Termination for Convenience Clauses in Building Construction and Infrastructure Contracts
1. Infrastructure, building and construction contracts often contain so called “termination for convenience” provisions, operating independently of breach, default or frustration. Termination of a contract has been considered as the legal consequence of certain kinds of breach, repudiation or frustration. Frustration is automatic. Breach and repudiation arise where default has occurred. 2. Provisions for termination at the convenience of, or at the will of the contracting parties, or any one or more of them, have become known as “termination for convenience provisions” (referred to in this paper as “TFC”) or “termination at will” provisions. . TFC can be invoked in circumstances agreed by the contracting parties (for example, at the will of all or any of the parties; in the absolute discretion of all or any of the parties; or on the occurrence of a specified event or specified events at the behest of all or any of the parties and on notice), as can their contractual consequences (for example, payment or compensation, with or without formulae for its calculation, or no compensation at all). . TFC in a contract would, on one view, appear antipathetic to the formation of contractual relations. TFC have given rise to debate and will continue to do so in respect of their application, construction and consequence. If a contract is defined as no more than a legally binding promise or agreement, TFC arguably occupies the whole area of possible obligation, leaving no room for the existence of a contract at all.
Further, if the essence of contract, regarded as a class of obligations, is a voluntary assumption of a legally enforceable duty, where there are identifiable parties, certain terms and consideration (unless by deed), TFC may be seen to attack the fundamental elements of a binding contract. Questions of validity for want of mutuality may arise at one end of the spectrum of possible consequences of TFC in contracts (but an argument that TFC means no contract exists because of an absence of mutuality would likely not succeed).
At the other end of the spectrum is the proposition that the provisions mean what they say by reference to the precise words used no more and no less. In between are questions of whether, for example, terms should be implied into a contract either by law, because of the type of contract being considered, or ad hoc, to give the contract legal efficacy; whether TFC can be breached by reason of an absence of good faith implied into the contract; or whether, if a term of good faith is implied, that implied term an itself be breached. 5. TFC in contracts appear harsh. More importantly, their terms would suggest that a contract can be ended at any time, even if there has been significant performance, in the absence of breach or default by the party against whom the provisions are invoked. If the provisions do not provide for compensation on termination, the rights of the parties pre-termination and post-termination are left to the application of principle. 6. TFC have given rise to some, but surprisingly, perhaps, little discussion.
The purposes of this paper (with particular, but not exclusive, reference to infrastructure, building and construction contracts) are to consider some issues in respect of TFC, including whether: i)the provisions in contracts give an unfettered right to terminate where the plain terms of the would permit it; ii) terms, for example, of good faith, are implied into contracts containing TFC and, if so, their application to such provisions; iii)any requirement for compensation follows on the provisions being invoked where the provisions fail to so provide. With emphasis on: a. first, the history and development of TFC. some history of the development of TFC gives indications of the consequences of TFC in government and non-government contracts; b. second, TFC in the broad context of principles of construction and interpretation of contracts; c. third, TFC in the broad context of principles for the implication of terms in contracts; d. fourth, the affect of an implied term to act in good faith in terminating a contract pursuant to TFC; e. fifth, the provision in TFC for compensation and remedies in or arising from the TFC including remedies in the event of absence of compensation provisions in TFC. . Sixth, conclusions. Some History of Termination For Convenience Provisions in Contracts 7. The genesis of TFC, at least in the United Kingdom and in Australia, lay in a so called “Doctrine of Executive Necessity”. The Crown, and Statutory Corporations may contract. The power of the latter is derived from statute. Valid contracts, may, however be overridden when a conflict between a contract and the public duties of the authority becomes apparent. The power to override contractual obligations rather than capacity to contract is enerally the issue. The Crown or a public authority cannot by contract be disabled from exercising their governmental powers, whether they be legislative or executive. The doctrine may have narrow application, but it exists nevertheless. 8. An application of the doctrine is in The Amphitrite, where governmental notification of the withdrawal of loading facilities and clearance for a load of coal, contrary to a prior undertaking, acted upon by the ship owners, resulted in an action in damages for breach of contract. Rowlatt J. eld, that the contract was not one that damages could be sued for because “…it is not competent for the Government to fetter its future executive action, which must necessarily be determined by the needs of the community when the question arises”. 9. The decision in The Amphitrite was controversial, but the existence of the doctrine was not. Thus, citing The Amphitrite, Mason J. said: “in the absence of specific words, an undertaking which would affect the exercise of discretionary powers to be exercised for the public good, should not be imputed to the Commonwealth”. 0. Although the existence of the principle was not doubted, the reasoning of Rowlatt J. seemed to be that no contract existed at all because of the doctrine. The reasoning suggested an absence of capacity to contract. If so, The Amphitrite was wrongly decided . The circumstances in which the doctrine applied and consequences of its application have not proceeded on the basis of an absence of capacity in the Crown and its instrumentalities to contract. Rather, issues of damages for breach or compensation were pursued. 11.
There is no doubt about the existence of the Doctrine in Australia and the United Kingdom. Its application was implicit and overriding, albeit within a narrow compass. A contract validly entered, could not bind a government or statutory corporation from exercising its statutory powers, absent some statutory prohibition, to the prejudice of the other party. Strictly, properly invoking the doctrine was not a breach of contract. Neither was it a frustrating event. It did not sound in damages contrary to the argument of Hogg.
Invoking the doctrine to terminate a contract may be the subject of administrative review Contractual provisions requiring compensation when the Doctrine was invoked was as much common sense as the facilitation of business with government and its instrumentalities. 12. It seemed but a short step to provide for the exigencies of executive necessity in government contracts by incorporating “termination for convenience” provisions in written contracts. There were, however, at least three consequences.
