Distribution agreements often contain clauses that dictate the notice period required for their termination. How do courts generally treat the express notice periods in such agreements? Will the time periods outlined in such provisions be upheld by the courts?
Courts have generally held that in a commercial context, the parties will be bound by the plain meaning of the agreement signed by the parties. Accordingly, notice periods for the termination of distribution agreements will be respected by the courts. It is considered inappropriate to impose longer notice periods on the parties even though a notice period contained in an agreement may appear to be unfair to the terminated party.
There are some exceptions to this general principle. It is open for a party subject to an unduly short express notice period to argue that the notice provision in the agreement is unconscionable and should therefore be set aside. However, commercial agreements between sophisticated corporations are rarely set aside as being unconscionable in the absence of fraud, duress, undue influence or misrepresentation.
There are other circumstances where an express notice period may not be upheld by the courts. Such situations include:
- If the parties are in an employer-employee relationship, rather than one involving independent contractual parties;
- If the actual relationship between the parties is considered to be beyond what was originally agreed upon in the written agreement (e.g., the parties’ contractual relationship has continued well beyond the term of the original contract between the parties); or
- If there is more than one agreement or termination clause, thus creating an ambiguity or two potential interpretations of the notice period.
If the distribution agreement between the parties does not contain a provision that expressly sets out the notice period for terminating the agreement, the courts will likely impose a reasonable notice period for termination. What is reasonable depends on the individual circumstances of each case, including the expectations of the parties, the duration or intended duration of the relationship, the dependency of the business of the terminated party on the arrangement and the commercial climate for the product being sold under the distribution agreement.