Shipbuilding: Termination for convenience and the doctrine of good faith

Termination for convenience clause in contracts gives the buyer the right to end the contract. Unless otherwise stated in the contract, the buyer is not required to give any reason for the termination, and there is no implied duty on the buyer to terminate in good faith.

 

In Monde Petroleum SA v WesternZagros Ltd  (1) it was said that there is no general doctrine of “good faith” in English contract law. A duty of good faith is implied by law as an incident of certain categories of contract (for example, we characterise contracts of employment and contracts between partners or others whose relationship as a fiduciary one). However, in all other categories of contract …such a duty will only be implied where the contract would lack commercial or practical coherence without it and where all the other requirements for implication are met.”  

 

Expressed “good faith” provision

 

In Optimares S.p.A. v Qatar Airways Group (2), the contracts included an expressed “good faith” provision. Qatar’s right to terminate for convenience was challenged on the ground that the termination was wrongful as the clause did not provide an unfettered discretion to terminate, but rather is qualified by the contractual good faith provisions. 

  

The Claimant (“Optimares”) and Defendant (“Qatar”) entered into Purchase Agreements for Optimares to design, manufacture, sell and deliver seats for various aircraft. (“the Purchase Agreements”) The Purchase Agreements incorporated Qatar’s Standard Conditions. Relevant clauses of the Standard Conditions are paraphrased below: 

 

12.2.3, Notwithstanding anything to the contrary, Qatar could terminate these Standard Conditions, the Purchase Agreement and/or any Purchase Order for its convenience and without incurring any liability. 

 

13.1.1, Neither Party shall be responsible to the other Party for any excusable delay (as defined in the Standard Conditions). 

 

13.1.7, Qatar could terminate the contracts if excusable delay lasted or could reasonably be expected to last for more than thirty (30) calendar days. 

 

16.13, Unreasonable Acts; The Parties shall act in good faith in performing their respective responsibilities and obligations, and shall not, except as otherwise expressly provided to the contrary,  unreasonably delay, condition or withhold the giving of any consent, decision, approval, agreement and/or any similar acts.


Excusable delay and termination for convenience 


Optimares notified Qatar of “excusable delay” under clause 13.1.1, citing the outbreak of the Covid-19 pandemic in Italy and the government-mandated lockdown. The following day, Qatar terminated the purchase agreements and purchase orders for convenience under clause 12.2.3. 


Optimares claimed that the termination was wrongful and that: 

  • Qatar’s had no right to terminate for convenience, as once excusable delay had been invoked, this displaces the termination for convenience clause 12.2.3.
  • If both of the clauses were available simultaneously, “this would render clause 13.1.7 otiose as it would always be preferable for Qatar Airways to terminate for convenience.”. 
  • Clause 12.2.3 does not provide an unfettered discretion to terminate, but is qualified by the good faith provision in clause 16.13.  Thus, Qatar had a “positive obligation to allow Optimares to perform its work, or at least an obligation not to take steps to frustrate it by terminating the contract.”   
  • The termination for convenience right was not exercisable in order to re-award the same works to another contractor at a lower price. 
  • Qatar had not paid for and had been unjustly enriched by the valuable IP which it received.    
  • Optimares should be entitled to lost profits and its costs thrown away, but if the termination were valid, Optimares should be entitled to its costs thrown away. Otherwise, it would be “a commercially surprising bargain for any party to have entered into”.

During the trial, Optimares alleged certain representations and demands made by Qatar,  and also assertions that they has spent “millions of euros in costs in progressing the works and was on the cusp of delivering shipsets” However, Qatar disputed the former and alleged that “Optimares was guilty of numerous delays prior to it terminating the contracts.” Mr Justice Calver stated that as the terms of the Purchase Agreements were clear, the outcome of such dispute does not matter. 


       Qatar’s argued that it had an unfettered right to terminate the contracts for convenience. 

  • The fact that clauses 12.2.3 and 13.1.7 co-existed and though Qatar had the option to terminate, this was irrelevant, as it had been agreed that the right under clause 12.2.3 would apply  “[n]otwithstanding anything to the contrary”. 
  • Optimares’ argument focuses on “what it considers to be fair or reasonable commercial conduct”, and sought to re-write the contracts  to restrict Qatar’s right to terminate the contracts for convenience. However, the purpose of interpretation is to determine “what the parties have agreed, not what the court thinks that they should have agreed…”. 
  • The duty of good faith in clause 16.13 only applies to the “performance of its respective responsibilities and obligations”, and not the exercise of termination right.   

Mr Justice Calver considered various authorities and summarized the proper approach to contractual construction of contract, and also whether an express duty to act reasonably imposes fetters on the exercise of termination at will provision. He ultimately held as follows.

 

Clause 12.2.3 provides a right to terminate for convenience and such right was not restricted by clause 16.13.

 

Clause 16.13   requires the parties to act in good faith in the “performance of the subject matter of the Purchase Agreement, namely the obligation to deliver the seats and all associated matters that may require cooperation between the Parties.” However, the exercise of a right to terminate for convenience does not constitute a responsibility or an obligation within the meaning of the clause. Also, clause 16.13 is subject to anything “expressly provided to the contrary". 

 

The evidence did not support Optimares’ claim that Qatar terminated the contract “ purely on the ground of obtaining a cheaper price for the work from another. He stated that even if it was so, Qatar was entitled to terminate under clause 12.2.3 in any event.

 

Optimares’ argument about “unjust enrichment” is “hopeless”, as it was clear that the rights in the IP in question “vested in Qatar Airways at the time of the creation without any additional cost.” Thus, Qatar “had a legal right to receive the IP and there is no room for any claim in unjust enrichment as alleged by Optimares.”

 

On fair and reasonable commercial conduct, he said that “while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a  very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight.” Also, he noted that Optimares had legal advice and were “... keen to conclude the deal with Qatar Airways...”.

 

Application to shipbuilding contract

 

In shipbuilding, when a buyer terminates for convenience,  they will not be able to do so “without incurring any liability”, as prudent shipbuilders will negotiate to be compensated as follows:  

  • A cancellation fee. 
  • The portion of work completed up to termination.
  • The cost of materials and equipment already purchased.
  • Costs of canceling purchase orders placed by shipbuilder.
  • Costs of demobilization, storage, securing and protecting the vessel.
  • Buyer to return all guarantees provided by shipbuilder for cancellation.
  • No warranty for the partially completed vessel.
  • The buyer is to remove the incomplete vessel from the shipyard timely.

Also, if the title to the incomplete vessel does not vest in the buyer progressively, then the title shall only vest in the buyer upon fulfilment of the above requirements by the buyer.

 

Disagreement about the amount of compensation should be decided by an expert appointed by mutual consent, whose decision shall be final and conclusive. Such expert costs should be paid by the buyer. Also, when a buyer terminates for convenience, this will affect the shipbuilder’s agreement with its subcontractors and suppliers. Therefore, shipbuilders’ related subcontracts and supply contracts must include the corresponding right to end for convenience, with appropriate compensation. 


 [2016] EWHC 1472 (Comm).

 [2016] EWHC 1472 (Comm).

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