Most commercial contracts have a natural ending. They run for a fixed term, or they describe a one-off job, and when the work is done the contract is spent. But a surprising number of agreements have neither. A supply arrangement, a distribution deal, an agency, a standing services agreement, a dealership, all of these can be signed without any end date and simply run on for years while both sides perform and neither gives the question of termination a second thought.
That works well while the relationship is healthy. The trouble starts when one party wants out. If the contract has no end date, no fixed term and no termination clause, what is the terminating party entitled to do? Can it walk away tomorrow, or does it owe the other side something first? The answer, settled across decades of Australian case law, is that a contract of indefinite duration can generally be ended on reasonable notice, and that period can range from a couple of weeks to many months depending on the circumstances. This article explains how that rule works, how courts measure reasonable notice, and where businesses most often get it wrong.
Where the right to terminate comes from
Australian courts have long accepted that parties to a commercial agreement of indefinite duration must have intended it to be terminable. In Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438, quoted in The Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072, McHugh JA said that when the question arises whether a commercial agreement for an indefinite period may be terminated, the answer depends on whether the agreement contains an implied term to that effect, and that ordinarily the nature of a commercial agreement will lead to the conclusion that the parties must have intended it to be terminable on notice.
That reasoning has been applied consistently since. In The Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072, Ryan J treated the distributorship in front of him as one for an indefinite period that attracted the principle in Crawford Fitting. In Stones Corner Motors Pty Ltd v Mayfairs W'Sale Pty Ltd [2010] FCA 1465, Collier J described it as settled principle that an oral dealership running since 1975 carried an implied term that either party could bring it to an end on reasonable notice.
Three qualifications matter before that rule can be relied on.
First, the implied term only does work where the contract is genuinely indefinite. If the agreement has a fixed term, or describes a discrete set of obligations that will be completed, there is no ongoing relationship to wind up, and the reasonable notice question does not usually arise. Ending a fixed-term contract early is a breach unless the contract itself allows it.
Second, an express termination clause displaces the implied term. Implied terms cannot contradict what the parties actually wrote. If the contract says either party may end it on 30 days' written notice, that clause governs, and the reasonable notice enquiry never gets off the ground.
Third, the implied term is only the default. Some industries are governed by codes and regulations that change how termination works, and those override the general law. Before relying on reasonable notice, it is worth checking whether a specific regime applies to the relationship.
What reasonable notice means in practice
There is no formula. A court assesses what is reasonable in light of the circumstances existing when the notice is given, not at some earlier point in the relationship. Ryan J in The Software Link case quoted with approval the classic statement that the period of notice must be sufficiently long to enable the recipient to deploy its labour and equipment in alternative employment, to carry out its commitments, to bring current negotiations to fruition and to wind up the association in a businesslike manner.
A second strand of authority deals with money the recipient has already spent. Where a party has put extraordinary expenditure or effort into the relationship, the notice period should, where appropriate, allow it to obtain the fruits of that expenditure, as McHugh JA explained in Crawford Fitting at 447, quoted in Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd [2011] NSWSC 457. The line between ordinary recurrent expenditure and extraordinary expenditure is not always easy to draw, but the principle matters: notice exists partly so the recipient is not left holding the cost of investments it made in the relationship.
In working out a defensible period, courts weigh a familiar set of factors:
- Dependence on the relationship: how long the arrangement has run and how central it is to the recipient's business.
- Sunk investment: what the recipient has spent on premises, staff, marketing, product development or equipment that cannot be recovered elsewhere.
- Lock-in: whether the recipient is bound by an exclusive arrangement or is free to deploy its capacity for other customers.
- Redeployment: how easily the recipient can put its labour, equipment and capital to alternative work.
- Outstanding matters: commitments and negotiations that need to be completed or wound up in an orderly way.
- The terminating party's own position: how long it reasonably needs to make alternative arrangements of its own.
None of these factors dominates, and the cases produce very different results. The length of the relationship matters, but it is not decisive on its own. A thirteen-year relationship can be terminable on two weeks' notice, while a twenty-one-year relationship may need far more.
Two cases, two very different answers
The contrast between two leading decisions shows how much turns on the facts.
In Colyer Fehr Tallow Pty Ltd v KNZ Australia Pty Ltd [2011] NSWSC 457, Colyer Fehr had acted since April 1993 as the buying agent in Australia for KNZ, acquiring tallow on its behalf and arranging delivery in return for a fee of $5 per tonne. The agreement was oral and had no end date. In April 2006, KNZ terminated it on two weeks' notice. Colyer Fehr sued for wrongful repudiation, arguing that reasonable notice was twelve months or at least six, and claiming damages equal to the profit it would have earned over the proper notice period. The Supreme Court of New South Wales held that two weeks was sufficient. The decisive features were that Colyer Fehr had never been locked in, it remained free to keep buying tallow for its own domestic and export customers and for others such as Unilever, it did not need significant assets or ongoing investment to perform, and KNZ itself needed time to build its own supplier relationships after the arrangement ended. The claim and cross-claim were both dismissed.
