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Thinking of ending a contract? What if there’s no notice to terminate provision?

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18/03/2014


Thinking of ending a contract? What if there’s no notice to terminate provision?

It is well established law that contracts which do not state their duration or explain how to deal with their termination, can be terminated by one or both of the contractual parties giving reasonable notice.

That’s all very well, but it leaves the crucial question: what constitutes reasonable notice?

A recent case [1] dealt with just this issue. The claimant, Hamsard and various of its predecessor companies supplied clothes to the defendant, Boots under a variety of trading arrangements. After a rocky period in their dealings, Boots gave Hamsard 9 months notice to terminate their agreement (which was not in writing). Hamsard argued that was unreasonable; the court disagreed.

While there’s nothing new in the judgment, the court set out a list of factors to consider when deciding what constitutes reasonable notice for terminating a contract. If you are contemplating the end of a contract and are unsure of how much notice to give, this list can offer some useful guidance.

Here are some issues to consider when assessing what constitutes reasonable notice to terminate.

Review the facts: what would be a reasonable length of notice to give in all the circumstances? How is the contract being managed now? Are you or the other party in breach? Are either of you taking action over and above what the contract stipulates? What effect will such action have in the longer term? How long can such action be sustained? Has termination been discussed? What was the reaction to it?

What’s normal in your trade? What’s the normal notice period for contracts similar to yours? What’s the normal trade practice? What is normal in your trade in the current economic climate? You might also consider the subject matter of the contract. Are you, for example, supplying goods? What type of goods? What’s the business cycle for the design, procurement, manufacture and sale of such goods?

The notice must be reasonable at the point it is given i.e. on the current facts. This might not necessarily be the same as when you first agreed the contract – circumstances might have changed. Assess what has changed and how that might affect the length of the notice period.

That said, the circumstances at the time you entered the contract might still be relevant. When was the contract formed? How was it formed? How formal an arrangement is it? Has it been amended? How often? Does it provide a framework for a long term relationship – or a shorter arrangement? What were the parties’ expectations at the time of the contract being entered? How long did you expect the contract to last? What are the parties’ expectations now? Does the actual business being conducted under the contract point to a long or short term business relationship? What changes have happened since you entered the contract? Given those changes, what notice period might be reasonable? For example, if a contract designed to last a year with a 3 month notice period, actually lasts 10 years, a 3 month notice period might be too short and unreasonable.

Review the pre-contract history: what happened before this contract was entered into? What’s the history behind your contractual dealings with the other party? Can you identify your common business purpose with the other party?

How formal is your relationship with the other party? ‘The more relaxed the relationship, the less likely it is that the law will imply a lengthy notice period’. [2]

Each case will present a different combination of facts and lead to a different conclusion about what is reasonable. Indeed, the court in the Hamsard case warned that the facts of other cases dealt with by the courts might not offer much useful precedent.

Given the choice, the best way to deal with notices is to agree their operation from the outset.

Tips to help you avoid future arguments
When you negotiate contract terms, consider the optimum duration for the contract and how long you would like as a notice period. Negotiate and agree these issues and formalise them in the contract.
Review these terms periodically throughout the contract. If the circumstances change, consider whether the notice period is still appropriate. If not, renegotiate.
Review your current contracts. Do they cover termination? If not, consider renegotiation.
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[1] Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) v Boots UK Ltd [2013] EWHC 3251
[2] Paragraph 68 of the judgment

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