten its payment terms and to pay key suppliers direct.
  44. Boots became aware of this not only from Hamsard, but also because it was contacted directly by suppliers who had continued to supply Hamsard in the expectation that there would be a new organisation in which Boots would be closely involved. One supplier informed Boots that "we are now in a deep mess", and asked Boots to settle payment for supplies directly in order to obtain the stock then in the forwarders' warehouse.
  45. As an immediate short term measure Boots therefore agreed to provide Hamsard with reduced payment days in order to secure the finance of the business, and in the immediately ensuing 2 weeks period to pay 80% of the value of stock invoices within 3 days (and the remaining 20% within 15 days). For the first week this meant Boots paid £1.04m 22 days early: and in the second week some £332,000.00 22 days early. These were plainly "one off" arrangements and neither side saw them as being a permanent feature of any ongoing relationship.
  46. So whilst this solved the problem for that 2 week period at the end of April, it did not provide a long term solution. Accordingly Mr Wiggins (now a consultant to Hamsard) sought agreement upon the following (which he described as "essential for us to continue to supply in the short term"):-
  47. a) The payments already on the system would be brought forward (provided that the attempt to do so would not risk delaying payment beyond the normal date):
    b) That April Operating Cost and profit share invoices should be paid immediately on receipt and that invoices for May could be rendered on the basis of estimates:
    c) That the March quarterly profit share reconciliation should be expedited:
    d) That the "advance" payments which had been agreed for a 2 week period should continue indefinitely "to maintain a steady stock flow".
  48. This request made abundantly clear that there was no question that Boots and Hamsard were trading on the same terms as Boots and Mini Mode 2 had done. What were in place were short term arrangements to enable Hamsard to survive on a "hand to mouth" basis through adaptation of the old arrangements, whilst more permanent arrangements were sorted out, whether those more permanent arrangements took the form of a restructured collaboration with Hamsard or a termination of negotiations.
  49. This led to an important meeting on the 30 April 2009 attended by Mr Filby, Mr Stuart and Mr Foster of Boots, and Mr Shannon and Mr Wiggins for Hamsard. Mr Shannon's revised evidence was that at this meeting Mr Filby said that he would serve 18 months' notice on Hamsard. This evidence was of a piece with Mr Shannon's main theme (which was that the parties had adopted the amended 2007 Agreement as governing their relationship). I do not consider it likely that Mr Filby did mention an 18 month notice period: Boots' attitude at this stage was that it did not want to commit to any relationship at all until it could improve the position that had obtained under the 2007 Agreement, and it regarded the current position as an interim one. I think Mr Shannon is now recollecting what he wishes he had heard, and not what was actually said. Even if an 18 month notice period had been mentioned, it would have amounted to a threat and not a promise, and would not have altered the position (on which the parties are agreed on the pleadings) that a reasonable period of notice was to be given on either side.
  50. At that meeting Mr Filby asked for an updated report on the current financial situation, indicating that the current funding arrangements could not continue indefinitely and that a quick resolution was required. Mr Shannon and Mr Wiggins said that it was their shared understanding that Boots would wish to engage with a new partner (other than the cash-strapped Hamsard) for the Minimode business. In other words, there was recognition on the Hamsard side that there was no real prospect of any long term arrangement between Boots and Hamsard being concluded. Mr Shannon confirmed that he would be willing to transfer the brands and the other assets to a third party acceptable to Boots at a fair value if Boots itself did not acquire the brand. It was the understanding of Mr Shannon and Mr Wiggins that Boots would first enter into Heads of Terms relating to the supply of childrenswear with that third party, and that such Heads would enable that third party then to negotiate with Mr Shannon a transfer of the brand and the assets at that fair value. In the meantime, their understanding was that Boots would continue to fund the Minimode business by paying for 80% of the stock in advance and 20% on the usual terms, and pay the Operating Costs and profit share on receipt of the invoice (rather than in accordance with the previous payment terms) in order to keep the brand "alive".
  51. Suppliers continued to contact Boots to explain that they held stock ready for shipment, but they were not prepared to release it because Hamsard had not paid for it: or to say that they had orders for stock from Hamsard, but they were not prepared to commence manufacture because they could not be sure of payment by Hamsard, and that accordingly the delivery deadline would have to be renegotiated. In the result, Boots became involved in the very dealings and administration which it had been the object of the outsourcing agreement to avoid. To obtain any flow of the products Boots had to pay the suppliers direct.
  52. Whilst the short term arrangements were entered into on an almost weekly basis, negotiations continued to seek a long term solution through Boots buying the Minimode brand and undertaking from Hamsard. On the 29 May an agreement (subject to contract) was reached for the acquisition by Boots of the Minimode brand and Hamsard's business under which Boots was to pay £3m immediately, and a further £1.5m by monthly instalments up to the 31 March 2010. The period of the instalment payments was to be regarded as a transitional period during which Hamsard would continue to provide certain services to Boots. When Boots received the Heads of Terms they required the insertion of a personal guarantee from Mr Shannon in respect of any liabilities or claims in respect of third party intellectual property rights, the title to the assets and any breaches of the contracts to be assigned to or novated to Boots. Mr Shannon rejected the idea of any personal guarantee, and so the deal foundered.
  53. When that happened Mr Wiggins wrote on 7 July 2009 to Boots to say:-
  54. "In the light of [the] decision to pull Boots out of the proposed transaction at such a late stage we both felt it sensible to establish as early as possible the basis on which our two organisations continue to trade. I believe that we shared a view that it was in the best interests of both parties that we come up with a mutually agreed plan that will avoid/minimise any disruption to the Minimode business now and in the months to come. You asked me specifically to discuss this with John Shannon and the other directors and provide an assurance that they were in agreement with our view that both parties should work together to come up with a mutually agreed plan for the Minimode business. I have spoken with John Shannon and confirm that his views are consistent with ours. He believes that we should meet as quickly as possible given that we are currently not only operating without a contract, but the contract we were working to has now gone beyond its end of year date. … [I]n order to achieve this I think we firstly will need to exchange views on what each of us requires or seeks out of this transitional arrangement. On our part this will revolve around cash neutrality, cost recovery and profit share. On your part it will include continuity of supply, including design and sourcing, but it will be helpful to understand any other key issues including your end plan so that we can also work to this…".

    What was there being proposed by Mr Wiggins for Hamsard was a transition plan for easing Hamsard out of the supply chain and easing a new supplier in. It was recognised on both sides that the end of the relationship was near.