First, the doctrine of executive necessity continued independently of contractual terms and continues to apply to government contracts. There is no suggestion that the doctrine was replaced by “termination for convenience” clauses, but its application is narrow. Second, in respect of contracts entered into by the Crown or its instrumentalities, the difference between political acts (which were subject to judicial review) and contractual acts (which were not subject to judicial review) opened further debate.
Third, because they were contractual (having jumped the hurdle identified in 4 above), the provisions were subject to legal and equitable principles in respect of formation, construction and enforcement, including the implication of terms, as later discussion will demonstrate. The implication of terms requiring good faith vis-a-vis the contracting party against whose interests the provision was invoked (contrast the Doctrine of Executive Necessity where the exercise of good faith served only the purposes of the party invoking it) will be considered in this paper.
Further, the application of contractual principles saw some contracts provide for separate consideration for and in respect of TFC . 13. Finn J. , in 2003, observed that TFC had received little attention in Australian legal writing. One might go further and suggest that even though TFC are now common in government and non-government contracts in Australia, they have received little attention either in decided cases or in relevant literature. It is intended in this paper to consider some of the more significant material. 4. In the United States TFC seems to have developed originally in government war contracts as “a tool to avoid enormous procurements upon completion of a war effort”, although its province is no longer so limited. The principle evolved into government contracts of far ranging varieties, both civilian and military where the exigencies of war no longer limited the government’s ability to terminate a contract for convenience. 15. TFC developed even further in the United States with “constructive termination for convenience”.
Where a contract was terminated for an ineffectual reason or the contract was rescinded or repudiated on an invalid basis, TFC were validly invoked to justify the government’s actions ex post facto. The principle was not dissimilar to the principle in Australian jurisprudence of reliance on the termination of a contract for valid reasons unknown at the time of termination for ineffectual reasons. TERMINATION FOR CONVENIENCE PROVISIONS IN THE BROAD CONTEXT OF PRINCIPLES OF CONSTRUCTION AND INTERPRETATION OF CONTRACTS. 16.
There is no reason to suggest that building construction and infrastructure contracts should not be subject to orthodox principles of construction of commercial contracts. The principles are important when considering, later, the implication of terms and the exception to the “parol evidence” rule applicable to a consideration of whether terms are implied. 17. Lord Hoffmann’s speech in Investors Compensation Scheme Limited v West Bromwich B. S. (H. L. (E. )), gives five principles by which contractual documents are construed.
It has been cited with approval in the High Court, except insofar as it may be discerned that Investors took a broader view of the admissible “backround” than was taken by the High Court in Codelfa in which case Codelfa should be followed. 18. Courts adopt a sensible approach to construction. There is a presumption, for example, that terms would not operate unreasonably. 19. The sensible approach to construction of a commercial contract does not permit the rejection of an interpretation, though unreasonable, if it was clearly intended by the parties. 0. A Court, given the task of construing a commercial contract, will be concerned to give effect to the intention of the parties, ascertained from the instrument as a whole. A commercial contract requires attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure. 21. Further, it is not the case that words used in a commercial contract are necessarily to be given their dictionary meaning, if, for example, it would frustrate its sensible operation. 22.
A provision, which is ambiguous may be construed contra proferentem against the party benefiting from the provision but the rule is one of last resort. It is preferable for judges to struggle with the words used in the contract. 23. It follows that TFC cannot be construed in isolation of the contract of which it forms part. The contract must be construed as a whole. 24. Further, it is very well to identify the “rules” for the construction of a contract, but the question remains as to what evidence is admissible for that purpose. 25. The written contract, complete or incomplete, was traditionally to be nterpreted without the use of extrinsic evidence. The broad purpose of the rule called the “parol evidence rule” was to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument. 26. The true rule has been refined to be that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.
But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made, unless known to both parties, or are notorious and therefore presumed, are not admissible. Objective, backround facts may be elicited by evidence of prior negotiations but not otherwise. 27. Where more than one meaning of a contract is possible, evidence of the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in that setting, is admissible. 28.
Evidence of mutual intention, if it amounts to concurrence, is admissible to negative an inference sought to be drawn from surrounding circumstances. 29. Evidence of the parties’ presumed intention in the construction of a contract has led (logically) to the admissibility of evidence of presumed intention in determining whether a term is to be implied in a contract. IMPLIED TERMS GENERALLY. 30. It is intended to consider the principles applicable to the implication of terms in a contract generally, and whether (and if so, when) a term of good faith is implied, and the extent to which it operates on TFC.
It is not intended in this paper to address terms included in a contract by the operation of statute as, for example, in the sale of goods legislation, or s. 133 B (1) (a) of the Conveyancing Act 1919 (NSW). 31. Categories of implied term were touched upon by Viscount Simonds in Lister v Romford Ice and Cold Storage Co. Limited where the distinction was made between terms that might be implied in a contract between two individuals assumed to be making a bargain in regard to a particular transaction or course of business on the one hand and terms arising from the status or relationship between he contracting parties generally. 32. Mason J in Codelfa described the distinction between the two types of implied term as an implied term necessary to give business efficacy to a particular contract on the one hand and, on the other, the implied term which is a legal incident of a particular class of contract, citing Liverpool City Council v Irwin as an example of the latter. 33. It may be said that Mason J in Codelfa supra. was describing what Lord Wilberforce recognized as two varieties of implied term. The first, where there is a complete bilateral contract.
