Rock & Roll Contract Law?: “Rolling Contract Provisions”

Background

The term “rolling contract” has entered day-to-day language, and is often seen in the press, and in general conversation. However, there is a lack of clarity as to what the term means in a formal contract. The courts in England and Wales have had several opportunities recently to consider the issue, and while their decisions are not binding in Scotland, they provide a useful indication as to current judicial thinking on the matter, and provide guidance as to how the term should be used. The case of G & A Ltd v HN Jewellery (Asia) Ltd was the first of two recent cases to deal with this issue.

Facts

In this case, a distributor entered into an exclusive distributorship agreement to sell jewellery for “three years rolling, commencing on 1 January 2001”. The contract was silent on termination but the defendant gave notice in August 2003 that it wished to terminate the contract as of 31st December 2003.

Decision

At first instance, it was held that the contract was only terminable on three years’ notice i.e. it was rolling in the sense that, without notice being given, there was at all times a three-year contract.

The Court of Appeal, however, held that “rolling” meant that as at 1 January each year, the contract would extend for a further three years unless reasonable notice had been given. The parties were free to give reasonable notice before the end of that year, which would bring the contract to an end two years after 1st January of the following year. The court stressed that the question was a matter of interpretation of that particular contract, rather than a dead-set rule. For example, the terms of the contract stated that there should be a meeting held by the parties by the 15th November of each year of the contract to plan capacities for the following year. The judge believed that this carried with it the concept of a taking of stock as to how the relationship was going between the parties. It was, therefore, effectively a contract which was reviewed on a rolling basis year-to-year, and as such, it would seem strange and unreasonable to construe the contract as a three-year contract from each and every day that it existed.

In summary, therefore, the court at first instance appeared to favour a construction of “rolling” meaning that from each and every day there was a three-year contract if no notice were given, whereas the court of appeal preferred a construction that the contract would become one of a period of a further three years on each 1 January if no notice were given.

To make matters more complicated, however, the claimants initially put forward the argument that it was a three-year contract which rolled in the sense of becoming another three-year contract at the end of the first period of three years unless, by reasonable notice, the contract was terminated as at the end of the first period. This definition was abandoned, and unfortunately, therefore not explored by the courts. However this is often seen in employment contracts where contracts tend to be shorter than three years and such a construction is less contentious, particularly because it avoids a notice period that is the same as the contract duration.

Measurement on a “Rolling Basis”

The more recent case of Stornoway 2011 Ltd v SIV Portfolio plc concerned an agreement which contained provision for a capped indemnity. The cap was to be calculated “within any twelve month period (such twelve-month period to be measured on a rolling basis).”

The court stated that “whereas there can be some circumstances, such as a provision in an employment contract for a rolling term, whereby employment is renewed on the anniversary of each twelve-month period, that is quite plainly not what is intended here.” There was an express provision for a cap on $1m within any 12-month period. There was also an express provision that such a 12-month period was to be measured on a rolling basis. This wording made it clear that there was no provision for consecutive 12-month periods, but for measurement retrospectively on every date over a previous 12-month period.

Comment

Ultimately, the term “rolling contract” is not legally defined and depends on the wording of the contractual provision within which it is employed. The judge at first instance in G & A Ltd v HN Jewellery Asia (Ltd) noted the following in relation to the term: “I should say that I have not had to deal with any other contract containing a similar phrase and there is no evidence as to business practice or the understanding of businessmen of such a phrase.” While case-law may develop this issue further, parties to a contract would be well advised to avoid using the ambiguous term. If the term is used, it is prudent to clearly state what the practical effect will be, particularly in respect of how the notice period will work.

Co-author'd by: Kevin McDade