Application of good faith as necessary limits in exercising the termination for convenience clause

Abstract

The right of the contracting party to terminate a contract for convenience is not a common feature in any jurisdictions. It is now a settled law that the exercising of the termination for convenience clause is valid, provided that the contractor is given consideration for his performance under the contracts. Besides, there is an important qualification on this right which is that the employer must terminate for convenience in accordance with an implied duty of good faith. Thus, the objective of this study is to determine the necessity of “good faith” on the part of a terminating party when exercising his right to terminate a contract under “termination for convenience” clause. The research methodology undertaken is by documentary analysis of law cases reported in law journals. The review of the cases are identified from three jurisdictions; United States, Australia and United Kingdom. The findings of the analysis are: first, an employer is entitled to terminate a contract for convenience purposes but it depends on whether a term of good faith is implied into the contract. Second, the duty of good faith is indeed subject to any local law prohibitions. Third, in the USA, it is generally accepted that an implied good faith is necessary as a limit to exercise termination for convenience clause. Forth, the United Kingdom and Australia are in the same position that the employer may terminate the contract ‘in its sole discretion’ or ‘at any time and for any reason’ will not be subject to an implied term of good faith. The lessons to be learnt from this review of cases law is that the importance to check our terms and conditions whether the contract provisions a right to terminate for convenience and whether good faith clauses is applied as limits. In circumstances where we may wish to rely on good faith obligations, such clauses need to be specific.