Terminating a contract with no set end date

In practice, we come across commercial agreements of varying types (Contracts) that, for whatever reason, don’t provide for a term or an end date (Expiry Date).   There may have been reasons for this at the time that can no longer be recalled.   It raises a number of issues, particularly where the subject matter of the Contract is not the performance of a discrete set of obligations, but is rather the basis of an on-going relationship.  The most obvious problem that arises in such circumstances is where both parties are performing their obligations under the Contract, but for whatever reason one party (Terminating Party) wishes to bring the Contract to an end.

Implied terms for termination in indefinite contracts

Contracts with no Expiry Date that form the basis of an on-going relationship, rather than provide for the performance a discrete set of obligations, may be characterised as indefinite contracts (Indefinite Contracts).

Courts have historically been prepared to find that it is an implied term in Indefinite Contracts that the Terminating Party, absent any breach by the other party, may terminate the Contract by providing “reasonable notice” to them (Reasonable Notice Clause).^[1]

It is important to be aware that as (in these circumstances) a Reasonable Notice Clause is an implied term, the Terminating Party may, if the other party resists termination, satisfy a court that the term is an implied term of the Contract.

What is “reasonable notice”

Given that there is authority for terminating Indefinite Contracts by providing “reasonable notice”, it is important to understand what factors will be taken into consideration to calculate “reasonable notice”.  Like most legal issues, what constitutes reasonable notice varies on a case by case basis and consequently, there is no definitive test or conclusive statement as to how much notice must be given in these circumstances.

This being said, the Courts have expressed that “reasonable notice” is a period of time that is:

“sufficiently long to enable the recipient to deploy his labour and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a business like manner.”^[2]

In addition to the above, it is important that any period of notice provide the recipient with enough time:

“where appropriate, [to obtain] the fruits of any extraordinary expenditure or effort carried out within the scope of the [Contract].”^[3]

Examples of “reasonable notice”

In a contextual vacuum, the statements quoted above provide at best, guidance to what is required when giving reasonable notice.  However, by virtue of the doctrine of precedent, under which the Courts are required to treat like cases alike, previous cases can shed light on what is, and equally importantly, what is not, reasonable notice in certain circumstances.

A recent example is the decision in Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd.^[4]  In this case, Colyer Fehr Tallow Pty Ltd (Colyer) was claiming damages from KNZ Australia Pty Ltd (KNZ) for the wrongful repudiation of an oral contract, entered into in or about April 1993, on 10 April 2006 by providing two (2) weeks’ notice.  Colyer asserted that reasonable notice, in these circumstances, was at the longest twelve (12) months and at the least six (6) months.  Under the contract in question Colyer acted as a buyer for KNZ.  The Court held that two (2) weeks notice was reasonable in the circumstances and in doing so emphasised the following factors:

• Colyer did not require significant assets or need to make significant ongoing investments to perform its obligations under the contract;
• the contract did not restrict Colyer from providing similar services to third parties; and
• a longer notice period would have, in these circumstances, disadvantaged KNZ, as in order to replace the services supplied under the contract they were required to establish its own relationships with suppliers.

In the earlier case of Software Link (Australia) Pty Ltd v Texada Software Inc,^[5] Ryan J remarked, (in obiter), that ninety (90) days’ notice for the termination of a software distribution agreement, entered into in or around 1984, was not reasonable.

General observations

It is evident from the above that what is considered reasonable notice can vary drastically between individual cases.  Each situation will turn on its own facts.  However, one take away from the varying decisions is that generally the more the non-terminating party has to lose from the termination, the longer the period of time which is considered reasonable is likely to be.

Best practice dictates that prior to terminating any Indefinite Contract, you see legal advice. The costs of ineffective termination are likely to far outweigh the costs of obtaining legal advice on how to best terminate it.

Further information about contract law

If you need advice on terminating a commercial contract, contact us for a confidential an obligation-free discussion: 

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] See generally Stones Corner Motors Pty Ltd trading as Keema Automotive Group v Mayfairs W’Sale Pty Ltd trading as Suzuki Auto Co [2010] FCA 1465 and Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072 at [26].
[2]Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072 as per Ryan J at [26].
[3] Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 447 as cited in Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd [2011] NSWSC 457 at [64].
[4] Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd [2011] NSWSC 457.
[5] The Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072.

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