THE BOTTOM LINE
- Long-standing, unwritten business relationships can be legally binding contracts that require a formal termination process, even if terms were never put on paper.
- Abruptly ending such a relationship—even with valid reasons like a partner’s late payments—can trigger a duty to pay damages for the other party’s lost profits.
- Courts will determine a “reasonable notice period” based on factors like relationship length and financial dependency, and will calculate damages based on the profits that would have been earned during that time.
THE DETAILS
In a recent interim ruling, a Dutch appeal court examined the fallout from a suddenly terminated 22-year business relationship between a vehicle advertising company and its primary car dealer. For over two decades, the companies operated without a formal written contract, relying instead on established practices. When the supplier terminated the arrangement with immediate effect due to frustrations over late payments, the court found that this long history of transactions had created a legally recognized “continuing performance agreement.” This case is a critical reminder for business leaders that years of consistent commercial conduct can create legally enforceable expectations, transforming an informal partnership into a contract with implied obligations.
The core of the dispute was not whether the supplier had reasons to be dissatisfied, but how it chose to end the relationship. The supplier argued it was justified in stopping all future sales immediately. However, the court ruled that under Dutch principles of “reasonableness and fairness,” the method of termination was improper. It weighed the supplier’s valid complaints against the car dealer’s significant financial dependency on the partnership—which accounted for over half its used-car profit margin. The conclusion was that an instant termination was commercially unreasonable. The court determined that a notice period was essential to allow the dealer time to adapt its business model, provisionally setting this “reasonable” period at six months.
The financial consequences of this hasty exit are significant. Because the supplier provided zero notice, it is now liable for the profits the car dealer would have earned during that six-month period. The court, finding the dealer’s initial damage calculations to be unverifiable, has taken the significant step of appointing an independent financial expert. This expert will conduct a deep dive into five years of the dealer’s accounting records to precisely calculate the average monthly profit generated by the relationship. This move not only delays the final judgment but also signals to all businesses the level of intense financial scrutiny that can follow an improperly managed contract termination. The final damage award will be based on the expert’s findings, turning an operational decision into a potentially costly liability.
SOURCE
Source: Gerechtshof Arnhem-Leeuwarden
