Termination provisions: the English High Court continues to adopt a strict approach to contractual construction

In this update we discuss the English High Court's decision in Optimares S.p.A. v Qatar Airways Group Q.C.S.C.¹ (which was handed down earlier this month), which addressed principles of contractual construction.

The dispute concerns the interpretation of termination provisions found within purchase agreements (that incorporated standard terms and conditions) relating to the design, manufacture, sale and delivery of seats for aircrafts. The Court was asked to determine the meaning of a termination for convenience clause, and the consequences which flowed from that termination right being exercised.

The judgment is a useful reminder of how the English Courts approach questions of contractual construction and the strict approach that is generally taken.

Background

In 2018 and 2019, Optimares S.p.A. (the "Claimant") and Qatar Airways Group Q.C.S.C. (the "Defendant") entered into purchase agreements for the Claimant to design, manufacture, sell and deliver seats for certain aircrafts. The purchase agreements expressly incorporated the Defendant's standard conditions (the "Standard Conditions") and provided that in the event of any inconsistency, the terms of the relevant purchase agreement would prevail. Pursuant to the purchase agreements, the Defendant agreed to pay the Claimant on delivery of the products and also pay for non-recurring costs in accordance with an agreed schedule; these being costs incurred by the Claimant in developing and producing the products.

On 22 March 2020, the Claimant served notices of excusable delay (pursuant to Clause 13.1.1 of the Standard Conditions), citing the COVID-19 outbreak in Italy and the Italian government's imposition of lockdown measures. Clause 13.1.7 provided that the Defendant was entitled to terminate the contract if the excusable delay lasted (or could reasonably be expected to last) for more than 30 days.

On 23 March 2020, the Defendant served termination notices in respect of all contracts and purchase orders placed under them. This termination was effected pursuant to Clause 12.2.3 of the Standard Conditions, namely the termination for convenience clause, which provided that:

"12.2.3 Notwithstanding anything to the contrary contained in these Standard Condition or the applicable Purchase Agreement, Qatar Airways shall be entitled to terminate these Standard Conditions, the Purchase Agreement and/or any Purchase Order for its convenience and without incurring any liability by providing three (3) months prior written notice to the Supplier for termination of these Standard Conditions and/or Purchase Agreement and fourteen (14) days prior written notice for termination of the Purchase Order." (emphasis added)

The Claimant did not accept that the Defendant was entitled to exercise its termination right on the basis that:

• as a result of the Claimant having already invoked Clause 13.1.1 (in relation to there being an excusable delay), the Defendant was precluded from exercising its right to terminate for convenience. This was because the correct termination procedure to follow was the specific procedure set out in Clause 13.1.7, and not the general termination for convenience provision; and
• any right to terminate pursuant to Clause 12.2.3 was subject to an obligation to exercise the right in good faith, pursuant to a general good faith provision found elsewhere in the contract.

The Defendant's position was that the Claimant was seeking to re-write the parties' bargain and "significantly restrict" its right to terminate the contract for convenience – despite the clear words used in the contract which entitled it to terminate at will. 

Judgment

In his judgment, Mr. Justice Calver set out the issues that he was required to determine, which were as follows:

• Whether the existence of an “excusable delay” which would give rise to a termination right in accordance with Clause 13.1.7 of the Standard Conditions precludes reliance by the Defendant on the termination for convenience provision in Clause 12.2.3 of the Standard Conditions ("Issue 1");
• What are the financial consequences of a termination in accordance with Clause 12.2.3? In particular, (i) what is the meaning of “without incurring any liability” in Clause 12.2.3 and (ii) do the consequences in Clause 12.3.2 apply to a termination for convenience? ("Issue 2");
• Whether Clause 12.2.3 of the Standard Conditions creates an unfettered right to terminate at will or whether the clause is qualified by other contractual provisions, notably the duty of good faith in Clause 16.13 of the Standard Conditions ("Issue 3").

