Termination for convenience unseats airline supplier

The High Court has reaffirmed the applicable principles of construction when interpreting contractual terms in the context of an agreement for the supply of aircraft seats to an airline. In upholding a party’s right to terminate for convenience, the judgment emphasises that the court’s function is to interpret a contract to identify the parties’ agreement, and not what the court thinks they should have agreed (or indeed what a party may retrospectively wish for). It also highlights the importance of considering the likely effects of relying on any particular termination clause in advance of triggering it, as the consequences may differ depending upon the provisions relied upon.

Background

In Optimares S.p.A. v Qatar Airways Group Q.C.S.C. [2022] EWHC 2461 (Comm), the court considered whether Qatar Airways was entitled to exercise its right of termination in its purchase agreements with Optimares.

In 2018 and 2019, Optimares agreed to design, manufacture, sell and deliver economy and business class seats (for Boeing 787-9, Boeing 777-9 and Airbus A321 aircraft) to Qatar Airways.

By March 2020, Optimares had incurred millions of euros in progressing the works and was on the cusp of starting to make some deliveries, but the parties’ relationship had broken down. Optimares served notices alleging “excusable delay” under the agreements, stating that due to the COVID-19 pandemic, the manufacturing processes for the seats had been rendered impossible. Against a backdrop of uncertainty as to when the products would be delivered, Qatar Airways exercised its right to terminate all of the agreements for convenience and to be repaid all sums that it had previously paid to Optimares.

The central issue in dispute was whether Qatar Airways had wrongfully terminated the agreements, which was an issue of contractual construction. The relevant termination clause provided that:

“Notwithstanding anything to the contrary contained in these Standard Condition [sic] or the applicable Purchase Agreement, Qatar Airways shall be entitled to terminate these Standard Conditions, the Purchase Agreement and/or any Purchase Order for its convenience and without incurring any liability by providing three (3) months prior written notice to the Supplier...”

Judgment

Principles of contractual construction

The key principles, derived from numerous Supreme Court cases, have most recently been summarised in Deutsche Trustee v Duchess & Others [2019] EWHC 778 (CH) as follows:

• When interpreting a contract, the court should seek to identify the intention of the parties objectively and by reference to the background knowledge which would have been available to the parties.
• Following the Supreme Court’s judgment in Arnold v Britton [2015] UKSC 36, the court is to identify the meaning of a clause by assessing the wording in light of:
  • the natural and ordinary meaning of the clause;
  • any other relevant provisions of the agreement;
  • the overall purpose of the clause and the agreement;
  • the facts and circumstances known or assumed by the parties at the time that the document was executed; and
  • commercial common sense; but
  • disregarding subjective evidence of any party's intentions.
• The mere fact that a contractual arrangement, once interpreted using the natural language, produces an unsatisfactory, or even disastrous, result for one party, does not permit departure from the natural language.
• Commercial common sense is a significant factor when interpreting a contract, but the court cannot deviate from the natural meaning of a provision to assist an “unwise party” or penalise an “astute party”. The contract should be interpreted to identify what the parties have agreed, not what the court thinks that they should have agreed.
• An iterative approach should be adopted to the interpretation process, by reviewing each of the suggested competing interpretations against other clauses in the contract to assess the commercial consequences.

The legal issues

The following legal issues were considered by the court:

1. Did the existence of an “excusable delay” preclude reliance by Qatar Airways on the termination for convenience provision?
2. Are there any financial consequences of a termination for convenience clause and, in particular, what was meant by the words “without incurring any liability” in the agreements?
3. Was there an unfettered right to terminate at will or was it qualified by other contractual provisions, notably a duty of good faith provision?
4. Could there be a claim for unjust enrichment or restitution in respect of the IP provided by Optimares to Qatar Airways?

The judge dismissed the fourth legal issue as hopeless, as Qatar Airways had a legal right to the IP which had vested at the time of its creation without any additional cost. This article focuses on the first, second and third legal issues.

