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In an application which allows 2 people to chat with each other in indiviual windows,
if user 1 closes the chat window, should user 2 be notified that user 1 closed the chat? (e.g User 1 Closed Chat message)
Or should user 2 only be notified when user 1 logs out of the application where the chat is contained? (e.g User 1 has logged out)
I would say it depends on the use case you are looking at and how the closing of the chat affects the conversation. For example, If I am chatting with AT&T customer care on their web chat and if either one of us closes the chat, the chat gets disconnected and hence a notification is very useful.
However if you are designing a chat messenger like say yahoo messenger, if closing doesnt disconnect the chat, you should be fine to go as long as the second user who has not closed the chat can still send messages.
However do keep both users informed if either user has logged out since you could cause a lot of frustration if one user keeps sending messages with no response
In most chat applications closing a chat window in and of itself has no meaning. As long as the chat application itself is open, the user is online and can be sent messages. The fact that this may (re)open a new window is irrelevant. In these kinds of chat applications only status changes (online, available, busy, etc.) are relevant for someone's contacts.
There are some chat applications where you can send someone a chat request and can then only send messages when the request is accepted and as long as the chat remains "open". Closing the chat window then means ending the chat, effectively changing the user's status to unavailable as a new chat request would need to be sent to continue the conversation. As such closing the chat window is a status change which is relevant to the chat partner.