The Courts are sometimes willing to add terms as implied, where there is established usage, spelling out what the parties know and would, if asked, unhesitatingly agree to be a part of the bargain between them. The second, where the Courts are willing to add a term in an apparently complete bargain on the ground that without it the contract will not work. 34. Although Lord Denning endeavoured to make a third category (the implication of reasonable terms), the attempt failed. 35. Where a Court is concerned to establish what the contract is, the parties not having fully stated the terms, the Court searches for what must be implied. 6. A distinction was drawn between the two kinds of implied terms in Renard. For a term to be implied ad hoc in a contract, five conditions were to be satisfied: a. it must be reasonable and equitable; b. 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; c. it must be so obvious that “it goes without saying”; d. it must be capable of clear expression; e. it must not contradict any express term of the contract. 37. In referring to implication ad hoc Priestley JA in Renard was distinguishing between that category and a term implied by law. 8. The distinction is, for the time being, important when considering the implication of terms such as “good faith” as an incident to the kind of contract being considered. For example, building, construction or infrastructure contracts generally. 39. The implication of a term ad hoc occurs in circumstances of individual contracts. The implication of a term by law is based on imputed intention as opposed to actual intention, and implies a term as a legal incident of a particular class of contract. 40. Priestley JA in Renard supra. argues that contracts generally are subject to an implied term by law of good faith. 1. Handley and Meagher JJA. , although agreeing generally with the judgment of Priestley JA. arrived at their decisions without the necessity to imply a term by law as opposed to an ad hoc implication of a term. 42. In Australia, the law in relation to implied terms has authoritatively been considered in a number of cases. 43. In cases where the contract is not completely in written form, the automatic or rigid application of the cumulative criteria in BP in respect of implied terms ad hoc is to be approached with caution. 44. In Byrne supra.
McHugh J and Gummow J in a joint judgment considered implied terms of “custom” and “business efficacy” as falling within the first category in paragraph 33 above and then excluded their ad hoc application in an employment contract because they were not so obvious that they would go without saying or that they were necessarily implied for the effective operation of the contract. 45. They then considered terms implied independent of intention and considered that even though such terms may be implied by law, they may be excluded by express provision made by the parties or by reason of inconsistency with the terms of the contract. 6. Further, in Byrne supra. the Court considered the concept of “necessity” and at 452. 9 considered the word as requiring the implication of a term only where, without it, the contract was rendered nugatory. It was observed at 450. 7 that the notion of “necessity” was crucial in modern cases in which courts have implied for the first time a new term as a matter of law. 47. In Australia, it has been suggested that there is an economic freedom which carries with it fundamental notions of caveat emptor.
On that footing, although obiter, the implication of terms, for example, of good faith and fair dealing would be inconsistent with the law as it has developed in respect of the introduction of implied terms into written contracts which the parties have omitted to include. This view as it was expressed in the High Court has given rise to the debate now to be addressed. 48. Terms, including a term requiring good faith in the performance of a contract may be implied into a contract either ad hoc or by law. In the former the BP (Westernport) supra. nd the cases following upon it in respect of the implication of a term ad hoc must be addressed. In the latter, jurisprudence developed so far in Australia has not yet embraced the implication of a term of “good faith” in contracts generally or in particular classes of contract and the debate continues. IMPLIED TERM OF GOOD FAITH 49. “It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract”. 50. One might have thought that such a clear statement meant what it said. But it does not. 1. The implication in a contract of a term of good faith by law has not been considered definitively in the High Court.. Further the High Court has warned lower courts, including the New South Wales Court of Appeal (described as an intermediate appellate court), that they are to apply the law, not make it. Such comments make the determination of the ultimate issue all the more interesting. 52. But Sir Anthony Mason has opined that whether the acceptance of a duty of good faith in contract performance by the Courts will survive the High Court having regard to Royal Botanic Gardens supra, remains an unanswered question 53.
The meaning of an implied term of good faith may be stated as broadly as “the obligation of good faith and reasonableness in the performance of a contractual obligation or in the exercise of a contractual power may be implied as a matter of law as a legal incident of a commercial contract”. 54. Further, it has been said that people generally including Judges and other lawyers have grown used to the Courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance. 55.
An implied term of good faith has been recognized in other jurisdictions in Australia (although in Victoria there was a reluctance to conclude an implied term of good faith as a legal incident, so that an obligation of good faith applies indiscriminately to all rights and power conferred by a commercial contract). Further, in Pacific Brands supra. Finkelstein J said that the precise role of the doctrine of good faith and fair dealing in Australia, remains unclear. In Garry Rogers Motors (Aust) Pty. Limited v Subaru (Aust. ) Pty. Limited at an interlocutory stage, an implied term of good faith and fair dealing was conceded.
Finkelstein J said at , citing Renard, Hughes Aircraft and Alcatel supra. that in appropriate contracts, perhaps even in all commercial contracts, such a term would be implied as a legal incident of the relationship and not ad hoc. Whether there was an implied term by law was not necessary to decide, however. 56. Finkelstein J made the observation in Garry Rogers supra. that if a term was implied by law as opposed to an ad hoc implication, a contracting party would be required to act in good faith and fairly, not only in relation to the performance of a contractual obligation, but also in the exercise of a power conferred by the contract. 7. It seems to me that the distinction drawn by Finkelstein J. is perhaps illusory. If TFC permitted a contracting party to terminate it may may be described as the exercise of a power, as opposed to a contractual right. It further seems to me that the implication of a term of good faith ad hoc could carry with it the same obligations as a term implied by law. 58. In Western Australia a term was implied to act fairly in a process contract in respect of the defendant’s dealings with companies or groups invited to tender.
In Dockpride the nature of the contract pursuant to which a number of tenders would be received, required overriding terms to be implied in respect of all tenders rather than individual tenders. The decision suggests that the term was implied by law and not ad hoc in respect of the contract generally. In considering the content of such a term His Honour said that “good faith” meant at least that the Authority was precluded from acting subjectively in bad faith and must treat all tenderers fairly.
It may be argued that an ad hoc implication of a term to act in good faith would have been sufficient in the circumstances. 59. Also, in Western Australia the exercise of a contractual power (to make additions and deletions to products and customers on reasonable notice) was subject to an implied term of good faith. In Topseal, His Honour, was considering whether an implied term of good faith applied to individual clauses and not to the contract as a whole. His Honour was considering an implied term ad hoc. 60.
