Case William Baird - Marks and Spencer (M&S)

From: Harrison, D. (2004) Is a long-term business relationship an implied contract? Two

views of relationship disengagement, Journal of Management Studies, 41, pp.107-125.

CASE STUDY
The case discussed in this part of the paper covers the period from October 1999,when M&S
terminated the relationship, through to July 2001 when William Baird were refused leave to appeal to
the House of Lords. The case has been written from a contents analysis of secondary data sources. It
was not possible to obtain interviews because of the ongoing legal action. The secondary material is
taken from the William Baird’s Particulars of Claim document, and the High Court and Court of
Appeal judgements, web sites, and practioner journals.

The Business Relationship

William Baird supplied M&S with men’s, women’s and children’s clothes, approximately
7 per cent of the total clothing stock.[2] The business relationship between the two companies began in
1969. William Baird had a contract business that made clothes for several large UK retailers. In 1985
M&S requested separate lines on the factory floor, and later, separate factories. By August 1997 the
whole contract manufacturing division was dedicated to producing garments for M&S. This
meant that William Baird’s contract business had only one customer and had therefore become an
exclusive supplier. M&S ‘encouraged’ William Baird not to have other customer relationships. Such
exclusivity in supply provided benefits to the retailer in terms of flexibility, e.g. rapid production of
popular garments. The assets or resources – plant, machinery, etc – used by William Baird to supply
M&S became specialized in use over time. William Baird became increasingly closely adapted to the
requirements of M&S. This adaptation and interaction can be characterized by the following features.
There was a close relationship between senior staff at the two organizations. For example, there were
strategy meetings covering a three-year period, coupled with meetings every six months to discuss
the forthcoming year. There were daily interactions between middle and junior levels of management,
regarding ‘sales, design, technology, quality and logistics’.[3] M&S prescribed a garment-manufacturing
timetable covering ‘. . . the design, development, manufacture and delivery of garments sold under the
“St Michael” brand name season by season’.[4] There were written orders in place for the seasons prior
to April 1996. Afterwards, orders were placed using a common electronic
system.[5]

There was no written contract in place between the two organizations. M&S had a deliberate policy of
not having written contracts with their suppliers, asserting that greater flexibility could be attained without
their use. In addition, there were few other safeguards in place and therefore William Baird held the
financial investments. M&S accessed these in return for regular and continuing stable
orders. William Baird had expectations for the future continuity of the relationship, and M&S had a
positive business reputation.

Hence a relational contract was in place, underpinned by the garment manufacturing process. The
business relationship was mutually beneficial, in the basic exchange of exclusive supply for regular
orders.

Legal Action
In 1999 M&S started to reduce the number of relationships with UK garment suppliers. M&S were
experiencing poor trading performance: 1999 profits were £545m, compared to £1.16bn in 1998.[6] AT
Kearney conducted a strategic review of M&S between June and October 1999. One part of the review
incorporated relocating and restructuring the supply base. Internationalizing the supply base was
expected to result in lower production costs and economies of scale.[7]

1
In October 1999 M&S terminated the relationship. The termination of the relationship was considered
by William Baird to be a shock. The actor held expectations for the future continuity of the relationship.
The implicit understanding was that the flexibility attained through exclusivity resulted in a steady stream
of orders year on year. M&S had apparently not informed William Baird of their intentions, nor given
space for negotiations or possible remedy of the problems identified.

One month later William Baird announced the intention to sue M&S for £53.6m as compensation for
breach of contract. ‘We are extremely disappointed that a longstanding relationship, based on mutual
trust, has been terminated unilaterally’.[8] The amount was to cover redundancy payments and other costs
regarding closing several factories. The central basis of the claim was that William Baird considered they
were entitled to a three-year notice period. Three years was considered to be appropriate because of the
duration of the relationship, the foregoing of other possible customer relationships, the dedicated assets
in place, and the time required to build alternative customer relationships. In essence, the argument was
that it might have been possible to re-deploy dedicated assets within new customer relationships, but this
takes time.

In response, M&S stated that they would ‘. . . fight any court action and that its legal advisors had said
William Baird’s case had “no merit” ’.[9] This was because there was no written contract between the two
actors. There would only be possibility for financial redress with a written contract in place, detailing
obligations towards a supplier.

The Implied Contract

William Baird admitted that there was no written agreement in place between the actors. This was
considered to be irrelevant, however. Instead, William Baird argued that a long-term relationship is akin
to an implied contract, and therefore should be legally enforceable. In other words, a relational contract
only between the two organizations should offer the same possibilities for legal redress as an
explicit, written contract. The norms and expectations operating within the relationship created
enforceable obligations and promises for both of the actors.

To establish that a relational contract is akin to a formal contract required establishing a set of implied
obligations and implied promises between the two actors (Alsop, 2000). The implied obligations on the
part of William Baird were based upon four main areas: (i) to supply garments each year on a seasonal
basis; (ii) for M&S to be involved in depth in the design and production of those garments; (iii) ‘to deal
with Marks & Spencer in good faith and reasonably having regard to the objective of the relationship;
(ibid, p. 4); and (iv) to have workforce and plant capacity for flexible production for M&S.

In exchange for these four main obligations, William Baird argued that M&S offered four implied
promises. These were that ‘. . . the relationship would continue long term and would be terminable only
upon the giving of reasonable notice . . . M&S would acquire garments from Baird Textile Holdings
Limited (BTH) in quantities and at prices which in all the circumstances were reasonable . . . and would
deal with BTH in good faith and reasonably having regard to the objective of the relationship’ (ibid).