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Can a judge (in interlocutory proceedings) forbid a party to terminate an agreement even though the contractual notice period has been observed?

Can a judge (in interlocutory proceedings) forbid a party to terminate an agreement even though the contractual notice period has been observed?

After a general introduction, this post will discuss a ruling by the judge in interlocutory proceedings in Rotterdam of 30 March 2016 on a continuing performance contract to produce and deliver dry soups which are eventually intended to be passed on to Heinz (ECLI:NL:RBROT:2016:2467). The purchaser ‘Continental Foods Belgium’ terminated its agreement with its producer and supplier ‘Intertaste’ with observance of the contractual provisions. Intertaste alleged that the reason for the termination was that the purchaser wished to take the production of dry soups in house (‘insourcing’) and that this was contrary to reasonableness and fairness. The producer Intertaste requested the judge in interlocutory proceedings to prohibit the purchaser from terminating the agreement. The judge in interlocutory proceedings then addressed the question whether reasonableness and fairness impeded this termination.

In the Netherlands, we greatly value contractual freedom in commercial contracts. This means that the parties who are entering into an agreement with each other, are in principle free to include in the agreement what they deem fit (this is different for employment contracts and leases for example). Of course, the provisions of the agreement may not be contrary to the law or public morality, so determines article 3:40 Dutch Civil Code. (‘CC’). Apart from this section of law, the CC mostly contains ‘regulatory law’. This means that if the parties have not made arrangements on a specific issue, the law determines which rules apply to this. On the basis of this regulatory function, the CC for example prescribes under which circumstances an agreement may be terminated, which conditions must be satisfied in that event and any loss possibly eligible for compensation. The parties are however free to arrange this differently and more specifically in their contract than provided for by the law.

If not otherwise agreed, an agreement may in general only be terminated if a party fails in the performance of his obligations under the agreement, also referred to as ‘breach of contract’. The principle is that the breaching party must first be issued with a notice of default and therefore get a ‘second chance’ from the other party to as yet comply with the obligations within a reasonable term. If he fails to do so, the agreement can be terminated and the breaching party may also be obliged to pay compensation, unless the non-performance can be blamed on force majeure.

The CC does not provide rules on the termination of the agreement without there being breach of contract. Are parties in that case not just allowed to part company? Without there necessarily being a breach of contract but just because a party so wishes; perhaps it no longer ‘clicks’ between the parties or because a party has different plans? This question often arises in continuing performance contracts where the parties have committed to work together for longer periods of time or if this has turned out to be the case in practice. As the law contains no provisions on this type of termination (‘giving notice’), it is for the parties to agree this between them. Most continuing performance contracts therefore contain a termination provision which is often linked to a notice period. If nothing is included in the agreement, it is not easy to determine whether, and under which circumstances, a party may terminate the agreement. According to the Supreme Court, a continuing performance contract entered into for an indefinite period of time can in principle be terminated. Reasonableness and fairness could however mean that the termination requires a sufficiently compelling ground for giving notice, a notice period must be observed and/or that the termination is accompanied by an offer to pay compensation. Many legal proceedings have been conducted on this issue and it is outside the remit of this article to examine such case law closely.

In this article, I would actually like to address the following question further. Assuming the parties did agree a notice period, can a termination in accordance with this period still be ‘invalid’? The age-old legal answer ‘it depends on the circumstances of the case’ yet again applies. In the Netherlands, alongside contractual freedom, reasonableness and fairness is also deemed very important. Courts can use reasonableness and fairness to supplement a contract in cases where there is no provision, but reasonableness and fairness can also be used to limit the operation of a contractual stipulation.

In the above case of Intertaste/Continental Food Belgium, Intertaste relied on this so-called limiting operation of reasonableness and fairness.

The facts are as follows.
Intertaste (formally consisting of two companies) is a dry soup producer. A number of agreements were entered into between Intertaste and (the legal predecessor of) Continental Food Belgium (‘CF Belgium’) in 2010 in respect of the takeover by Intertaste of a factory and the associated business in Utrecht. The formation of these agreements resulted from a tender of Heinz for the production of dry soups and the circumstance that both Intertaste and CF Belgium had both independently, and unsuccessfully, tendered for this contract after which they, at the suggestion of Heinz, came to a collaboration so that they were awarded the contract by Heinz.

One of the agreements entered into in this context relates to the Contract Manufacturing Agreement (‘CMA’). The CMA includes a termination arrangement ‘for any or no reason’ with a notice period of 12 months. The agreement also determines in respect of this termination that Intertaste is subsequently obliged to collaborate in the transfer of the production to a subsequent supplier, which could be CF Belgium itself.

During the negotiations, Intertaste proposed that the CMA should include a prohibition for CF Belgium to at any point restart the production of dry soups itself (‘insourcing’). CF Belgium rejected this proposal. CF Belgium indicated that it would be very unlikely that it would recommence the production itself but that it did not want to be restricted in possible takeovers whereby one, in the words of CF Belgium “sometimes cannot anticipate what is involved”.

The prohibition proposed by Intertaste was in the end not included in the agreement. From the ruling it can be deduced that (the legal predecessor of) CF Belgium was taken over (by CF Belgium). This acquiring party apparently did want to take the production of soups back in house. On the basis of the above indicated ‘improbability’, Intertaste had apparently assumed that this qualification would not become reality.

In his ruling, the judge in interlocutory proceedings attached great value to the professionalism of the parties. On this the judge stated:

“Important in the first place is that the CMA must be viewed as a commercial contract between professionally operating parties, on the wording of which (…) protracted negotiations were held with the aid of lawyers. The text of the agreement which was eventually agreed between the parties states in so many words that termination “may be given for any or no reason in the notifying party’s sole discretion” (…). This indicates that the parties have considered the possibility to determine that termination could only legally take place under certain circumstances but that they have instead chosen to make a termination possible irrespective of the reason.”

The judge subsequently also addressed the negotiations and that Intertaste had knowingly decided to sign the contract without including the ‘insourcing’ prohibition. Indeed, the termination clause actually sets out that Intertaste will collaborate in the transfer of the production to a subsequent producer, even if this were to be CF Belgium itself. The judge therefore came to the following conclusion:

“In these circumstances, viewed in their interrelationship, the court finds that it cannot be stated that the wish to produce dry soups itself makes the termination by CF Belgium unacceptable in accordance with the criteria of reasonableness and fairness. The fact that when entering into the agreement, (the predecessor of) CF Belgium did not have the expectation that it would want to produce dry soups itself, does not alter this. After all, this does not detract from the fact that the parties have expressly opted in favour of terminating the agreement for whatever reason as well as for not including an ‘insourcing’ prohibition in the agreement.”

Unfortunately, rulings such as these never tell the whole story. One could imagine that in the context of the takeover of the factory, Intertaste made substantial investments and that it left a ‘sour taste’ for Intertaste that, although its former contractual party did not intend to take the production back in house, the party that acquired the contractual party apparently did. Intertaste had assumed a different future than what became reality. The lesson to be learned from this is that it must always be properly recorded under which circumstances an agreement can be terminated. This is of course closely related to the circumstances under which one is prepared to enter into an agreement with each other. Stipulate those as well! This ruling shows that the more circumstances you can put forward to substantiate a particular point, the greater the chance of success. If the circumstances in this case had been just a little different, the ‘reasonableness and fairness’ element might have resulted in a very different outcome.

By Cindy Snelders-van de Kamp

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