Reasonable notice termination not construed or implied into a contract with detailed termination provisions

Artcrafts International SpA v MOU Ltd [2024] EWHC 1558 (KB)

The question

Where a contract contains comprehensive termination provisions, in what circumstances will the court avoid construing or implying an additional right to terminate on reasonable notice?

The key takeaway

Where a contract expressly sets out the circumstances in which a party could terminate and requirements to enact termination, it was “unarguable” that the contract could be construed to allow termination on reasonable notice or for such a term to be implied.

The background

MOU is an English luxury brand, well-known for its footwear. Artcrafts is an Italian company that distributes apparel on behalf of a portfolio of brands.

In 2011, MOU granted Artcrafts an exclusive licence to manufacture, distribute, sell, advertise and promote various of its products in return for substantial royalties.

In 2022, following the issuance of several notices of material breach by MOU, Artcrafts successfully brought proceedings against MOU to ensure the continuation of the licence agreement. In 2023, Artcrafts brought the present summary judgment proceedings against MOU, alleging that MOU was in breach of the licence agreement for advertising and distributing products the subject of the licence in the USA and elsewhere both itself and through a third party.

MOU denied that it was in breach of the agreement and alleged that on a “true construction” of the contract it was entitled to terminate the agreement on reasonable notice, despite no such express provision being contained in the agreement, and no such argument having been raised in the 2022 proceedings (in which MOU had sought to terminate for material breach).

The licence agreement was for a five year term, and included an automatic renewal right for Artcrafts. The agreement also contained a fairly detailed “Events of Termination” clause which set out various events that would entitle the parties to terminate the agreement, including insolvency, challenge to validity of the rights the subject of the agreement, change of control, non-payment of royalties, or generation of insufficient royalties over a two-year period. The court commented that this clause demonstrated that the parties had carefully crafted circumstances in which particular parties could terminate the agreement, even in the absence of any breach by the counterparty.

A separate clause (clause 29.3) provided that “the rights and remedies of the parties in connection with the agreement are cumulative and are not exclusive of any rights or remedies provided by law”. This meant that if the relationship were to fall apart due to the actions or inactions of the other party, they would also have the common law rights to terminate for repudiatory or renunciatory breach.

The court considered two key issues: 

• Did a true construction of the contract allow for termination on reasonable notice?
• In the context of the terms of contract could a termination clause be implied in the terms alleged?

The decision

The court granted summary judgment to Artcrafts.

True construction of the agreement

The court found MOU’s plea on true construction of the agreement to be “unarguable”. The contract contained extensive and carefully drafted provisions as to when termination was permitted, these provisions were detailed and, importantly, were not limited to circumstances in which Artcrafts breached the contract, including, for example, rights to termination for failure to generate sufficient royalties. The agreement was the product of negotiation between the parties and was professionally drafted by lawyers. Both parties had the benefit of leg al representation and advice at the time they entered into the contract.

These factors viewed collectively showed that the agreement had been drafted to “keep the licence agreement alive if at all possible”, such that there was no scope for a true construction to provide for termination on reasonable notice. A clause mandating that the parties use their best efforts to preserve the contract by entering into negotiations, was also contrary to an objective common intention that, at the time the agreement was entered into, the parties intended that one party should have the right to unilaterally bring the contract to an end for any reason or no reason at all. While the inclusion of an entire agreement clause did not exclude the implication of a term in theory, it showed the approach of the parties was to record their agreement in detailed express provisions.

Implied term – termination on reasonable notice

In assessing whether a reasonable notice termination clause could be implied into the agreement, the court confirmed the approach that implication occurs after the express terms are given their proper construction. The detailed termination provisions in the agreement did not favour implication of the term.

In any event, the court considered that the implication of such a term would break the “cardinal rule” that an implied term must not contradict the express terms of a contract, given that termination on reasonable notice would fly in the face of various express terms of the agreement which provided (i) for termination on notice where specific conditions were met; (ii) for termination in the event of material breach, though even then the parties had to follow specific procedures before terminating; (iii) for circumstances in which the parties could terminate absent any breach; and (iv) Artcrafts with the right to extend the agreement in five-year terms, the benefit of which would be lost if termination was permitted on reasonable notice.

Even if the alleged implied term had not contradicted the express terms of the agreement, the court found that the express terms of the agreement were sufficiently definite, detailed and commercially sensible so that MOU could not bring itself within the circumstances that such a term could be implied into the agreement.

Why is this important?

Termination clauses are a valuable mechanism for parties to define the circumstances in which a contract can be brought to an end. While every case turns on its own facts, and on the terms of the contract under consideration, where a clause clearly specifies the circumstances in which a party may terminate a contract, a party is unlikely to be able to imply additional terms for termination, or terms to the contrary.

Any practical tips?

In light of the fact that it may be difficult to imply further such terms, carefully consider and define the circumstances in which the agreement should be terminated. Ensure the termination clause or clauses align with other contract provisions.

Where the contract duration is long, or where the counterparty is given renewal rights, consider providing some mechanism for early termination to avoid the inability to terminate.

Winter 2024