Termination for Convenience Clauses

Commercial Contracts

“Termination for Convenience” clauses allow a contracting party to walk away from their contractual commitment for “convenience”. These provisions are commonly used in subcontracts – typically construction, engineering, road works and procurement agreements, where the weaker party does not have the bargaining power to challenge this unfair provision. This allows the powerful party to terminate the contract, without reason, depriving the weaker party of the benefits of the agreement.

Recent Examples

There have been a number of recent Court cases involving the right to Terminate for Convenience:

  • in the 2007 decision involving Australian Aerospace (AA), AA decided to terminate a Procurement Agreement relying on the termination for convenience power. AA was successfully challenged in the Victorian Supreme Court on the grounds that the exercise of the termination power was not done in good faith but rather for an improper purpose, ousting the minor party from the benefit of the contract so that AA could seize the benefits for itself;
  • in a 2009 decision involving Telstra, the Federal Court considered that there was an argument to be considered about the lack of good faith, and found that Telstra would have to establish that it “reasonably believes” the matters involved;
  • however, in a Coles Supermarket decision in 2011, the New South Wales Supreme Court allowed Coles to summarily terminate a contract relying on the termination provision where Coles was dissatisfied with the poor quality of the services which were being provided to it;
  • in a more recent 2015 decision, the Federal Court examined whether “reasonableness” was a constraint on the exercise of a right to terminate a contract for convenience. The Court noted that where a clause empowers one party to act to the detriment of another party, the requirement of good faith often requires “reasonableness” in the exercise of the power.

Good Faith and Reasonableness

Concepts of “good faith” and “reasonableness” clearly intrude in this discussion. The law remains unclear, although there is growing recognition of the need for the more powerful party to exercise a degree of reasonableness and not to exercise the power to terminate for convenience for an improper purpose or an ulterior motive.

In our many comments about “good faith” in commercial contracts, we have said that the growing judicial reliance on good faith undermines the fundamental need for certainty in commercial contracts. Despite that, there is real justification in the case of unfair use of the Termination for Convenience power, to introduce a requirement that the party relying on such a provision should be obliged to act reasonably and in good faith.

Conclusion

Although, due to a lack of bargaining power, you may be forced to accept a Termination for Convenience provision, in many situations, having regard to recent cases, you could be in a position to challenge an unfair termination, or to negotiate for a fairer commercial outcome.

Mike Lyons
VPro Lawyers