A manufacturer and a franchisee signed a franchise agreement for 5 years with an option to extend it for 5 additional years. Following the end of the original term, the parties continued their working relationship without signing a new agreement. After the manufacturer unilaterally terminated the agreement only 3 years later, the franchisee demanded compensation for lack of prior notice and for the remainder of the term.
The Court held that the agreement was not renewed in accordance with the specific option mechanism detailed therein and was thus renewed for an indefinite period and its termination required reasonable prior notice. When an agreement stipulates a specific mechanism for renewing a fixed-term engagement any renewal carried out according to that mechanism follows the fixed term set forth in the agreement's provisions. However, insofar as the agreement was extended through the parties' conduct without utilizing the mechanism established in the contract a new contractual framework for an indefinite period is created. As such, in long-term agreements for an indefinite period there is an obligation to provide prior notice before terminating the relationship, in order to allow the counterparty time to reorganize and find an alternative source of income. Here, the parties continued the agreement through their conduct but did not exercise the option as required. Therefore, the continuation of the agreement was not for an additional 5-year term, but rather for an indefinite period. Given that the extension was for an indefinite period and the manufacturer terminated the agreement after a long duration, it is appropriate that the franchisee be given prior notice of at least 6 months under the circumstances.