When I review contracts, the first section of my report lists the red flags ie those clauses that you really really ought to know about (and ideally get removed). These are the ones which could turn your perfect deal into a complete nightmare.
One of my red flags is whether your legally binding agreement is easy for the client to wriggle out of… perhaps I am a cynic but I want to know what would happen if that client finds a replacement supplier which is quicker, cheaper or better quality and wants to dump you fast. I don’t mind a sensible and fair ‘divorce settlement’, but the agreement should compensate the supplier for its lost profits and costs incurred.
Of course not everyone checks their contracts this thoroughly and sometimes the minutiae come back to haunt you…
A surprised CEO said recently that:
If I was given a time machine and could go back to when we were negotiating the contracts, and I was told that “If you sign this contract as it is drafted, Qatar can walk away at any time of their option and not pay you a penny”, I would not have signed the contracts.
Termination at will (for convenience)
Qatar Airways was buying new seats for retrofitting its planes. It included a term in its purchase agreement that notwithstanding anything to the contrary in the Standard Conditions or the applicable Purchase Agreement… [Qatar] shall be entitled to terminate… for its convenience.
The court said the language used by the parties in respect of this termination right is clear and unambiguous.
So the airline could terminate the contract at will, or for its convenience. That means the supplier need not be in the wrong, have defaulted or have breached the contract. It’s basically leaving on a whim…
But what about the supplier? Does it get compensated? That depends…
The court said the exercise of the contractual right of termination does not give rise to any entitlement to common law damages. The sole source of the consequences of the exercise of the right is the term itself and there is no provision contained within the contract for reliance damages to be awarded to the supplier in the event of termination.
In this case the supplier got nothing. Zilch. De nada. Zero.
Ouch!
What should you do?
As a supplier, always check whether an agreement gives you a right to finish. If there is a right to terminate at will, ensure you will be properly compensated.
As a client, if you’re not sure you need the entire scope, either start small and use the change mechanism to extend (and take the risk that’s not the best price) or use a right to omit scope or terminate at will based on compensating your supplier. Don’t game the contract!
Case: Optimares SpA v Qatar Airways Group QCSC [2022] EWHC 2461