  55. The collapse of the negotiations also led Boots further to consider its strategic position. Those responsible at Boots (Rachel Polson, Ben Wallace, Ken Murphy and Kay Croot) took the view that given the critical path for range development and launching childrenswear it was sensible to continue to trade with Hamsard until August 2010 because this would provide continuity of stock and the ability to meet the sales budget for Autumn/Winter 2009 and Spring/Summer 2010. But they recommended to the Boots executives that there should be a mutually agreed end point at August 2010 (with Boots retaining exclusivity until then). In an internal communication they noted:-
  56. "The agreement we have with Hamsard provides an 18 month notice period, however after 6 months Boots loses exclusivity of Minimode. We are keen to avoid this situation so feel it is important to work closely for mutual benefit".

    This individual subjective view of the nature of the contractual arrangements does not, of course, determine what the implied contract between the parties was. That must be ascertained objectively by reference to what the parties did and what they said to one another.

  57. Rachel Polson communicated that strategy to Hamsard in these terms on 9 July 2009:-
  58. "I can confirm that, in principle and subject to [Hamsard] and JS Childrenswear Limited between them ensuring that the terms of the pre-administration agreement between Boots and Adams are adhered to (unless otherwise agreed between us) Boots is prepared to continue to work with Hamsard… in relation to Minimode for the AW09 and SS10 ranges. Clearly, we need to agree the precise terms that will govern the agreement between us covering those ranges and we will make some proposals in the next few days. We need to agree payment terms for the relevant period and will also want to explore the transitional process and how Hamsard might support range development for the AW10 season even though Hamsard would not be the supplier of the range".

  59. It is clear from internal communications on the Hamsard side that the idea that Hamsard would not be the supplier of the Autumn/Winter 2010 range came as no surprise. Hamsard's anticipation was that Boots would source this directly from another supplier using Hamsard's designs. So Mr Wiggins prepared a draft proposal "for the workout of the Minimode contract" which he presented to Boots. This proposal made a number of notable points:-
  60. a) It recognised that Hamsard had insufficient investment funds to continue to meet the working requirements of both the Minimode and the Adams Childrenswear operations:
    b) It noted that because a transfer of the business to Boots could not proceed "it has been assumed by Hamsard…that Boots do not wish to continue to fund the Minimode business on the current basis indefinitely and therefore wish to find a new partner for their branded childrenswear offering".
    c) It indicated that Hamsard understood the position taken by Boots and wished to work closely with Boots to ensure a smooth, cost-effective, disruption-free transition from Minimode to "the new offering":
    d) It acknowledged that the transition would need to avoid disruption to either business and "to avoid, wherever possible, additional costs, or loss of profit, to either party (above and beyond those costs/profits that would have been incurred/enjoyed had the previous arrangements continued)":
    e) It proposed that the transition should seek to maximise overall profit throughout the transitional period:
    f) It recorded that for the AW09 and the SS10 ranges Hamsard was to complete the sourcing phase (including delivery to the distribution centre) but that for AW10 Hamsard was "to complete the design work to the point of placing orders" but that "Boots or their nominated partner would place the orders". For SS11 Boots or their nominated partner would be responsible for all aspects. In his accompanying timeline Mr Wiggins made clear that so far as AW10 was concerned Hamsard would undertake only the design (and that the sourcing and merchandising were functions to be carried out by Boots or Boots' nominated partner): and (importantly) that the relationship would come to an end in January 2010.

    In cross examination Mr Shannon indicated that he had, in fact, agreed that these proposals should be put to Boots.

  61. In responding to that proposal Rachel Polson identified certain additional points that needed to be considered but which had not been expressly addressed in Mr Wiggin's written proposal. The first item was that the trading agreement between Hamsard and Boots would be terminated by mutual agreement on the 31 August 2010 (and so much later than Hamsard proposed). The second was that Boots should have the exclusive right to sell Minimode products until the parties ceased trading on the 31 August 2010. The third was that Hamsard and Boots would need to agree in writing the Sales, Product Cost Prices and Operating Costs for the period until 31 August 2010. The fourth was that on termination of the contract Boots had the option to buy the Minimode shop fittings from Hamsard at their net book value at the termination date (or at any other amount agreed within Hamsard and Boots). Amongst the proposals in relation to Operating Costs Rachel Polson suggested that the cost of the Boots Advantage Card points scheme allocated under the transitional agreement for the period from 1 August 2009 until 31 August 2010 should be "variable per month" with "Boots finance [to] provide actuals at each month end".
  62. There was no immediate agreement upon these transitional terms. Part of the reason for that was that Hamsard was desperately in need of cash in order to avoid a yet further administration and was putting proposals to Boots for the advance payment of its anticipated profit share secured against a charge on its assets. Only in this way could it get sufficient working capital to survive at all. Boots was not prepared to countenance this arrangement and began actively to look for a new partner, selecting Mothercare for that purpose. The objective of Boots was to complete a transition from Hamsard to a new provider with effect from the end of August 2010.
  63. Boots needed to plan the transitional arrangements with care because, as an internal report generated in about August 2009 noted:-
  64. "It is envisaged that [Hamsard] would continue to provide services for an interim period August 2010, a period driven by the long sourcing lead times from the far east with development taking place 1 year in advance of launch and timings of the seasonal calendar. [Hamsard] will continue to support the implementation of Autumn/Winter 2009 product which is already shipped and Spring/Summer 2010 ranges which have been ordered and in production. This will enable a smooth transition and in the interim period maximise profit from the childrenswear business and to prevent disruption to Boots customers and stores. A new agreement will be put in place to govern this transitional period".

    Although Boots sent a draft of such a transitional agreement, this was not accepted by or commented upon by Hamsard.

  65. The reason for that may have been that, unknown to Boots, Mr Shannon was in negotiation to sell Hamsard to an outside investor (Habib Alvi Ltd, the corporate vehicle of Mr Ali). Mr Ali's solicitors conducted a due diligence exercise on Hamsard. In the course of that Mr Wiggins explained:-
  66. a) That the contractual arrangements recorded in the documents were actually between Boots and the pre-administration business;
    b) That "the business has continued to be operated on the same basis as that contract by mutual agreement" except that the payment terms have been shortened;
    c) That there was no documentary material to support this except exchanges of emails altering the payment terms;
    d) That Hamsard was currently in discussion with Boots about the on-going contract;
    e) That Mr Ali should assume that Hamsard would cease to supply Boots at the end of August 2010;
    f) That because of Mr Ali's funding resources he had a reasonable chance of convincing Boots to assign or write a new contract.
  67. On 10 September 2009 Mr Shannon completed the sale of Hamsard to Mr Ali. In the Disclosure Letter modifying the warranties Mr Shannon disclosed:-
  68. "[JHS Childrenswear Limited] is party to a profit share agreement with Boots UK Limited under which the Company designs, sources and merchandises an exclusive range of babywear products under the Minimode brand… the Buyer is aware that the Company is currently in discussions with Boots UK Limited about the ongoing contract and it is likely that the Company will cease to supply Boots UK Limited from the end of August 2010".

