Terminate at will – termination right was not subject to duty to act in good faith

19 October 2022

The High Court has held that an express contractual duty to act in good faith did not restrict a party’s ability to terminate the contract at will.

Three key take-aways
  • The courts will, generally speaking, respect the right of a contract party to take its own commercial interests into account when deciding whether to terminate the contract.
  • The courts will be reluctant to find that a party is subject to requirements to act in good faith or reasonably when deciding whether to terminate a contract.
  • If parties wish to impose this kind of obligation, they must do so clearly and unequivocally in their contract.

What happened?

Optimares SpA v Qatar Airways Group QCSC [2022] EWHC 2461 (Comm) concerned a contract for the design, manufacture, sale and delivery of seats for commercial aircraft to an airline company.

The contract consisted of a purchase agreement and a set of standard terms and conditions.

Clause 12.2.3 of the standard terms gave the airline a right to terminate the contract “for its convenience and without incurring any liability by providing three (3) [months’] prior written notice to the [supplier]”. The contract stated that the termination right applied “notwithstanding anything to the contrary . . . in [the contract]”.

Clause 16.13 of the standard terms required both the airline and the supplier to (among other things) “act in good faith in the performance of their respective responsibilities and obligations”.

Two years into the contract, the airline served notice to terminate the contract and all purchase orders it had placed under it.

The supplier objected and, ultimately, brought legal proceedings. It argued that, when deciding whether to terminate the contract, the airline was obliged by clause 16.13 to act in good faith. The inference (although the supplier did not explicitly allege this) was that the airline had failed to act in good faith, because it had been deep in negotiations with an alternative to procure aircraft seats at a lower price.

The airline had also terminated the contract with the supplier just as the supplier was “on the cusp” of delivering the seats. The supplier argued that it had therefore wasted a significant amount of costs, which it sought to recover from the airline.

The airline argued in response that its right to terminate was “unfettered” and that it was under no obligation to act in good faith when exercising it.

What did the court say?

The judge agreed with the airline.

He noted that the express duty of good faith in clause 16.13 applied to the parties’ performance of their “responsibilities and obligations” under the contract. But a right to terminate was neither a responsibility nor an obligation, and so the duty of good faith simply did not apply to it.

The judge also noted that clause 12.2.3 applied notwithstanding anything to the contrary, which indicated that it was clearly intended to override any duty of good faith in clause 16.13, even if that duty had applied to the airline’s right to terminate.

Because the court found that the duty of good faith did not apply, it did not have to consider whether the airline in fact acted in good faith.

However, the judge nevertheless went on to say that, in his view, the airline had not acted in bad faith. There had been a breakdown in the relationship between the supplier and the airline, with the supplier having missed delivery dates and the airline genuinely doubting when the first delivery would occur. It was also unsurprising that the airline had begun to source an alternative supplier.

What does this mean for me?

All cases of contractual interpretation turn on their specific facts as the court attempts to understand what the parties intended by their words. It is important, therefore, not to place too much emphasis on the specific decision in the case.

But the judgment does demonstrate the importance of ensuring that different provisions of a contract interact properly and are worded clearly.

Generally, the courts regard a contractual right to terminate an arrangement as an unqualified right that can be exercised on purely commercial grounds. They will be reluctant to reach a conclusion that effectively locks a party into a contract against its will.

This applies not only to an express contractual duty of good faith, but also to the so-called “Braganza duty”, which requires a party to a contract not to exercise any contractual discretion it has under the contract in bad faith or in a way that is irrational or (in a sense) unreasonable.

Where parties do wish to apply a duty of good faith when exercising a contractual right of termination (which is likely to be a rare situation indeed), they should make this absolutely clear by stating that the duty applies to (among other things) a party’s right to terminate the arrangement.