ºÃÉ«ÏÈÉúTV

Termination clauses in industry contracts have been giving headaches to the courts recently. Not so long ago, we had the case of Mr Rice and Yarmouth council (6 September 2002, page 50) whereby a small horticultural business had taken on a complicated maintenance contract for the council's parks. Although this contract entitled the council to terminate it for "any breach", however trivial, the Court of Appeal refused to read the contract literally and decided that the termination in that case was wrongful because the breaches alleged were not sufficiently serious.

Last month, Judge Seymour considered a substantial professional appointment, on this occasion a contract for surveying the Churchill Gardens Estate in Westminster, central London. This huge estate comprises 37 blocks of flats (some 1600 dwellings) built in the 1950s.

Hadley Design Associates was appointed to this commission in 1987. Its contract was based on the RICS conditions with amendments prepared by the council. The work of surveying the estate must have seemed endless, since it progressed for more than nine years. In 1996, Westminster council's solicitors wrote to HDA giving one month's notice to terminate the contract based on a clause that allowed such termination by either party without the need to prove default. By this time, compulsory competitive tendering had become the norm and the council wished to test the market for surveying services. There was no suggestion that HDA was in breach of contract. But the loss of profit on work as yet uncompleted would have been substantial, and (like Mr Rice) HDA decided to press a claim against the council for wrongful termination.

Most, if not all, professional appointments promoted by the institutions include clauses of this kind, based on the idea that if a professional relationship has broken down it is not sensible to force the parties to work together. How could such a seemingly ordinary clause be attacked?

HDA argued that the Unfair Contract Terms Act of 1977 applied, since the contract was based on the council's "standard terms of business".

That being the case, section 3(2) prevented the council from rendering "a contractual performance substantially different from that which was reasonably expected", except insofar as the contract term satisfied "the requirement of reasonableness".

There is a case for a system that applies uniformly to both consumer and business contracts. This would eradicate anomalies present in the Unfair Contract Terms Act of 1977

There were a number of difficulties with this argument, even if the contract could be described as being on the council's "standard terms".

Of course, if the council had misled HDA or suggested that, in spite of the clause, it would only terminate in the case of default, the position might have been stronger. But nothing of that kind was alleged.

And there was another difficulty. The "service" here was being provided by the surveying firm, not by the council. All the council was obliged to do was to make payment when due. That "contractual performance" would not be affected by giving notice of termination.

There was one further argument available to HDA. Sir Thomas Bingham in Timeload vs British Telecommunications 1995 had suggested that the "common law could … treat the clear intervention of the legislature expressed in the statute [the unfair terms act] as a platform for invalidating the operation of an oppressive clause in a situation of the present kind". In other words, the statutory control of exclusion and limitation clauses should be treated as giving the common law a green light to attack other kinds of unfairness in contracts. But the judge thought this was fraught with difficulty and provided no satisfactory basis on which to challenge the termination clause.

The Law Commission has been thinking recently about amending the unfair terms act with a view to harmonising it with the rules applicable to consumer contracts contained in the Unfair Terms in Consumer Contracts Regulations. Whereas the act only applies to terms that exclude or restrict liability (and so, for example, would not apply to a situation in which a contract of loan empowered the lender to vary the interest rate payable on the loan), the regulations apply to all contract terms in consumer contracts (except those defining the subject matter of the contract and the price), where these have not been individually negotiated. In such circumstances, any term that is challenged must satisfy the reasonableness test. If the Law Commission has its way, this rule will in due course be extended to business contracts, including professional appointments such as HDAs.