Contrast that with The Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072. Software Link had been the sole Australian distributor of Texada's software for about twenty-one years, and had spent substantial time, money and resources advertising the product, promoting it at trade fairs, canvassing customers and providing after-sales service. Texada gave ninety days' notice. On the interlocutory application, Ryan J declined to accept that ninety days was necessarily an appropriate period, and noted that Software Link may well have a strong case that a longer period was required. The distributorship was not terminated on the spot, but the case illustrates that a long-running, exclusive arrangement built on one party's promotional effort can require considerably more than three months.
The same concern surfaced in Stones Corner Motors [2010] FCA 1465, where a car dealership agreement that had run for thirty-five years was terminated on about four and a half months' notice, and the Federal Court held that whether that notice was reasonable raised a serious question to be tried.
The pattern across the cases is straightforward: the more the recipient has invested, the more exclusive the arrangement, and the harder it is for the recipient to redeploy its resources, the longer the notice period is likely to be. A business that simply sells its time or services without exclusivity or capital commitment sits at the short end. A distributor that built a market, hired staff and invested in premises sits at the long end.
Where termination commonly goes wrong
The most expensive mistake is treating termination as a formality. Notice that is too short makes the termination a wrongful repudiation. The recipient can accept the repudiation, treat the contract as at an end, and sue for damages measured by what it would have earned during a proper notice period, as Colyer Fehr attempted to do. In some cases the recipient can also seek an injunction to restrain the termination from taking effect until a court decides the question, which was the remedy sought in both The Software Link and Stones Corner Motors cases. An injunction can keep a relationship running for months while the parties fight, which rarely suits the terminating party.
Other common errors include:
- Assuming the implied term applies where it does not. Fixed-term contracts and contracts with express termination clauses are governed by their own terms, not by reasonable notice.
- Ignoring the recoupment issue. Where the recipient made extraordinary early-stage expenditure, the court may imply that the contract should continue for a reasonable period so the recipient can recoup that investment, meaning the question of termination may not even arise until that period has elapsed.
- Judging notice from the terminating party's perspective only. What is convenient for the party giving notice is largely irrelevant; the enquiry focuses on what the recipient needs.
- Assuming an oral agreement is not really a contract. The implied term applies with full force to informal and oral arrangements, as Colyer Fehr Tallow demonstrates.
- Leaving the question to be fixed after the event. The reasonableness of notice is assessed at the time it is given, against circumstances as they then stood. A terminating party cannot improve its position afterwards by pointing to things that happened later.
How legal advice changes the outcome
A commercial lawyer's value in this area is concentrated at three points.
Before terminating, a lawyer reviews the contract for express termination provisions, confirms whether the relationship is genuinely indefinite, and works out a defensible notice period by building an evidence file: what the recipient has invested, how dependent it is, how easily it can redeploy, and what commitments need winding up. Where the relationship is delicate, the lawyer can also structure the exit as a staged process, an early warning followed by formal notice, which both satisfies the practical needs of the recipient and builds the record if the notice is later challenged.
For the recipient facing termination, a lawyer assesses whether the notice is adequate, quantifies the loss if it is not, and considers urgent remedies such as an injunction where the termination would destroy the business before a trial could occur.
Prospectively, a lawyer can fix the problem at the drafting stage. A clear term, a defined expiry or renewal mechanism, and an express termination clause with a fixed notice period remove the reasonable notice question entirely. That is almost always cheaper than litigating it later.
The risk is concentrated in the notice you give
The single biggest error in this area is the assumption that ending an indefinite contract is as simple as writing a letter. It is not. The notice period is judged against what the recipient stands to lose, assessed at the moment the notice is given, and a terminating party that guesses low can face a damages claim equal to the recipient's lost profit over the true reasonable period. That exposure can dwarf the cost of advice taken beforehand.
The same principle cuts the other way for a business that receives notice: the length of the notice it is owed is not a matter of courtesy, it is a legal entitlement that can be worth real money, and it is worth having the notice tested before the relationship is wound up or replaced.
A short, confidential conversation with a commercial lawyer can establish where on the spectrum a particular relationship sits, what a defensible notice period looks like, and whether the contract should be redrawn to prevent the problem recurring. Artificer Legal offers an obligation-free discussion to work through exactly that assessment.