In Thiess Contractors Pty. Limited v Placer (Granny Smith) Pty. Limited, Templeman J. considered the implication of a term of good faith in respect of a provision giving Placer “at its option, at any time and for any reason it may deem advisable, cancel and terminate the contract, in which event the Contractor shall be entitled to receive compensation…” It was held that the absolute power in the provision displaced any requirement to exercise it in good faith. The term was clear and unambiguous and was construed in the ontext in which it appeared. As later discussed, it would appear that in the face of specifically expressed provisions requiring good faith in respect of some of the provisions of the contract in Theiss a term requiring good faith was submitted to be implied by law to a TFC in the contract. The case is in many respects unsatisfactory. 61. The reasons of Warren CJ in Esso supra. were followed by a paper delivered by Her Honour in 2009 which recognized the difficulty in applying an implied term of good faith.
Her Honour’s view was clearly favourable to the implication of terms requiring good faith by law in commercial contracts, relying extensively on authority for holding that view. 62. Eighteen indicia of “good faith” have been identified in the context of negotiation, in the field of industrial law. They are interesting but do not inform the debate. 63. Whether terms (including good faith and fair dealing) may be implied and, if so whether they are implied by law as an incident of the type of contract, or, ad hoc to particular contracts or provisions in particular contracts, seems to me important in at least one respect.
On the one hand, it may be argued that the content of a term implied by law may be the same as the content of a term implied ad hoc. On the other hand, the requirements for the implication of a term ad hoc are often difficult to establish as many of the cases suggest. The implication of a term by law to commercial contracts generally or to particular kinds of commercial contracts would meet what might otherwise be a difficult task. 64. To an extent considerations relevant to the implication of terms ad hoc elide with relevant considerations when considering terms being implied by law. That is unsatisfactory and confusing.
There is to say the least a degree of overlap leading McHugh and Gummow JJ to observe that terms implied by law to particular classes of contract had their origins as implications based on the intention of the parties, but thereafter became so much a part of the common understanding as to be imported into all transactions of the particular description. 65. Further, it seems to me that the cases do not suggest that the implication of a term by law to particular kinds of provisions in contracts generally, or commercial contracts in particular, is an inappropriate extension of the jurisprudence on this topic in Australia.
Indeed Theiss supra. at first instance may be considered as a case where it was argued that an implied term of good faith applied by law to a termination clause rather than to the whole contract. 66. Having made those observations, however, and proceeding therefore on the basis of “if there is a duty of good faith” and not here dealing with the question whether good faith in a contract is implied or arises from the construction of the contract, the definition of the content of an implied term of good faith is somewhat fluid. Sir Anthony Mason has said that there are three aspects to good faith: a.
An obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself); b. Compliance with honest standards of conduct; c. Compliance with standards of conduct which are reasonable having regard to the interests of the parties. 67. An obligation of good faith in a relevant context of termination for convenience clauses in contracts may therefore include (each of the following is capable of its own implication without relying on the umbrella of “good faith)”: d. Honesty – Sir Anthony Mason’s second point; e.
Reasonable conduct – contracts will be construed reasonably, considering the position of the parties; f. Reasonableness in the exercise of discretions. That is to say a discretion cannot be exercised unreasonably in an administrative law sense; g. Unconscionability; h. Cooperation. 68. Implying an obligation of good faith may carry with it concepts of reasonableness and discretion. The standards by which a relevant state of satisfaction is reached may lead to a consideration of Administrative Law concepts, particularly where one or some of the parties are government authorities.
For example, a termination for convenience provision allowing a party in its discretion to terminate the contract at its will, requires a decision to be made which may involve the exercise of a discretion or the formulation of a judgment in the exercise of the power. Abu Dhabi supra. is one example of it. 69. An implied duty to act in good faith and fairly has been expressed in a positive and a negative sense. That is to say, it will require a contracting party to act in good faith and fairly, not only in relation to the performance of a contractual obligation, but also in the xercise of a power conferred by the contract. The obligation of good faith and fair dealing would act as a restriction on a power to terminate a contract, especially if that power was in general terms. Further, the implied term restricts the party from acting capriciously. It would not operate to restrict actions designed to promote the legitimate interests of a party. Providing the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and and in good faith will ordinarily be satisfied. 0. Against the above backround, which may suggest a tide of support in Australia for terms to be implied by law in a commercial contract, a number of authorities have decided against such an implication in their own fact situations. None of them has decided against implication by law in principle in appropriate circumstances. It is an open question. 71. Of significant importance in this context, is Gummow J’s decision in the Federal Court in Service Station Association Limited v Berg Bennett & Associates Pty.
Limited. His Honour’s reasoning at - (to p. 407) was not inconsistent with the Court’s (Gleeson CJ. , Gaudron, McHugh, Gummow and Hayne JJ. ) reasoning in Royal Botanic Gardens supra. -, -. It might therefore be thought that Gommow J’s apparently consistent view that the implication of a term (of good faith) by operation of law would be a major step would be influential at least if a “good faith implied by law” case was before it. 72.
Further, the recognition that in many Australian jurisdictions statutory regimes are in place to ameliorate cases of hardship in individual cases caused by the strict application of legal principle to contractual relations provides good reason to adhere to principle in cases where such legislation does not apply or is not invoked. 73. The decision in Thiess supra. , on one view, is consistent with the observations in the High Court in Royal Botanic Gardens supra. , and Gummow J. in Service Station Association supra. , but inconsistent with the development of the implied term of good faith by law in courts other than the High Court.
