Termination of a continuing performance contract. What are the rules?

Everyday agreements are made, consciously by signing a contract, but often also unconsciously by making an oral agreement. Many of these agreements are continuing performance contracts. In this article, we would like to point out the legal consequences of terminating continuing performance contracts and, in particular, when terminating distribution and agency agreements.

What is a continuing performance contract?
In a continuing performance contract, there is a legal relationship in which the parties have committed to mutually performing one or more performances for a definite or indefinite period of time. These performances must be continuous, recurring, or consecutive. Examples of continuing performance agreements are distribution agreements, employment contracts and rental agreements.

Termination of continuing performance contracts
There is no general legal regulation regulating the termination of continuing performance contracts. For some specific continuing performance contracts, such as a rental agreement or an employment contract, there are compelling legal conditions that regulate the termination. If the termination is not regulated by specific legal conditions, the parties have the power to freely determine for themselves the possibility of termination by contract.

Termination unregulated?
If the parties have not arranged anything regarding termination, termination is determined according to the supplementary effect of fairness and equity (article 6:248 (1) Dutch Civil Code). In such a case, it must be determined whether termination is possible under the circumstances and what kind of period of notice must be considered. If the parties agreed on a period of notice, the period may be challenged by reason of the restrictive effect of fairness and equity. Ultimately, if a party is successful in any such challenge this may result in the requirement of a shorter or longer period of notice being imposed upon the affected party.

Fixed-term contracts
Fixed-term contracts are in general not terminable during the fixed term unless:

(i) mid-term termination has been expressly agreed,
(ii) this results from fairness and equity which, pursuant to article 6:248 Dutch Civil Code, always applies to agreements concluded between the parties, or
(iii) there are unforeseen circumstances as referred to in article 6:258 Dutch Civil Code.

For an early termination in compliance with articles 6:248 and 6:258 Dutch Civil Code, there must be unforeseen circumstances of such a nature that the other party cannot expect, according to standards of reasonableness and fairness, to continue with the unchanged maintenance of the agreement until the agreed date when the contract becomes terminable. The criteria for such an outcome are standard, and the following factors, among others, play a role in the interpretation of this standard:

(i) the contents and nature of the contract,
(ii) the nature and mutual relationship of the parties, and
(iii) the weight of the mutual interests.

Open-ended contracts
Open-ended contracts can, in principle, be terminated at any time by any party giving notice. In summary, the Supreme Court applies the following principles when terminating open-ended contracts:

- if the law and the contract do not provide for a regulation before termination, the indefinite duration contract is in theory terminable;
- however, the requirements of fairness and equity in connection with the nature and contents of the contract and the circumstances of the case may imply that termination is only possible if sufficiently serious reasons exist for the termination; and
- From these same requirements, it may result in that a certain period of notice must be observed or that the termination must be accompanied by the offer to pay compensation in damages arising from the termination.

With regards to termination of two common, continuing performance agreements, namely: the agency agreement and the distribution agreement, the following applies.

Termination of agency agreements
The following applies to the termination of agency agreements. If the agency agreement is concluded for an indefinite period or for a definite period of time with the possibility of early termination, the agreement can be terminated with respect of a period of notice. If no period of notice has is specified or has been agreed by the parties, the period of notice shall be four months for an agreement with a maximum term of three years, five months for an agreement of more than three years, and six months for agreements of more than six years (article 7:437 (1) Dutch Civil Code).

A contractually agreed period of notice must be at least one month for contracts with a duration of less than one year, two months for contracts with a duration of less than two years and three months for contracts with a duration of more than three years (article 7:437 (2) Dutch Civil Code). Upon termination of the agency contract, the principal is in many cases legally obliged to pay a goodwill fee (also known as 'customer fee') to the commercial agent. This statutory obligation is of semi-enforceable law: it may not be deviated from to the detriment of the commercial agent.

Termination of distribution agreements
With regard to the termination of distribution agreements, the following applies. If an affected party wishes to terminate the distribution agreement that has been concluded and there is no period of notice in the agreement, it will have to observe a period of notice that is reasonable given the circumstances. Literature and case law have developed the following rules of thumb regarding the period of notice to be observed:

- for contracts of 0 to 2 years: 3 months' notice;
- for contracts of 2 to 4 years: 6 months' notice;
- for contracts of 4 to 10 years: 8-12 months' notice; and
- for contracts of 10 to 20 years: 1-2 years' notice.
- In  particular situations, the period of notice can be even longer.

However, what a reasonably period of notice is remains dependent on the circumstances of the case, such as:

- the mutual interests of the parties;
- the duration of the contractual relationship;
- the degree of dependence of the distributor on the supplier;
- the expectations created and/or the distributors’ confidence in continuation of the relationship;
- the supplier's explicit or implicit statements regarding the duration of the relationship;
- whether significant investments have been made by the distributor;
- Whether a duty of care has been met;
- whether the requirements of proportionality and of subsidiarity have been met; and
- the reason(s) for the termination.
- Compensation

In theory, there is no right to compensation, termination fee or goodwill on distributor's side in case of regular termination of a distribution agreement. This may be different if the distributor has made investments for the continuation of the agreement that are not merely factored into the period of notice. Examples of investments are advertising costs, redundancy arrangements for staff, costs for a showroom, investments in IT system, repair service, special training of staff, etc. Please note that under German or Belgian law, a distributor can claim goodwill compensation.

In conclusion
Should you have any questions about the termination of continuing performance contracts, we will be happy to exchange thoughts with you. Should you wish to know more about the three agreements commonly used in (international) trade, namely: the agency, distribution, and franchise agreement, we would like to refer you to our article on the matter by clicking on this link.