    Later on Mr Shannon made further disclosure in these terms:-

    "Although there has been no formal notice given, Boots UK Limited have indicated that they wish to terminate the profit sharing agreement at the end of August 2010 and agree a fee payable to the Company for the design and sourcing of the Autumn/Winter 2010 season. Negotiations are ongoing".

    There was thus no doubt at all that Mr Shannon (who was selling) and Mr Ali (who was buying) knew that the relationship with Boots was destined to end in August 2010 unless Hamsard recapitalised itself so as to be able perform as Mini Mode 2 had originally done.

  69. Boots became aware of this transaction only after it had completed. Boots immediately wrote to Mr Ali to say that discussions had been underway for some time in relation to arrangements that would allow for a smooth termination of the current arrangements, but that no response had been received from Hamsard, and it invited Mr Ali's views. Boots also indicated that following the sale to Mr Ali it no longer considered that its short term funding arrangements were required and that Boots intended to revert "to the agreed payment terms in the current agreement". However Hamsard requested that the arrangements should continue notwithstanding the change in ownership of the company. Boots were willing to accede to this request provided that Mr Ali signed a letter which promised that if Boots paid suppliers' invoices early:-
  70. "I will ensure that the suppliers of the stock paid for on the basis set out below will be paid in full immediately upon receipt of the payment referred to below".

    Mr Ali signed just such a letter on the 17 September 2009.

  71. Boots, having hitherto dealt with Mr Shannon, now had to consider what attitude Mr Ali might take to the provisional termination arrangements. In an internal memorandum on the 1 October 2009 Rachel Polson advised Kay Croot:-
  72. "If both parties' long term plans are not aligned and Mr Ali refuses to accept the mutually agreed transitional arrangements, it may be necessary to issue formal notice of termination. This would be an 18 month notice period taking trading to March 2011".

    This view was not communicated to Mr Ali.

  73. Mr Ali did not abide by his promise: money provided by Boots to pay suppliers was used elsewhere in the business and Boots continued to receive demands for payment from suppliers. Thus, for example, on the 15 October 2009 Boots received an email from EMA Textiles informing Boots that there were Minimode products in transit or landed to the value of £611,000 in respect of which there were outstanding invoices and a further £300,000 of goods on the water yet to be invoiced, and that it was intended to cease delivery. DS Clothing also advised Boots that Hamsard owed it £700,000 and that there was £1m worth of stock ready to ship. These disruptions to supply meant that stock availability was severely compromised. So Boots insisted that all suppliers be told that Boots would pay them directly for stock and requested Hamsard's new management to:-
  74. "Confirm in writing that on behalf of Hamsard and Mr Ali.. you have agreed that Boots UK will pay suppliers directly for the balance of the Autumn/Winter 2009 stock and the coming Spring/Summer 2010 season".
  75. This led to a crucial meeting between Rachel Polson, Ben Wallace and Kay Croot of Boots and the Managing Director of Hamsard on the 24 November 2009. The letter sent that day confirming the content of the discussion (which I accept as an accurate record) records that Boots informed Hamsard that it intended to move to a new partner for its childrenswear business, and Boots gave notice to terminate the current arrangements between Boots and Hamsard relating to the supply of Minimode childrenswear. Boots acknowledged that it would need to agree terms for the termination of the current arrangements. Boots was to confirm the transfer dates and the identity of the new provider. As part of the "transition plan" it was acknowledged that:-
  76. "The current profit share arrangements will remain throughout the termination period. However there will be changes to the cost base during the transitional period which will need to be taken into account as elements of the service transfer to Boots' new provider".
  77. On the 27 November 2009 Boots gave formal written notice of the termination of the current contract between Boots and Hamsard "to take effect from 31 August 2010". The notice made reference to the proposals which had been made to ensure a smooth transition of the business from Hamsard. Mr Ali did not respond to this. Instead he wrote to Hamsard's suppliers demanding a 10% discount on all outstanding invoices, and offered payment of the balance by a slower means than the suppliers had been used to. Understandably, this provoked protests from suppliers, in which protests Boots became involved. One supplier compared Mr Ali to a Somali pirate who hijacked vessels and held cargoes to ransom.
  78. Meanwhile Boots sought to secure a replacement for Hamsard. On the 21 November 2009 they signed a letter of intent with Mothercare UK Limited for the supply of branded children's clothing to Boots. The letter recorded an intention to commence the sale of that range from the 1 September 2010 and observed:-
  79. "As normal trading deadlines for the Autumn/Winter 2010 season have already passed, it is recognised by both Parties that there will be additional costs and risks relating to the Autumn/Winter 2010 season only and as such this season will not be representative of a typical trading season in terms of ranges and/or financial results".

    On the 8 February 2010 Boots and Mothercare UK Limited signed Heads of Terms. Until then there was a commercial risk (small but real) that Boots would be without a range of own-brand childrenswear.

