Termination at will clauses - Hadley Design Associates Ltd v Westminster London Borough Council

The question of termination at will clauses recently came before Judge Seymour in Hadley Design Associates Ltd –v- Westminster London Borough Council. He looked at the extent to which such clauses can be relied upon and, in particular, considered the application of the Unfair Contract Terms Act 1977 and whether there are any developed principles of “good faith” in English contract law.

Hadley Design Associates had been employed by the Council since 1987 to provide consultancy works in relation to a number of blocks of flats at the Churchill Gardens Estate, Pimlico. The finalised contract incorporated the RICS 1981 Conditions, together with a number of amendments to those Conditions.

The Council sought to terminate the contract by relying on a one-month notice of termination clause contained in the RICS Conditions, as amended by the schedule of amendments to the conditions. The termination provisions did not require reasons for termination and, therefore, on the face if it entitled termination at will.

HDA brought proceedings for wrongful termination of the contract. They argued that the termination clause should be limited so that it only applied in the event of default by HDA or the Council running out of funds by virtue of a collateral contract or estoppel. However, the judge found that the facts to justify a collateral contract or estoppel were not present. HDA also claimed that a term should be implied to the same effect but the judge found there was no basis for any such implication.

That left HDA with arguing that the RICS termination clause was caught by s3 of the Unfair Contract Terms Act 1977 and therefore should not be applied. In particular, they argued that the termination of the contract would render substantially different performance of the contract than that which was reasonably expected and therefore, in accordance with s3 (2)(b) UCTA 1977, the termination provisions could not be applied.

As s3 UCTA 1977 only applies to contracts where one of the contracting parties is either a consumer or dealing on the other’s written standard terms of business, the court had to determine whether the contract between the parties was the Council’s “written standard terms of business”. Judge Seymour rejected HDA’s argument that the modifications to the RICS 1981 Conditions were the Council’s standard conditions for building surveyors. It was held that the concept of a party having its “written standard terms of business” was one in which it would be envisaged that that party would have a stock of written, usually printed, contract conditions that they would simply draw from as a matter or course and intend to adopt or impose those conditions without any consideration to the individual arrangement to which they were to be used or negotiation with the other contracting party. A mere preference to use those conditions would not be sufficient. To qualify as being standard terms, the party would need to intend to adopt the conditions more or less automatically in all transactions of a particular type without any opportunity for negotiation. Judge Seymour followed the example of previous authorities in not laying down a general principle for the definition of “written standard terms of business”, and acknowledged that this was a grey area that depended on the genesis of each individual contract.

It was held that the parties were not contracting on the Council’s written standard terms of business and therefore the 1977 Act did not apply.

Judge Seymour went on to consider what the position would be if the parties had been contracting on the Council’s written standard terms of business.

HDA had submitted that the termination clause did not satisfy the requirement of “reasonableness” in s11(1) of UCTA as the one-month notice period was disproportionate to the possible length of HDA’s engagement. Judge Seymour did not agree with this reasoning. He doubted that s3(2)(b) UCTA would apply to a power to terminate a contract such as this at all due to the difficulty in determining what period of performance would be reasonable to expect of a party where there was no reference to the duration of the contract.

Despite this, Judge Seymour went on to suggest that the question of whether the clause satisfied the reasonableness requirement should be approached in three steps: whether it was reasonable that there should be a termination provision in the contract at all (to which he asserted it would be manifestly unreasonable not to have a termination provision as otherwise the parties would be locked into a contract for possibly many years); whether the type of provision was itself reasonable; and, whether in light of general practice the notice period itself was unreasonably short. Following this analysis the court decided that the termination clause in question was not unreasonable.

HDA also submitted that English law was developing in the direction of implying a doctrine of “good faith” into contracts and, in accordance with such a doctrine, the Council should be prevented from terminating their contract with HDA without good reason. However, Judge Seymour found that any such development of the law would be “fraught with difficulty”: it would involve finding a principle in common law that would enable the courts to invalidate or restrict a particular contractual provision, and the situation in question would have to be so special that, if it did not fall within a statutory provision, it was one that Parliament clearly intended should achieve the same result as that statutory provision. Judge Seymour was not prepared to enter the “treacherous waters” of such an analysis without the full consideration of any authorities and, as HDA had not submitted any robust authorities to support its position, he could not be convinced that a doctrine of “good faith” does in fact exist in English law.

So, termination at will clauses have again survived judicial scrutiny. If you accept a contract that contains a termination at will clause then you should be aware that it will be likely to withstand any argument that it should not apply.

For more information please contact Emma Schaafsma at [email protected] or on +44 (0)20 7367 2811