UK: Termination for Convenience - An Unfettered Right. Discuss.

In addition to a party's right to bring a contract to an end at common law, most engineering and construction contracts contain provisions allowing the parties to terminate a contract should certain circumstances arise, for example, serious or repeated default or insolvency.
Such termination provisions will usually require notice to be given before the termination can take effect and will often allow the "defaulting" party an opportunity to correct the problem and, thereby, avoid the termination.

It is increasingly the case that engineering and construction contracts will also provide the owner and, sometimes, the contractor, with the ability to terminate the contract "for convenience" or "at will". More often than not, such a provision will permit termination without having to specify a reason.

Whilst such provisions might be envisaged to provide an owner with an escape route should funds run out or where drastic design changes are required, they may also allow it to terminate the contract and retender the works simply to get a cheaper or better deal, or to avoid the difficulties often associated with terminating for default.

What do these "for convenience"/"at will" provisions look like and how will the courts generally construe them?

In his April 2002 paper for the Society for Construction Law, Termination for Convenience, John Tackaberry QC provided this example of a termination for convenience clause:

"In addition to such other rights to terminate the Contract, or the employment of the Contractor under the Contract, whether under the Contract or at law, as the Owner may have, the Owner has the right, at any time whatsoever after the signing of the contract, to terminate this Contract or the said employment or any part thereof for convenience. The exercise of this right shall be at the Owner's absolute discretion. Accordingly, the exercise of this right shall not be subject to challenge in any tribunal on the ground of insufficiency of reason for termination.

This right shall be exercised by notice in writing, expressly citing this clause and stating whether the whole or part of the Contract, or the whole or part of the Contractor's employment, as the case may be, is being terminated; and if part, identifying that part with reasonable precision. The said notice is to be delivered by hand to the Contractor's head office and a receipt obtained. The notice shall have immediate effect upon delivery as aforesaid.

Immediately after receipt of the notice, the Contractor shall secure the whole of the contract or the relevant part as the case may be so as to stabilise protect [and mothball] the work that has been done."

The contract will also typically set out the financial consequences of the termination.

Such clauses must be construed in the context of the contract as a whole and occasionally assistance may also be derived from the matrix of fact (that is, the background to the formation of the contract).

A question that has arisen on a number of occasions is whether the right to terminate for convenience is subject to an obligation of good faith.

Can an obligation of good faith be implied?

Whilst a duty to act in good faith has long been an established principle in most civil law jurisdictions, common law jurisdictions, in particular England and Wales, have generally been reluctant to imply such terms into contracts on the basis that the parties should be permitted to perform them in line with their freely negotiated expressed intentions.

Lately, however, common law jurisdictions such as Australia, Canada and Scotland have begun to recognise an implied duty of good faith in commercial contracts. We have seen the courts in England and Wales, particularly in the past few months, grappling with this area of law.

In the February 2013 case of Yam Seng Pte Ltd v International Trade Corp Ltd, in the High Court, Mr Justice Legatt held that an implied duty of good faith could be applied to English contract law in certain circumstances. The judge said that he doubted English law had reached the stage where it was ready to recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts, but he saw no difficulty in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties.

One month later, in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (Trading as Medirest), the Court of Appeal acknowledged that certain categories of contract contain an implied duty of good faith, but stated that generally if the parties wish to impose such a duty they must do so expressly. The court also emphasised that any clauses purporting to impose such a duty will be construed narrowly with regard to the remainder of the contract.

Is a party required to act in good faith when terminating for convenience?

In 2003, His Honour Judge Richard Seymour QC in Hadley Design Associates Limited v The Lord Mayor and Citizens of the City of Westminster held that a duty to act in good faith would not be implied in relation to a termination for convenience clause.

It was clear from the termination for convenience clause in that case that the contract could be terminated at any time, by either party, on one month's notice. The clause did not require there to be any reason for the termination. The owner terminated the contract without giving reasons in accordance with this provision. Further, it was clear that the owner would be using another contractor to complete the work. Hadley Design argued, amongst other things, that it was an implied term of the contract that any termination must be carried out in good faith and that the client was in breach of this implied term.

His Honour Judge Richard Seymour QC, after considering the relevant authorities, said:

"In the result it is plain, in my judgment, that no such terms as those contended for in the present case fall to be implied into the 1987 Contract as a matter of law. No relevant principle of law has been established by reference to authority or statute. The implication of a term or terms which inhibit the operation of the clear term of the 1987 Contract providing for termination on one month's notice would be contrary to principle.

Although conceptually different, the submission that the terms contended for should be implied in order to give business efficacy to the 1987 Contract fails for reasons similar to those which caused the submission that the terms should be implied as a matter of law to fail. There was no necessity for such implication."

Would an express obligation to act in good faith rule out a termination for convenience?

What happens if the contract contains both a termination for convenience and a good faith provision?

Although not a termination for convenience case, in Mid Essex Hospital Services NHS Trust, the Court of Appeal held that an express duty to cooperate in good faith was determined by reference to the two objectives expressed within the same clause. However, there was no general obligation of good faith applicable to the entire contract.

In the May 2013 case of TSG Building Services Ltd v South Anglia Housing Limited, the contract in question contained a termination at will clause. Mr Justice Akenhead held that a partnering clause did not impinge upon either party's right to terminate at will. The partnering clause required that the parties:

"work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents, and all their respective obligations under the

Partnering Contract shall be construed within the scope of such roles, expertise and responsibilities, and in all matters governed by the Partnering Contract they shall act reasonably and without delay."

The judge held that this provision did not apply to the termination provision on the basis that termination at will is not a "responsibility", it does not give rise to a "role" and is not dependent upon any "expertise". He further found that the partnering clause did not require South

Anglia to act reasonably in terminating the contract under the termination at will provision, which did not require any reason to be given. No general duty of good faith was implied. The right to terminate was unqualified and unconditional, and it was obvious that either party could terminate at any time.

Concluding remarks

This is an area of law to watch. Whilst a duty of good faith is still unlikely to be implied generally, the courts now appear to be more open to imply such a duty in certain circumstances.

Absent an express duty of good faith in a contract, it is unlikely that the courts would imply a term that a termination for convenience would have to be exercised in good faith.

Where there is express reference to good faith or similar mutual trust type obligations, the courts will consider and construe such provisions narrowly and in the context of the provisions to which they are meant to apply.

The courts will be very reluctant to fetter a party's clear right to terminate for convenience/at will unless the contract makes it very clear that it was intended that that right specifically should be exercised in good faith.

Finally, so as to avoid having the type of argument as in TSG Building Services Ltd, if the intention is that the right to terminate for convenience/at will is not to be subject to good faith or similar mutual trust type obligations elsewhere in the contract, then this should be stated expressly in the contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.