Kellogg Brown & Root v Australian Aerospace [2007] VSC 200
In the Commercial and Equity Division of the Supreme Court of Victoria, Hansen J granted an interlocutory injunction restraining a head contractor from relying on its notice terminating a defence procurement subcontract for convenience, finding that the lower risk of injustice favoured an injunction on undertakings as to damages where a serious question was conceded as to whether an implied term of good faith and fair dealing qualified the power and was breached [49], [72], [101].
What the court decided
Kellogg Brown & Root Pty Ltd (KBR) sought an injunction restraining Australian Aerospace Ltd (AA) from relying on a notice terminating for convenience their agreement of December 2005 [2]. AA held Commonwealth contracts to supply 46 MRH 90 helicopters, and engaged KBR for the main component of its training services and support obligation for phase 2 [4]. Clause 12.3 allowed AA to terminate by written notice and limited AA's liability to listed payments and costs, with no anticipated profit [10]. The clause mirrored the head contract and was understood as reflecting the principle of executive necessity [11].
On 20 December 2006 AA gave KBR notices of default under clause 12.2.1 [12]. AA later said by email that it would terminate for convenience unless a changed scope of work was agreed [20]. On 20 March KBR invoked the dispute resolution process over the default notices [21]. AA's notice of termination was dated 13 April 2007 [2]. It terminated the contract for convenience with immediate effect [30]. KBR's case was that the power was qualified by an implied term of good faith and fair dealing [33].
His Honour applied the Court of Appeal's approach in Bradto Pty Ltd v State of Victoria of taking the course carrying the "lower risk of injustice" [45], [47]. AA conceded a serious question but submitted that KBR was by no means certain to establish the term, which his Honour accepted was relevant [49], [50].
In GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd Finn J, although obiter, accepted that exercising such a clause would be subject to good faith and fair dealing [53]. In Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL the Court of Appeal rejected an asserted good faith term, though none of the Victorian cases concerned a termination for convenience clause [54]. The authorities revealed a deal of obiter, the High Court was yet to consider the issue and the question was whether the particular contract permitted the implication [56]. His Honour said he "would apprehend" that the case for the term and its breach was well arguable [61]. He declined to develop it because the evidence was incomplete, it was for the trial and he should not embarrass the trial judge [61].
On the balance of convenience, potential harm to KBR if no injunction was granted and it succeeded outweighed the harm to AA if one was granted and KBR failed [73]. His Honour saw no reason why the implied term issues could not be heard and determined speedily [73]. He was unpersuaded that the parties could not continue working under the contract until the hearing [73]. AA's evidence of loss from late delivery to the Commonwealth was speculative [73]. The consequential effects of termination were likely to be such that damages would not adequately compensate KBR [74].
AA's reliance on poor performance despite terminating for convenience raised "something of a conundrum" [75]. His Honour found it somewhat curious that AA said the dispute process could be completed while the termination stood whatever the outcome [75]. The injunction was purely negative, involved no supervision and left AA free to exercise its other rights, including under clause 12 [78].
AA submitted that KBR's undertaking was valueless and that for this reason alone the injunction should be refused [70], [98]. His Honour held that the undertaking was not valueless, given a strong revenue base and KBR's membership of a very large international group [99]. It had value likely to be sufficient, but the evidence did not permit an estimate of AA's possible damage, so no security was required [100]. KBR Holdings, as holding company and guarantor of KBR's obligations, had to give an undertaking too [100]. The orders, announced on 23 May, restrained AA until trial or further order and reserved costs [1].
Why it matters
The decision is an example of an interlocutory injunction restraining reliance on a termination for convenience, granted on a discretionary weighing of particular facts. The concession of a serious question, inadequacy of damages, speculative loss to AA and the negative form of the order counted; AA's pre-emption of the dispute process was one factor among several. Whether a good faith term is implied into such a clause was left for trial on authorities that were mixed and largely obiter.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.