Dutch Supreme Court clarifies the rules for termination of continuing performance contracts

Following a sequence of judgments in recent years, on Friday 2 February 2018 the Supreme Court further clarified the doctrine of termination of continuing performance contracts in this relevant judgment.

Framework on termination of continuing performance contracts

First, the Supreme Court sets forth the framework on termination of continuing performance contracts with an indefinite term:

• If the law or contract does not provide the option of an early termination:
  • the contract can in principle be terminated (unless the parties intended otherwise);
  • but the principle of reasonableness and fairness could demand:
    • a sufficiently serious ground for termination;
    • a certain notice period;
    • payment of compensation for damages suffered as a result of the termination;
• If the law or contract provides the option of an early termination:
  • and the law or contract leaves a certain gap, reasonableness and fairness could entail that additional requirements for termination apply (= additional application of the principle of reasonableness and fairness);
  • depending on the presence of specific circumstances, the early termination can still be unacceptable on the basis of the principle of reasonableness and fairness (= restrictive application of the principle of reasonable and fairness).

Crux: gap in early termination clause can be complemented

The crucial point of this judgment is that reliance on the additional application of the principle of reasonableness and fairness is (substantially) easier than to rely on the restrictive operation of the principle of reasonableness and fairness (which is to be exercised with restraint). The Supreme Court clarifies in this judgment that reliance on the additional application of the principle of reasonableness and fairness requires that a certain gap is left in the early termination clause. In the case at hand, the parties had agreed on a detailed and clear termination clause. Contrary to the plaintiff ’s defense, the Supreme Court upheld the ruling of the High Court of Amsterdam that no additional termination requirements applied on the basis of principle of reasonableness of fairness. The High Court assessed the termination agreement correctly and applied due restraint regarding a restrictive application of the principle of reasonableness and fairness.

Do’s and don’ts: prevent a gap in early termination clauses

The drafting of early termination clauses needs to be done with due care and eye for detail, in order to leave as few gaps as possible. It is recommended to, at least, clearly state in the clause: how to terminate, the termination period, the compensation for termination (or absence thereof) and possible reasons for early termination. This leaves minimum room for the additional application of the principle of reasonableness and fairness. A clear and fully covering early termination clause that strikes a good balance between the interests of each party also helps to avoid the restrictive application of the principle of reasonableness and fairness.

Also a detailed and elaborated termination clause which is ascribed to specific circumstances avoids derogation in certain circumstances as a result of the restrictive application of the principle of reasonableness and fairness.

For questions on the termination of contracts? Contact the team Commercial or Isabel van Tuyll (isabel.van.tuyll@kvdl.com). We are specialized in national and international contract law and disputes.