Issue 1: The question for the court was whether:

(a) Qatar Airways could choose which termination clause to rely upon, being either (i) a termination right that arises in the event of an excusable delay in the performance of Optimares’ contractual duties and obligations and where such delay satisfies one of the conditions specified in the contract (e.g. the delay lasts or is expected to last for over 30 days), or (ii) a termination right for convenience; or

(b) whether the termination for convenience clause ceases to operate once an excusable delay arises.

As noted above, the starting point for the court’s consideration was the contractual words. As the relevant clause provided, in clear and unambiguous language, that Qatar Airways had an unfettered right to terminate “notwithstanding anything to the contrary in the Standard Conditions or the applicable Purchase Agreement”, the court held that Qatar Airways was entitled to terminate in accordance with either of the termination provisions.

The court acknowledged that the consequences of termination may be different depending upon which termination clause Qatar Airways chose to rely. If terminating for convenience, three months’ notice needed to be given, whereas termination for excusable delay had immediate effect. This difference in notice periods might, depending on the facts, have differing financial consequences for Qatar Airways, which might have a significant bearing on its decision to terminate under one clause or the other. Notwithstanding the more onerous notice period if terminating for convenience, reliance upon this clause might nevertheless be preferable if Qatar Airways wished to avoid a protracted dispute about whether an excusable delay had, in fact, arisen.

Issue 2: The court rejected Optimares’ submission that the contractual right of termination for convenience gave rise to an entitlement to common law damages, i.e. the wasted costs incurred by Optimares. The consequences of invoking the right to terminate for convenience were dictated solely by the termination clause itself.

As there was no provision in the agreements for common law damages to be awarded, the court concluded that Qatar Airways incurred no liability to Optimares. This was consistent with the contractual provision that Optimares was required, on termination, to repay “all sums previously paid by Qatar Airways”.

Issue 3: The court also considered the degree to which a duty of good faith constrained Qatar Airways’ ability to exercise the termination for convenience clause.

Optimares argued that the right to terminate was qualified by a good faith provision in the agreements, which obliged Qatar Airways to allow Optimares to perform its work or, at the very least, to not take steps to frustrate it by terminating the agreements. Qatar Airways contended that the duty of good faith only applied to the “performance of its respective responsibilities and obligations”. The court agreed that the exercise of a right to terminate did not constitute “performance of any responsibility or obligation”, and referred to previous cases which demonstrated the courts’ reluctance to qualify an express right to terminate with a duty to act in good faith. The court held that the wording of the termination clause clearly granted Qatar Airways an unfettered right to terminate.

In summary, the court dismissed Optimares’ claim, and Qatar Airways’ counterclaim succeeded (to the extent recorded in the judgment, and it was awarded nearly US$2.5 million).

Comment

The judgment is a useful reminder of the relevant principles around contractual interpretation. A key point arising from this judgment is the court’s categorical statement that, notwithstanding that a contractual provision may be weighted in favour of one party over another, in circumstances where the parties have negotiated and prepared a written contract, assisted by skilled professionals, the court will adopt a textual analysis when interpreting the contract and look to the natural and ordinary meaning of the clauses.

Practically, this means that during the negotiation and drafting phase of a contract, parties should carefully consider how a court is likely to interpret the wording in the contract and whether it accurately reflects what the parties intend.

Where there are multiple provisions, for example relating to termination as in this case, parties will need to review the wording of the entire agreement and consider the interaction between clauses to ensure there is no conflict. If reliance on one clause is intended to preclude reliance on another, that should be made clear in the contract.

The decision is also a reminder that good faith obligations are strictly construed. If parties wish a duty of good faith to apply in a specific scenario such as termination, they will need to use clear and unambiguous wording in their agreement.

If you are considering terminating a contract, this judgment highlights the importance of first weighing up all the options, including which termination right to invoke. You will need to have in mind the consequences that might flow from the exercise of that right, including the potential disputes risks associated with the relevant clauses and the nature of any damages that may be recoverable. Seeking advice on these issues in advance may help inform on the route to termination that is ultimately taken.

For further information please email the authors or your usual CMS contact.

This article was prepared with the assistance of Ellen Bandarian, trainee in CMS London.