  80. The negotiations with Mothercare proceeded against a background of increasing financial pressure on Hamsard rendering it, in effect, incapable of performing as a provider of childrenswear. Suppliers were exercising liens over stock. Hamsard was unable to pay most of the invoices that it owed. It could not even pay its own staff who therefore ceased to distribute even the stock that had been paid for by Boots. Quite apart from this trading pressure, Hamsard was being used to make loans to JHS Childrenswear to support that business (eventually to the extent of £1.27m). So cash pressure within Hamsard's own business, exacerbated by the demands of the group, meant that Hamsard became almost entirely dysfunctional.
  81. Mr Ali defaulted on his payment obligations to Mr Shannon and on the 22 January 2010 Mr Shannon reassumed ownership and control of Hamsard. The Adams business (then being conducted by JS Childrenswear) went into administration for the third time.
  82. It was Mr Shannon's aim to salvage something from the wreckage. But he had no negotiating position. He was dependant upon Boots to pay his suppliers (and even his staff). All he could offer was continued exclusivity of the Minimode brand until the termination date (assuming that clause 4.2 of the 2007 Agreement between Boots 1 and Mini Mode 2 governed the transitional trading arrangement between Boots and Hamsard). Using this lever
  83. a) He requested that for July and August 2010 (the last two months of the trading relationship following the year end 30 June 2010) the profit share to which Hamsard was entitled should be a blended rate of 32.5% (rather than the 20% rate fixed under the "profit staircase"):
    b) He challenged the deduction of the actual Advantage Card costs from gross profits for the purposes of the profit share calculation and insisted upon a reversion to 1.3%:
    c) He required Boots to buy out the Hamsard owned shop fixtures and fittings at net book value as at August 2010:
    d) He agreed a discount package for both the AW09 and SS10 stock so that the greatest volume of stock could be sold through a number of Boots flagship stores to enable maximum profit to be realised; and when that clearance plan had reached its end at the beginning of August then to move to a "price pointing plan" (under which items priced at £5 or less would be sold for £1, items priced at £6/£7 for £2 and so on):
    e) When he discovered that any remaining Minimode stock left unsold by this process as at 31 August 2010 was to be destroyed or given to charity he asked if he could collect it free of charge.
  84. This last request was refused. In the result some 222,500 items of stock were given to charity: they were worth (at cost) about £714,000 and represented 0.44 months' worth of the stock that had been purchased by Boots. The items given away consisted of the residue of about 350 lines of stock (each of which came in five or six sizes) gathered in from 40 stores. It therefore represented what Alison Hands called "very broken stock".
  85. On the 24 January 2011 Boots presented to Hamsard its final profit reconciliation, showing an overpayment by Boots to Hamsard of £215,942. The workings which lay behind this invoice assumed that in the calculation of the gross profit Boots was entitled to offset the actual costs of its Advantage Card scheme (rather than any budgeted figure) and assumed that Hamsard was entitled to a 20% profit share (i.e. was still on the first step of the profit staircase). It did not make any allowance for the Hamsard owned fixtures and fittings which remained in Boots stores at the termination of the relationship: that was because Hamsard had not submitted an invoice or even put a value upon the fixtures.
  86. Hamsard had by then ceased to trade. Trading stopped on 24 September 2010.
  87. Having found the relevant facts I turn to the issues for decision.
  88. It is appropriate to begin with two general observations:-
  89. a) There was a marked difference of emphasis between Hamsard and Boots as to the significance of the 2007 Agreement. The burden of Mr Shannon's evidence was that the 2007 Agreement governed the relationship between Boots and Hamsard subject only to such specific variations as were necessary to accommodate Hamsard's precarious financial standing. But Boots' perspective was different. It was that Boots was thrown into a contractual relationship with Hamsard as a matter of necessity, because Hamsard had taken over the performance of the contracts which Mini Mode 2 could no longer perform (because of its entry into administration); that no detailed terms had actually been agreed; so the 2007 Agreement provided a reference source for the necessary rights and obligations of the parties constituting the relationship into which sheer necessity had forced them. Mr Shannon's approach means that the terms of the implied agreement between Boots and Hamsard must be approached as if the parties had some long term project in view: the Boots approach means the implied bargain must be approached as if it was essentially short term.
    b) What is material is not the subjective intention either of Mr Shannon on behalf of Hamsard or of Boots or its personnel. The terms of the contract they made is determined by the outward appearance of what they said and did.
  90. I address first the issue of a reasonable notice period. The parties' contending possessions may be summarised in this way:-
  91. a) Hamsard says that a reasonable notice period would have been 18 months because this was the period that actually obtained under the 2007 Agreement as varied, and reflected the maximum length of the design and production cycle. Hamsard submits that its financial insecurity is irrelevant, and that in truth the position in November 2009 was really no different from what it had been in (say) February 2009 when Boots kept it on as a supplier. Indeed, in some respects its financial insecurity was less relevant because Boots was in fact paying suppliers directly and thereby ensuring security of supply and eliminating any cash flow problems. The August 2007 Agreement and the common law both contemplated that if Hamsard was in serious breach, then Boots could terminate the contractual relationship summarily: but once Boots had decided not to take that step, then factors that would have been relevant to summary termination became irrelevant to the question of what was "reasonable notice". Hamsard's repudiatory breaches were to be ignored.
    b) Boots submits that the term as to reasonable notice is to be found in a new agreement that came into existence between Hamsard and Boots (not "patched in" to the 2007 Agreement). The genesis of the new agreement was that both parties were "fire fighting" the consequences of the administration of Mini Mode 2. The notice period under the 2007 Agreement is an irrelevance (i) because it does not represent what the parties regarded as "reasonable" but simply represents a bargain struck between different parties during a re-negotiation of extended payment terms: and (ii) because it related to a long term agreement which the new agreement between Boots and Hamsard plainly was not. What is reasonable must be judged by reference to the circumstances in which the notice was served.
  92. Given that it is common ground that the period of notice must be "reasonable", the applicable principles which guide the court to the correct resolution of that dispute are in my judgment these. First, what length of notice is reasonable must always depend on the particular facts of the particular case, so that other cases are of limited assistance: Decro Wall Manufacturing [1971] 1WLR 361 at 376 G.
  93. Second, the particular facts might well involve consideration of the general circumstances and practices of the trade in which the Claimant and the Defendant are involved, since that relevant background might assist the objective observer to understand what the parties may reasonably be understood to have agreed as to "reasonable notice". This was the approach adopted in A-G of Belize [2009] UKPC 10 to the implication of terms into written contracts, and it seems to me to apply with equal force to oral contracts or (as here) contracts to be spelt out of conduct. Such things may be taken as matters which the parties had in mind when agreeing the notice provision and as informing what was "reasonable".
  94. Third, what is "reasonable notice" is to be judged as at the time when the notice is given. In Paper Light Limited v Swinton Group Limited [1998] CLC 1667 Clarke J identified the choice as lying between the circumstances at the time when the contract was made and the circumstances at the time when notice was given. He then said:-
  95. "It seems to me that the correct answer to that question in principle is that, whereas the question whether a term is to be implied must be judged at the time of the contract, once it is decided that a term as to reasonable notice should be implied, the question what period of notice would be reasonable must be judged at the time the notice is given. It will be known at the time the contract is made that circumstances may change between the time of the contract and the time of the notice, which may be many years later. Thus it would be unsatisfactory and make no commercial or other sense to hold that the reasonable period of notice should be determined long before the notice was to be given".

