No General Implied Term Of Termination On Reasonable Notice In Commercial Contracts Of Indefinite Duration

Parties to commercial contracts of indefinite duration should not assume that there is an implied right to terminate on reasonable notice. 

Whether or not such a right arises will depend on the particular circumstances of the case. 

Facts

In 2001 the then-operator of what is now the St Vincent’s Private Hospital Northside in Chermside, Queensland approached Dr Kay (a doctor with expertise and experience in establishing and managing emergency centres) to establish and operate the emergency centre at the hospital. The former operator and the appellant (Impact) (Dr Kay’s company) entered into a contract, with no specified end date, under which Impact would operate and manage the emergency centre (Agreement). The former operator was later replaced under the Agreement by the respondent (Hospital).

A dispute arose in 2024 when Dr Kay proposed to sell shares in Impact to a third party. If such a change in control occurred without the Hospital’s prior informed approval (not to be unreasonably withheld), Impact would be in breach of the Agreement, which would entitle the Hospital to terminate. The Hospital withheld its consent. 

The Hospital subsequently contended that the Agreement included an implied term (whether by law or in fact) entitling the Hospital to terminate the Agreement on the giving of reasonable notice (Disputed Term) (despite there being no such express term). The primary judge found that the Agreement included the Disputed Term.

Impact appealed. The Court of Appeal of the Supreme Court of Queensland allowed the appeal and dismissed the Hospital’s cross-appeal.

Implication by law vs implication in fact

Terms may be implied into contracts on a number of bases: (1) by law, as a necessary incident of a particular class of contract; (2) in fact, to give business efficacy to the particular contract; (3) by custom or usage; (4) by course of dealing; or (5) by construction of the particular contract.

The court focused only on implication by law and implication in fact.

A term implied by law is a legal incident of a particular class of contract, whereas a term implied in fact is one which is necessary to give business efficacy to the particular contract. Implication by law does not depend on the facts of the case.

The court referred to the High Court’s suggestion in Commonwealth Bank of Australia v Barker [2014] HCA 32 (Barker) that some terms are implied by law as ‘universal implications’, implied into all contracts rather than just a particular class. An example provided by the High Court is the duty to co-operate established in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51. However, the court in Impact did not address whether a right to terminate on reasonable notice might be implied into all contracts, instead focusing on the narrower proposed category of “commercial contracts of indefinite duration”.

The court, citing Barker, clarified the distinction between terms implied in fact and by law as follows: terms implied in fact are “individualised gap fillers, depending on the terms and circumstances of a particular contract”, whereas terms implied by law are “in reality incidents attached to standardised contractual relationships” operating as “standardised default rules”, and are founded on “more general considerations” which take into account “the inherent nature of the contract and of the relationship thereby established”.

No class of “commercial contracts of indefinite duration”

The Hospital acknowledged that no previous case had identified “commercial contracts of indefinite duration” as a particular class of contract into which the Disputed Term is implied by law, but invited the court to recognise it as a new class. The court rejected that invitation.

The Hospital’s argument was based on the repeated implication, in fact, of such a term across a number of cases. The court found that the cases relied upon by the Hospital did not support a conclusion of implication by law because:

1. the cases make clear that the implication depends on the “particular circumstances of the case” (i.e. implication in fact)
2. some of the cases did not concern the disputed term (and instead the issue in dispute was the length or reasonableness of the notice period); and
3. to say a term is sometimes implied in fact in a number of agreements of a particular class of contracts is not to say that the term is implied, by law, in all contracts within that class.

The court further found that the Hospital failed to articulate the necessity which supports the implication of the Disputed Term into all commercial contracts of indefinite duration, that the agreement is plainly capable of effective performance without the implication, and that the Disputed Term is not needed for the effective working of contracts of the contended class. 

The purported class is extremely broad such that nothing can be discerned about the inherent nature of all such contracts, or the relationship between the parties, which would render it necessary to imply the Disputed Term into every contract in the class. 

Pre-contractual negotiation and express terms considered in assessing implication in fact

For implication in fact, the court applied the test from BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (BP Refinery), which requires that the purported term be: (1) reasonable and equitable; (2) necessary to give business efficacy to the contract; (3) so obvious it goes without saying; (4) capable of clear expression; and (5) not contradictory of any express term. 

The objective framework of facts is an important part of this assessment. There was admissible extrinsic evidence, including evidence of pre-contractual negotiations such as that the Hospital had proposed rolling terms of three or five years, which Dr Kay had rejected because he would not be able to recruit specialists with that limitation. Such extrinsic evidence is admissible to the extent of identifying the surrounding circumstances within which the particular contract was formed. While the primary judge only gave a small amount of weight to extrinsic evidence, partly because of the existence of an entire agreement clause, this should have been given greater weight.

The extrinsic evidence was considered along with the express terms of the Agreement, such as that the term continues until terminated under an express provision, and that Impact, but not the Hospital, has an express right to terminate for convenience.

The court found that the Disputed Term failed the BP Refinery requirements and was therefore not implied in fact.

Implication by construction not considered

The court referred to a number of cases that recognise, on the basis of construction of the particular contract, an implied term to terminate on reasonable notice. However, the court did not consider whether, on the construction of the Agreement as a whole, the Disputed Term should be implied. This appears to be because the Hospital only argued implication by law and implication in fact, and did not argue implication on the basis of construction. 

The decision in Impact therefore leaves open the question of whether, in a future case, a right to terminate on reasonable notice might be implied into a contract of indefinite duration on the basis of construction of the contract as a whole.

Practical significance

Parties to contracts of indefinite duration should not assume that there is an implied right to terminate on reasonable notice. 

The decision in Impact also demonstrates that an asymmetric termination regime conferring on only one party a right to terminate without cause may, when considered together with evidence of pre-contractual negotiations (such as that the parties expressly rejected rolling terms in favour of an indefinite term), weigh against such an implied term. However, the mere fact that one party is entitled to terminate on notice does not necessarily defeat an argument that there should be an implied right for the other party to terminate on reasonable notice. 

The decision leaves open questions in respect of implied terms. There are certain classes of contract in which a right to terminate on reasonable notice has been implied (for example, employment contracts, and perhaps other agreements where an agreed (minimum) term has expired). In this case, the term was not implied by law, in part, because the purported class of “all commercial contracts of indefinite duration” was held to be too broad a class to support the implication. It remains to be seen whether a narrower class (for example, professional services agreements of indefinite duration) might be more capable of supporting an implication of a right to terminate on reasonable notice.
 

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.