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Contracts, when did they or should they end?

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A recent case conducted by MST highlights legal and commercial issues arising from failure by parties to contracts to decisively end the contract or renew it.

MST acted for a company that provides services under a Licence Agreement (“Licensee”).  The Licensee responded to telephone calls made to the Licensor who diverted them to the Licensee from which it obtained job orders and the work in relation to them.

The parties entered into the Licence Agreement in January 2004 for a term of 2 years.  The Licence Agreement provided that either party could express an intention to extend for a period of 2 years by giving notice of not less than 90 days before the end of the term.  Neither party gave a notice.  Instead, they continued to conduct the Licence Agreement as though it had been extended for a period of 2 years.  The same thing happened in 2008 with the result that in September 2009 the Licence Agreement was ongoing but the Licensor wanted to terminate the Licence Agreement.  The Licensor served a Notice stating that the Licence would terminate at the expiration of 90 days.

Over the years the Licensee made a substantial investment in staff and training, had contracts on foot that it needed to complete and had leased premises from which to conduct licensed operations.  The issue was whether a 90 days notice was, in all of the circumstances of the relationships between the parties, a reasonable period of notice.

The Licensor threatened to terminate the License Agreement at the expiration of the 90 day period and, to prevent that, MST took action in the County Court to obtain an injunction restraining termination at that time and seeking to have the Court decide the issue.

In her reasons for granting the injunction, the judge agreed that there were a number of possible scenarios.  First, because the parties had “rolled over” the Licence Agreement on 2 previous occasions in 2006 and 2008, it was arguable that there was a 2 year extension in running that would expire in November 2010.  The alternate view was that if there was no such roll over for 2 year periods, reasonable notice is required and the period of notice depends on the facts of each case and involves a consideration of factors including the length of the relationship, the nature of the licensed services, the ability of the parties to obtain alternate work or alternate service providers as well as ongoing third party contractual obligations entered into because of the ongoing relationship.

This case highlights the need of parties to contracts to properly manage their rights to terminate at the end of the agreed contractual period or to extend the contract by agreement, whether pursuant to a specific option to do so in the agreement, or by general negotiations.

MST can help identify solutions for clients faced with open ended and ongoing contracts as well as carefully drafting new contracts that have effective termination and option provisions. For further information please contact one of our Corporate Advisory lawyers.

Author: David Boyall