Implied term(ination): how long does an indefinite contract last?

Disputes relating to informal contracts are not uncommon. They turn on the strength of the evidence of the parties, as opposed to construing the written terms of a document. Late last year we wrote about the complexities of ascertaining the terms of an informal contract. Recently, the New South Wales Court of Appeal was tasked with deciding the duration of an implied agreement (United Resource Management Pty Ltd v Par Recycling Services Pty Ltd [2023] NSWCA 236).

Your agreement ends – but you act as if it hasn't

Between 2011 and June 2019, URM collected waste from Sydney local governments and delivered it to a facility run by Par. The agreement included that URM would pay gate fees to Par, and those would be guaranteed by Mr Johnston (for present purposes, we will call it the Somersby Agreement).

Between Sydney and Par's facility, the waste made a stop at a resource recovery centre run by KEE, an arrangement governed by an agreement between URM and KEE (let's call that agreement the KES Agreement). In 2014, the KES Agreement was replaced by a new one between KEE and URME, an entity associated with URM. At that time, URM did not tell Par that the KES Agreement had terminated. This turned out to be important, because the Somersby Agreement said it automatically terminated upon the termination of the KES Agreement. Nonetheless, Par and URM dealt with each other as if the Somersby Agreement remained on foot, because Par did not know about the new agreement. Nearly five years later, Par discovered the truth.

Both Par and URM accepted that, after the Somersby Agreement terminated:

• Par and URM were bound by an agreement to be inferred from their subsequent conduct; and
• except for its termination provisions, that agreement was on the same terms as the Somersby Agreement.

The parties also accepted that Mr Johnston was a party to that implied agreement as guarantor of URM’s payment obligations.

But was that implied agreement, like the old Somersby Agreement, to come to an end when the new agreement between KEE and URME ended? URM said it did, but Par argued that, as the implied agreement had no express duration, a term should be implied that it was terminable on reasonable notice.

The NSW Court of Appeal held that Par and URM's conduct, viewed objectively, was consistent with them having adopted most of the terms of the Somersby Agreement to govern their relationship. The test was whether the terms could continue without modification. That did not include the termination clause of the old Somersby Agreement.

On its face, the duration of the implied agreement was therefore indefinite, as there was no manner provided for termination. Was it therefore terminable on reasonable notice?

Ultimately, the Court held that the conduct of the parties “would be reasonably understood to convey”, without an agreement otherwise, that their implied agreement was terminable on reasonable notice. That implied term would operate consistently with respect to each of the parties and was unlikely to advantage one over the other.