Termination Clause Does not Need to be Exercised in Good Faith
In Monde Petroleum SA v Westernzagros Ltd, the High Court has ruled that a term of good faith should not be implied when exercising a right to terminate a contract.
The Facts
WZL and Monde had entered into a contract that would see Monde receive monthly fees and, if certain conditions were satisfied, a right to obtain a 3% interest in the project. The contract conditions did not look like they were going to be met. WZL served notice to terminate, but failed to give the 30 days' notice of termination as it had been required to do.
Monde claimed that the decision as to whether to terminate should have been exercised in good faith, and there should have been an implied term to this effect. Monde also argued that WZL had repudiated the contract by failing to give the appropriate notice period and should pay damages for the loss of chance in participating in the project.
The High Court ruled that the fact that the contract was 'long-term' or 'relational' was not enough to justify implying a term of good faith. The judge added that he doubted that an express right to terminate the contract would ever give rise to a restriction on it having to be exercised in good faith. As long as the conditions giving right to the termination have been satisfied, a terminating party would not have to justify its actions.
The Court agreed that WZL should have given the 30 days' notice, but this was a minor point. The effect of the breach was not significant. This was not a repudiatory breach and had not renounced performance of its very few obligations, but the effect should have been for the termination notice to take effect 30 days afterwards. That would not have made any real difference including to any possibility of getting the 3% interest in the project, as this would not have happened anyway.
Comment
There have been occasional cases where judges have implied a duty of good faith into English law contracts. Good faith is a common concept in contracts in some other jurisdictions, such as in other European countries. The introduction of a clause to act in good faith in English law in recent years had been focused on longer-term or relational contracts. Here, the High Court further cast doubt on the extent of that and in any event gave a clear statement that there was no need for it to be used to justify a right to exit a contract if there is a clear right to terminate.