Australia: ‘Till death do us part’: terminating perpetual contracts

Addisons Contractual Interpretation Series
Last Updated: 14 November 2013
Article by Kristy Dixon and Belle Jing


In an earlier article entitled "Addisons Contractual Interpretation Series – Entire Agreement Clauses – Entirely Reliable?", we looked at the ability of an "entire agreement clause" to exclude terms that are not expressly set out in an agreement. We noted that an entire agreement clause is not effective to prevent a court from implying a term unless the agreement expressly excludes the implication of that term.

In this article, we examine whether a general law right to terminate an agreement at will or on reasonable notice can be implied into an agreement that is otherwise framed as a "perpetual contract"; that is, it neither expressly contemplates a set term nor the circumstances (whether at all or unambiguously) under which the agreement can be terminated.

Key Points

  • Whether a commercial contract is a "perpetual contract" – that is, it does not specify an end date and does not confer any right to terminate – may not always be clear on its face.
  • Where a commercial contract is a perpetual contract, Australian courts appear willing to imply that the parties to the contract must have intended the contract to be terminable, whether on reasonable notice or potentially at will, however such a right is not automatic and will depend on whether it can be implied in the particular circumstances.
  • However, all due care should nevertheless be taken to remove any ambiguity surrounding the term of a contract as there is still room for dispute:

    • Dispute 1: a party may argue that the terminating party wrongfully terminated because a right of termination cannot be implied until the contract has existed for a "reasonable period".

      If a business arrangement is in its initial stages and a party has expended money or effort in developing the business, a court may find that the contract must continue for such time as will enable that party to recoup its expenditure.
    • Dispute 2:a party may argue that it has suffered loss because insufficient notice of termination was given.A terminating party must give enough notice to allow the relationship to be brought to an end in an orderly way and the parties to enter into alternative arrangements. What is sufficient notice will depend on the facts – for example:

      • if the terminating party has a considerable market share, the other parties will probably require more time to build a new business; an
      • do how long the parties previously required to establish similar arrangements
  • It is prudent to ensure that express termination rights are included in agreements to protect the parties, even where a "rolling" or more flexible term of contract is desired.

What Constitutes a Perpetual Contract?

A "perpetual contract" is generally one that does not specify an end date and does not confer any rights to terminate the contract. However, it is not always readily apparent whether an agreement is perpetual or whether it in fact has a finite term.

Take, for example, a contract that does not contain an express term period or any express rights of termination. However, certain provisions in the contract are designated as "essential terms", the performance of certain clauses are expressed to be "of the essence", and the contract specifies that the breach of certain other provisions will constitute repudiation of the contract. The common law rights of termination that are triggered by these clauses arguably define the term of the contract, notwithstanding that it may not be expressly defined. Such a contract is therefore not a perpetual contract despite not having a term or termination rights on its face.

On the other hand, consider an agreement that specifies an initial term but provides that the agreement will "automatically renew" upon expiry of the initial term unless a party to the agreement has given notice of non-renewal prior to the end of the initial term. In these circumstances, if no notice of non-renewal is given within the prescribed timeframe, the agreement will transform into a perpetual contract upon the expiry of the initial term.

When can a Perpetual Contract be Terminated?

Once a contract is identified as a perpetual contract, whether the agreement may be terminated on notice depends on whether the agreement contains an implied term to that effect.1 This requires an examination of the subject matter of the agreement, the circumstances in which it was made, and the provisions to which the parties did and did not agree.2

Freedom of contract discourages the courts from implying terms into a contract based on their view of what the parties should have contemplated at the time of entering into the contract. Yet, where the subject of inquiry is a commercial contract, the nature of the business relationship will ordinarily lead the courts to the conclusion that the parties must have intended the agreement to be terminable and accordingly, to imply a right to terminate the agreement on notice.3

However, the basis for implying such a right may not arise until the contract has existed for a "reasonable period". Usually, if the parties are in the initial stages of a business arrangement and a party has expended money or effort in developing the business (eg where, prior to making any sales, a distributor expends a large sum of money to advertise the manufacturer's product), it accords with the reasonable expectations of the parties that the contract should continue for such time as will enable the party that had incurred the expenditure to recoup its expenditure. Once the business has existed for a reasonable period, the inability to profit from such expenditure is considered a business risk of entering into an agreement that carries an implied right of termination at any time.

Accordingly, once such an agreement has been on foot for a reasonable duration, any party will be entitled to terminate that agreement by notice to the other. Whether an agreement needs to have continued for a reasonable period however, is itself a matter of implication to be determined having regard to the context of the agreement.4

How Much Notice must be given to Terminate a Perpetual Contract?

