| Date | 17 October 2007 |
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| Judgment | Kellogg Brown & Root Pty Ltd v Australian Aerospace Ltd [2007] VSC 200, (15 June 2007) |
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| The Issue | The use of Termination for Convenience clauses in contracts |
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| Implication |
Could a recent ruling in the Australian courts have implications for English law. The case found that there was a real prospect of succeeding with an argument that the circumstances in which a termination for convenience clause was sought to be operated amounted to a breach of an implied obligation of good faith under Australian law. |
printIn the recent Australian case of Kellogg Brown & Root v Australian Aerospace the Supreme Court of Victoriaconsidered whether there was a common law obligation of good faith that applied to the operation of a “termination for convenience” clause in an Australian contract. Termination for convenience clauses are common in government contracts, not so in the private sector, where, certainly in building and civil engineering contracts, termination may usually only be the remedy for a serious breach or insolvency. The intent behind termination for convenience clauses in government contracts is to allow termination where, for example, there has been a change in direction of policy. The question that arose in this case was whether the operation of the clause by the main contractor, who was dissatisfied about the performance of his sub-contractor, amounted to a breach of the principle of good faith. Whilst the concept of good faith does apply in contracts of insurance, partnerships and some areas of consumer law, there is no general principle of good faith under English law. Australian Aerospace (“AA”) contracted with Kellogg Brown & Root (“KBR”) for the provision of training services and support in respect of a contract that AA had secured with the Australian Government for the supply of, in total, 46 helicopters. KBR’s sub-contract concerned services relating to phase 2 of the main contract for 12 helicopters. In the case under consideration here, AA had notified KBR in December 2006 that it was failing to progress “at a rate to facilitate the due and proper completion of the contract within time frames specified therein”. Following various communications between the parties in the weeks that followed, on KBR’s part denying that it was in default, the parties agreed to meet in March 2007 and discuss the situation that had developed and, in KBR’s eyes, to endeavour to redress the position and to restore relations to a positive level. At the meeting, according to an affidavit made by KBR’s project director, AA stated that it wished to de-scope KBR’s work and introduced the prospect of termination for convenience, when a senior executive stated that if AA and KBR could not agree on the de-scoping, AA would terminate the contract for that reason. KBR’s project director said that it was apparent that AA intended to replace KBR in order to provide the training and support itself and that AA’s negotiations were not in good faith. KBR sent a draft to AA setting out terms under which KBR would, after all, agree to an element of de-scoping, whilst denying all the allegations made about its performance. Further communications followed in which AA indicated that it intended to terminate for convenience in preference to taking action for KBR’s default and stating that if the de-scoping proposed at the meeting was not agreed by 20 March AA would so proceed. KBR responded by notifying AA that it considered the parties were in dispute in respect of the notices relating to performance issues and it wished to invoke the operation of the dispute resolution procedure under the sub-contract. AA continued in all its subsequent communications, whilst sometimes agreeing to dispute resolution, to insist that parallel negotiation on de-scoping would continue, with the threat of termination for convenience implicit should such negotiations fail. One month after the meeting AA sent KBR two letters. The first advised that it considered that there remained no point in continuing discussions on de-scoping KBR’s work; the second gave notice that the contract was terminated for convenience with immediate effect. Following receipt of this notice KBR sought an injunction to prevent AA from invoking the termination for convenience clause. KBR’s argument was that AA had acted in bad faith. One of the supporting affidavits alleged that AA was attempting to oust KBR and to seize the benefits of the contract for itself. The Judge noted that it had been conceded by AA “that there is a serious question to be tried, which [is] whether a term of good faith and fair dealing is implied in the contract and, whether the notice of termination was given in breach of that term.” Having considered the various authorities in detail and noted that particular consideration would have to be given at trial to termination for convenience in defence procurement contracts, the Judge concluded that, taking all matters into account, including the strength of KBR’s case, the lower risk of injustice favoured the granting of the injunction sought by KBR thus preventing AA from terminating the contract and allowing KBR to continue working on the project pending a full trial. In conclusion, although the matter is yet to be tried, it will be interesting to see whether, if KBR’s case succeeds and the obligation to act in good faith is upheld, the concept leads to any variation in the stance in English law in light of Australian case law.
CJ-0741
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