A notice period is the amount of advance warning one party must give the other before ending a contract. For example, if a contract says you must give 90 days’ notice, the contract will usually come to an end 90 days after valid notice is given.

But what happens when a contract does not say how much notice is required?

This question was considered in the recent case of Anheuser-Busch International Inc v Commonwealth Brewery Ltd. The case initially ran through the courts in the Bahamas and was then appealed to the Privy Council. The Privy Council decided that 3.5 months’ notice was enough to end a business relationship that had lasted for 40 years.

Background to the Case

In 1975, the parties entered into an oral exclusive distribution arrangement which was never put in writing and no notice period for termination was determined. In 2015, one party terminated by letter giving 3 months’ notice. The other party refused this, stating reasonable notice should be 3.5 years to wind matters down, being approximately 1 month for each year of the trading relationship. They argued the loss of the right to distribute the products would cause commercial harm to their business and that it would take years to make comparable arrangements.

The Privy Council’s Findings

The Privy Council determined that reasonable notice exists to allow an orderly wind-down of the relationship by the parties. It should give the parties enough time and opportunity to enter into alternative arrangements. This may include “carrying out existing commitments, bringing current negotiations to fruition, and, where appropriate, obtaining the fruits of any extraordinary expenditure or effort carried out within the scope of the agreement.” Essentially, if all that can be done in a short period, that will suffice, regardless of the length of the contract and trading relationship. The Privy Council stressed that a notice period does not exist to insulate a party from loss of profits.

Factors Courts Consider When Determining a Reasonable Notice Period

As a starting point, the Privy Council set out a non-exhaustive list of factors for consideration when determining reasonable notice.

No written agreement

If neither party has sought the protection of a fixed term for the contract or determined a notice period in writing, it suggests that a shorter notice period is reasonable.

Importance of the relationship

If the contract forms a large part of one party’s business, that party may need more time to adjust to its loss. Conversely, where a party has other sources of income and is not heavily reliant on the relationship, a shorter notice period may be sufficient.

Commitments to third parties

The court may consider whether either party has obligations to customers, suppliers or other third parties which depend on the contract continuing. The more complex those arrangements are to unwind, the longer the notice period may need to be.

Length of the relationship

Whilst a longer relationship between the parties suggests there should be a longer notice period, this is not decisive and other factors should always be taken into account.

Investment

A party that has invested significantly in staff, equipment or infrastructure specifically for the contract may require more notice, particularly if those investments cannot easily be used elsewhere and have not yet generated the expected return.

Ongoing obligations

The court may also consider whether a lengthy notice period is practical. For example, where a party is already dealing with competitors, an extended notice period may create commercial conflicts and be unrealistic.

How Businesses Can Avoid Disputes Over Notice Periods

The safest approach is to have a written contract that clearly sets out:

the duration of the agreement;
when and how it can be terminated; and
the amount of notice required.

Relying on oral agreements or allowing notice periods to be implied by law can create uncertainty and lead to costly disputes. This case shows that a court may decide that a much shorter notice period is reasonable than one party expected, even after many years of trading together.

Where you wish to terminate a contract which is silent on the notice period, it may be helpful to address the factors highlighted by the Privy Council when approaching the other side to show careful consideration has been given to those factors.

Key takeaway

A long standing commercial relationship does not automatically mean a long notice period is required. The court will consider all relevant circumstances when deciding what notice is reasonable.

Need Advice on Contract Termination?

If you would like assistance in drafting or amending a contract, including negotiating notice and termination provisions, please get in touch with our Corporate & Commercial team by emailing online.enquiries@la-law.com or calling 01202 786188.