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The particular power of termination for convenience clauses

Posted on 14 November 2022

The wake of the Covid-19 pandemic and resulting government restrictions had a dramatic impact on contractual operations around the world, causing many parties to consider whether it was possible to undo bargains which had become uneconomic or redundant. While some parties turned to force majeure provisions or sought to rely on the doctrine of frustration, the English Commercial Court's recent decision in Optimares SpA v Qatar Airways [2022] EWHC 2461 (Comm) demonstrates the particular power and utility of a termination for convenience clause.

Background

The claimant, Optimares, was an Italy based manufacturer of seats for aircraft, which had agreed to design, manufacture, sell and deliver seat sets to the defendant, Qatar Airways.

The purchase agreement expressly incorporated the defendant's standard conditions which provided, at clause 13.1, that neither party would be responsible for any "excusable delay" in performance occurring due to causes such as an act of God, natural disaster or epidemic. Upon the occurrence of an excusable delay, the parties were to seek to agree a recovery programme, but if the defendant regarded the recovery programme as unfeasible or the delay could reasonably be expected to last more than 30 days, it had the right to terminate with immediate effect, without any liability other than payment of costs already incurred by the claimant. At clause 12.2.3, the standard terms also provided that "notwithstanding anything to the contrary in the standard conditions or the applicable purchase agreement", the defendant could terminate the agreement "for its convenience and without incurring any liability" on three months' notice.

The claimant contended that it had incurred millions of euros in progressing the works and was "on the cusp" of delivery when, on 22 March 2020, it served notices contending that an excusable delay had arisen as a result of the Covid-19 outbreak and the Italian government's response, rendering manufacture impossible. The next day, the defendant gave notice purporting to exercise its right to terminate for convenience pursuant to clause 12.2.3 and reclaiming payments already made under the contracts. The claimant contended that the agreement had been wrongfully terminated and brought proceedings for lost profits and wasted costs.

Although the claimant did not dispute that the defendant had a right to terminate for convenience in some circumstances, it contended that the right was not available where excusable delay had been invoked pursuant to clause 13.1; that the right was subject to contractual duties of good faith; and in any event, even if the termination was valid, it was entitled to its wasted costs.

Contractual interpretation

Following a series of decisions of the Supreme Court, the approach to construing contractual provisions in English law is now well-established. The court seeks to identify the parties' intentions, focussing on the meaning of the relevant words in their documentary, factual and commercial context. This meaning will be assessed in the light of the natural and ordinary meaning of the clause; any other relevant provisions; the overall purpose of the clause and the agreement; the facts and circumstances known or assumed by the parties at the time; and commercial common sense.

Subjective evidence of the party's intentions is disregarded, and commercial common sense is not to be invoked retrospectively – the fact that an agreement has worked out badly for one of the parties is not a reason for departing from the natural language. Similarly, a court will be very slow to reject the natural meaning of a provision as correct simply because it appears to be imprudent, even ignoring the wisdom of hindsight. Finally, the court is required to undertake an iterative approach, checking rival suggested interpretations against other provisions of the document.

The decision

In this case the judge was clear in his conclusion that it was open to the defendant to terminate the purchase agreements as they did. The language used by the parties in clause 12.2.3 was clear and unambiguous, and it was irrelevant that the defendant also had the option to terminate for excusable delay under clause 13.1. Although the claimant contended that the termination for convenience provision rendered clause 13.1 redundant, the judge did not agree, noting that under clause 13.1 cancellation had immediate effect, whilst termination pursuant to 12.2.3 was subject to a notice period, and the defendant was not relieved of any liability incurred in accordance with the contract whilst it was still alive, including during the notice period.

The judge also rejected an argument that the right to terminate for convenience was qualified by a duty of good faith in the standard conditions which provided that "both parties shall act in good faith in the performance of their respective responsibilities and obligations…" In the judge's view it was plain that the exercise of a right to terminate for convenience did not constitute a responsibility or an obligation within the meaning of the clause. In any event, on the basis of the evidence the judge did not consider that the defendant's termination was made in bad faith.

As to the financial consequences, the claimant argued that even if the termination was valid, it should still be entitled to its wasted costs. However, the judge disagreed, noting that the sole source of the consequences of the exercise of the right to terminate for convenience was clause 12.2.3 itself, which made no provision for damages to be awarded to the claimant and instead provided that the defendant could terminate "without incurring any liability". Going on to reject a further argument that the defendant had been unjustly enriched, the judge concluded that in fact pursuant to the contract the defendant was entitled to repayment of sums it had previously paid, as well as freight charges and interest.

Comment

Terminating a contract can be fraught with worry. Establishing whether a breach of contract is sufficient to trigger a right to terminate at common law is not always straightforward, and wrongful termination may result in a repudiation of the contract which, if accepted by the counterparty, can lead to a liability for damages.

A termination for convenience clause removes much of this uncertainty and as this decision demonstrates, can be a particularly powerful tool in circumstances where a contract has become uneconomic. The defendant was not only able to avoid incurring further liability under the contract, it was able to recover significant amounts already paid out. However, in order to make certain that the clause can be relied upon, it is vital to ensure that it is both clear and unambiguous. In this case the clear wording adopted by the defendant served its purpose, notwithstanding the existence of other termination powers in the contract.

The decision also demonstrates that English court will not rewrite the parties' negotiated bargain, whether or not a party has entered into what appears to be a very imprudent term. As the judge noted, the contractual arrangements were evidently weighted in the defendant's favour, and imposed significant risks on the claimant. Nevertheless, that imbalance had been envisaged by the parties when they entered into the agreement.

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