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Disputes over non-renewals can lead to litigation. Courts examine the contract terms, parties’ conduct, and applicable laws to determine the outcome. Real-life examples, such as a business facing the unexpected termination of a crucial agreement, illustrate the potential complexities involved. A ruling by the Netherlands Commercial Court (NCC) on July 5, 2023, provides insights into the obligations and consequences surrounding the non-renewal notifications in contractual relationships. This blog aims to dissect the NCC’s decision, elucidating the legal principles at play and providing actionable guidance for navigating the complexity of contract non-renewals. Also, this blog first examines whether, and if so how, a contract can be terminated under Dutch law, and the criteria for doing so. It then looks at the decision of the NCC to see whether there may also be circumstances in which a party that does not give notice of termination nevertheless acts contrary to reasonableness and fairness.
How can a long-term performance contract be terminated under Dutch law?
Whether and, if so, under what conditions a long-term contract concluded for an indefinite period can be terminated is determined by its content and the applicable statutory provisions. If the law and the contract do not provide for termination, the contract is in principle terminable. Under Section 6:248 (1) of the Dutch Civil Code, the requirements of reasonableness and fairness in connection with the nature and content of the agreement and the circumstances of the case may imply that termination is only possible if there is a sufficiently serious reason for it. These requirements may also imply, having regard to the nature and content of the contract and the circumstances of the case, that a certain period of notice must be observed or that the termination must be accompanied by an offer of compensation (damages). (See, inter alia, HR 28 October 2011, ECLI:NL:HR:2011:BQ9854, NJ 2012/685, para. 3.6, HR 14 June 2013, ECLI:NL:HR:2013:BZ4163, NJ 2013/341, para. 3.5.1 and HR 10 June 2016, ECLI:NL:HR:2016:1134, NJ 2016/450, para. 4.4.2).
Even if the law or a continuous performance contract provides for the regulation of termination, if the law and the agreement between the parties leave room for it, the requirements of reasonableness and fairness in connection with the nature and content of the contract and the circumstances of the case under Art. 6:248 (1) of the Dutch Civil Code may mean that further requirements are imposed on the termination. Reliance on a power to terminate arising from the law or an agreement may, under certain circumstances, be unacceptable according to the standards of reasonableness and fairness referred to in Article 6:248 (2) BW. 6:248 (2) BW (cf. HR 10 June 2016, ECLI:NL:HR:2016:1134, NJ 2016/450, para. 4.4.2).
It should be noted that what has been considered above does not alter the fact that it is possible that a long-term contract concluded for an indefinite period may not be terminable by the intention of the parties. The counterparty of the party invoking non-cancel lability may, under certain circumstances, invoke Article 6:248 (2) and Article 6:258 of the Civil Code. (cf. HR 15 April 2016, ECLI:NL:HR:2016:660, NJ 2016/236, paragraph 4.4)
The Fujifilm-Duomed case
At the heart of the NCC’s scrutiny was a contentious dispute between two companies, Fujifilm and Duomed, over a distribution agreement that wasn’t renewed. This case not only highlighted the common occurrence of non-renewals in international commerce but also posed significant questions about the legal foundation for the duty to notify about such non-renewals and the potential repercussions of failing to do so. As explained above, The legal landscape in the Netherlands, shaped by precedents like the “De Ronde Venen/Stedin case” by the Dutch Supreme Court, acknowledges that contracts of indefinite duration can be terminated under the umbrella of reasonableness and fairness. This doctrine necessitates a reasonable notice period and, in certain situations, compensation for termination without cause. However, the application of this principle to fixed-term agreements is more nuanced, often restricted by stringent conditions.
The most recent distribution agreement between Fujifilm and Duomed is the 2021 Distribution Agreement. This agreement was not entered into until 20 June 2022 and was made retroactive to 1 April 2021. Thus, the agreement was entered into approximately 15 months later. As to its duration, the Distribution Agreement provides as follows:
‘23.1 The term of this Agreement shall be from the Effective Date until 31 March 2023. It is expressly agreed and understood that unless this Agreement is terminated earlier, this Agreement shall automatically expire and cease to be in effect upon expiry of the term hereof. FUJIFILM agree to start negotiation on a new agreement no later than three (3) months prior to the expiration date of this Agreement, but neither Party shall be entitled to a new agreement.
23.2.Notwithstanding the exclusive distributorship granted to the Distributor under Article 2.1 above, FUJIFILM may commence selling the Products in the Territory, directly or indirectly through its Affiliate or designee, in order to secure continuous and stable supply and services of the Products to the marketplace in the Territory during the transition to a new distributor, after giving a written notice – at least three (3) months before the end date – of its intention not to renew this Agreement.’
The NCC judgment
In the NCC judgment, the interim judge considered that although the parties’ main concern, in this case, was whether the doctrine of termination of fixed-term contracts applied to successive fixed-term contracts, the court didn’t need to decide that question. This is because Duomed is not asking for the relationship to continue indefinitely, but only to offer a reasonable period so that it can achieve continuity and a smooth transition for its own customers and limit the impact of the end of the distribution relationship.
Next, the interim judge considered that the parties must allow their conduct to be determined in part by the legitimate interests of the other party. This follows from the principles of reasonableness and fairness which also govern a legal relationship. The interim relief judge found that Fujifilm had failed to do so. In the interim relief proceedings, the court considered that since 2013, the parties had repeatedly entered into a new agreement (well) after the end date and that Duomed therefore did not have to assume that the Distribution Agreement 2021 would now end on the contractual end date.