    One of the cases upon which Clark J relied was the decision of the Privy Council in Australian Blue Metal Limited v Hughes [1963] AC 75 where, at p99 Lord Devlin (who gave the opinion of the board) said:-

    "The question whether a requirement of reasonable notice is to be implied in a contract is to be answered in the light of the circumstances existing when the contract is made. The length of the notice, if any, is the time that is deemed to be reasonable in the light of the circumstances in which the notice is given".
  96. Fourth, the principle that the length of notice to be given is to be assessed in light of the circumstances obtaining when the notice is given, does not mean that the circumstances at the time of the contract are irrelevant. That is because the implication of the requirement to give reasonable notice is "intended to serve only the common purpose of the parties", and the "common purpose for which [the notice] is required" is a matter to be determined as at the date of the contract. This was the view of Lord Devlin (and the other members of a very strong Board) in the Australian Blue Metal case in the passage immediately following that which I have cited. It concludes:-
  97. "The common purpose is frequently derived from the desire that both parties may be expected to have to cushion themselves against sudden change, giving themselves time to make alternative arrangements of sort similar to those which are being terminated".
  98. Fifth, one very important consideration in determining what notice period is "reasonable" will be the degree of formality in the relationship. The more relaxed the relationship, the less likely it is that the law will imply a lengthy notice period: see Alpha Lettings Limited v Neptune Research [2003] EWCA Civ 704 at paragraph 31.
  99. I turn to the application of these principles to this case. I conclude that the 9 months' period of notice given was reasonable.
  100. First, the contract into which the "reasonable notice" term was implied was one brought about by the necessity to continue the supply of the current season's stock (AW09) and to arrange for the manufacture and supply of the next season's stock (SS10) where the critical path was imminently to begin. It was informal, short-term and subject to constant temporary adjustment to take account of Hamsard's deteriorating financial position. An objective observer would expect the notice provision to be principally related to when those immediate needs had been addressed rather than to the long term business needs of either party. Notice given in November 2009 effective August 2010 left the parties knowing exactly where they stood for the SS10 and AW10 ranges. The initial design work that had been started on the AW10 range would be paid for by Boots as part of the Operating Costs in the last quarter of 2009 (and then set against each party's share of profit), the designs would still belong to Hamsard (which could sell them to Boots for use by its new supplier), and Hamsard would not at that point be committed to any third party. The parties did not need to look any further into the future to bring to an end their then current relationship.
  101. Second, the circumstances in which the implied contract came about had provided the opportunity to negotiate a new joint venture (different in form from that arising under the 2007 Agreement). If there were a new joint venture then it would contain its own termination provisions. But if there were not, then an objective observer would expect the notice period to be related to what was required for the parties to adjust to an acceptance of that fact (i.e. that there was no long term future in the relationship) and to wind down their current contracts. This is not the same as saying that the period required was that within which Boots might reasonably expect to find a new supplier and Hamsard to find a new customer, because acceptance of the fact that no commercially viable joint venture could be negotiated might mean that one or other or both of Boots and Hamsard might have to abandon that business model altogether. The object the parties had in view by agreeing upon reasonable notice (their "common purpose") was that they should have a period to adjust themselves to the fact that their current interim operational arrangement (brought about by necessity) had no long term future and would have to be brought to a close. Nine months was ample for that (and of course far longer than the adjustment period that followed Mini Mode 2's entry into administration or Mr Shannon's sale of Hamsard to Mr Ali, and greatly in excess of Hamsard's own proposals).
  102. Third, there is no practice or custom of the trade which bears on the notice period. Hamsard called Mr Wayne Wright as a retail expert, not to prove some pleaded custom or usage of the trade, but to provide context or background. Counsel for Boots criticised (in the light of very late disclosure by Mr Wright of sustained dealings with Hamsard) his ability to give any independent evidence. But it is unnecessary to pass judgment upon his qualities as an independent expert for his evidence established only that in 20-odd years of retail experience he had only encountered 7 contracts even comparable to the 2007 Agreement, and that it was not possible to draw anything from them since termination provisions were a matter for the agreement of the parties, there being no hard and fast rules: and he had no evidence to give about the type of implied contract with which I am concerned.
  103. Fourth, the existence of an 18-month notice period in the amended 2007 Agreement is of no relevance to what was in November 2009 a "reasonable" period of notice. The 18 month notice period was simply the quid pro quo granted in renegotiation of contract payment terms: it is not some sort of pre-estimate of what would be "reasonable".
  104. Fifth, the notice period exceeded what Hamsard itself had proposed for the winding down of the relationship. In July 2009 Mr Wiggins of Hamsard had proposed a termination as at January 2010. It was Boots that suggested a later termination in August 2010. Until Mr Shannon resumed control (after notice had been given) no-one ever suggested that 9 months' notice was unreasonably short.
  105. Sixth, the contract into which the reasonable notice term had been implied was an interim one which, so far as was necessary to make it function, adopted the same financial and operational arrangements in relation to orders placed in the interim as had applied under the amended 2007 Agreement. But in fact Boots and Hamsard had not been able to operate their interim contract arrangements on that footing. Boots, in order to secure supply, had been required to adopt different operational and financial arrangements. The direct and accelerated payments which it made were not an agreed variation to the original implied contract, but rather were urgent steps taken in mitigation of the damage caused by Hamsard failing to do what it implicitly promised to do (namely perform in the interim the obligations on which Mini Mode 2 had defaulted). The "current arrangements" that were being wound down were not therefore those embodied in the implicit contract, but those which had evolved after February 2009. In fixing a reasonable notice period the Court is entitled to take into account that during the notice period Boots was, in practice, being required to do more than it ever agreed simply to secure the agreed outcome.