Before addressing those specific issues, Calver J. considered (by reference to the relevant authorities) the proper approach to contractual construction in a case such as this.  Calver J. noted that in a case involving a contract which had been "negotiated and prepared with the assistance of skilled professionals, the court is more likely to interpret the agreement principally by textual analysis" – citing the necessary balancing act that must be undertaken between applying "textual" and "contextual" analysis to questions of contractual construction (per the Supreme Court's decision in Wood v Capita²).

Calver J. also noted that the relevant principles of construction were summarised in Deutsche Trustee v Duchess & Others³, and proceeded to summarise them.  Of particular note were the following points:

• the Court is concerned to identify the intention of the parties "by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”⁴;
• the Court should focus on the meaning of the relevant words in their documentary, factual and commercial context;
• commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties, is not a reason for departing from the natural language;
• the 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;
• the Court is required to undertake an iterative approach. This involves checking each of the rival suggested interpretations against other provisions of the document and investigating its commercial consequences.

Applying these principles, Calver J. went onto consider Issues 1 – 3 (as set out above) and made the following findings:

Issue 1
The Court held that the Defendant was entitled to choose which termination procedure to invoke (i.e., whether to terminate for convenience or for an excusable delay), and that the termination for convenience clause did not cease to operate once notice of an excusable delay had been given. 

The Court acknowledged that the consequences of terminating for convenience may differ from the consequences of terminating for excusable delay.  Therefore, the two termination routes could sit side by side with one another and that the right to terminate for convenience pursuant to Clause 12.2.3 did not render Clause 13.1.7 otiose.

Issue 2
The Court rejected the Claimant's submission that the exercise of the right of termination for convenience gave rise to an entitlement to common law damages (i.e., the Claimant's wasted costs).

The financial consequences of termination in accordance with Clause 12.2.3 were that the Defendant would not incur any liability upon termination save that it would be liable for any contractual liability to pay the purchase price for any completed shipsets (i.e. groups of seats for instillation in the aircraft).  There was no provision in the agreements for common law damages to be awarded, and therefore the Defendant was not liable to the Claimant in respect of the same.

Issue 3
The Court held that Clause 12.2.3 created an unfettered right to terminate the agreement for convenience.

The good faith clause in clause 16.13 concerned only the performance of the subject matter of the contract (i.e., the obligation to deliver seats and all associated matters that required the parties' cooperation) and was not relevant and had no bearing upon the exercise of Clause 12.2.3 since the exercise of a right to terminate does not constitute a responsibility or obligation.  The judgment also made reference to the fact that previous authorities highlighted the Court's general reluctance to qualify an express right of termination with a duty to exercise that right in good faith.

Calver J. therefore dismissed the Claimant's claim, and the Defendant's counterclaim succeeded.  Calver J. also dismissed a claim that the Claimant was entitled to assert a claim for unjust enrichment / restitution in relation to the IP provided by the Claimant to the Defendant.

Comment

This judgment is a useful reminder of how the English Courts approach questions of contractual construction – and, in particular, that the Court's function is to determine what the parties have agreed, and not what the parties should have agreed, or what they might now wish they had agreed. 

In a commercial context involving contracts between sophisticated parties who are advised by skilled professionals, the English Courts are far more likely to give effect to the strict wording of the agreement, even if that produces an outcome which (after the fact) appears to be prejudicial or even disastrous for one (or more) of the parties.  Although a Court may give consideration to whether or not the interpretation of a particular provision makes "commercial common sense" – that assessment must take place as if being considered at the point at which the contract was negotiated and entered into, and should not be invoked retrospectively. 

This case also highlights the importance of robust and clear drafting in contracts, so that the parties are clear as regards how the clauses operate within the contract, and how the clauses sit together.  Furthermore, when contracting on a counterparty's own standard terms (which are likely to be heavily weighted in their favour), parties should have in mind the fact that English Courts are likely to give effect to the strict wording of those terms, even if that creates a result which might appear to be unfair, or contrary to commercial common sense.

It is therefore always advisable to consider the practical implications of contractual provisions (e.g. how a termination provision will operate in practice) and (where appropriate) set out in the contract, by reference to indicative examples, what is being agreed in practical terms. This will provide guidance to the parties (and ultimately to a judge) if the true meaning of the contractual terms ever becomes the subject of a commercial dispute.