Termination for Convenience Clauses and Good Faith

• Author: Anthony Gray
• Position: Deputy Head, University of Southern Queensland Springfield Campus, Australia
• Pages: 260-275







 !∀

260

Termination for Convenience Clauses and Good Faith

Associate Professor Anthony Gray

Deputy Head, University of Southern Queensland

Springfield Campus, Australia

Anthony.Gray@usq.edu.au

Abstract. This a rticle considers the legal va lidity of so-ca lled termination for convenience

clauses, which allow at least one party to the contract to terminate th e contract without cause.

Such rights are in contrast to more traditional approaches to contractual termin ation, which

distinguished between b reaches of condition and breach es of warranty, allowing termination only

for the former. Specifically, it will be asked whether such termination for co nvenience clauses are

consistent with requirements of good faith in co ntracting, the existence of which is itself

contentious. As a result, it will be necessary to consider the cu rrent state of the law in Australia

and elsewhere in relatio n to the extent to which good faith is and should be a feature of

contracting.

© 2012 Anthony Gray. Published by JICLT . All rights reserved.

1. Introduction

Clauses allowing at least one party to the contract

1

to terminate the contract without cause are an increasing

feature of contracting in Australia. An example of such a clause for discussion purposes appears in the standard

form contract of a major Australian construction company. It states t hat

The contractor may terminate the agreement at any time in it s absolute discretion by written

notice to the supplier in whic h case, and provided there have been no defaults by t he supplier,

the supplier will be entitled to the following amounts as reasonably determined by the

contractor:

The value of all good supplied in accordance with the agreement, to the date of termination

(less any amounts already paid to the supplier in respect of that supp ly; and

All reasonable direct costs incurred by the supplier as a result of termination (subject to an

obligation on the supplier to mitigate such costs).

Whilst it is perfectl y understandable that a party to the contract might wish to provide this kind of flexibility

in case their circumstance s change, it raises the question of whether a party to a contract should always have the

ability to exercise such a right, whether some limits should exist to the use of such a right, or whether such a

right should not be allowed to be exercised at all. Various legal iss ues arise in relation to the exercise of such a

right; for the purposes of this article, I will focus p articularly on contentious good faith doctrine, and the extent

to which it may have a role in regulating the exercise o f such a right. Such clauses occur within the broader

context of the notion of freedom of co ntract, and questions regarding the extent to which it is proper for a court

to review the substantive terms of contracts that might appear particularly favourable to one party over the other,

or contain clauses that are arguably unfair.

I should make clear so me issues that I believe to be generally outside of the ambit of my present purp oses

here:

1

Some contracts provide either party with the right to terminate the contract at their convenience.







 !∀

261

a) The extent to which good faith is or should be an organising principle for a range of rec ognised

equitable concepts such as unconscionabilit y, duress, undue influence, misrepresentation, breach of

fiduciary duty, relief against forfeitures, unjust enrichment;

b) Whether good faith is a term to be implied in law or in fact, or considered to be a general principle of

contractual construction

2

c) The exact scope of the obligation (if any) to act in good faith.

All of these matters have alre ady been the subject of a large volume of literature. I will only address these

matters to the extent believed necessar y to answer the immediate question regardin g termination for convenience

clauses, though I am aware of the much larger context in which s uch questions operate.

2. Some Background on Good Faith in Contracts

The notio n of good faith in contracting is of ancient lineage. It has existed at least since the de velopment o f

Roman law,

3

and some say it preceded the development of natural law.

4

It was associated with trustworthiness,

conscientiousness and honoura ble conduct.

5

Tetley writes that the co ncept of good faith as an implicit principle

governing performance of contracts continued during the eleventh and twelfth centuries, and was generally

adopted in the civil law world.

6

The civil law world continues to accept the doctrine.

7

There was an initial acceptance of the doctrine in the common law. A good example of this ap pears in the

decision of leadi ng commercial law jurist Lord Mansfield in the insurance case of Carter v Boehm.

8

Lord

Mansfield stated there that

Insurance is a contract upon spec ulation. The special facts, upon which the contingent chance

is to be computed, lies most commonly in the knowledge of the ins ured only; the underwriter

trusts to his r epresentation, and proceeds upon confidence that he does no t keep back any

circumstances in his knowledge; to mislead the underwrite r into a belief that the circumstance

does not exist, and to induce hi m to estimate the risqué, as if it did not exist. Good faith forbids

either party by concealing what he privately knows, to draw the other into a bar gain from his

ignorance of that fact.

He reiterated in subsequent cases that ‘by the law of merc hants, all dealings must be fair and honest’.

9

As we

know now, the common law developed in a different direction, with the general abandonment of the concept of

‘good faith’, not surprisingly during the rise of concepts of freedom of contract and liberalism, and the rise of

positivism at the expense of notions of natural law.

10

The familiar debate between certainty and fle xibility has

occurred in this context. For instance Rogers CJ Comm D noted that

11

2

See for example John Carter and Elisabeth P eden ‘Good Faith in Australian Contract Law’ (2003) 19 Journal of Contract

Law 1 55; Elisabeth Peden Good Faith in the Performance of Contracts (2003); Elisabeth Peden ‘Inco rporating Terms of

Good Faith in Contract Law in Australi a’ (2001) 23 Sydney Law Review 222; Elisabeth Peden ‘Implicit Good Faith’ – Or Do

We Still Need an Implied Term o f Good Faith?’ (2009) 25 Journal of Contract Law 50; Bill Dixon ‘Good Faith in

Contractual Performance and Enforcement – Australian Doctrinal Hurdles’ (2011) 39 Australian Business Law Review 227.

3

N W Palmieri ‘Good Faith Disclosures Required During Pre-Contractual Negotiations’ (1993) 24 Seton Hall L aw Review

70, 80.

4

W T Tete ‘Tort Roots and Ramifications of the Obligations Revision’ (1986) 32 Loyola Law Review 47, 58.

5

J F O’Connor Good Faith in International Law (1991) p117.

6

William Tetley ‘Good Faith in Contract, Particularly in the Contracts of Arbitration and Chartering’ (2004) 35 Journal of

Maritime Law and Commerce 561, 567.

7

Eg French Civil Code 1804, German BGB (references needed), Chinese Contract Law.

8

(1766) 3 Burr. 1905, 97 ER 1162.

9

Pawson v Watson (1778) 2 Cowp 786, 788.

10

S ome argue that this development ignored the relationship aspects of contracting, assuming the parties were not in an

ongoing relationship: Woo Pei Yee ‘P rotecting Parties’ Reasonable Expectations: A General Principle of Good Faith’ (2001)