  106. Seventh, at the time when notice was given Hamsard had no money, effective communication between Hamsard and Boots such as had existed in February 2009 was in November 2009 no longer there, and there was deep unrest down the supply chain. The notice period cannot be divorced from the realities of operating the contract. The manner in which the contract was being performed at the time notice was given and foreseeably would be performed during the notice period are legitimate factors to take into account in assessing what is "reasonable" in all the circumstances.
  107. Eighth, Boots had been engaged with Hamsard in the negotiation of transitional arrangements in which it had been clear for more than 6 months (and had been accepted by Hamsard) that Hamsard would not be supplying the AW10 range. There was only a narrow window within which notice could be given formally to confirm that position.
  108. Given that the common purpose of the parties was to have a period to adjust to the fact that the interim arrangement would not become a long term one and that they needed to wind down their contracts, for how long was it reasonable to expect the parties to be bound to one another to perform their implied contract in these circumstances (given that there was no apparent prospect of Hamsard even doing that)? In my judgment it cannot be said that 9 months was unreasonably short. If Hamsard had faced reality and said "We cannot afford to carry on: we would like to give notice" could Boots reasonably have said "Well you must carry on under the operational and financial arrangements deriving from the 2007 Agreement for 12 months (or 14 months or 18 months) or pay damages instead because that is the reasonable notice period in these circumstances?" In my judgment, plainly not.
  109. Mr Mill QC submitted for Hamsard that whilst the factors I have identified might have justified (indeed, did justify) an acceptance by Boots that Hamsard was in repudiatory breach of contract (leading to summary termination), once Boots decided to affirm the contract and terminate it by notice then Hamsard's breaches were irrelevant and could not be taken into account in adjudging what period of notice would be reasonable. I do not see upon what principle this should be so. Affirmation of the contract is not the same as waiver of the breaches. When Lord Devlin said that one must look at "the circumstances" I am sure he meant "all of the circumstances" not "such of the circumstances as are not otherwise relevant to terminating the contract in some other way".
  110. Mr Mill QC also submitted that it was not permissible to take into account the fact that termination of the current arrangements had long been flagged up. He relied on Concourse Initiatives Ltd v Maiden Advertising [2005] EWHC 2995. In that case C knew that an arrangement between M and R (upon which its own agreement with M depended) would expire in October 2004. C did not receive written notice terminating its arrangements with M: but it was argued that it had received reasonable notice of termination of the contract between C and M from its knowledge of the arrangements between M and R. This argument was rejected, the deputy judge holding that "there is a world of difference between informal discussions as to what might or might not happen in the future, and a formal notification …that a contract was to be terminated": see para [186]. I would agree with that. The question there was whether notice had been given: and it is vital to know whether that event has or has not occurred. But Boots does not say it gave notice of termination in May 2009. It accepts it did not give notice until November 2009: and the (different) question here is whether in deciding what notice period is reasonable the Court is entitled to take into account the fact that the notice did not come "out of the blue" but was given for a date which it had in principle been accepted in unresolved negotiations would be the termination of date of the transitional period. In my judgment it can.
  111. Since I hold that reasonable notice was given, the dependent damages questions do not arise (though I will briefly advert to them). What remains is (i) the "good faith" term and (ii) the Counterclaim.
  112. The "good faith" term which it is said should be implied into the implicit contract between was identified in Mr Mill QC's opening of the case as being exactly that expressly incorporated into the 2007 Agreement (see paragraph 11(q) above). Mr Mill QC did not suggest that the term became part of the implicit contract because the 2007 Agreement was incorporated into the arrangements arrived at in February 2009 (although this was the thrust of Mr Shannon's evidence). Counsel argued that the modern approach was for the Court to consider whether the provision which it is sought to imply into the contract would spell out in words what the contract, read against the relevant background, would reasonably be understood to mean: Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988 at [21]. Mr Mill QC referred to clause 13.4 of the 2007 Agreement and submitted that the parties were to be taken as having obviously intended that that term should form part of their implicit contract since there were no material differences between the circumstances of the contract entered into in February 2009 and those attending the 2007 Agreement.
  113. In support of that analysis he relied upon the decision of Leggatt J. in Yam Seng Pte Ltd v International Trade Corporation [2013] EWHC 111. ITC had granted to Yam Seng an exclusive distribution right for the sale of a product at duty-free outlets: but it then provided the same product to a different distributor for sale in the same domestic market at a price that was lower than the duty-free price. Yam Seng terminated the contract. Leggatt J held it entitled to do so for breach of an express term in the contract. But there had also been a claim that ITC was in breach of an implied "good-faith" term. The judge accepted that English law did not recognise a requirement of good faith as a duty in implied by law into all commercial contracts. But he held:-
  114. "Nevertheless, there seems to me to be no difficulty, following the established methodology of English law for the implication of terms in fact, in implying such a duty into any ordinary commercial contract based on the presumed intention of the parties."

