Supreme Court: Failure to offer compensation for termination of continuing performance agreement does not simply lead to invalid termination
Continuing performance agreements between two or more parties are not uncommon in the commercial world. These are agreements by which parties undertake to perform for a longer period of time, such as a collaboration agreement, a distribution agreement or a franchise agreement. The termination of such agreements may have drastic consequences for the other party. The law provides no rules for innominate continuing performance agreements. Over the past decades, the Dutch Supreme Court has formulated several legal rules on the question as to whether, and on what terms, continuing performance agreements can be terminated. The recent judgment of the Supreme Court is one of these.
Summary of the case
The proceedings concerned four franchisees of Leen Bakker who challenged the termination of their franchise agreement by Leen Bakker. Leen Bakker had terminated the franchise agreements with due observance of a longer notice period than contractually agreed, while not offering any further compensation (for damage). The franchisees argued that the termination was unlawful, because Leen Bakker should have offered compensation and had failed to do so. It was argued that this left the termination of the franchise agreement without legal consequence, and that therefore the franchise agreement still continued.
On appeal, the Court of Appeal held that Leen Bakker had lawfully terminated the franchise agreements (Leen Bakker had observed the contractual notice period and the ground for termination), but was obliged to pay compensation to the franchisees. The absence of a direct offer of compensation did not render the termination invalid. The franchisees disagreed and appealed to the Supreme Court.
In these proceedings the Supreme Court held that if the ‘requirements of reasonableness and fairness’ entail that compensation must be offered upon termination, the absence of an offer to that effect usually does not render the termination invalid. However, this omission may have consequences for the amount of compensation that may still have to be paid afterwards. At the same time, the Supreme Court emphasizes that circumstances may occur indeed that make it unacceptable to give notice without offering a suitable compensation (for damages). In such situations, the termination is invalid.
Importance of the judgment in practice
This Supreme Court judgment shows that the rules on termination of continuing performance agreements (still) lack clarity; not offering compensation usually does not invalidate the termination at once, but circumstances may occur that do make it so. It is also important that even if the party giving notice used a longer notice period that the contractual notice period, the other party could be entitled to compensation. The requirements of reasonableness and fairness entail that all circumstances of the case – such as the nature and substance of the agreement and the reason of the termination – are relevant.
If you consider terminating a continuing performance agreement, you will do wise not to look at the agreement alone, but to consider the other circumstances and broader context as well.
Would you like to learn more about terminating continuing performance agreements? Please contact one of the attorneys from the Commercial & International Trade team.