On the other hand, the Interim Relief Judge noted that, given the wording of the 2021 Distribution Agreement: “neither party shall be entitled to enter into a new agreement”, Duomed could have expected that there would come a time when Fujifilm would not want to enter into a new agreement. In these circumstances, the interim judge considers that Fujifilm had an obligation to give Duomed clear and timely notice if it did not wish to extend the distribution relationship beyond the 2021 Distribution Agreement. Fujifilm has breached this obligation. The interim judge then ruled that this breach could be remedied by requiring Fujifilm to continue the distribution relationship for a certain period of time.
This period should be long enough to ensure a smooth transition for Duomed’s customers, but not so long as to undermine the temporary nature of the distribution relationship. Partly because of the discussions Duomed is already having with a new supplier, the interim relief judge considers a six-month period to be sufficient. The interim relief judge also takes into account the agreed two-year term and the time the parties have taken in the past to enter into a new agreement with retroactive effect each time the agreement has expired.
The NCC case brought to light the legal complexities associated with the termination of long-standing business relationships formed through successive fixed-term agreements. The court meticulously analyzed whether these agreements were to be treated as of indefinite or fixed duration, a determination that carries significant legal implications. A cornerstone of the NCC ruling was the establishment of a duty to timely inform the counterpart of the intent not to renew the agreement. This obligation, though not explicitly outlined in the contract, was inferred from the broader legal principles of reasonableness, fairness, and the inherent expectation of good faith in contractual dealings. The concept of good faith is paramount in the realm of contract law, particularly when it comes to the renewal and termination of ongoing agreements. It embodies the anticipation that parties will act in consideration of each other’s legitimate interests, potentially giving rise to duties that extend beyond the contract’s explicit terms.
To mitigate the risks associated with assumed renewals, it’s prudent for parties to integrate specific contractual clauses that clearly outline the terms of termination and renewal. These include formality requirements and explicit provisions detailing the renewal process, which serve to prevent potential disputes and ensure clarity in the continuation of contractual relationships. The NCC’s decision to emphasize the duty to notify stems from an intricate analysis of legal doctrines and precedents. This duty, while not directly stated in many contracts, is often derived from the broader obligations of good faith and fair dealing inherent in contractual relationships.
The Implications of the NCC’s Verdict
The NCC’s verdict sets a precedent that underscores the significance of the duty to notify in the context of non-renewals. It highlights the potential legal ramifications for parties that fail to adhere to this obligation, including the possibility of forced continuations of contractual relationships under certain conditions. In light of the NCC’s ruling, businesses and legal professionals must adopt a strategic approach to contract drafting and negotiation. This involves a careful consideration of the terms related to renewals and terminations, ensuring that they are explicitly defined and aligned with the parties’ intentions. To safeguard against unintended implications of non-renewals, contracts should include protective clauses such as specific formality requirements for renewal notifications and clear stipulations regarding the process and conditions for renewal discussions. Understanding the legal landscape and the implications of rulings like the NCC’s decision is crucial for effectively navigating contract renewals. By incorporating strategic contractual provisions and maintaining open communication, parties can minimize the risks associated with non-renewals.
Conclusion
The recent NCC case provides a compelling opportunity to delve deeper into the nuances of not renewing long-term agreements, a topic that has yet to significantly stir the legal discourse. It’s common for parties to implicitly continue a long-term contract, raising questions about their intentions with such continuations. However, this becomes a non-issue when a party communicates its intention not to renew before the term ends. The obligation to notify in cases of non-renewal primarily stems from an interpretation or the supplementary effect of reasonableness and fairness. Yet, the repercussions of failing to meet this obligation seem to be confined to liability for damages, especially when a contract includes a clear expiration date. The lack of timely notification plays a crucial role in preventing the justified expectation of the other party that the agreement will be renewed. Whether such justified trust exists depends heavily on the specific circumstances. Contractual safeguards, a defined end date, and clear communication regarding the renewal process aim to minimize this justified expectation as much as possible. The risk remains that, despite clear contractual safeguards, the actions of the parties might still lead to a justified belief in renewal. However, this should not readily be the case.
Contact our Dutch Law firm
For any legal inquiries or support in the Netherlands, please feel free to contact our adept team at MAAK Advocaten. Committed to excellence, our Dutch lawyers provide superior legal services tailored to your distinct needs. You can reach our law firm in the Netherlands through our website, by email, or phone. Our approachable and skilled staff at MAAK Attorneys will be delighted to assist you, arranging a meeting with one of our specialized attorneys in the Netherlands. Whether you need a Dutch litigation attorney or a Dutch contract lawyer in Amsterdam, we are eager to guide you through the legal intricacies and secure the most favorable results for your situation.
Contact details
Remko Roosjen | attorney-at-law (‘advocaat’)
+31 (0)20 – 210 31 38
remko.roosjen@maakadvocaten.nl
The information on this legal blog serves purely for educational purposes and should not be taken as specific legal guidance. While we endeavor to maintain accurate and current information, we do not assert its absolute completeness or relevance to your particular situation. For advice tailored to your legal concerns, we urge you to engage with a licensed attorney. Please note that the blog’s content may change without notice, and we are not liable for any inaccuracies or missing information.