A perpetual contract that is held to be terminable on notice is not likely to be terminable at will. The terminating party will be required to give a sufficient period of notice to the other party so as to "enable the parties to bring to an end in an orderly way a relationship... so that they will have a reasonable opportunity to enter into alternative arrangements and to wind up matters which arise out of their relationship".5

Importantly, it is not the expectation of any particular party that will dictate what constitutes a reasonable period of notice: its purpose is not to allow a party to continue to make profits during that time to the detriment of another, or to enable a party to replace the whole of the business that they will lose once the agreement is terminated6 but to serve the "common purpose" of the parties, determined by reference to what the parties would have contemplated at the time of entering into the contract.7

In the context of distributorship arrangements, where long-term relationships are not unusual, the courts have taken the view that ordinarily it will be the common purpose of the parties for their business relationship to continue for long enough after notice of termination is given as to enable each party to:

  1. deploy its assets in alternative arrangements (including, where necessary, the retrenchment of employees and contractors without causing undue hardship to them), although the prospect that the relevant party will realise a profit in those alternative arrangements will generally not be a relevant factor;
  2. carry out its existing commitments;
  3. bring current negotiations to fruition; and
  4. obtain the reward of any extraordinary expenditure or effort that the relevant party had expended in contemplation of future earnings (although the distinction between what is ordinary and extraordinary will not always be easy to draw, and is likely to involve a comparison of what level of effort and expenditure was expected or demanded at the time of contracting as part of the ordinary course of business and the level of effort and expenditure actually made).8

Similar principles have also been applied in respect of the termination of joint venture relationships,9 contractor arrangements10 and licences to extract minerals from land.11

Once the common purpose has been identified, the final step is to assess the time reasonably required to fulfill that common purpose; a matter to be judged having regard to the whole of the relationship between the parties as it stood at the time that notice was given, and not simply what the parties would have contemplated at the time of entering into the contract.12

Naturally, what is a reasonable notice period will depend very much on the particular facts of the case. For example, where the terminating party has a considerable market share, it is likely that the non-terminating parties will require more time to build a new business.13 It seems that both historical and after-the-fact evidence, although not decisive, will unavoidably influence that determination:

  1. In Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd14, the leading case in Australia on the subject, the fact that the distributors (the non-terminating party) had, within 6 months, obtained new and significant distributorships that resulted in large earnings in their first year of business, appeared to weigh considerably on the court's finding that a notice period of 6 months was reasonable and that a longer period would not have put the distributors in a better position.
  2. Similarly, in Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd15, it was held that 1 month was reasonable notice, as the respondent required less than a month to make the necessary arrangements to relocate, restructure and rebadge her business when she initially joined the joint venture and was able to relocate and re-establish elsewhere within a week after the appellant proposed the joint venture cease to operate.16

How can Parties Avoid a Dispute about a Perpetual Contract?

While it is clear that in Australia, commercial contracts that are perpetual contracts are capable of being terminated, what is a "reasonable" period for giving notice of termination can be uncertain and difficult to determine.

Therefore, all due care should be taken to remove any ambiguity surrounding the term of a contract and the period of notice required to terminate the contract, to avoid the possibility of a dispute as to whether and how the contract can be terminated.

Even where it is appropriate or desirable to have a more flexible "rolling" contract, it would be prudent for parties to include express termination rights in their agreement which makes suitable provisions to cushion all parties against an expected breakdown in the business relationship.


1 Winter Garden Theatre (London) Ltd v Millenium Productions Ltd [1948] AC 176 (Winter Garden) at 205; Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556 (Martin-Baker) at 581; Crawford Fitting Co and Others v Sydney Valve & Fittings Pty Ltd and Another (1988) 14 NSWLR 438 (Crawford) at 443-444 and 447.

For a term to be implied into a contract, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; and (5) it must not contradict any express term of the contract: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363 at 376.

2 Crawford at 443, citing Re Spenborough Urban District Council's Agreement [1968] Ch 139 at 147.

3 Crawford at 443-444; Martin-Baker at 577.

4 Crawford at 447-448.

5 Crawford at 448.

6 Pacific Products Pty Ltd v Howard [2005] SASC 290 (Pacific Products) at [21]-[24]; Crawford at 448.

7 Crawford at 447, 450 and 454-455, citing Australian Blue Metal Ltd v Hughes [1963] AC 74 (Blue Metal) at 99.

8 Crawford at 441, 444, 445-446, 448 and 449-450; Blue Metal at 342; Pacific Products at [16]-[20] and [30]-[32]; W K Witt (W A) Pty Ltd v Metters Ltd and General Industries [1967] WAR 15 at 23.

9 Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd (2008) 66 ACSR 1 (Lawfund) at [31]-[35].

10 Adrians Transport Pty Ltd v Pacific Dunlop Ltd (T/A Olex Cables) (Federal Court, unreported, 8 March 1996).

11 Blue Metal.

12 Crawford at 444, citing Winter Garden at 199-200; Pacific Products Pty Ltd v Howard [2005] SASC 290 at [15].

13 Crawford at 453.

14 (2008) 66 ACSR 1.

15 (1988) 14 NSWLR 438.

16 Lawfund at [35].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Kristy Dixon
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