In a recent judgment, the Dutch Supreme Court has again expressed its opinion on the termination of continuing performance agreements. The recent judgment deals with the question whether DPD could terminate the agreements with two package carriers according to the one-month notice period contractually agreed.
What is the case about?
In 2008 and 2011, respectively, DPD concluded an agreement for the transportation of packages with two transport companies. The term of both agreements is one year. The agreement also provides for successive one-year extensions, and gives the parties the right to terminate the agreement upon one month’s notice, effective from the end of the month.
The agreement was tacitly renewed for years on end, in accordance with the agreement. At the end of November 2018, DPD terminated the agreements as of 1 January 2019. DPD observed the contractual notice period of one month. Next, the package carriers claimed compensation. They believed that DPD should have observed a longer notice period on grounds of reasonableness and fairness.
On appeal, the Court of Appeal held that DPD had failed attributably by observing only one month’s notice. The Court of Appeal took into account that there are changed circumstances, such as the substantial expansion of the collaboration since the agreement was concluded, as a result of which DPD should have observed a longer notice period. The Court of Appeal held that the changed circumstances should have led to a longer notice period. Since the agreement did not provide for this, the Court of Appeal considered this a “gap” in the termination arrangement, on which further requirements may be set on grounds of the additional effect of reasonableness and fairness. The Court of Appeal refers to earlier case law of the Dutch Supreme Court (the Goglio judgment), about which we also wrote a blog at the time. According to the Court of Appeal, a notice period of two months or three months, respectively, is reasonable. For this reason, the Court of Appeal held that DPD has to pay compensation for giving notice of the agreement with only one month’s notice.
The Supreme Court has set aside the judgment of the Court of Appeal. According to the Supreme Court, the Court of Appeal could not simply extend the contractual notice period without first examining whether reliance thereon was unacceptable according to standards of reasonableness and fairness. The Supreme Court did include the comment that the additional effect of reasonableness and fairness may entail that the party giving notice can be obliged, under certain circumstances, to offer a fee or compensation. This is in line with earlier case law of the Supreme Court. The amount concerned must depend on what is reasonable and fair under the circumstances. It may be relevant whether the terminating party grants or granted the other party a longer notice period than the contractual notice period.
In practice
This judgment shows once again how important it is to include a clear and reasoned termination clause in a contract. If the termination clause includes a “gap”, the court may interfere. The court can either add to or limit the clause, based on the requirements of reasonableness and fairness.
In addition, the judgment emphasizes that the terminating party has to think carefully about the time of giving notice, the effective date, and the potential obligation to pay an additional fee or damages. A careless termination may have unpleasant financial consequences. In this context, see also our earlier blog of last January.
Would you like to learn more about terminating continuing performance agreements? Or would you like advice about drafting a good termination clause? Please contact one of the attorneys of the Commercial & International Trade team.