    In dealing with the presumed intention of the parties he said:-

    "… the relevant background against which contracts are made includes not only matters of fact known to the parties but also shared values and norms of behaviour. Some of these are norms that command general social acceptance; others may be specific to a particular trade or commercial activity; others may be more specific still, arising from features of the particular contractual relationship…..".

    Amongst the contractual relationships which he identified were contracts which involve a long term relationship between the parties and to which they make a substantial commitment, saying:

    "such relational contracts … may require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are interested in the parties understanding and necessary to give business efficacy to the arrangements will stop examples of such relational contracts might include some joint-venture agreements, franchise agreements and long-term distributorship agreements"

    Mr Mill QC sought to bring the arrangements made in February 2009 into that category.

  115. I do not accept that submission on the facts. The 2007 Agreement was a true joint-venture which was contemplated to last for a considerable period: and it made appropriate express provision (though not in unqualified terms) about the approach each party should adopt to the relationship. The implicit contract entered into in February 2009 was brought about by force of circumstance, and is plainly an interim arrangement affording the different parties an opportunity to negotiate a new joint-venture. Its terms do not depend upon the subjective intention of the parties, but upon what was communicated by words or conduct. An objective observer looking at what Boots and Hamsard said and did would be bound to conclude that they recognised the necessity for such an immediate, interim contractual arrangement (and that, so far as it was necessary to give commercial effect to that interim arrangement, would refer to the financial and operational terms of the 2007 Agreement). But the observer would conclude that they did not regard themselves as in a long-term arrangement governed by all of the terms of the 2007 Agreement. It is not obvious that they would have intended a clause about "good faith" directed to the conduct of a long-term joint-venture to form part of their interim bargain (though it may well have become an express term part of any restructured venture).
  116. I would hold that there is no "good faith" term of the type contended for to be implied into this interim arrangement.
  117. I would maintain that view even if the arrangement between Boots and Hamsard is to be regarded as some sort of nascent joint venture in the course of negotiation. I do not regard the decision in Yam Seng Pte Ltd v International Trade Corporation as authority for the proposition that in commercial contracts it may be taken to be the presumed intention of the parties that there is a general obligation of "good faith". I readily accept that there will generally be an implied term not to do anything to frustrate the purpose of the contract. But I do not accept that there is to be routinely implied some positive obligation upon a contracting party to subordinate its own commercial interests to those of the other contracting party. Boots was not obliged as a matter of "good faith" to order from Hamsard goods that it did not want (the so called "transitional AW10 stock") simply because if it had done so the nascent joint venture would have been more profitable.
  118. Further, if a term is to be implied then I consider that it would only have imposed on the parties a duty to deal with one another on an open and collaborative basis. That is the obligation actually imposed in the 2007 Agreement. There is no obligation to maximise profit. The term plainly cannot be read as subjecting every other contractual obligation to the qualification that the maximum Net Profit must be generated by the relationship.
  119. Boots had a contractual right to terminate the relationship on reasonable notice. It was free to exercise that right according to its terms. The right was not subject to a qualification that it could only be exercised in "good faith" and so as to "maximise the Net Profit generated under the Agreement".
  120. Boots had no contractual obligation to order any particular category of goods from Hamsard. If Boots decided not to sell children's gloves Hamsard could not say "But you have ordered gloves in the past: and the "good faith" term requires you to keep on ordering them so that our collaboration yields the maximum profit". This principle applies to the AW10 stock. Even if Boots had in one year (2009) ordered winter stock for early delivery and even if (as Hamsard contended and Boots denied) this had created some legitimate expectation that in the ordinary course Boots would do the same again (a proposition I do not accept), 2010 was different. Hamsard was not to be the source of the AW10 range. Boots was under no obligation to order "transitional AW10" stock from Hamsard. This would not have been "transitional stock" since it would not be related to the actual AW10 stock provided by Mothercare from 1 September 2010. It would be a range introduced in competition with the intended AW10 Mothercare-sourced stock and ordered purely for Hamsard's benefit and to the detriment of Boots' sales strategy.
  121. Boots had a contractual right to set the prices for the products: this was undoubtedly one of the financial and operational terms of the 2007 Agreement by reference to which the implicit contract was operated. The right to set sale prices applied to goods which belonged to Boots and for which it had already paid Hamsard. The right was not subject to a qualification that it could only be exercised in "good faith" and so as to "maximise the Net Profit generated under the Agreement". It was not subject to some unstated obligation to sell the stock for the best price reasonably obtainable. Indeed, according to the very terms of Clause 10.2 of the 2007 Agreement Boots was free to exercise that right notwithstanding the provisions of any other term of the agreement. The implicit contract cannot have been on more onerous terms.
  122. I do not accept the submission by Counsel for Hamsard that the expert evidence established that at the end of a trading relationship remaining stock is sold via a discount outlet or a surplus trader and that therefore "as a matter of good faith" this ought to have happened. The evidence established only that this is what often happened but that it was a matter of being flexible and reactive to the circumstances at the time, there being no hard and fast rule. No implied term to that effect can be smuggled into the contract under the cover of a "good faith" term.
  123. I therefore hold that the claimed "good faith" term is not an implied term of the implicit contract: and that if it was then Boots did not act in breach of it either in failing to order "the transitional range" or by disposing of the broken stock by giving it to charity. Assuming the claimed term to be implied, Boots was free to exercise its contractual rights honestly in its own commercial interests: it was not obliged to subordinate those interests (in ordering stock it did not want or in facilitating the sale of rival products at the very time it was launching its new range) to further Hamsard's competing interests.
  124. Had I been of the view that there was some obligation to order transitional stock or sell (rather than give away) broken stock the damages assessed would have been very small. The "transitional stock" would have been selling in direct competition with the discounted SS10 stock, and the one would have impacted on the other. The broken ranges were by definition the stock Boots had been unable to dispose of even at absolute knockdown prices.
  125. This brings me to the Counterclaim issues.
  126. The first issue concerns the Advantage Card costs. The Advantage Card is Boots loyalty card. Points are earned on products purchased and may be redeemed for other products. Points earned on buying shampoo could be redeemed against a baby-grow (and vice versa). Not all points are redeemed and not all sales earn advantage points the effective rate of discount where points are earned is 4%. But under the 2007 Agreement (and the budgets initially agreed between Boots and Mini Mode 2) the way this was brought into the accounting for the purpose of calculating the profit share was to allocate to Operating Costs a fixed 1.3% of sales (rather than the effective discount of 4%).
  127. In March 2009 Boots adopted a different practice as regards Hamsard: Boots charged the actual cost of all Advantage Points awarded on sales of childrenswear. This varied from 0.9% to 5.1%.
  128. Hamsard argue that in the absence of specific agreement to charge actual Advantage Card Costs against Operating Costs Boots could only charge 1.3% of sales. Boots argue that Ms Polson had suggested that for the period from 1 August 2009 until 31 August 2010 the figures to be set against Operating Costs should be "variable per month… finance will provide actuals at each month end", and that there had been no positive dissent from that proposition, so that it became an agreed part of the transitional plan.
  129. In my judgment when Boots and Hamsard acknowledge that the operation and financial provisions of the 2007 Agreement should apply to their implicit contract, that included an acknowledgement that the constituent elements of the Operating Costs should remain the same (subject to contrary agreement). This meant that Advantage Card Costs of 1.3% of sales could be taken against part of the Operating Costs.
