Beware Informal Contracts

On a daily basis businesses worldwide enter into commercial arrangements with other businesses, and in facilities management the outsourcing of non-core activities is particularly common. In many cases these commercial arrangements are on the basis of trust and previous relations rather than by entering into a formal contract (either written or verbal). The parties may have various reasons for relying on relatively informal arrangements including inequality in the parties' negotiating positions or simply misplaced trust.
A recent Court of Appeal case - Baird Textile Holdings Limited -v- Marks & Spencer plc - served as a reminder that, whatever the reason, commercial arrangements are best regulated by a formal contract and not left to the real or perceived understanding of the parties.
The case
For 30 years Baird had been one of M&S's major garment suppliers until, without warning, in October 1999 M&S terminated their supply relationship with effect from the end of the then current production season. Historically, the M&S 'contract' had accounted for between 30% and 40% of Baird's business. Baird brought proceedings against M&S claiming losses in excess of £50m for the failure by M&S to give reasonable notice of termination - in its view, three years.
There was no express contract, written or verbal, regulating the on-going commercial arrangement between Baird and M&S. There was however a close "tie-up" relationship, described by M&S as a partnership in the sense of a spirit of co-operation rather than in any legal sense.
On an annual basis Baird supplied garments to M&S in varying quantities against twice-yearly orders and allowed M&S to be closely involved in design and manufacture. Baird further established and maintained a workforce and manufacturing capacity sufficient to meet and respond to M&S's continuing requirements. Sir Richard Greenbury (former Chairman and Chief Executive of M&S) gave evidence for Baird that: "Indeed it was clearly understood that once a major supplier to M&S, always a supplier."
In the absence of a formal contract Baird had to rely on other legal arguments, namely that a contract should be implied from M&S's conduct or, alternatively, that M&S by its conduct should be stopped from denying that the relationship was to continue long-term subject to termination on reasonable notice (the estoppel argument).
Using the new procedure available to a defendant under the Civil Procedure Rules M&S made an early application for judgment on the ground that Baird had no reasonable prospect of succeeding on either claim. The Court of Appeal found against Baird on both its claims.
A key factor in Baird's failure was the agreed fact that M&S deliberately did not conclude any express contract to regulate their on-going relationship because that gave it greater flexibility in its dealings with Baird. The Court of Appeal further held that a contract could not be enforced because the Court could not determine with certainty what quantity of garments M&S were bound to acquire from Baird and at what price.
The result was harsh on Baird and some might consider unjust. The Court of Appeal itself suggested that the House of Lords should reconsider the existing law of estoppel and it is understood that Baird has now lodged an appeal. However, in the absence of a change of the law, the best protection for parties to commercial arrangements remains to ensure that express contracts, the terms of which are certain, are concluded, irrespective of the relative bargaining position of the parties. Even if the law is changed following a further appeal it must still be regarded as best practice to rely on a formal contract.
This document is for general guidance and research purposes only, and does not purport to give professional advice. Please check the date at the top of the article; the Workplace Law Network retains historic articles for general research.