UK: What Constitutes Reasonable Notice To Terminate?

In an ideal world, no services would be provided or goods delivered until the relevant parties had entered into a written contract. However, in reality, it is often the case that services are commenced, goods delivered, or that a working relationship develops without a formal contract ever being entered into or specific clauses relating to termination being agreed. Similarly, fixed term contracts are often allowed to continue without any addendum or further written agreement being entered into. In those circumstances, in order legally to terminate the contract, "reasonable notice" must be provided. However, determining the amount of notice that a court will see as "reasonable" is a difficult and potentially dangerous guessing game.

In a recent case, a High Court judge found that a reasonable notice period for termination was nine months. In the case, the parties had discussed distribution arrangements by email and had exchanged formal agreements with each other. However, no formal agreement was ever signed. When one party terminated the arrangement, the other party claimed damages for breach of contract (i.e. breach of an implied term in the agreement to provide reasonable notice to terminate).

The judge held that the emails constituted the agreement between the parties and that, as those emails did not deal with termination (and neither party had breached the contract so as to give rise to a right of termination), reasonable notice to terminate the contract should have been given. For a number of reasons discussed in the judgment, including the amount of investment the claiming party had made as a result of the agreement, the judge considered that a reasonable amount of notice would have been nine months.

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High Court determines what is a reasonable notice period

In an ideal world, no services would be provided or goods delivered until the relevant parties had entered into a written contract. However, in reality, it is often the case that services are commenced, goods delivered, or that a working relationship develops without a formal contract ever being entered into or specific clauses relating to termination being agreed. Similarly, fixed term contracts are often allowed to continue without any addendum or further written agreement being entered into. In those circumstances, in order legally to terminate the contract, "reasonable notice" must be provided. However, determining the amount of notice that a court will see as "reasonable" is a difficult and potentially dangerous guessing game.

In a recent case, a High Court judge found that a reasonable notice period for termination was nine months. In the case, the claimant was a distribution company and the defendant was a fashion and skate show brand. The parties first met at a trade show in San Diego in September 2004 where they discussed whether the claimant should become a distributor for the defendant. These discussions were continued via email over a number of months. On 10 March 2005 the claimant sent the defendant an email asking for confirmation that they would be the sole distributor for the defendant in the UK and Ireland. The defendant replied to confirm this but stated that terms would need to be agreed.

Negotiations concerning a formal written agreement continued, and both parties sent their own drafts of a formal agreement to each other. However, neither agreement was signed. Despite the lack of a formal agreement, the parties fully commenced their business arrangement and the Claimant acted as the sole supplier for the defendant in the UK and Ireland for more than two years.

In July 2007, the defendant purported to terminate the arrangement between the parties and gave the claimant six month's notice. At the same time the defendant alleged that the claimant had breached the agreement between the parties and so terminated the agreement from August 2007. Providing two notices of termination in this manner is a common tactic when terminating a contract where termination provisions have not been agreed.

The claimant issued proceedings and claimed damages. The key issues to be determined by the court were:

• what were the terms of the agreement between the parties? and
• was the defendant entitled to terminate the agreement and if so, on what basis?

The judge held that neither of written agreements exchanged by the parties was binding and, instead, that their relationship was governed by what had been agreed by the parties in correspondence. The judge was not convinced that the claimant had breached the agreement and, as there was no written agreement between the parties governing how the relationship should be terminated, the judge held that it could only be terminated on reasonable notice.

To determine what was reasonable notice the judge considered the previous decision in Alpha Lettings Limited v Neptune Research and Development Inc (2003) and set out the following factors that would be used to determine what was a reasonable notice period:

• The degree of formality – the parties had put forward their drafts to be used as the basis of a formal agreement but neither had been used. As no written agreement was used as the basis for their relationship there was no great degree of formality.
• The length of the relationship and the extent of the early investment by the claimant – the relationship had lasted for two and a half years, the claimant had invested a considerable amount of time, effort and money during that period. In particular, the claimant had spent £35,000 on promotional shows.
• The percentage of the claimant's turnover made up by the defendant's products – when termination occurred the claimant's turnover had dramatically decreased to less than 50% of its previous level.
• How quickly the claimant would be able to replace the business lost – the claimant would need to take time to find another shoe brand and achieve profitability and, although the judge noted that there were signs of improvement, he believed that it was likely the claimant's turnover would remain low for at least another year or two.
• Several other factors also influenced the judge's decision, such as the fact that the business was seasonal in nature, the claimant had taken on new employees and vehicles, a new warehouse had been brought into operation in the autumn of 2005 and further business premises had been planned. All of these factors lead the judge to determine that nine months was a reasonable notice period for termination.

While this judgment does not create any new law, it does show the various factors a court will take into consideration when determining what a reasonable notice period is when there are no express terms agreed relating to termination.

Wherever possible, a formal written agreement should govern business relationships between parties, particularly where high value arrangements are concerned. In addition, where contracts have continued past a fixed term it is prudent for the parties to agree in writing how the agreement should be terminated. If not, parties run the risk of becoming engaged in costly litigation, and the terminating party may be required to pay damages to reflect a "reasonable" notice period, which may well be longer than anticipated.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 26/05/2009.