In Theiss, however, good faith was an express requirement of the contract, but found not to apply to the termination clause, otherwise expressed clearly. The question in Theiss, therefore, was whether there should be implied by law a term of good faith to the termination for convenience provision in the contract, as opposed to the contract as a whole. His Honour’s reference to Gummow J’s decision in Service Station (and by not referring directly to authority in respect of the implication of terms ad hoc) would indicate that was the approach. As a question of construction a term was not implied. The TFC was specific and unambiguous. 4. In the circumstances of the particular contract (although it appears that expressio unius was not argued), Theiss should be distinguished from other authorities in Courts, other than the High Court, which appear to be developing a body of jurisprudence favouring the implication of a term requiring good faith in the performance of and the exercise of powers in commercial contracts as a matter of law. 75. The decisions cited in this paper would suggest that jurisprudence is developing with a “playing it safe” approach in the sense used by Warren CJ in Esso supra. , that is “if there is a duty of good faith…”.
Decisions implying terms by law as opposed to the ad hoc implication of terms are persuasive but not binding, and principle is still developing. By contrast, decisions implying terms ad hoc are determined by the application of binding principle to the facts of individual cases. 76. There is good reason to conclude that, at least until the High Court addresses the issue, a term of good faith in the performance of and the exercise of powers in commercial contracts will be implied, as a matter of law and ad hoc, in appropriate circumstances, including building, construction and infrastructure contracts.
Even in the face of clearly expressed and unambiguous terms a termination for convenience provision in a contract will be, it is here argued, subject to the implication of a term requiring good faith either ad hoc or by law. The more so would a term requiring good faith be implied on one basis or the other in circumstances where parties may contract out and agree that terms implied either by law or ad hoc will not apply. INVOKING A TERMINATION FOR CONVENIENCE PROVISION. 77. The purpose of TFC is to enable a party to discharge a contract and bring it to an end in circumstances where there remain executory obligations. 8. The terms of the TFC must be complied with. If conditions precedent to the effective termination of a contract are present, strict compliance with them is required. 79. If not contracted out, an implied term of good faith (that is, implied either by law or implied ad hoc) will apply to the provision, based on the arguments presented in this paper. 80. Provided the provisions of the TFC are complied with the contract is discharged and is at an end. The consequences of a valid termination will be addressed shortly. 81.
If a contract has been purportedly terminated for invalid or ineffective reasons, it is arguable that TFC can be resorted to to terminate the contract for valid reasons under that clause provided its terms and the obligation of good faith are complied with. That could only occur if the contract was still on foot, that is, for example, absent the breach of a fundamental term or repudiation. 82. TFC may be breached by invoking the provision other than in good faith. What is relevant here is the breach of substantive terms of the contract, that is, the TFC 83.
A TFC provision may be breached by actions contrary to its terms, It may also be breached because it is “tied” to an obligation of good faith which was absent when it was acted on. 84. It has been argued that “It is not possible for a breach of an obligation of good faith to lead to an award of damages. A breach attracting compensation would need to be a breach of a substantive term. ” 85. Peden has suggested that there has been no award of damages for breach of an independent obligation of good faith in Australia. It has always been “tied” to a breach of a substantive provision. The position may be different in the United States. 6. In my view Peden is probably correct. An implied term could not be so extensive as to allow the provision to “stand alone” and be, in that sense, independent of the contract, or the provisions of the contract’ which attracts it. Prudently, however, a pleading would properly allege a breach of an implied term as well. 87. Significantly whether a breach of an implied term is alleged or, whether a breach of a substantive term, for want of good faith is alleged, subjective elements become relevant – a consideration of the criteria in paragraphs 65-66 are sufficient to demonstrate the point here being made. . THE VALID TERMINATION OF A CONTRACT PURSUANT TO TERMINATION FOR CONVENIENCE PROVISIONS 88. Termination in these circumstances is termination without breach. That is to say, the contract is discharged independent of fault. 89. In that sense TFC provisions constitute an agreement to terminate a contract, which has executory obligations. Therefore, consideration independent of the consideration in the contract of which it is a part may be required and, prudently, should be given. 90. Discharge of a contract without fault may occur under the doctrine of frustration.
It may also occur by express agreement as in TFC. 91. The consequences of discharge where there is no fault depends on the intention of the parties, express or implied. But in the absence of clearly expressed terms, there is an inference that the termination operates as to the future only, that is, so far as it is executory, and does not discharge such accrued liabilities and accrued rights as arose from performance or breach. 92. In Financings Limited v Baldock the Court was dealing with contractual provisions defining a number of events any one of which gave an option to bring the contract to an end.
The contract was effectively silent about the consequences of terminating the contract. The owners, in that instance, were forced to rely on ordinary remedies for breaches accrued at the date of termination. 93. It would be, to say the least, imprudent not to make provision in termination for convenience provisions for damages or compensation on termination, but not for the reasons stated by Lloyd J in Abbey. He reasoned, inadequately it is submitted, that if adequate compensation was not provided for upon termination for convenience, the parties ran the risk of the provision being “treated as leonine and unenforceable as unconscionable”.
That is not a correct statement of the law, at least in Australia. It would be difficult to find a fact situation where any party to a contract of the kind containing termination for convenience provisions was under any kind of “special disability” in dealing with the other party to the transaction to satisfy one of the elements of unconscionability. 94. If a TFC fails to provide for compensation there are, it is suggested, adequate remedies at law. The absence of compensation provisions is not a sound reason for not enforcing TFC otherwise expressed clearly and unambiguously, subject to the implied term of good faith.
CONCLUSIONS 95. The reasoning of McHugh and Gummow JJ in Byrne supra. (although at 452-453 their Honours found no “necessity” in the sense required to imply a term in a contract of employment), was not inconsistent with the development of a principle of an implied term of good faith by law in commercial contracts generally. 96. It is submitted that a term requiring good faith in the performance of a commercial contract will be implied by law in Australia and will apply to TFC. 97.
