Termination for convenience clauses and good faith

Building and engineering contracts usually can only be terminated in limited circumstances, e.g. for serious default or insolvency. Some contracts confer the added power to terminate for a party’s own convenience. A recent Australian case addresses the question of how far a “termination for convenience” power goes. Can it be used to terminate a contract for any reason? Or can the power only be used in good faith?

The Case

The case concerned a project for the supply of 46 helicopters to the Australian government. KBR were a subcontractor for portions of the works and services. The main contractor was dissatisfied with KBR’s performance, and sought through negotiations to “descope” much of its work. These negotiations came to nothing, but the main contractor then attempted to rely on a termination for convenience clause as a basis for terminating KBR.
KBR sought and obtained an injunction to stop the main contractor from relying on the termination for convenience clause. It alleged that the attempted termination was made in bad faith, and that it was an implied term of the contract that the termination for convenience power must be exercised in good faith. The court upheld this argument (for interim purposes), and granted an interim injunction.

Comment

The whole point of termination for convenience clauses is that they allow a party to terminate a contract without having to prove default, insolvency etc. Government contracts (e.g. GC/Works) often use them to allow for termination of a project where there has been a change of government policy, and the government no longer wishes to proceed with a project. They can equally be applied in private sector contracts.
It could be said that uncertainty is created if the law imposes unstated conditions on the exercise of termination for convenience clauses, e.g. that the termination power must be exercised in good faith. English law does not impose a blanket obligation of good faith on the exercise of contractual rights, and this Australian decision on the exercise of a power to terminate for convenience must be understood in that light. Nevertheless, there are an increasing number of Australian cases where courts have been prepared to restrain a party from terminating a contract where the attempted termination appears to have been made in bad faith. To what extent (if any) English law will adopt this approach is something of an open question.

Reference: Kellogg Brown & Root Pty Ltd v Australian Aerospace Ltd [2007] VSC 200. Click here for a link to the case