Express clauses terminating a contract without cause – also referred to as ‘termination for convenience’ or ‘termination at will’ clauses – have increasingly become a feature within construction contracts. Although gaining in popularity, the validity and operation of such clauses has largely remained unexplored, with the small number of cases suggesting that although such clauses has been generally recognised by the courts, the question of the legitimacy of terminating a contract at will, still largely remains unanswered. So what should parties be mindful of if they wish to include termination for convenience clauses in construction contracts? For contracting parties wanting to rely on termination for convenience clauses, the need to demonstrate that the contract was terminated in good faith is essential.
The right to terminate a contract at common law
A clause granting a broad discretionary right to terminate at will an express entitlement, must be included within the contract to have any validity.
In Koompahtoo Local Aboriginal Land Council v Sampine Pty Ltd (2007) 233 CLR 115, the High Court recognised at common law, the right to terminate a contract can generally arise when:
- there has been a breach of an essential term (at 94);
- an action of repudiation, when one of the parties is unable, or unwilling to perform (at 94); or
- there has been a breach of a condition, or sufficiently serious breach of an intermediate term.
Good faith in construction contracts
What role does good faith play in construction contracts? Well, quite a substantial role actually, and turning to the comments of Bingham LJ – as he was known then – in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd 1 QB 433;  EWCA Civ 6, his Lordship observed:
“In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as “playing fair”, “coming clean” or “putting one’s cards face upwards on the table”. It is in essence a principle of fair and open dealing …”
Good faith and termination for convenience clauses
Case law has suggested that a party wishing to exercise a termination for convenience clause will have to rely on whether they acted in good faith. Additionally, the courts will also look to the contract when trying to ascertain if the agreement allows for an action of terminating the contract without cause.
In Sundararajah v Teachers Federation Health Ltd, Foster J in an interlocutory decision, found the clause permitting the party to “end this agreement to the extent that it relates to that Fund on the giving of 90 day’s notice”, allowed for the terminating of the contract was not qualified by an obligation to act in good faith because it would be inconsistent to the broad terms of the termination for convenience clause.
Can good faith be implied in construction contracts?
Interestingly, the Federal Court of Australia in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd suggested that good faith may be implied in all commercial contracts:
“Recent cases make it clear that in appropriate contracts, perhaps even in all commercial contracts, such a term will ordinarily be implied; not as an ad hoc term (based on the presumed intention of the parties) but as a legal incident of the relationship… There is no reason to think, prima facie at least, that the obligation of good faith and fair dealing would not act as a restriction on a power to terminate a contract, especially if that power is in general terms.”2
However, subsequent cases have tempered the implication of good faith within commercial contracts, with a number of courts preferring to look at a contract on an individual basis.
Furthermore, in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL, Buchanan J rejected the notion that an implied term of good faith was applicable to all commercial contracts, but rather, it may be “appropriate in a particular case to import such an obligation to protect a vulnerable party from exploitive conduct which subverts the original purpose for which the contract was made.”3
When trying to imply a term of good faith, as a matter of fact, the five-point test as laid down in BP Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (1977) 180 CLB 266, must be satisfied being:
- it must be reasonable and equitable
- it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
- it must be so obvious that it goes without saying;
- it must be capable of clear expression;
- it must not contradict any express terms of the contract.
How can an obligation to act in good faith be satisfied in relation to a right to terminate a construction contract for convenience?
Although there is arguably no definitive definition of good faith, the express right to terminate is still subject to an implied obligation to exercise such actions in good faith, and “such a restriction will not operate as to prevent or hinder an action designed to protect the legitimate commercial interests of a party” 4. Furthermore, the duty does not “require a party to act in the interests of the other contracting parties nor to subordinate their own legitimate interests to those of the other parties.”5
Parties to a contact relying on termination for convenience clauses should scrutinise the terms in which the clause is drafted closely, paying particular attention to the good faith obligations, and whether or not it is able to show that the termination of a construction contract was done in good faith.
This article or the information contained therein does not purport to provide a full explanation of the law, give advice or any guidance to anyone in connection with termination for convenience or drafting of construction contract or other issue and this article is not to be used by anyone to support their legal position or otherwise. This article is provided on the basis of the assumption of particular facts and circumstances. For clarification purposes and further to the above this article does not purport to be advice in relation. This firm cannot take responsibility for any action readers take based on this information. We would be happy to assist you with any property, real estate, development, building, construction and engineering related legal issues you may have, please get in touch via firstname.lastname@example.org or telephone our Brisbane office on (07) 3087 3463 or Sunshine Coast office on (07) 5413 9270 and one of our experienced lawyers will respond to you.
1 Sundararajah v Teachers Federation Health Ltd (2011) 283 ALR 720 at 41.
2 Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd  FCA 903 at -.
3 Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL  VSCA 228 at .
4See Sundararajah v Teachers Federation Health Ltd (2011) 283 ALR 720 at 67.
5 See Sundararajah v Teachers Federation Health Ltd (2011) 283 ALR 720 at 68.