Terminating an indefinite contract

There may be many reasons for a contract having no end date (Indefinite Contract).  However, in practice this can be problematic when a party wants to end the contract for any reason.  In this article we examine how to deal with the various contractual requirements for termination of an Indefinite Contract.

Common law notice requirements

Courts have historically been prepared to imply a term into an Indefinite Contract that the terminating party, absent any breach by the other, may terminate the contract by providing “reasonable notice” (Reasonable Notice Clause).^[1]  If the non-terminating party resists termination, it will be up to the terminating party to satisfy the Court there was an implied Reasonable Notice Clause.  This will most commonly be argued as matter of common sense, as contracts cannot be indefinite even if entered into by corporate entities.

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 determine the exact amount of time. 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.  Each case turns on its own facts.

A notable authority for this is the case of Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 (Crawford).  In that case, McHugh JA said at [448] that 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].”

In the more recent Federal Court case of Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072, Ryan J said at [26] 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.”

The case of Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd [2011] NSWSC 457 (KNZ Australia) upheld the reasoning in Crawford.  In that case, Colyer Fehr Tallow Pty Ltd ACN 001 849 869 (Colyer) was claiming damages from KNZ Australia Pty Ltd ACN 003 169 293 (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 most twelve (12) months and at 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 relied on 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.

From the above, we can extrapolate that the more the non-terminating party has to lose from the termination, the longer the notice period will have to be.

Compensation

Under Australian law, the party that wishes to end the Indefinite Contract will be required to compensate the other party when:

• reasonable notice is not given;
• terms of the Indefinite Contract stipulate that compensation would be required should a Party wish to leave the Agreement; and
• no estoppel right of action could be applied on the facts.

Payment of commission

The doctrine of unjust enrichment in equity would apply to commission payments if a dispute arises between the parties in which one Party claims that it is owed unpaid commission payments where they introduced the customer to the other Party and/or negotiated the sale in the following scenarios:

• for sales made and orders completed prior to termination where the other Party has not paid the agreed commission due;
• where the sales order was received before the Agreement was terminated but the payment and fulfilment of the order was not completed until after termination of the Agreement; or
• the transaction is entered into within a reasonable time after termination; and
• was wholly or mainly attributable to the agent’s efforts.

Takeaways

In general, where a contract is for an indefinite term, consideration must be had of the amount of loss that that the non-terminating party will suffer as a result of providing notice to terminate.   Put another way, if a party has invested a significant amount of money into infrastructure and marketing then a short notice period is unlikely to be successful.

Links and further references

Cases

Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd [2011] NSWSC 457

Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438

Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072

Stones Corner Motors Pty Ltd trading as Keema Automotive Group v Mayfairs W’Sale Pty Ltd trading as Suzuki Auto Co [2010] FCA 1465

Further information about indefinite contracts

If you need assistance with forming contracts or knowing your rights and obligations when leaving an Indefinite Contract, contact us for a confidential and 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] Stones Corner Motors Pty Ltd trading as Keema Automotive Group v Mayfairs W’Sale Pty Ltd trading as Suzuki Auto Co [2010] FCA 1465.

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