It is submitted that as long as the issue develops below the High Court, there will be an inclination to imply a term of good faith, either ad hoc to particular contracts or particular provisions of contracts (for example TFC) or as a matter of law to the class of contract. 98. TFC provisions are valid and enforceable, but will be subject to an implied term of good faith unless contracted out by specific provisions in the contract or by necessary implication. ——————————————– [ 1 ]. Some examples of “termination for convenience” provisions are in fn. 9. [ 2 ]. Carter on Contract, LexisNexis [33-080]. [ 3 ]. Dunlop Pneumatic Tyre Co. Limited v Selfridge & Co. Limited  AC 847 at 855; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105; Carter ibid. [01-001] [ 4 ]. For example, in the “ticket” case MacRobertson Miller Airline Services v Comm. Of State Taxation (1975) 133 CLR 125 at 133 per Barwick CJ. [ 5 ]. Australian Woolle Mills Pty. Limited v The Commonwealth (1954) 92 CLR 424 at 457; Ermogenous ibid. 105. [ 6 ]. South Australia v The Commonwealth (1962) 108 CLR 130 at 154 per Windeyer J. [ 7 ].
Wallace-Smith v Thiess Infraco (Swanston) Pty. Limited  FCAFC 49 (30 March 2005) . [ 8 ]. GEC Marconi Systems Pty. Limited v BHP Information Technology Pty. Limited  FCA 50 (12 February, 2003) per Finn J.  seqq.. [ 9 ]. Government Contracts, Seddon, 3rd. Ed at 194 [5. 2] [ 10 ]. Agreements about the Exercise of Statutory Powers, Prof. Enid Campbell, 45 ALJ 338 at339-340. [ 11 ]. Ibid. 338; J. D. B. Mitchell “The Contracts of Public Authorities (1954) p. 56. [ 12 ]. Ansett Transport Industries (Operations) Pty. Ltd. V The Commonwealth (1977) 129 CLR 54 at 74 per Mason J. 13 ]. Rederiaktiebolaget Amphitrite v The King  3KB 500. [ 14 ]. Ibid. 503. 7. [ 15 ]. The Doctrine of Executive Necessity in the Law of Contract, P. W. Hohh, 44 ALJ 154 and Enid Campbell ibid. 340. [ 16 ]. Ansett Transport Industries ibid. at 78 per Mason J. ; see also L’Huillier ibid. at 477-478 per Callaway JA. [ 17 ]. Seddon, ibid. 194. [ 18 ]. The Amphitrite ibid. 503 and see L’Huillier v State of Victoria  2 VLR 465 at 478 per Callaway JA. [ 19 ]. Ansett ibid.. 74. [ 20 ]. See, for example, Northern Territory v Skywest Pty. Limited (1987) 48 NTR 20 at 47; Allars, M. Administrative Law, Government Contracts and the Level Playing Field” (1989) UNSWLJ 114 at 123; Seddon ibid. 196; Administrative Law, Wade & Forsyth 7th. Ed. 843-845. [ 21 ]. Enid Campbell ibid. 340; and see Ansett Transport Industries ibid. at 76-77 per Mason J. who seems to reason, consistently with Hogg ibid. 159, that damages follow. [ 22 ]. Ansett Transport Industries ibid. at 74 per Mason J. [ 23 ]. Ibid. 159. [ 24 ]. Legislative Executive and Judicial Powers in Australia, Wynes, 5th Ed. 387 seqq. ; Judicial Review of Administrative Action, Aronson Dyer 2nd Ed. 26-133. [ 25 ]. Enid Campbell ibid. 340 [ 26 ]. Seddon ibid. 197 [5. 4]; and see AGS Commercial Notes Number 27 (3 June 2008), Scala, Lang and Browitt. [ 27 ]. Ansett ibid. 74 [ 28 ]. See para. 11 fn. 21. [ 29 ]. But see 45 (c) below where administrative law concepts for the exercise of a discretion seem to be developing in the law of contract. [ 30 ]. Australian National University v Burns (1982) 64 FLR 166 at 174 per Bowen CJ and Lockhart J. ; General Newspapers Pty. Limited v Telstra Corpn. (1993) 45 FCR 164 (FCFC); Panel on Take-overs and Mergers; ex parte Datafin Plc. 1987] 1 QB 815; Administrative Law, Wade & Forsyth ibid. ; Judicial Review of Administrative Action, Aronson Dyer Groves 4th. Ed [3. 220]-[3. 330];[3. 270]-[3. 280];[12. 75]; [ 31 ]. Kellogg Brown & Root Pty. Limited v Australian Aerospace Limited  VSC 200 (15 June 2007) per Hansen J. . [ 32 ]. Anderson Formrite Pty. Limited v Baulderstone Pty. Limited (No. 7)  FCA 921 (25 August, 2010 per GrahamJ . Reasons for separate consideration although not given but were likely for an agreement to discharge a contract: D & C Builders Limited v Rees  2 QB 617 at 626 A-C per Danckwerts LJ. and Foakes v Beer 9 AC 605 at 613. [ 33 ]. GEC Marconi Systems ibid. , ref. in Kellogg Brown & Root Pty. Limited v Australian Aerospace Limited  VSC 200 (15 June, 2007)  per Hansen J. [ 34 ]. Some examples are found in Garry Rogers Motors (Aust) Pty. Limited v Subaru (Aust) Pty. Limited  FCA 903 (2 July 1999) per Finkelstein J ;Anderson Formrite ibid. ; GEC Marconi ibid. ; Kellogg Root ibid. ; Theiss Contractors Pty. Limited v Placer (Granny Smith) Pty. Limited  WASC 1046 (16 April, 1999); AGS “Commercial Notes” No. 27 (3 June, 2008) ibid. Rail Link and infrastructure contract for the South West Rail Link Sydney, obtained on application to the principals. [ 35 ]. Krygoski Construction Co. Inc. v The United States  USCAFED 1133; 94 F 3d 1537  – ; GEC Marconi ibid. ; 64 American Jurisprudence 2d, Public Works and Contracts, . [ 36 ]. Krygoski ibid. . [ 37 ]. 64 American Jurisprudence ibid. ; GEC Marconi ibid. . [ 38 ]. Shepherd v Felt and Textiles Australia Limited  HCA 21; (1931) 45 CLR 359 at 377 per Dixon J. ; Rawson v Hobbs  HCA 72; (1961) 107 CLR 466 at 489 per Kitto J. GEC Marconi ibid. . [ 39 ]. Codelfa Construction Pty. Limited v State Rail Authority of New South Wales (1981-82) 149 CLR 337 at 350 seqq. And 353. 3, 357. 1, per Mason J. ; 373. 8 per Aickin J. ; 401-402 per Brennan J. [ 40 ].  1 WLR 896 at 912F- 913E. ; the principles were clarified by Lord Hoffman in Bank of Credit and Commerce International SA v Ali  1 AC 251 ,; LMI Australasia Pty. Limited v Baulderstone Hornibrook Pty. Limited  NSWCA 74 (10 April 2003)  per Young CJ in Eq. [ 41 ]. Maggbury Pty. Limited v Hafele Aust. Pty.
