InsightsInsight - Commercial Dispute Resolution - POSTED: January 16 2015
Contracts: termination and reasonable notice periods
In today’s commercial environment it is regrettably common for businesses to fail to expressly stipulate a notice period should either party wish to terminate the contract. In fact it is not uncommon for parties to fail to agree a written contract governing their relationship altogether. In the absence of express agreement the Courts may imply a term that the contract can be terminated on “reasonable notice”.
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In the commercial environment it is regrettably common for businesses to fail to expressly stipulate a notice period should either party wish to terminate the contract. In fact, it is not uncommon for parties to fail to agree a written contract governing their relationship altogether. In the absence of express agreement, the Courts may imply a term that the contract can be terminated on “reasonable notice”.
What constitutes “reasonable notice” is not always straightforward and previous cases have considered how “reasonable notice” should be construed. Although each case will turn upon its own facts there are some universal factors which have been established and which should be taken into account when determining the length of notice which should be provided.
The Court has established, in the case of Martin-Baker Aircraft Co v Canadian Flight Equipment  2 QB 556, that what is “reasonable notice” will be determined on the basis of the facts in existence at the time notice was given and not the time when the contract was entered into (although the circumstances at the time of the contract may still be relevant).
The law in relation to reasonable notice periods was helpfully considered in the case of Jackson Distribution Ltd v Tum Yeto Inc  EWCA 982 (QB). This case concerned a distribution arrangement between the parties where there was no formal written agreement, albeit that the parties had discussed a number of arrangements in a series of e-mails and that draft agreements had passed between the parties although none had been agreed.
The judge in the case applied the following factors in reaching his decision as to what constituted reasonable notice.
Depending upon the facts of the case and the type of contract in place, other factors, including the general circumstances and any relevant trade practices, may also be applicable in determining the appropriate notice period when terminating a contract. Although the above provides a useful summary of the factors a Court will consider when determining reasonableness, it is imperative to carefully consider the relationship between the parties in order to be fully informed of a business’ position and the commercial options available (inevitably in terms of negotiating a notice period between the parties). In particular, agency agreements are subject to varied rules regarding reasonable notice periods and should be considered separately.
- Degree of formality: was there a written contract in place; what rights did the parties have pursuant to the contract? This is arguably the most important consideration the more relaxed the contractual relationship the less likely it is that the Court will impose a lengthy notice period.
- Competition: was the other party prevented in any way from selling or acting in competition with the party giving notice of termination? If so this may contribute to a longer notice period.
- Length of the relationship & early investment: a lengthy relationship between the parties and significant initial investment of time, effort and money can all contribute to a lengthy notice period. It may also be relevant to consider whether there was any long term future to the arrangements (in particular in cases which involve a supplier/distributor relationship).
- Dependence for revenue: where the case concerns a distribution relationship in particular, was there any significant dependence on the other party for revenue? This is another factor which can contribute to a longer notice period.
There are a multitude of reasons why parties may wish to terminate an existing contract; either due to a lack of economic viability, breakdown of the business relationship, or simply that one party no longer requires the goods or services. It is always advisable to be clear from the outset as to what constitutes “reasonable notice” on termination. A well-drafted and unambiguous contract can ensure certainty in the parties’ relationship. Such clarity should not be underestimated in its role in reducing the risk of a disputed termination and avoiding any prospective litigation.
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