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Caught on our radar

What is
a reasonable
period of notice?

The Swedish Supreme Court has announced a fundamentally important ruling in relation to the period of notice, which could be of significance for many types of commercial agreement. The agreement, a retailer agreement, had been entered into with an unspecified period, and did not include any terms and conditions in relation to giving notice of termination.

The Supreme Court decision also shows that, in future, the courts may be expected to seek solutions in international rules, and not just in the Swedish rules of law that are normally applied.

The dispute

It is not uncommon for commercial agreements to be entered into without the parties reaching a specific understanding on how the agreement will be terminated. The case in question (NJA 2009 s. 672) related to an oral retailer agreement between bakery company Malmbergsbagarn and its distributor, Allbröd. Because Malmbergsbagarn wished to renegotiate the agreement after a number of years of cooperation, including introducing a period of notice, Allbröd instead terminated the agreement without observing any period of notice. One interesting question in this case was whether the parties actually had an agreement relating to long-term cooperation, or whether their cooperation should be regarded as a less strictly defined relationship that could be terminated more easily.

Both of the courts focused more on the actual cooperation than the form it took, and therefore interpreted the agreement as a long-term cooperation agreement between the parties. The Court of Appeal took into account the loyalty principle that generally applies between the parties to an agreement, particularly in cases of long-term cooperation, and was of the opinion that a period of notice of three months should be observed. The Supreme Court came to the same conclusion, i.e. that three months was a reasonable period of notice, but reached this decision through different reasoning.

The court’s analysis

By way of introduction, the court noted that Swedish law does not include any retailer legislation, and that supplementary law must be constructed with the support of both rules for other comparable contractual obligations, such as commission and agent agreements, and current case law.

Having reviewed relevant and related regulations, all of which include periods of notice of between one and six months, the court reported on current case law, with a decision from 1989 in which the circumstances were similar to those in the case in question, but where the retailer agreement could be terminated without any period of notice whatsoever.

The court then noted, somewhat surprisingly, that consideration must also be given to the fact that sole retailer agreements are often international. Despite the fact that the agreement in question had no international connection at all, the court looked towards Europe and the US, and in particular at the Draft Common Frame of Reference (DCFR) model rules, which were drawn up by academic groups with representatives from all EU nations and which include proposals for model regulations for European civil law. These rules, which are the result of voluntary collaboration between the member nations rather than a binding convention, have not previously been used as the basis for any Swedish ruling.

However, with reference to the regulations of the DCFR in particular, which do not thereby have a precedent as a source of law in Sweden, the court noted that a period of notice should be observed and made a free assessment of reasonableness in terms of the period of notice in view of e.g. the agreement period, the position of the parties and their contractual obligations, and the other grounds for their cooperation. In an overall assessment, the court found - despite the previous case from 1989 - that a reasonable period of notice was three months.

The significance of the ruling

The ruling may provide guidance in other cases where agreements for long-term cooperation have been entered into without the parties having agreed on the issue of termination. It states that agreements that operate until further notice may be terminated at any time after observing a three months’ notice, unless otherwise has been agreed. The ruling also creates considerable uncertainty on which rules should actually form the basis for interpreting commercial agreements. It clearly paves the way for international influence, even where this is of a purely academic nature and has not led to any binding conventions.

The issue of what constitutes a reasonable period of notice has been clarified, but the interpretation of agreements will not be any simpler in future.