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An expired contract – but no one’s noticed!

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Posted by Pete Maguire on 24 August 2012

Pete Maguire - Commercial Contracts Lawyer
Pete Maguire Partner

Where do you stand if the contract has "expired", but the services carry on nonetheless? 

Service contracts are often entered into for a fixed period. Usually, towards the end of the period, the parties will either discuss an extension, a new contract or simply agree that upon expiry, they will go their separate ways. However, it can happen that a fixed period contract may simply expire without the parties noticing with the services continuing accordingly.

This begs the question "what is the legal position?" In answering this question, the courts will consider:

  • what the parties have said and done about extending the contract; and
  • the extent to which their behaviour is consistent with the terms of the old contract.

Such a review may lead a court to conclude one of the following:

  • A new contract has been entered into - actions, as well as words, may create a contract.
  • The old contract has been continued, on the same or varied terms. Just as actions may create a contract, it can be varied by them too. Contract clauses seeking to limit the parties' freedom to vary the contract, for example by imposing formal requirements for a variation, may themselves be varied.
  • There is no contract, but only a duty to pay a reasonable sum for services requested. 

The relevance of the parties' words and actions

A court will look at the parties' actions and communications, to decide what a reasonable person would have understood the parties' intentions to be, rather than what they may subjectively have intended. 

By way of example in a first instance Scottish case, the court found that the reasonable detached observer would almost inevitably have assumed, from their behaviour and in the absence of discussions, that the parties were continuing to do business, so far as possible, on the terms of their expired franchise contract; SJD Group Ltd v KJM (Scotland) Ltd [2010].

The relevance of the original contract terms

If the parties continue to do business in a way which is consistent with the terms of the expired contract, this will support an argument that its terms still dictate their relationship.

Whether a court will hold that the whole of the expired contract has been extended or that just some of the old terms apply will depend on the facts. Where there have been no disputes over specific terms in the post-expiry period, the whole of the original contract is likely to apply.

In cases where terms of the old contract do not make commercial sense when applied to the parties' current dealings, then it is more likely that the court will decide that:

  • the parties have a new contract, on just the terms evident from the parties' dealings; or 
  • the parties have no contract, but just an obligation to pay a reasonable sum for services or goods provided.

Terminating the relationship

If there is no contract, then neither party is of course obliged to continue dealing with the other.

If the original contract has been extended (or there is a new contract on the same terms), then the termination provisions from the original contract may apply, insofar as possible, and to the extent consistent with the parties' other words and behaviour. However, given that the original term has expired, the most likely outcome is that the court will imply a term that the contract will be deemed to continue on a rolling basis, subject to a right to terminate on reasonable notice.

What is meant by reasonable notice will depend on the individual circumstances of each case, and the following factors may well be taken into account by the court:

  • The length of the contract term and the type of contract (what rights are granted).
  • The degree of financial dependence of the terminated party on the contract.
  • The common intention of the parties at the time when they entered into the contract.
  • The commitments of the parties which exist at the date of notice to terminate.
  • The time needed by the terminated party to replace the lost business represented by the contract.

Conclusion

To avoid potential disputes, it is always preferable to expressly extend or vary a contract before its expiry to avoid uncertainty about the nature of the parties' relationship going forward. 

About the author

Pete specialises in the drafting and negotiation of outsourcing and commercial contracts.

Pete Maguire

Pete specialises in the drafting and negotiation of outsourcing and commercial contracts.

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