What is a reasonable period of notice when terminating a long term commercial agreement with no express provision for termination?
The question
When it is not disputed between the parties that an agreement contains an implied term that reasonable notice of termination has to be given, what factors are taken into account to determine what a reasonable period of notice is?
The key takeaway
Reasonable notice and its implication into commercial agreements is a highly fact-specific assessment that requires a thorough consideration of all circumstances existing at the time the notice of termination is given. The court confirmed that while there are "relevant factors" in determining what a reasonable notice period is, these are not exhaustive and will be relevant to the extent they impact the overarching purpose of a notice period: the orderly conclusion of the commercial arrangement.
The background
Anheuser-Busch International Inc (AB InBev) and Commonwealth Brewery Ltd (CBL) are both brewers and distributors of beer, spirits and other beverage products. In 2018, CBL merged with its subsidiary, Burns House Ltd (BHL). CBL and BHL were subsidiaries of the Heineken Group.
AB InBev and BHL entered into an oral distribution agreement in 1975 (the Agreement) which provided BHL with the exclusive right to distribute AB InBev's products in the Bahamas. The Agreement continued until 2015. The Agreement was never set out in writing and may have developed over time. The Agreement contained no express terms as to the right of either party to terminate.
In 2012, AB InBev became the indirect controlling shareholder of Cerveceria Nacional Dominicana SA (CND). AB InBev assigned and novated the Agreement to CND in December 2014.
AB InBev sought to terminate the Agreement in August 2015 on three months' notice which it explained in its termination letter represented reasonable notice "in accordance with the principles set out in the English Court of Appeal decision of Alpha Lettings Ltd v Neptune Research and Development Inc [2003] EWCA Civ 704."
BHL's response to the letter was that the Agreement could only be properly terminated on three and a half years' notice: approximately one month for each year of the Agreement. BHL then stopped paying AB InBev's invoices and the supply of AB InBev products was later stopped on the basis of non-payment of invoices. AB InBev brought a claim for non-payment of invoices; BHL filed a defence denying repudiatory breach of the Agreement and asserting that it was entitled to refuse to pay the invoices to mitigate its losses from the unlawful termination of the Agreement .
It was not disputed between the parties that the Agreement contained an implied term that reasonable notice of termination had to be given. The issue to be determined was whether the period of notice which AB InBev gave was reasonable.
The Bahamian court of first instance found in favour of BHL and held that a reasonable period of notice would have been 15 months. One of several points taken into consideration was that it was reasonable to infer that the parties intended that in the event of termination “each side would be afforded sufficient time and compensation to make alternative arrangements without damage to the other’s business interests”.
Taking into account the fact that: (i) BHL was allowed to sell its own products in competition with AB InBev and (ii) BHL had to use its best efforts to sell AB InBev products up to the end of the notice period (which militated against a long period of notice to allow BHL to make alternative arrangements fully to replace the business derived from AB InBev) and (iii) while the relationship between AB InBev and BHL had continued for many years, it was a small proportion of BHL’s business and BHL was able to reallocate staff to promote its own brands, the Bahamian Court of Appeal upheld AB InBev's three and a half months' notice period as reasonable. BHL (through CBL) appealed.
The decision
The Privy Council advised that the appeal should be dismissed in full, maintaining that AB InBev's three and a half months' notice period amounted to reasonable notice.
In determining what amounts to a reasonable notice period, it took into account that the “chief purpose” of the notice period was to enable the parties to achieve an orderly end to their relationship and drew upon five separate (non-exhaustive) factors including: (i) the degree of formality of the agreement between the parties (the fact that the parties have not agreed a period of notice is a factor which points against a long period of notice if other things are equal); (ii) the length of time the relationship has been in operation, in so far as it reflects the significance of the business in question to the recipient of the notice and the recipient’s ability to adjust to its loss; (iii) the significance of the relationship business of the recipient of the notice – can the recipient adjust to the loss of the relationship with ease or with difficulty, or does the relationship being terminated take up a high proportion of the recipient’s turnover so that the loss of the relationship will pose a greater difficulty to the recipient in adjusting its business; (iv) the extent to which the recipient of the notice had invested resources into the relationship; and (v) if the recipient had, with the knowledge of its counterparty, incurred extraordinary capital expenditure a short time before the relationship was terminated.
Assessing reasonableness was designed to reflect a commercially pragmatic period of adjustment for AB InBev and BHL. On the significance of the Agreement to BHL, the court noted that sale of AB InBev products accounted for approximately 10% of BHL's turnover at the time of termination and BHL's capital expenditure was not "attributable only to" facilitating the Agreement but rather, BHL's overall operations, including other distribution agreements. These factors pointed towards BHL, in particular, requiring a lesser period of adjustment on termination of the Agreement.
Why is this important?
While this case is persuasive only, it demonstrates that the courts are inclined to adopt a commercially pragmatic approach to determining what comprises "reasonableness" for the purposes of notice termination clauses. The judgment highlights that the courts will imply a term that provides a workable exit to a commercial agreement but will not step in to protect a party against all potential financial consequences arising from the loss of a commercial arrangement.
Any practical tips?
Whether a term that reasonable notice must be given before a party terminates an agreement is to be implied into a contract is answered in the light of the circumstances existing when the contract is made (here 1975). Parties are therefore generally better served by agreeing an express clause (in a formal agreement) at the outset. This avoids the need for the terminating party to evidence that there is a valid implied term to terminate on reasonable notice, and to prove that the notice given is reasonable. If the amount of notice given is not reasonable then the innocent party can claim damages for the entire period deemed to be reasonable.
If a commercial agreement fails to provide for termination or a notice period, the terminating party should take into consideration the factors discussed above to scope the impact on the recipient of the notice and what they can achieve by way of replacing the commercial arrangement in the notice period. They should then reflect these considerations in the length of notice given.
Summer 2026
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