Termination for convenience clauses are a common enough feature of technology contracts. But just how convenient are they when a party comes to exercise their termination rights under them?
What is termination for convenience?
Termination for convenience clauses are, as their name suggests, a mechanism that enables one party (or both parties) to a contract to exit the contractual relationship without having to have a reason for doing so.
There are two important things to understand about termination for convenience clauses (also commonly referred to as 'termination without cause' or 'termination at will' provisions).
First, in order for a termination for convenience right to arise, it needs to be expressly provided for in the contract. Without such a clause, at common law, parties will generally only be able to terminate where there has been a repudiation of the contract; an essential term has been breached; there has been a sufficiently serious breach of an intermediate term; or the contract has become frustrated.
Second, there is still some uncertainty as to a party's contractual power to terminate at will under such a clause. The case law demonstrates that an unsettled issue when a party exercises its right under a termination for convenience clause is whether that party must act in good faith in doing so. The interpretation of the contract as a whole, including any restraints on the right to terminate for convenience, will be key factors when determining whether this good faith requirement applies.
Convenience
In Theiss Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd[1], Placer exercised its right to terminate for convenience. The specific clause in the contract was not qualified by an obligation of good faith, and the clause was, according to the Court, 'clear and unambiguous in providing Placer with an absolute and uncontrolled right to termination'. The Court seemed satisfied in this case that no requirement to act in good faith was necessary.
Similarly, in Starlink International Group Pty Ltd v Coles Supermarkets Australia Pty Ltd[2], the Court held that a requirement to act in good faith in exercising a right to terminate for convenience would be inconsistent with the broad terms of the termination for convenience clause where such clause was expressed in clear language and without restriction. In that case, the clause allowed Coles to terminate 'at any time without a reason' by giving 45 days notice. Again, no requirement of good faith was implied.
On the basis of these two cases at least, it appears that termination for convenience clauses are, as their name suggests, anything but inconvenient (that is, of course, unless you are on the receiving end of the termination notice). Unfortunately, however, it appears that there are still some potential traps that can make the exercise of these clauses somewhat fraught.
Inconvenience?
In Kellog Brown & Root Pty Ltd v Australian Aerospace Ltd[3], it was successfully argued that the right to terminate for convenience may be subject to an implied term of good faith. In that case, Australian Aerospace exercised a right to terminate for convenience in its contract with Kellog Brown. The only catch was that the clause was exercised at a time when the parties were in the midst of a dispute resolution process, and Australian Aerospace appeared to terminate the contract after pre-empting the likely outcome of the dispute process and the possible success likely to flow to the other party.
Similarly in Sundararajah v Teachers Federation Health Ltd[4], there was found to be a serious question to be tried as to whether a termination for convenience clause could be activated in the absence of good faith.
An obligation to act in good faith will not necessarily be implied into all commercial contracts.[5] As with any implied term, it must satisfy a five part test:[6]
- the term to be implied must be reasonable and equitable;
- the term must give business efficacy to the contract;
- the term must be so obvious that it goes without saying;
- the term must be capable of clear expression; and
- the term must not contradict any express term of the contract.
So does the right to terminate under a termination for convenience clause need to be exercised in good faith?
In Apple Communications Ltd v Optus Mobile Pty Ltd[9], Apple entered into a distribution agreement with Optus for a term of three years. Less than 12 months into the contract, Optus gave notice purporting to terminate under a termination for convenience clause in the agreement. Prior to entering the agreement, Optus had concerns about its distribution arrangements and was contemplating a restructure which would cancel all contracts. Apple claimed Optus had breached its implied term of good faith by not communicating to Apple that fact prior to entering the contract. Windeyer J found for Optus, noting that even though Optus had known about the issues, that does not necessarily mean they breached their obligations of good faith when they sought to terminate the agreement when there was 'a proper reason to exercise those rights'.[10] His Honour went on to say:[11]
[b]usinesses as large as Optus must constantly be considering changes to their modes of operation and certainly could not be expected to disclose these considerations in a way which might make them public.Implications
Termination for convenience clauses are often used in Australian technology contracts. As with any clause in a contract, it is important that the right to terminate for convenience be very clearly expressed. Unfortunately, it might not end there. The case law shows that there is at least a possibility that an obligation of good faith may be implied in respect of the exercise of such a termination right.
Whether this occurs will depend not just on the wording of the contract (considered as a whole), but also the circumstances surrounding the exercise of the termination right. It would seem prudent, therefore, for a party wishing to exercise such a right to turn their mind to whether a good faith obligation might be implied having regard to such circumstances.
[1]
(2000) 16 BCL 130.
[2]
[2011] NSWSC 1154.
[3]
[2007] VSC 200.
[4]
(2011) 283 ALR 720.
[5]
Esso Australia Resources Pty Ltd v
Southern Pacific Petroleum NL [2005] VSCA 228.
[6]
BP Refinery Western Port v Shire of
Hastings (1977) 180 CLR 266.
[7]
Sandararajah v Teacher's Federation
Health Ltd (2011) 283 ALR 720.
[8]
Garry Rogers Motors (Aust) Pty Ltd v
Subaru (Aust) Pty Ltd [1999] FCA 903 at [37].
[9]
[2001] NSWSC 635 (Apple).
[10]
Apple at [19].
[11]
Apple at [19].
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