Introduction
A long-standing commercial relationship, distribution, franchise, agency, cooperation, is terminated. Or termination is being considered. At first glance the legal question is simple: is it permitted? In practice the answer is rarely black and white, and the consequences of a misjudgment are considerable.
Termination under the contract
Where the contract contains a termination clause, that clause is in principle decisive. Notice periods and formal requirements must be observed. A party that fails to comply terminates irregularly and is liable for damages, generally assessed at what the other party would have received had notice been given regularly.
But even a contractually permitted termination may be unlawful. The standards of reasonableness and fairness (Section 6:248(2) DCC) place limits on the manner in which a contractual right is exercised. A termination at the worst conceivable moment, without a reasonable transition period, may give rise to liability for damages despite a valid termination clause.
Termination without a contractual arrangement
For long-term agreements of indefinite duration without a termination provision, the starting point is that termination is possible. The standards of reasonableness and fairness determine the conditions. Relevant factors include the duration of the relationship, the investments made, the degree of dependence, and the time the party given notice needs in order to adjust.
In a case concerning the termination of a framework agreement by the Municipality of Amsterdam the termination was upheld following an integrity investigation, the counterparty had failed to cooperate sufficiently. In a case concerning exploitation agreements the court permitted termination after 17 to 25 years on the basis of the duration and changed circumstances, while at the same time dismissing the royalty dispute. Termination and the substantive relationship are two separate assessments.
Agency
Agency agreements are subject to statutory notice periods (Section 7:437 DCC), and on termination the agent is in principle entitled to a client compensation, also known as goodwill compensation. This regime is mandatory law and cannot be contracted out to the agent's detriment. The compensation may amount to up to one year's average commission.
Assessment of damages
In the case of irregular termination, damages are generally assessed on the basis of the positive contractual interest: what would the aggrieved party have earned had notice been given regularly? Even where a termination is in principle regular, additional damages may be payable where the circumstances so require.
What decides the outcome
The outcome of a termination dispute is rarely decided by whether notice could be given, but by the ground, the notice period to be observed and the damages. A party that tests the termination against the contractual regime and the requirements of reasonableness and fairness, and assesses the consequences in advance, keeps control.