Limited (2001) 76 ALJR 246 at 248  per Gleeson CJ Gummow and Hayne JJ. ; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 at 445  per Gleeson CJ, Gaudron,,McHugh, Gummow and Hayne JJ. [ 42 ]. Ibid. [ 43 ]. Garcia v National Australia Bank Limited (1998) 194 CLR 395 at 403 [17}. [ 44 ]. L. Schuler AG v Wickman Machine Tool Sales Limited  AC 235 at 251; cited with approval in this context in Shevill v Builders Licensing Board (1982) 149 CLR 620 per Gibbs CJ at . [ 45 ]. Contract Law in Australia, Carter, Peden, Tolthurst, 5th ed. 12-04]; Charter Reinsurance Co. Limited v Fagan  AC 313 at 388; Peppers Hotel Management Pty. Limited v Hotel Capital Partners Limited  NSWCA 114  per McColl JA. [ 46 ]. McCann v Switzerland Insurance Australia Limited & Ors. (2000) 203 CLR 579 at 589  per Gleeson CJ. [ 47 ]. MGICA Limited v United City Merchants (Australia) Limited (1986) 4 ANZ Insurance Cases 60-729 at 4,351. [ 48 ]. Investors ibid 114-115. [ 49 ]. McCann ibid.  per Gleeson CJ,  per Kirby J. [ 50 ]. Metrolands Investments Limited v J. H. Dewhurst Limited  3 AER 659 at 668. [ 51 ].
Goss v Lord Nugent (1833) 110 AER 713 at 716; Codelfa ibid. 347. 7 per Mason J. [ 52 ]. Codelfa ibid. 352. 2 per Mason J. [ 53 ]. Codelfa ibid. 352. 4. [ 54 ]. Codelfa ibid. 352. 7 per Mason J. [ 55 ]. Heimann v The Commonwealth (1938) 38 SR (NSW) 691; Codelfa ibid. 652. 9-653. 3. [ 56 ]. Codelfa ibid. 353. 3-. 8 per Mason J. [ 57 ].  AC555 at 576 [ 58 ]. Ibid. 345. 8. [ 59 ].  2 AER 39 – an easement or licence to use stairs and lifts to a leased upper level dwelling. [ 60 ]. Liverpool City Council v Irwin & anor.  2 AER 39 at 43 (b) – (g)_ per Lord Wilberforce; cited with approval in Codelfa ibid. 45. 7 per Mason J. ; 402. 7-403 per Brennan J [ 61 ]. Liverpool CC ibid. 43 (d). [ 62 ]. Liverpool CC ibid. 43 (d)-(e). [ 63 ]. Liverpool City Council v Irwin  3 AER 658 at 664. [ 64 ]. Liverpool CC ibid. (HL) see fn. 51, at 43 (f). [ 65 ]. Liverpool CC ibid (HL) 43 (f)-(g). [ 66 ]. In Renard Constructions (ME) Pty. Limited v Minister for Public Works, (1992) 26 NSWLR 234 at 256 A-B per Priestley JA. -referred to as “implication ad hoc”. [ 67 ]. Byrne v Australian Airlines Limited (1995) 185 CLR 410 at 442. 1 per McHugh J and Gummow J. [ 68 ]. B. P. Refinery (Westernport) Pty.
Limited v Hastings Shire Council (1978) 52 ALJR 20 at 26 (PC); Concrete Pty. Limited v Parramatta Design and Developments Pty. Limited  HCA 55  (an example of the 5th. Condition) [ 69 ]. Renard ibid. 256 C-E; Castlemaine Tooheys Limited v Carlton & United Breweries Limited (1987) 10 NSWLR 468 at 486-490. [ 70 ]. Renard ibid. 256 D-E. [ 71 ]. ibid. 265, 268 E-G. [ 72 ]. Ibid. 279 B-C per Handley JA; 275 E-F per Meagher JA. [ 73 ]. For example, Hospital Products Limited v United States Surgical Corpn. (1984) 156 CLR 41;  HCA 64 [22- per Gibbs CJ. ; Mason J. 55], -; Wilson J. [ 4]-; Deane J. , -. [ 74 ]. Byrne ibid. 422; 442. 5; Hawkins v Clayton (1988) 164 CLR 539 at 573 per Deane J. [ 75 ]. Byrne ibid. 446. [ 76 ]. Byrne ibid. 447-449. [ 77 ]. Byrne ibid. 449. 9 [ 78 ]. Royal Botanic Gardens and Domain Trust v South Sydney Council  HCA 5 - per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ. [ 79 ]. Butt v M’Donald (1896) 7 QLJ 68 at 70-71; Real Estate (Australia) Limited v St. Martins Investments Pty. Limited  HCA 51 per Mason J. ; (1979) 53 ALJR 745 at 749; Hospital Products ibid. 45]- per Dawson J. [ 80 ]. But see Concut Pty. Limited v Worrell  HCA 64  per Kirby J. re an employment contract. [ 81 ]. Good Faith in the Performance of Contracts, Elisabeth Peden 2003. [ 82 ]. Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349 at 369; Burger King Corporation v Hyngry Jack’s Pty. Limited (2001) NSWCA 187 , ;Vodafone Pacific Limited v Mobile Innovations Limited  NSWCA 15 (20 February 2004)  per Giles JA. [ 83 ]. Renard ibid. 268 F-G per Priestley JA. [ 84 ]. Esso Australia Resources Pty.
