It’s over! – Termination at will provision not subject to a duty to act in good faith

Michael Comba and Sydney Chandler take a look at a judgment which reaffirms longstanding principles around contractual construction and interpretation that will be applied by the courts.

Termination at will (or termination for convenience) is a clause that gives a party to a contract the right to terminate a contract without having to give a reason. Such provisions are often a ‘must have’ for public authorities.

This right does not exist automatically at law and must be drafted into a contract. But what is its relationship with a contractual duty of good faith? Does good faith affect how such rights can be exercised?

The judgment in Optimares SpA v Qatar Airways Group QCSC [2022] EWHC 2461 (Comm) reaffirms longstanding principles around contractual construction and interpretation that will be applied by the courts, and reminds that the duty to act in good faith is unlikely to interfere with termination rights unless that’s expressly stated. Furthermore, it helpfully highlights the importance of drafting these clauses, bearing in mind the potential (or likely) outcomes and consequences of them.

Background

The court considered whether Qatar Airways was entitled to exercise its right of termination of purchase agreements with Optimares for the design, manufacture, sale and delivery of aircraft seats.

There had been delays in delivery of the seats and Optimares had spent significant costs progressing the works. Optimares claimed that they were “on the cusp” of making deliveries but Qatar Airways exercised its right of termination for convenience and asked to be repaid all sums paid over under the contract. Optimares subsequently brought a claim for wrongful termination, arguing that the right to terminate was qualified by an express duty of good faith.

The relevant termination clause stated:

“Notwithstanding anything to the contrary contained in these Standard Condition 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

The question was of contractual construction as to whether Qatar Airways had rightfully or wrongfully terminated at will.

The key issue was whether there was an unfettered right to terminate at will in accordance with the clause, or whether it was limited by the contractual provision to act in good faith. The contract required the parties “to act in good faith in the performance of their respective responsibilities and obligations under these Standard Conditions and the Purchase Agreement”.

Optimares argued that the duty to act in good faith obliged Qatar Airways to allow Optimares to perform under the agreements, and that termination would frustrate that.

The court held that the duty of good faith related to the performance of the parties of their “responsibilities and obligations” under the agreements and that the right to terminate was neither a responsibility nor an obligation. Calver J held that the right of termination at will was therefore not subject to the duty to act in good faith.

Part of the courts’ reasoning was the consideration of the phrase “notwithstanding anything to the contrary” in respect of the termination provisions. The court held that:

“It follows that notwithstanding that Qatar Airways has the right, at its own choice, to cancel the contract under [other provisions] it is entitled instead to terminate the contract for its convenience…The factual matrix relied upon by Optimares cannot be said to affect the interpretation of these unambiguous words.”

The court accordingly dismissed Optimares’ claim.

Analysis

The judgment is another reminder that that the court will look at the natural and ordinary meaning of contractual clauses where the parties prepared and negotiated that contract. If parties want the duty of good faith to specifically apply in termination scenarios, this will need to be written into the contract in plain, unambiguous language.

During contract negotiations, parties should carefully consider whether termination provisions, and any relationship with a duty of good faith, accurately reflects the desired outcome of the parties.

Michael Comba is a Solicitor and Sydney Chandler is a Trainee Solicitor at Sharpe Pritchard LLP.

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