Corporate Focus - June 2010

Reasonable Notice of Termination

When parties enter into business arrangements it is all too common that they do so without finalising the negotiations on the terms of the contact. Consequently if there is a dispute, and the parties cannot point to a signed agreement containing all the relevant terms and conditions, the parties will seek to argue that the draft of the contract which favours them applies. The court then has to determine what agreement has been reached and what terms and conditions are in force. More particularly, if the parties have not agreed on termination provisions then the question is how and when should the contract be terminated?

Absent an agreement on how to terminate the usual rule is that reasonable notice should be given (unless of course a clear material breach of contract can be identified). Determining what is ‘reasonable notice’ is not without its own difficulties. However, the case of Jackson Distribution Limited –v- Tum Yeto Inc  has gone some way in giving guidance on the point.

In Jacksonthe Claimant sought damages for breach of contract in bringing to an end a sole distribution agreement. Negotiations had not resulted in a signed contract but the parties carried on in business anyway. The Claimant argued that by conduct the parties had relied on a draft agreement giving an initial term of 6 years terminable only by breach. The Court had to determine what were the terms and conditions of the contract and whether the Defendant was entitled to terminate as it did.

It was found that the only issue on which there was agreement was that there was a sole distribution agreement. The balance of the terms had to be implied, including that termination should be by way of reasonable notice (there was no evidence of breach of contract to allow immediate termination). But what was reasonable notice?  Royce J set out various factors to be taken into account which will be of use to all parties in a similar situation.

Royce J first had reference to the case of Alpha Lettings Limited –v- Neptune  where Longmore LJ found that there was little authoritative guidance on the point. There it was suggested that reasonable notice might equate to the time needed to find an alternative supplier or the time required for an orderly wind-down of the business. In addition other factors could be considered.

The first was the degree of formality of the relationship. The more relaxed a relationship the less likely it would be that a lengthy notice period would be implied. The degree of relaxation includes whether one party is free to sell competing products. If so a shorter period may be required.

The second was the length of time which the relationship had lasted and accordingly the longer the relationship the longer the notice period. Alternatively if a distributor required greater initial capital investment at the outset then in the early years a lengthy notice period may be appropriate; but as the relationship progressed and the business became established a shorter period of notice may then apply. Unlike in a contract of employment, where a long serving employee has a legitimate expectation that their services will be properly considered in determining the notice period, businessmen were found to expect to run risks and would not get the same protection.

Taking these factors into account in the present case Royce J found that as there was no written agreement there was no great degree of formality; there was no clause preventing sale of competing goods; whilst the relationship only lasted 2 and a half years there had been substantial initial investment; and the percentage of turnover of the Claimant’s business attributable to the Defendant’s products had decreased. He considered additional factors such as that the business was seasonal; that the Claimant had recently taken on new employees, vehicles and warehousing; that it would take time for the Claimant to find an alternative distributor and that then it would take 3 years to establish the new brand and profitability. In all the circumstances, having reference to earlier decisions, it was found that 9 months was the appropriate notice period.

In the first instance it is clear that if at all possible parties should ensure that termination provisions are clearly dealt with in the contract, or that when a fixed term contract has expired an arrangement is reached on future termination provisions. Otherwise costly and time consuming litigation can ensue and at trial the decision is effectively taken out of the hands of the parties. If parties do need to address the issue then it is hoped that at least if they can have reference to this decision it may assist in seeking to resolve disputes without recourse to litigation.