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The Termination of Continuing Performance Agreements

Earlier this year, the Supreme Court gave an important ruling on the possibility of terminating continuing performance agreements. The case involved a licensing agreement, in relation to a patent, in which a term of 15 years had been agreed upon. In addition, a possibility of termination had been included in the agreement and the arrangement to pay a ‘break-up’ fee by the licensee. The licensor made a payment request relating to payment of the 2012 license, and when payment was not forthcoming, they issued a notice of default to the licensee. Subsequently, the licensor terminated the agreement for breach of contract by the licensee. The licensee did not agree with the termination and took the licensor to court.

The Supreme Court ruled that even when the law or a contract of continuing performance does include a termination arrangement, the legal principle of reasonableness and fairness (also: good faith) in relation to the nature and content of the agreement and the circumstances of the case could set this arrangement aside. The Supreme Court provided an overview of how the supplementary and restrictive standards of reasonableness and fairness work with respect to terminating agreements.

First, even if an agreement for an indefinite term does not provide for termination it can, in principle, still be terminated. However, on the basis of the supplementary standards of reasonableness and fairness (Article 6:248(1) of the Civil Code) certain conditions may apply to the termination, depending on the nature of the agreement and the circumstances of the case (i.e. only on compelling grounds, after observing a certain termination period or combined with damages or both).

Second, if an agreement does include a provision for termination, the supplementary standards of reasonableness and fairness may lead to further conditions being attached to the termination, but only if there is room to do so in the agreement.

Third, in both aforementioned instances, the restrictive standards of reasonableness and fairness (Article 6:248(2) of the Civil Code) may prevent a party from invoking termination of an agreement on the grounds that it would be unacceptable given the circumstances of the case.

Fourth, the parties may agree that an agreement for an indefinite term cannot be terminated. If one of the parties invokes the clause not to terminate, the other party may invoke the restrictive standards of reasonableness and fairness, arguing that invoking this clause is unacceptable, or terminate or alter the agreement via the doctrine of unforeseen circumstances (Article 6:258 of the Civil Code).

In this case, it was ruled that the licensee had not sufficiently substantiated its claim, with a reference to the supplementary and/or restrictive standards of reasonableness and fairness, that the licensor had terminated the agreement unlawfully and, therefore, the termination was considered reasonable.