Limited v Southern Pacific Petroleum NL  VSCA 228 (15 September 2005) ,  per Buchanan JA; hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1  per Finn J. Pacific Brands Sport & Leisure Pty. Limited v Underworks Pty. Limited  FCA 288 - per Finkelstein J.. [ 85 ].  FCA 903 (2 July 1999] per Finkelstein J -. [ 86 ]. Castlemaine Tooheys Limited c Carlton & United Breweries Limited (1987) 10 NSWLR 468 at 487 per Hope J; Byrne ibid. , 185 CLR 410 at 449 per McHugh and Gummow JJ. [ 87 ]. Dockpride Pty. Limited & anor.
V Subiaco Redevelopment Authority  WASC 211 (22 September, 2005) - per LeMiere J. [ 88 ]. Ibid. ; Chinook Aggregates Limited v Abbotsford (Municipal District) (1989) 40 BCLR (2D) 345. [ 89 ]. Topseal Concrete Services Pty. Limited v Sika Australia Pty. Limited  WASC 57 (10 April, 2008) per Beech J. -[. [ 90 ].  WASC 1046 (16 April 1999) appealed in  WASCA 102 (14 April 2000) but not relevantly overturned. [ 91 ]. “Developments in Contract”, 15 October, 2009 delivered to the Judicial College of Victoria. [ 92 ]. Western Australia v Taylor (1996) 134 FLR 211 ref. n Brownley v Western Australia  FCA 1139 . [ 93 ]. BP (Westernport) ibid. [ 94 ]. Breen v Williams (1996) 186 CLR 71; Byrne ibid. (1995) 185 CLR 410 at 449. [ 95 ]. Breen ibid 449. [ 96 ]. Esso ibid.  per Warren CJ. [ 97 ]. Peden ibid. 92; [ 98 ]. Peden ibid [7. 2]. [ 99 ]. Contract and its Relationship with Equitable Standards and the Doctrine of Good Faith, The Cambridge Lectures, 1993 (8 July, 1993. [ 100 ]. Abu Dhabi National Tanker Co. v Product Star Shipping Limited (No. 2).  Lloyd’s Rep. 397 at 404 per LegattLJ. [ 101 ]. Alcatel Australia ibid 349 at 369. [ 102 ]. Expectation Pty.
Limited v Pinnacle VRB Limited  WASCA 160 (19 June, 2002) -. [ 103 ]. See also, Judicial Review of Administrative Action, Aronson, Dyer 2nd. ed. 126; Re Tracey  NSWCA 43 (1 February 2011) -. [ 104 ]. Garry Rogers ibid. per Finkelstein J -. Dockpride ibid. ; Renard ibid. 234, 263; Esso ibid. . [ 105 ]. For example, GSA Group Pty. Limited v Siebe PLC (1993) 30 NSWLR 573 at 581 E-F per Rogers CJ Comm. D. [ 106 ]. 117 ALR 393. [ 107 ]. Service Station ibid. 407. [ 108 ]. Warren CJ “Good Faith: Where are We At? ” ibid. ; Service Station ibid. at 407 ; Toll (FGCT) Pty.
Limited v Alphapharm Pty. Limited  HCA 52; (2004) 219 CLR 165 at 183 per Gleeson CJ, Gummow, Hayne, Callinan, Heydon JJ. [ 109 ]. Warren CJ “Good Faith – Where Are We At? ” ibid. [ 110 ]. Byrne ibid. 449. 9. [ 111 ]. Mardorf Peach & Co. Pty. Limited v Attica Sea Carriers Corp. of Liberia  AC 850 at 870 per Lord Wilberforce; Mannai Investment Co. Limited v Eagle Star Life Assurance Co. Limited  AC 749 per Lord Hoffmann. [ 112 ]. Para. 15 above and fn 38. [ 113 ]. Peden ibid. [8. 2]. [ 114 ]. Ibid. [8. 4]. [ 115 ]. Ibid. [8. 3]. [ 116 ]. See para. 12 and fn. 32; D. & C. Builders ibid 626 A-C. 117 ]. Carter on Contract ibid. [31-020]. [ 118 ]. Segur v Frankklin (1934) 34 SR (NSW) 67 at 72; McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 477 per Dixon J. [ 119 ].  2 QB 104 at 121 per Diplock LJ. [ 120 ]. Ibid. 121. 5 [ 121 ]. Abbey Developments Limited v PP Brickworks Limited  EWHC (Technology) 1987 per Lloyd J. [ 122 ]. Lopwell Pty. Limited v Clarke  NSWCA 165 (14 August 2009) per Macfarlan JA (Ipp and Campbell JJA agreeing); ACCC v CG Berbatis Holdings Pty. Limited  HCA 18; (2003) 214 CLR 51; Blomley v Ryan  HCA 81; (1956) 99 CLR 362 per Kitto J.