  130. The actual complaint made in the Particulars of Claim relates to the period from 1 February 2009 to 31 August 2010.
  131. February and March 2009 fell within a year for which the budgeted Advantage Card costs were 1.3%.
  132. The budget for April 2009 through to March 2010 contained a budget figure as regards Advantage Card costs of 2.2% of sales.
  133. It is common ground that no budget provision for Advantage Card costs was made for the period commencing April 2010 through to August 2010.
  134. I find (in reliance upon the analysis undertaken by Doug Hall BA FCA (the head of Forensic Services at Smith & Williamson, an impressive witness) that in February and March 2009 (when the implicit contract came to being) Boots actually charged 1.3% of sales as the Advantage Card costs element of the Operating Costs. Since this is the figure for which Hamsard contends, there can be no complaint.
  135. I find that for the period from 1 April 2009 to 31 March 2010 there was a budget produced which allowed for 2.2% of sales to be carried to Operating Costs. Mr Shannon says in his evidence that there was an agreed budget for this period, and no budget, other than that to which I have referred, has been produced. On that evidence I find that Boots and Hamsard agreed that for that period the budget figure for Advantage Card costs was 2.2% of sales. In fact over the period it appears that "actual" costs were used in the computation of the Operating Costs. This resulted in the percentages varying from 0.9% to 5.1% (and averaging 2.9%). Some £404,856.00 was charged in excess of the budget figure. It is necessary to assess what would have been Hamsard's share of this excess cost (which would otherwise have been distributable as part of its profit share). I accept Mr Hall's evidence that this would have been £92,000.
  136. I do not accept Boots' case that in fact the use by Boots of Advantage Card promotions drove sales higher than would otherwise have been the case, to the benefit of Hamsard's profit share, so that it was reasonable to charge higher Advantage Card costs against Operating Costs. In my judgment, it is not a question of what is "reasonable": the question is what would an objective observer (acquainted with the common knowledge of the parties) have understood them to have agreed by the words they used and the acts they undertook. It may well be the case that the increased costs of the Advantage Card were offset by increased sales: but if the parties had not agreed the consequences of that, then their bargain must be adhered to.
  137. Nor do I accept Boots' case that at monthly or quarterly reconciliations the "actual" costs were accepted. This is in effect a plea of "settled accounts": it was not flagged up in the pleaded case and accordingly no evidence was led as to these meetings.
  138. This leaves the 5 months from 1st April to 31st August 2010. It is common ground that no budget was agreed for this period. This was the period when the parties were agreed upon selling off the stock at discounted prices in order to shift it before the termination of the relationship. But they are to be taken as having conducted that exercise within the same financial and operational framework as had hitherto existed. I would therefore hold that for the 5 month period the rate of 2.2% (being the last agreed rate) continued to apply in the absence of agreement upon an alternative. The experts have not provided a figure for this. Working with appendix 6 to Ms Hindson's Second Supplemental Report (which I accept as reliable) I estimate this figure to be £31,000.
  139. The consequence of this is to entitle Hamsard to an adjustment of £123,000.00 in its favour. The amount of the Counterclaim should be reduced by that amount.
  140. I turn to the question of fixtures and fittings. This may be shortly dealt with. Boots has always accepted that if Hamsard put forward a figure for the written down value of Hamsard's fixtures and fittings, then Boots would be obliged to pay. However, Hamsard never calculated the written down value of the fixtures and fittings and never made any demand upon Boots. It had not done so when the proceedings commenced or when Boots made its Counterclaim. Indeed, it did not do so until part way through the trial before me. Boots immediately admitted the £29,000 claimed. Mr Shannon complained that Boots should have reminded him that he had not ascertained or demanded the written down value of its fixtures and fittings. But there is nothing in that complaint. This further reduction reduces the Counterclaim to £63,920.
  141. In undertaking this calculation I have had to decide whether Boots is to be treated as entitled to a 20% share of profits for July and August 2010: or whether Hamsard should be entitled to a "blended rate". I have decided that Hamsard would only have been entitled to 20% since that is the rate that would actually have been earned under the financial and operational conditions derived from the 2007 Agreement that were imported into the implicit contract for those two months. The fact that a higher average rate might have been earned if the contract had continued for longer is irrelevant. One is only looking at a defined two month period at the start of the next contract year.
  142. In assessing the Counterclaim I have also had to consider Hamsard's argument that the invoice on which the Counterclaim is based should be adjusted by altering the allocation of the stock loss. This is an issue that only really emerged in the exchange of expert evidence itself (which continued during the trial) as Hamsard sought further points of attack. The nature of Hamsard's case is that the residual stock should have been sold at a discount of 75% and that if that had been done then the stock loss figure would have been different. I have already addressed (and rejected) the argument that Boots was not entitled to give away the broken stock. In any event this was stock remaining unsold even after it had been on sale at discounts exceeding 75%: so the adjustment contended for cannot be maintained.
  143. For these reasons I dismiss Hamsard's claim and award Boots £63,920 on its Counterclaim.
  144. I indicated above that I would briefly address the sundry accounting issues of principle that would have arisen if my decision on the notice period had been different. This, by way of footnote, I now do.
  145. I would in general have preferred the accountancy evidence of Mr Hall to that of Ms Hindson having regard to the nature of the instructions each received, the materials each had to consider, their respective experience, and the consistency of and basis for Mr Hall's views.
  146. In assessing damages for any early termination of the contract I would have asked: what sum (on the balance of probabilities) would Hamsard have earned by way of profit share?
  147. In answering that question I would have applied the "profit staircase" under the 2007 Agreement. I would not have used a "blended rate" derived from historic data for full year's trading.
  148. In assessing the likely level of sales I would not have assumed that the demise of the Adams operation would have significantly increased the level of sales growth for the extended notice period. Hamsard contended for 16.54% uplift. The historic level (pre-Hamsard) had been an annual rate of 11.6%. The evidence established that the undercapitalisation of Hamsard's business affected supply. Indeed one can see that sales plummeted at the time of Mini Mode 2's collapse. Absent any clear evidence that Hamsard had the capital base to sustain growth I would have allowed sales growth of 5%.
  149. In assessing profitability from those sales I would have assumed the same gross profit percentage as in the period 14 February 2009 to 31 August 2009. I would have allowed 2.2% as the Advantage Card costs.
  150. I would then have adjusted that figure to reflect the fact that in order to obtain that profit share Hamsard would have been obliged to incur overheads which were not recoverable as Operating Costs (and so would have to be debited to the profit share). I would estimate those at 20% of turnover (about half of what Mr Hall calculated).
  151. Then (since I have not taken any funding costs into account in assessing overheads) I would have adjusted that answer by endeavouring to assess what it would have cost Hamsard to perform its part of the bargain. I would not have assumed that Boots would (without charge) have continued to supply Hamsard with working capital by paying suppliers direct during any extended period. I would have tried to estimate what capital was required, whether Hamsard could (as a freestanding company and not part of the Adams Group) have got it from the market or from Mr Shannon or whether it would ultimately have had to have relied on Boots (and to allow a discount on its supply invoices as in the past). The quality of the evidence would have made this difficult: but I would have made a modest adjustment to reflect those costs (or the chance that Hamsard would not, as capitalised, have survived the entire lengthened notice period). I would have taken the charge that was made in 2010 for additional discount (£250,000) as a reliable indicator of funding costs.
  152. I would not have made any adjustment to reflect any savings by Hamsard on IT or warehousing costs or on staff redundancies. The evidence on these issues (even if not the subject of sustained challenge on account of its lateness) was profoundly unsatisfactory.
  153. These conclusions are not material to my disposal of the case, summarised in paragraph 108.
  154. I will hand down this judgment on 31 October 2013 at 2.00pm.

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