Must A Party To A Renewable Contract Give Reasonable Notice Of Non-Renewal?

Written by litigator and mediator Irvin Schein and originally published at irvinschein.com.​

The recent case of Data & Scientific Ink v. Oracle Corporation may open the door to a cause of action against a party to a renewable contract for failure to give the other contracting party notice of non-renewal.

In this case, the plaintiff had a contract with the defendant, a multi-national computer technology company carrying on business through partner network conduits. The plaintiff was a member of the network under an agreement which was said to be renewable annually at the sole discretion of the defendant.

The contract specifically provided that the plaintiff could apply for renewal on an annual basis, and the defendant would notify the plaintiff if it accepted its application for renewal annually.

The plaintiff had been a member of the partner network from 1994 to 2014. Every year for 20 years, the agreement was renewed without interruption or incident. The plaintiff’s business and its reliance on the relationship with the defendant grew over the years.

In the fall 2014, the plaintiff was invited by the defendant to renew the agreement as in previous years. After an unsuccessful attempt to make its request for renewal online, it made the request in a letter to the defendant. Several weeks later it received a written response from the defendant saying that the agreement would not be renewed notwithstanding the long-term relationship and notwithstanding the fact the defendant had actually invited the plaintiff to submit an application for renewal.

The plaintiff had received no prior notice of the defendant’s decision not to renew.

The plaintiff sued the defendant for damages for failing to give reasonable notice of non-renewal. The plaintiff took the position that the defendant had been obliged to exercise his discretionary renewal power reasonably and that its termination of the 20 year relationship without notice was unreasonable.

The defendant brought a motion to strike out the claim on the basis that it failed to disclose a reasonable cause of action. In other words, the defendant asked the court to conclude that there is no duty in law to provide reasonable, or any notice of a decision not to renew a renewable contract.

At the hearing of the motion the defendant agreed that as a general rule, discretionary contractual powers must be exercised reasonably as a matter of good faith.

However, the defendant also referred to previous judicial authority to the effect that absent active dishonesty, the reasonable exercise of discretionary contractual powers does not apply in case of contract renewals. The defendant asked the court to accept that as a general principle, the obligation to exercise discretionary contractual powers reasonably simply does not apply in contract renewal situations, ever.

The Court did not accept that submission. The Court concluded both that there is a judicially recognized requirement that parties perform their contractual duties honestly and reasonably, and that as a newly recognized duty, there is a new general duty of honesty in contractual performance. This new duty of honesty in contractual performance flows directly from the general organizing principle of good faith.

As a result, there may well be an argument available that in contract renewal situations including a “sole discretion” non-renewal power, the discretion must be exercised reasonably in the sense that appropriate consideration ought to be given to the legitimate interests of both contracting parties. As part of that consideration, notice of an intention not to renew might well be required in some circumstances.

Accordingly, the Court declined to strike out the statement of claim on the basis that it could not succeed. The judge felt that it was not plain and obvious that the claim had no chance of success and accordingly, the plaintiff was entitled to proceed with the action.

Needless to say, nothing in the case involved a determination that the plaintiff was going to win at trial. The case stands for the proposition only that a party is entitled to assert a claim based on the proposition that the discretionary power relating to a renewal provision must be exercised reasonably and a reasonable exercise of that discretion may include providing notice of an intention not to renew.